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

Q4 2013 Results Earnings Conference Call

February 26, 2014, 08:30 AM ET

Executives

Thomas J. Pennison Jr. - Chief Financial Officer

Mark S. Mednansky - Chief Executive Officer

Jeff Carcara - Chief Operating Officer

Analysts

Will Slabaugh - Stephens Inc.

Nicole Miller Regan – Piper Jaffray

Imran Ali - Wells Fargo

Jason West - Deutsche Bank

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Del Frisco’s Restaurant Group Inc. Fourth 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.

Thomas J. Pennison Jr.

Thank you Kyle, and good morning everyone. By now you should have access to our earnings press release for the 17-week and 53-week periods ending December 31, 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 fourth quarter and full year results in greater detail, as well as provide a financial and development outlook 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 condition.

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

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

Mark S. Mednansky

Thank you, Tom and good morning to all. The fourth quarter proved more difficult than we had expected due to a number of factors. And as a result our performance fell short of our expectations.

Comparable restaurant sales for our three combined concepts did increase by 2.8% but our restaurant level EBITDA did not grow at the rate that we had modeled. We will cover the areas that we did not manage the level that we had expected, and what we are doing to execute our plan moving forward.

We opened four Del Frisco’s Grilles in the fourth quarter and while each of these sales volumes were very strong, their initial operation margins were collectively lower than we had modeled and two of the restaurants opened very late in the quarter due to construction issues caused by poor weather in Texas. We are working on reducing the time that we experience new unit inefficiencies, but did not realize gains from our efforts during the fourth quarter.

Now after opening 11 of these Grille units we are at the point where we have weekly milestones that we must achieve during the months of our openings. Also we have spread the planned openings in 2014 in a more even manner to ensure a high level of execution at each new unit. We did lose two weekends of business either foreclosures or greatly reduced sales in our Texas stores due to weather issues during our highly profitable holiday party season. But we also did not control labor on the softness of sales that we knew was coming.

Still revenues were up more than 20% for the fourth quarter and 13.3% even when excluding the extra operating week. Restaurant level EBITDA grew at a lower but still strong rate of 13% while adjusted EPS increased 16%.

Now turning to the brands and sales. Del Frisco’s Double Eagle comparable sales increased 5.2% mainly through guest traffic growth. The Chicago Del Frisco’s just celebrated its first anniversary in December and while not yet in the comp base is generating solid unit volumes. Del Frisco’s offered a $49 Prime Pair prix fixed steaks menu on Sunday’s during Q4 at all locations with the exception of New York City. This offer includes an 8-ounce hand-cut fillet paired with your choice of crab cake, lemon garlic scallops or barbeque fried strip as-well-as choice of a salad and a side dish. The $49 promotion has proven to be very popular with our guests and we have had great success with it many times over the past several years.

Comparable sales at Sullivan’s Steakhouse fell 0.7% which was significantly better than the 5.9% decrease we experienced in the third quarter. Guest traffic fell 3% but this is too marks an improvement on the 5% decrease we had in the third quarter. We know that re-tooling a brand and being recognized by guests for these efforts will take time but we are encouraged by our early traction. Still please be aware that Sullivan’s is by far the most correlated of our three concepts with casual dining since it sources a large portion of its guest base from the middle and upper middle class dining public.

Given the ongoing challenges to that segment Sullivan’s still faces headwinds but we are encouraged by the initial results and efforts from our team led by Jeff Carcara, Ray Risley and our regional managers.

The Grille had a rather busy fourth quarter as we opened in Palm Beach, Chestnut Hill, Fort Worth and Southlake, Texas. This expanded the brand's presence by more than a third to 11 restaurants. Preliminary sales results at these new locations were strong and with the exception of some snow and ice storms hindering dining in Fort Worth and Chestnut Hill, the weather was not -- when it wasn't a factor we were also often turning away guests. Know that even with restaurant level margin erosion in the fourth quarter due to new store inefficiencies cost of sales improved on a percentage basis and helped lower our consolidated cost of sales.

The Grille ran 290 basis points and 190 basis points lower in the quarter itself than Del Frisco’s and Sullivan’s respectively and will further mitigate the impact of beef inflation as it becomes a larger contributor to our overall results. Del Frisco’s Grille has really exceeded our expectations with our healthy lunch business, flexibility of real-estate options and rather broad demographic that skews younger and more female than that of our Steak House concepts.

