Del Frisco's (DFRG) CEO Mark Mednansky on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: Del Frisco's (DFRG)

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

Q2 2014 Earnings Conference Call

July 22, 2014 8:30 a.m. ET

Executives

Alex Pendleton - VP of Accounting and Corporate Controller

Mark Mednansky - CEO

Tom Pennison - CFO

Jeff Carcara - COO

Analysts

Jeff Farmer - Wells Fargo

Matt DiFrisco - Buckingham Research

Nicole Miller - Piper Jaffray

Will Slabaugh - Stephens

Howard Penney - Hedgeye Risk Management

Jason West - Deutsche Bank

Paul Westra - Stifel

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Del Frisco's Restaurant Group Inc. Second 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 that time for you to queue up for a question.

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

Alex Pendleton

Thank you, Orlando, and good morning everyone. By now you should have access to our earnings press release for the 12-week period ending June 17, 2014 as well as our 10-Q. If you have not already reviewed it, it may be found on our corporate Web site 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'd 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'll also 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.

And with that, I'll turn it over to Mark.

Mark Mednansky

Thank you, Alex, and good morning everyone. The second quarter was generally in line with our expectations in regards to comparable sales and margin management. We benefited from double-digit top line growth and positive blended comparable restaurant sales.

We held the restaurant level margins steady during a challenging cost quarter through the mitigating impact of Del Frisco's Grilles, lower cost to sales and its expanding presence within our portfolio.

We grew diluted EPS despite higher pre-opening and G&A expenses compared to the previous year. However, we're taking a more cautious view on this year's consolidated revenues and therefore diluted EPS for the back half of 2014.

We now expect fewer restaurant operating weeks in 2014 relative to our initial plans as several openings have been delayed. The Del Frisco's Double Eagle flagship opening in Washington DC is now slated for a fourth quarter opening. And two of the three Grille openings in the fourth quarter will take place later than we had originally scheduled. All of these timing issues deal with later than planned delivery of sites from our landlords.

We have also lowered sales projections for our Chicago Del Frisco's Double Eagle based on its current run rate, as well as our Palm Beach Del Frisco's Grille, we still has not been given clearance by local ordinance to serve lunch, brunch or make use of patio seating as we had modeled.

We believe that all these issues are short-term and will not affect the long-term success of our company. We remain confident in the health of the upscale consumer segment and in their willingness to spend discretionary income at Del Frisco's next generation dining experience.

This is exhibited by more of our affluent guests enjoying the entirety of our offering; appetizers, entrees, wines and desserts, which generated higher average checks than our modest price increases would suggest.

Del Frisco's Double Eagle faces most formidable year ago comparison of positive 5.9% in 2013 in the second quarter, and still generated a 5.2% increase this year, thereby extending it's enviable track record a positive comparable restaurant sales to 18 consecutive quarters. Notably, this included a 1.9% increase in guest counts, with the balance driven by higher mix and to a lesser extent, higher pricing.

Restaurant level margins were slightly below last year despite higher commodity inflation related primarily to beef and all sorts of sea food. But operating expense leverage mostly offset these pressures.

Sullivan's Steakhouse delivered its first positive comparable restaurant sales result in nearly two years at positive 0.9%. As of four-prong strategy that we've discussed over the past several quarters, has taken hold and guests responded favorably to these changes.

We're especially gratified that restaurant level EBITDA grew at more than 14% and only a 1.4% increase in restaurant sales as the concept benefited from favorable cost of sales through better mix and sales leverage on operating expenses.

Jeff will walk you through some greater color during his prepared remarks, but let me be clear that we're not yet satisfied with Sullivan's performance, and expect more from the brand and from ourselves.

We're deploying capital to remodel enhanced restaurants at the top and mid tier, where we believe further sales and margin improvements can be achieved. Please also remember that Sullivan's serves as the source of growth capital that is being utilized to develop our other two concepts.

Turning to Del Frisco's Grille, we added one restaurant very late in the second quarter, and now we have 12 Grilles in operation across seven states in Washington DC with four additional locations scheduled to open this year.

Restaurant sales volumes remain in line with our projections even as we cycle over some extremely high honeymoon periods. And this has enabled us to deliver cash on cash returns at or above our 25% development model.

The Grille's positioning as the destination for affordable everyday upscale dining, appealing to guests where they work and live makes the concept ideal for A plus urban and suburban settings. We have some exciting projects planned for the balance of this year that will enable us to capitalize our lunch, dinner or social opportunities.

In the meantime, you can see from our segment reporting that the concepts continue growth and progress in supporting new stores as they move through their learning curves is facilitating the larger contribution to a restaurant level EBITDA and improving our consolidated cost to sales.

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

Jeff Carcara

Thanks, Mark and good morning. Our flagship Del Frisco's Double Eagle brands now deliver consistent positive comparable sales for the last four and a half years, a track record that we believe has few, if any parallels within the fine dining segment.

The strength of our brand is best exhibited by the eagerness of our upscale dining guests to experience the entirety of our next generation offerings; signature steaks and fresh sea food, an award winning wine list, a lively bar, energetic ambience and genuine hospitality.

We're also getting strong responses from the handful of remodeling projects completed last year, including some added patio seating, and we'll continue to examine other means to polish and evolve the concept and asset base further.

This summer, we're featuring the Prime Pair, a $49 price fixed menu that includes perfectly prepared eight-ounce fillet paired with the choice of succulent crabcakes, scallops or shrimp, plus a salad and side. We have offered this Prime Pair over the past several years and because it is a great meal at a great value it always proves popular with our guests.

