Del Frisco's Restaurant Group's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct. 9.13 | About: Del Frisco's (DFRG)

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

Q3 2013 Earnings Conference Call

October 9, 2013 08:30 AM ET

Executives

Tom Pennison - CFO

Mark Mednansky - CEO

Jeff Carcara - COO

Analysts

Jason West - Deutsche Bank

Jeff Farmer - Wells Fargo

Paul Westra - Stifel

Josh Long - Piper Jaffray

Michael Martin - Small Cap Report

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Del Frisco’s Restaurant Group Inc. Third Quarter 2013 Earnings Conference Call. Today’s call 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 questions.

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

Tom Pennison

Thank you Kayla, and good morning everyone. By now you should have access to our earnings press release and 10-Q for the 12-week period ending September 3, 2013. If you have not already reviewed it, it may be found on our corporate website at www.dfrg.com, under the Investor Relations section.

With me here today are Mark Mednansky, our Chief Executive Officer; and Jeff Carcara, our Chief Operating Officer. Both Mark and Jeff will offer opening remarks before I review the third quarter financials in greater detail, update our annual outlook and provide a glimpse into our development plans for 2014.

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 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 position.

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. In terms of quarterly sales and profitability, our consolidated results with respect to restaurant level EBITDA and adjusted diluted EPS were slightly below our own expectations due to ongoing challenges at Sullivan’s. This has caused us to revisit some of the projections we made for the year. Still we are very pleased by the results of the Del Frisco’s Double Eagle and the Del Frisco’s Grille concept. We were able to expand our restaurant level EBITDA by nearly 9% on a 13% revenue gain for the quarter.

You will recall from our last conference call that we pointed to flat trends on a consolidated basis over the first few weeks of our fiscal 12 week period that began in early June. And comparable sales did not materially change through the quarter end in early September. Total comparable sales were down two tenths of 1% with no pricing at any of our menus. The year ago comparison was positive 3.5%. While I will provide some highlights from each of the brands, I would like to first say how excited we are about our Grille concept which continues to build momentum on successful restaurant openings, and more than doubled its contribution to our restaurant level EBITDA on a year-over-year basis.

Del Frisco’s Double Eagle Steak Houses comparable sales increased 4.4% mainly through guest traffic growth, and while it’s certainly not immune to the prevailing industry trends, it’s general outperformance proves to us why this rightfully is the premier Steak house concept within fine dining. Of the nine [prime] [ph] base locations, they all delivered positive traffic and our Chicago Del Frisco’s will mark its first anniversary this December and continues to generate strong volumes as we look forward to the strong holiday season there this year.

Del Frisco’s featured a $49 price fixed menu during their third quarter and on Sundays we offered our $99 three course dinner for two that we call power couple Sundays. Both promotions were featured at all Del Frisco's with the exception of our New York flagship, and similar to what we have done over the past few years.

Comparable sales at Sullivan's Steakhouse declined 5.9% during the quarter while guest traffic fell 5%, reversing the positive trend in guest traffic that we experienced in the second quarter. Out of three brands Sullivan’s is more susceptible to what is happening within the casual dining space, since it is more heavily dependent on the spending habit of the middle and the upper middle class dining public.

From our vantage point, it appears that aspirational guests have shifted some of their discretionary purchases away from dining, and into such items as cars, home remodeling projects or durable goods. While weekday trends which in many cases represent business activity have held steady year-over-year, weekend trends for aspirational dining have fallen off. We saw this disparity coming about six months ago and therefore rolled out our $39 three-course-meal option during the second quarter.

While now in the past our call to action took place during the third quarter, we’re now offering this value all year. Just we’ll address the specific steps we are taking as part of our four point plan to improve performance at Sullivan’s, but we realize that brand retooling is just simply not a quarter or two process. However, with the resources we are devoting to this effort we can right the ship and make Sullivan’s the go-to-destination for upscale, yet affordable neighborhood steakhouse dining.

Now regarding Del Frisco’s Grille, we are gratified with the progress we’ve made over the past two years, as what we have first envisioned has truly panned out. We now have eight grills operating across the country and they’ve been very well received by our targeted demographic of younger, affluent and more female guest than that of the steakhouse. The brand possesses many of the attributes desired by prime real-estate developers eager to lure customers to their site. And with a very healthy lunch business the Grille is suitable and can be successful in a variety of potential setting; urban and suburban, business and leisure.

In the quarter itself, we opened our seventh grill location in Santa Monica, California at the corner of Ocean and Colorado Avenue. This restaurant is right across the street in the famed Santa Monica pier and just over a one week ago we opened our eighth Grille in Palm Beach, our first restaurant in the State of Florida. The restaurant is ideally located in the historic Royal Poinciana Plaza and close to the legendary Breakers Resort. We have received fantastic reception so far at both locations and believe both California and Florida markets are ripe for further development of both the Grille and the Double Eagle brand.

