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Ignite Restaurant Group (NASDAQ:IRG)

Q2 2013 Earnings Call

August 7, 2013, 5:00 PM ET

Executives

Ray Blanchette - Chief Executive Officer

Michael Dixon - President and Chief Financial Office

Analysts

Phan Le - Lazard

Bryan Elliott - Raymond James

Nicole Miller - Piper Jaffray

David Tarantino - Robert W. Baird

David Carlson - KeyBanc

Operator

Good afternoon, and welcome to the Ignite Restaurant Group second quarter 2013 earnings conference call. (Operator Instructions)

Before I turn the call over to management, I would like to note for you that portions of this call deal with forward-looking information. These statements reflect management's expectations for the future. The company's actual results may differ materially from these expectations. Management refers all of you to today's press release and the company's recent filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial conditions.

On the call today we have Ray Blanchette, Chief Executive Officer of the company; and Michael Dixon, President and Chief Financial Officer. At this time, I would like to turn the call over to Michael Dixon, President and Chief Financial Officer of Ignite Restaurant Group. Please go ahead, sir.

Michael Dixon

Good afternoon and thank you for joining us today. By now everyone should have accessed to our press release, which we issued this afternoon. The release, which covers our second quarter fiscal 2013 can also be found our website under the Investor Relations section. Additionally I would encourage everyone to review our related 8-K filings with the SEC for greater detail on information included in our press release and on today's conference call. We expect to file our Form 10-Q within the next day or so.

Our agenda for the call will be as follows. Ray will provide an overview of our business, and then I will discuss the financial results. We will have time at the end for questions, and we'd like to finish up in about an hour. Before I turn the call over to Ray, let me once again remind investors of the change in our fiscal quarter calendar.

Beginning with the first quarter of fiscal 2013, we adjusted our quarterly reporting calendar to four 13-week operating periods. Previously, the first three quarters of our fiscal year consisted of 12 weeks, and the fourth quarter consisted of 16 weeks. As a result of this change, financial results for the 13-week quarter ended July 1, 2013, may now be directly comparable to those of the corresponding 12-week quarter ended June 18, 2012. We'll point out the impact of this as we go through the numbers for the quarter.

Now, I'd like to turn the call over to Ray Blanchette, our Chief Executive Officer.

Ray Blanchette

Thanks, Mike, and thanks everyone for joining us today. As we announced last week and then reaffirm today, our second quarter results have a net loss of $0.10 per share. We're significantly impacted by the acquisition and operations of Macaroni Grill, which we acquired early in the quarter.

I'm not pleased with these results. However, I want to reiterate that this result doesn't change our outlook for the opportunities and benefits that the Macro brand and its real estate bring to Ignite. We're also not pleased that we didn't have better line of sight to these results earlier in the quarter. This issue has already been remedied, and I'll discuss that in a minute.

I think it's important for me to spend some time today, explaining what transpired in this quarter and we learned about the Macaroni Grill business. As mentioned in our release, the majority of the variance to our expectations during the second quarter is a result of investments and expenditures in marketing and labor in the Macaroni Grill business.

During the due diligence phase of our acquisition and right up to the February 6, signing of the letter of intent, Macaroni Grill's comp sales were right around in negative 5%; from February through April 9, when we closed on the business, comp sales deteriorated to a negative 11.5%. While there was no secret to us that Macaroni Grill sales had been challenged for an extended period of time, the pace of deterioration in the first quarter was significantly greater than we had anticipated, and we felt that we needed to act very quickly.

Prior management had purchased some national cable TV time for late April, early May. And while the media purchase was not consistent with how we buy TV, we did choose to make use of that purchase time. And we launched our create-your-own-pasta spots, and took advantage of an existing and unique item on our menu that we could execute with confidence. And with this campaign, we saw a modest improvement in sales trends, but given the level of previous decline, we felt that we needed to be more aggressive and more importantly more differentiated in the marketplace.

So with that we launched our Summer Uncorked campaign in early June. If you haven't seen the spots, this program features half-of-one, seven days a week. We're excited about this idea. It tells a fundamental truth about the brand and ties back to what we believe is an interesting and unique aspect of the Macaroni Grill experience. Wine was always an integral product of the Macaroni Grill experience and an important differentiator from other casual dining Italian brands. And if you saw the social media buzz around this, it was pretty exciting.

After the quarter end, we also tapped into the significant Macaroni Grill customer database that we now own and delivered some limited time offers to our loyal guests. So as a result of all the efforts that we put into the quarter, we saw our comps move from that negative 11.5% that we bought in April to negative 1.6% in July, but it did cost us $2 million more than we had originally planned in that marketing effort.

So two important learning's to date, specifically with regards to revenue, when a concept has been consistently down in sales as long as Macaroni Grill has. It generally takes longer than you think to turn to tie. We were overly optimistic in how quickly we thought we could change the course. I think in this particular case, clearly not all 1,000 basis points changes in sales if you decide.

I think if we had taken this business from negative five to a plus five, the conversation that we are having today with regards to this increase in marketing spend would be very different. I mean that is a gigantic move in same-store sales in a very short-period of time.