As Mark mentioned, we've reduced our model sales expectations for Chicago Del's. While this location was negatively impacted during Q1 by lost operating days, we did not see the rebound in Q2 that we expected. Based on this realization we've focused our multiunit leader, marketing resources and operations team on initiatives to gain momentum. And although we've seen some traction early in Q3, until we see sustained and accelerated growth we'll continue to be conservative in our outlook.

Turning to Sullivan's, our concept re-tooling is on the right track and we're encouraged by its improved performance in the second quarter, although victory cannot yet be declared. We're raising our profile with more concentrated radio, digital and direct mail, which is fostering greater brand awareness, and this has facilitated better trends particularly for our lunch program, which is also helping cost to sales. Faster execution at lunch is also getting great guest response or better labor management was a big component of our sales leverage.

Sullivan's current call to action is our Summer Fling, which runs through Labor Day, which we think is the hottest deal of the season; a signature six-ounce fillet along with a half of fresh Maine lobster for just $42. It's getting great traction and complementing our Sure Thing menu, which consist of three courses of Sullivan's favorites at an attractive $39 price point.

In addition to our menu specials, earlier this year we made some strategic changes to our bar menu. As Tom will share, while we generated a comparable restaurant sales increase of 90 basis points, we did experienced a 5% decrease in traffic, which we measure utilizing entree counts. Approximately 80% of the entree reduction during the quarter related to the removal of certain discounted bar menu items, which while reducing entree counts generated a favorable mix shift to higher priced items contributing to the increased average check. As these removed items also had a high percentage food cost, this strategic menu change also benefited cost of sales.

As previously shared, we remodeled three locations last year in Austin, Charlotte, and Palm Desert. They redesigned, reenergized the ambience and created a more contemporary look in both the bar and dining rooms.

We're cautiously optimistic with the direction sales are moving at these restaurants, and plan to remodel another two Sullivan's by year end. These two renovations will be modeled after our Austin location, which features a larger bar opened to the dining room.

Finally with respect to the Grilles, we're seeing the newer locations reduced operating inefficiencies quicker. The now larger base of restaurants is helping to grow stronger leaders for the new restaurants, which in turn helps us get up to speed quick in regards to guest experience, cost of sales and labor.

The larger base is also helping to reduce the deleveraging we saw last year when over doubling our size. This can be seen in the second quarter, in which restaurant level EBITDA, margins fell only 60 basis points compared to 410 basis points in Q1 and 190 basis points in Q4 2013.

As you know, the Grille features a variety of Del Frisco's prime steak and other top selling signature items, but its menu is diverse and well balanced, offering a variety of dining options that are relatively less expensive and make it ideal for business or casual meal.

In late May we began promoting the Triple Treat, an adult milkshake consisting of Nocello walnut liqueur, Creme de Cacao chocolate liqueur, and vanilla ice cream, along with our double-patty prime cheeseburger and a choice of classic fries, our original sea salt and parmesan, or sweet potato.

Resembling a childhood favorite, this adult version uses ingredients of the utmost quality, and has received a lot of great media buzz, while also making guests very happy.

With that, I'll learn it over to Tom.

Tom Pennison

Thank you, Jeff. I'll begin by reviewing our quarterly financial results, and then discuss our revised annual earnings guidance in view of our updated projections for consolidated revenues.

For the 12-week period ending June 17th, consolidated revenues increased 11.6% to 67.4 million from 60.4 million in the year ago period. This growth in top line was a result of 2.2% blended increase in comparable restaurant sales on a calendar basis across all three concepts as well as 61 additional operating weeks resulting from five Del Frisco's Grille's opening in the second half of last year along with one restaurant at Burlington, Mass that opened at the very end of the second quarter this year.

As we discussed in our first quarter call, the 53rd week in fiscal 2013 has resulted in a one week calendar shift in a quarterly comparison year-over-year. The implications of these shifts are more meaningful in the first and fourth quarters as they affect the comparison of restaurant sales around the holidays. But for consistency we will still provide the variances, however, minor in the second and third quarters as well.

As already noted, on a comparable calendar basis, total comparable restaurant sales increased 2.2% in the second quarter of the 2014, while on a fiscal quarter basis unadjusted for the calendar shift, sales on the same restaurants increased 2.3%. For Del Frisco's Double Eagle, revenue increased 3.8% to 33.9 million in the second quarter from 32.6 million in the year ago period. The top line improvement was due to a 5.2% increase in comparable restaurant sales generated by 3.3% increase in average check and 1.9% increase in traffic.

Note that on a fiscal quarter basis, sales in the same restaurants increased 5.4%. This comparable growth was partially offset by reduced revenue in a non-comparable restaurant.

For Sullivan's, revenues increased 1.4% to 18.4 million in the second quarter from 18.2 million in the year ago period. This improvement was a result of a calendar based comparable restaurant sales increase of 0.9% consisting of a 5.9% increase in average check which was offset by 5% to traffic. As Jeff shared, approximately 80% of the on trade reduction during the quarter, we are ready to renewal of certain discounted bar menu items which reduced on trade counts which generated a favorable mix shift to higher priced items contributing to the increased average check.

On a fiscal basis, sales for the same restaurants increased 0.7%. Please note that the difference between revenue growth and comparable restaurant sales growth is due to reward card expense and gift card income variances year-over-year as all 19 Sullivan's restaurants are included in the comparable restaurant base.

For Del Frisco's Grille, revenues increased 57.9% to 15.1 million in the second quarter from 9.6 million in the year ago period as the concept benefited from an additional 61 operating weeks provided by the opening of five restaurants in the second half of last year and one restaurant at the end of the second quarter this year.

