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

Q1 2014 Results Earnings Conference Call

April 29, 2014, 8:30 am ET

Executives

Alex Pendleton - Vice President of Accounting, Corporate Controller

Mark Mednansky - Acting Chairman of the Board, Chief Executive Officer

Tom Pennison - Chief Financial Officer

Jeff Carcara - Chief Operating Officer

Analysts

J.R. Bizzell - Stephens Incorporated

Josh Long - Piper Jaffray

Imran Ali - Wells Fargo

Matt DiFrisco - Buckingham Research

Jason West - Deutsche Bank

Paul Westra - Stifel

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Del Frisco's Restaurant Group Inc. first quarter 2014 earnings conference call.

Today's conference is being recorded. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at the time for you to queue up for questions.

I would now like to turn the conference over to Alex Pendleton, Vice President of Accounting and Corporate Controller. Please go ahead, sir.

Alex Pendleton

Thank you, Lisa, and good morning everyone. By now you should have access to our earnings press release for the 12-week period ending March 25, 2014 as well as our 10-Q. 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, Tom Pennison, our Chief Financial Officer and Jeff Carcara, our Chief Operating Officer.

Before we begin, I would like to remind everyone that part of our discussion 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 Mednansky

Thanks, Alex, and good morning, everyone. As we referenced on our last call, the first quarter got off to a slow start due to winter weather issues which resulted in more than 30 lost operating days. However, when the weather was not an issue, trends were favorable and our guests demonstrated a willingness to spend. We therefore feel good about the health of the upscale customer and are optimistic as to what it should mean for our next-generation concepts this year.

For the quarter itself, revenues rose 11.4% on a blended comparable sales gain and sales contributions from the newer Grilles. While restaurant level EBITDA grew at a lower 6.1% rate due primarily to deleveraging at Sullivan's, overall cost of sales fell 70 basis points despite commodity pressure on beef and other proteins. As our team continues to do an outstanding job managing our cost daily utilizing best practices and we did benefit from 1.8% menu price increase that we implemented at the end of the fourth quarter of 2013.

We also benefited from the mitigating impact of the Grilles lower cost of sales and a growing presence within our overall portfolio. However, the lower operating margins on a consolidated basis combined with expected higher G&A spending resulted in adjusted net income and diluted EPS that were slightly below the first quarter of last year.

Now turning to the brands and sales. Del Frisco's Double Eagle Steak House built upon last year's 1.9% comparable sales gain and an even more impressive 5.1% comparable sales increase this year, which we also leveraged at the restaurant level. Although traffic was similar to last year, our affluent guest base generated a higher average check enjoying the entirety of our offerings.

Sullivan's was the most impacted by the tough weather and by the calendar shift that excluded New Year's Eve from the quarter this year. However our menu, marketing and remodeling efforts are being recognized by our guests and we believe they will continue to respond favorably to these changes.

Jeff will provide more details momentarily. And while we have no Sullivan's opening in this year's development pipeline, I think it bears mentioning that Sullivan's is a meaningful source of operating cash flow with over $4 million average unit volume and 20% plus margins across the healthy portion of the portfolio and thereby serves as a source of growth capital for our company.

Turning to the Grille. We currently have 11 restaurants in operation with five slated to open this year. Sales results at our newest restaurants continue to be in line or above our projections. Restaurant level margins fell compared to last year because of the newer stores moving through their learning curve. Still, the brand has become a larger contributor to restaurant level EBITDA growth and like I said earlier, improving our consolidated cost of sales.

One of the most common questions asked of us, is how the size of the Grilles market potential, given the flexibility of its real estate options, its healthy lunch business, ability to attract a broad an awfully mobile demographic and of course it strong cash on cash returns. While we already appreciate the fact that we have created something very special and unique with this concept and have significant opportunity to build it out over time, we decided to engage Tango Analytics, an outside consulting firm with expertise in real estate models for restaurants and retail clients to conduct quantitative research to help us arrive at a more definitive answer as to what that potential might look like.

They concluded, that based on average unit volume of approximately $5.2 million, which is within the targeted range of our new restaurants, the market could support more than 170 restaurants across the country. This is in line with our internal projections. Having achieved less than 10% of that potential, we clearly have a lot of white space available for us to cover over the coming years and we will approach that opportunity in a disciplined manner by choosing only A+ sites.

And now we will hear from Jeff Carcara, our Chief Operating Officer. Jeff?

Jeff Carcara

Thanks, Mark. Del Frisco's Double Eagle extended its record of positive comparable sales to 17 quarters despite its own weather challenges and even improved on last year's comparable sales increase. We note that the five remodeling projects we completed in 2013 also provided a boost to our next-generation flagship brand and as weather gets better across the country, we hope to benefit from add patio seating in several of those locations.

