Fiesta Restaurant Group, Inc.
Q3 2014 Earnings Call Transcript
Published:
- Operator:
- Greetings and welcome to the Fiesta Restaurant Group Third Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference to your host, Ms. Lynn Schweinfurth, Vice President and Chief Financial Officer. Thank you, you may begin.
- Lynn Schweinfurth:
- Thank you, good afternoon and thank you for joining our call. Our third quarter 2014 earnings release was issued after the market closed today. If you’ve not already seen it, it can be found on our Web site, www.frgi.com under the Investor Relations section. Before we begin, I must remind everyone that our call today may include statements that are not based on historical information. These forward-looking statements include, without limitation statements regarding our 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 from what is expressed or forecasted in such forward-looking statements and we 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 our SEC filings. Please note that during today’s conference call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. Any discussion of such information should not be considered in isolation or as a substitute for results prepared in accordance and reconciliation to comparable GAAP measures is available in our earnings release. Now I would like to turn the call over to Tim Taft, President and Chief Executive Officer.
- Tim Taft:
- Thank you Lynn and good afternoon everyone. I am going to off script a little here to share with everyone Fiesta Nation learned by little over a week ago. The Dallas Business Journal hosted their annual CFO award program where our own Lynn Schweinfurth came home with the CFO of the year for public restaurant companies. Lynn no doubt will tell you that this is the team effort and she is right. But this honor is about been a leader, about character and about performance and it surprised no one she was this year’s recipient, getting some dirty looks here so why don’t we move onto more even good news that’s our third quarter results. In the third quarter we marked yet another period of outstanding results and I thank the entire team for their contributions to Fiesta’s continued success. Our achievements to-date supports the confidence that we have in our direction and demonstrate our commitment to delivering on our promise to guests and shareholders alike. During the quarter, we grew revenues by 10.4% through a combination of contributions from newer restaurants and comparable sales gains and increased EPS by 62% as we expanded restaurant level margins, leverage fixed expenses and lowered our interest expense. Lynn will walk you through the numbers in greater detail shortly so I limit myself to a few overarching themes, some individual brand highlights and a few of our development and brand elevation plans for next year. Realizing greater efficiency through scale is an important component of our strategy. We have made considerable progress on this front especially with respect to optimizing our supply chain. More recently in the first quarter we reached the multiyear product and marketing agreement with Coca-Cola which combined the system soft drink gallonage of both brands. While at the end of July we completed the transition of Taco Cabana to Performance Food group as its main distributor. This place both brands under the same distribution company for the first time. Given a number of warehouses and the closer proximity to restaurants in Taco Cabana market, we believe PFG will provide faster delivery of products to ensure improved quality and freshness in addition to significant cost savings over the term of the contract. We also believe our consolidated distributor is better equipped to accommodate Fiesta’s growth plans due to its distribution network in the Southeast. And while Taco Cabana has benefited from PFG’s established relationship with Pollo Tropical our introduction of Pollo Tropical to Texas has been aided considerably by Taco’s 36 plus year operating history in the state with respect to selecting in security great real estate sites along with sharing infrastructure, managerial oversight and recruiting efforts. In addition, we believe our new Caribbean inspired prototype and new menu offering have helped to cultivate the warm reception Pollo has received in Texas as demonstrated by great social media buzz. And more importantly, initial sales continuing to exceed our expectations. It is important to note that in building the Pollo Tropical presence in Texas we have thus far invested very little in media and instead limited our exposure to preopening media such as local TV morning programs or local radio shows as forums communicate our brand attributes as a context of upcoming restaurant opening. We believe that as we fill out these markets and add media weights we’re going to see similar sales expansions one to what has been experienced in Tampa Orlando and other markets that are now just reaching media efficiency. We opened nine company-owned restaurants in the third quarter including seven Pollo Tropical and two Taco Cabanas. We now expect to open 26 company-owned restaurants in 2014 including 22 Pollo Tropical, four Taco Cabana restaurants, leading the high end of our target range. Of the Pollo Tropical opening, 10 will be opened in key Texas DMAs including five in Dallas Fort