DALLAS - (BUSINESS WIRE) - February 26, 2020 - 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 fourth quarter 2019, which ended on December 29, 2019.
Fiesta President and Chief Executive Officer Richard Stockinger said, "Pollo Tropical generated positive comparable restaurant sales of 0.6% during the fourth quarter and continues to gain market share on both a comparable sales and traffic basis, confirmed by Blackbox industry benchmarks. We attribute Pollo's traction and ability to outpace its peers during the fourth quarter to the popularity of the Pollo Time everyday value platform along with successful Limited Time Offer (LTO) promotions, including our recent Churasco and GrillMaster LTO's. The brand's positive sales momentum and market share gains have extended into the first quarter of 2020."
Mr. Stockinger continued, "Taco Cabana experienced weak comparable restaurant sales and transactions during the fourth quarter due in part to efforts to improve execution through menu simplification and ineffective promotions. The menu simplification efforts included removal of certain menu items and limited other items to certain dayparts, which enabled us to significantly improve guest satisfaction and reduce order cycle times over the fourth quarter. Those moves resulted in a greater transaction decline than anticipated. In the first quarter of 2020 we are re-introducing select items back to the menu and expanding some daypart choices to regain sales traction without sacrificing the customer satisfaction gains we achieved in the fourth quarter."
The Company announced that Charles "Chuck" Locke is no longer with Taco Cabana, effective immediately. An external search for the new President of Taco Cabana is underway.
Mr. Stockinger added, "On a full year basis, we were pleased that consolidated restaurant level adjusted EBITDA margins were roughly flat compared to 2018 after adjusting for accounting changes and the impact of Summer named storms, with full year 2019 Pollo margins up slightly and Taco margins down slightly. In 2020, we expect restaurant margins to be stable at Pollo and at Taco we are targeting a 200 to 300 basis point increase in restaurant margins compared to 2019, driven by efficiency and operations simplification initiatives."
Mr. Stockinger concluded, "In 2020, we are acutely focused on building top line momentum at Pollo Tropical as we continue to eliminate barriers across all channels so that our customers can enjoy the brand everywhere including dine-in, delivery, catering and online pickup. We will also continue to drive revenue growth through a combination of new product innovation, effective LTO's and check building strategies. As those initiatives ramp up, we expect Pollo comparable restaurant sales to grow sequentially over the course of the year. Our goal at Taco Cabana in 2020 is to stabilize sales trends by optimizing key day part choices, improving our value promotions and maintaining our focus on new product innovation. For both brands, we plan to build on the traction we established in the fourth quarter of 2019 in catering and will be expanding the number of delivery service provider partnerships in the first and second quarters of 2020. We also expect to see significant growth in our online business in the second half of the year as we implement a much improved digital customer experience, with better ease of access across all digital applications including our mobile and loyalty apps."
Fourth Quarter 2019 Financial Summary
Fourth Quarter 2019 Brand Results
Total Pollo Tropical restaurant sales decreased 1.3% to $89.7 million in the fourth quarter of 2019 compared to $90.9 million in the fourth quarter of 2018 due to the closure of 14 restaurants in December 2018, partially offset by a comparable restaurant sales increase of 0.6%. Off premise sales consisting of online, catering, and delivery orders comprised 5.6% of total restaurant sales in the fourth quarter of 2019 compared to 2.1% of total restaurant sales in the fourth quarter of 2018. Sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant sales by approximately 60 basis points. The increase in comparable restaurant sales resulted from a 0.5% increase in comparable restaurant transactions and a 0.1% increase in average check, driven by modest price increases.
Positive comparable restaurant sales and market share momentum for Pollo Tropical were confirmed by favorable industry comparisons. Pollo Tropical's fourth quarter 2019 comparable restaurant sales were 2.0% higher than the Black Box fast-casual Florida benchmark for the markets in which we operate while comparable restaurant transactions were 4.4% higher than the Black Box fast-casual Florida benchmark for the markets in which we operate. Pollo Tropical market share gains have continued into the first quarter of 2020.
Adjusted EBITDA for Pollo Tropical decreased to $10.6 million in the fourth quarter of 2019 from $12.4 million in the fourth quarter of 2018. Absent the $0.4 million negative impact from the adoption of the new lease accounting standard, Adjusted EBITDA in the fourth quarter of 2019 would have decreased by $1.4 million. The decrease was due to higher restaurant wages and related expenses due to higher medical and worker's compensation expenses, higher cost of sales due to sales mix and promotions and discounts, and higher other operating expenses due to higher third-party delivery fees, contracted cleaning services and repairs and maintenance costs, as a percent of restaurant sales.
Taco Cabana restaurant sales decreased 9.2% to $69.0 million in the fourth quarter of 2019 from $76.0 million in the fourth quarter of 2018 due primarily to a comparable restaurant sales decrease of 8.1% and the closure of nine restaurants in December 2018. Off premise sales consisting of online, catering, and delivery orders comprised 4.2% of total restaurant sales in the fourth quarter of 2019 compared to 2.0% of total restaurant sales in the fourth quarter of 2018. The decrease in comparable restaurant sales resulted from a 7.1% decrease in comparable restaurant transactions and a 1.0% decrease in average check. The decrease in average check was due primarily to the higher mix of value and promotion offerings, partially offset by menu price increases of 0.7%. While the menu simplification initiative improved guest satisfaction and reduced order cycle times, the reduced menu resulted in a greater than anticipated transaction decline. During the first quarter of 2020, we intend to carefully re-introduce select items and expand dayparts to increase sales while maintaining the operational improvements provided by the menu simplification.
