Fiesta Restaurant Group, Inc.
Q2 2022 Earnings Call Transcript

Published: 11 Aug 2022

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Fiesta Restaurant Group's Second Quarter 2022 Earnings Call. As a reminder, all participants are in a listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Raphael Gross, Partner at ICR. Please go ahead.

[Raphael Gross:]

Thank you, operator. Fiesta Restaurant Group's second quarter 2022 earnings release was issued after the market closed today. If you have not already accessed it, it can be found on the Company's website www.frgi.com, under the Investor Relations section. Before we begin, I'd like to inform you that during the call, the Company will make various statements that are not based on historical information. These forward-looking statements include, without limitation, statements regarding the Company's future financial position and results of operations, business strategy, budget, projected costs and plans, and objectives of management for future operations. Actual outcomes and results may differ materially, unless as expressed or forecasted in such forward-looking statements. And the Company can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements can be found in the Company's SEC filings. Please note that during today's conference call, certain non-GAAP financial measures will be discussed, which the Company believes can be useful in evaluating its performance. Any discussion of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. And a reconciliation to comparable GAAP measures is available in the Company's earnings release. On the call with me today are President and Chief Executive Officer, Rich Stockinger; Chief Experience Officer and Senior VP of Strategic Initiatives, Patty Lopez-Calleja, and Chief Financial Officer, Dirk Montgomery. And now I'd like to turn the call over to Rich.

[Rich Stockinger:]

Thank you, Raef. I'd first like to thank all of the investors and other participants on the call today for their continued support. I'll be covering three topics today

[Dirk Montgomery:]

Thank you, Rich, and good afternoon, everyone. I'll start by reviewing our second quarter results and then provide you with an update on our outlook for the remainder of 2022. Overall, we were pleased with our financial results for the quarter and we're very excited to see strong comparable restaurant sales growth in the second quarter of 8.4% versus 2021. We gained momentum as we completed the second quarter with June and July comp sales of 10% or higher with further comp sales acceleration in early August. The most encouraging news on our sales trend is clearly our improvement in traffic trends, which accelerated over the second quarter and continued to improve in July. As Rich commented, over the last three weeks, we have seen a 340 basis point improvement in recent year-over-year traffic trends compared to the first quarter, with select markets now realizing positive traffic trends. The action items we shared last quarter, including our focus on improving staffing, offering value-oriented promotions, and ongoing menu innovation are working and building top line momentum. Regarding sales performance, total revenues increased 8% to $98.5 million in the second quarter of 2022 from $91.2 million in the second quarter of 2021, driven by the comparable restaurant sales increase. Second quarter improvement compared to 2021 resulted from a 15.1% increase in the net impact of product and channel mix and pricing, and a decrease in comparable restaurant transactions of 6.7%. The second quarter 2022 positive mix impact was driven by the addition of check building, higher ticket menu items such as the Family Bundle Packages, GrillMaster Trio and Churrasco Protein items as well as the continued success of add-on offerings, including avocado slices. The second quarter 2022 consolidated net loss was $6.2 million or $0.25 per diluted share and includes income of approximately $0.3 million from discontinued operations. The second quarter 2022 loss from continuing operations was $6.5 million or $0.26 per diluted share. This compares to consolidated net loss in the second quarter of 2021 of $83,000 or $0.00 per diluted share, including an $0.11 per diluted share of negative impact from discontinued operations. Second quarter 2021 net income from continuing operations was $2.7 million or $0.11 per diluted share. On an adjusted basis, second quarter 2022 consolidated net loss from continuing operations was $2.1 million or $0.09 per diluted share compared to adjusted net income of $3.4 million or $0.13 per diluted share in the second quarter of 2021. Please see the non-GAAP reconciliation table in our earnings release for more details. Consolidated adjusted EBITDA, a non-GAAP financial measure, was $5.7 million and 5.7% of total revenue in 2022 compared to $9.1 million and 10% of total revenue in 2021. Turning to restaurant level results. Restaurant-level adjusted EBITDA margin, a non-GAAP financial measure, was 15.2% in 2022 compared to 20.3% in 2021. Restaurant-level EBITDA margins declined during the second quarter compared to 2021, primarily due to higher labor, repair and maintenance, utilities, insurance, and commodity costs, and sales mix within cost of sales, partially offset by the impact of higher restaurant sales in the quarter. In addition to increased inflation pressures, we also proactively invested in expanded labor hours to improve staffing levels those results that were only partially realized during the second quarter. But those investments to improve staffing levels contributed to building sales momentum versus the in July and in early August. Second quarter restaurant level adjusted EBITDA non-recurring expenses, which adversely impacted restaurant level adjusted EBITDA margins by 100 basis points related primarily to short-term supply disruption caused by plant damage to a chicken supplier. The supply disruption required the use of a backup supplier from May to early July and our primary supplier is back to full operating capacity. Regarding second quarter trends in key expense categories, cost of sales as a percentage of restaurant sales in the second quarter of 2022 increased to 33.2% compared to 30.4% in 2021 due to higher commodity costs, partially offset by our phased menu price increases. As noted, higher commodity costs were partially due to additional chicken costs of approximately $0.9 million as a result of utilizing the backup supplier. Restaurant wages as a percentage of net sales increased to 25.1% in the second quarter of 2022 from 24.1% in 2021, driven primarily by higher labor costs due to higher wage rates, overtime pay and training costs, partially offset by the impact of higher restaurant sales. In the second quarter, staffing levels improved, enabling us to open all sales channels more consistently which we expect will drive further sales growth. Other restaurant operating expenses as a percent of restaurant sales increased in the second quarter compared to 2021 due primarily to the impact of higher repair and maintenance costs, higher utility costs, higher insurance costs, and higher delivery fee expenses due to increased delivery channel sales. General and administrative expenses were $12.8 million for the second quarter of 2022 and $11.1 million for the second quarter of 2021, due primarily to increased professional fees, higher employee and other support costs. General and administrative expenses for the second quarter of 2022 included $1.7 million in non-recurring expenses comprised of $1.2 million in professional fees, $0.3 million in digital platform costs and $0.2 million of general and administrative efficiency initiative costs. General and administrative expenses for the second quarter of 2021 included $0.3 million related to non-recurring digital platform costs. Turning now to cash flow-related comments. In the second quarter of 2022, our total cash balance was $42.9 million, including $3.6 million of restricted cash and grew $2.1 million from the first quarter of 2022. Capital expenditures in the second quarter of 2022 were $4.6 million. In addition, we continue to have no debt on our balance sheet and $10 million in undrawn revolver capacity as an additional source of liquidity as part of the loan agreement we executed in 2020. We are continuing efforts to finalize settlements on the winter storm insurance claim we noted previously, which represents a future potential cash inflow once that claim is fully settled. I'll close with a few comments on our outlook for the remainder of 2022. We are very encouraged by our sales momentum so far in 2022 that continued to accelerate in July and into early August. We are very focused on achieving our growth objectives through our four key growth initiatives, which are on track, and we expect will continue to build momentum as we realize the full impact of those initiatives. From a labor rate perspective, we feel comfortable that our current wage rates are competitive based on recently updated wage rate benchmarking at a unit level by role that confirmed our current rates are at or above market. We expect margins to improve measurably in the third quarter, driven by our accelerating traffic trends from improved staffing, effective value-focused promotions, menu innovation and prudent pricing action of 4% to 6% that we plan to take in September. As Rich mentioned, we have multiple points of evidence that our pricing and value promotion strategies are proving effective and will allow us to continue to recover margins with additional pricing action while minimizing any traffic risk. We are targeting restaurant-level adjusted EBITDA margins, a non-GAAP financial measure, of 18% to 20%, as our sales growth and labor optimization initiatives increasingly gain momentum, barring unforeseen changes in our cost structure and operating environment. G&A expense reduction plans are being implemented, which we expect will result in a reduction in expense levels in the second half of this year and an ultimate reduction in G&A to the targeted range of 8.5% to 9% of restaurant sales. Regarding capital expenditures, we expect full year 2022 capital expenditures to be in the range of $25 million to $28 million. The increase from 2021 spending is driven largely by refreshes and remodels for which we expect to invest $8 million to $10 million and technology investments in the range of $6 million to $8 million, primarily in our digital platform and restaurant technology infrastructure. In closing, we are very encouraged by our continued strong sales momentum thus far in 2022, and we continue to be intensely focused on driving sustainable traffic growth across all channels, while also taking highly targeted action to improve store margins. Most importantly, we will continue to drive growth by further implementation of our key initiatives to enhance customer experience -- the customer experience across all service channels. Thank you for listening, and we will now open the call for questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question comes from Edward Reily of EF Hutton. Please go ahead.

