Fiesta Restaurant Group, Inc.
Q1 2021 Earnings Call Transcript

Published: 13 May 2021

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to Fiesta Restaurant Group's First Quarter 2021 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, Managing Director at ICR. Please go ahead.

[Raphael Gross:]

Thank you. Fiesta Restaurant Group's first quarter 2021 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.

[Richard Stockinger:]

Thank you, Raphael. 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 two topics today, a business update including an overview of first quarter results and an update on the status of our 2021 strategic priorities. Patty Lopez-Calleja, our Chief Experience Officer will provide a digital platform initiatives update followed by Dirk wrapping up with the financial updates. Overall we are pleased with our first quarter sales and profit after considering the impact of Winter Storm Uri on February sales, which negatively affected the entire State of Texas for multiple weeks. Both of our brands showed continued positive momentum in sales trends during the first quarter of 2021 compared to the fourth quarter of 2020, which continued in April. Pollo Tropical first quarter 2021 comp restaurant sales improved to positive 4.3% compared to 2020 and were 3.3% down versus the first quarter of 2019. Taco Cabana first quarter comp sales improved to minus 4.3% compared to the first quarter of 2020. The negative impact of Winter Storm URI on Taco Cabana first quarter comp sales was estimated at a negative 480 basis points.

[Patty Lopez-Calleja:]

Thanks Rich. Our goal in the digital transformation of our brands is to provide our guests a frictionless omnichannel experience. As Rich mentioned in his comments, our digital strategy focuses on experience customization that we believe will drive growth across all channels. We continue to improve the Pollo Tropical drive-thru infrastructure during the first quarter, completing Wi-Fi signal extension work that will allow our drive-thru mobile ordering devices to work further back in the drive-through car lanes during peak times allowing for greater throughput. We are also in the final states of upgrading all units for faster drive-thru payment processing devices that reduce estimated processing speed from 25 seconds to less than 5 seconds per transaction. We intend to allow similar improvements going forward at Taco Cabana. We have made progress on our efforts during the first quarter to add geofencing technology capability for curbside pickup to improve speed of service and ease-of-use. We started the test of the geofencing technology right in the first quarter and plan to continue implementation after we evaluate the test results of our successful pilot program, partnering once again with the experienced consultancy firm Bottle Rocket. We also began the design phase of our enhanced once again we experienced while also began the design phase of our enhanced drive-thru digital platform in April which will continue through the second quarter. We are very excited about the capabilities for improved order accuracy, speed of service, and greater levels of personalized marketing and additional opportunities to showcase our unique brands attributes that this platform will enable. In addition to creating a stable and favorable environment and increase order value, the minimum buyable products or MBP targeted for the first phase of the digital drive-thru transformation will give us more insight into who our guests are and how they use this channel. We hope to begin a test of the drive-thru digital platform sometime in the second half of 2021. We continue to iterate on what and how we communicate with our loyalty members through our app leveraging insights to provide more personalized and relevant compensation. We see our mobile application and the future drive-thru experience as the core component of our digital platform which will allow for enhanced innovation going forward.

[Dirk Montgomery:]