Worth, three in Houston and two in San Antonio with the balance in the South West Central and South Florida. But 20 new company-owned restaurants opened through the end of third quarter. We have six remaining openings this year including the second Cabana Grill restaurant located in Jacksonville that’s expected to open in December. We intend to use the second Cabana Grill locations to further evaluate the opportunity for expansion of the differentiated Taco Cabana concept outside of Texas. Successful brand and operating refinements will be applied to future opening of Taco Cabana and in some cases to existing Taco Cabana restaurants. These include repositioning the kitchen by 90 degrees which is enhanced efficiency and throughput. Showcasing product freshness by enabling customers to watch tortillas being hand pressed and toasted right in front of them and adding new menu items such as tostadas and black refried beans. And now let’s turns to individual brand highlight from the third quarter. Pollo Tropical generated the 5.9% increase in comparable restaurants sales against the 6.5 comparison resulting in the two year cumulative comp sales growth of 12.4%. Comp sales this year consisted of 4.6% increase in transactions 1.3% increase in check. Note of accumulative impact of price increase is 1.6% Pollo Tropical is now generated comp sales growth for 20 consecutive quarters. The brand continues to benefit from higher off-premise and home meal replacement sales as the food travels well and is offered at very competitive price points, along with greater ran awareness and media efficiency in some fodder markets through new restaurant developments. We also enhance throughput by eliminating low selling products which is increased speed of service, improved accuracy and reduced waits. We’ve promoted our Create Your Own TropiChop during July and August and our new Chicken Avocado club wrap in Florida market in September. We also extended the roll out of our Tropical light menu to Texas which includes healthier options. The menu is now offered in West Palm Beach in Texas and will be rolled out system wise by year end. Looking ahead we think the smartphone app which is been testing over the past several months and rolling out some more restaurants will make Pollo Tropical a more convenient option to people on the go and more viable option for catering. Turning to Taco Cabana restaurant sales grew a solid 3.5% against a 1.8% comparison for two year accumulative comp sales of 5.3%. Comp sales growth this quarter consists of a 0.9% increase in transaction and a 2.6% increase in average check. Check average was possibly impacted by a new menu board that moved to more guests from combos to more profitable plates and the accumulated impact of many price increases of 1.1%. We completed 31 Taco Cabana remodels to the end of the third quarter and related sales list is contributed to our topline performance and overall brand perception and appeal while incremental EBITDA contributions continue to meet healthy investment return hurdles. At the end of the year we will have only 23 of 14% of our company-owned restaurant remaining to be remodeled to complete the program. We plan to remodel these remaining restaurants in 2015. During the third quarter we promoted two bundle of deals each of 499 price point chicken cabana bowl and a drink and state street taco street in a drink. For breakfast, we feature the Rise and Dine breakfast taco for a $1.09. We believe that our promotions are reinforcing every day value and helping to drive incremental transaction while our operations team is doing outstanding job raising the level of execution to ensure a great guest experience. Now let me briefly discuss our plans for 2015. Currently there are several restaurants under construction that will be opened in 2015. More specifically we’re anticipating opening the total of 26 of 30 new company-owned restaurant next year which include 24 to 26 Pollo Tropical and two to four Taco Cabana restaurants. We’ll also close up the four locations of which three could be Taco Cabana and one is Pollo Tropical relocation. The new Pollo Tropical restaurants will be built in existing markets with the majority being in Texas and Florida. We’ll also add two new restaurants in the national DMA and reach a penetration level to become media efficient. In 2015, we will launch a remodeling program for Pollo Tropical restaurants starting with our Orlando market. The brand has performed exceptionally well in this market with quality operational execution. Orlando represents a logical launch of remodeling program and has already had both core and elevated restaurant in the same market. The remodel design will include features and brand elements consistent with the new Caribbean prototype that we have successfully introduced in Texas. Going forward, new restaurants in the Orlando market will be build using a new prototype as well. Upon completion of the remodeling program in Orlando, restaurants throughout the market will offer elevated service model consistent pricing and Caribbean aesthetics. We believe this initiative will drive incremental transaction growth and will plan to expand the program in other markets based on successful results in future years. Overall the plan is working and we will continue to work with plan. Now let me hand the call back to over to Lynn.
