Del Frisco's Restaurant Group Inc (DFRG) CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Del Frisco's (DFRG)

Del Frisco's Restaurant Group Inc. (NASDAQ:DFRG)

Q2 2013 Earnings Call

July 16, 2013 08:30 AM ET


Tom Pennison - CFO

Mark Mednansky - CEO

Jeff Carcara - COO


Jeff Omohundro - Davenport Company

Justin Marshall - Deutsche Bank

Jeff Farmer - Wells Fargo

Brian Elliott - Raymond James

Paul Westra - Stifel Nicolaus


Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Del Frisco’s Restaurant Group Inc. Second Quarter 2013 Earnings Conference Call. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for a question.

I would now like to turn the conference over to Tom Pennison, Chief Financial Officer. Please go ahead.

Tom Pennison

Thank you Jake, and good morning everyone. By now you should have access to our earnings press release and 10-Q for this 12-week period ending June 11, 2013. If you have not already viewed it, it may be found on our corporate website at, under the Investor Relations section.

With me this morning is Mark Mednansky, our Chief Executive Officer; and Jeff Carcara, our Chief Operating Officer. Both Mark and Jeff will provide some opening comments before I review the financials in greater detail and update our guidance.

Before we begin our formal remarks, I must remind everyone that part of our discussions today will include forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We refer all of you to today’s earnings press release and our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

In addition, we also will be referring to some non-GAAP financial measures this morning. We have therefore provided reconciliations of those measures in the earnings press release tables to the most directly comparable financial measure presented in accordance with GAAP.

With that, I would like to turn the call over to Mark.

Mark Mednansky

Thank you, Tom and good morning to all. Let me begin by saying how pleased we are with our team's performance in the second quarter, and express our optimism towards further accomplishment this year and beyond. From a sales standpoint the momentum we experienced from March into April continued with us over the 12-week period and resulted in an increase in total comparable restaurant sales of 2.5%.

Now that’s on top of 4.2% gain in the second quarter of last year. Please note that we had absolutely no pricing in the second quarter itself and our last pricing action of about 1% was in the first quarter of 2012 which has since rolled off.

Del Frisco’s comparable sales increased 5.9% and that was due almost entirely to growth in guest traffic, with all nine locations and account base delivering positive sales for the quarter. This suggests that we have pricing capacity at this concept then we look to leverage that in the fourth quarter. Our newest Del Frisco’s in Chicago continues to generate very robust volumes and we are thrilled with the reception it is receiving in the city's local dining scene.

After strong results in Q2 Del Frisco’s began the third quarter featuring a $49 Prime Pair price fixed menu which includes an 8 ounce hand cut Filet Mignon paired with your choice of our signature crab cake, lemon garlic scallops or barbequed spice shrimp, and that comes with a salad and a wonderful side dish. While on Sundays we are offering our $99 three course dinner for two that we call power couple Sundays.

Now both these promotions are featured at all Del Frisco's with the exception of our New York City flagship and that's consistent with the marketing efforts we've run over the past several years. Sullivan's Steakhouse experienced a 2.7% decrease in comparable sales during the quarter, although again nearly a point and a half in positive guest traffic and we're very pleased with that.

As Jeff Carcara, our Chief Operating Officer will explain shortly, we're devoting significant resources to retuning the brand to ensure that it's widely viewed as the affordable destination for upscale neighborhood steakhouse dining. Our entire management team has great confidence in the long term health and vitality of the Sullivan's brand. In the near term we're determined to regain guest counts as a means to showcase all positive changes being made to the menu and the ambience.

We believe accentuating value is key for Sullivan. We are therefore willing to accept some short term deterioration in average check if it yields higher guest count. For the quarter, the decline in comparable sales resulted in deleveraging at the restaurant level. However unlike the first quarter, our labor component was well aligned with the number of guests that we served, even as we contended with higher costs for other items such as credit card fees and utilities. With respect to Del Frisco's Grill, we are very pleased that the brand positioning we envisioned and introduced meshed it so well with our experience thus far.

In the nearly two years since the inaugural opening in New York City we've added six grills across the country. As you know we previously announced we will open five Del Frisco's Grills this year. We now expect to increase this to a total of six. I'm very pleased that our construction team is ahead of schedule with our Chestnut Hill location which is an affluent suburb of Austin. This unit was originally slated to open in 2014.