Before I turn the call over to our COO, Jeff Carcara I'd like to say that we feel very good about the overall state of the fine dining consumer and what that should mean for us business this year. Our consumers are fluent and eager to experience the best things in life which of course include delicious steaks, great wines all served in a next generation setting. Although the first quarter got off to a slower start that we would have preferred because of some weather issues the underlying demand for our Del Frisco’s restaurant group experience with our lively bars, energetic ambience and warm hospitality is most certainly there.

In fact on days so far this quarter when weather was not an issue we've seen increased traffic and a willingness of the upscale guest to spend. And with the onset of March we should see trends reflect guest sentiment. And now we will hear from Jeff.

Jeff Carcara

Thanks, Mark. Let me begin with Del Frisco’s Double Eagle, which continued it streak of positive comparable sales now at 16 quarters despite its own weather challenges. As the flagship brand of our next generation restaurant company we know that we must continue to polish and evolve the concept. We completed five remodeling or enhancement projects during the year in Las Vegas, New York, Dallas, Fort Worth and Houston and will continue investments during 2014.

Turning to Sullivan’s our Vice President of Operation, Ray Risley and his team are continuing the execution of the multi-faceted re-tooling to showcase it as an exceptional white tablecloth steakhouse that is also a great value. Incidents of our $39 Sure Thing, three course meal option continued to show solid preference, while our fourth quarter Steak and [inaudible] promotion was also well received.

Our lunch business improved with the benefit of a new menu that includes new incredible lunch items and can be executed quickly for those diners with limited time. Looking ahead we will be rolling out new spring-summer menus later this year as well as a specific call to action promotion throughout the summer months. We are also fostering more awareness for Sullivan’s through media, including a concentrated campaign of radio in select markets a revamped website, direct mail, and an enhanced loyalty program. And while these items had an impact during the quarter itself, we view these investments as part of a long term marketing plan to make Sullivan’s the go to destination for upscale, yet affordable, neighborhood steakhouse dining.

And lastly we completed the re-modeling of our Sullivan's locations in Austin and are putting the finishing touches on Charlotte and Palm Desert remodels. Guests’ responses to the more contemporary dining room and bar feel has been positive and we have three to four additional projects planned for this year. So to sum up on Sullivan's we are already making some headway with more positive changes to come and we have every confidence that Sullivan can regain momentum.

And now for an update on Del Frisco’s Grille. We were very busy opening four restaurants in the fourth quarter. The teams did a good job in managing pre-opening costs, but more strides are needed with respect to post-opening costs. However the totality of so many openings in such a tight timeframe had a greater impact on our consolidated results than we had expected. While we have learned a great deal about the growth of guests thus far we have engaged in outside consulting firms to increase our knowledge of our guests and their needs, where they are coming from and why they are coming to us.

This study will help us better pinpoint where we should be building new properties in the future and what the potential full footprint might be for the brand. We will share more about this study in the future. Above all we are excited with our progress and success in rolling out this concept.

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

Thomas J. Pennison Jr.

Thank you, Jeff. For our 17-week fourth quarter that ended on December 31st, consolidated revenues increased 20.5% to $97.5 million from $80.9 million in the year ago 16-week period. Our top line growth was a result of a 2.8% blended increase in comparable restaurant sales across all three concepts as well as 113 additional operating units resulting from the opening of one Del Frisco’s Grille and one Del Frisco’s Double Eagle subsequent to the third quarter of 2012 and the incremental 17th operating week. The additional 17-week during the quarter which included Christmas Day when our restaurants are closed as well as New Year’s Eve our highest indexing day of the year contributed $5.8 million to consolidated revenues.

Rolling in the fourth quarter we did benefit from a favorable comparison against lost revenues related to Hurricane Sandy that occurred during late October 2012. However this benefit was significantly offset by 12 lost operating days and diminished operations in December of 2013 resulting from ice and snow storms especially in the Dallas Fort Worth area that resulted in four of our restaurants closed for several days, three of which were in our comparable restaurant group. These ice storms also delayed our South Lake Texas opening by approximately two weeks.

For Del Frisco’s Double Eagle revenues increased 17.4% to $51 million in the fourth quarter from $43.4 million in the year-ago period. The top line improvement was due to 22 additional operating weeks resulting from 12 incremental weeks for our Chicago restaurant and 10 weeks related to the 17th operating week during the quarter, along with a 5.2% increase in comparable restaurant sales on a 16-week comparable basis. Comparable restaurant sales consisted of a 4.5% increase in traffic along with a 0.7% increase in average check.

