Carrols Restaurant Group, Inc.
Q2 2021 Earnings Call Transcript

Published: 12 Aug 2021

[Operator:]

Good morning. Welcome to Carrols Restaurant Group, Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be given at that time. I would like to remind everyone that this conference call is being recorded today, Thursday, August 12, 2021, at 8

[Tony Hull:]

Thank you, Doug, and good morning, everyone. By now you should have access to our earnings announcement released earlier this morning and an earnings presentation that are both available on our website at www.carrols.com under the Investor Relations section. Before we begin our remarks, I would like to remind everyone that our discussion will include forward-looking statements, which may consist of comments regarding our strategies, intentions or plans. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed on them. We also refer you to our filings with the SEC for more details, both with respect to the forward-looking statements, as well as risks that could impact our business and results, including among other things, the impact of COVID-19. During today’s call, we will discuss certain non-GAAP measures that we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute to results prepared in accordance with Generally Accepted Accounting Principles. A reconciliation to comparable GAAP measures is available with our earnings release. With that, I will now turn the call over to our Chairman and CEO, Dan Accordino. Dan?

[Dan Accordino:]

Thanks, Tony, and good morning, everyone. I would like to begin with some color on our recent performance before discussing the special cash dividend we announced earlier today. Afterwards, Tony will review our quarterly financials and outlook in greater detail. Beginning with our topline, comparable sales rose 12.6% during the second quarter at our Burger King restaurants, which was driven mostly by the 31.5% in April. Recall that in May 2020, comps declined only slightly, while in June of 2020, comp sales are returning positive. As a result, our sequential trend of comp sales growth slowed through the three-month period this year but we are still positive throughout the second quarter. Importantly, relative to 2019, our quarterly comparable Burger King restaurant sales increased 7.8%, despite only serving approximately 89% of the traffic in the second quarter of 2019. We once again outpaced the overall U.S. Burger King system as we have done for 20 out of the past 22 quarters. Using a calendar basis rather than the physical period basis we used to report our second quarter 2021 comparable Burger King restaurant sales increased 14.2%, compared to 13% for the entire U.S. Burger King system, reflecting a positive differential of 120 basis points. In July 2021, comparable sales at our Burger King restaurants increased 1.8%, compared to July 2020 and improved 4.4% compared to 2019 on a same store basis. Turning to the promotional calendar, Burger King emphasized several new product and value offerings during the second quarter, most notably among these was the hand-breaded chicken sandwich, which was promoted with extensive national advertising beginning in June. The campaign established tremendous awareness for Burger King’s new chicken sandwich, which we believe is best-in-class and we doubled our crispy chicken sandwich sales per store. From a value standpoint, Burger King’s focus was on the buy one get one plus a $1 offer as an alternative to the two for $5 platform. Interestingly, and perhaps not surprisingly, the new chicken sandwich has fared better within our Northeast and Midwest regions, but sales have not been as strong in the South, Central and Southeast. We believe that the concentration of chicken-based QSR restaurants based in the South coupled with numerous chicken sandwich introductions across the industry by our peers has weighed more heavily on its reception in these regions. We are encouraged by the rollout of Burger King’s Royal Perks Loyalty Program which is geared towards increasing the level of one-on-one engagement Burger King has with its customers reducing the use of paper coupons and driving traffic to weaker day parts. This platform provides the brand with valuable data and insights, and members of these types of programs typically show higher spending frequency as compared to non-members. So far in 2021, mobile orders accounted for about 1% of our sales. We are confident Burger King’s new loyalty program will accelerate the growth of this distribution channel and drive increased traffic by improving customer engagement. During the second quarter, all of our dining rooms were open and they remain so today despite the emergence of the Delta variant. Dining room usage increase during the quarter at our Burger King restaurants where eat-in and takeout combined were tracking at about 14% of total sales by June and drive-thru was down to approximately 80% of total sales, compared to the mid-80s during most of our COVID-impacted months. Last year during Q2, only about 20% of our dining rooms were open. On a related note, delivery comprised 4.7% of our total Burger King restaurant sales during Q2, up from 2.8% in Q2 last year and flat with 4.8% in Q1 of 2021. The average check size rose sequentially to $17.56 from $17.51 for delivery. The overall second quarter average check for Burger King was $9.01 including delivery. Integrated delivery services are available at about 90% of our Burger King restaurants and most of our Popeyes locations. And