Thank you, Patty and good afternoon every one. I'll start by reviewing our first quarter results and then provide you with an update on our outlook for the remainder of 2021. We were pleased with our first quarter performance in terms of sales, profit growth, and margin improvement, absent the impact of and Winter Storm Uri. As a reminder, the COVID-19 pandemic began to have a significant impact on Pollo Tropical and Taco Cabana sales trends, beginning the week of March 16, 2020 and creates some level of non-comparability at current year results with prior years. As a result, we will be providing commentary this year for many key measures comparing current year results to both 2020 and 2019. Total revenues decreased 1.3% to $144.7 in the first quarter of 2021 from $146.7 million in the first quarter of 2020, driven by the comparable restaurant sales decrease at Taco Cabana, which is due principally to the impact of Winter Storm Uri and restaurant closures partially offset by the comparable restaurant sales increase at Pollo Tropical. As we noted previously, our historical penetration of dine-in sales has been approximately 25% and we made very good progress offsetting the dine-in sales loss throughout the first quarter of 2021 with strong off-premise and drive-thru sales growth. Our first quarter same-store comp sales trend improved from the fourth quarter 2020 levels with Pollo Tropical comps trends improving the plus 4.3% for the first quarter compared with the first quarter of 2020 and minus 3.3% compare with the first quarter of 2019. Taco Cabana first quarter same-store comp sales were minus 4.3% compared with the first quarter of 2020. As Rich has noted , the estimated negative impact of the Winter Storm Uri on Taco Cabana comparable restaurant sales was approximately 480 basis points. Taco Cabana 2021 comparable restaurant sales trends for March, April, and May to date versus the first quarter of 2019, all showed acceleration above fourth quarter 2020 comp sales trends versus 2019. First quarter 2021 consolidated net loss was 2.1 million or $0.08 per diluted share and included approximately $0.09 per diluted share of negative impact primarily from closed restaurant rent charges, and an out of period tax adjustment. This compares to a net loss in the first quarter of 2020 of $7.3 million or $0.29 per diluted share, including a $0.25 per diluted share negative impact primarily from impairment charges and closed restaurant rent and other charges. Provision for income taxes in the first quarter of 2021 includes a one-time, $1.5 million out of period adjustment related to tax depreciation and certain assets placed into service, several years prior to the formation of Fiesta in 2011. The impact on the provision for income taxes is primarily related to an increase in valuation allowance on our deferred income tax assets as well as the affect of a decrease in the Federal Corporate income tax rate in 2017 on our deferred tax assets and liabilities. On an adjusted basis, first quarter 2021 consolidated net income was $0.2 million or $0.1 per diluted share compared to an adjusted net loss of $2.9 million or a loss of $0.11 per diluted share in the first quarter of 2020. Please see the non-GAAP reconciliation table in our earnings release for more details. Consolidated adjusted EBITDA, a non-GAAP measure, increased 63% versus last year of $12.9 million. This is the third quarter of consolidated adjusted EBITDA growth above prior year despite negative same-store comp sales at Taco Cabana, including the impact of Winter Storm Uri, and both brands grew their adjusted margins in the first quarter above 2020 levels. The estimated negative impact of Winter Storm Uri on a consolidated adjusted non-consolidated adjusted EBITDA was approximately $1.9 million, or 110 margin basis points, as a percentage of total revenues. Now turning to our individual brands. At Pollo Tropical our first quarter comparable restaurant sales increased 4.3% in the first quarter. The first quarter improvement resulted from a 9.1% decrease in comparable restaurant transactions, and a 3.4% increase in the net impact of product channel mix and pricing. The increase in product channel mix and pricing was driven primarily by increases in delivery, online and drive-thru average check and sales channel penetration and menu price increases of 1.2%. Regarding sales trends by channel, Pollo Tropical, dine-in and counter take out comparable restaurant sales decreased to 39% from the first quarter of 2020 to the first quarter of 2021, due primarily to the negative impact of the pandemic on dine-in traffic and closures of our dining rooms during part of the first quarter of 2021. The decrease in dining channel sales was offset by strong off-premise channel growth. During the first quarter of 2021, Pollo generated drive-thru growth of 4% and delivering online channel growth of at least 21% in those channels compared to the fourth quarter of 2020. Pollo Tropical first quarter 2021 delivery sales penetration exceeded 10% of total sales for the first time, and that's the highest penetration and delivery we've had to date. Turning to the brand profitability for the first quarter, Pollo restaurant level adjusted EBITDA margins a non-GAAP measure continue to be strong with first quarter restaurant level adjusted EBITDA margins of 21.4% in 2021, compared to 18% in 2020 and 23.3% in 2019. As a percentage of restaurant sales Pollo Tropical experienced lower first quarter 2021 cost of sales of 31.1% compared to 32.4% in 2020, due to operating efficiencies, lower promotions and discounts and price increases, partially offset by lower rebates and discounts from suppliers. Restaurant wages as a percentage of net sales also declined from 24.5% in the first quarter of 2020 to 23.2% in 2021 driven primarily by labor efficiencies and lower medical benefit costs, partially offset by higher incentive bonuses. Pollo Tropical did an exceptional job managing food costs and labor to improve restaurant level adjusted EBITDA margins compared to last year. Other restaurant operating expenses increased in the first quarter compared to 2020, due primarily to increase delivery service provider fees, partially offset by lower utilities costs. Rent in the first quarter increased compared to 2020 due primarily to the impact of sale leaseback transactions and lease renewals at higher rates. We also incurred incremental costs related to COVID-19 of $0.3 million during the first quarter, including quarantine