DALLAS - (BUSINESS WIRE) - August 07, 2019 - Fiesta Restaurant Group, Inc. ("Fiesta" or the "Company") (NASDAQ: FRGI), parent company of the Pollo Tropical® and Taco Cabana® restaurant brands, today reported results for the 13-week second quarter 2019, which ended on June 30, 2019.
Fiesta President and Chief Executive Officer Richard Stockinger said, “Comparable restaurant sales for the second quarter mirrored the decline of the benchmark index in our Florida and Texas markets. Comparable restaurant transactions, however, exceeded the benchmark index in Florida due in part to the popularity of our everyday value platform 'Pollo Time'. Pollo Tropical comparable restaurant sales were negatively impacted by roughly 120 basis points due to cannibalization of existing restaurants by new restaurants in our core markets. In these markets, we have opened new restaurants in the proximity of existing units with high sales in order to improve the customer experience and increase overall sales. In essence, sales have been transferred from one Pollo restaurant to another, causing comparable restaurant sales to decline, but as a company we increase our penetration and share. As a whole, we believe this is another sign that our actions to date are positively impacting our guest experience.”
Mr. Stockinger continued, “We are positioning ourselves for sales growth at our existing restaurants through strategic initiatives related to menu innovation and simplification, everyday value platforms, the 'My Pollo' and 'My TC' loyalty and e-club programs, refined catering menus, and our DoorDash partnership. These initiatives are in turn supported by digital, social media, traditional TV, and local marketing which we are utilizing to accentuate our freshness attributes. Our intention for the balance of this year is to generate higher profitability and margins on a consolidated basis, excluding the recent lease accounting changes and non-cash write-off, as we leverage expected favorable commodity costs and prior-year investments. In addition, we are pleased to have reduced outstanding borrowings under our revolving credit facility by $21 million this quarter due primarily to a tax refund. As a result, our outstanding revolving credit facility balance as of June 30, 2019 was $17 million lower than at the end of 2018.”
Mr. Stockinger concluded, “We determined that the sustained decline in our stock price was a triggering event requiring an interim impairment test of goodwill as of June 30, 2019. Based on this interim impairment test, we recorded a non-cash impairment charge to write down the value of goodwill for the Taco Cabana reporting unit. This impairment charge had an unfavorable impact on net income (loss) of $46.5 million or $1.73 per diluted share.”
The Company today announced an increase to its share repurchase program of an additional 500,000 shares of common stock. The Company previously announced plans on February 26, 2018 to repurchase up to 1,500,000 shares of common stock. The Company has purchased a total of 270,627 shares of common stock under its share repurchase program and, following the increase, 1,729,373 shares of common stock remain available for purchase by the Company.
Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume, general market and economic conditions, and other corporate considerations. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by the board of directors.
Second Quarter 2019 Financial Summary
Second Quarter 2019 Brand Results
Pollo Tropical restaurant sales decreased 2.9% to $92.6 million in the second quarter of 2019 compared to $95.4 million in the second quarter of 2018 due primarily to a comparable restaurant sales decrease of 1.3% and 10 fewer restaurants in 2019. Sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant sales by approximately 120 basis points. The decrease in comparable restaurant sales resulted from a 1.8% decrease in comparable restaurant transactions partially offset by a 0.5% increase in average check. The increase in average check was driven primarily by menu price increases of approximately 1.5%.
Pollo Tropical's second quarter 2019 comparable restaurant sales were the same as TDnK's Black Box Intelligence's fast-casual Florida benchmark for the markets in which we operate, while comparable restaurant transactions exceeded TDnK's Black Box Intelligence's fast-casual Florida benchmark for the markets in which we operate by 2.4%.
Adjusted EBITDA for Pollo Tropical decreased to $14.6 million in the second quarter of 2019 from $15.5 million in the second quarter of 2018. Absent the negative impact of the new lease accounting standard, Adjusted EBITDA in the second quarter of 2019 would have decreased by $0.5 million. The decrease was due primarily to a $0.4 million increase in rent as a result of adopting the new lease accounting standard, higher restaurant wages and related expenses as a percent of restaurant sales due to higher wage rates and overtime, higher delivery fees and other operating expenses and the impact of lower comparable restaurant sales, partially offset by lower cost of sales as a percentage of restaurant sales.