Now, we’ll hear from our Chief Operating Officer, Jeff Carcara.

Jeff Carcara

Thank you, Mark. First, let me touch on Del Frisco’s Double Eagle brand. While we are extremely proud of our results, we continue to polish and evolve this concept. Mark spoke of several marketing initiatives and will also give a brief update on the upgrades to several of our Double Eagle units later in the call. While we have detailed plans for all of our concepts to continue to grow and evolve, due to the recent performance at Sullivan’s, I would like to share a little more on what we have done and what we are doing to better the performance of the brand.

We’ve been working this year to ensure the long term health and vitality of Sullivan’s brand. While Mark discussed some of its challenges, I would like to address the initiatives we have put in place as part of our four point plan to sharpen the brand and showcase it for what it has always been, an exceptional white table cloth steakhouse that is of great value.

First, our focus on refreshing our menu. As you may recall we introduced the Sure Thing $39 menu, which is a three course meal option including appetizers, salad and entrée. Last quarter we rolled out a sleek new menu design along with 19 new items. Guest feedback thus far has been positive. In September we introduced a new lunch menu, which similar to our dinner menu, enables guests to create the experience they seek. Our culinary team has created several new credible lunch items and has designed the menu so that it can be executed quickly for those diners with limited time. In October, we rolled out our autumn-winter menu. We made several seasonal changes and added two dry-aged steak selections.

Second, to create more awareness for these enhancements, we have made and are making at Sullivan’s, beginning this month, we have launched a concentrated campaign of cable TV and radio in select markets. We have time for the ads to begin in October ahead of the holiday season. On a related note, we have upgraded our digital presence with a new brand website and mobile site. Many of our guests begin their interaction with us on their PCs, tablets or smart phones. Sullivan’s evolved logo and photography featured in the online realm represents the brand well;

Third, we have made changes to the leadership structure at Sullivan. Specifically we have added a new position of Vice President of Operation. Leading the team at Sullivan’s as Vice President of Operations will be Ray Risley. Ray has over 30 plus years of experience in our industry with 15 years of experience with the Del Frisco’s Restaurant Group across all three brands. Ray will have three of our most tenured Sullivan’s regional managers reporting to him focused 100% on Sullivan. In the past these regional managers oversaw multiple brands. This structure change allows us to manage priorities appropriately and keep the vast majority of our resources focused on growth. I will continue to be involved day-to-day with Ray and the Sullivan’s team.

Fourth, we have started remodeling Sullivan’s locations in Austin, Charlotte and Palm Desert, which should be complete by the end of the fourth quarter. All of these base lists are designed to create a more contemporary feel within the dining room and bar. Based on the results of our Chicago Refresh we did last year, we feel confident we can replicate those results. In summary, we are well on our way with the changes made and those that we are making and look forward to providing updates on our progress on future calls.

I would also like to give you a quick update on our Del Frisco’s Grille brand. As you know by the end of 2013, we will have opened six new grilles this year. Our Operation’s team has been focused on significantly decreasing our preopening cost. I’m pleased to say our team has achieved goals and continue to look for more opportunity. Along with preopening cost we have been working hard to quickly reduce post opening inefficiencies without affecting the guest experience.

We continue to make strides to each opening and have made significant improvements in Houston and Santa Monica. Our culinary team has rolled out several new items this year and has created market specific appetizers and entrées for all of our new openings. We continue to be excited with the progress and success of our Del Frisco’s Grille brand.

And with that I’ll turn it back over to Tom.

Tom Pennison

Thank you, Jeff. For our 12 week third quarter, which ended on September 3rd, consolidated revenues increased 13.2% to $54.2 million from $47.9 million in the year ago period. Our top line growth was driven by 47 additional operating weeks, resulting from the opening of four Del Frisco's Grilles and one Del Frisco's Double Eagle subsequent to the second quarter of last year. These new restaurants contributed $7.8 million to our revenues which were partially offset by a blended decline in total comparable restaurant sales of two-tenths of 1%. This decline consisted of a 0.9% decrease in traffic that was partially offset by 0.7% increase in average check. In the third quarter of last year total comparable sales rose 3.5%. Despite the increase in average check, there was no pricing effective in the third quarter of 2013.

For Del Frisco's Double Eagle revenues increased 14.3% to $28.8 million in the third quarter from $25.2 million in the year ago period. This improvement in the brand’s top line was due to 12 additional operating weeks related to December 2012 opening in Chicago along with a 4.4% increase in comparable restaurant sales.

Comparable restaurant sales increase consisted of 3.9% increase in traffic along with 0.5% increase in average check. This year's comparable restaurant sales growth lapped over comparable restaurant growth of 5.3% in the prior year's third quarter and marked the concept’s 15th consecutive quarter of positive comp stores sales trend.