pay and cost related COVID-19 testing, due to the severe winter storm that impacted Texas, from February 14 through February 21, 2021 Taco Cabana February revenue and profit were negatively impacted compared to 2020 results. All units were closed for a number of days during that period with significant reductions in traffic due to poor road conditions. We estimate Winter Storm Uri negatively impacted first quarter 2021 comparable restaurant sales by 480 basis points and adjusted EBITDA by 1.9 million. At Taco Cabana first quarter 2021 comparable restaurant sales decreased 4.3% versus 2020. The decrease in comparable restaurant sales resulted from the 15.9% decrease in comparable restaurant transactions and 11.6% increase in the net impact of product channel, mix and pricing The increase in product channel mix and pricing was driven primarily by increases in drive-thru and delivery sales channel penetration, growth in average check for drive-thru versus last year and menu price increases of 2.1%. From a sales by channel perspective, Taco Cabana dining and counter take out comparable restaurant sales decreased 64% from the first quarter of 2020 to the first quarter of 2021 through the negative impact of the pandemic on dining traffic and closures of our dining rooms during most of the quarter. The decrease in dining channel sales was partially offset by significant off-premise channel growth. Taco's delivery business in the first quarter of 2021 was more than two times the first quarter of 2020 sales driven by the increase in the number of delivery service providers that began late in the first quarter of 2020. The online and catering channels also realized revenue growth in the first quarter of 2021 versus the first quarter of 2020. Sequential trends from the fourth quarter of 2020 to the first quarter of 2021 were negatively impacted by the winter storm. However, after excluding February, the average weekly sales by channel in the first quarter of 2021 showed growth in the drive-thru and delivery channels compared to the fourth quarter of 2020 average weekly sales. Turning to the brand's profitability for the first quarter, Taco Cabana continued to improve margins and dollar profits in the first quarter compared to the first quarter of 2020. Taco restaurant level adjusted EBITDA margins, a non-GAAP measure grew from 8.8% in 2020 to 11.3% in 2021, including the negative impact of winter storm Uri. The estimated negative impact of winter storm Uri on Taco Cabana first quarter 2021 adjusted EBITDA margins was negative 270 basis points. As a percentage of restaurant sales, Taco Cabana experienced lower first quarter cost of sales of 28% compared to 30.7% in 2020 due to lower commodity costs, operating efficiencies, lower promotions and discounts and price increases, partially offset by sales mix and lower rebates from suppliers. Restaurant wages as a percentage of net sales also declined from 32.2% in the first quarter of 2020 to 31.4% in 2021, driven primarily by labor efficiencies that were partially offset by higher incentive bonus and medical costs. Despite lower comp sales, Taco Cabana continued to improve efficiency at a sustainable level in managing food costs and labor to improve restaurant level adjusted EBITDA margins compared to last year. Other restaurant operating expenses increased as a percentage of sales in the first quarter compared to 2020 due primarily to increased delivery service provider fees, and repair costs due to Winter Storm Uri, partially offset by lower other repair and maintenance costs. Rent in the first quarter increased compared to 2020 due primarily to the impact of lease renewals and higher rates and sale lease back transactions. We also incurred incremental costs related to COVID-19 of $0.2 million during this quarter, including quarantine pay and costs related to COVID-19 testing. Turning now to cash flow related comments. In the first quarter our cash balance grew from the fourth quarter balance of $50 million at January 3, 2021 to $59 million at the end of the first quarter of 2021. Net debt, a non-GAAP financial measure decreased from $23.3 million at the end of the fourth quarter to $14.2 million at the end of the first quarter. During the first quarter we sold two properties and sale leaseback transactions for total proceeds of $3.1 million and net gains of $0.3 million in the first quarter of 2021. As you may recall, last year we had 1600 properties that we marketed for outright sale or sale leaseback transactions. Through the end of the first quarter of 2021 we had sold 15 of the 16 properties and expect to close on the one remaining property during the second quarter, although there can be no assurance that that transaction will occur. Total capital expenditures for the first quarter of 2021 were $3.1 million, which included $2 million for maintenance, $0.5 million for technology and corporate, and $0.7 million for remodeling and development. I will close with a few comments on our outlook for the remainder of 2021. We are encouraged that both brands appear to be gaining momentum during the second quarter-to-date compared to first quarter trends. Pollo is trending to flat sales versus 2019 and Taco Cabana is off to a great start in May, with the best Cinco de Mayo holiday single day sales and sales per holiday week that the brand has seen since 2017. From a margin perspective Rich mentioned the labor cost pressure we are seeing in our action plans. Based on internal analysis as well as input from our pricing analytics consultants we believe that we can take additional pricing action if needed to offset cost pressure to maintain margins at historic levels, while still keeping the strong value perceptions that our customers have for both brands. Commodity food costs are expected to remain stable, through the remainder of 2021 based on current supply commitments that we have in place for calendar 2021 across key commodities. Capital expenditures in 2021 are still expected to be in the range of $33 million to $38 million, with the increase compared to 2020 levels, primarily driven by investments in our digital platforms, including digital drive-thru upgrades. In closing, we believe both brands are entering the second quarter of 2021 with top line momentum and we believe our revenue building strategies and off-premise channels and investments in our digital platform will accelerate sales for the remainder year. Thank you for listening and we will now open up the call for questions. Operator?