Our two most recent Grille openings in Atlanta late last year and then in Houston in the first quarter this year, both have had widely successfully honeymoon periods, and more importantly have continued to sustain their momentum. More generally the brand is proving to be a strong complement to our two larger concepts and is being well received by our target demographic of younger, affluent and upwardly multiple guests, including more female guests than that of the steakhouses.

The Grille is also generating a healthy lunch business at about 30% of the total mix, which is attractive to real estate developers, eager to lure customers to retail establishments, making the Grille a desirable tenant for lifestyle centers and upscale shopping malls alike.

The Grille is proving to be a versatile growth vehicle, suitable and successful in a variety of potential sites, urban and suburban, business and leisure. The operational inefficiencies experienced at the brand due to new restaurant openings coupled with deleveraging at Sullivan's, more than offset the restaurant level margin gain, experienced at Del Frisco's but we were still able to expand our restaurant level EBITDA by 11.7% and even stronger 19% revenue gain.

Based on our results through the second quarter, we're refining our guidance, as Tom will explain shortly as part of his financial review. But first we'll hear from Jeff Carcara, who'll discuss our current initiatives at Sullivan's Steakhouse.

Jeff Caracara

Thank you Mark, and good morning everyone. This year we started working on refreshing the Sullivan's brand. We've worked with several designers to develop a new look for the dining and bar space and have also repositioned and evolved our logo, photography, menu design and advertising campaign.

Early in the second quarter we rolled out our Sure Thing $39 menu which is a three course meal option including appetizers, salad and entrée. Initial reviews have been extremely favorable in calling out its variety, quality and affordability.

The value this option adds is helping Sullivan's positioning as an affordable neighborhood steakhouse, and while serving to reduce our check average in the near term, it's enabling us to boost traffic as a means to showcase all the enhancements we are making to the brand.

We ran the Sure Thing menu through the end of the second quarter and added permanently to our new menu which was implemented on June 12th, which was the first day of the third quarter. And in addition to this sleek new design, we changed or replaced 19 items from appetizers to desserts and have added five new cocktails.

The seasonal feature panel, Sullivan's Seasonal was added within the menu which allows our chef to showcase items at their peak of freshness. The addition of this panel is fairly unique to the steakhouse segment and will help drive further culinary innovation.

Most importantly the new menu provides our guests the ability to customize their dining experience. Later this quarter we'll be rolling out a new lunch menu which will also allow our guests to have the same type of flexibility and create the experience they're looking for.

Also towards the end of Q3 we’ll start several remodels to give some of our older restaurants a face lift and create a more contemporary feel within the dining room and bar. I should note that the Sullivan's in Chicago which was refreshed last year has sustained its sales lift and gives us confidence that we can replicate this accomplishment at other locations. Overall we are excited about the changes we have made, and the ones to come. I look forward to keeping you updated over the next few quarters.

And with that I would turn it back over to Tom.

Tom Pennison

Thank you Jeff. I would now like to review our financial results for the second quarter as well as update our guidance for the full year. For our 12-week second quarter, consolidated revenues increased 19% to $60.4 million from $50.7 million in the year ago period. Our top line growth was driven primarily by 59 additional operating weeks resulting from the opening of four Del Frisco’s Grille and one Del Frisco’s Steakhouse Double Eagle, subsequent to the second quarter of last year. These new restaurants contributed $8.9 million to our revenues where our comparable restaurants contributed an additional $800,000.

Comparable restaurant sales rose 2.5% and consisted of a 3.2 % increase in entrée counts that were partially offset by 0.7% decrease in average check. In the second quarter last year total comparable sales rose 4.2%.

For Del Frisco’s Double Eagle Steak House, revenues increased 17.4% to $32.6 million in the second quarter from $27.8 million in the year ago period. This improvement in the brand's topline was due to 12 additional operating weeks related to the December 2012 opening in Chicago along with a 5.9% increase in comparable restaurant sales.

Comparable restaurant sales consisted of a 5.8% increase in entrée counts along with a 0.1% increase in average check. This increase lapped over comparable restaurant sales growth of 7.3% in the prior year second quarter and marked the 14th consecutive quarter of positive comparable restaurant sales for Del Frisco’s. Operating weeks for Del Frisco’s were 120, compared to 108 in the second quarter of 2012.