The second thing we learnt is differentiated message that utilizes all of our tools, national cable, social media and local store marketing, can drive traffic to Macaroni Grill. We need to land on the right balance of the part that maximizes traffic without costing too much. But I can tell you I'm very encouraged to see that we can move the needle on the business. On the margin side, labor at Macaroni Grill required the largest incremental investment versus our expectations.

Post acquisition, we identified significant labor shortages in the Macaroni Grill units. Essentially these businesses were been staffed to accommodate, and I think in a lot of cases facilitate a declining sales environment versus our philosophy around staffing to build sales. So as a result, we increased hourly headcount in the system by over 22%.

We created and filled 1,700 new jobs, while quantifying the hard cost to our P&L from hiring and training 1,700 incremental employees is relatively straightforward. We also experience the usual inefficiencies related to sizeable inexperience staff and we believe those were material as well.

At any rate a significant investment was made and clearly more than we have planned. It was required to provide an acceptable level of customer service and provide a base on which we can grow future sales. Ideally we would have had immediate line of sight to these margin pressures, created by this labor investment. In this case, the majority of this margin pressure occurred in June, and due to some poor systems inherited to this part of our acquisition, we didn't have timely visibility to this.

In late June we were able to implement some of the systems that we use at our Joe's business, such as weekly P&Ls that cover virtually all controllable costs, including labor and cost to goods. And a real-time labor monitoring tool that allows our operations VPs to monitor sales and labor throughout the day.

And we actually roll that to the Directors of Operation in the Macaroni Grill brand today. So we're going to get labor cost in line with revenues, especially now that we have better visibility to it. But it still will take a little time to fully integrate the new hires in the Macaroni Grill, and realize the benefit that we expect from the improved execution.

Let me shift gears and talk a little bit about the Joe's and Brick House brands. This is a much better story. Sales trends at Joe's returned to positive territory in the second quarter, and our comparable restaurant sales in the Joe's business increased seven-tenths of 1%, given this positive comps in 18 out of last 19 quarters.

For July, Joe's comp sales are up 1.6%, which is encouraging, given the challenging causal dining environment. I know the Knapp Track numbers just came out today, and July was not a good month and we performed very well relative to the Knapp Track. And we believe the 100% Shore campaign is resonating with our guests and helping to drive positive traffic results, and we've seen that over the past two months.

After the quarter end, we also opened the much anticipated new Joe's Crab Shack in Harlem, New York, and we're pleased with the opening volumes. We just finished our first week.

We're also pleased with the continuing sales momentum with Brick House Tavern and Tap. Brick House Tavern and Tap saw a 6.4% increase in comparable sales during the quarter. Our menu innovation and food quality, service and atmosphere, allow Brick House to stand apart from the traditional causal dining options. For July, Brick House comps continued their positive trend with comps of 3.7%.

So before I turn the call over to Mike, let me share just a few more comments on how I see Ignite moving forward through the remainder of 2013 and into 2014. And when I look at the future of Ignite, I really look at sort of four areas targeted for growth. Number one, we clearly need to continue our diligent focus on improving Macaroni Grill sales and margins, and we acquired nearly $400 million in revenue and we need to make it profitable. So I believe we have the team and experience in place today to make that happen.

Number two, the success and potential of the Brick House business, means, we should grow this brand faster. We can do this via maximizing the real estate we already control, through conversions of underperforming locations in our portfolio, and we also intend to accelerate our franchising efforts there.

Number three, the Joe's business has proven to be a solid and steady performer. We'll continue to grow this brand in a disciplined manner, focused on the types of locations that have proven successful in the past. In addition, we'll continue our remodeling program of the older Joe's locations, as we now have some early results that have proven to be very positive.

Number four, we need to leverage this franchise infrastructure that we now own. We intend to accelerate our efforts around domestic Brick House locations and international Macaroni Grill locations. We also see some opportunistic opportunities for other brands internationally, the other brands that we own.

We knew the turnaround is never easy. I personally recognize that we were overconfident in our ability to quickly move the needle at Macaroni Grill, based on our success at Joe's. The fact is we've made more progress in the 90 days-plus that we've owned Macaroni Grill than we did in the first six months of the Joe's turnaround. But we still have a very long way to go and in there working on it every single day.

So with that, let me turn it over to Mike to walk you through the financials.

Michael Dixon

Thanks, Ray. I mentioned earlier the change in calendar quarters to a 13-week quarter from a 12-week quarter. We'll give revenue results on a comparable 13-week basis. However, the expense side of equation along with the balance sheet, of course, will not be directly comparable.

So for the first quarter ended July 1, 2013, we posted total revenues of $228.1 million, that's a $95.2 million or a 71.6% increase over the comparable 13-week period of the prior year. That's due primarily to $86 million associated with the Macaroni Grill acquisition and a combined 1.3% increase in comparable restaurant sales in Joe's and Brick House.

By concept, sales at Joe's increased $8.5 million to $129.6 million versus $121.1 million in the comparable period of the prior year. This increase is driven by a 0.7% increase in comparable restaurant sales and additional operating weeks from new store openings.

That's partially offset followed by the honeymoon effect related to restaurants open more than a year, but not yet in the comparable restaurant store base. Comparable sales increase reflects 0.8% in pricing, 1.2% benefit from mix shift, offset by 1.3% decrease in traffic over the full quarter.