In 2014 we planned an additional investment to polish and evolve the concept further. Sullivan's focused management team led by Vice President of Operations, Ray Risley is continuing to retooling of the concept through menu improvements, particularly with new craveable lunch items, revitalization of the bar and through better training and staff development. In several weeks, we roll out of spring summer menu. We will bring back some of last year's favorites along with adding a couple of new items to the Sullivan's seasonal panel. We are also continuing to raise our profile with more concentrated radio, digital and direct mail that is geared toward fostering greater brand awareness.

On last quarter's call, I mentioned we were putting the finishing touches on the completion of three remodels Austin, Texas, Charlotte, North Carolina and Palm Desert, California. All three restaurants are benefiting from the completion of those renovations. Thus far we are very positive reviews by guests and team members in regards to the re-energized ambience and contemporary look in both the bar and dining rooms. We are watching the performance of all three of these units closely as we move towards starting our first of several remodels this year. While a lot of the New Year's Eve and the impact of weather hurt our momentum in the first quarter, we will not use that as an excuse. We are far from declaring victory, however we are cautiously optimistic about the direction the concept is moving.

Regarding Del Frisco's Grille. The four restaurants that opened in the fourth quarter last year are getting up to speed in gaining efficiencies. In fact our entire 2013 class is generate strong volumes and demonstrating the flexibility we have in opening successfully in different types of environments, and attracting guests where they work or where they live. Just as an example, the Grille opening in downtown Fort Worth is only a few blocks away from our Del Frisco's Double Eagle Steak House. It opened strongly and continues to perform very well and has no discernible impact on Del Frisco's. In the suburban Southlake market in our home office, in what is generally considered a bedroom community, our Grille is also off to a great start.

As you know the Grille features a variety of Del Frisco's prime aged steaks, top selling signature items, but also offers an assortment of relatively less expensive entrées. Our culinary team continues to work on new, innovative items that answer the demand of our guests and one of which is developing more gluten-free items. We do not view gluten-free as a fad but think that providing our guests with more variety in their dining options will set us apart when they consider where to go for a business or casual meal. Please look for these items and other new options being added to our menus in the coming months geared towards keeping our offerings fresh.

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

Tom Pennison

Thank you, Jeff. For our 12 week first quarter that ended on March 25, consolidated revenues increased 11.4% to $66.6 million from $59.8 million in the year ago period. Our top line growth was a result of a calendar basis 1.6% blended increase in comparable restaurant sales across all three concepts as well as 71 additional operating weeks resulting from six Del Frisco's Grille openings during fiscal 2013.

As shared with our guidance last quarter, due to the 53rd week in fiscal 2013, there is a one-week calendar shift in the comparison to the first fiscal quarter of 2014 to the first fiscal quarter of 2013. As a result of this shift, the week between Christmas and New Year's, and especially New Year's Eve traditionally a high volume week and day for the company's restaurants was included in the first quarter of 2013 but was replaced with an average volume week in the first quarter of 2014.

As a result, the first quarter of 2014 was negatively impacted by not having a high volume, highly profitable New Year's Eve versus the prior year fiscal quarter, which by itself provided an additional $1.5 million in sales versus a comparable normal operating day. While on a comparable calendar basis, total comparable restaurant sales increased 1.6% in the first quarter of 2014, on a fiscal quarter basis, unadjusted for the calendar shift, sales in the same restaurants increased 0.8%.

As Mark referenced, the first quarter was severely impacted by lost operating days and diminished operations due to ice and snow storms in January and February and a colder March, which negatively impacted the use of our patio seating. We lost 32 operating days in the first quarter, of which 21 were at Sullivan's. This compares to a loss of six operating days to winter storm Nemo in the first quarter last year. This count only includes days for which we were closed. In addition to these, there were other days, for which we were open and operating, however weather conditions reduced traffic to the restaurant resulting in diminished operations.

For Del Frisco's, revenues increased 0.9% to $32.6 million in the first quarter from $32.3 million in the year ago period. The top line improvement was due to a 5.1% increase in comparable restaurant sales generated entirely by an increase in average check and partially offset by reduced year-over-year sales in a non-comparable restaurant. Note that on a fiscal quarter basis, sales in the same restaurants increased 5.5%. During the quarter. Del Frisco's revenues were negatively impacted by six lost operating days.

For Sullivan's, revenues decreased 4.4% to $19 million in the first quarter, from $19.9 million in the year ago period. This decrease was a result of a calendar basis, comparable restaurant sales decline of 2.1%, consisting of a 2.3% increase in average check, which was offset by a 4.4% decrease in traffic. On a fiscal basis, sales for the same restaurants decreased 4.5% as the New Year's Eve sales impact was more pronounced at Sullivan's. As shared earlier, Sullivan's was most impacted by severe weather and lost 21 operating days during the first quarter. We estimate that adjusting for the lost and diminished operating days, Sullivan's would have been flat to down 1%.

For Del Frisco's Grille, revenues increased 97.3%, to $15 million in the first quarter from $7.6 million in the year ago period as the concept benefited from an additional 71 operating weeks provided by the opening of six restaurants last year. While the Grille experienced its own weather challenges and reduced patio usage during the quarter, we continue to be pleased with the sales of our Grilles.