For Sullivan’s Steakhouse, revenues decreased 6.5% to $16.1 million in the third quarter from $17.2 million in the year ago period. Comparable restaurant sales declined 5.9% and consisted of a 0.9% decrease in average check coupled with a 5% decrease in traffic. This decrease in comparable restaurant sales lapped over comparable restaurant sales growth of 1.4% in the prior year's third quarter.

During the quarter, as Mark alluded to the softness in traffic was more pronounced during the weekend day parks of Friday and Saturday nights, which have a higher middle class aspirational diner composition versus weekdays which have a higher business composition.

For Del Frisco’s Grille, revenues increased to 59% to $9.3 million in the third quarter from $5.5 million in the year ago period. The brand benefitted from an additional 35 operating weeks provided by the opening of four restaurants subsequent to the second quarter of 2012. We continue to be pleased with the sales performance of the Grilles as well as that of our original Grille in New York City that continues to grow year-over-year.

Turning to our cost structure, cost of sales as a percentage of revenue decreased 40 basis points to 29.9% from 30.3% in the year ago period, despite no pricing effect on any of our menus in the quarter. For comparison purposes, beef accounted for 32.8% of our total cost of sales in the third quarter this year versus 34.1% in the same quarter last year. By concept we experienced a 60 basis point decrease in cost of sale to 30.4% for Del Frisco’s Double Eagle while the cost of sales at Sullivan’s and the Grille maintained relatively consistent at 30.2% and 27.5% respectively.

The Double Eagle benefitted from lower prime beef cost during the quarter versus the prior year, as well as favorable shift in sales mix. While the Grille maintained its cost of sales percentage, the increased due to sales growth of the Grille’s lower cost of sale structure compared to that of Del Frisco's Double Eagle and Sullivan benefitted us on a consolidated basis.

Restaurant operating expenses as a percentage of revenues increased 110 basis points to 47.4% from 46.3%. By concept, Del Frisco’s operating expenses as a percentage of revenues were unchanged at 40.7% from the prior year while Sullivan's delivered by 370 basis points to 55.5% due to the afore mentioned lower sales volumes spread across certain fixed and semi-variable costs, particularly fixed costs and benefits, fixed labor and benefits, utility cost and maintenance cost, although once again the team did effectively manage variable labor costs relative to traffic.

Finally the Grille experienced a 60 basis point decrease to 54.2% due primarily to fewer new Grille openings that we're operating within the first 90 day during the quarter versus the prior year, which resulted in lower new opening and efficiencies impacting margins during the quarter.

I shared last quarter while we have been able to maintain our cost of sales margin without any recent price increases, across our portfolio we have experienced cost experiences within our restaurant operating expenses, such as certain local minimum wage increases, benefit costs and other operating items. While we had not taken any pricing since the first quarter of 2012, we did roll out new menus across all three concepts early this month, with a blended increase of approximately 1.8% to mitigate some of these increases.

Turning back to the third quarter marketing and advertising cost increased 209,000 from a year ago and were 20 basis points higher at 2.5% as a percentage of revenue. Taking all these inputs together, restaurant level EBITDA increased 8.9% to $11 million in the third quarter to 10.1 million in the year ago period, while margin decreased 80 basis points to 20.2% from 21% in the prior year.

The opening cost decreased to 0.8 million from $1.1 million last year, due primarily to the timing of new openings relative to 2012, as well as lower non-cash preopening rent during the quarter. In the third quarter of 2013, expenses related to the Santa Monica Grille which opened during the quarter and the Grille on Palm Beach which opened in late September, part of our fourth quarter.

Approximately 201,000 of the pre-opening cost during the quarter represented non-cash straight line rent versus $408,000 in the prior year quarter. General and administrative expenses increased to $4.2 million from $3.3 million in the prior year and as a percentage of revenues rose 80 basis points to 7.7% from 6.9% 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 an incremental 0.3 million in public company expenses, which included an incremental $241,000 in stock compensation expense. The total stock compensation expense during the quarter was $401,000 versus $103,000 in the prior year with $322,000 of that amount included in our general and administrative expenses and the remaining $79,000 including restaurant operating expenses.

On a side note in the fourth quarter, we will begin to fully lap many of the public company expenses that we started incurring last year although our stock compensation expense will continue to be higher year-over-year. Next year we expect G&A will grow at a slower rate than sales and we can begin to leverage this line item.

Also during the quarter we incurred approximately $3.7 million non-cash charge related to transaction bonus agreements that existed between affiliate of Lone Star Funds and certain executives of the company along with a $0.4 million charge related to a secondary public offering this past July.

Depreciation and amortization increased to $2.6 million from $2.1 million, primarily due to the development of five restaurants over the past year, as well as refresh expenditures for restaurants that were remodeled during 2012 and year-to-date through 2013. As a percentage of revenue, depreciation and amortization increased approximately 60 basis points to 4.9% from 4.3%. Bringing these together on a GAAP basis, we had a net loss for the third quarter of $0.4 million or $0.02 per diluted share and this compared to a prior year net loss of $2.4 million or $0.12 per diluted share.