The sales volumes of the newer units within Joe's continue to be strong, with a trailing-12 month average unit volume of $4.5 million for the restaurants in the class of 2011, and a $5 million average for the units in the class of 2012 that are open for at least one year. We believe these units will settle in at or above our $4 million AUV goal and well above our system average of $3.3 million.

At Brick House, revenues increased to $600,000 in 2013 to $12.5 million versus $11.9 million in comparable 13-weeks of the prior year. Now, this increase reflects a 6.4% increase in comparable store sales and the addition of one new location, but partially offset by one location that was converted to Joe's Crab Shack since last year's first quarter. The comparable sales increase is comprised of a 3% benefit from price and a 3.4% benefit from traffic and mix combined.

As Ray mentioned, to the first five weeks of the third quarter, we are currently tracking comparable sales at Joe's of about 1.6% and at Brick House of about 3.7%. We opened three new Joe's units in the North East and one Brick House in Colorado during the second quarter. Continuing our real estate optimization strategy, the Colorado Brick House was converted from an underperforming Joe's unit.

Subsequent to quarter end, we opened our newest iconic Joe's in Harlem, New York, as Ray just mentioned. And while still very early, we're excited about this location and pleased with the first week sales in excess of $215,000.

Romano's Macaroni Grill sales were $86 million. This includes $750,000 of royalty income. Comparable restaurant sales at Macaroni Grill decrease 7.4%. Now, clearly a disappointing result, we didn't see significant sequential improvement in comparable sales from a negative 11.5% in March to approximately negative 1.6% in the first full period of the current third quarter.

Before I shift to the margin discussion, I'll note that we intend to file our Form 10-Q later this week. Now, for the first time this Q will include segment data by brand for revenues, incremental loss from operations and capital expenditures. We believe this information will be useful to readers of our financial statements, especially in light of the Mac Grill acquisition. We also think segment reporting will give investors a better line of sight into our effort to execute on the Mac Grill turnaround.

Looking at the margin, costs of sales decreased to 29.3% of revenues versus 31% in the prior year. This was primary due to the inclusion of the Mac Grill business, which tends to have lower food cost than the Joe's concept. In addition, we experienced favorable year-over-year shellfish pricing. Now, the half of wine promotion that Ray mentioned did move the need a little bit the other way, but that program was really only in place for June, so it didn't have too big impact.

Labor increased quite a bit to 31.3% of revenues versus the prior years 26.7%. This largely reflects investment in Mac Grill that Ray described earlier. And we believe it is essential providing a level of guest service that will drive sales over time in Macaroni Grill.

Occupancy expenses increased to 8.3% of revenues in 2013 versus 6.2% in 2012, due primarily to deleveraging for Mac Grill's lower average volume across its 186 units. Other operating expenses increased to 21.1% of revenues from 16.4%, again primarily as a result of Macaroni Grill deleveraging and the increased marketing spend that Ray mentioned earlier.

G&A cost increased to 7.3% of revenue from 6.7% in the prior year. Adjusting the current year for about $5.2 million of cost, primarily related to Mac Grill acquisition, and adjusting the prior year for about $1.7 million of cost related to the IPO. Results in G&A cost as a percent of revenue of 4.6% in the current period and 4.7% in the prior year period.

Depreciation and amortization costs decreased to 3.2% of revenues versus 3.5% in the prior year. This benefit is a reflection of the Mac Grill asset value assigned in the purchase accounting, partially offset by additions to the legacy concepts with the addition of new restaurants over the past 12 months.

Pre-opening expenses increased to $1.5 million from $1.4 million in the prior year. We opened four units in the second quarter of 2013 versus five units in the second quarter of 2012, and we also incurred pre-opening cost in both quarters for store openings in progress.

As we mentioned earlier, Form 10-Q for this quarter, which will be filed in the next day or two, we'll report segment data by brand, including income from operations. I want to note that income from operations includes the restaurant operating cost and expenses, directly allocable G&A cost, depreciation and amortization and other income expense items directly associated with the brand.

That said, the operating margin for the Joe's brand for the quarter was 13% and that compares to 14.2% in the prior year. This year-over-year decrease is primarily attributable to a shift in Joe's marketing spend to earlier in the year for 2013.

At Brick House operating margin decreased to 5% from 5.9% in the prior-year quarter. And relative to Joe's, Brick House margins are impacted by slightly higher direct G&A cost, as we really prepare this brand for rapid growth; higher depreciation cost, as these are all relatively new units; and higher occupancy cost, due to the mix of real estate and more current leases.

On a year-over-year basis, however, the margin decreased from 5.9% to 5.0%, is really due primarily to pre-opening expenses in the current year. Macaroni Grill delivered a loss from operations of $5.8 million or an operating margin of a negative 6.8%.

Interest expense decreased $1.7 million in 2013 from $2.8 million in 2012. Excluding the rate of our debt issuance cost in both periods, results in a year-over-year decrease of about $450,000, which is really due to lower interest rate despite our higher debt balance.

Finally, our effective income tax rate for the quarter included a 44.4% benefit versus an expense of 20.4% in the prior year. The 2013 tax rate is the result of our loss in the quarter coupled with the addition of benefits from the FICA tip we see for Mac Grill.