The comparable restaurant sales growth laps over a comparable to 5.9% in the prior years’ fourth quarter and marked the concept's 16th consecutive quarter of positive same-store sales trends. Our Sullivan Steakhouse revenues increased 5.8% to $28.9 million in the fourth quarter from $27.3 million in the year-ago period primarily due to the 19 additional operating weeks relating to the extra 17th week.

Comparable restaurant sales did decline 0.7% on a 16-week comparable basis which consisted of a 3% decrease in traffic partially offset by a 2.3% increase in average check. While we still have ways we were pleased with the 520 basis points improvement from the third quarter comparable results.

For Del Frisco’s Grille revenues increased 73.3% to $17.6 million in the fourth quarter from $10.2 million in the year-ago period. The brand benefited from an additional 72 operating weeks provided by the opening of seven restaurants subsequent to the third quarter of 2012 and the 17th operating week as-well-as positive comparable restaurant sales in the quarter. Given that several lost operating days due to the ice storm of our Dallas Grille one of the two Grilles in our comparable base we were pleased with the continued momentum of our most tenured Grille locations.

Turning to our cost structure, cost of sales as a percentage of revenue decreased 10 basis points to 30.3% from 30.4% in the year-ago period as we benefited from a 1.8% price increase taken mid-quarter as-well-as the increased weighting of the Grille with its lower cost of sales to our restaurant portfolio. By concept at Del Frisco’s Double Eagle we experienced a 30 basis points increase in cost of sales to 31.1% due primarily to higher beef cost. However this increase was more than offset by a 40 basis points of cost of sales improvement at Sullivan’s to 30.1% and 30 basis points improvement at the Grille to 28.2%.

Restaurant operating expenses as a percentage of revenue increased 150 basis points to 43.8% from 42.3%. By concept, Del Frisco’s operating expenses as a percentage of revenues increased by 30 basis points to 37.4% due primarily to increased labor and benefit cost as-well-as occupancy. Sullivan's increased by 109 basis points to 48.9% also due to higher labor and benefits as-well-as utility cost and maintenance cost in the quarter.

Finally the Grille experienced a 230 basis point increase to 53.9% due primarily to three incremental new Grille openings operating within their first 90 days during the quarter which resulted in higher new opening and efficiencies impacting margins. While these new opening inefficiencies were expected the sales volume of the new Grille restaurants were greater than expected placing a higher weighting of these lower margin locations on the overall results.

As shared last quarter we had experienced cost increases 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 mid quarter and late October 2013 with a blended increase of approximately 1.8% to mitigate some of these cost pressures.

Turning back to the fourth quarter marketing and advertising costs increased $522,000 from a year ago and were approximately 20 basis points higher at 2.1% as a percentage of revenue. This was due primarily to increased media spending made at our Sullivan’s concept during the quarter. Taking all of these inputs together, restaurant level EBITDA increased 13.2% to $23.2 million in the fourth quarter from $20.5 million in the year ago period, while margin decreased a 160 basis points to 23.8% from 25.4% in the prior year.

Pre-opening costs increase slightly to $2.1 million compared to last year, approximately $356,000 of preopening cost represented non-cash straight line [rent] during the fourth quarter versus approximately $360,000 in the prior year. During the quarter we opened four Grilles versus one Grille and one Del Frisco’s in the prior year we did benefit from lower cost for the two locations that opened in Texas and the overall lower free opening costs of a Grille versus a Del Frisco’s.

General and administrative expenses increased to $5.3 million from $4.8 million in the prior year. As a percentage of revenues it reduced 50 basis points to 5.4% from 5.9%. In addition to the extra operating week the net increase was primarily related to additional corporate regional management headcount along with management training expenses to support our recent and anticipated growth as-well-as increased non-cash stock compensation expense. These increases were significantly offset by lower incentive bonus compensation.

Also during the quarter as communicated in our recent developments in early December we incurred approximately $2.4 million non-cash impairment charge related to one Sullivan’s along with $3.1 million in expenses related to the secondary public offering in December to sell the remaining shares held by Lone Star Funds.

Depreciation and amortization increased to $3.7 million from $3.1 million due to the development of new restaurants over the past year, as well as refresh expenditures for restaurants that were remodeled during 2013. As a percentage of revenue, depreciation and amortization remained flat at 3.8%. Bringing these together on a GAAP basis, net income for the fourth quarter was $4.6 million or $0.19 per diluted share and this compared to the prior year net income of $7.6 million or $0.32 per diluted share.