Turning to our cost structure, cost of sales as a percentage of revenue increased by 10 basis points to 30.1% from 30% in the year ago period. We did benefit from the 1.8% price increase taken in the fourth quarter last year and the natural portfolio hedge provided by the Grille's growing weight on the restaurant portfolio. But it was not sufficient to fully offset the approximately 8.1% increase in year-over-year beef costs we experienced during the quarter. While the blended 8.1% benefited from menu engineering and mix change, we saw an increase of approximately 12.6% in year-over-year beef pricing for the same items on a apples-to-apples basis.

By concept, at Del Frisco's we experienced a 110 basis point increase in cost of sales to 31.1%. This increase is partially offset by 50 basis point improvement at the Grille's 27.5%, and 70 basis point improvement at Sullivan's to 30.4%. The improvement at Sullivan's was positively impacted by the menu changes discussed previously; they removed certain high food cost bar menu items. Although the 30.1% was above our expectations for the quarter, our portfolio mix allowed us to maintain a consistent cost of sales in percentage terms. While we continued to experience pressure on beef cost as well as certain sea food items, we do believe we are past the most significant year-over-year increases.

Restaurant operating expenses as a percentage of revenues remained flat the prior year at 44.6% for the quarter. By concept, Del Frisco's operating expenses as a percentage of revenue improved by 100 basis points to 37.9% due primarily to sales leveraging on labor and benefit cost.

Sullivan's also improved by 110 basis points to 50.5% due to sales leveraging on labor and occupancy cost along with initiatives that reduced other restaurant operating expenses.

Finally, the Grille experienced a 190 basis point increase to 52.4% due primarily to six Grille openings mentioned earlier with the majority of the percentage increase related to occupancy expenses.

Marketing and advertising cost increased 39,000 from a year ago, but we are 20 basis points lower at 2% of revenues. Taking all of these together, restaurant level EBITDA increased 12% to 15.7 million in the second quarter from 14 million in the year ago period. Our margins increased slightly 23.3% versus 23.2% during the prior year period.

Pre-opening cost increased to $906,000 from 328,000 last year. During the quarter we opened a Grille's in Burlington, Mass as well as incurred expenses for the upcoming openings of the Del Frisco's Double Eagle in Washington D.C and Grille's in Irvine, California and Rockville, Maryland. Pre-openings cost included approximately 400,000 in non-cash straight line rent for the quarter.

General and administrative expenses increased to 4.8 million from 4.2 million in the prior year, and as a percentage of revenues increased 30 basis points to 7.2% from 6.9% during the prior year period. The increase in expenditures relates to additional corporate and regional management headcount to support continued growth in our restaurant portfolio with approximately half of the dollar increase driven solely by incremental non-cash stock compensation expense during the quarter.

Depreciation and amortization increased to 3 million from 2.6 million due to the development of new restaurants over the past year as well as refresh expenditures to restaurants that we modeled in 2013. As a percentage of revenue, depreciation and amortization increased 20 basis points to 4.5%. Bringing these together net income for the second quarter was 4.8 million or $0.20 per diluted share. And this compares to prior year net income of 4.4 million or $0.19 per diluted share.

In terms of our liquidity and balance sheet, as of June 17th we had cash, cash equivalents of approximately 12 million. We currently have no outstanding debt and expect to continue financing our capital requirements for development, maintenance and remodeling primarily through cash provided by operations, and if necessary minimal borrowings under our credit facility.

During the quarter we did repurchased 103,500 shares of outstanding stock under our stock repurchase authority. As previously shared this authority is geared to offset delusion caused by the issuance in exercised stock options and other equity compensation. Under our current authorization we still have approximately 3.6 million available for the repurchase of our stock.

In terms of our 2014 and outlook, we are lowering our earnings per diluted share expectations to between $0.90 and $0.94 from a previous range of $0.94 to $0.98. This is due in part the fewer new restaurant operating weeks that we had originally projected at the Del Frisco's Double Eagle in Washington D.C will now open in the fourth quarter versus the third quarter along with two of our three Del Frisco's Grille restaurants opening later in the fourth quarter than we had remodeled. These movements account for approximately $0.02 per share of the revision.

We've also revised our full year sales expectations for the Chicago Del Frisco's Double Eagle based upon its current run rate and for the Palm Beach Del Frisco's Grille, which is still not being given clearance by the city to serve lunch or make use of patio seating. We have thought that these issues would be behind us by now, although in a sense they are not, this restaurant is operating below its anticipated sales volume.

Remainder of the guidance previously provided is either unchanged or had slight adjustments which I will review now. Once again we are expecting total comparable restaurant sales of positive 1.5% to 2.5% on a 52 week comparable basis. We will be opening a total of six restaurants in 2014, five Del Frisco's Grille's and one Del Frisco's Double Eagle inclusive of the one Grille that is already opened in the second quarter.

In the third quarter we will be opening a Del Frisco's Grille in Irvine, California, while in the fourth quarter we will open a Del Frisco's Double Eagle in Washington D.C and three Del Frisco's Grille locations in Rockville, Maryland; Tampa, Florida and Pasadena, California.

For cost of sales, we are slightly increasing the bottom end of the range to be between 30.1% and 30.4% of consolidated revenues. Annual restaurant level EBITDA is now expected to be between 22.6% and 23.1% which is subject to quarterly seasonality variances. Historically, the third quarter is our lowest seasonality period, which results in a lower restaurant level EBITDA percentage due to delivering impact of fixed cost. Pre-opening expenses are still expected between 4.9 million and 5.5 million inclusive of non-cash pre-opening rent.

Our general and administrative are expected between 20.5 million and 21.2 million including non-cash stock compensation and normalized incentive donors compensation. We now expect our effective tax rate to be between 31 and 32.5.