[Edward Reily:]

One key theme in previous quarters has been staffing issues. Given that you're at the lowest number of open positions in recent years, would it be safe to say that the staffing challenges have largely dissipated?

[Rich Stockinger:]

I would say -- it's Rich, and I'll open up for everybody else. I would say not yet. We are improving. We still have some issues with call-outs. That happens especially on weekends. No, we still need to increase the staffing percentage by hopefully reducing turnover and by retention, but we're not done yet. We're gaining ground though, and you've seen that, because that's what's helping us increase the transactions as well as the sales. But we've got some -- we've still got some work to do.

[Edward Reily:]

Okay. Great. And then it looks like advertising spend isn't really out of the norm. I was wondering, what's driving the growth in new customers?

[Rich Stockinger:]

The advertising spend is a bit higher than we had during COVID, it's up to about -- I think it's 3.5% of sales. But the new customers we're gaining a lot from the quick service. That was also part of the research, where if you look at what we can get for a Pollo Time, which is less than $6, quarter-chicken rice and beans for lunch compared to our competitors and what they're charging for -- even at quick service, we've seen that we're taking some of that customer base from below us. And now, I believe we're starting to see some of that customer base coming back from casual, coming down to us. So it's not so much been the marketing, even though we're doing the social, we're doing the TV, everything we've done in the past. But I believe that the "recessionary factors" that we're going through right now is having a positive impact on our business and transactions.

[Edward Reily:]

Got you. And -- sorry...

[Dirk Montgomery:]

I was just going to add, Eddie, that our barbell strategy in terms of pricing and promotions, we think is actually being very effective in retaining our value proposition with our value-focused customers. So Rich underscored some of the evidence of that. But we think that, that's what's causing us to actually retain the value-conscious customers and get matriculation from kind of both sides of the spectrum. We've got matriculation from casual and also from quick serve, because of the value and the quality.

[Rich Stockinger:]

But Eddie, the most important, the most important is having the staffing and opening up all the trade channels. We're now opening up back to regular hours that we were open before COVID. That is the most important, because you can advertise in market all night long. But if you don't have the staff and the team to execute through all channels, it's not going to work. So with the increase in staffing, especially where we see staffing, which is less of a concern like Palm Beach County and Orlando, we're seeing significant positive sales, including positive traffic.

[Operator:]

This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.