- Lynn Schweinfurth:
- Thank you, Tim. Let’s begin with the third quarter summary before diving deeper into the results themselves. Afterwards I’d like to provide an update on our full year outlook as well as our offer our initial thoughts on operating targets for 2015. First, during the third quarter, we grew total revenues by 10.4% to $155.3 million as we benefited from the positive impact of 21 net new company-owned restaurant openings over the past year and comparable restaurant sales growth at both brands. As Tim indicated, Pollo delivered comps sales growth of 5.9% further solidifying its position among the best performing fast casual operators. In addition, Taco delivered positive comp sales growth of 3.5% including transaction growth of almost 1%, its best performance since the fourth quarter of 2012. So far in the fourth quarter, the comp sales growth momentum has continued the quarter-to-date comp sales growth of 6% at Pollo and 5% at Taco through this past Sunday, November 2. Turning to the P&L. Restaurant level adjusted EBIDA as the percentage of restaurant sales improved 100 basis points to 20.9% due to favorable cost of sales, labor, rent and advertising expenses that were partially offset by higher other operating expenses. In dollar terms, restaurant level adjusted EBITDA rose 15.5% to $32.3 million. Improvement in G&A, year-over-year as a percentage of revenues drove 70 basis points of margin expansion and contributed to a 24.9% increase in consolidated adjusted EBITDA $21.9 million and a 170 basis point improvement in consolidated EBITDA as a percentage of revenue to 14.1%. Cost of sales improved as a percentage of restaurant sales by 50 basis points through quarter compared to the prior year period primarily due to the benefit of modest price increases, a shift in sales mix, to more profitable menu items due to Taco’s new menu board rolled out at the beginning of the year and effective supply chain initiatives that more than offset commodity inflation. Supply chain management initiatives among other thing included the financial benefit of new contracts for food distribution and soft drinks entered into early on the year as well as other food commodity contracts that were in effect during the quarter. Restaurant wages and related costs improved as a percentage of restaurant sales by 60 basis points. And sales growth at both brands and lower medical cost more than offset inefficiencies and incremental labor at new elevated restaurants and higher workers’ compensation cost. Rent expense improved as a percentage of restaurant sales by 20 basis points as sales growth more than offset higher rent at new Pollo Tropical opening. Other restaurant operating expenses increased as a percentage of restaurant sales by 30 basis points. This was the consequence of timing and cost of certain repair and maintenance expenses, partially offset by lower insurance expenses. Advertising expense decreased as a percentage of restaurant sales by approximately 30 basis points due primarily to the timing of promotions. Preopening cost increased by $0.8 million to $1.4 million in the third quarter of 2014 due to nine company-owned restaurant openings in the third quarter this year versus four in the year ago period and the timing of expenses for future restaurant openings which are typically incurred between four to six months prior to opening. We continue to expect preopening cost of approximately $4 million in 2014. G&A expenses increased $0.2 million to $11.8 million in the third quarter of 2014, but improved 70 basis points as a percentage of revenues to 7.6% in the third quarter of 2014 due to the impact of higher sales on essentially flat overhead. As we focused on ensuring that our infrastructure spending is efficient, yet adequate meeting or exceeding our short and long-term business objectives. Additionally, as called out in our press release today, during the quarter, we recognized the benefit related to a favorable litigation settlement that positively impacted results by 0.5 million. Depreciation and amortization increased $0.9 million to $6 million in the third quarter of 2014 due to new restaurant openings over the past year and remodeling at Taco Cabana partially offset by the impact of sale leaseback transactions completed at the very beginning of fiscal 2014 and in the prior fiscal year. Interest expense decreased by $3.9 million to $0.5 million in the third quarter of 2014 compared to the prior year period. This expense reduction was due to the $134 million reductions in our outstanding debt to $66 million at quarter end from $200 million and a reduction of our interest rate on borrowings from 8.9% to 2.2% under the new senior credit facility. We incurred an impairment charge of $0.2 million this quarter related to a decision to opportunistically relocate an existing restaurant through superior location in the same trade area prior to lease expiration. During the quarter we recognized other income of $0.6 