For Sullivan’s Steakhouse, revenues decreased 2.7% to $18.2 million in the second quarter, from $18.7 million in the year ago period. Comparable restaurant sales declined 2.7% also, consisting of a 4.1% decrease in average check that was partially offset by 1.4% increase in entrée counts. This overall decrease in comparable restaurant sales lapped over comparable restaurant sales growth of 0.6% in the prior year's second quarter. Operating weeks for both periods were 228.

For Del Frisco’s Grille, revenues increased to $9.6 million in the second quarter from $4.3 million in the year ago period. The brand benefitted from an additional 47 operating weeks provided by the opening of four restaurants subsequent to the second quarter 2012. Operating weeks at Del Frisco’s Grille was 72 compared to 25 in the second quarter 2012.

Turning to our cost structure, cost of sales as a percentage of revenue decreased 70 basis points to 30% from 30.7% in a year ago period. For comparison purposes beef accounted for 31% of our cost of sales in the second quarter this year versus 34% in the same quarter of last year. And as Mark alluded to, there has been pricing in effect on any of our menus. By concept, we experienced a 160 basis point decrease in cost of sales to 30% for Del Frisco’s Double Eagle which offset a 60 basis point increase at Sullivan’s to 31.1%. The 28% cost of sales at our Grille also assisted in lowering the overall cost of sales as a percentage of revenue.

The Double Eagle benefitted from lower prime beef and seafood cost although non-protein food and alcohol beverage cost were unfavorable related to the prior year, Sullivan Steak higher non-protein food cost also, and to a lesser extent, higher beef cost which were partially offset by favorable seafood and alcohol beverage cost. These impacts were also due in part to a shift in the sales mix, the items with the higher percentage of cost.

Restaurant operating expenses as a percentage of revenues increased 230 basis points to 44.6% from 42.3%. By concept Del Frisco’s experienced higher operating expenses as a percentage of revenues due to higher operating costs at the newer Chicago restaurant as well as increased utility cost and certain other operating expenses across the all restaurant. Together these factors resulted in a 90 basis point increase as a percentage of revenue to 38.9%.

Sullivan's deleveraged by 370 basis point to 51.6% as a percentage of revenue due to lower sales volumes, driven only by a lower average check, spread across certain fixed and semi-variable costs. Despite the lower sales volumes, the Sullivan’s team did a great job of managing labor cost relative to traffic with utility and maintenance cost drawing a significant amount of the deleveraging. Finally the Grille incurred higher restaurant operating expenses though in part to new opening and efficiencies of our recent opening in Houston.

Additionally, why our portfolio concept has been very successful in allowing us to maintain and reduce cost of sales without any price increases in over a year, we have faced increases in components of our restaurant operating expenses, including certain local minimal wage increases as well as other cost items. As such and as Mark mentioned we do anticipate a menu price increase in the fourth quarter to address some of these cost increases.

For the quarter, marketing and advertising cost increased 194,000 from a year ago, but as a percentage of revenue decreased 10 basis points to 2.2%. Taken together restaurant level EBITDA increased 11.7% to $14 million in the second quarter from $12.5 million in the year ago period, while margin decreased 150 basis points to 23.2% from 24.7% in the prior year.

The opening cost decreased to $0.3 million from $0.8 million from last year, due primarily to the timing of new openings compared to the prior year. In the second quarter of 2013 expenses were related to one restaurant that would be opening this week in Santa Monica, while in 2012 expenses were related to two openings last summer.

Approximately 200,000 of that amount of pre-opening costs represented non-cash straight line rent during the second quarter. General and administrative expenses increased to 4.2 million from 2.8 million in the prior year. And as a percentage of revenues rose 150 basis points to 6.9% from 5.4% during the prior year. This increase was primarily related to additional corporate regional management headcount along with management training expenses to support our recent and anticipated growth. We also incurred about $0.5 million in additional public company expenses, which included $0.2 million in stock and compensation expense.

Depreciation and amortization increased to $2.6 million from $1.9 million due to the development of five restaurants over the past year, as well as refresh expenditures for restaurants that were remodeled during 2012 as well as year-to-date to 2013. As a percentage of revenue depreciation and amortization increased approximately 60 basis points to 4.3% from 3.7%.

Interest expense during the quarter decreased by 1 million to 24,000. This was due to the payoffs of previously outstanding debt in the prior year with our IPO proceeds, coupled with the fact that we had no borrowings under our revolving credit facility during the quarter.