As discussed in our last call, we restructured our debt agreement as part of the Mac Grill acquisition to add a $50 million term loan on top of the existing $100 million revolver. At quarter end, we would draw in a $105 million on this facility. Net of some letters of credit supported by the facility, about $40 million of this facility is still available at quarter end.

We are in compliance with the debt covenants. Now, the recent performance of Marco put some pressure on these covenants as we look forward, but we're confident we have a capital resources and flexibility to appropriately manage our business.

Let's shift gears to where we expect for the remainder of 2013. On the development front, we expect to open as many as four new Joe's and one new Brick House before the end of the year and convert as many as two Macro locations to Brick House locations. And note that we also closed 200 performing locations in July that were at the end of their lease terms.

In addition, we plan our remodeling a number of Joe's locations. As Ray mentioned this earlier, it's earlier in remodel project or this remodel program, but we've completed one location and it has shown significant sales lift. So we're watching this carefully, as we see this as a real opportunity for us to drive Joe's sales in the future.

For the full year, we still project the comparable sales increase at Joe's of about 0.6% and about 4% at Brick House. With a slight decrease in new store development and the honeymoon effect on the Joe's stores not yet in the comp base. Full year revenues for these two brands, we project between $480 million to $500 million.

On the margin side, we believe the full year guidance we gave last quarter in regards to Joe's and Brick House is still valid, but I think restaurant that will profit will be likely be closer to the 16% to 16.5% or the lower-end of our stated range.

As for Mac Grill, we certainly miss the mark in our margin expectations for the quarter, but we did hit our projected revenues. Our full year expectation for Mac Grill revenues is still in the $260 million to $280 million range. Mac Grill margins will be a challenge to forecast in the near-term. As noted earlier, we've seen good movement on Mac Grills comp sales, however, we need to continue managing all aspects of the cost structure, including the labor and marketing areas we discussed earlier.

As I previously mentioned, Mac Grill posted a negative 6.8% operating margin for the quarter. Now, if I just add for the incremental $2 million marketing spend that Ray mentioned, we have about 400 basis points of margin to get this business to breakeven at the operations line. And I'm going to guess probably another 300 basis points to cover the incremental G&A that we added to support the Macaroni Grill business. Now, we can get there through a combination of increased revenues and diligent margin management, especially of our labor, but we believe they'll likely take a couple of quarters to make this happen.

The majority of our acquisition related cost is behind us. We are pursuing a potential purchase price adjustment, as we work through the post closing working capital mechanism for the Mac Grill acquisition. That adjustment would be reflected in our opening balance sheet. And we expect another $600,000 to $800,000 in acquisition related expenses over the remainder of the year.

We've made a lot of great progress on the integration of Macaroni Grill into Ignite, including staffing up the Houston restaurant sports center, and closing the Dallas office, and we've just got a few more pieces left to wrap up and I think we're pretty well integrated.

So with that, I'll turn it back over to Ray.

Ray Blanchette

Thanks Mike. So to wrap this up, we have a solid track record of success at Joe's and Brick House, continues to show our ability, to take market share from the more established casual dining brands. And we believe the long-term investment pieces regarding Macaroni Grill remains viable. At the end of the day, we acquire restaurant brand with strong consumer recognition, sound real estate and with the potential for significant increases in AUV, and we acquired it for about $300,000 a unit. We're still convinced that the brand will prove to be accretive to IRG's earnings and we're determined to demonstrate continued progress over the next several quarters.

So with that I'll go ahead and open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) At this time, we'll take question from Matthew DiFrisco with Lazard.

Phan Le - Lazard

This is actually Phan in for Matt. Just wanted to drill in a little bit more on the trends at Mac Grill there, I know you had mentioned that you were seeing maybe flat to slightly positive when you were coming out of the call last time. And just wandering, if you could talk about, was there volatility within those couple of months up and down? Just trying to get a better feel of the underlined trends there going forward?

Michael Dixon

There's certainly some volatility, self-inflicted volatility around promotional activity that we chose to do, but generally speaking what we saw was, in upward sloping line throughout the course of the quarter, and then clearly for us getting into a positive territory reliably is the number one priority that we have in the business today.

Phan Le - Lazard

And then in terms of Joe's, I think you mentioned that you saw a little bit of contraction on the EBIT line due to some higher marketing spends. Are you seeing a more competitive advertising promotional environment within the space? And do you expect the increased marketing spend to, sort of, persist through the remainder of the year at Joe's?

Michael Dixon

Well, I say, it's late for the marketing spend? No. That was a conscious decision to accelerate some of the Q4 spend into Q2, so we're still on track for our full year marketing spend. As for the competitiveness of the space, I don't think so. I think we made the decision to increase the spend, a little bit in the second quarter to highlight some of the items we were moving.

Ray Blanchette

Also, it's got strategic implications for us as you well know. The Joe's business has some seasonality attached to it, and so for us to ramp up spending a bit in the second quarter is to try and create momentum, and what's been a difficult market, we think makes good solid strategic sense. And so I think that's what you saw, balance through the year, our spent is basically like-for-like versus last year, so you won't see any big change there.

Phan Le - Lazard

And then one more, last question, if I can squeeze it in. In terms of Macaroni Grill, the labor and media investments that you made during the quarter, is that something that's sort of done with and isolated to Q2, or do have a sense that you need to continue to keep spending through the remainder of quarter and add more bodies to some other stores or increase media in different markets?