at current $20 million quarterly run rate, we view this convenience option as an ongoing sales contributor even when the pandemic subsides. Turning now to profitability, adjusted restaurant level EBITDA declined by 11.6% compared to the same period in 2020, as margins decreased by 340 basis points to 11.3% of restaurant sales. The magnitude of the margin compression we experienced in the second quarter was driven by two main factors, first, our objective to increase the operating hours of our stores to take advantage of the strengthening post-COVID economy in the face of severe labor constraints, and second, a spike in food and labor input costs as the entire economy opened at the same time. Food, beverage and packaging costs as a percent of net sales increased primarily because of higher pork and other commodity costs, along with the incremental impact related to higher delivery activity. Although, these increases were partially offset by menu price actions we instituted in March of 2021. Labor costs as a percent of net sales also rose sharply due to the contrast between the beneficial labor environment that was in place in the second quarter of 2020 during the early stages of the pandemic and the incredibly tight labor market experienced in the second quarter of 2021 during the reopening phase of the pandemic. I can tell you that the velocity and magnitude of the change was greater than anticipated as the second quarter unfolded. The most significant unexpected headwind was the nearly 12% increase in average hourly wages for our team members including overtime. This costs us approximately $3 million more than we had planned and was driven by competitive pressures, as well as difficulty filling positions during operating hours. The other major labor headwind came from our inability to staff our restaurants practically with managers at the beginning and end of each day. We were required to pay premium to team members to opening closed restaurants and this also cost us about $3 million. In the second quarter of 2021, we also provided standard overtime hours to assistant managers that were restricted in the year ago period. Our team size for Burger King restaurant averaged 21 employees during the second quarter of 2021, which was similar to the first quarter, but higher than the 19 we averaged in the second quarter of last year. As a consequence of the expansion of operating hours, however, these employees are having to work more hours per week. In late July, we increased menu pricing by another 2% and plan to do the same in October, as well as implement other menu price increases that we may deem necessary as the year progresses. You may recall that we had intended to hold pricing at about 2% for the entire year. But given the challenges we are seeing with respect to restaurant level input costs, we intend to use the flexibility we have to take additional pricing in the midst of this more elastic economic environment. We expect that the incremental benefit to our bottomline from these pricing actions should help us largely offset the current high cost environment. Turning to our restaurant portfolio, we acquired 19 Burger King restaurants late in the second quarter in two separate transactions. These restaurants are located in Indiana and Michigan, two Midwestern states where we already have a significant presence. We believe that we can improve upon the average sales volume of these restaurants and increase their margins over time as we integrate them into our existing operations. We currently have no additional multi-restaurant acquisitions in the pipeline, given the high multiples we are seeing being paid for QSR acquisitions in the private markets. In the past year we have not only increased our available liquidity to over $175 million, but also reduced our total net leverage to 3.8 times from 4.18 times a year ago. Today we believe our liquidity is ample as is our ability to generate consistent earnings. Consequently, we expect to be able to continue to invest in strong return producing organic growth through remodeling our existing restaurant portfolio and building new restaurants, as well as acquiring restaurants in both brands when they can be purchased at reasonable multiples. Given this backdrop, as well as confidence in the outlook for our business, our Board of Directors concluded that the company should move ahead with plans to return capital to our stockholders in order to further enhance shareholder value, while keeping our leverage in check at under 4 times over the cycle. As highlighted in our earnings release this morning, our Board of Directors approved a special cash dividend of $0.41 per share, which will be paid October 5, 2021 to stockholders of record as of August 25, 2021. This $25 million special cash dividend marks the first dividend we have paid in nearly 15 years as a public company. So to conclude, we are facing our cost challenges head on with more aggressive pricing, which we believe will stabilize margins in the back half of the year and positively impact overall EBITDA levels. Our franchisor is also working with U.S. and other Burger King franchisees to optimize value menu items in order to relieve margin headwinds. At the same time, the flexibility we now have with respect to our balance sheet is enabling us to tangibly demonstrate our commitment to using resources at our disposal to enhance value for our stockholders. With that, let me turn the call over to Tony to review our quarterly financials.