Our effective income tax rates for the quarter were 35.9% versus 36% last year. During the quarter our tax rate was impacted by certain one-time adjustments, including the correction of an immaterial error related to fiscal 2012, and with the deferred tax asset in the associated tax benefit related to local net operating loss carry forwards were recorded that were not realizable as they expired and should not have been recognized.

This correction which resulted in increased income tax expense during the quarter was partially offset by a decrease in unrecognized tax benefit related to the lease of certain exposure items for which the Statute of Limitations has expired. The impact of these one-time items was a net increase in the income tax expense of $0.2 million or approximately $0.01 per share. Bringing these together on a GAAP basis, net income for the second quarter was 4.4 million or $0.19 per diluted share. And this compared to the prior year net income of 3.6 million or $0.20 per diluted share.

On an adjusted basis net income was $4.8 million or $0.20 per diluted share compared to $4.3 million or $0.24 per diluted share in the second quarter of the previous year. We encourage you to review the reconciliation table in the earnings press release for further details as to how we arrive at these adjusted results. Please note that for all of aforementioned earnings per share calculations, the share base was 22.8 million shares in the second quarter of 2013, versus only $18 million in the second quarter of 2012.

In terms of our liquidity in balance sheet as of June 11, 2013 we had cash and cash equivalents of approximately $14.4 million and no outstanding debts. Once again we intend to finance our capital requirements for development, maintenance and remodeling solely through cash provided by our operations as well as borrowings available under our credit facility.

Turning to our outlook, we are fine tuning some of our guidance for the full year, which I will remind you is a 53 week fiscal period. First we are maintaining our expectations for total comparable restaurant sales to increase between 1.5% and 2.5% on a 52 week versus 52 week basis, on top of the 4.2% gain we achieved in 2012. Through the first 24 weeks of the year our growth in total comparable restaurant sales was 1%. And we expect to build upon that over third and fourth quarters.

In addition as mentioned we intend to take some pricing ahead of the holiday season, which will also provide some boost to revenues in the fourth quarter. We are now expecting to open five to six Del Frisco’s Grille's this year compared to our initial expectations of only five restaurants.

You will recall we opened our first restaurant in Houston in the first quarter and we'll be opening our second restaurant in Santa Monica shortly. In the fourth quarter we now look for three to four Grille openings versus three openings previously.

Our range for cost of sales is being lowered to between 30.5% and 30.9% of consolidated revenues from the previous 30.8% to 31.2%. And this takes into consideration our more favorable achieved results year to date of 30.4% and more favorable view on these inflations for the remainder of the year along with our effeteness in managing commodities.

Related to the cost of decrease, despite many other cost input impacting overall profitability as well as the expectation of additional new opening and efficiencies for the sixth Grille opening, we are increasing our annual restaurant level EBITDA range to be between 23% and 23.4% of consolidated revenues versus to pervious 22.8% to 23.3%.

General and administrative expenses including non-cash stock compensation expense are projected between $17 million and $18 million where our annual affected tax rate is estimated at approximately 30% to 32%. Both of these items are unchanged from prior expectation.

So 2013, with all of this together as well as consideration of increased preopening cost associated with a sixth opening, we are maintaining our range for adjusted earnings per diluted share of $0.92 to $0.96. This utilizes an estimated annual weighted average diluted common share base of approximately $23.9 million versus a base of $20.4 million in 2012.

Finally, we are raising our total capital expenditure before tenant allowances to be between $31 million and $33 million versus our prior range of between $27 million and $29 million which is related fully to the expectation of a sixth Grille opening in 2013.

Net of tenant allowances cash capital expenditures are now expected to be between $27 million and $29 million versus our original expectations to between $24 million and $26 million.

With that, I’ll now return the call back to Mark.

Mark Mednansky

Thank you, Tom. Before Q&A, I would like to leave all of you with the following thoughts. Our success continues to be driven by our expectation people and three dynamic next generation brands.

Our team is focused by making every dining and social experience special because when we do so, we ensure the loyalty of our guests and expand our potential reach. Am by taking care of our team and our guest, we are best positioned to reward our shareholders with predictable revenue and profitability growth over the long term. We are determined to strengthen our operation at our existing restaurants but at the same time we are preparing for future growth.

As we expand our base to serve new and under penetrated markets rating new units to our portfolio funded from cash flow as we have zero debt. Across all of the three concepts, we are expanding our usage of digital media, we’re enhancing our loyalty program and we’re determined to grow beverage sales to expanded education of our team. That we are proud today they have over 150 team members with level one or above court of master Sommeliers certification. Sullivan's is rightly getting more attention at the executive level and we think that the changes being implemented will have a positive and a very lasting impact on this concept.

