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Fiesta Restaurant Group, Inc. Reports Third Quarter 2019 Results

By: Fiesta Restaurant Group, Inc. |  0 Shares     63 Reads

Company Completes Key Executive Hires and Continues Progress on Strategic Drivers of Future Growth

DALLAS - (BUSINESS WIRE) - November 05, 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 third quarter 2019, which ended on September 29, 2019.

Fiesta President and Chief Executive Officer Richard Stockinger said, "Although quarterly comparable restaurant sales declined, we experienced sequential improvement at both brands as a result of our everyday value platform, LTO promotions and growing sales traction from our investments in off premise channels. In addition, third quarter comparable restaurant sales at Pollo Tropical were negatively impacted by Hurricane Dorian by approximately 150 basis points and by planned sales cannibalization of roughly 80 basis points. We were encouraged by the fact that Pollo Tropical comparable restaurant transactions exceeded the industry benchmark for the quarter and comparable restaurant sales were positive for the period in September following the hurricane, with improvement across all Florida markets. We launched Taco Cabana's value platform, 'TC Time', in September, which helped drive the brand's comparable restaurant transactions above the industry benchmark index in Texas during the month."

Mr. Stockinger continued, "We continued to make strong progress during the quarter on our sales-building initiatives of menu innovation and simplification, everyday value platforms, and off premise dining including online, delivery and catering. The sales performance in September is only partially reflective of those efforts. We expect those investments will continue to accelerate results for the remainder of the year and into 2020. We also continue to focus on restaurant level margin improvement. Excluding the impact of lease accounting changes and the hurricane impact, Pollo Tropical restaurant margins would have increased, and Taco Cabana restaurant margins would have been flat to last year, despite the sales decline."

Mr. Stockinger added, "We were also very excited to have filled two more key positions in our senior leadership team during the third quarter. We named industry veteran Dirk Montgomery as our new CFO and Hope Diaz joined Fiesta as our new CMO. They each bring very strong capability and deep restaurant experience to Fiesta and they will help us accelerate the speed of our progress."

Mr. Stockinger concluded, "As we close out the year and look toward 2020, we expect stable food costs for the remainder of 2019 and 2020 vs. the prior year based on supply commitments in place across key commodities. We will maintain our focus on building sales growth across in store and off premise channels by continuing to enhance our brands' attractiveness to guests."

Third Quarter 2019 Financial Summary

• Total revenues decreased 6.0% to $164.2 million in the third quarter of 2019 from $174.6 million in the third quarter of 2018;
• Comparable restaurant sales at Pollo Tropical decreased 3.8%;
• Comparable restaurant sales at Taco Cabana decreased 4.8%;
• Net loss of $22.2 million, or $0.84 per diluted share, in the third quarter of 2019, which includes a $0.84 per diluted share negative impact from $3.3 million in impairment charges, $21.4 million in non-cash impairment of goodwill, and $0.7 million in net closed restaurant rent charges, net of income tax benefits of $3.2 million, compared to net income of $2.0 million, or $0.08 per diluted share, in the third quarter of 2018;
• Adjusted net income (a non-GAAP financial measure) of $0.2 million, or $0.01 per diluted share, in the third quarter of 2019, which includes a $0.02 per diluted share negative impact from adoption of the new lease accounting standard, compared to adjusted net income of $3.0 million, or $0.11 per diluted share, in the third quarter of 2018 (see non-GAAP reconciliation table below);
• Adjusted EBITDA for Pollo Tropical of $11.0 million in the third quarter of 2019 would have been $0.4 million higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to $12.5 million in the third quarter of 2018;
• Restaurant-level Adjusted EBITDA (a non-GAAP financial measure) for Pollo Tropical of $17.8 million, or 20.1% of restaurant sales, in the third quarter of 2019 would have been $0.4 million, or 0.4% of restaurant sales, higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to $19.1 million, or 20.4% of restaurant sales, in the third quarter of 2018 (see non-GAAP reconciliation table below);
• Adjusted EBITDA for Taco Cabana of $1.2 million in the third quarter of 2019 would have been $0.5 million higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to $2.5 million in the third quarter of 2018;
• Restaurant-level Adjusted EBITDA (a non-GAAP financial measure) for Taco Cabana of $6.9 million, or 9.2% of restaurant sales, in the third quarter of 2019 would have been $0.5 million, or 0.6% of restaurant sales, higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to $8.0 million, or 10.0% of restaurant sales, in the third quarter of 2018 (see non-GAAP reconciliation table below); and
• Consolidated Adjusted EBITDA (a non-GAAP financial measure) of $12.2 million in the third quarter of 2019 would have been $0.8 million higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to Consolidated Adjusted EBITDA of $15.0 million in the third quarter of 2018 (see non-GAAP reconciliation table below).

Taco Cabana Goodwill Impairment

As of September 29, 2019, in response to a further decrease in the market price of Fiesta's common stock and lower than expected profitability in the third quarter, we performed an interim impairment test of the Company’s goodwill. Based on this interim impairment test, we recorded a $21.4 million non-cash impairment charge to write down the value of goodwill for the Taco Cabana reporting unit, which resulted in a full impairment of the Taco Cabana reporting unit goodwill and had an unfavorable impact on net income (loss) of $19.3 million or $0.73 per diluted share in the third quarter of 2019. We previously recorded a $46.5 million non-cash impairment charge to write down the value of goodwill for the Taco Cabana reporting unit in the second quarter of 2019.