Turning to our cost structure. Cost of sales as a percentage of revenue decreased 70 basis points to 30.1% from 30.8% in the year ago period as we benefited from a modest 1.8% price increase taken in the fourth quarter last year and more favorable sales mix at Del Frisco's and Sullivan's, as well as the Grille's increased weighting on the restaurant portfolio with its lower cost of sales. By concept, at Del Frisco's, we experienced a 60 basis point decrease in cost of sales to 30.9%, an 80 basis point increase at Sullivan to 30% and a 30 basis point increase at the Grille to 28.4%.

While our national portfolio hedge continues to the assist us in managing cost of sales as a percentage, in absolute terms we did see pressure during the quarter on beef cost as well as certain sea food items. Despite an approximate 5% increase in beef cost during the first quarter, beef cost as a percentage of total cost of sales reduced from 33.5% last year to 33.2% in the first quarter of 2014.

Restaurant operating expenses as a percentage of revenues increased 150 basis points to 45.9% from 44.4%. By concept, Del Frisco's operating expenses as a percentage of revenues decreased by 80 basis points to 39.3% due primarily to sales leveraging on labor and benefit cost in other restaurant operating expenses. However Sullivan's increased by 190 basis points to 50.9% due to sales deleveraging on the same labor and benefit cost in restaurant operating expenses due in part from the calendar shift and lost operating days. Finally the Grille experienced a 330 basis point increase to 53.9% due primarily to Grille openings at the tail-end of the fourth quarter which resulted in new opening and efficiencies impacting margins as well as higher occupancy cost.

Marketing and advertising cost increased $313,000 from a year ago and were 30 basis points higher at 1.8% as a percentage of revenue. This was due to increased digital and direct mail marketing across all concepts.

Taking all of these inputs together, restaurant level EBITDA increased 6.1% to $14.8 million in the first quarter from $13.9 million in the year ago period, while margin decreased 110 basis points to 22.2% from 23.3% in the prior year. Pre-opening costs fell to $0.4 million from $0.6 million last year. Approximately $335,000 of pre-opening cost represented non-cash straight line rent during the recent fiscal quarter versus approximately $197,000 during the prior year.

General and administrative expenses increased to $4.7 million from $3.8 million in the prior year and as a percentage of revenues increased 70 basis points to 7% from 6.3% during the prior year period. This net increase was primarily related to additional corporate and regional management headcount to support our recent anticipated growth, incremental public company related costs as well as increased non-cash stock compensation expense.

Depreciation and amortization increased to $3 million from $2.4 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 increased to 4.5%.

Bringing these together on a GAAP basis, net income for the first quarter was $4.5 million, or $0.19 per diluted share and this compares to a prior year net income of $3.6 million or $0.15 per diluted share. Note that the effective tax rate was 32.7% in the first quarter this year versus 26.9% in the first quarter last year.

On an adjusted basis, net income was $4.7 million or $0.20 per diluted share compared to $5 million or $0.21 per diluted share in the first quarter of the previous year. While there were minimal adjustments made in the first quarter of 2014, the adjustments for the first quarter of last year consisted of the secondary stock offering and related expenses. We encourage you to review the reconciliation table in the earnings press release for further details as to how we arrived at these adjusted results.

In terms of our liquidity and balance sheet, as of March 25, 2014, we had cash and cash equivalents of approximately $16.3 million. We currently have no outstanding debt and expect to continue financing our capital requirements for development, maintenance or remodeling primarily through cash provided by operations and if necessary minimal borrowings under our credit facility.

Also we did not repurchase any outstanding stock in the quarter under our stock repurchase authority. Under that initial authority, we still have approximately $6.3 million available for the repurchase of our stock.

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. This is unchanged from our prior expectations. We already discussed the unfavorable fiscal calendar shift impacting the first quarter of 2014 related to New Year's Eve. Note that in the fourth quarter, we will similarly lose the benefit of New Year's Eve in that fiscal quarter as our fiscal year ends on December 30.

We will be opening a total of six restaurants, beginning with a Grille at the very end of the second quarter. In the third quarter, we will be opening a Del Frisco's as well as one Grille and the remaining three Grilles will be opening in the fourth quarter.

As mentioned earlier, we have seen continued pressure on beef costs as well as certain sea food items, although at this time, we are maintaining our cost of sales expectation to range between 29.9% and 30.4% of consolidated revenues. Looking to the higher side of the range, we take into consideration estimated beef inflation of 7% to 9% which is still above the annual forecast we received in the 5% to 8% range but as well as increases in certain sea food costs. These increases are expected to be partially offset by the increased weighting of our lower cost of sales Grille concept as well as will consider additional pricing, if needed.

Annual restaurant level EBITDA is expected between 22.9$ to 23.4%, which is subject to quarterly seasonality variances. Pre-opening expenses are expected between $4.9 million to $5.5 million inclusive of non-cash pre-opening rent. Although we are opening the same number of restaurant in 2014 is in 2013, most of the incremental spend is the result of expected higher non-cash pre-opening rent, the opening of a Del Frisco's and opening in higher cost geographic areas of the country.