[Tony Hull:]

Thank you, Dan. Total restaurant sales for the second quarter increased 15.2% to $424.5 million, compared to the prior year period $368.4 million. Our Burger King comparable restaurant sales increased 12.6% during the quarter, with average weekly sales for Burger King restaurant up $30,700. This is an improvement of 14.7% in 2020 levels, and more importantly, exceed the 2019 levels by 7.8%. Increased contributions new and post-COVID reopened restaurants is the primary reason for the difference between comparable and total sales growth in the quarter. Let me quickly give you our Burger King performance by region as we operated nearly 10, 30 restaurants as of the end to Q2 across 23 states. In the Northeast representing 21% of our Burger King restaurants, comparable sales were up 19.7%. In the Midwest representing 29% of our Burger King restaurants comparable sales were up 12.4%. In the South Central representing 24% of our Burger King restaurants and consisting mainly of Tennessee comparable sales increased 10.6%. And finally in our Southeast region representing 26% of our Burger King restaurants comparable sales were up 6.6%. With respect to our Popeyes restaurants comparable restaurant sales decreased 5.3% versus the positive 17.1% during the same period last year. While the brand experience some pressure from competitors launching new chicken sandwiches themselves, our results are favorable of the two-year period and the majority of the growth is related to the continued strength of the breast chicken sandwich. Our Popeyes restaurants represented 5.2% of our second quarter revenue. As a result of the inflation challenge experienced in the second quarter, adjusted EBITDA decreased $8.7 million to $29.3 million, while adjusted EBITDA margins decreased adjusted EBITDA margins decreased 340 basis points to 6.9% of restaurant sales. Food, beverage and packaging costs as a percentage of net sales increased 140 basis points, primarily because of higher pork and other commodity costs. Beef prices averaged $2.35 per pound in the second quarter, which was only a 50-basis-point increase from the same period a year ago, when ground beef prices were at $2.34 per pound. Last quarter we stated that our food supplier forecasted beef costs would be elevated during the summer months, but return to roughly $2.30 per pound for the remainder of 2021. They have revised their forecasts to between $2.40 a pound and $2.45 a pound from September to December of 2021. They believe the same easing trajectory is likely to occur over the remainder of 2021 for all other commodities including chicken. The one exception to this is pork, which they believe will remain elevated for the rest of 2021. Restaurant labor expense increased 200 basis points as a percent of restaurant sales in the second quarter point of 2021 compared to the prior-year quarter. Again, the dramatic contrast between the restrained operating environment we experienced in the second quarter 2020 and the economy reopening during the second quarter 2021 is something that we believe is unprecedented and certainly it was not anticipated. It is worth noting that labor costs as a percent of net restaurant sales, which reached 32.4% in the second quarter of 2021 were lower by 70 basis points compared to that margin during the second quarter of 2019. In fact, adjusted EBITDA in the second quarter of 2021 was $5.2 million greater than the amount we earned in the second quarter of 2019. This is relevant as it compares this year’s results to where we were prior to the onset of any pandemic-related volatility has impacted us over the past 18 months. Restaurant rent expense in the second quarter decreased 70 basis points as a percent of sales compared to the prior year period primarily due to sales leverage. Other restaurant operating expenses increased 60 basis points as a percent of sales compared to the prior year period, due to higher repair and maintenance, security and equipment rental costs compared to the prior -- to a period of restricted operating experience in the prior year. General and administrative expenses rose to $20.7 million in the second quarter of 2021 from $18.6 million in the prior year, but fell 10 basis points as a percent of restaurant sales. The increase in dollar terms was due to the lapping against training costs, short-term pay and travel reductions experienced in 2020 and $0.5 million higher stock compensation expense this year. Our net loss was $9.6 million in the second quarter 2021 or $0.19 per diluted share. This loss includes $8.5 million of non-cash charge related to the write-off of original issue discount and other debt issuance costs that were paid and capitalized in earlier periods. On an adjusted basis, excluding certain non-operating items, second quarter adjusted net income was $16,000 or zero cents per diluted share. In the prior period, adjusted net income was $9.6 million or $0.16 per diluted share. Free cash flow for the second quarter of 2021 was $4.2 million, compared to $48.6 million in the prior year period. Recall that in the second quarter of 2020, we reduced capital expenditures and took aggressive actions to shore cash by managing working capital and comparing the two quarters, these two items account for about $30 million as a reduction of free cash flow generation. The rest of the difference is primarily due to the $8.7 million reduction in adjusted EBITDA. We ended the second quarter with cash and cash equivalents of $56.2 million and long-term debt and finance lease liabilities of $521.5 million. We have $46 million drawn in our $175 million revolving credit facility and had $9 million of letters of credits issued under such facility. This left $120 million of unused availability under our credit facility and when added to our cash balance provided us with $176.2 million of liquidity at the end of Q2. Our net debt compared to covenant EBITDA as defined in our senior credit facility stood at 3.82 times at the end of the second quarter, compared to 4.18 times in the year ago period. Dan mentioned our acquisition of 19 restaurants during the second quarter for which we paid $30.8 million. I want to point out that we intend to complete sale leaseback transactions on 12 these acquired restaurants and expect to receive proceeds of approximately $20.1 million during the third quarter of this year. Adjusting our second quarter and net debt for this incoming cash lowers our net debt leverage ratio to 3.65 times and resulted to net purchase price for the restaurants of $10.7 million. As previously announced, we completed a private offering of $300 million senior unsecured notes due 2029. This transaction reduced our secured debt to $220 million and our secured debt to covenant EBITDA ratio to 1.36 times. As result of this transaction, we now have a fixed interest rate on all of our debt for the next four years. During the second quarter of 2021, the company did not repurchase any shares of its common stock due to a limited trading window as a result of the private debt offering. The Board of Directors has approved an extension of the company’s 2019 stock repurchase program, which was set to expire on August 2, 2021, and has approximately $11 million of its original $25 million in the past due remaining. That program will now expire on August 2, 2023 unless terminated earlier by the Board of Directors. In our last conference call, we provided a few guidelines on food beverage and packaging costs and labor trends for the remainder of 2021. After the unprecedented cost volatility that we experienced in the second quarter, we are reluctant to provide a revised outlook. The only known at this point are, A, we increased menu prices in July and intend to do so again in October, and B, having drive-thru and delivery channels provides us and other QSR operators with resilient topline stability. In terms of commodity costs, we have no other guidance to provide other than the food supplier -- our food supplier believes that some of the levels we have seen this summer should begin to retreat with the exception of pork as the year progresses. We believe that labor margin -- labor costs margins will get some relief if higher menu pricing lifts net sales and we continue to expect our labor margin for the full year 2021 will remain below that of 2019 levels. We are also maintaining our net capital expenditures target of $60 million consisting of rolling out outdoor digital menu boards to 450 restaurants this year including our Popeye’s restaurants. As of today, 689 of our restaurants have outdoor digital menu boards in place. New kitchen equipment that was installed at our Burger King restaurants for the preparation of the new hand-breaded chicken sandwich was also a part of the $60 million net capital expenditure number. Third, we expected that number to remodel approximately 25 restaurants, which suddenly Popeye’s. And finally, we expect to build nine new Burger King restaurants. Two of which have already opened and two of which should go online next year. We are also building one new Popeye’s restaurant this year. To conclude, the quarter certainly brought us some unexpected challenges, but we think they are manageable and we continue to believe that we will generate meaningful free cash flow this year. In addition, the payment of a special dividend demonstrates our commitment to enhance shareholder value while keeping our leverage in check. And with that, Operator, let’s go ahead and open the line for questions.