On an adjusted basis net income was $8.6 million or $0.36 per diluted share compared to $7.5 million or $0.31 per diluted share in the fourth quarter of the previous year. The adjustment to the fourth quarter consisted of the aforementioned secondary stock offering related expenses and non-cash impairment charge.

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. Briefly related to the highlights for the full year 2013 compared to fiscal 2012 our consolidated revenues increased to 15.9% to $271.8 million from $232.4 million.

Total comparable restaurant sales increased 1.35, including an increase of 4.4% at Del Frisco’s Double Eagle and partially offset by a decrease of 3% at Sullivan’s. This was following a total comparable restaurant sales increase of 4.2% in 2012. It should be noted that on a 52 week comparable basis we did benefit from one additional operating day across all restaurants related to Christmas Day going to the 53rd week in 2013 which fell in the last day of fiscal 2012. This additional day added approximately 30 basis points to the annual comparable sales growth.

Cost of sales as a percentage of revenue decreased to 30.2% from 30.6% while restaurant level EBITDA increased 9.9% to $62.1 million from $56.5 million. On a GAAP basis net income for the year was $12.2 million or $0.52 per diluted share compared to a net income of $13.8 million or $0.67 per diluted share in 2012. On an adjusted basis net income was $20.7 million or $0.87 per diluted share compared to $19.3 million or $0.94 per diluted share.

Once again I encourage you to review the reconciliation table in the earnings press release for further details as to how we arrive at these adjusted results. Also as a reference the 53rd week during 2013 provided approximately $0.03 per diluted share.

In terms of our liquidity and balance sheet, as of December 31, 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. Also during the quarter we acquired 196,500 shares for approximately $3.7 under the $10 million authority provided by our Board of Directors.

Turning to our annual outlook for 2014 which is a 52 week period, we are expecting total comparable restaurant sales of positive 1.5% to 2.5% on a 52 week comparable basis. Related to our revenue due to the 53 week during 2013 we will experience an unfavorable fiscal calendar shift impacting 2014 in especially the first quarter. During 2013 we benefited from two high end indexing New Year's eves, one is in the first fiscal week of 2013 and the other during our 53rd week. On average each of these days provided an additional $1.4 million in sales versus a comparable normal operating day. On a fiscal comparable basis the first quarter of 2014 will be negatively impacted by not having a New Year's Eve versus the prior year fiscal quarter. Also as our fiscal year this year ends on December 30 our next New Year's Eve will fall in to fiscal 2015. Also we will have one less operating day during the fourth quarter related to how Christmas day falls relative to the prior year.

During 2014 we will be opening one Del Frisco’s Double Eagle in our third fiscal quarter and five Del Frisco’s Grilles which Mark will detail. The first Grille to open will be in Burlington at the end of the second quarter. We expect cost of sales to range between 29.9% and 30.4% of consolidated revenues which takes into consideration estimated beef inflation of 5% to 6% as well as increases in certain sea food costs. These increases are expected to be partially or fully offset by increased weighting of our lower cost of sales Grille concept during the year.

Annual restaurant level EBITDA is expected to be between 22.9% and 23.4%. Pre-opening expenses for the year are expected to be between $4.9 million and $5.5 million inclusive of non-cash pre-opening rent. While we are modeling the same number of restaurant openings in 2014 as in 2013, a significant amount of the increase over prior year pre-opening costs is a result of expected higher non-cash pre-opening rents. The opening of a Del Frisco’s this year and opening in higher cost geographic areas in the country, for example California in the northeast during in 2014 versus Texas and Florida in 2013.

General and administrative expenses are expected to be between $20 million and $21 million including non-cash stock compensation as well as normalized incentive bonus compensations. On an annual basis with all of this together our range for earnings for diluted share is $0.94 to $0.98 on an estimated annual weighted average diluted common share base of approximately 24 million.

Adjusting for the $0.03 earnings per share for the 53rd week in 2013 the top end of the range represents approximately 16.7% EPS growth in 2014. While this is below our long term EPS growth target it does factor in the unfavorable calendar from 2014, the increased pre-opening costs impact and the operating day losses we have experienced in the first fiscal period of the quarter due to weather.

Finally our total capital expenditures before tenant allowances are estimated to be between $38 million and $40 million in 2014 comprised of new restaurants re-models, maintenance cap and technology expenditures.

With that I now return the call back to Mark.