Finally, our total capital expenditures before tenant allowances are expected between 38 million and 40 million in 2014 comprised of new restaurants, remodels, maintenance capital and technology expenditures.

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

Mark Mednansky

Thank you, Tom. The team and I are disappointed to lower our estimated EPS range for this year. However, given the current circumstances we found it necessary and appropriate to add clarity for our investors. This adjustment, however, in no way detracts and we will review as a bright future for our company characterized by three dynamic plans, significant white space, favorable cash on cash returns, no debt and then an incredible collection of passionate team members.

Before taking your questions, say, let me wrap up my formal remarks with an update on our development plans. This year as you already know we will be opening six restaurants, which truly reflect the full breadth of restaurant settings in markets that we can build over time. A few days before we concluded the second quarter we opened a Del Frisco's Grille in Burlington, Massachusetts right across from the busiest mall in the area with good visibility to the interstate. The restaurant offers gets two floors of dining featuring two bars, two outdoor patios and an outdoor fireplace.

Our next opening will be in mid August at Del Frisco's Grille in Irvine, California at the spectrum center, which is a preeminent entertainment in life style destination visited by more than 17 million people each year, and featuring more than 130 stores, restaurants and entertainment venues.

In the fourth quarter we will open a landmark Del Frisco's Double Eagle Steakhouse in City Center in Washington D.C., which will be the 11th location for our flagship concept. After D.C., we will open three additional Del Frisco's Grilles around the country. First we'll open at Rockville, Maryland in the Pike & Rose development. It's a mixed used project that includes 250C concert venue, a high tech movie theater, residential and office buildings and 150,000 square feet of retail which we believe will provide a strong lunch, dinner and late night opportunities.

Then we will open in Tampa, Florida and Boy Scout Boulevard near International Plaza. The nearest sounding area includes approximately 70,000 office workers and a growing number of residents which we believe makes it a very attractive location. The restaurant itself will feature a rooftop bar and dining area, something that none of our competitors have in that area.

Finally, the Pasadena restaurant is situated in the central business district along the farmed Rose Bowl Parade route and will mark that completion of our development plans for 2014.

Note that by year end we've only reached about 10% of Del Frisco's Grille's 170 plus unit domestic market potential as discussed at length on our previous call. We are not yet able to discuss our pipeline for beyond 2014, but next year's restaurant class is already shaping up nicely. If all goes as planned we will be more front end loaded than our 2014 class. We look forward to sharing more details once leases are finalized. But suffice it to say for now, developer interest in our branch remains very strong.

We are proud that Del Frisco's restaurant group is one of the most exciting growth stories in the restaurant industry today. And while our new restaurant development is important to us, we are also working hard to ensure that our existing Del Frisco's and Sullivan properties uphold all that being next generation in sales offering our guest a vibrant, contemporary and inviting the atmosphere for each and every occasion.

We thank you all for joining us this morning. And now we are happy to answer of your questions. So, Orlando, let's open the lines for questions, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll take our first question from Jeff Farmer with Wells Fargo.

Jeff Farmer - Wells Fargo

Great. Thank you, and good morning.

Mark Mednansky

Hi, Jeff.

Jeff Farmer - Wells Fargo

I think I heard you correctly, and I think I read it in the press release as well, but two of the three Grille openings in the Q4 are now expected in the back half or toward the later part of that quarter. So, the question would be, what's the expectation for lost operating weeks, and do you think you guys are finding yourself on a path to see another period of pretty concentrated new restaurant inefficiencies similar to what you saw at the end of last year?

Mark Mednansky

Tom, why don't you talk about the operating weeks and then, Jeff, I'll answer your question on the inefficiencies.

Tom Pennison

On the operating weeks, in total, if you look at all the activity we had for this year, we are looking at about 19 weeks in total that we've lost as well as, I'd just touch right now, there are some margin aspects with some of these openings being a little bit later that we have factored it into the updated model where that's tied into the restaurant level EBITDA being a little bit shaved off. But we've also learned a lot from what we went through in the fourth quarter which I'll let Mark touch on that.

Mark Mednansky

That's exactly right, Tom. Jeff, we are disappointed and upset that some of these openings this year have been pushed back. Our construction teams are on schedule with our end of the work, but the project themselves had been delayed.

Before I move on with the second part of your question, when you plan a year, you put in a cushion for delivery of projects from your landlords or even from your own work. We thought we had significant cushion in this year and in fact even in first quarter. Beginning of the first quarter we thought we were still okay. So, again, we are disappointed that we are behind schedule.

As far as the inefficiency all being grouped up in the fourth quarter, you like to open these restaurants especially in the summer when it's a little slower in the third quarter, a good time to ramp up. So, by the fourth quarter when you are busy, you can fully experience all the flow through. But with that being said, Jeff and his operating team have done a really nice job this year getting out those inefficiencies earlier. And we are getting the steady state faster. So that's where we hope to pick up some upside in Q4.

Jeff Farmer - Wells Fargo

Great. Thank you. A couple of quick follow-ups, I was hoping to get some color on same-store sales trends in the first weeks of Q3. I don't think I mentioned or I heard that if you guys did mention it.

Mark Mednansky

Jeff, it's Mark. We are pretty close to where we were when we ended up Q2. We are still seeing some strength with the upscale guest, and we feel confident in our year end guidance and that pretty will take you there.

Jeff Farmer - Wells Fargo

Okay. And then, again, I apologize if I missed this, but the Grille same-store sales number, did you guys pointed out?

Mark Mednansky

No, we haven't touched on the Grille same-store sales as we talked in the past. That's going to be something we consider at the end of this year. We still have very, very small base of restaurants there in that comp store base. Right now with the few restaurants in there, it's mixed and so we want to get some more data in there before we share that with everyone.