million related to condemnation proceeds received from an imminent domain proceeding pertaining to a Taco Cabana Restaurant that closed during the quarter. Our third quarter income tax provision was drive using an estimated annual effective income tax rate of 38.3% while in the same period last year the provision for income taxes was derived using an estimated annual effective income tax rate of 36.5% excluding discreet items. The 2014 rate is higher than the prior year period due to the expiration of the work opportunity tax credits at the end of 2013. Net income increased 81.6% or $4.1 million to $9.2 million in the third quarter of 2014 as compared to net income of $5 million in the prior year period. Diluted EPS increased to $0.34 per share from $0.21 per share. Note that despite our equity offering last year which increased our share count approximately 15%, diluted EPS still grew by almost 62%. Turning to brand margins at Pollo, margins contracted due primarily to other operating expenses that were negatively impacted by timing and temporary higher cost for certain repair and maintenance expenses in new markets partially offset by lower insurance cost. From a profitability standpoint, adjusted EBITDA at Pollo grew 13% in the third quarter of 2014 to $12.1 million off of an 18% increase in restaurant sale. Taco Cabana restaurant margins expanded materially this quarter due to sales leverage, favorable product mix primarily due to the impact of new menu board and favorable timing of advertising expenses. From a profitability standpoint adjusted EBITDA at Taco increased 43.7% to $9.8 million compared to the prior year period off of the 3.6% increase in restaurant sale. At quarter end, we had a cash balance of $1.9 million and takedown $5 million of borrowings under our senior credit facility compared to the fiscal year end. After reserving $7.5 million for letters of credit, we had $76.5 million of borrowing capacity under our senior credit facility, and we are in compliance with all related covenants. Now let's review 2014 financial expectations. Consistent with our guidance last quarter at Pollo we expect to exceed the high end of our comp sales growth range established early in the year of 5%. This includes anticipated sale cannibalization associated with new store development that will negatively impact our comparable sales growth over 1 percentage point on a full year basis. But note that the impacts of this higher second half of the year than the first. With respect to Taco, we continue to expect comp sales growth between 1.5% and 3.5% as previously communicated. G&A expense expectations continue to be between $48 million and $50 million which compares with $48.5 million in 2013 and will drive margin expansion given a higher revenue base. Assuming the work opportunity tax credit is not reinstated in 2014, we continue to estimate an effective tax rate of 38.3%. However, if this credit is reinstated before the end of our fiscal year, we would expect the rate of 36.5% to 37.5%. Finally, 2014 capital expenditures are projected to be higher than what we have previously communicated due primarily to the timing of new company-owned restaurant openings that will fall early in 2015 that we're spending money against in late 2014 in addition to land purchases. Therefore, we would expect capital expenditures to be between $70 million and $75 million in total in 2014. So let's turn to preliminary operating targets for the upcoming 2015 fiscal year. With respect to comp sales growth, we are modeling Pollo at mid-single digits and Taco at low single digits. Note that the Pollo comp sales expectation includes some sale cannibalization next year of approximately 1% similar to 2014, as we continue building our presence in existing markets. Inflation will be higher than what we've experienced in the past several years; more specifically we believe commodity inflation will be in the mid-single digit for a basket of commodity purchases on a consolidated level in 2015. The increases will be in the mid to high single digits at Pollo and the low single digits at Taco. This is obviously higher than the 1% inflation we're expecting in 2014. Protein inflation especially chicken is driving a material portion of these expected increases in 2015. We are proactively looking into various means to mitigate cost including the potential of altering our products justifications and our supplier sources while maintaining our current high quality standard. One of the areas that is coming in better than our original expectation is the cost for healthcare in 2015. In addition, we are in the process of identifying other expense opportunities in the middle of the P&L. We are increasing prices more than we have had to do in the past while ensuring that we will continue to offer a great price value relationship to our guests. Therefore, we are planning to increase prices at Pollo by a little over 4% and prices at Taco by approximately 2.5% in 2015 compared