On an adjusted basis, net income was $2.3 million or $0.10 per diluted share, compared to $2.1 million in the third quarter of the previous year. The adjustment for the third quarter consists solely of expenses and transaction bonuses associated with the secondary stock offering that took place during the quarter.

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 in all the aforementioned calculations, the share base was $23.9 million in the third quarter of 2013, compared to $20.8 million in the third quarter of 2012.

In terms of our liquidity and balance sheet, as of September 3, 2013 we had cash and cash equivalents of approximately $8.7 million and no outstanding debt. Looking ahead we expect to continue to finance our capital requirements for development, maintenance and remodeling through cash provided by our operations with minimal borrowings under our credit facility. Given our strong cash flow and periods of time with excess cash flow, our Board of Directors has provided authority for up to $10 million that can be utilized for the repurchase of our common stock over the next two years.

This authority will be used opportunistically as a means to offset dilution to existing shareholders caused by the issuance and exercise of stock options and other equity composition or compensation. Repurchases will be made exclusively through the use of excess cash flow and proceeds from the exercise of stock options and we will have no impact on our ongoing development and growth plans.

Turning to our outlook, we were fine tuning some of our full year guidance, which I will remind you is a 53 week fiscal period that concludes with a 17 week fourth quarter that began on September 4th. First, in view of our year-to-date performance, particularly at Sullivan’s and continued macro uncertainty, we were lowering our expectations for total comparable restaurant sales to positive 1% to 1.5% on a 52 week versus 52 week basis. This does imply stronger comparable sales growth in the fourth quarter versus earlier in the year but we remain conscious given the current macro environment.

Despite this caution we do have several favorable factors within our control in the fourth quarter. In addition to the blended 1.8% price increase previously mentioned, we do have additional patio seating versus last year that we can better utilize in the cooler fall season as well as some additional private dinning seats as we enter the holidays. Additionally barring any late season weather concerns, we will have a favorable comparison relative last year’s hurricane Sandy impact in the Northeast. We will be opening six Del Frisco's Grilles this year and this includes four Grilles opening in the fourth quarter, of which one is already opened in Palm Beach.

Mark will walk through the specifics but the final opening of the year in South Lake Texas will open at the very end of the fiscal fourth quarter and will therefore have a minimal sales effect on the quarter itself. Our range of cost of sales is being reduced to be between 30.3% and 30.7% of consolidated revenues and this takes into consideration our achieved results today, favorable view on these inflations through the end of the year and effectiveness in managing commodities. Despite the cost of sales decreased, as we anticipate some increased market and advertising spending in the fourth quarter, we are maintaining our expectation for annual restaurant level EBITDA between 23% and 23.4%.

Preopening expenses for the year are expected to be between $4.4 million to $4.6 million. In addition to the added preopening expense for the six Grille opening, we will also encourage non-cash pre-opening rent for some 2014 related opening that we now expect to take possession of during the fourth quarter. As shared previously, non-cash pre-opening rent can be incurred four to six months prior to an opening.

General and administrative expenses are now expected to be toward the upper end of our range between $17.5 million to $18 million. This increase is primarily due to the result of higher than anticipated non-cash stock compensation expense, which is expected to total between $1.5 million and $1.7 million for the year, the majority of which is included in G&A expenses and some in restaurant operating expenses.

On an annual basis, with all this together, we are adjusting out range for adjusted earnings per diluted share to $0.89 to $0.93 from the previous $0.92 to $0.96. This adjustment is driven significantly by the increased preopening expenses and non-cash stock compensation expense. Our estimated annual weighted average diluted common share base remains at approximately $23.9 million and this compared to a base of $20.8 million in 2012.

Finally, our total capital expenditure before tenant allowances were estimated to be between $31 million and $33 million, and net of tenant allowances, cash capital expenditures are expected to be between $27 million and $29 million. These are both unchanged from prior projections. We are also providing initial guidance for the development of five to seven restaurants in the 2014 fiscal year, including one Del Frisco’s Double Eagle restaurant in Washington DC, and four to six Del Frisco's Grille locations. Based on currently executed or near executed leases, we anticipate building Del Frisco's Grilles restaurants in Rockville, Maryland; Burlington, Massachusetts; Irvine, California; and Tampa, Florida.

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

Mark Mednansky

Thank you, Tom. We will be happy to take your questions momentarily but first let me conclude our formal remarks with the following takeaway. Del Frisco's restaurant group is blessed with talented people and exceptional culture built on providing the very best in culinary and hospitality and three dynamics mixed generation brand. Everyday our team dedicates itself to making our guests dining and social experience as special as they can with great food, innovative cocktails and unmatched attention to detail. Our appetizers, entrées, and desserts are in a class of their own. Our beverage program is supported by over 190 team members with level one or above Court of Master Sommelier Certification.