Jeff Farmer - Wells Fargo

All right. Thank you.

Mark Mednansky

Thanks, Jeff.

Operator

And our next question comes from Matt DiFrisco with Buckingham Research.

Matt DiFrisco - Buckingham Research

Thank you. . I guess as a follow-up to that, if you could comment on the average weekly sales that is disclosed on the Grille, is that within relation to your guidance or your expectations? I think if we disaggregate out the comp for the Grille, obviously it's only four or five stores, it does appear though it decelerated the Grille meaningfully in 2Q from 1Q, so I was wondering, is there something unique to a store, New York, Dallas, Phoenix, or D.C., those older stores, that is something one-time in nature that can give us comfort, that maybe occurred within that small class of stores that might have eroded that trend from 1Q?

Jeff Carcara

Hello, Matt. I wanted to –- I'll take the average restaurant volume first. It's very important to note that that average restaurant volume that we share in a release is across all of the restaurants. That includes, if you go back to our first opening which was in New York, which was out -- was touched down as $10 million Grille. Most of the Grilles we are adding right now have been really more focused, and where we've talked about from the beginning, our prototype in that 5 million to 6 million. As we add, we are $6 million AUV restaurants; it does lower if you look at a multi-year aspect to it.

Now, what we have seen take place on the AUV is you have a large number of non-comp restaurants which as we've shared we tend to see a very large opening with these Grilles well above where our expectations were. And then as they lap themselves in the second year, especially in their first six months we do see them negative to prior year. Now, in all cases even some of those that went beyond the six months, they're still above where we anticipated them to be from the very beginning.

Matt DiFrisco - Buckingham Research

Okay. I guess just -- is there something seasonal though, of those stores that you've opened the last four quarters, again the store numbers at the Grille, you had 11 in 1Q, and you had virtually 11 in 2Q as well, and both basis from a year ago were six Grilles versus six Grilles. So the rate of decline did decelerate, so is there something maybe seasonal I'm maybe missing as far as those last four quarters' worth of openings, why the average weekly sales decelerated for the Grille?

Jeff Carcara

We do have probably the most significant which is absolutely seasonal that we touched on is our Palm Beach location which was operating lower because we couldn't fully operate it with the seasonality in that area has dropped off even more so in second quarter which definitely would plan that overall average.

Matt DiFrisco - Buckingham Research

Okay. That's helpful. Thank you.

Operator

And our next question comes from Nicole Miller with Piper Jaffray.

Nicole Miller – Piper Jaffray

Thank you. The Eagle strategy I believe is the ability to open one at least every other year. With pushing back the D.C. Eagle unit, does that change that objective over the long-term?

Mark Mednansky

Hey, Nicole. Good morning. No, it does not. As we've talked in the past we like opening our Del Frisco once a year if possible. And that's where I see it going in the future. You will see there one or two Del Frisco's opening over the next few years per year. Pushing this back from a third quarter to a fourth quarter opening really it takes some wind out of the sales as you know with the large amount of revenue and profitability that these units generate. We are working hard on the pipeline for '14 and '15 and '16 right now with this very strong concept.

Nicole Miller – Piper Jaffray

And on the beef side, I understand there is kind of commentary talking about this being the key to prices potentially. So is the thought that we kind of sustain these levels and cheaper in the next year? Or is it thought that in there is a benefit already beginning in the back half of this year?

Mark Mednansky

I'll start with that, and I will let Tom or Jeff add. At the beginning of the year we knew that the first half was going to be tough. It closed in the second quarter higher than what we had anticipated and higher than what most experts thought it would go. We've seen that level out here over the last 30 days, but still not to the amount that we had modeled for the second half of 2014. They are talking about release now in '16, but every year as you know we contemplate and add a menu price increase in the fourth quarter. We'll be discussing as, and have discussed as a management team, the amount of that menu increase this year and the timing of it whether it's third or fourth quarter.

Nicole Miller – Piper Jaffray

And then just a quick final one, I think it has been pretty clear that the discussions around the stores that are being pushed back, but back on the Chicago unit, how would you characterize how you feel today about the site selection, and/or is there something going on with competition? Why is that one maybe not achieving the hurdles you would have thought? Thank you.

Mark Mednansky

What I'll tell you Nicole this was one that hit a square in the eyes. In Q1 we had so many operating days and weeks that were lost due to the conditions in the hard land. When we went into Q2 and with good weather, we were severely disappointed that our sales didn't come back to where they were last year. We opened that store exactly where we had modeled and in fact came in a little higher in year one where we had initially remodeled it. We think the site selection is strong. And Chicago is a great city to have a Del Frisco's Double Eagle.

We have seen some increase in seats in the white tablecloth Steakhouse segment in downtown Chicago. We've had some execution problems at the store level that has caused a decline. But we've also put in initiatives that get the shift going in the right direction. So we've taken one of our top multiunit performers and put them in charge at the store. In fact he helped us. This is very similar to what our entry into the Philadelphia market with the Del Frisco's Double Eagle many years ago. Well, we opened strong, saw a little decrease and then came on very strong where today we're the busiest Steakhouse in the city.

That same operating partner is leading the charge here at this store. We also because things came in pretty well the way we wanted them to in year one, haven't spend any marketing dollars in this location in the city. So our marketing team is putting together a plan that we will start executing here in the third quarter to really showcase this beautiful restaurant and the outstanding team that we have there. So we think there is upside. We've seen some improvement here early in the third quarter, but as Jeff said, we make the changes in our guidance and we want to live on the conservative side and we are not going to declare victory until we see sustained and accelerating growth in this unit.