to 2014. Overall, we believe we can bridge the dollar impact at higher than expected commodities with pricing, cost mitigation tax tactics and expense savings opportunities. As Tim indicated, we plan to open 26 to 30 new company-owned restaurants in 2015 of which 24 to 26 are expected to Pollo restaurants. We are also anticipating that we will close up to four restaurants in 2015. G&A is expected to be 53 million to 55 million. We are planning for an effective tax rate of approximately 38% to 40% assuming the work opportunity tax credit is not reinstated for 2015. If the tax credit is reinstated for 2015, then our tax rate will improve approximately 150 basis points. And finally, total capital expenditures in 2015 are projected in the range of $78 million to $88 million. This consist of; one, new restaurant development capital expenditures of $58 million to $65 million; two, capital expenditures to complete the Taco remodeling program to implement a new Pollo remodeling program and capital maintenance at both brands of $14 million to $15 million; and three, capital expenditures for IT and other projects of $6 million to $8 million. Lastly, 2015 will be a 53-week fiscal year and this extra week is factored into our operating target. Before we take your questions, let me conclude by saying that we are very pleased with our performance through the first three quarters of 2014 and our business fundamentals give us continued confidence as we enter 2015. At every level of the organization, we are working collaboratively to execute our operational and development strategies to meet high expectations for financial performance to shareholder value. Operator, please open the line for questions.
- Operator:
- Thank you. At this time, we will conduct a question-and-answer session (Operator Instructions). Our first question comes from Will Slabaugh with Stephens Incorporated. Please proceed with your question.
- Will Slabaugh:
- Thank you and congrats on the quarter. I wonder if you could talk just a little bit more about what you've seen in the new Pollo units in Texas. I'm not sure if you're willing to speak to the volumes at this point, but it would be good to hear if they're still running at or ahead of plan, how you view the efficiencies around the costs of the new stores relative to your expectations as well.
- Tim Taft:
- Well, I think there is a couple of measurements, one certainly is top line. And we continue to be extremely encouraged by what these restaurants are producing. The other thing that we really are excited about is kind of the social media buzz and what people are saying about the product. And the good news is that the question we believe has squarely been answered, does this food translate to Texas and the answer has been in an overwhelming test.
- Will Slabaugh:
- That's great to hear. And then one more question quickly on the remodels with Pollo. Did I hear you correctly that we should think about the look, the plating, the silverware, that whole elevated operation, should that be fairly similar in the remodeled stores as it currently is an elevated stores in new markets?
- Tim Taft:
- Well, first of all, we’re planning on doing the starting with Orlando which is going to be an elevated store. So you will have the hard plates and the modified table service in there. The thing that you should be on the lookout for is that we call the restaurant that we’re building the new prototype in Texas the folks in operations call it Big Blue. We’re going to open up and we’ll build and open up three Big Blues next year in Orlando and with that development we’re going to transform really the color paint mostly to make them look like a signature elements of Big Blue. So by the end of 2015 those new prototypes colors will not look at a place in Orlando the market will look like that altogether.
- Operator:
- Thank you. Our next question comes from Imran Ali with Wells Fargo. Please proceed with your question.
- Imran Ali:
- Thanks for taking my questions. You referenced Tampa earlier, the market that is only just beginning to take advantage of media efficiencies. Looking to 2015 and 2016, what other markets are close to reaching media efficiency?
- Tim Taft:
- Well, I think that you’re going to find the Nashville is one that we’ll open up too that will be media efficient. Tampa already is, Lynn can you think of which ones are we not? Jacksonville…
- Lynn Schweinfurth:
- We will not be media efficient in Atlanta either.
- Tim Taft:
- That’s correct.
- Lynn Schweinfurth:
- Yes, the Jacksonville we’re nearing media efficiency today, Tennessee by the end of 2015 and then some of the Southwest Florida markets will be nearing efficiencies in the next one to two years.
- Tim Taft:
- And clearly the three DMAs in Texas where we just opened up.
- Imran Ali:
- Got it. That's great. And also I think you touched on this earlier, but what is your expectation for a new versus existing market development over the next couple of years?