[Operator:]

Thank you. Our first question comes from the line of Jake Bartlett with Truist Securities. Please proceed with your question.

[Jake Bartlett:]

Great. Thanks for taking the question. My first was on the wage inflation that you are talking about, the 12% wage inflation. As we think about how temporary that might -- that level might be, can you break down the impact of overtime in -- and maybe training or versus the kind of the core underlying wage inflation that you are seeing?

[Tony Hull:]

Yeah. Excluding overtime, that -- it was 11.9% and excluding overtime, the increase was 10.4% on average hourly rates. So the…

[Jake Bartlett:]

Okay.

[Tony Hull:]

… overtime was a factor but it was not a huge factor. It’s mostly the supply and demand dynamic in the quarter.

[Jake Bartlett:]

Got it. Got it. And then just in terms of the chicken sandwich, I think in the past you commented that you are coming out of the gate fairly strong in a number of stores. It seems you have decelerated from that. Can you give any thoughts as to maybe why that the sandwich didn’t hit some of the targets, I think, that you were -- and the system was hoping to see? And then also just the trajectory of the chicken sandwich sales, have they been continuing to come out strong and then decelerate, any evidence that it might -- momentum might be stabilized or building? Any thoughts there would be helpful.

[Dan Accordino:]

Yeah. This is Dan. The sandwich did come out quite strong and remain strong, as Tony said, in the Northeast and Midwestern markets. We were at on average -- for the entire company, we were in the mid-60s at -- when it was -- during the advertise launch and it has decelerated to the point where we are now in the mid-40s.

[Jake Bartlett:]

Okay. And again just in the context of that, I believe you are selling about 28 of the prior sandwich. So I think the comment was kind of doubled in the quarter, but now you are doing less than that now?

[Dan Accordino:]

No. I think -- yeah, I think, we are not doubling what we were doing previously. But we are selling about 18 or 19 more per day at the same price that we were selling the previous sandwich.

[Jake Bartlett:]

Okay. And again as you think about the just the remainder of the year and I know in the past you have expressed some confidence just in the marketing calendar -- promotional calendar menu innovation. But as you look at the remaining five months we have here, how confident are you that there’s some driver to an acceleration of comps or maybe just kind of holding or gaining some market share, as you look at the plan, how good you feel about it?

[Dan Accordino:]

Well, I think, as RBI said in their call, they are doing a lot of things in terms of menu innovation, looking at the value portion of the menu, looking at how we can increase the advertising and product development around breakfast. So I am hopeful that those things will transpire between now and the end of the year.

[Jake Bartlett:]

Great. I will pass it on. Thank you.

[Operator:]

Our next question comes from the line of Brian Mullan with Deutsche Bank. Please proceed with your question.

[Brian Mullan:]

Hi. Thank you. I am just curious, Dan or Tony, did the labor situation negatively impact your sales in any way in the quarter, I know in the prepared remarks, Dan, you referenced having some issues with managers at opening or closing times as an example. Is that something you can clearly see and measure in the business, if you are able to quantify…

[Tony Hull:]

We…

[Brian Mullan:]

Yeah. Yeah.

[Tony Hull:]

Yeah. Brian, we did measure that and we think it’s about a half, like, 50 bps of our comp sales, right, 50 bps lower than they would have been had we been able to stuff everything optimally. So not a huge…

[Brian Mullan:]

Okay.

[Tony Hull:]

…amount, but it was definitely a factor in the quarter.

[Brian Mullan:]

Okay. Thanks, Tony. And then just as my follow-up, I saw you took 2% of price in July. You mentioned maybe take another price increase in October. Can you just speak to how you plan to approach that October decision, I mean, the comp sales are running nicely above 2019, which is great. But the traffic’s on all the way back which is an industry issue, not the Carrols issue. But how do you strike that balance of keeping value for the consumer, but also protecting your margins when you make these decisions, just how you are trying to approach it?