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

Note that if we adjust out the $0.03 in EPS for the 53rd week of 2013, the top end of our range represents approximately 17% earnings per share growth in 2014. Although this is on the low side of our 17% to 20% long-term earnings per share growth target, it does factor in the unfavorable calendar shift of 2014, the increased pre-opening costs impact and the operating day losses already experienced in the first quarter.

Finally our total capital expenditures before tenant allowance is expected to $38 million and $40 million during 2014, comprised of new restaurants, remodels, maintenance capital and technology expenditures.

With that, I will 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 address our development plans and leave you with some concluding thoughts. We have planned six restaurant openings this year and they represent the full breadth of restaurant settings and markets that we can build overtime.

The first restaurant opening of 2014 will take place at the tail-end of this quarter with a new Grille in Burlington, Massachusetts. In the third quarter, we are going to open our 11th Del Frisco's Double Eagle Steak House, and it will surely be a landmark restaurant in city center, Washington DC. Then we will close out the quarter with a Grille in Irvine, California.

In the fourth quarter, we will open Grilles in Tampa, Florida, Rockville, Maryland and Pasadena, California. The Pasadena restaurant in the city central business district is our newest lease signing and is going to open late in the fourth quarter and will mark the completion of our development plans for 2014. All of our restaurants are either going to permit or under construction and should be on budget and on time for this year.

The pipeline for 2015 to 2017 is already taking shape and we look forward to sharing with you the details on these sites once the leases are all finalized. As I mentioned earlier, our consultants believe that we can build more than 170 Grilles across the country at average volumes of approximately $5.2 million or more. And there is no shortage of developers interested in bringing our concepts to their sites based on our favorable demographics and prestige that we provide.

This gives us a lot of clout in negotiating better terms and it enables us to be rather selective to what we choose to build. While growth is a big part of our story, we are evolving to solidify our next generation status by keeping our existing Del Frisco's and Sullivan's properties vibrant contemporary and inviting. Our future is bright with three strong brands, significant white space, favorable cash on cash return, no debt and an incredible collection of passionate team mates.

We thank you all for joining us this morning and now we will be happy to answer any of your questions. So, operator, let's open the lines for questions, please.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from Will Slabaugh with Stephens Incorporated.

J.R. Bizzell - Stephens Incorporated

Hi. This is J.R., on for Will. Congrats on the quarter. Topic of conversation last quarter was Grille productivity. Just wondering if you go in a more detail there of how you worked through that and what you are doing moving forward?

And secondly, I know you flew in some managers, maybe for retraining for that productivity, obviously training. I am wondering if there is a one-time expense there associated with that?

Mark Mednansky

Thanks, J.R. This is Mark, and good morning to you. What your specifically addressing the fact that we brought in our general managers for our Grille concepts, we first and foremost every quarter, the entirety of our management team, all general managers, senior managers and we go over the quarter, the previous quarter in detail. We also at those meetings talk about the future of our company, our brands and include the general managers who are the leaders of our company in the strategy and our five-year plan. But specifically, with this new Grille being a new concept, we had separate meetings with our general managers where we looked at all of our best practices because we believe that we can take some of the inefficiencies of new openings out of the equation and lower them. So utilizing these talented individuals' ideas in addition with already our standard operating practices, we put together a good manual, not only on how to build a Grille, but how to open a Grille successfully. That processes is being led right now by Jeff and April Scopa, our Director of Human Resources and Training and we have some great ideas and some good progress because of the efforts of our team.

J.R. Bizzell - Stephens Incorporated

Great. Thanks for the detail. Switching gears here to Sullivan's and I would like to hear that ex-weather the flat to negative one which stays in line with the four key progression. I am just wondering if you could go into more detail on what's working there? I know the remodels are obviously helping. I am wondering if Jeff can maybe go into more detail around remodels and what he likes about what is working moving forward?

Jeff Carcara

Yes, J.R. Thanks. Good question. Well, first of all, the remodels, as I said in the last quarter, we are finishing up the touches. Austin was our first completed remodel. That unit is doing very well. We really are seeing some great things, great comments from our guests along with Charlotte and Palm Desert. Right now, the three units are positive. We are very happy with the direction sales are moving with the three units along with the remodels, though, for the entire brand.

We started last year, if you remember, if you have been listening along the way, we really started this revitalization of Sullivan's last year with our menu. We started with the $39 Prix Fixe which continues to be a strong mover in the restaurant. We then moved to the entire menu, refreshed it, added some more entrée selections and then we moved to lunch and we are very happy to see some movement in regards to lunch.

The last few quarters, we have been up in sales at the lunch day part and we continue to see great feedback from our guests around the lunch program. Dinner is where our bread-and-butter is, but it's nice to see the movement on lunch and its only going to great things for the brand.