Taco Cabana restaurant sales decreased 3.3% to $78.1 million in the second quarter of 2019 from $80.8 million in the second quarter of 2018 due primarily to a comparable restaurant sales decrease of 3.0%. The decrease in comparable restaurant sales resulted from a 6.1% decrease in comparable restaurant transactions partially offset by a 3.1% increase in average check. The increase in average check was due primarily to menu price increases of 2.8% and the introduction of higher priced shareable items.
Taco Cabana's second quarter 2019 comparable restaurant sales were the 0.1% lower than TDnK's Black Box Intelligence's fast-casual Texas benchmark for the markets in which we operate, while comparable restaurant transactions were 0.6% lower than TDnK's Black Box Intelligence's fast-casual Texas benchmark for the markets in which we operate.
Adjusted EBITDA for Taco Cabana decreased to $4.1 million in the second quarter of 2019 from $4.6 million in the second quarter of 2018. Absent the negative impact of the new lease accounting standard, Adjusted EBITDA in the second quarter of 2019 would have decreased by $0.1 million. The decrease was primarily due to a $0.5 million increase in rent as a result of adopting the new lease standard, higher advertising expense and delivery fees and the impact of lower comparable restaurant sales, partially offset by lower restaurant wages and related expenses as a percentage of restaurant sales due to improved labor scheduling that was partially offset by higher wage rates and overtime.
Taco Cabana Goodwill Impairment
As of June 30, 2019, the sustained decrease in the market price of the Company's common stock was determined to be a triggering event requiring an interim impairment test of the Company's goodwill. Based on this interim impairment test, the Company recorded a non-cash impairment charge to write down the value of goodwill for the Taco Cabana reporting unit, which had an unfavorable impact on net income (loss) of $46.5 million or $1.73 per diluted share.
Lease Accounting Change
We adopted Financial Accounting Standard Board ("FASB") Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842) ("ASC 842"), which requires lessee recognition of lease assets and lease liabilities on the balance sheet, as of the beginning of fiscal 2019. The new lease accounting standard, ASC 842, had a significant impact on our results of operations because we had $18.6 million in sale-leaseback gains from which we no longer receive a benefit to rent expense and we have a significant number of closed restaurants for which we had previous closed restaurant rent reserves and would not have recognized current period expense under the previous accounting standard.
As a result of adopting this standard, substantially all previously deferred gains on sale-leaseback transactions were recognized as an adjustment to retained earnings and we will no longer receive the benefit to rent expense from amortizing these gains resulting in higher rent expense being recognized each period over the life of the respective leases. Amortization of deferred gains from sale-leaseback transactions for the three months ended July 1, 2018 totaled approximately $0.4 million and $0.5 million for Pollo Tropical and Taco Cabana, respectively.
Additionally, prior to the adoption of ASC 842, we recorded closed restaurant reserves representing future minimum lease payments and ancillary costs from the date of the restaurant closure to the end of the remaining lease term, net of estimated sublease recoveries, when a restaurant closed, recorded expense related to the accretion of the reserve each period, and recorded subsequent changes in the assumptions related to the sublease income to expense in the period in which the assumptions changed. The subsequent closed restaurant rent payments were recorded as a reduction to the closed restaurant reserves, with no rent related expense being recorded in the period. As a result of adopting ASC 842, these closed restaurant rent reserves were recorded as a reduction to operating lease right-of-use assets, and rent expense (the straight-line amortization of the right-of-use assets and accretion of the lease liability) related to closed restaurants is now included within closed restaurant rent expense, net of sublease income in the condensed consolidated statement of operations each period. The comparative period information has not been restated and continues to be reported under the accounting standard in effect for that period. Closed restaurant rent expense, net of sublease income for the three months ended June 30, 2019 totaled $1.0 million and $0.3 million for Pollo Tropical and Taco Cabana, respectively.