And our surrounding table service is truly next generation and unlike anything that can be found in a traditional steakhouse setting. Given that development is a clear priority for our Company, we are devoting the human and capital resources necessary to manage our portfolio of geographically dispersed location. However, we are also working to ensure that our existing restaurant base can perform at peak levels of performance. The totality of these efforts are critical to our long term success.

We are building more awareness for our concepts through media, including most notably new cable TV and radio spots, revamp websites and we have enhanced our loading programs ahead of the holiday season this year. We further believe in our opportunity to grow beverage sales by further educating our team on our extensive wine and beverage selection.

We are also making headway with respect to other tangible growth drivers, by protectively investing in our restaurant base to ensure that we are viewed at the dining destination of choice. These actions are centered on keeping our restaurant base fresh and relevant with updated decor and added seating capacity to accommodate private, patio or balcony dining.

Beside the remodeling efforts at Sullivan’s that we referenced earlier, we are updating several of our Del Frisco Double Eagle restaurants. Projects that have been or will be completed this year ahead of the critical holiday season include restaurants in Las Vegas, New York, Dallas, Fort Worth, and Houston while our Denver Del Frisco’s, to which a patio was added last year is already benefiting from this fall season with outdoor dining.

In the fourth quarter, we already opened a grill in Palm Beach, Florida and shortly we’ll be opening in Fort Worth, Texas, then Chestnut Hill, Massachusetts and finally in Southlake, Texas. With several folding train opening teams, we are well prepared for most of openings within a quarter.

For fiscal year 2014, we are providing initial expectations of five to seven restaurants opening, including the one Del Frisco’s Double Eagle and the four to six Del Frisco’s Grille location. There will be no restaurant openings in the first quarter, since the Grille in Southlake, Texas which was originally scheduled to open in January was already moved into the fourth quarter of this year.

In terms of locations, we can formally name as Tom stated, we have either executed or newly executed leases for our Double Eagle in DC and this is the site at DC at City Center, arguably the most exciting project in our nation’s capital in the past few years. At four, Del Frisco's Grille located Rockville Maryland, Burlington Massachusetts, Irvine California and Tampa Florida. The remaining Grill locations will be identified when their leases are executed.

Our 2014 plans have certainly shaped up nicely with a diversity of restaurant settings and markets and we are already working on our 2015 and 2016 pipeline, which we will not discuss at this early juncture, except to say that they’re shaping up nicely as well. Please also note that as we expand our base to serve new and underpenetrated markets, we’re funding these new units entirely through cash flow and have zero debt.

We are pleased that our Board of Directors have agreed to provide us with the ability to repurchase some of our stocks over the next two years, but I want to reiterate that this will be done from excess cash flow and will not slow our growth. It’s been more than two years since we opened the first Grille in New York City and since that time we have demonstrated this concept as not only viable but deserving to be our dominated growth vehicle. The Grille has proven its ability to be successful and draw a strong local following in a variety of markets, including areas of the country where we have either limited or no brand exposure.

Through data mining, we have been able to identify neighborhoods and potential guests who may have dined with us and our other concepts. Then we leverage that information for our site selection process. At the same time, we can successfully share market with a Double Eagle or Sullivan’s, such as we do in Houston where each concept serves many of the same guests but for different dining and social occasions.

In other words, the beauty of this Grille is that it can be successful whether we are planting flags such as in southern California or Florida or expanding the existing market such as in New York, Dallas or Houston. Finally, we built a strong infrastructure of industry professionals at every level of our company. This will allow us to continue to evolve our brands while aggressively expanding our Del Frisco’s and Grille concepts.

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

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Jason West with Deutsche Bank.

Jason West - Deutsche Bank

Just a couple of things. Tom, I don’t know if you have mentioned this or if I have I missed it just where comps are running so far in the fourth quarter, I know we haven’t really gotten into the busy season yet but maybe helpful to get an update there?

Tom Pennison

The first period of our fourth quarter is effectively the month of September and we basically saw some continuing trends of Q3 into that first period. Most of the initiatives that you heard Jeff speak about went into place in October, which is after that period, really just started last week. But as far as the initial period of our 17 week quarter, add some more trends to what we saw in Q3.

Jason West - Deutsche Bank

Okay, and was the pricing effective throughout that period or was that really after September period?

Tom Pennison

Many just went in place beginning of October, really last week. So we don’t have pricing in that first four weeks of the fourth quarter.

Jason West - Deutsche Bank

Okay got you. And then just on the Sullivan’s efforts to turn things around, you mentioned increasing some of the TV and radio ad spend. Is that an increase year-over-year in an ad spend or timing or is that similar to what you did last year?

Tom Pennison

It is going to be a redistribution predominantly as well as some incremental. We have done marketing. Q4 is the period where we are most confident, when you get the best return on marketing. So we are comfortable to try these new mediums. We have done some selected radio in the past but not with the messaging and professionally produced messaging that we are utilizing. This time we haven’t done cable TV. So that is new and we are focused on the markets where we can get the return in the cost. It’s not that TV as ever only reasonable or more approachable for our spend. We do anticipate year-over-year in absolute dollars that will be higher like given the extra incremental week for the year, it shouldn’t be too significant as a percentage but we have planned for it to be a little bit greater for Sullivan’s year-over-year in Q4.