[Tony Hull:]

Yeah. Yeah. We approach the pricing decisions pretty much the same all the while -- all the time, Brian, which is we look at what our competitors are doing in each of the markets and we don’t take a broad-based approach across the entire company. We actually have 15 different levels of pricing across the company. So we look at the competitive pricing on a DMA basis, as well as looking at what the promotional pattern you are going to be in the marketing calendar and then we adjust the pricing accordingly. What we don’t want to do is simply increase prices and drive more people into whatever the promo might be.

[Brian Mullan:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of James Rutherford with Stephens, Inc. Please proceed with your question.

[James Rutherford:]

Thank you, and good morning, Dan and Tony. I wanted to touch on this $0.41 per share special dividend. Clearly, it’s a significant amount for your shareholders. I just was hoping you could talk a little bit about what led you and the Board to make this decision. And please rank your capital priorities for the capital allocation priorities for the remainder of the year.

[Dan Accordino:]

Sure, James. What prompted us to this decision as a Board was we wanted to return cash to our shareholders, which is something that we had been indicating for the entire year. We said that on a prior call and we said it to go since then. Share repurchases certainly will continue to be a part of the dynamic as we go forward. But the share repurchases that we did in 2020 really didn’t have the impact that we had hoped that they would and this is a direct contribution right back to our existing investor base, which has been loyal to us now for several years. As far as our capital priorities, we will continue to look at our $60 million CapEx number, roughly $15 million to $20 million of that is the ongoing maintenance -- capitalized maintenance and new equipment for stores and that sort of thing. And then the balance of that, the $40 million will be allocated against new builds and remodels. The priority being probably remodels, because we have several of those where the franchises are coming to term and we also think there would be an adequate return to do the remodel. That $60 million does not include any moneys that we might spend on M&A activity.

[James Rutherford:]

Okay. Got it. And then coming back to the staffing issue the entire industry is dealing with. Just curious, Dan, what are you all doing to address that, I mean, obviously, just increasing wages is part of it. Do you think your wages are where they need to be now to be competitive or is there kind of more to come? Just what’s your overall feeling about how you handle this in the next couple of quarters?

[Dan Accordino:]

No. I think I haven’t really seen a big spike in recent weeks, James. It looks like things are somewhat stable. The issue now is getting people who want to come to work. It’s not so much, I mean, I think, you saw in the industry press that there’s more job openings and there is supposedly people who are on unemployment. So it doesn’t seem to be so much a wage issue right now as it is just people who for whatever reason don’t want to come to work. The -- our staffing levels at the store level right now are pretty good. The wage increases that we have done have been to retain the existing employee base and having enough employees so that we can, not have to pay overtime. My primary focus is on the overtime issue, because frankly, you don’t get much benefit for that at all. You are paying 50% more for less productivity.

[James Rutherford:]

Got it. Just last one for me and I will hand it back. But there was a comment at the end of the prepared remarks about I think it was working with RBI to optimize menu for maybe better margins. I didn’t catch all of that. Can you just give some more color on what that meant specifically? And also, Tony, if you could give us kind of what your total menu price is running today, including the most recent increase plus what you did back in March? Thank you very much.

[Tony Hull:]

Yeah. That -- what we are referencing in that sentence was the fact that RBI is just in response to the commodity price -- the commodity pressures, RBI is actively addressing some of the value meals. So instead of having 10 chicken nuggets for $1.49, they are reducing it to $8 chicken nuggets and instead of having the bacon cheeseburger on the $1 menu, they are taking out the bacon because pork is such an expensive commodity right now. So, I think, they are just being super responsive to -- for the benefit of the franchisees to what’s happening in the cycle of commodity pricing.

[Dan Accordino:]

And some of the value menu items…

[Tony Hull:]

Yes.

[Dan Accordino:]

Some of the value menu items, so the prices were capped at a certain number. Those caps have now been adjusted. So we can increase the price of some of those items by either $0.20 or $0.40.

[James Rutherford:]

That is all. Yeah.

[Operator:]

Our next question come -- oh, go ahead. I am sorry.

[Tony Hull:]

Sorry, James. The last part of your question was overall commodity cost inflation for the year or what was the?

[James Rutherford:]

No. The price…

[Tony Hull:]

Yeah. What was pricing? We are at 4% over last year right now and when we look at the removal of the price caps, that could be another 1.5% to 2%, which takes effect today, actually. So, I would expect that we could end the year at somewhere in the 6% range in terms of the year-over-year pricing.

[Operator:]

Our next question is coming from the line of Fred Whiteman with Wolf Research. Please proceed with your question.

[Fred Whiteman:]

Hey, guys. Good morning. I just wanted to follow up on that last point. If you do get to 6% pricing, I am wondering how you feel potentially being above broader food away from inflation and what that could mean per share versus some of the other QSR burger peers?

[Tony Hull:]

The most recent data that I have seen indicates that McDonald’s right now is about 5% pricing year-over-year and my guess is that their franchise system probably will be looking at more pricing between now and the end of the year as well. So, I think, that’s more relevant as a comparative base as opposed to the food away from home phenomenon. So, we will continue to make certain that our pricing is in line with our competitors.