Still we caution you it will take at least several quarters to fully assess our progress. While the menus at Sullivan's are being substantially revamped, please be rest assured that our culinary teams at Del Frisco's Double Eagle and our Del Frisco's Grilles are equally innovative and creative in delighting their respective guest with new appetizers, entrées and delicious desserts.

Also we have planned several remodeling projects at our Del Frisco's restaurants that vary in scope. But they are similarly designed to keep our existing locations fresh and relevant. Some cases, renting more seats to accommodate private patio or balcony dining, while in others we are simply updating the décor.

The key take away is that we will not hesitate to proactively invest in our restaurant base to make certain we are viewed as the destination dining of choice. In addition to making capital investments in our restaurants, we are also investing in human capital so we can manage our portfolio, a geographically dispersed location.

These additional resource, while already included in our guidance as critical to our ability to be successful as a next generation restaurant company. Although we are raising our development goals for 2013 with six new units, we will never grow at a rate beyond our capacity to manage successful openings in ongoing operations.

So with that in mind, let's discuss our updated development plans for the remainder of this year. In the next few days, we’re going to be open our seventh Grille in Santa Monica, California. This restaurant is at the corner of Ocean and Colorado Avenues and has sweeping views of the Pacific Ocean and right across the street from the famed Santa Monica pier.

And in the fourth quarter we’ll open Palm Beach Florida, which is entirely new market for us. Then we will follow up with openings in Fort Worth, Texas, Chestnut Hill, Massachusetts and we’ll finish at the very end of the year in Southlake, Texas. As I said earlier, the beauty of the Grille is that can successful and very diverse markets and therefore we do not have to wait to cherry pick only the most high profile spots.

To be sure all new restaurants have to manage efficiencies at first as the second quarter demonstrates. These impacts can and will weigh in our financial results as we continue to expand our portfolio. So I must say that our team is getting better at the time needed for individual location to reach its operational steady state.

This is exemplified in our Huston opening in the first quarter of this year where we were able to reduce preopening cost and get our food and labor cost better aligned in which the first five Grille restaurants that we opened.

Both Jeff Carcara, Thomas Dritsas is our Vice President of Culinary and our Vice President of People and Education, April Scopa and their entire team are doing incredible jobs with respect to our new restaurant opening process.

So with that we appreciate you all join us this morning. We’re now available to answer to any questions to you might have. So operator please open the lines for questions.

Question-and-Answer Session


(Operator Instructions) And we will take our first question from Jeff Omohundro with Davenport Company.

Jeff Omohundro - Davenport Company

Thanks, it is Jeff Omohundro, Good morning, just a couple of questions, first was four openings now planned in Q4 just wondered if you could address that depth of the opening teams to ensure strong openings with minimal insufficiencies and the fourth opening being in Southlake, does that help in that effort?

Mark Mednansky

Great question. We have been planning the expansion of this dynamic brand for the past three years, even before we created the first one. With that in mind we’ve been utilizing different opening teams at each and every growth that we opened to point so we’d have two to three fully trained opening teams so we would be able to accommodate multiple openings within a quarter.

For a restaurant based currently of 35 we’re very well positioned for growth with exceptional regional managers, a training team and a culinary team that’s probably larger than that you would expect from a base of 35 restaurants. So short answer is, yes and to your last point, the last point being here in Southlake, Texas where we already have a Grille in Dallas and one in Fort Worth, really gives this some flexibility to Jeff and his team and we’re very confident in opening these four over the larger fourth quarter. As you know it does include in extra period. And that fourth quarter a 17-week period versus a normal 12. So on fiscal basis it is little bit spread out.

Jeff Omohundro - Davenport Company

And then my other question relates to Sullivan's and the significant efforts on menu there. Certainly the fixed place menu appears to have mixed very high. Just wondering relative to your expectations around mix then the impact of the of that in terms of check and traffic, how did that actually perform relative what you were looking for? And as a supplement to that how effective was the new digital marking that we’ve seen behind that effort? Thanks.

Jeff Carcara

Jeff, this is Jeff Carcara. The prefixed menu in the second quarter just outperformed what we expected. It was a good percentage of preference. We saw a lot of great dimensions earlier. We saw a lot of great comments on it based on its variety and the price. So we are pretty happy with what we saw in Q2, therefore adding it here into the main menu in Q3.