[Operator:]

Thank you. Our first question comes from James Rutherford of Stephens Incorporated. Please go ahead.

[James Rutherford:]

Thank you and good afternoon. Hope you're all doing well. I wanted to start off on, yes, I wanted to start off on the split of sales by channel. I appreciate you laying it out in that detail and it's clear you continue to see drive-thru delivery and mobile ordering growth with counter sales down. And we listened to a lot of earnings calls in the last few weeks, it seems like more and more that delivery and mobile channels that the gains in that would be quite durable, but how do you think about the drive-thru versus counter sales mix and where that normalizes? Is there any indication in recent weeks or months that gives you the kind of view how customers will use your businesses going forward.

[Richard Stockinger:]

Sure, so I mean it varies a little bit by brand. I think we pre-COVID from an occasion perspective for Pollo, we had a very large lunch occasion dine-in mix, and we believe that as consumers go back to their regular patterns of behavior, we believe that ultimately that dine-in occasion is going to return. And we're starting to see that. Whether the level of incrementality between drive-thru and dine-in, it's still pretty early, still difficult for us to determine whether how much incrementality we're going to retain on drive-thru.

[Dirk Montgomery:]

Yes James, we're focusing a lot on this, but Patty went over on the digital side with the drive-thru. We believe that, yes, at Pollo, especially in the core markets our lunch is starting to come back. But we also believe that the guests' preferences will change in terms of they still want to eat at home, and not in dining experience that we had in the past, and that's why we're putting such focus on the drive-thru and other channels. In case that never comes back, we still feel we have a great opportunity to increase our sales system wise because of the efforts and the investments we're making

[Richard Stockinger:]

And then even though it's difficult to really pinpoint through incrementality, on the Pollo side from the fourth quarter to the first quarter we saw an increase generally across all channels. So that increase in sales was pretty evenly spread across most of the channels, as they all more or less maintain their penetration. On the Taco side, we opened up the dining rooms a little bit later. So it's still pretty early for us to really determine, how much incrementality we're going to see on the Taco side.