Mark Mednansky

And J.R., just to interject, the strength that lunch with the new lunch menu and really some of the learnings that we got from the Grille on how to execute much more efficient and faster, even in a steak house setting, that greater lunch mix also helps with cost of sales being lower in the first quarter.

Jeff Carcara

A final comment, J.R., is that obviously it's a short amount of time. We finished Austin just at the end of Q4. Charlotte and Palm Desert just got the finishing touches mid Q1, but because of the lift we are seeing at all three units, we are actively working with our landlords deciding what are the next two or three units that we are to remodel this year. We are bullish on the remodeling. We like to the initial results. And as we have said, we will either remodel two or three existing Sullivan's this year to match what we have done, specifically what we have done in the Austin unit.

J.R. Bizzell - Stephens Incorporated

Well, that's great to hear. Thanks, guys.

Mark Mednansky

Thanks, J.R.

Operator

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

Josh Long - Piper Jaffray

Great. Thank you. This is Josh, on for Nicole. My first question was on the comment for the market potential that the third-party consultant provided. I was curios if that was domestic and if there, over time, although it is still early, there is an opportunity to visit later on some international units there on top of that 170 and just what philosophy there would be? And then I have a follow-up as well.

Mark Mednansky

Well, Josh, good morning to you. The outside consulting firm, Tango Analytics were just charged with looking at domestic build out for just the Grille brand. And as we discussed they came up with 170 units across the United States at a opening sales of $5.2 million or more.

Now one of the reasons we utilized Tango Analytics wasn't just to give us a number, they also provided us with some areas in the country that our real estate team, frankly, haven't really taken a deep dive at a few of these markets that they provided to us. So it was really twofold on why we engaged the company. We are very pleased with the results.

To your question about international expansion. This had nothing to do with international expansion, but I will remind you and all the callers that one of the reasons, we developed the Grille was to have another vehicle for international expansion, because when we look for market partners throughout the world to help us build our company, they will be very similar to what we have here in United States.

You will have one Del Frisco's Double Eagle perhaps in say, London, and now our market partner out in London will be able to build four or five Grilles. Truly build a nice company for him or herself. And we are excited about that but right now we are just solely focused on building out the Grilles profitably here in the United States, continuing to evolve the Del Frisco's Double Eagle brand and working on revitalization of Sullivan's.

Right now, we are very happy with some of progress we are making but we have a lot on our plate and you won't hear anything about international growth this year, but we hope to start addressing that issue in 2015.

Josh Long - Piper Jaffray

Understood. Thank you for that. Switching over to the operations side. Jeff, coming out of the first quarter, do you like maybe one of the opportunities to just get back to a more normal or I guess a less volatile week-to-week operations from a traffic perspective. And I was curious, you have done, historically, a very good job managing the operations and running a very tight ship, which has really helped out in the results. Just curious if you might be able to touch on some of those processes or things that you have been able to instill sine you have been here with the firm over the last several quarters?

Jeff Carcara

That's a good question. We are excited to get into some normal weeks here and get away from some of the ups and downs of Q1 and the weather issues, but it shard to keep people focus. Since I have been here, last year, middle of the year, we started, what we call our how we work rules and guidelines. And that's really how our team stays focused. We rolled it out with our regional managers and that's just specifics on how to go in, how to prepare for a visit, one, understand what you are walking into from a people, sales, all the financials and having a plan walking in the door.

Right now we are very focused on how we work and following those rules and guidelines to a T so that we can have productive visits. We can make impacts in the units, in the individual units and we can start to manage some of the normalization, as you call it in the upcoming weeks. But overall the how we work rules and guidelines is flowing down to our general managers and our executive chefs and it is making our regional managers much more productive and focused when they are in the four-wall.

Mark Mednansky

One of the things I like to brag about Jeff and his team, one of the other things they were worked on in 2013 and now continuing 2014, is really building our pipeline. That's from all the great employees, both front and back of the house that we have. We have always been able to move people along in our company. But now there is a much more clear ladder for their success in their career for everyone that works for us. Whether you are sous-chef wanting to be an executive chef, an assistant wanting to being the GM, Jeff and his team have done a really nice job of building that ladder for their careers.

Josh Long - Piper Jaffray

Thank you for that. Tom, you maintain the COGS guidance for the year. I was curious if the beef inflation that we have all been hearing about in the mainstream media was playing out like you expected, and you are curious on its the idea of locking in some beef, particular beef that's like going forward it was something that might give an opportunity or if you still thought that there is more opportunity planning more on the stock market or just being more flexible?

Tom Pennison

That's a good question, Josh. Clearly the first quarter, it wasn't until March, we started to see some of the more significant pressures on beef cost and we are seeing that play out higher in April for us. We have in the past some short-term lock-ins of certain of our cuts and we are definitely open to doing that. We are actually evaluating that continuously.