Tom Pennison

And one other thing Jeff, during that quarter it wasn’t really promoted significantly. It was done more in restaurant advertising as well as some email and with that ended up being just around 9%, if you look on a dinner mix, about 9% of the mix was all prefixed and we definitely saw some incremental happening with that to the standpoint of helping drive that entree growth in the second quarter. Now in the third quarter we will be working a little bit more promotion of that.


And now we’ll take a question from Justin Marshall with Deutsche Bank.

Justin Marshall - Deutsche Bank

Just quick question on the Double Eagle. The comps came in much higher than we were expecting and seems like it was a great quarter. Was there anything special going on there related to whether and maybe how the quarter progressed?

Mark Mednansky

No, Jeff, just the opposite. We had some tough weather in the queue and then Boston which is one of 10, Boston of course has a problem during the marathon where we had shut it down for a few days. So we continue to be very pleased with the recognition that Del Frisco gets with the high end diner as we dominate in every city we’re located.

Justin Marshall - Deutsche Bank

And then on an inflation update you talked a little bit about lowering your cost of sales line guidance. Can you talk about what you expect for disinflation in the second half and possibly the magnitude of the pricing you might be looking at in the fourth quarter?

Tom Pennison

From a cost to sales standpoint, we feel there is still probably maybe 3% to 5% potential in the second half of the year, just in pure cost. We’re also adding additional growth coming in. While those grills come in with some inefficiencies, we’re also introducing more and more of this lower cost to sales into our mix that has been very positive in lowering our cost to sales so far.

So the combination of those is really helping us. We never thought it would be as high as the, when a lot of the -- earlier this year people were speaking double-digit and lower teens we never anticipated that, so we’ve actually seen a little bit more happen in line with our expectations quite honestly, but it’s now allowing us to cut back on the range of error just in case we were wrong, but right now as I said it’s about 3% to 5%.

And then as we look to the fourth quarter with pricing, normally we tend to look in that 1% to 2% range. We don’t see anything beyond that, but the focus on that price increase will be more site specific and geographic specific to deal. It’s (inaudible) to like I've we’ve always said of driving our comps as much as to help our margins where we have seen increased cost pressures in some of our jurisdictions. And as I mentioned some of them where we’re dealing with wage increases that we’ve basically been eating for the last year and a half in doing no pricing, we’ll adjust those a little bit more significantly going over the location where we’re not seeing that type of pressure.

Mark Mednansky

And Justin this is Mark. Yes, 1% to 2% increase expected in the fourth quarter will be between all three concepts. We believe we have some pricing leverage across all three brands.


And now we will hear from Jeff Farmer, Wells Fargo.

Jeff Farmer - Wells Fargo

And just following up on Justin’s question there, so again I realize this is probably just more than a directional proxy, the casual dining center sales did soften up pretty dramatically in June as well as some of the traffic levels recognizing that your quarter ended mid-June. Can you just talk about some of the intra-quarter trends that might get a little bit more challenging toward the end of that quarter? And then anything you can tell us about the first few weeks of the third quarter would be helpful as well?

Mark Mednansky

Sure Jeff we don’t give guidance on specific numbers or units during a quarter but I will say that Q3 started off pretty flat with that of last year. We had some nice momentum, very end of Q2 it started slowing down a little and we experienced a little flatness at the beginning of the quarter. But we have some exciting opportunities, we have some marketing plans so we’re still very confident with the year-end numbers that we’re guiding as far as sales increases for our company.

Tom Pennison

And Jeff just to add within the second quarter we saw our first and third period of the quarter there are higher comps in our period five center was a little bit lower and that period it was also impacted when we had a little bit more significant impact that took place in Boston also which happened in that period.

Jeff Farmer - Wells Fargo

Okay. And then switching topics a little, just coming back to G&A, so your G&A dollar growth for the second quarter in a row and you’ve explained some of this with corporate hires and regional management and fringing and things like that but your G&A growth is, materially out of your revenue growth rate and I know you don’t expect that to happen forever but as you look forward over the balance of 13’ and into 14’ how should we think about that, more specifically the rate of G&A growth relative to the rate of revenue growth?

Mark Mednansky

Well as far as 2013, we are right in line with the expectations we had there is no variance there whatsoever. We did have several open positions last year that we filled in the second half of 2012. So right now we’re lapping over some of that. For example I don’t think Jeff he’s been here a year yet.