- Tim Taft:
- Well, new is defined as in terms of opening up in new marketplace where we don't have any penetration or is that your question?
- Imran Ali:
- Yes, that's right.
- Tim Taft:
- I think that what you're going to find is that in the state of Florida there is a lot of markets that we currently have not gone into so you'll probably see us entering those, in Texas right now we targeted this year with Dallas Fort Worth, Houston and San Antonio you'll see us going into the other major DMAs in the state of Texas and primarily all you have to do is take a look at a marketing footprint where we have media efficiency the Taco Cabana in Texas and those markets you'll see us move into with Pollo.
- Operator:
- Thank you. Our next question comes from Nicole Miller [audio-gap].
- Unidentified Analyst:
- …remodel program, how many units are actually in that Orlando area we're talking about I mean I think there is a probably a total around 10 are all of those going to be remodeled just trying to reconcile that with your commentary Tim on the three new Big Blues that are going to be Orlando?
- Tim Taft:
- Yes, Josh. Right now there is about 13 so there will be 3 more and then all of those will and then at the end of the year all 15, 16 of those restaurants will all look why they belong to the same brand group.
- Unidentified Analyst:
- Got it, and to that take to do the 10 or so 13 that are the only unit where the market right now should that take more or less the entire year should we think about those being relatively evenly spaced?
- Tim Taft:
- Yes, you should.
- Unidentified Analyst:
- Right and then although it's probably a little bit early, how are you thinking about the cost being this -- being going to be the one of the first remodels to this newer Caribbean look, how did you kind of approach the cost input output conversation on the remodel side?
- Tim Taft:
- Yes Josh I think that when you think of remodels for Pollo you shouldn't think of it in the same way that kind of money that we spend on Taco. We're talking mostly about soft goods and about paint and maybe some tables, but we're not replacing rugs or replacing walls or the expensive kind of remodeling that we had to spend the money on for Taco.
- Unidentified Analyst:
- Okay, that's helpful and then Lynn switching over to the cost of goods sold basket can you kind of walk through what percentage of the basket is locked right now for the rest of the year and next year I mean are we still in the preliminary stages of locking down a lot of those items is there an opportunity there kind of give us some perspective on what's happening with that?
- Lynn Schweinfurth:
- Yes this year we have a great deal of visibility and work for the most part locked in, next year we've locked in a good portion of our contracted products, there are still some moving pieces that we're still working on over the next several weeks. But I do think we still have a good amount of visibility and our estimates are reasonable based on what we know today. Certainly based on what we've locked in and then those negotiations that are currently underway.
- Unidentified Analyst:
- Okay and then last one for me just kind of a bigger picture as we're facing this inflation and we're still trying to manage this price value condition, how do we think about that in terms of the pricing that I have to next year, you've mentioned some opportunities around maybe shifting product specs but then also really focusing on the execution side so just thinking bigger picture how do we balance the value versus the menu pricing that we're taking in the current environment?
- Tim Taft:
- Yes, Josh clearly one of our cornerstones is the price value relationship that we enjoy, we don't feel that this price increase that we're going to be taking jeopardize our position at all.
- Operator:
- (Operator Instructions) Our next question comes from Nick Setyan with Wedbush Securities. Please proceed with your question.
- Nick Setyan:
- Congrats on another amazing quarter. Lynn, when are we thinking about taking that incremental price increase on the Pollo side? Is it into Q4, early Q1 2015?
- Lynn Schweinfurth:
- No it will be taken in the fourth quarter.
- Nick Setyan:
- In the fourth quarter? Okay. So Q4, what's the pricing going to look like in Q4?
- Lynn Schweinfurth:
- Well we'll take the absolute pricing is about 5% so the effective pricing next year will be a little over 4%.
- Nick Setyan:
- And then what about in Q4 of this year?
- Lynn Schweinfurth:
- Well in Q4 the pricing will be in effect about roughly half the quarter.
- Nick Setyan:
- Got it, okay. Perfect. And then in terms of the actual timing of the remodeling, someone else asked, you guys are -- I think previously the expectation was it's going to be weighted more towards the second half, and I guess now you guys are expecting to just kind of evenly do the remodels starting in Q1?