Nicole Miller – Piper Jaffray

Thank you.

Operator

Next we will hear from Will Slabaugh with Stephens.

Will Slabaugh – Stephens

Yes, thanks guys. I wonder if you could give us a little more detail on the Grilles. Can you talk about the groups from a couple of different of perspectives? First, I know you're lapping over some tough honeymoons as you mentioned from last year. It sounds like you are still pretty pleased with the top line performance of your older Grilles; I just wanted you to confirm that. And then secondly can you talk about the sales and market progression at the group of stores that we mentioned a little bit ago of the four that you opened up toward the end of last year, as well as what sounds like a pretty good Burlington opening to start off this quarter?

Tom Pennison

Thanks, Will. A few items on that of the opening class; if you go back to the first one in New York still continue to be very strong, margin strong, continues to be positive. That class if you look at it from a margin standpoint; that class at 2011 is so well within that 20%-25% restaurant level EBITDA. The class that we opened in '12 was still within that range.

Now, our newest class, well, we had a tough Q4. We've seen some good progression starting to take place. Actually our location that opened right at the end in December of last year was in the top two restaurant level EBITDA growth for us really brought their margin up, and actually gave a great demonstration to the rest of the team what can be done. So really, I mean, Jeff should speak to because Jeff has really done a great job here in Q1 and Q2 laying out great benchmarks for the team to achieve in clear directions about each week of that progress where it should be. And we are seeing that play out nicely and, like I said, that opening right at the end of last, and that's already in place for Burlington. Jeff should like to touch on that.

Jeff Carcara

Yeah, we've seen the inefficiencies reduce greatly in our last three openings. The recent opening in Burlington was about four weeks, four and a half weeks out now. And we are achieving our benchmark. So with a little bit more increased focus and understanding of how these restaurant opens, last year was a big learning year for us. We doubled -- over doubled our size. And with that came great learning. And we now really have been able to bundle those and put them into the opening process to help us get these inefficiencies down quicker.

Mark Mednansky

Hey, Will, it's Mark. I am going to add just one more piece to that, and try to address your initial question. So Tom has already talked about our New York store. Some of the units we opened after New York opened up as many of you know way above our prototype and what we modeled for success and then in a good cash-on-cash return. And a lot of those sales came from just really busy bars primarily because of the locations they were in. They were in hot bar areas. So we saw after one year that bar business staying and after between a year and 18 months we saw the bar business came to steady state still above where we have initially modeled these units, but getting to a plateau and remaining there.

Our 2014 openings are more situated in affluent suburbs where we have seen with the openings we've done, at the end of '13 and now what will be going in the '14, more of the dining public. People still enjoying cocktails and wine which is part of what we do at Del Frisco's Grille. But the bar business not being as bigger part of the business as it was in some of our openings that we had in '12 and at very beginning of '13.

So we think that the popularity of the Grille, the dining public to enjoy to cocktails while they are eating, are still going to be robust. We feel good about our locations. We have shared with our investors and our analysts our disappointment in our one unit in Phoenix. We will discuss some of the problems we are experiencing right now in Palm Beach, but we feel real good about the strength of the rest of the restaurants in our fleet today and the openings that we'll finish in 2014.

Will Slabaugh – Stephens

Got it. Thank you for that color. One more question, if I could, to move over to Sullivan's. Nice to see that moving into positive territory for the first time in a white, so congrats on that. I wonder if you could talking about, you mentioned Sullivan's had better cost of goods sold, how did you achieve that? And then secondarily on the pricing side, I know you mentioned that mix was pretty positive as you took off some bar items there, but sort of what that breakdown was of mix and pricing, if you would?

Jeff Carcara

Just to give the numbers of the pricing component, when you go that one item that eventually was 80% of the entree falloff, that particular item that we took off had almost an 80% food cost. So you can imagine that had a pretty significant bearing on it. So we're within that 5.9%. It's about 2% price and the remainder being mix shift.

Mark Mednansky

So, Jeff and Ray Risley, the Vice President of Sullivan's have done an outstanding job working with the Sullivan's team improving mix. Now, when we eliminated this bar entree, I want to be real clear on this, it wasn't that we were just losing guests. We count guest as in entree, which includes entree served in the bar. What we've done is move people from this $6 and $7 steak entree in our bar to heavy appetizers that are not counted as guests, but we still get revenue.

That's really helped our sales and it's helped our cost of sales. While we believe it's still attracting the right people to our bars to enjoy dining our bars as well as shrinking in the Sullivan's bar. They've also done an incredible job so far this year, moving the mix in totality at the Sullivan's brand and that they worked hard at speeding up lunch, which we all know that it's important to be quick at lunch to get people in and out, because of that sales the lunch have gone up, and food costs during the lunch period is decreased from that of dinner.

And they've also done a wonderful job of offering people everything that's available on the menu, from appetizers, side dishes and desserts where you can make up some lost ground.

Will Slabaugh - Stephens

Got it. Thanks very much.

Mark Mednansky

Thank you.

Operator

(Operator Instructions) We'll take our next question from Howard Penney with Hedgeye Risk Management.

Howard Penney - Hedgeye Risk Management

Thank you for taking my question. As Matt was pressing you on the performance of the current store rates, can you go through what the economics are given sort of the small number of stores in the comp store base, and the total number of stores? Can you go through the economics of how you envision this unfolding, the Grille, excuse me, how you envision this concept rolling out in terms of volumes, margins, and when you think you will get to a fairly consistent performance?

Tom Pennison

Sure, Howard. This is Tom. From the time we laid this out we've looked at the prototypical Grille, which was between 4.5 and 6 million. And we took really tough targeting at five in a quarter is what our prototype was. So, we target internally to be within that 5 to 6 million AUV.