Jason West - Deutsche Bank

Okay, got you, and can you remind us on the remodels that you have done at Sullivan’s? I guess Chicago is really the only one. What does that do to sales when you reopen on these remodels?

Mark Mednansky

Hey Jason, it’s Mark. A year and a half ago we remodeled Chicago Sullivan’s and we saw double digit increase for the year and then in year two we saw it sustained and still running with positive sales. So we saw very good results, a reminder that we’re going to take that same format. The next store that we will do, will be in Austin, Texas very similar to what we did in Chicago and we’re looking at a little different remodel program in Charlotte, and then we will end the year in Palm Desert. At the end of the year we will look at the results from the four remodeled scores. We will look at the cost of each one, determine that they are alike and then plan for 2014 on a remodeled schedule for the rest of the fleet.

Operator

And we will take our next question from Jeff Farmer with Wells Fargo.

Jeff Farmer - Wells Fargo

You did touch on this, but one of the areas of investor pushback that I get on the stock is that with just eight Grille units in operation, I think the oldest is just two years old, two years of age I should say. Grille still has some proving out to do. So along those lines, can you just provide some more up-to-date color on unit level economics at the Grille and I guess more specifically, the developer interest. What they are telling you? What it was like a year ago? How, sort of the buzz, if there is one around the concepts built out? How many units you get offered to you, like your ability to sort of cherry pick the best ones? Any color would be helpful in terms of gauging the ongoing unit growth opportunity for this concept.

Mark Mednansky

Yes, this is Mark, I would love to take that and then I will have Tom or Jeff chime in at any point. I will start with the end of your question. Because of the success we have had with the eight units, developers are really clamoring to get a Grille but it really started with the name Del Frisco’s. Even though there is only currently 10 Del Frisco’s Double Eagle Steak houses, the name resonates within the dining and business community and most definitely the real estate community has one, it’s a cache. It’s a plum to have Del Frisco’s any brand in your development, and especially with the huge volumes that we are putting up in the smaller size units, these developers know that they will get to percentage rent in a faster way with Del Frisco’s Grille then they will with most of our competition. The fact that we have no debt, that we’ve proven that we can open multiple restaurants without affecting our company and really do it in a first class manner and style, we’re gaining first pick for all the eight sites around the country. It also gives us, again it’s very important point, it gives us the ability to sit back and cherry pick and really negotiate for great sites.

When you have three different expansion vehicles and you are able to – and you have so much white space available throughout domestic growth, we’re able to sit back and not overpay for new sites. So that’s as far as growth, very exciting.

Now on the unit economics, I want to remind you that this Grille, the cost of sales is running about 250 basis points less in cost of sales than that of the steakhouses. Now there are some added costs for operation such as labor because you are serving a lunch period, but at the end of the day it’s a very attractive financial model.

Jeff Carcara

And just to add to that Jeff, the initial modeling of the Grille was targeting to be a restaurant level EBITDA between 20% to 25%, it was really that 22% to 23%, being the sweet spot, of course you have higher volume locations, like New York, you are able to get one of the higher end of that. But of the locations that now been operating for over a year or in some cases six to nine months we are seeing that materialize. We are seeing the unit economics we wanted to have. So we are very excited to have. As Mark alluded to you, we are seeing this coming and exactly as planned, both the lower cost of sales, delivering the unit economics, getting the overall demographics we’re looking for and it just gives us great excitement as we move forward.

Mark Mednansky

Jeff, I want to give you one more, I don’t want to prolong it, but one more positive – what we’re hearing from some investors isn’t why not more and quicker? The diversity of our locations by design, we pick them to show the power of the brand that we envisioned when we started this project four or five years ago, working on it. If you look at our locations, Radio City Music Hall in New York, right across from the Ice Skating Rink, we’re in an uptown young area in Dallas. We’re on the beach up in Santa Monica, in a small scrip mall in Palm Beach, in the middle of Buckhead, down the street from a Del Frisco’s in Houston. Wherever we have put these, they have worked and it really opens up the rest of the country for expansion for us.

Operator

And we will take our next question from Paul Westra with Stifel.

Paul Westra - Stifel

just follow up on your pricing 1.8%, can you just quantify if that was leading to a cross offering and maybe where you took the pricing on the menus spread around or any given category, but more importantly Sullivan’s, with the new price increase, can you give us an idea of what you think the cost would be to be given the changes and some of the reinvestments you are making to basically hold margins flat on a year-over-year basis?