Jeff Farmer - Wells Fargo


Mark Mednansky

But we have some of those items in place to where we’ll see that growth really as we go in the third quarter start to reduce because now we’ll start to lap over some of the public company expenses, our stock comp expense and the like. As we go into 2014 we do expect to be at a lower growth in our G&A than our sales growth. That was not the anticipation for 2013 at all because of just the changes in those additional expenses. But we will be at a slower pace as we go in 2014 to be able to start leveraging that line item.

Jeff Farmer - Wells Fargo

Okay then last one I am sorry did I cut someone off?

Mark Mednansky

Yes Jeff historically this company has always been able to produce outstanding consistent results with what I would call a lean G&A structure. I want you to know that as we build the infrastructure to properly handle disciplined growth we’ll always be cognizant of the fact that we will not let the G&A get away from us as other companies have done.

Tom Pennison

One last one on G&A in for your answer is that we include in our G&A all of our management education expenses and while you may think of G&A being in a truly overhead, it is absolutely a component to our growth that goes along with that, that’s tied into the time that a manager, his education all their salary cost, travel cost, lodging everything associated with that is in our management education under G&A. And year-over-year outside of some of just new positions, that’s been the slow significant increase. As we are hiring more managers we’re looking for quality people when they are available and bringing them in as we are looking to accelerate our growth as we go forward.

Jeff Farmer - Wells Fargo

Okay that’s helpful and hopefully just one more quick one. Again the Houston Grille opening, I think it has been opened about four months, pretty close proximity to, I think a Double Eagle and Sullivan’s. So sort of those three restaurant, have they been able to work sort of hand in hand the way you would expect it? How was that whole dynamic played out with all three concepts pretty close to one another in one city?

Mark Mednansky

We are truly excited that, you can have three of our concepts within two miles and still have great operations. Del Frisco’s Double Eagle and Houston is on a very nice role. Their namesake just a couple of miles down the same street, Houston's Sullivan's is running about the same levels it was previous to the opening of the Grille and the Grille is just knocking its socks off, so well received in the spider City of Houston.


(Operator Instructions). And now we will hear from Brian Elliott with Raymond James.

Brian Elliott - Raymond James

I would like a quick, some more details rather on the Sullivan's remodel, kind of how far down the testing that you might be, but work you are looking at from this type of range of the average investment that you have talked about, pretty material interior increase but maybe walk through some of the numbers on both magnitude of investment and expected timing of a roll-out across the system?

Jeff Carcara

Sure. This is Jeff. Last year we did Chicago and we changed the restaurant’s physical plan. We removed the wall and the cellar between the dining room and the bar and we opened up that space to be one space and we created a great energy in that restaurant. We have seen it do great as far as sales numbers. That investment was give or take around $800,000. It was a little bit more from designer, physical change to the building. There was the little bit more cost involved there with the bar moving and making the bar full 360 degree rounds or circular bar so that you can guests can sit at all sides of it versus just the one sided bar that the Sullivan's traditionally have.

Right now, for design aspects we have two plans. We are going into one to two units and doing a similar renovation that we did in Chicago. So we are looking at anywhere between 600,000 and 800,000 on those units. And then we have another plan which basically gives our units a facelift goes in, that’s more in the line of $400,000 to $500,000, may be a little bit less. We are still putting that together right now. We are very close. We have three units picked out for this year that we hope to get complete by the end of fourth quarter. So does that answer your question? Is there anything more I can add there?

Brian Elliott - Raymond James

Yes, so as far I guess you characterized it there is ongoing test really right, that we are not committed to doing it system wide or anything?

Jeff Carcara

No, we want to look at both plans to see what investment level is truly needed. We will have those by the first quarter next year. I am sure we will understand that lot better.

Mark Mednansky

So, Brian we have the big test in Chicago and the second test and then the third. So, ranging from let's say $350,000 to $800,000. After we get some data and we see the results, we will look at the lift at all three and then we look at return on investment and then we will make a determination and I'm sure we just won’t pick one out of the box. We will probably make sure that we have some strong data. We will probably do a second test of multiple options and then go through and fix the remaining 15 that are a little older over the course of the next 12 to 18 months.


And we will now take a question from Paul Westra with Stifel Nicolaus.