Mark S. Mednansky

Thank you, Tom. Before we transition to the Q & A portion of the call, allow me to leave you with these thoughts. Our culture really differentiates us from most other restaurant companies. This not only benefits all levels within our organization but also how we serve our guests with the very best in culinary and hospitality. As a growing company with dynamic next generation brands we are able to attract and retain the very best talent. True stars want to participate and contribute to our success and we give our operators tremendous latitude in making decisions but also hold them accountable for the performance of their restaurants.

I am truly proud of our team. Because of the success we have to-date with Del Frisco’s Grille developers across the country are clamoring for us to build Grilles in their centers. The Del Frisco’s name resonates within the dining and business community and most certainly in the real estate community and it is therefore seen as a coup to secure Del Frisco’s brand.

With the volumes that we are generating on these smaller size units, developers also realize they will reach a percentage faster with Del Frisco’s than they will with most of our competition. While we are driving upscale guests with disposal income to our landmark centers and we are therefore often given the ability to cherry pick the very best classy sites and leverage to negotiate better terms.

This year we’ll be opening six restaurants with a diversity of urban and suburban restaurant settings and markets. Development will consist of one Del Frisco’s Double Eagle and five Del Frisco's Grille locations and will begin late in the second quarter with the opening in Burlington, Massachusetts. The remaining restaurants will open in the third and fourth quarters. We are excited to be strengthening our presence in our nation’s capital with a landmark Del Frisco’s Double Eagle in City Centre, DC.

We will be also opening second Grille in the DC area in nearby Rockville Maryland. The Boston area will get a second Grille with our opening in Burlington and we will also increase the Grilles presence in California and Florida with openings in Irvine and Tampa. We are now working on our pipeline for 2015 and beyond with more incredible insights to share with you once these deals are finalized. We have an exciting future ahead of us, three strong brands, no debt, favorable cash on cash returns, the authority from our Board of Directors to repurchase the shares of our stock and significant wide space for growth.

So with that we appreciate all of you joining us this morning. We’re now available to answer your questions. Operator, will you please open the lines for any questions we have today.

Question-and-Answer Session

Operator: (Operator Instructions). We’ll take our first question from Will Slabaugh with Stephens Inc.

Will Slabaugh - Stephens Inc.

Yeah, thanks guys. Want to ask you first about the guidance. It’s kind of a two part question here. First on the top line, is there anything outside of weather that may have impacted the quarter to-date a period or any other reason to believe that the positive fundamental traffic trends you’ve been seeing wouldn’t continue throughout the year? Or should we thinking about that guidance as more of a conservative stance around recovery throughout the year? That’s the first part. And secondly just around the EPS guide, and what sort of margin degradation and where this might occur what you’re incorporating there?

Mark S. Mednansky

Well, Will good morning, it’s Mark. I’ll start with the sales side and then ask Tom to cover about EPS. As many of you know, we’ve have some problems with weather that’s really have affected us being strong in mid-West and the East Coast. But what’s been really encouraging on year-to-date as of today even with losing 28 operating restaurant days, losing New Year’s Eve, which is the highest grossing day for this company, we’re still positive for the year.

But putting that into place we feel very confident that we’ll continue of where we are to Del Frisco’s Double Eagle brand and continue our strong performance. We see the Sullivan's brand improving, but we have not declared victory yet Will. We still have a ways to go, we’re seeing the traffic be better than it was certainly in the third quarter of 2013. But we’re still retooling the brand and we’re looking for flat sales here in the near future, and hoping for increased sales near the end of the year. And with the Grille we only have two stores currently in the base and that’s not a significant part of it but we’re really excited about the sales with these new stores that we opened last year.

Thomas J. Pennison Jr.

Yeah, and Will willing to touch on the overall guidance, one other things as Mark alluded to the 28 operating days we lost quarter-to-date, and that compares to put them perspective to last year we lost 6.5 days. And that’s only -- those are only day we were physically closed that doesn’t really account for some of the diminished days, which really put us -- when you look at margins and flow through right out of the box of that first period, not to also with the New Year's eve that had some bearing right out of the starting gate. So overall EPS and flow-through.

As you look at the overall restaurant lower EBITDA margins, the margins really are looking at versus where we finished this year is coming back up some. The real impact is the much greater pre-opening costs year-over-year, which is about a $1 million increase. And now a bigger part of that is non-cash, when you think about -- if you look at the preopening expense in Q4 where we had the same number with four Grilles in Q4 this year versus one Grilles and one Double Eagle. That Double Eagle can be very expensive, and with that Washington DC Double Eagle we were picking up all that non-cash preopening rent.