Mark Mednansky

This is Mark, Paul. Let me start with telling you first with the price increase, the cost menu increase, 1.8%, that was done across all three brands and it was more surgical. We look at different locations, we look at cost of doing business in certain locales, we looked at restaurants and tiered them on what we thought they could support and not diminish guest count. So it was across the board, but I would remind our listeners today that when you’re looking at steakhouses in particular with steaks only $30 and $40 range, $1 to $2 per entrée, we didn’t believe was significant that would hurt our guest traffic moving forward.

Now, as far as we turn on investment on some of the changes we’ve done in the advertising, we’ve looked at pretty strong push for us in a new way with cable and radio spots, but as far as the cost, not significant cost compared to other restaurant chains. We were able to do it pretty efficiently and we did it again surgically, not at every single restaurant because we wanted to hold some restaurants back and see the return so we’ll know how to react in the future. We hope that we can bring in single digit positive sales to Sullivan’s brand and if we do that, we’ll pay for this advertising push.

Paul Westra - Stifel

That’s helpful. And maybe some more clarity on the deep price outlook. You mentioned some favorability in the fourth quarter. Are you talking about sequentially on the cost side from the third quarter or on a year-over-year basis and then maybe give us a peak of what you think 2014 is in store for these costs. Obviously [indiscernible] choice looks to be up but curious about what your thoughts on the pine market?

Mark Mednansky

And just to start really looking at on a year-over-year basis, we always expect from a seasonality standpoint you’re always going to have higher cost in Q4 with the holiday season when the demand is greatest, but since we do not contract RB [ph], we do have some of that seasonality that come into play. We are expecting modest, really lower to middle single digit year-over-year in Q4 which is and quite honestly we’re not really fully seeing that either so far. We’ve actually had several session at Palm side at the cuts we utilize were lower right now than they were at this time last year. So that’s why with really more favorable outlook through the end of the this year that the combination of how we manage our ability to always handle the mix, not to mention the aspect of additional grills in this fourth quarter additional growth we’re adding with that 300 basis point savings.

We feel very confident in our ability to further reduce our cost of sales for Q4. As we look out to 2014 and to your point there is still discussion over sort of [indiscernible] with some of the different players that we speak to and monitor while at one time they were speaking once again to double digit, they have come down more the mid-single digits, kind of like that 5% to 8% and as we look to 2014, we’re kind of going in with the aspect of assuming somewhere between 5% and 8%. When you look at – Pete [ph] makes up less than a third of our cost of sales in almost call it just shy of 2%. We’re almost covering that based on our mix, especially as you have once again at higher Grille coming in based on what we just did pricing in this quarter. So we feel good as we go into next year if it stays in that projection to be able to further maintain or continue to leverage our cost of sales for the 2014.

Paul Westra - Stifel

Great. And then just finally, two quick following questions. Could you quantify or if you have in the past the extra week here, what that may have helped you blocking that number in next year’s fourth quarter and then a quick update on the preopening cost. You said you made some progress. Should we be extrapolating forward a little bit lower preopening cost per unit and what that number should be?

Mark Mednansky

I think the last and first, just to get clarity on preopening cost, where the observations team has made some fantastic progress on it but I refer to as the cash preopening cost of things that deal with the education process and everything that takes place at two of the opening restaurants. We still have a significant amount depending it’s the location specific that preopening rent that non-cash rent.

For example, this Q3 we actually had preopening rent of or four restaurants in the quarter versus last year three but the preopening rent was double last year because of those included a Double Eagle in Chicago. So far as we enter in, we have a Double Eagle in Washington D.C., we have a Double Eagle that preopening non-cash rents would be much higher than that of the Grille. So that plays into the preopening metrics also. So I just shared that with you, as that’s a big component that it’s just the nature of whatever the lease is and that’s not controlled by Jeff and the Operations team.

So as far as -- I think in total, especially with the higher number of Grilles, we are going to be able to continue to lower that, but it depends site specific on how much of it to non-cash. Going back to the – separate from the preopening. Just to remind you, this is the week that is basically Christmas Day through New Year's Eve. Now New Year's that week is a very busy day. That's one of the busiest days of the year but we are close to Christmas and that week in between is pretty light.

So it is a lower indexing week than that of the overall Q4, when we had factored from a restaurant level EBITDA standpoint was how we factored it. It was about $600,000 to $700,000 factored in. Now some of that we need to see with the new openings how that will play in because we issued some estimates for all the new openings, but that's something we will be able to report on and we will share more specifically as we go into specially that impact for 2014, when we get through the Q4 reporting.

Operator

And we'll take our next question from Nicole Miller Regan with Piper Jaffray.

Josh Long - Piper Jaffray

This is Josh Long for Nicole. I had a question on the G&A commentary, where we were talking about potential leverage for that line item. I was curious if that was going to be something we’d see throughout the year of just by year end? And then I was also curious on any initial outlook on the implications for private dining interest as we into a seasonally strong fourth quarter.