Ray Blanchette

Well, it's two separate questions. With the media specifically, I'll be very candid, we had a very weak buy that we just bought. And we weren't comfortable given the size of the current decline, just using that media buy, so we have it up. So that is a one-time expense. We're now on, what we committed to everyone, when we originally bought the business, that we were going to put Macaroni Grill on a continuity plan on national cable and that's where we're at.

So we're into now, our TV buys, our new menu, and menu innovations is what we're going to talk about, so that does result in some incremental TV weeks balance of the year, just because we're not up against TV in some of these cases in Q4. So that's the answer to the marketing questions.

With regards to labor, that was not a one-time investment. That's the investment to drive sales and traffic in restaurant through the experiences that we sell. Now, we do expect to become more efficient with that labor investment that we've made and so we are looking for some incremental improvement. And now that we've provided ops with all the tools that they need to have a line of sight to correct labor deployment, we're expecting to see some improvement in that line item.

Operator

At this time, we'll move to Bryan Elliott with Raymond James.

Bryan Elliott - Raymond James

Mike, just want to actually have a quick follow-up and then a question. So the follow-up is, so you mentioned two units closed in July on lease expirations. Could you let us know which brands those were or what models?

Michael Dixon

That was one Joe's unit and one Mac Grill unit.

Bryan Elliott - Raymond James

And will there be a write-off at the third quarter or were the assets already been written out.

Michael Dixon

It was very, very small in asset value.

Bryan Elliott - Raymond James

And then your openings that you gave right before that those are gross, right?

Michael Dixon

Correct.

Bryan Elliott - Raymond James

Now, so we're going to get to see margins in the 10-Q here shortly, can we walk through what the operating income is going to include? Is it fully allocating G&A across all three brands and there is no corporate overhead or whether there will be corporate overhead fees?

Michael Dixon

There will be corporate overhead fees, Bryan. You will see the directly allocable G&A, which really represents the brands specific personnel and their costs, includes the filed supervision et cetera. But the shared service is not allocated.

Bryan Elliott - Raymond James

And will we get some historicals from which we can model?

Michael Dixon

I think this is going to be more of a prospective disclosure. I think it's important that we're launching this now with Mac Grill, because it's obviously a significant component of the business. And at least at this point it has a pretty different margin structure.

Bryan Elliott - Raymond James

While you gave us already historical, Mac Grill filing a while ago. So we're not going to really be able to model Joe's and Brick House in this manner until a year from now when we get the fourth quarter, four full quarters of historical data?

Michael Dixon

I am sure we can figure some. And well, you've got the data for our Joe's and Brick House, per-Mac Grill. So you got a pretty good idea, what that structure looks like.

Bryan Elliott - Raymond James

Well, we don't know what the breakouts are. So we'll have to wild guess on the margins. I guess that will be in this forum for that to be broken out on a trailing-12 basis for us to model. I think that, so if we're going to get that on a go-forward basis, that's a reasonable request.

Operator

And at this time we'll take a question from Nicole Miller with Piper Jaffray.

Nicole Miller - Piper Jaffray

On the margin front, if I look at 2Q Mac Grill, negative single-digit, then operating margin down 6.8%, can you tell me please again the Mac Grill's July comp?

Michael Dixon

Negative 1.6%.

Nicole Miller - Piper Jaffray

So help me walk, kind of, through this math. So down 1.6%, what kind of implication for that is that improvement in operating margin? And we want to ask that question, so down 7%, it was down 6.8% operating margins, so a comp down 1.6%, what does the operating margin look like in July then?

Michael Dixon

Well, we're not disclosing what that is. Obviously, it's improving with the comp improvement. Part of it is, Nicole, is how do we get that improved comp, obviously we're spending on improving labor. We need to drive labor improvement. If we're spending a lot towards marketing that's going to have an implication on the operating income margin for that business.

So I guess, just trying to take your step back, if I think about this business, macro business, can it drive positive restaurant level profit or say restaurant level profit right on the operating margin, add a $2.1 million to $2.2 million AUV. The answer is yes. We still need to get the labor in line as we've talked about. And we need to be efficient in our spending the market in dollars, whether that's in used stores comps or promos or just pure marketing.

Nicole Miller - Piper Jaffray

So I guess the operating margin doesn't improve as fast as a comp. So when you had a flat comp, you still have a negative operating margin in the short run?

Michael Dixon

In the short run, I would say yes, especially with the investment on labor.

Nicole Miller - Piper Jaffray

And then what kind of positive comp will it take into until you're at a normalized run rate, because we all get that. But bridging the gap, when do you get to that breakeven? I know you've said and obviously we know its 700 basis points, but what kind of comp or AUV, I am not really sure I'm even asking there a question, so we can figure out how to model getting there?

Michael Dixon

As I said, I think it's going to take us a couple of quarters to get there. So I don't think it takes a whole a lot more of comp sales, it takes us to be, to get the labor model figured out appropriately and it takes us to efficiently use these marketing dollars. And by that I mean pulling in the percent of promotional discount et cetera that have been a part of this brand for a while, and being able to drive that comp sales increase without heavy promotional discounts.