- Tim Taft:
- Well there is two different things, I think we got the final remodel to Taco Cabana are going to be in the first quarter and second quarter and that'll finish up Taco and then we'll probably begin the remodels of Pollo sometime late in the first quarter and those 13 restaurants will be remodeled through the rest of the year.
- Nick Setyan:
- Okay, great. And then the labor continues to leverage just way ahead of expectations. So are there any learnings that you guys can maybe communicate to us from these newer Pollo stores? Is it all like non-Pollo related, or are we actually seeing the profitability of these new stores ramp up ahead of your expectations?
- Lynn Schweinfurth:
- Well, I think there is a few things going on Nick one is we’re certainly enjoying some high sales so that certainly helps us to leverage our labor cost. But if you dig into our variable analysis which is part of our Q filing tonight, you will see that while we see some benefits associated with sales leverage and some other favorability as we are seeing some inefficiencies partially offsetting those benefits. So there is obviously some moving pieces going on. The team continues however to focus on trying to make the restaurants as efficient as quickly as they can after they open the doors and after they understand what the recurring sales volume is so that they can schedule labor accordingly.
- Nick Setyan:
- Okay. And just the last question, I promise. Can you possibly quantify the EPS benefit from that final week next year?
- Lynn Schweinfurth:
- We haven’t even given EPS guidance, so to carve that out just seems a little bit different than what our practice has been. But certainly all of the operating targets that we’ve provided do include the 53rd week.
- Operator:
- Thank you. Our next question comes from Alex Slagle with Jefferies. Please proceed with your question.
- Alex Slagle:
- Thanks. A question on the new Pollo Tropical stores in Texas. I wonder if you could talk to the sales mix dynamics you're seeing initially in those stores and how it might differ from some of the other markets and your expectations. Kind of taking everything from product mix, check size, frequency, drive-through usage, anything you want to point out.
- Tim Taft:
- Well, I think the main takeaway for us right now is that one of the big reasons that we wanted to move into Texas was because we were going to have the ability to use some of Taco Cabana’s marketing dollars if we had to. But the fact is we really haven’t had to do that and that’s because as we open these restaurants not only the social the media buzz but the repeat trial has been very-very encouraging. So, when we open and for instance we opened up the one here in Addison and then two-three months later we opened up two more in Frisco and both of those restaurants continue to do -- perfumed very-very well. And that’s without using media dollars. So I think that sampling and as really been a big part of helping cement the trajectory of these restaurants. And ones in San Antonio we’re doing very-very well and the ones we’ve built in Houston are -- we're pleasantly surprised we’re encouraged, we’re excited about it. We like what’s happening. In terms of sales mix Alex so this is refining the new menu items that were developed for specifically for Texas and the culmination of lot of the other models that we have rolled out in the past. We’re selling a lot of the Calypso beef, the new dinner rolls that are made of sugarcane, those things are very-very popular. And I think that it’s interesting when you first open up one of these Big Blue restaurants you have more dine in and less drive through because people want to come in and experience the ambiance and what’s going on inside the restaurant. And then once they’re comfortable with their -- and they’re able to maneuver around the menu then they start going in the drive through. And also now that we’re rolling out the app you’re seeing more and more off premise consumptions.
- Alex Slagle:
- Thanks. Just one more question I may have missed on the cost of goods with the inflation and the pricing you're putting out there. Did you mention anything or have any expectations for is that pricing really going to offset or to what degree it's going to offset the inflation in 2015?
- Lynn Schweinfurth:
- Well, the inflation right now as we expected is to be in the mid-single digits on the commodity inflation front. With pricing, we are intending to implement pricing at Pollo at little over 4% effectively in 2015, 2.5% at Taco. So it will not completely offset the commodity cost increases we’re expecting. However, some of our healthcare costs have come in better than expected and we’re looking for other opportunities in the middle of the P&L that we think can help bridge the gap.
- Operator:
- Thank you. At this time, this does conclude today’s Fiesta Restaurant Group teleconference. You may disconnect at this time. And thank you and have a great day.
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