Mark Mednansky

I am going to cover the G&A question and have Jeff talk what’s he's seeing on the private dining. The G&A, it’s really more of by end of the year -- a big driving factor Josh is the non-cash comp expense. That's going to be the biggest year-over-year increase that we're dealing with, that the first half of next year will still be anything higher than what it was in the first half of 2013, within that it kind of balances out at year end.

Now that said, there are some other additions that this year, a big part of our G&A is the management education. Now that’s somewhat baked into our numbers. So we won't have as significant as an increase. We'll still see that increase as we're increasing the number of restaurants we open each year. We feel like that’s somewhat baked into the 2013 G&A although better than it was versus 2012.

Jeff Caracara

As far as the private dining bookings, going into the fourth quarter into the holiday season right now most of our bookings for the holiday season do come towards the end of October and to November, but right now we are seeing ahead of time. We're seeing good traction right now in early bookings compared to last year. So honestly we're pretty excited about what we're seeing in the holiday bookings thus far into the fourth quarter.

Tom Pennison

And Josh we were pretty bullish on it, we have added seats at the end of '12 last year that you really couldn't take advantage of because we added them late in the year and we have added some seats this year for private dining along with an exceptional team that's led by our national private dining coordinator Sherry Joseph. We have a national sales director that's really come into her own, in her second year with us. So we feel good about private dining closing out the year.

Josh Long - Piper Jaffray

That's helpful. And then with the marketing or the opportunity to shift some of those dollars of marketing around Sullivan's, I would imagine that some portion of that would be focused on highlighting the private dining aspect of Sullivan's. Is that correct? And then give us a sense for which of the other messaging we might be seeing as we’re out looking either at the TV radio spot?

Mark Mednansky

If you go on the websites, and I encourage everyone to take a look at our websites, we're going to have the commercial on there for you to look and listen to. But initially the idea is just to get traffic back into the Sullivan's brand. Once we get demand we have point of sale materials collateral within the stores that help sell private parties and just as important gift cards in Q4. One of the things we do best is hire outstanding men and ladies to run our restaurants. We think that's a competitive edge. We just have to get people into the units. Once we do that we're confident we'll be able to sell them on private dining and on gift cards.

Operator

[Operator Instructions]. And we'll take our next question from Michael Martin with Small Cap Report.

Michael Martin - Small Cap Report

I’m just wondering if you could give us some more color on your corporate culture, how you attract, train and motivate people, particularly as you go down the organizational pyramid and what your turnover is like, et cetera.

Mark Mednansky

This is Mark. I will start with that. I think we have differentiated culture from that of most restaurants companies and an exceptional culture. We really are a hands on self-actualized company that has general managers that make decisions in their marketplace. These men and women are running multi-million dollar operations, in some cases restaurants, they are doing up to $30 million. So they really act as individual CEO’s. We give them the latitude to make decisions and what they are doing with charitable work, the hiring of their team, the hiring of their management team which is a little different than most restaurant companies. They are fully responsible for the performance of their team. In fact every quarter we meet as a management team, every general manager comes in, we meet somewhere in the country and they present their P&L not to Jeff, Tom and myself, but they present the P&L line by line to all of their peer group and they are held accountable for the performance by their peers, probably more than myself Tom and Jeff have to speak at these meetings. So it’s dynamic accountable culture that true stars want to participate in. Also the fact that we are a growing company, that we are building these three brands. They are dynamic brands and leaders in the industry help us to track and retain the best in business.

Now I will turnover, I will say something and then I will have Jeff conclude. Turnover is something that we look at for senior level and the senior level to me is GM’s and above. We are very cognizant of having the right person run these restaurants, these regions and the departments and turnover is either at industry or lower than industry standards depending on the brand. As far as our work place, we give our employees better benefits, industry leading benefits but at the same time we understand that many people in the food service industry are there just for a short amount of time. So instead of concentrating on keeping people longer at the hourly position, we concentrate on providing a great environment for them to thrive longer with us. And if they leave us in a year and they give us 110%, we welcome that and we think it is one of the reasons that year over year we have been able to be a very profitable company.

Jeff Carcara

And the only thing I wanted to touch on; Mark touched on there at the end regarding benefits and we offer great benefits to our team members in the restaurants but we also to attract talent and you’re talking about attracting talent, we offer great benefits to our managers or general managers and our executive chefs. We pick up the cost of their insurance, the general manager and executive chef for their family and we believe that is an industry leading benefit that most of our competitors don’t do. So it starts with attracting great talent, having benefits for them and then it goes to the training department and development and of course promotion. So we have a very strong plan in place for each of our managers as they come into our company.

Operator

There are no further questions at this time. I’d like to turn it back to management for additional or closing remarks.

Tom Pennison

Thank you. Ladies and gentlemen, we thank you for your time today. Get to our website if you’re not close to a Sullivan’s or Del Frisco's but more importantly, come dine with us during this next quarter. Thank you and have a wonderful day.

Operator

And this concludes today’s conference. Thank you for your participation.

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