So between that and the normalized G&A is really where we’ve covered some of the margins. Now given how we started the year, I never like to say conservative, but we definitely want to be in a place to deliver on what we say as we’re not comfortable not to deliver on that truly this quarter. While we have some things are outside of our control they happen. And we need to prepare for that.

So as we looked at -- we’ve spoken the 18% to 20% in the past, if you look at 18% to 20% that’s $0.99 or $1 based on the adjusted if you look at the 87 less the $0.03 of that extra week. So we’re about a penny different from been at 18% EPS growth, but clearly our focus is to be able to deliver that and more.

Will Slabaugh - Stephens Inc.

Thanks, that’s very helpful. And one more quick one if I could on Sullivan's. Obviously there was a big improvement from 3Q to 4Q. Can you talk just a little bit more about what went on there, do you think that was the new menus were a big driver there anything else you would point to as far as making that five percentage point move from quarter-to-quarter?

Jeff Carcara

We had a few things going on, this is Jeff by the way. We had a few things going on, the new lunch menu definitely drove traffic. We saw an increase in our lunch sales Q4 year-over-year. We also had a couple of promotions going on, one was the -- was our sure thing menu really not a promotion it's something we started last year in 2013 and that as I said earlier we saw increased incidents of it. And we also ran our steak and lobster, which we also saw preference on that go up to from year-over-year.

So we have a lot of good things going on at Sullivan’s and we hope to take this top spin into New Year.

Mark S. Mednansky

Hey, Will. One of the mistakes I think we made last year and previous years with the Sullivan’s brand is when we decided to really focus more on value and really just spend our advertising and most of our efforts on highlighting the $39 three-course dinner. At the end of the day Sullivan’s is still white table cloth steakhouse that people want to have a great time. They want to know they can come and have a great value.

But we need to focus on having some of the luxury items available and really front and center. And that's what we did in Q4 with the steak and lobster and we were very encouraged that people wanted to step up and really have a good time. And we are going to use that same philosophy through the remainder of '14 and beyond. Having that $39 value available but being able to give the guest crave-able options that will allow them to spend what they want to spend and have a great time at this exciting brand.

Will Slabaugh - Stephens Inc.

Thanks guys.

Mark S. Mednansky

Thanks, Will.

Operator

We will take our next question from Nicole Miller with Piper Jaffray.

Nicole Miller Regan – Piper Jaffray

Thanks and good morning. Jeff at the beginning I think there was a comment when you were talking about Double Eagle about remodeling. I want to understand of those efforts on what was like maintenance, the nature and what was the customer engaging and kind of thinking of the New York City patio and for the ones that were customer facing and more offense. What kind of impact do you think that can have positively this year or in the future?

Jeff Carcara

Well in Houston similar to New York we added a patio second storey patio on that comes off the mezzanine. Fort Worth we added another we added an outdoor wrap up patio on the second floor. While they are in essence sense we are always defensive in some manner these are just enhancing the units that have already been successful. So adding more seats to units that have high demand that we do turn guests away is going to be a substantial addition to these units through 2014.

Mark S. Mednansky

Nicole we I want to just reiterate what Jeff said. I think whenever you have an upscale product in retail or in hospitality you are constantly remodeling to be defensive to stay next generation and evolve. With that being said we've added enhancements in most of these units whether it's more seats, whether it's additional wine walls that really pop a room to drive more traffic through the doors. When we were looking at modeling 2014 and doing our budgets, we have not yet had a full year with the balcony in Fort Worth, with the balcony in Houston, we had the patio open in New York City for a week.

So we don't know what really we can expect in incremental sales and maybe we were somewhat conservative in our plans with some of these units but be assured that we will continue to spend the money wisely. And again not having any debt and these restaurants making good returns we will continue to spend money on our units to keep them vibrant, so we don't lose traction with this we think industry leading brand.

Nicole Miller Regan – Piper Jaffray

That's helpful. Thank you. And then Tom just as quick last one for you always give us good updates on these, I am going to ask you the big picture question. Can you as the portfolio changes in your brand, the Grilles and even the tactics that you are evolving around Sullivan’s, can you look back to the IPO or prior and have these changes as a percentage to cost to goods sold and is there a way to prove out that over time you will be less influenced by these potentially and is it even important? Thank you.

Thomas J. Pennison Jr.