Nicole Miller - Piper Jaffray

So one last question, just harping on this and I apologize, but to get everybody on the phone on the same page. Does it sound more or like, we get that, it's a trade-on earnings this year. Looking forward, let's say, 12 months from now, it's more like, you're kind of having offset in the first half and you neutralize it in the second half of next year, so that maybe it's just breakeven or could it possibly be accretive already next year?

Michael Dixon

Well, certainly our intention to have it be accretive next year.

Ray Blanchette

Nicole, one other thing that you obviously saw on the second quarter is exactly how aggressive we intend to be with regards to driving revenue back in the Macaroni Grill, driving trial reintroduction of this brand. And we understand the near-term, short-term pressure that creates.

But when we pull back, for us, it's a very simple proposition to turn this brand around. You stuff them up, you clean them up and you fill them up, and once we've done that, that's when the real work around margin optimization happens, when we have significant traction back in this business from a revenue growth standpoint.

I mean, you've known us for a long time, we are obsessed with sales growth in our businesses and that's where we're obsessing over right now is getting Macaroni Grill to the point where it is increasing its customer base in a reliable fashion. And then we are very confident that we can manage margin once the problem is inside our four walls. And I hope that that color is helpful.

And as I mentioned, we don't anticipate going out there and making huge investments in marketing in order to accomplish this. We feel that we have a lot of leverage that we can pull and a lot of ways in which we can make this acquisition accretive. And we're working on multiple fronts right now.

Nicole Miller - Piper Jaffray

And in terms of the comp, it sounds like April, May, June, is at less negative, less negative, less negative, you're down to 1.6% in July. If you look at July and the three months of the third quarter last year, what's the easiest month comparison and the most difficult, so we can get an idea what comp might look like for the rest of third quarter?

Michael Dixon

I think that the comps last year, third and fourth quarter, were all pretty much in that negative five or six.

Ray Blanchette

5-ish, 6-ish, that was all, I mean, pretty good.

Nicole Miller - Piper Jaffray

Even by month, it's consistent by month?

Michael Dixon

Yes, it was fairly consistent, Nicole. I mean not exactly, but it's all right. Directionally, yes, that's where it was.

Nicole Miller - Piper Jaffray

And then big term opportunity franchise, you did inherent that. We don't want to lose sight of that, when will you be franchising Mac Grills, will you franchised Joe's Crab Shack and Brick House?

Ray Blanchette

Well, I mean, I can tell you right now, we expect to open some international Macaroni Grill's this year. We've got existing franchises that are expanding. We've had a lot of strong interest in the Brick House brand domestically and the Macaroni Grill brand internationally. We've had some interest in Joe's internationally. And so we're having a lot of conversations now with perspective franchises, all the way to the point of literally having folks here in Houston for Discovery Day.

So it's a very active process right now. I am really excited about what this could potentially be, but again we don't want to get out of our seats here. That's a slow burning fuse, but we know the idea of creating a long-term stable cash flow in Ignite is very exciting and worthwhile work. So we're very focused on doing that.

Operator

At this time we'll move to David Tarantino of Robert W. Baird.

David Tarantino - Robert W. Baird

Ray, I think you mentioned in the early part of the prepared remarks that, that you were surprised by how difficult it was to turn the Macaroni Grill business. And I was just wondering if you could maybe talk about some of the things that surprised you the most, as you took control of the business and where are you maybe fell short of your own optimistic or your own internal targets?

Ray Blanchette

Well, I don't know if I said surprised, but when I think about it, David, quite frankly, I think we were bit arrogant. And that's the piece that's a little embarrassing. I think we looked at this and, kind of, went into with an, well, you know, that we've done this before. We're just going to turn this thing around. The reality is it took us two years to turn the Joe's business around to the point where it was really cranking and producing significant same-store sales growth.

So we did that as a private company. I think going in now as a public company, putting myself back in the same fire of having a turnaround, you go in with a greater sense of urgency, all right. And so you see just exactly how aggressive we intend to be returning this business around. But there is still, it does take time. I mean these turnarounds are a lot of hard work. You've got to get out and do good work and you've got to win your guest back and you got to win their confidence and that piece doesn't happen overnight.

But I can tell you, we spend a lot of time, obviously in the Macaroni Grill business and I hope the folks on this phone call are doing the same thing. And you're seeing the level of energy change in the restaurants, right. And you're seeing the quality to food improved. We've already touched over, I think, 25% to 35% of the current menu has been changed. We're rolling out our first Braiser campaign here in a week or so.

So the things that we said we were going to do, we've doing, and we've been doing very quickly. I just think that we were little arrogant in believing that we could turn a brand that had been down in sales for eight years around in 90 days.

David Tarantino - Robert W. Baird

And maybe just as a follow-up to that, I guess related you're talking about maybe pushing out the recovery a couple of quarters, yet it took you a couple years on Joe's. So I'm just wondering, do you think you're being optimistic here in terms of the speed at which you can turn this or I guess, what's giving you comfort that it's only a couple of quarters versus the couple of years?

Ray Blanchette

Well, its 1,000 basis point sales trend change in 90-plus days. I mean we see that it's encouraging. There does seem to be something about, you consider run up to the top of the world, but breaking through. It has always been challenging. And we saw the same thing in Joe's where we got rid of massive declines, and then we just had a hard time, really getting into that significant, sort of, high-single digit same-store sales growth. That's what took two years.