[Fred Whiteman:]

Okay. That’s fair. And, I guess, just broadly would love to get any updated thoughts from the stickiness that you are seeing on check. I know that you guys have sort of signaled that that was something that you would thought would be a tailwind relative to pre-COVID levels. But have you seen anything change in terms of either larger group orders persisting, delivery mix being a little bit stronger longer than you thought, anything that you would highlight there?

[Dan Accordino:]

I would say the average check is holding up incredibly resiliently as we reopen. So we are -- it’s staying above $9 and even as we are seeing traffic, traffic was up 12% in the second quarter. So even with that increase in traffic, the price -- the average ticket is staying at $9. So that’s holding up really strongly.

[Fred Whiteman:]

Great. And then you have -- there was a comment about higher transaction multiples for stores in the private market. Could you just give an update on what you are seeing in the market and how we should think about that going forward, because I think, Dan, I think, you made a comment, there’s no multi-unit deals in the pipeline, so maybe what you are seeing on the multiple side and then what if anything it would take for you guys to get more active in the market again?

[Dan Accordino:]

Well, we have -- oh, go ahead, Tony.

[Tony Hull:]

I was just going to say that on the stores, Fred, that we bought the 19 stores, we -- the multiple on those net of the sale leaseback proceeds we are getting this month is under 5 times. So, that’s obviously very attractive for us. But we have seen the marketplace, the number of transactions in the 9 and 10 multiple range for multi-unit acquisitions, mostly private equity family offices shifting assets around that sort of thing. So that’s what we are -- that’s what we are not going to compete with and it also indicates -- it’s another indicator of what we think is undervaluation of our share price that sort of thing.

[Fred Whiteman:]

And just one final one, is that 9x to 10x multiple for sort of multi-branded deals, what sort of concepts are trading at that multiple?

[Tony Hull:]

I think they were single brand deals. So that’s what we have been seeing out there.

[Fred Whiteman:]

Okay. Thanks.

[Dan Accordino:]

And in terms of what would attract us back to the market we have historically paid in the 5 times range EBITDA and that’s where we will continue to be. So that one would attract us back into the market. We will continue to look for those deals and if there are either Popeyes or Burger King operators who become available at that level at those multiples then certainly we got the cash to be a player.

[Fred Whiteman:]

Makes sense. Thank you.

[Operator:]

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

[Jeremy Hamblin:]

Thanks. So I want to come back to the labor inflation, so real kind of initial thrust in the economy. You mentioned that was a challenge getting people onsite. I am wondering here now in August the 12% wage inflation. Are you starting to see any relief on that front or do you think that this is likely to be an issue until the supplemental unemployment benefits subside?

[Dan Accordino:]

I don’t see the rate continuing to increase. I think it’s stabilized. But I also don’t think that the rate except for the overtime fees. I don’t see the rate coming down. I think the rate is going to be the rate, though, which I don’t see that we are going to be able to hire employees for much less than the rates that we are currently paying. But it seems to have been stabilized over the past two weeks or three weeks.

[Jeremy Hamblin:]

Got it. And then the special dividend, 8% yield really fantastic for shareholders. Is that something now, as you mentioned, 15 years public first time doing this? I am a little curious as to what changed in thinking about making that decision. I know you are on the Board? And then secondly is this a use of capital or capital allocation that is something that I know you are not instituting a regular quarterly dividend, but is this something as a means for potential future distributions through this measure?

[Dan Accordino:]

I think a special dividend is just that, Jeremy. It was a one-time event and what the Board concludes that we are going to do on a go-forward basis as it relates to a current dividend, an ongoing dividend and/or share repurchases in excess of the $11 million that is currently been approved. Those discussions will take place in the future. So right now the only thing that has been agreed to is this one-time $0.41 special dividend.

[Jeremy Hamblin:]

Fair enough. Last thing I want to come back to is the acquired locations and they continue to be laggards even though they are lapping actually much easier comps than the stores in the Northeast and the Midwest. I don’t know that I can recall having so much challenge with particular geography. When you have acquired locations, you generally have had a fantastic track record of bringing those locations up to legacy levels in terms of both AUVs, as well as restaurant level margins and so it’s been two years now. What -- do you need to change what you are doing in those stores? Can you help provide some color of why, because the gap I think has actually widened pretty substantially versus where it was when you acquired them, any color…

[Dan Accordino:]

The -- yeah. The majority of that, the Cambridge deal where you see these -- the sales dislocation is, that’s really two markets, it’s a Tupelo, Mississippi area and Memphis. And the operational metrics in those markets actually have improved dramatically and they are quite close to where they are in terms of the legacy stores. So I don’t think it’s -- it may be a Burger King brand issue. It may be a QSR issue in those markets. It may be an economic issue. We are working with RBI to try to drill down on that. But I don’t think it’s anything that’s Carrols specific, no.