Paul Westra - Stifel Nicolaus

Just couple of more questions on, do you mind end up these questions again, you mentioned 3% to 5% inflation. Is that year-over-year basis may be in the second half or is that essentially from here expected?

Tom Pennison

No, it’s more year-over-year.

Paul Westra - Stifel Nicolaus

Yes, I thought so and as a sort of follow up on that, in the first half of the year, you generally did about 60 basis points better than your prior guidance and then took guidance down by about 30 basis points for the year. I was just trying to figure out, is some of what you experienced here in the first half potentially going to, as far as less than expected cost of goods sold for that rollover during the second half as well?

Tom Pennison

Normally the fourth quarter is the highest of the seasonality where the high volume and it's also because of the demand curve it's also the time where we see these increases. So it’s more of a fourth quarter timeframe that we still expect to see, a little bit of higher year over year which is why even though year-to-date we are 30.4, we are still showing a higher on the tail-end as well as it also gives some flexibility as we are working with Sullivan's and some of the check items aspect on that.

Paul Westra - Stifel Nicolaus

And then just a follow up on the pricing, you mentioned 2000 call, pretty decent pricing in all brands and you also mentioned maybe standard 1% to 2% price range here at the end of the year. So I hate to say you are looking at 1% or 2% right now, but because you have flexibility you might go back to it. And if so how would you, you should do an annual price increase that it must take right off, is it possible you might choose to take two smaller ones in other words, if it's available?

Mark Mednansky

Well Paul, we believe that we do have pricing power right now across those three brands, but Tom hit on it. It's location driven. So we are able to take more in some cities than others. We'll look at the P mix, we'll look at cost of products and we'll make that determination, but we believe we'll take one price increase this year. We'll do it all once some time near the beginning or the middle of Q4 and we'll spread that across, and I am sure it's going to some in between 1% and 2%.

Paul Westra - Stifel Nicolaus

Okay it's helpful. And just a final question, trying to gauge, I guess maybe just your thoughts on sort of what's controlling the pace of growth of the Grille, sort of in your mind obviously pulling up as high as six this year. Are you just going to let sort of I guess, just slowly increasing the pace of growth, or do you think you have a growth infrastructure in mind. You mentioned, will you just continue to add them as the opportunities present themselves? Or do you have a thought in mind where you were just going pick a number roughly on an annual pace, achieve that number instead.

Mark Mednansky

Well I think Paul when you pick a number, when you just try to hit a number I think it really puts undue pressure on the management team to make decisions that aren't wise for long term success of that company. We have said as a company that we will grow new store openings in excess of 10%. Obviously we're doing much better than that this year.

The pipeline for '14 and '15 is real robust at this time. Especially with these new Grille concepts, all these incredible locations that are being shown to us, there is a potential to us to increase this year. But at the end of the day we're only taking sites that we're very confident in. and that is for all three brands. We believe that all three brands are strong growth vehicles. We have stated before that we'll open, it's the best year we'd open a Del Frisco’s Double Eagle, Sullivan's Steakhouse and about three to four Grille's.

And the beauty of having three concepts is we don't have to open up Del Frisco’s this year or Sullivan's, because six great locations presented themselves and we have the infrastructure to profitably open those units, we decided to open six units this year.

Paul Westra - Stifel Nicolaus

It's helpful. And then on the Grille, obviously you are geographically pretty disbursed to your old concept. As far as minimum efficient scale, not just oversight, just consumer recognition and convenience factors, do you feel that at a certain point maybe few more geographical openings and then more of a back sell situation or is it whether these things standalone one or two states?

Mark Mednansky

That's again a great question. So far we have proven that these units can standalone in geographic centers where we had no exposure in the past. But what we do have is very good data, on the Del Frisco’s and Sullivan's current guests, where they work and where they live.

So I will give you an example, we went to Atlanta, Georgia, our specific site on Peach Street rarely how many guests in that trade area had already experienced a Del Frisco’s or Sullivan's. And we also knew how many people in that area were dining out in similar type restaurants. We think this information gives us a definite competitive advantage when selecting real estate in the country.


And that would conclude our question-and-answer session for today. I will now turn the call back over to you host for closing remarks.

Mark Mednansky

Thank you very much. We thank everyone for your time today and we urge you to go out, if you haven’t tried one of our restaurants, do so and we will see you next quarter. Thanks everyone.


Ladies and gentleman, this will conclude your conference for today. Thank you for your participation.

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