We did start to see sales growth in, sort of, 14 to 16 months. So I think we're on a compressed timeline here with Macaroni Grill. We have more experience now. We know what leverage to pull and we're pulling them simultaneously rather than having to get hunt in pack to find them.

And so I am very excited about what's going to happen here balance of the year. We've got some incremental TV weeks coming up. I've got a very high expectation for what the business is going to do. But I've learnt my lesson, I'm not going to say anything. We're going to get out, and just do, and just work as hard as we can to make this happen.

David Tarantino - Robert W. Baird

And then maybe a question for Mike, what needs to happen to get to breakeven here. I guess, I think Nicole was trying to get at this, but you talked about, kind of, more efficiently managing labor and marketing spending, but could you help us sort of disaggregate, sort of the efficiencies that are required to get back to breakeven and the sales lift that's required to get back to breakeven?

Michael Dixon

I guess, that's what I was trying to answer for Nicole obviously, not very well. The challenge is, David, we can get to breakeven at a restaurant level profit perspective at current AUV. But it depends on how you get there. I mean, as I try to say, if we're driving a lot of sales through promotional discounts, then it's very difficult to get the labor in line. However, some combination of the labor model and driving revenue the right way, we can get the store level breakeven at current AUVs.

We probably need a little bit of a lift in comp sales, I can't tell you exactly what percentage it is to offset some of the additional cost associated with the business, the allocated G&A, the incremental G&A, the stuff that I talked about in the prepared comment. So I think we can get through a store-level breakeven at current volumes. But that takes the discipline management and learning around labor that we're in the process of doing.

Ray Blanchette

It also delays the recovery to a point that we're uncomfortable then. We're continuing even today that make investments in labor to drive sales and traffic. I think what we've learned was our approach we flew all the general managers in and we said, all right, go staff your restaurants and we sort of unhandcuffed them. And they have been in a cash constrained environment for a long time.

And in our experience, when you add on sales builders, you add on service, add on bartenders, you generally get an immediate lift from that. And those things take themselves very quickly. Well, what we got was, we get all of that, but then we also got all the extra cooks that they wanted to bring in or all the guys that they haven't given a raise two to three years.

And so I think in that regard we got out of over seats and we didn't have the same disciplined approach that we had in Joe's, because in the Joe's turnaround we didn't have the cash to go do that, right. And so now we've provided the operators with the tools that they need to effectively manage labor. The only labor that we wanted to add incrementally was people that can drive the guest experience directly. They are active in servicing the guest, and what we got was a broader swipe.

And so we're going to back that down, find a way to get back and balance and focus, but those people that are out there to build sales and traffic, we're still going to make those incremental investments, because for me the fastest way to return to turn this business around is to drive significant same-store sales growth.

David Tarantino - Robert W. Baird

And couple of more quick ones. I think, Mike, you mentioned that debt covenants are a little bit more tight, maybe if you could elaborate on what you meant by that comment, which covenants maybe are at risk of being triggered and what the exact flexibility is that you have around those covenants?

Michael Dixon

Well, we will only have two financial covenants. And the leverage covenant is really the one I'm talking about, but I think, as I said it's not, we're in compliance for the quarter. We believe we'll be in compliance going forward, just that you start pushing up against that, we just need to be careful in how we manage that. I will say that we've got good relations with our banks. So I'm not concerned that we won't have access to capital. But our goal, and as we model the business is to stay in compliance with our currents and we believe we can do that.

David Tarantino - Robert W. Baird

And then last one, I think you had previously indicated the base business revenue and ex-Macaroni Grill would be revenue of 510 to 520, if my notes are correct, and now I think, you said, 480 to 500, is that right? And if, so what's the difference there? What's driving the lower outlook?

Michael Dixon

You're probably right. I don't know, if I said 500 and 520. But I think that the driver on the base business is really, we've scaled back development by a couple of units from where we thought we'd be originally. Our development this year is either for those that are opening, is more back-weighted than we thought. So we lost some operating weeks from where we thought we'd be, just some of these openings have been a little more difficult to get completed. But they will get completed.

And then finally, I think the impact of those non-comps stores that have been opened for over 12 months. We are seeing a little bit bigger decline in year-over-year sales than we anticipated. But as I mentioned in the comments, these are still $4.5 million to $5 million AUV units.

And we're still confident they're going to settle in at the $4 million target that we have for these units. We're just getting there little bit quicker. Those stores that are closer to, kind of, that 24 month, we see them, kind of, coming into the comp base, pretty close to what we expected. But we've got a number of stores that are not in the comp base shift that are declining in comp stores a little bit faster than we thought.

Operator

At this time, we'll go to David Carlson with KeyBanc.

David Carlson - KeyBanc

My apologies if I miss this, but did you just talked about adding on some of the bartenders, servers, et cetera. But then about the incremental investment in the labor, is that $6 million to $7 million incremental by itself or it was just $6 million to $7 million that kind of the all-in labor cost or labor investment for the quarter?