We have not locked in any of our purchase at this point. We have some windows we expect that could arrive later in Q2. We still anticipate the second half of the year to be softer than it is right now, especially more so as retailers may exit the market, given where the prices re currently. We are still getting from multiple sources that they are coming up with an annual expectation in a 5% to 8% increase.

What we are seeing right now, I would expect it to be toward a higher side of that and the potential to 7% to 9%. As a mentioned, we experienced about 5% in Q1 and we were able to lower our cost of sales 70 basis points. That said, we are seeing currently early in the quarter, much higher year-over-year pressure on beef.

That said, it goes back, this isn't something that we haven't managed through before and I think we are in a very good position given our Grille and the management tools and practice we have in place to weather the storm well. And if we need to, when it comes down to it, we have to do some additional pricing, we will consider that. We do look at that as a last resort. We have some pricing we are going to consider surgically additionally this year, more so the parts of the country that have other operating expenses that are increasing.

An example of that would be California, as their minimum wage increases in June. But other than that, we think we are in a good position to maintain it. We still feel the second half of the year will be softer than what we are experiencing right now, but it is still yet to be seen.

Mark Mednansky

Clearly, right now though Josh, it's probably some peak year-over-year beef cost we are seeing currently which is where you are getting the hype in the media to your point.

Tom Pennison

Josh just a reminder, we truly believe that we have still some pricing power available. If we need to at the high-end, we will be able to take some price to combat anything that's going to be over that, say 5% to 8%, that we have already factored into our annual guidance.

Josh Long - Piper Jaffray

Very helpful. Thanks for the update this morning.

Mark Mednansky

Thank you, Josh.

Operator

Our next question comes from Imran Ali with Wells Fargo.

Imran Ali - Wells Fargo

Hi, guys. I am on for Jeff Farmer. Thanks for taking my questions. Just following up on the last question. Do you have an updated outlook on your total commodities basket for the year, in terms of inflation?

Tom Pennison

Other than the beef side, the only other area that we are seeing some pressures have been on some seafood components, specifically shrimp and some crab meat, we actually have some pressure there. There are a few other items working the opposite way for us. Overall we are still in an all-in feel that in that 5% to 8% range covers the other components. I think we may have mentioned on our prior calls, but late last year, we actually brought in a Director of Purchasing. It was one of our additions, really, to help us focus on opportunities that while we had a shared focus between myself, really Mark, our executive chef and several within the company, to focus on some different agreements. We really now have a person focusing on opportunities to further help us offset from the cost increases or mitigate some of the cost increases that we have been experiencing.

Imran Ali - Wells Fargo

Okay, great, and shifting a bit, but I might have missed earlier but can you talk about the same store results trends that you have seen across your concepts over the last five or six weeks?

Mark Mednansky

Hi, this is Mark. I will take that. I will start back beginning of the quarter. We had a tough January and February due to weather. March gave us a nice lift and though we are not going to speak about Q2, so far positive in the quarter. Sullivan's relatively flat with some positive sales at the Del Frisco's Double Eagle brand.

Imran Ali - Wells Fargo

Okay, great. That's helpful.

Mark Mednansky

One other item that I would add in there just as a note, under our fiscal calendar Easter, in both years, falls in Q2. So we don't have, within all the calendars, some people may have an Easter shift, we don't really have that. So Easter is comparable in our Q2. So just as an FYI there.

Imran Ali - Wells Fargo

Okay, great, understood. Thanks very much.

Operator

We will take our next question from Matt DiFrisco with Buckingham Research.

Matt DiFrisco - Buckingham Research

Thank you. Two questions. I was just curious if you could talk about the expectations for volumes from the stores still, the Grille specifically, to open in 2014? What your expectations are? If there is any, obviously, I don't presume there is a New York volume one there, but if there is any outlier that might be smaller or bigger than average?

Mark Mednansky

Matt, good to hear your voice again. No, I mean New York is just a special place. Whether it's Del Frisco's or the Grille, the other restaurants and steakhouses are in New York and aren't as lucky as we are with the volumes, but putting that aside, we have always said that our volumes for this Grille concept are $5 million to $6.5 Million. And they are all modeled to perform underneath that actually. So when we look at a site, we look at worst-case scenario with sales. And if they can still bring us our cash on cash returns, then we will pull the trigger into the deal.

With that said, we are very confident that these sites will perform, at least in the mid to the upper end of that range here in 2013. If you look at where we are building, Burlington, Massachusetts, right across from the busiest mall in the area, with good visibility to the interstate. Pasadena in the central business district. A new exciting area in Rockville, Maryland, with a combination of social living and office space that's going to provide us three meal periods.

We are going on this year to Tampa, on Boy Scout. A wonderful location with a rooftop deck, something that none of our competitors have in that area. So we have some wonderful locations this year. Irvine, California, at the Spectrum, just with a great pat site that everyone drives by when they come into the center.

So we think we have chosen some good real estate. We are excited about this brand and its accomplishments and we see no reason that they shouldn't continue to do well.