[Jeremy Hamblin:]

So you are saying the operational metrics relative to the AUVs that are being achieved, right? So this to me, it seems like it’s more of a sales issue than a, right? You have done a great job of improving the margin relative to the sales, but I think it’s…

[Dan Accordino:]

And the consumer metrics which is generally what you work on to improve your sales. So the consumer metrics actually are pretty close to where we are across the Board in terms of all the data we get back from the guest racks and customer service data and that sort of thing. So it’s not really, I can’t put my finger on it and say that it’s a specific operational issue, and therefore, I think it’s more broad-based across the category, and perhaps, the entire economy in those two markets.

[Jeremy Hamblin:]

Got it. Got it. Thanks for that color, guys. Best wishes.

[Tony Hull:]

Thanks, Jeremy.

[Operator:]

Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your question.

[Brian Vaccaro:]

Thank you and good morning. I just wanted to circle back to the sales cadence you saw through the quarter. Dan, could just frame with the monthly BK comps look like versus 2019 moving through Q2?

[Dan Accordino:]

Yeah. Tony, can you?

[Tony Hull:]

Let me just find that data. So versus -- on a monthly basis versus 2019, April was about 10% and then it was about 6% for May and June versus 2019.

[Brian Vaccaro:]

Okay. And then you said I think mid-4s for July, if memory…

[Tony Hull:]

Yes.

[Brian Vaccaro:]

Okay.

[Tony Hull:]

Yeah.

[Brian Vaccaro:]

Okay. Great. All right. Thank you for that. And Tony, I appreciate the color on the commodity front and the updated beef forecast. And sorry, if I missed it, but what was the year-on-year commodity inflation on the basket in the second quarter? And I guess taking into account the latest supplier forecast, what does that year-on-year inflation trend look like moving through the second half or maybe you could help frame the COGS ratio. Does it go down from here versus Q2 because of the pricing and maybe some of the sequential trend? Just if you could help us frame to make sure we are all on the same page?

[Tony Hull:]

Yeah. Overall for the year, we are expecting 6% to 6.5% commodity inflation. And again, to your point, to the extent that the menu price increases lift overall sales, that should take pressure off the cost of sales margin. But it’s really hard to predict given the -- there’s so much…

[Brian Vaccaro:]

Yeah.

[Tony Hull:]

… unprecedented stuff going on with commodities. And once when it’s like whack a mole. Once one gets under control, another one comes up and there’s shipping needs and so it’s really hard to predict. But that’s based on our suppliers latest forecast we took it sort of 6.5% for the overall -- for the year overall.

[Brian Vaccaro:]

Okay. And where was that in Q2 or even if you have a first half, what was the commodity inflation you saw on the basket, do you have that handy?

[Tony Hull:]

I do. It was about 1 point -- 1.5% to 2% in the second quarter.

[Brian Vaccaro:]

Okay.

[Tony Hull:]

Because remember meat was really high. There isn’t -- it’s not really indicative because beef was really high in the second quarter of 2020. So beef was actually pretty much flat. So…

[Brian Vaccaro:]

Right.

[Tony Hull:]

I think we are going to see the harder comps on beef, it’s going to be and the first quarter was pretty -- the pricing was pretty good on beef in the first quarter. So I think even though it’s expected to moderate somewhat, I think, that’s where they are going to -- that’s where the headwind is going to be for the rest of the year.

[Brian Vaccaro:]

Yeah. Yeah. Okay. That makes sense. And then, I just wanted to circle back to you on the acquisition of the 19 units. I think the dollar amounts is a little under $11 million net of the real estate. Can you just give some more color of the performance of these units, average sales or profitability and is there an opportunity for significant margin improvement as you have seen historically, Dan?

[Dan Accordino:]

Yeah. I think that there -- I don’t know about significant, but certainly, there’s opportunity in both labor and cost to sales. And certainly, and then the smaller acquisition the five store acquisition, there’s a lot of opportunity in 400 basis points, 500 basis points and the larger acquisition, it’s pretty typical of what we have seen in other acquisitions. So we should be able to get 150 or so basis points.

[Brian Vaccaro:]

Okay. Great. I will pass along. Thank you.

[Operator:]

Our next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

[Jeffrey Bernstein:]

Great. Thank you very much. Just following up on the earlier question with regards to the same-store sales trends versus 2019, I think, you mentioned it started at 10% last quarter and now we are in the 4s. Just wondering to what you might attribute that whether you have heard that that’s indicative or similar with the broader industry or is it maybe a Burger King specific issue in terms of just the slowdown versus the more comparable 2019 period, any thoughts on that?

[Tony Hull:]

Yeah. It seems there’s a little bit of softness out there right now. I don’t think it’s Burger King specific. I think they are just -- it just seems the childcare payments come in next week and so that should help things in the latter part of August and so I just think it’s a general malaise out there. And whenever we see sort of whenever, in the kind of the two examples we have of when COVID kind of picks up like it did obviously in March of 2020 and then over the summer in 2020, and now it’s picking up again, there’s a little bit of softness and then the QSR is going to come through with pretty strong results. So, I think my view, I don’t know, Dan, I think, we are just seeing a little bit of that given the Delta variant at this point. So things should stabilize once that gets under control a little more or better understood, I guess.