Michael Dixon

I don't think we broke that down. I'm not sure exactly, we did say that we had a $2 million incremental marketing spend in the quarter. We didn't quantify the incremental spend on labor. I mean I think you can do some math around it and you're going to probably get into the $3 million to $4 million range.

David Carlson - KeyBanc

I mean, how much of that will, you're just talking about backing down some of the labor investments overtime, how much of that $3 million to $4 million do you think can be backed off, on a run rate what would you expect it to be on the annualized basis?

Michael Dixon

If we think about labor for Macaroni Grill as a percent of revenue, over time it should probably be in the low-30s. I mean, so we've got a little bit of room to get there. And as Ray mentioned, we're not going to get there overnight.

David Carlson - KeyBanc

And did you guys get the impression of the due diligence process that labor would require this sort of incremental investment?

Ray Blanchette

No. Not this order of magnitude. I think it's all about our company philosophy around staffing to build sales versus whatever the philosophy was previous. So not this sort of thing that's necessarily going to show itself in a diligence process in a meaningful way, that this is more of a strategic investment that we're making, because we intend to own this brand for a long time and to return it to its rightful place in the segment.

David Carlson - KeyBanc

Are the labor additions, the incremental ones, are they primarily front of house. Can you kind of walk a little bit through what's in this experience and that you said mainly guest facing, but can you walk a little bit through what that entails?

Michael Dixon

I would tell you that well over half of them are front of the house, server position, house position. So that's really what has Ray mentioned out, their focus is to bring in people that we're going to help drive revenue through an improved guest experience, so that's where the bulk of that mark.

David Carlson - KeyBanc

And then, final question I guess it's a kind of different way to get in terms of questions that were being asked earlier, but in some of the restaurants where you're doing volumes closer to $2.3 million say on the 10% to 15% above the current average volume. What's kind of the margin construct at those restaurants, just to kind of give us some sort of an idea about the leverage potential on sales?

Ray Blanchette

Well, it's a mix bag, Dave. I think some of them are driving positive pressure on the profit, some of them aren't. I think at that stage it tends to go back to the labor management individual unit. But to the point your question is, as I said earlier, we can drive positive restaurant level profits at these volumes.

David Carlson - KeyBanc

And then on the national advertising, when do you guys or do you as planning on moving to providing more food products, I don't know if you alluded to this earlier. And in general, the one promotion that half-off was it to narrow in its appeal to drive sufficient traffic to offset the discount?

Ray Blanchette

No. I will tell you that we are pleased with the results of Summer Uncorked. And when you think about anytime you go out with a particular food item that's much more narrowed than the amount of incidence that wine would impact, right. And so wine was a fairly broad message for us to go out with, but obviously one that had a solid strategic intent and a positioning intent.

And so I'm really pleased with that. We are planning on showing food in upcoming campaigns, and because there is some new products that were enormously proud of and we're anxious to introduce to people, so you're going to see some more innovation, which is kind of true to Ignite. But, yes, this whole idea of wine is a cornerstone and this brand feels right for me candidly.

Operator

We'll take a follow-up from David Tarantino with Robert W. Baird.

David Tarantino - Robert W. Baird

Just a couple of follow-ups on the earnings outlook, Mike, and this is going to be very difficult for all of us to model. I'm just trying, if you can maybe directionally comment on what your plan looks like for the second half of this year? And maybe if you could just kind of directionally let us know if you think you could have positive net income in the second half or if it's going to be negative or even just some directional comments would help?

Michael Dixon

It clearly is a challenge for us, as indicated by the Q2 performances really forecasting this Mac Grill business. As you'd expect, we're confident around Joe's and Brick House. As we look at the business, as I mentioned, to kind of drive the 700 basis points that we need to make this a breakeven proposition, I said it's going to take us a couple of quarter. I mean that gives you an idea of how long we think it's going to take. But our caveat for that'd be, there's a lot that has to happen to come to fruition. So we will get it as, the Mac Grill business should be able to support itself, if you will, by the end of the fourth quarter.

David Tarantino - Robert W. Baird

And then, I think previously you've outlined some G&A savings or as synergies that were associated with this. Are those expected to come-in in the second half or are those more coming-in in next year?

Michael Dixon

To be honest, David, I think we've got them. If you look at it, unfortunately, we're not driving the profit out of Mac Grill business to support the incremental G&A, but the G&A growth, in additions, they basically just, they came in right where we expected them to, which really reflected the significant savings that we anticipate. I think we talked about getting about $7 million worth of G&A synergies off of the Mac Grill infrastructure.

We said that it would take us probably, I don't know, a year-and-a-half or a year plus to realize. We're just over a quarter end of the business, and we believe we realized about $5 million of those synergies that we had identified. So it doesn't show up as a result of that driving the profit out of the Mac Grill business. But in terms of the infrastructure, we thought required to support the business, we're pretty much right where we thought we would be.

Operator

And this time we have nothing further in the queue, we'll turn things back over to management for any additional or closing remarks.

Ray Blanchette

Well, thank you again for joining us. As you can see, we have to work it out for us, and are attacking it with enthusiasm. And we remain very excited about the prospects for all of our brand and the opportunities they provide to add shareholder value overtime, so we look forward to speaking with everyone very soon. Thank you.

Operator

This does conclude today's conference call. Thank you all for your participation. You may now disconnect.

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