Within that AUV, we're looking to have a restaurant level EBITDA between 20% and 25%. Now, while we do have more favorable food cost, our cost of sales that out Grille gives us that we've spoken to, we give a little bit of that back on our restaurant operating expenses, because the lunch day part has the labor be a little bit higher as well as some of the premiere spots we're utilizing, occupancy can be a little bit higher on that lower base.

But that 20% to 25% is we've been achieving that with the class of 2011 and 2012, unfortunately we have such a large component of the Grille today is relatively new restaurants in a non comparable group, that's not fully visible yet, but we're between that 20% and 25% target for both the '11 and '12 as well as already approaching that on a run rate with some of the '13 openings.

Operator

Next question, we'll hear from Jason West with Deutsche Bank.

Jason West - Deutsche Bank

Yeah, thanks guys. Just on the delayed store openings, I just want to clarify, I've missed the beginning of the call, but it sounds like the delays are unrelated to anything you guys are doing in terms of construction or people, it's really just the projects themselves are delayed, and things that are out of your control, I just want to confirm that that's what's going on?

Mark Mednansky

Jason, it's Mark. Yes. We put cushion in all these projects. When they tell us they're going to have it to us by May 1st, we throw back usually six to eight weeks, but we've just had a few that are really been challenging for our partners to get into us on time.

Our team is set. We have an outstanding construction development crew. For a company that our size, we have the right amount of people with a great resume that have performed for us each and every time we've opened our unit. They're on time with their work. It's a partner.

So, we learn from this for our projections for the future even more cushion will be added when we look at our properties in the future, and working more with our partners to get realistic turnover dates from them is imperative for us for modeling purposes in the future.

Jason West - Deutsche Bank

Okay. And then just thinking about next year, and we've had I think generally good performance on these new stores, but you have had some disappointments in the portfolio, you've had to make some management changes. I mean, does this cause you to kind of rethink the rate of six stores a year maybe into next year, either by outside force or internal decision that you may slow that down a little bit next year?

Mark Mednansky

Well, first, we haven't disclosed how many units we'll open next year. We've said pretty close five to seven, but we feel very good about where we're today in developing leaders that can produce the results we need in the right amount of time.

Now, if you remember, beginning of '13 we only had five units in the Grille concept, and we build six restaurants from those initial five units. And then as we've talked, that was taxing to the company. Today we have a larger base. And it's much easier to develop management both front and back of the house that already move up, assistant managers to become general managers, sous-chef to become chefs. And just as important, now we have a much larger pool of inspired hourly workers both in the front and back of the house, our team members that want to grow with this company and go to management, it gives us more time to evaluate their performance, gives us more time to have them working in units not just training in the units.

So, when we do open these units we can get this steady state in a much quicker amount of time. So we're not backing off on what we think we can build. We're excited about the growth prospects for this company. We're building on the infrastructure of the team both at the home office and out in the field so we can achieve profitable growth not only next year, but for the future.

Jason West - Deutsche Bank

Okay, thanks. Just one more, Tom, I don't know if I missed this, on the beef outlook for the rest of the year, I think you said net inflation in the second quarter was around 8%, what does that number like year-over-year in the back half in your modeling?

Tom Pennison

From a modeling standpoint, we can handle between that 6% and 8% without any problem. With that said, we're evaluating some pricing right now that will help us be in a better position from our margins.

We anticipated based on third-parties, they still haven't really updated that 6% to 8% they keep saying, but we really -- well, it's not as bad as we speak today, year-over-year increases as we saw in Q2. It still hasn't dropped as far as some people thought it would have.

So right now where it has the annual outlook at six to eight, I'd definitely say it's in the higher end of that, and has the potential to be eight to nine.

Jason West - Deutsche Bank

Okay. And does your model on this guidance include the pricing that may be coming in the back half, or is that not in the model?

Tom Pennison

I'd say the pricing isn't fully there, but there are some aspects that are planned -- there are some aspects that are planned for, just maybe not to the full extent of it.

Jason West - Deutsche Bank

Okay, got it. Thank you.

Operator

And we'll now hear from Matt DiFrisco with Buckingham Research.

Matt DiFrisco - Buckingham Research

Thanks. I just had a follow-up question. When do you -- have you planned on a time or an opening yet for the Cherry Creek Grille, and how does that factor into the model, stores like that might be, are those being pushed out as well, or is that something that was still on time and on schedule?

Mark Mednansky

Matt, we have not talked publicly about the openings for 2015 in the timetable, but that one on time we are really excited about going in Cherry Creek. As you know, it's a dynamic area and fits perfectly with the Grille design, but now the openings for '15, lot of them are going to be more in our hands with either land that we might be doing something with or existing buildings that are already there. So, we are currently feeling pretty strong right now on the class of '15.

Matt DiFrisco - Buckingham Research

That's great. Then a follow-up on that, I guess just when you talked a little bit about the suburbs, and some of those other alternatives where the bar mix might be a little lighter, is there also an offset where the investment cost is even more attractive, and not only do you get back to operating margins faster in that north of 20%, but you also have a return on invested capital that could be maybe more compelling in a world with smaller volumes?

Mark Mednansky

Well, I'll start there and I'll let Tom or Jeff add some comments. Every restaurant, every situation is different. So you might be able to get a lower entry point when it comes to rent or lease, if you're in the suburb versus a large city, but you might be building from the ground up. So it all depends.

As you know, we build beautiful restaurants. We think that's one of the discerning factors the reason why guests come to us versus our competition. We think as long as we continue to get at least 25% cash on cash return, we'll provide good value to our shareholders today and in the future.