Matt DiFrisco - Buckingham Research

That's great, and then just a question on guidance. I think it was $20 million to $21 million with G&A. I missed it, if you said the proportion of that and equity based compensation. I guess the base was about $1.7 million last year. Just what is the annual assumption is in equity based compensation, non-cash within the G&A number?

Tom Pennison

I am pulling this off the top my head. I don't have it in front of me, but I definitely could come back to confirm that, but I believe it was in a $2.4 million to $2.5 million range.

Matt DiFrisco - Buckingham Research

Prefect. Thank you very much.

Mark Mednansky

Thank you, Matt.

Operator

We will take our next question from Jason West with Deutsche Bank.

Jason West - Deutsche Bank

Yes. Thanks, guys. So one just on the guidance on the cost and the cost of goods sold. Does that include any additional pricing this year?

Tom Pennison

No, that doesn't include any additional pricing.

Jason West - Deutsche Bank

Okay, and when is first time you guys might look at that again?

Tom Pennison

We have some surgical pricing that's going to roll out probably late-May, more targeted certain parts of the country where we are seeing some minimum wage increases, which we expect that to be de minimis at this time and then we will be evaluating as we get into closer to the fourth quarter if there is anything we need to do across the board. Our first rollout will be more dealing with our Sullivan's concept, specifically, because we have Sullivan's in Palm Desert, California, to look at some of the pricing there and then we will follow-up with Del's and the Grille as needed.

Mark Mednansky

Jason, historically we have taken a price increase beginning of fourth quarter almost every year for the last 15 years. Just skipping one or two years. But what's really special about our company because of its size, is we are very flexible. So if something gets out of hand, it is very inexpensive for us change menus. We can turn on a dime with our team and take care of any business we need to take care of.

Jason West - Deutsche Bank

All right, that's helpful, and then in terms of the consultants and the work that they did, coming up with the 170, can you talk a little bit about what goes into that math. I don't believe there is another comparable chain out there in the category of that size. So jus how they compared what you guys are doing and the opportunity there with what else is happening in the market.

Mark Mednansky

Okay, I will start with that. Jason, it's Mark. First, they look at the results of our current units, not only the financial results. They did intercepts of customers. We did valuations where customers were asked online to go talk about why they came where they came from. Again just getting the data who our guests are and why they utilized the brand. They also work with other restaurant companies. So even though they don't share the data from, of course, from other restaurant companies, they have resources as a company to really know what our competitive set is doing and where they are doing it. They looked at the demographics of our current users, household income, age, business versus non-business. Then they look at population basis throughout the country and really try to match where a Grille could do in excess of $5.2 million.

Jason West - Deutsche Bank

Okay, got it, and then just last thing on Sullivan's. I know you guys have talked about it in the past. There is a handful of stores that are dragging down the performance of that chain a bit. Just wanted to get your latest thinking on any opportunities to exit some of those weaker stores, or if that's really not possible anytime soon?

Mark Mednansky

Well, just a reminder, we rolled off one of our units in 2013. That was the Seattle unit, but with the other units being profitable, we haven't had to do that. We don't have any stores currently scheduled this year that we would walk away from or have a lease coming to a conclusion, but they will start bringing off here in 2015 and beyond and we will make those decisions at that time.

Jason West - Deutsche Bank

Okay. Thanks, guys.

Operator

(Operator Instructions). We will take our next question from Paul Westra with Stifel.

Paul Westra - Stifel

Great. Good morning, gentlemen.

Mark Mednansky

Good morning, Paul.

Paul Westra - Stifel

I am just following up on the Tango Analytics. I know you want to keep some of this probably private, but at least if you could give us any more color about what that provided you? You mentioned obviously the (inaudible), what was the most positive insight with consumer reach maybe or frequency and maybe where it might change your behavior on the margins? Are you looking at more one-off markets perhaps, or maybe more locations in backfill locations on the margin what, maybe, was the best insight it provided you and maybe might change your behavior?

Mark Mednansky

Well, good morning, Paul. First, many of our competitors are looking closely at the concept and trying to duplicate it. So we don't want to give out that much information, but I will speak first and see if Jeff or Tom add on their side.

It really validated what we have seen and what we have planned. When we started working this concept five years ago, had started talking about it eight years ago. So validated everything we have been doing as a management team. I will tell you, more than that the number of units that they saw we could expand to, and by the way, they were very clear that they were very conservative with that 170 unit count. Very conservative. But it has opened up some other areas of the country that maybe we haven't looked at yet as a real estate team and it has activated our real estate team and our partners throughout the country to make a full-court press on some of these areas that we haven't been in yet.

That, to me, is the exciting part of what they brought to us, was showing us that this brand really does resonate with our guests, not just in city centers and not just lunch guests, but from suburban areas to the city, in the trade areas within the city. The potential for buildout of multiple units in a city was validated by their findings. That's exciting when you look at being able to go into Boston, let's say, and have one Del Frisco's Double Eagle and build four or five or six Grilles. That's what they came back and told us is possible and that's what we always believed.