[James Rutherford:]

That sounds pretty encouraging on that 4Q to 1Q shift you saw growth you saw across channels. On the Pollo restaurant on margin and on wages, first is the clarification. I think your average hourly wage at Pollo was $9.60, the last update, is that going to $10 per hour which would be about a 4% increase on my math, or is it the hourly wages across the board are going up by $1, which would be a larger increase, just want to get that correct first of all?

[Dirk Montgomery:]

Yes, good question. Good, good question for clarification. So we had some employees that were below $10 per hour, so we're moving those employees to $10 and then we're giving all employees an extra dollar per hour.

[Richard Stockinger:]

That extra dollar per hour is just for the time being, to get us through this labor crunch.

[James Rutherford:]

So the ones that were…

[Richard Stockinger:]

It is not permanent.

[James Rutherford:]

Oh sorry I apologize, I interrupted you. I thought I was cutting in and out a little bit there. So that's not a permanent thing you're saying Rich?

[Richard Stockinger:]

No but we are going through and evaluating market-by-market to see where we are from our wages, and we'll evaluate any additional increases as we get that data.

[James Rutherford:]

Okay, so that dollar is temporary.

[James Rutherford:]

And there was a 3% price increase taken in April, is that in addition to the 1.2% price that was already in place in the first quarter. So going forward, it's more like 4%, 4.2% price at Pollo?

[Richard Stockinger:]

That's correct. Correct.

[James Rutherford:]

Okay.

[Dirk Montgomery:]

In a general level price increases that we just took we believe will offset the cost of the changes that we've made to date, even though some of those are short term as Rick said.

[James Rutherford:]

Yes that was exactly what my next question was going to be so thanks for that. And then just two more on commodities did I hear correctly that you expect your commodity costs to be flat for the year because of locking in the price, across the board?

[Richard Stockinger:]

Correct. So for food for key commodity categories we are locked in. We are not locked in, in some other categories that are less materials such as packaging. So we are seeing some pressure. I think like most other players in some of those areas, but on the commodity front, and we expect stable costs.

[James Rutherford:]

Okay, great. And last one, thank you again this much time here but on the remodels plan for the year. Are those changes to kitchen and design operation focused on improving the performance of your existing markets or those more changes made with the mind toward testing out to see what might work outside of Florida.

[Dirk Montgomery:]

Yes it's really, but I mean it's definitely an existing markets, as Rich said, as we have identified remodels that we'd like to do, we want to try to incorporate some of the new elements from our research to try to get an early read on those elements before we start up any new stores.

[James Rutherford:]

Thanks for all the time, I will turn it over.

[Dirk Montgomery:]

Thanks James.

[Richard Stockinger:]

Thanks James.

[Operator:]

Our next question comes from Joshua Long from Piper Sandler. Please go ahead.

[Joshua Long:]

Great thanks for taking the question and gentlemen, thanks so much for all the great details. I wanted to start it off with as clarification, understood on Pollo Tropical in terms of getting back towards some of those I think you said 2019 levels. I wanted to see if you can clarify your comments on Taco Cabana. It sounded like things were moving in the right way, but I wanted to make sure I understood the points in terms of how Taco was performing in the quarter-to-date period.

[Richard Stockinger:]

Sure, so the quarter performance was negatively impacted by Winter Storm Uri. So that's in this first quarter. So we tend to try to break it. We've broken it down by month which is why we reflected in the press release as such. So, as we look from January and February into March, April May, we're definitely seeing acceleration in the Taco brand from the levels that they were at the beginning of the year even back to the fourth quarter of 2020. So, we are focused I think like our investment, stakeholders on our trend versus '19 and we're seeing improvement in the trend versus '19, particularly as we head in from April into May.

[Joshua Long:]

Okay, thank you for that and I think previously we talked about expecting positive growth in 2021 driven in part by the growth initiatives and then just overall increases across the different segments in terms of traffic as consumer mobility got back to normal. Is that still the outlook, and any sort of additional color that would be helpful?