Matt DiFrisco - Buckingham Research

Great.

Jeff Carcara

Another thing I'd like to just recap, Matt, also when we speak to the beverage mix, we still have a relatively strong beverage mix across all of these Grilles. It's more of a matter of when they start out. We have some of these locations that are just in areas that are more broad-centric that start out at a much, much higher bar mix than what our targets are or what's sustainable. And it's the sustainability of it that has become an issue or -- I won't call it an issue, it's not -- it's on a bad problem to have sales significantly above what you expected. It just doesn't sustain. And that's where we're seeing to Mark's point, the class of 2014 or in areas that the mix we have is more sustainable than some of the locations that have created a drag on our year-over-year sales.

Matt DiFrisco - Buckingham Research

Understood. That's helpful. Thanks.

Operator

And our next question is from Paul Westra with Stifel.

Paul Westra - Stifel

Great, thanks. Just a few quick follow-ups; a question on pricing, you alluded to it, can you refresh us or remind us, what current year-over-year pricing is, and to what extent would the incremental pricing that you're considering, can you give a range of what that would look like?

Jeff Carcara

We currently have approximately 1.8% pricing that we in place year-over-year tied to what we did in the fourth quarter of last year. We haven't finalized a percentage in our pricing and don't want to naturally put that up publicly, but as we said historically it would normally run between that 1% and 2%. Definitely I wouldn't expect it to be less than that, in the lower end of that range.

Mark Mednansky

We believe that we have some pricing power at all three brands, especially at Del Frisco's Double Eagle and the Grille's. So we've been taking a very hard look at each unit, at each entree, at each appetizer, and we're looking at timing currently as the management team.

Paul Westra - Stifel

Okay. And then on your question at Sullivan's, I was surprised that the outlook wasn't even more I guess, or the cost of goods sold outlook for the second half of the year wasn't even higher, especially given your commentary of where beef prices are, ending up in the high end toward eight and nine. Are you seeing any other offsets in the commodity basket, and if so where?

Jeff Carcara

Well, first of all if you look at 2013, the second half of last year was much higher than the first half was. So, from a percentage increase we've already gone against the higher base we were at on the second half of last year. So it's still high prices. It's just relative to the prior year. It's a little bit lower than what we've experienced here in the first half, and specifically in the second quarter.

Clearly there are some items that we're seeing a little bit favorability on. When it comes to beef, the bulk of it is all higher than last year. We've had a few cuts that we used that have been favorable for us. And as I alluded to the 8%, it was a matter of a little bit menu engineering and coming up with some different items to help offset.

If you look at the population of just core beef items, the same items we used last year to this year and just look at the average price as a group, that was the number 12.6 I mentioned, which was up significantly higher. But we're already seeing that even today be a lower number into -- under double-digit right now.

Mark Mednansky

Hey, Paul, it's Mark. As you know, one of the reasons we came up, built in and are executing the Del Frisco's Grille concept is to have another vehicle the mitigates cost pressures during times like this.

So, as we continue to buildup the Grille, it will help mitigate pressures with beef. This concept for us -- there's so many things that help us get through times more steady state. So, if business travel was down, the Grille's not as dependent on business travel as white tablecloth steakhouses are, not as dependent on beef -- it's really sweetheart of a concept as we think really is the key to keeping a graph us straight lines for us as we move into the future.

Paul Westra - Stifel

Just one more follow-up -- my question really is, your non-beef costs, chicken, other proteins, non-beef cost of goods sold commodity basket, I guess is what I was looking for, did you see any better improvement in that non-beef basket?

Mark Mednansky

There are some areas of it. The big thing as far you know, we do have a high beverage mix, and that being the largest part of our cost of sales. That's easy to maintain those margins. So we don't really see that pressure on about 34% of our overall cost of sales apply there.

We're seeing on some of our other food items -- we're still seeing some pressures on selected sea food items with favorability and others, and we have seen some improvements on what I call with the other category, which does include the chickens, the focus of our non-protein component of our basket.

And lastly, Paul, one of the advantages we have this year versus last year is in the past we used a third-party provider to help us with the purchasing of not only proteins, but the entirety of the grocery basket. We now have an in-house Director of Purchasing that has really made some great moves for us across everything we're buying from oil to beef, to sea food, even to small ware.

So, he is just getting ramped up. We're very excited about what he has brought to our company and the value that we'll continue to see from his efforts and our corporate executive chef's efforts moving forward.

Paul Westra - Stifel

Okay. And then a question lastly, on your Palm Beach one just to follow-up, is there a risk that could be sustained as far as getting the regulatory approvals for lunch, brunch, and patios, or is there some visibility at the end of the tunnel here?

Mark Mednansky

Yeah. Well, we should have been out in the sun bathing by now, Paul, but we've been -- we've gone out of our way as we have in every single location we have opened a restaurant, being great neighbors, to be part of the community, to offer great wages, benefits to the employees who work and live in those communities, to give back to community and offer a great food and drink and service to our guests.

So, we believe that we'll prevail -- we believe that the good people that make those decisions in Palm Beach will allow us to open this restaurant fully as we had expected when we signed the lease, and that is being able to serve the lunch and brunch and utilize a beautiful patio, which will really add to our sales in this location. We're still working hard, and we still believe that we'll get there in Palm Beach, Florida.

Paul Westra - Stifel

Okay, thank you.

Mark Mednansky

Thank you.

Operator

We have no additional questions. I'll turn the call back over to management for any additional or closing remarks.

Mark Mednansky

Well, we thank you for your time this morning. Come visit us in our restaurants and spend some money. Thank you, and have a great day.

Operator

Ladies and gentlemen, that does conclude today's presentation. Thank you for your participation.

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