Restaurant Portfolio
During the second quarter of 2019, Fiesta opened one Pollo Tropical in South Florida and one Taco Cabana restaurant in Texas. As of June 30, 2019, there were 140 Company-owned Pollo Tropical restaurants, 165 Company-owned Taco Cabana restaurants, 31 franchised Pollo Tropical restaurants in the U.S., Puerto Rico, the Bahamas, Guyana and Panama and eight franchised Taco Cabana restaurants in the U.S.
Capital Expenditures
Full year capital expenditures in 2019 include opening three new Company-owned Pollo Tropical restaurants in South Florida and three to four new Company-owned Taco Cabana restaurants in Texas. Total capital expenditures in 2019 are expected to be $45 million to $55 million including $12 million to $15 million to develop new Company-owned restaurants, $10 million to $12 million to implement information technology and other systems projects and $1 million in catering equipment. In addition, ongoing reinvestment in our Pollo Tropical and Taco Cabana Company-owned restaurants in 2019 is expected to include $16 million to $18 million for restaurant remodeling, equipment to support new menu platforms and other facility enhancements, and $9 million to $11 million for capital maintenance.
Investor Conference Call Today
Fiesta will host a conference call at 4:30 p.m. ET today. The conference call can be accessed live over the phone by dialing 201-689-8562. A replay will be available after the call until Wednesday, August 14, 2019, and can be accessed by dialing 412-317-6671. The passcode is 13692282. The conference call will also be webcast live from the corporate website at www.frgi.com, under the Investor Relations section. A replay of the webcast will be available through the corporate website shortly after the call has concluded.
Fiesta Restaurant Group, Inc., owns, operates and franchises the Pollo Tropical® and Taco Cabana® restaurant brands. The brands specialize in the operation of fast casual/quick service restaurants that offer distinct and unique flavors with broad appeal at a compelling value. The brands feature fresh-made cooking, drive-thru service and catering. For more information about Fiesta Restaurant Group, Inc., visit the corporate website at www.frgi.com.
Forward-Looking Statements
Certain statements contained in this news release and in our public disclosures, whether written, oral or otherwise made, relating to future events or future performance, including any discussion, express or implied regarding our anticipated growth, plans, objectives and the impact of our investments in strategic initiatives, including those relating to advertising and marketing, our new loyalty programs, operations improvements, menu development and innovation and catering and third party delivery on future sales and earnings contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the words "may," "might," "believes," "thinks," "anticipates," "plans," "positioned," "target," "continue," "expects," "look to," "intends" and other similar expressions, whether in the negative or the affirmative, that are not statements of historical fact. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, and you should not place undue reliance on our forward-looking statements. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those discussed from time to time in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 30, 2018 and our quarterly reports on Form 10- Q. All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this release are made only as of the date of this release and may change. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA are non-GAAP financial measures. Adjusted EBITDA is defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items for each segment that are related to strategic changes and/or are not related to the ongoing operation of our restaurants as set forth in the reconciliation table below. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, construction and other administrative functions. Restaurant-level Adjusted EBITDA is defined as Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses).
Adjusted EBITDA for each of our segments is the primary measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. In addition, management believes that Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business, and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies.
Adjusted net income and related adjusted diluted earnings per share are non-GAAP financial measures. Adjusted net income is defined as net income (loss) before impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, other expense (income), net, terminated capital project costs, board and shareholder matter costs, restructuring costs and retention bonuses, certain legal settlements and related costs and other significant items that are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Management believes that adjusted net income and related adjusted earnings per diluted share, when viewed with our results of operations calculated in accordance with GAAP (i) provide useful information about our operating performance and period-over-period growth, (ii) provide additional information that is useful for evaluating the operating performance of our business, and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly should not be considered as alternatives to net income or net income per share as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies.
Raphael Gross
Investor Relations
203-682-8253
investors@frgi.com
Fiesta Restaurant Group, Inc. owns, operates and franchises the Pollo Tropical® and Taco Cabana® restaurant brands