[Richard Stockinger:]

Yes, I mean that is still the outlook, and as indicated in our prepared comments, I mean both brands are moving toward flat to 2019 with Pollo a little bit ahead of Taco, Pollo basically is flat 2019 at this point. And as we said, I mean Taco had a fantastic Cinco de Mayo holiday and so May is off to a great start, obviously it's still early in May, but they had a fantastic Cinco de Mayo Holiday Inn week and that puts them on a good trajectory to meet or be 2019 as we head through the remainder of the year.

[Joshua Long:]

Great, thanks for that. And I wanted to shift over to some of the qualitative research you were doing if you're any of the takeaways there. Perhaps it just underscores, some of the learnings and or some of brand attributes and things that we've already known about the brand but it gives you a different perspective or maybe a little more firepower as you start to layer in some of these initiatives going forward? And then if you can provide any sort of expected timeline or just general expectations around the flow of some of that quantitative research that you're doing?

[Richard Stockinger:]

Yes, Joshua, it is Rich. I'm not ready to publicly disclose it, in terms of what the results are, but we've been pretty excited about the results so far. We definitely have strong essence, especially in core, but we're analyzing not just core, but also out of core and also potential new markets, as what people want, what the people want to use us for, and how do they want to use us for it. Now you can read into some of it in terms of where we're putting the money in terms of the digital investments in the drive-thru. But we're a little early. I believe though that we'll be able to discuss this definitely by the end of the year, and you'll start seeing in some of the newer remodels and the tests that we're doing, kind of what we got out of the research, but clearly, the food is the number one qualitative and quantitative result is how much people love the food, the freshness of the food. Those are the two big attributes, and we've worked hard to get there and the guests are seeing it and appreciating it.

[Joshua Long:]

Great, thank you.

[Richard Stockinger:]

Thanks, Joshua.

[Operator:]

Our next question comes from Brian Vaccaro from Raymond James. Please go ahead.

[Brian Vaccaro:]

Hi, good evening. I appreciate the monthly sales trends, but can you help us level set where average weekly sales volumes are for each brand? I just want to make sure we're all on the same page trying to work through the one week of calendar shift and the two year stacks that you disclosed?

[Richard Stockinger:]

Sure, I mean we hit so we did it I'm giving broad strokes here but overall, our average weekly sales trend sequentially from the fourth quarter for Polo improves in high single digits. We haven't published the average weekly sales numbers, but you can get to the average sales numbers from using the information that we provided in the press release, and it's from, excuse me from a channel perspective, as I mentioned before we had growth across all of the channels. In terms of Q1, average weekly sales compared to Q4, so that we were encouraged by that, because we were concerned, like everyone else about some level of trade out across the channels. On the Taco side it's because of Winter Storm Uri, it's very difficult to really compare average weekly sales by quarter. You almost have to look at it by month, and as I mentioned, we did see growth in average weekly sales in the drive-thru and the delivery channels, if you exclude February at Taco in Q1 versus Q4.

[Brian Vaccaro:]

All right. So on the Taco side, I think the math is a little over $30,000 a week for the first quarter. Obviously the Winter Storm Uri had a big impact there. Can you help us with where we are in March and April, on average sales?

[Dirk Montgomery:]

We are not -- I mean, what -- our view of all this is that the reason that we're publishing comps compared to 2019 is really to try to get back to what we think is a comparison that that kind of takes out the impact of COVID. We're certainly willing to disclose average weekly sales, consider that if that's an important item to the investment community. But our thought was at least for this quarter that we would publish comp sales versus 2019 to really give a clean look at what our true trends are against history.

[Brian Vaccaro:]

All right, fair enough. And last one from me, just on G&A. What's a reasonable number to expect for this year on the G&A line given all the moving parts. And I think you are in the low $50 million range. But, so it's worth on streamlining your G&A costs, but just ballpark the G&A expectations for the year? Thank you.

[Dirk Montgomery:]

Yes, I mean I think we mentioned on the last call that we -- our goal is to really try to keep G&A as a percentage of revenue flat as we head into '21 against '20. So that's our goal and I think we believe that that's achievable.

[Brian Vaccaro:]

Okay, thank you.

[Richard Stockinger:]

Thanks Brian.

[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.