Thank you Nicole, great question. We have very sequentially seen these as a percentage of our cost of sales reduced especially when you look at it on a full year basis. Certain periods it did reduce in Q4 over Q4 although not as significantly as we saw some quarters as there was a late increase in some of these costs in December. All that said given the mix in the growth of the grille which will significantly outpace the growth of the Double Eagle and Sullivan's, these will become less will become lower as a percentage. Now the Grille beef is still part of the Grille, it's not as significant to the grill but we'll see that become lower and lower impactful to us from a cost of sales standpoint.

As we look to our range across the sales it's our first time in the guidance which whether a budget or in a guidance to go below 30% where we have a low end of that 29.9. If we really see a relatively moderate year on beef versus expectations we are likely for the first time that's come under 30% because of the influence of that Grille.

So it really will be as we go forward I think two years out with a number of grills at that time relative to rest of days it really will become less pronounced on us.

Nicole Miller Regan – Piper Jaffray

Thank you very much, appreciate it.

Operator

We'll take our next question from Imran Ali from Wells Fargo.

Imran Ali - Wells Fargo

Hi, guys, thanks for taking my questions. Can you just update us on Grille averaging unit volume trends you are seeing whether there any meaningful discrepancies across day part trends, alcohol mix and so on?

Mark S. Mednansky

As far as the overall -- one of the things you will see especially because in the press release you will see like a reducing AUV, although very strong is our first location specifically and we've mentioned it before our first Grille was $10 million Grille now in New York city which that's not AUV we've ever been targeting so as we evolve that it's coming down but that said we are still averaging north of the $6 million which was the top end of our range.

Our prototype we still use it's around 5.25 will be modeled other than identified units we use our actual expectations but we have been averaging we will be north of $6 million which is pretty much where we would expect to be especially from opportunities clearly ranges geographically as far as those AUVs.

We have seen consistently though across all of them is similar beverage mix, similar lunch mix where we're fully open for lunch and really not too divergence we haven’t seen too much difference in the behavior and how they are using this.

Jeff Carcara

So today we have 11 of these grills in we have one of them that's playing underneath that range. We're very confident with all of these stores at $6 million or above and especially with the six that we opened in 2013 so strong it's real early I mean we opened two of these in December. So there is somewhat of honeymoon period with a grill versus that of a Steakhouse but if we do our job and we take care of our guest and we execute the drop off won't be significant like you see in casual dining.

And with only two in the comp base we have drop off on one and we had increasing sales in the other. So I think we'll look at it store-by-store situation moving in the future. And once we have more in our base we'll be able to speak more fully to you what we see in our comp stores as this concept evolves.

Imran Ali - Wells Fargo

Okay, that's great color, thank you for that. And just lastly on you've provided consolidated restaurant level margin guidance but considering what's going on at Sullivan's and your repositioning efforts can you help us think about the margin range you expect to see for that concept?

Thomas J. Pennison Jr.

That margin range versus where we were at today we would expect what we will target to improve by 150 to 200 basis points from restaurant level EBITDA versus what we saw last year on a full year basis but we haven't really gone into great detail with that publicly from a blended aspect that's where we'll give you the overall communications.

Imran Ali - Wells Fargo

Okay appreciate that very much. Thanks very much.

Mark S. Mednansky

Thank you.

Operator

(Operator Instructions). We will take our next question from Jason West with Deutsche Bank.

Jason West - Deutsche Bank

Yes. Thanks. Good morning guys. Just one on the quarter-to-date, just want to clarify that you guys said that you have positive comps quarter-to-date even without weather issues?

Mark S. Mednansky

Yes, Jason. It's a fairly positive and if you take out, if you just look at apples-to-apples, you look at the weeks that we have been open taking out the first week without New Year's Eve we are over a 100 basis points positive as a company. But we have challenged our team to fight reality and that is we don't have a New Year's Eve this week and that's what our bogie and that's where we are looking at as operator.

So we are just over the baseline being positive for the year. We think that's a good sign with all the lost operating days that we have had. We think that upscale consumer is not only coming out but they are a little more active with their pocket book. We think the economy is treating them well and there is a good feeling out there right now in our units.

Jeff Carcara

And given, it's basically the strength that we are seeing when weather has impacted us and really we are seeing that now at the Double Eagle which has performed very strong as it usually does but we are seeing that strength show-up at Sullivan's. Sullivan's off the 28 days we mentioned Sullivan's was impacted by 15 of those days. So it had a largest impact which still is especially when you adjust for the -- if you shift the week to be more on a comparable basis is much better trend then what we saw early last year.