Third Quarter 2019 Brand Results

Pollo Tropical restaurant sales decreased 5.6% to $88.3 million in the third quarter of 2019 compared to $93.6 million in the third quarter of 2018 due primarily to a comparable restaurant sales decrease of 3.8% and nine fewer restaurants in 2019. Off premise sales consisting of online, catering, and delivery orders comprised 4.4% of total restaurant sales in the third quarter of 2019 compared to 1.7% of total restaurant sales in the third quarter of 2018. Sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant sales by approximately 80 basis points while Hurricane Dorian negatively impacted comparable restaurant sales by approximately 150 basis points. The decrease in comparable restaurant sales resulted from a 2.7% decrease in comparable restaurant transactions and a 1.1% decrease in average check. The decrease in average check was driven primarily by discounted pricing for Pollo Time partially offset by menu price increases of approximately 1.1%.

Pollo Tropical's third quarter 2019 comparable restaurant sales were 0.5% lower than TDnK's Black Box Intelligence's fast-casual Florida benchmark while comparable restaurant transactions were 2.9% higher than TDnK's Black Box Intelligence's fast-casual Florida benchmark for the markets in which we operate. However, excluding planned sales cannibalization where 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, Pollo Tropical's third quarter 2019 comparable restaurant sales were 0.3% higher than TDnK's Black Box Intelligence's fast-casual Florida benchmark for the markets while comparable restaurant transactions were 3.7% higher than TDnK's Black Box Intelligence's fast-casual Florida benchmark for the markets in which we operate.

Adjusted EBITDA for Pollo Tropical decreased to $11.0 million in the third quarter of 2019 from $12.5 million in the third quarter of 2018. Absent the $0.4 million negative impact from the adoption of the new lease accounting standard, Adjusted EBITDA in the third quarter of 2019 would have decreased by $1.2 million. The decrease was due to higher restaurant wages and related expenses due to higher wage rates and overtime, higher other operating expenses due to higher third-party delivery fees and contracted cleaning services, and higher G&A expenses due to the timing of incentive compensation accrual adjustments and investments in off premise support, as a percent of restaurant sales, as well as the impact of lower comparable restaurant sales, partially offset by lower cost of sales due to favorable commodities and lower repairs and maintenance expenses due to the outsourcing of repairs, as a percent of restaurant sales. As noted above, Hurricane Dorian negatively impacted sales by approximately 150 basis points, with the estimate of lost profit from the sales decline of $0.6 million.

Taco Cabana restaurant sales decreased 6.3% to $75.3 million in the third quarter of 2019 from $80.4 million in the third quarter of 2018 due primarily to a comparable restaurant sales decrease of 4.8% and six fewer restaurants in 2019. Off premise sales consisting of online, catering, and delivery orders comprised 3.6% of total restaurant sales in the third quarter of 2019 compared to 1.4% of total restaurant sales in the third quarter of 2018. The decrease in comparable restaurant sales resulted from a 5.6% decrease in comparable restaurant transactions partially offset by a 0.8% increase in average check. The increase in average check was due primarily to menu price increases of 1.4% and the introduction of higher priced shareable items, partially offset by discounted pricing for TC Time. Tropical storm severe weather during the quarter resulted in store closures due to flooding, which resulted in a negative sales impact of approximately 20 basis points.

Taco Cabana's third quarter 2019 comparable restaurant sales were 1.9% lower than TDnK's Black Box Intelligence's fast-casual Texas benchmark for the markets in which we operate while comparable restaurant transactions mirrored TDnK's Black Box Intelligence's fast-casual Texas benchmark for the markets in which we operate.

Adjusted EBITDA for Taco Cabana decreased to $1.2 million in the third quarter of 2019 from $2.5 million in the third quarter of 2018. Absent the $0.5 million negative impact from the adoption of the new lease accounting standard, Adjusted EBITDA in the third quarter of 2019 would have decreased by $0.9 million. The decrease was primarily due to higher cost of sales due to increased discounting and promotional activity, higher advertising expense due to increased media spend, higher other operating expenses due to third-party delivery fees, and higher G&A expenses due to the timing of incentive compensation accrual adjustments and investments in off premise support, as a percent of restaurant sales, as well as the impact of lower comparable restaurant sales, partially offset by lower restaurant wages and related expenses due to improved staffing utilization that was partially offset by higher wage rates and overtime, as a percent of restaurant sales.

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 September 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 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 September 29, 2019 totaled $0.6 million and $0.1 million for Pollo Tropical and Taco Cabana, respectively.

Increased Share Repurchase Authorization

On November 5, 2019, Fiesta announced an increase to its share repurchase program of an additional 1.0 million shares of common stock. The Company has purchased a total of 1,176,895 shares of common stock under its prior share repurchase program authorization, and, following this increase, 1,823,105 shares of common stock remain available for purchase.

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.

Restaurant Portfolio

During the third quarter of 2019, Fiesta opened one Pollo Tropical in South Florida. As of September 29, 2019, there were 141 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 new Company-owned Taco Cabana restaurants in Texas. Total capital expenditures in 2019 are now expected to be in the lower half of the previous $45 million to $55 million range. The full range includes $11 million to $13 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 consists of $16 million to $18 million for restaurant remodeling, equipment to support new menu platforms and other facility enhancements, and $10 million to $11 million for capital maintenance.

Total capital expenditures in 2020 are expected to be approximately $5 million to $10 million lower than the current year due primarily to lower levels of new equipment and facility enhancements and fewer new Company-owned restaurant openings.

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 412-317-6026. A replay will be available after the call until Tuesday, November 12, 2019, and can be accessed by dialing 412-317-6671. The passcode is 10135857. 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.

About Fiesta Restaurant Group, Inc.

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 intention to repurchase shares from time to time under the share repurchase program, 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.

(a) Percent of restaurant sales for the applicable segment.

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.

⁽¹⁾ Excludes general and administrative adjustments above.

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.

Contact:

Raphael Gross
Investor Relations
203-682-8253
investors@frgi.com

SOURCE Fiesta Restaurant Group, Inc.

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