[Jeffrey Bernstein:]

Makes sense. And then in terms of the menu would seem like in this environment, especially with the pricing you are taking and the success within premium products you might downplay the push of more value-oriented products. Just wondering whether that’s a consideration or maybe when you look at your value mix whether it’s just seller items or any sort of promotion, like where is that mix today versus where perhaps it has been pre-COVID to get a gauge whether the consumer is moving toward those value items or perhaps to the industry’s benefit maybe moving more towards premium?

[Tony Hull:]

There’s really three components to it. The value menu will continue to be a value menu even though as I said earlier the price points may be $0.20 higher than they were previously. So instead of $1, it would be a $1.20, which is still a value. The breakfast component which is generally the whole industry that are two for $4 kind of thing for breakfast, that will continue. And the balance of the promotional calendar still will have some digital coupons and a fair amount of digital coupons. Paper coupons will be less than they were in 2019 and 2020. And there will still be value meals, so some of your -- some of the competitors are running a $4 meal, some are running a $5 meal and Burger King will continue to participate in that realm as well.

[Jeffrey Bernstein:]

Understood. And just lastly, are you seeing any easing in -- maybe you mentioned this earlier, I apologize, I missed it. But in terms of getting applicants to work, I know you mentioned there is more available positions than there are unemployed. But in markets where perhaps that have already restricted or removed the extended unemployment benefits have you seen where in those markets you are actually seeing an increase in applicants, which would be a positive with presumably the nationwide ending of that in early September?

[Tony Hull:]

The applicant flow has picked up. What we are challenged with more so now than I can recall is people continuing to show up for their shifts. If you may -- if the weather’s good, somebody may just decide today’s not a good day to come to work. So that’s the challenge that we primarily have right now. Yes, we have -- we are getting applicants and we have got -- we have increased resources in terms of sourcing those applicants and interviewing them, so that we hope we can recruit folks who are more reliable and responsible in terms of showing up for all their shifts.

[Jeffrey Bernstein:]

Yeah. No. Anecdotally, on Long Island, there’s a couple of Burger King restaurants with signage out front saying they are paying $20 an hour for the 12 p.m. or the midnight to 6 a.m. shift. So, it seems like the pay is definitely there, but…

[Tony Hull:]

We don’t -- yeah, we have reduced our 24-hour stores, because in our world where we have stores it just doesn’t make any sense to keep restaurants open if you have to pay those kinds of rates. So we don’t have anything even approaching that. I mean the highest rates that we have are mandated by the State of New York, which is $15. So we are at $15.25, $15.50 in some stores here and that’s as high as we go. $20 an hour, unless they have got fabulous pricing in these Long Island stores. That math just doesn’t work for us.

[Jeffrey Bernstein:]

Agreed. Thank you very much for the color.

[Operator:]

Our next question comes from the line of Karru Martinson with Jefferies. Please proceed with your question.

[Karru Martinson:]

Good morning. I just want to take a dive a different direction from the chicken sandwiches and talking about how you guys are doing on the breakfast front. Are you seeing people returning back to work? What’s the thought here post-Labor Day as folks come back to the office and that breakfast part becomes a bigger part of your business again?

[Dan Accordino:]

Yeah. Go ahead, Tony.

[Tony Hull:]

Breakfast, all day parts were up in the second quarter. So, I think, the issue with breakfast is really going to be -- driving breakfast is going to be some of the new products that RBI is coming out with the breakfast that we are excited about. So I think that’s going to -- that’s really going to help it, and obviously, there’s a lot of competition in that period. But we have seen an improvement in that day part and we hope some of the product changes that are coming will further enhance that increase.

[Dan Accordino:]

Yeah. Breakfast -- in 2020, breakfast was negative about 26% during Q2, and this year, we were positive, 31% -- 34% during the breakfast day part in Q2. So, yeah, it’s what one would have expected given the fact that we are now open for normal breakfast hours and there’s more people out now driving around for breakfast. So our breakfast sales are increasing but there’s still a very significant opportunity in breakfast relative to the entire space.

[Karru Martinson:]

Okay. And then, you talked about pulling back on M&A for the time being with multiples being that high. I mean, where do you see target leverage for yourself going in and where would you be willing to stretch that if an opportunity did present itself?

[Dan Accordino:]

I think we are trying -- our goal is to stay at 4 times or less through the cycle. And if we do an acquisition, obviously, we pro forma, we put the cost of the acquisition in our net debt number, would be add to that, but we would also include the pro forma EBITDA from that acquisition. So if with that acquisition it keeps us under 4 times or 4 times or less, then obviously it’s attractive to us. If -- we probably steer -- we would steer clear from an acquisition that would cause our leverage ratio to bounce above 4 in any significant way on a pro forma basis.

[Operator:]

Ladies and gentlemen, we have come to the end of our question-and-answer session. I’d like to turn it back to management for closing remarks.

[Tony Hull:]

Thanks, everyone, for speaking with us and listening to our conference call and we look forward to talking to you in November. Thanks. Bye-bye.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.