For us, not only building out and having a lot of white space, but when you are able to cluster like that, the efficiencies that we will have in multiunit management, in marketing dollars, in so many different areas, we are really excited about that for the future.

Jeff Carcara

I think that's the biggest take away that seeing the potential in some of the areas we haven't looked at as well as what was surprising to us. To Mark's comment on the conservatism, there were certain areas, for example, one of our more recent openings, very successful openings didn't even show up on the map but we know the volume that's there as well as other parts of the country that maybe individual members of the management team had great knowledge of, while they showed sites there, there definitely were additional site potential in those locations. So I think it really will help us as we try to further enrich our pipeline for the upcoming years.

Paul Westra - Stifel

Great, thank you and segueing over to Sullivan's. I know you have hit on this before but any more color we can have would be great. You mentioned, you are better operating, Sullivan's doing $4 million, 20%. Can you frame the stores that are not in that $4 million, 20% margin? And what potentialities could be for that group?

Mark Mednansky

Just to touch on, we will share this segmented population in the past. We have a little bit less than the top half of the group that has AUVs north of $5 million and has a restaurant level EBITDA north of 20%, north of 22% that performed very well. The characteristics of those, and even in 2013, they were relatively flat and had several positive comp store sales in that group and they have performed well.

We have a mid group that's been a little bit north of $4 million AUV that are I the probably closer to the lower to mid teens restaurant level EBITDA. And this is really speaking more toward 2013 as a reference.

And then we had a bottom five, who were probably closer to a $3 million AUV and with a flow through restaurant level EBITDA down like 5% that have really brought down some of those numbers. It's really, as we spoke about, we are focused on the future investments, the remodels, on the mid-tier and the top-tier. In most cases, the bottom group, the constant threat there has been really a trade area that has left us.

In many cases, there are other restaurants that closed down in the area. The traffic streams have gone into a different direction in the trade area to where we are not that those units and those are ones that we will evaluate the possibility of either an early exit or definitely not consider renewing those leases as that they come to the end of their term.

Paul Westra - Stifel

Okay. So no strategic changes for those bottom five given some of the insights and successes you have done so far over the mid to high tiers groups and remodels you mentioned?

Mark Mednansky

Well, the focus on the education, best practices, how we work that Jeff spoke to, we are definitely focusing those items even at that level, but as far as evaluating those to put significant additional investment in, especially when we have one of those we just impaired last year, we are not going to put significant investment in those.

Jeff Carcara

And Paul, one of the questions we get from some of our investors is why not take some of those units and convert them to Del Frisco's Grilles. We won't do that because what we see as those are the units that really the trade area has left us. So we are not going to waste a Grille location in the city with a location that isn't up to what we are looking at for the rest of the country.

Paul Westra - Stifel

Great, and then lastly on the Double Eagle. You mentioned the guest check drove the comp, obviously. Can you talk a little bit more about where on the menu you mention the entirety of it has to be more (inaudible) and desserts. Any commentary on the check increase would be helpful.

Mark Mednansky

Its nice when you take just a minimal price increase, one in the last two and half years and your check still rises. It speaks to the strength of our guests, of the upscale guests. It speaks to the strength of our team's ability to not just sell, but to guide people through a dining experience.

One of the things we are very proud of in our company. So we have over 250 of our teammates who have at least the first certification of the Sommelier series certificates. Excuse me. I can pass the test. I just can't say it. That is huge. When you look at other restaurant companies and they have one or two people in each location that have gone through the work. We are so proud of our team that they have taken the time and there are so many of them now that are on n their Level II and above and we really think that that does not push wine sales.

It helps people enjoy their time with us in our restaurants and specifically at Del Frisco's Double Eagle, our guest really enjoy the vast amount of choices they have of wine. Everything from a $30 to $2,000 bottle wine. We had the staff that can knowledgeably take them through and guide them through their dining and drinking experience. We think that's one of the reasons why our check average has elevated at this legendary brand.

Jeff Carcara

And Paul, just to go back, you remember a year ago, we spoke a lot about the malaise that we saw across our concepts in 2013. We definitely saw a greater propensity to spend in Q1, to Mark's point, saw on the wine side just a higher average bottle purchase that took place during that time period that helped with that check average.

Paul Westra - Stifel

Great, and what is the current effective year-over-year pricing on each of the brands, if you haven't said it already. I may have missed it.

Mark Mednansky

On a blended basis, we have 1.8% working with us. We haven't really laid it out by brand but it was probably closer to 2% on Sullivan's and a little bit less than 1.8% on Del.

Tom Pennison

That's right.

Paul Westra - Stifel

Okay. Thank you.

Mark Mednansky

Thanks, Paul.

Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to Mark Mednansky for any additional or closing remarks.

Mark Mednansky

Well, thank you. We thank everyone, as always, for your interest in our company. We will look forward to speaking with you at the conclusion of the next quarter. Thanks everyone. Bye.

Operator

That concludes today's teleconference. Thank you for your participation.

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