Taco Cabana's fourth quarter 2019 comparable restaurant sales were 6.1% lower than the Black Box fast-casual Texas benchmark for the markets in which we operate while comparable restaurant transactions were 3.0% lower than the Black Box fast-casual Texas benchmark for the markets in which we operate.
Adjusted EBITDA for Taco Cabana decreased to $(0.3) million in the fourth quarter of 2019 from $3.4 million in the fourth quarter of 2018. Absent the $0.5 million negative impact from the adoption of the new lease accounting standard, Adjusted EBITDA in the fourth quarter of 2019 would have decreased by $3.2 million. The decrease was primarily due to the impact of lower comparable restaurant sales including higher cost of sales due to increased discounting and promotional activity and commodity costs, higher advertising expense, higher other operating expenses due to repairs and maintenance costs and third-party delivery fees, and higher G&A expenses, as a percent of restaurant sales.
Deferred Income Tax Valuation Allowance
Financial Accounting Standard Board ("FASB") Accounting Standards Codification Topic 740 Accounting for Income Taxes requires a valuation allowance on deferred tax assets if it is more likely than not that the deferred tax assets will not be realized based on all available positive and negative evidence. Objective historical evidence is given greater weight than subjective evidence such as forecasts of future taxable income. We considered three years of cumulative operating income (loss), including the loss before income taxes for the twelve months ended December 29, 2019, which resulted from goodwill and long-lived asset impairments at Taco Cabana as well as a decline in profitability. Based on our evaluation of all available positive and negative evidence, we determined that it is more likely than not that our deferred tax assets will not be fully realized in future periods and recorded a $13.5 million valuation allowance to reduce our deferred tax assets, which increased our tax expense for the three months ended December 29, 2019.
Lease Accounting Change
We adopted 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 December 30, 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 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 December 29, 2019 totaled $0.5 million and $0.2 million for Pollo Tropical and Taco Cabana, respectively.
Full Year 2019 Financial Summary
Total revenues decreased 4.0% in 2019 to $660.9 million from $688.6 million in 2018, driven primarily by comparable restaurant sales decreases of 1.8% at Pollo Tropical and 4.1% at Taco Cabana, and the net impact of opening new restaurants and closing 14 underperforming Pollo Tropical restaurants and 11 underperforming Taco Cabana restaurants in December 2018.
We recognized net loss of $84.4 million in 2019, or $3.18 per diluted share, compared to net income of $7.8 million, or $0.29 per diluted share in 2018, due primarily to one-time charges including a $67.9 million in goodwill impairment and a $13.5 million valuation allowance on our deferred income tax assets as well as $13.1 million in impairment and other lease charges primarily related to Taco Cabana restaurants that were subsequently closed in January 2020, $4.2 million in closed restaurant rent, net of sublease income, $1.0 million in expense related to the cost for the removal, transfer and storage of equipment from closed restaurants and site development cost write-off, and $1.3 million in severance costs and digital brand repositioning. Excluding these charges, we recognized adjusted net income of $9.2 million in 2019, or $0.35 per diluted share, compared to a net income of $16.3 million, or $0.60 per diluted share in 2018 (see non-GAAP reconciliation table below).
Consolidated Adjusted EBITDA decreased to $58.4 million in 2019 from $68.0 million in 2018 (see non-GAAP reconciliation table below), including the impact of lease accounting changes and Summer named storms.
Consolidated Restaurant-Level Adjusted EBITDA decreased to $108.9 million or 16.6% of restaurant sales in 2019 compared to $118.4 million or 17.3% of restaurant sales in 2018 (see non-GAAP reconciliation table below). Absent the $3.3 million negative impact from the adoption of the new lease accounting standard and the estimated $0.7 million negative impact of Summer named storms, Consolidated Restaurant-Level Adjusted EBITDA margins for the full year 2019 would have been roughly flat.
Restaurant Portfolio
During the fourth quarter of 2019, Fiesta opened one Pollo Tropical in South Florida and closed one Taco Cabana restaurant. As of December 29, 2019, there were 142 Company-owned Pollo Tropical restaurants, 164 Company-owned Taco Cabana restaurants, 32 franchised Pollo Tropical restaurants in the U.S., Puerto Rico, Panama, Guyana, Ecuador and the Bahamas, and eight franchised Taco Cabana restaurants in the U.S.
Full Year 2020 Outlook
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, March 4, 2020, and can be accessed by dialing 412-317-6671. The passcode is 13698884. 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 and sales building initiatives, including those relating to advertising and marketing, operations improvements, menu development and simplification, digital ordering and online sales, catering and third-party delivery on future sales, margins 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 29, 2019 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.
FIESTA RESTAURANT GROUP, INC.
Supplemental Non-GAAP Information
The following table sets forth certain unaudited supplemental financial data for the periods indicated
(In thousands):
Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA are non-GAAP financial measures. Adjusted EBITDA is defined as earnings (loss) 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.
FIESTA RESTAURANT GROUP, INC.
Supplemental Non-GAAP Information
The following table sets forth certain unaudited supplemental financial data for the periods indicated
(In thousands of dollars, except per share amounts):
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, 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
SOURCE Fiesta Restaurant Group, Inc.
Fiesta Restaurant Group, Inc. owns, operates and franchises the Pollo Tropical® and Taco Cabana® restaurant brands