Mark S. Mednansky

Jason, one more thing, one of the things I am cautiously optimistic on is the response we have had from our guests in our Austin Sullivan's with the complete remodel just finishing at the end of the year and doing some limited advertising with more planned in the second half of this quarter and beginning of Q2. But being positive down there for being double-digit negative last year, I know it's an easy comp but still stopping the erosion, stopping it and just trying to move the other way very encouraging to us as a team.

Jason West - Deutsche Bank

Okay. That's really helpful color. And then just on the margin a little bit on the Grille side the margins finished up 2013 in the high teen around 18%. Can you talk about the outlook there as these stores mature, where you think that margin goes and may be you got some evidence now may be on some of the older stores in the Grille if you call them old, I guess. Where do we think that margin can get to overtime as this concept matures?

Jeff Carcara

The margins we are targeting at EBITDA restaurant margin for the Grille between 20% and 25%. If we go back to our class of 2011, which has the benefit of some high AUVs specific New York where we're well to upper end of that range, if you look to our class of 2012, we are in that range a little bit to the bottom of that range where we think there is some opportunities to further improve. And then we have right now if you look at 2011, half of those are all in 2013 bringing that down.

So from a normalized standpoint, we want to see these average out because you are always going to have some differentials with occupancy and where we operate for example in California where we will have wage pressures as well as occupancy cost. In the Northeast we expect maybe in the 21% to 22% versus some of the other ones we hope to see close to that 23%, 24% and that average out to 22% to 23% restaurant level EBITDA.

Mark S. Mednansky

Jason, one of the items that we talked about as a team that we were frustrated with our performance in 2013 was the new units and we really had thought that we will be able to get these inefficiencies of new units out at a much faster rate than we did last year. What I can tell you is that we put together a great plan we have looked at it, we have broken it out week-by-week whether it's labor, food cost, bar cost, operating cost and have an outstanding plan for future development.

In fact, we have all of our general managers and regional managers meeting with Tom, Jeff and myself over the next three days and formatting and solidifying the plan that they’re putting together with us for these new stores that we’re going to open. We’re a growth company and we should be able to open restaurants and get them open to a steady state and as fast as the timeframe as we can. We believe that our systems and procedures of what made this company strong historically and we will ensure that our new units are at profitability in a much faster rate in the future.

Jason West - Deutsche Bank

And just to follow up on that, I mean you’ve talked about hiring outside consultants, I mean what are they helping you guys with, it sounded more maybe on a revenue side where you’re looking at some changes or opportunities there. Are they helping you on the cost side?

Mark S. Mednansky

What this company specializes in and they are one of the best is that looking at companies and giving you the true capacity for a footprint. So we know how far we can take this brand with the guest that are visiting us today, who they are, where they live in other cities. So it will give us an idea of what is the true potential of this brand to grow.

Also in addition to all the work we do with all of our other partners, our real estate partners American Express and everyone else, where else other opportunities to build great growth that will do $6 million and return a healthy return. Are there areas that we are now looking at currently, where there is a high concentration of a desired demographic that we need to look at. So that’s specifically why we’ve hired this company.

Jason West - Deutsche Bank

But it’s not related to address any sort of sales concerns you guys have seeing and it doesn't sound like anything like that. It’s more looking at that the growth opportunity.

Jeff Carcara

It’s all about clearly we want to see the development of the Grilles over the upcoming years, being able to accelerate that development. And this company is specializing to be able to help rank what are the best locations across the United States that has greater sales potential. So we have a good count as Mark mentioned that footprint, but also to make sure that our brokers and our development team aren’t forgetting about some high potential areas and their focus.

Jason West - Deutsche Bank

Yes.

Mark S. Mednansky

So just adding to all the information we currently have Jason and just making sure that that is good solid information, we’re pleased where we’ve opened these restaurants with the revenue that they are giving us across the board.

Jason West - Deutsche Bank

Thank you.

Mark S. Mednansky

Thank you.

Operator

And we have no further questions in queue at this time. I would now like to turn the call back over to Mark Mednansky for any additional or closing remarks.

Mark S. Mednansky

Well, thank you for joining us everyone. As usual Tom, Jeff and I will be available for anything that you need during the quarter. We look forward to talking all of your when we report our first quarter in three months. Have a great day.

Operator

And this does conclude today’s conference call. Thank you all for your participation.

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