Del Frisco's Restaurant Group (DFRG) Mark S. Mednansky on Q2 2016 Results - Earnings Call Transcript

| About: Del Frisco's (DFRG)

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

Q2 2016 Earnings Call

July 21, 2016 8:45 am ET

Executives

Thomas J. Pennison Jr. - Chief Financial Officer

Mark S. Mednansky - Chief Executive Officer

Analysts

Nicole M. Miller Regan - Piper Jaffray & Co. (Broker)

Will Slabaugh - Stephens, Inc.

Brett Levy - Deutsche Bank Securities, Inc.

Jeff D. Farmer - Wells Fargo Securities LLC

Brian M. Vaccaro - Raymond James & Associates, Inc.

Jordy Winslow - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Del Frisco's Restaurant Group Second Quarter 2016 Earnings 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 would now like to turn the conference over to Tom Pennison, Chief Financial Officer. Please go ahead.

Thomas J. Pennison Jr. - Chief Financial Officer

Thank you, Rein, and good morning, everyone. By now, you should have access to our earnings press release for the 12-week period ended June 14th, 2016 as well as our 10-Q. If you have not already reviewed them, they may be found at our corporate website, www.dfrg.com under the Investor Relations section.

With me here today is Mark Mednansky, our Chief Executive 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 will also be referring to some non-GAAP restaurant-level EBITDA this morning. We have, therefore, provided a reconciliation of that measure in the earnings press release tables to the most directly comparable financial measure, which is net income presented in accordance with GAAP.

And with that, I will turn the call over to Mark.

Mark S. Mednansky - Chief Executive Officer

Thank you, Tom. Good morning, everyone. We know there are multiple earnings conference calls across the restaurant industry this morning and therefore -- therefore we'll keep our formal remarks brief, so we can leave you more time for questions.

The second quarter for DFRG met our expectations with nearly 20% growth in diluted EPS and we're pleased to be reaffirming our previously stated annual EPS guidance for 2016. Now, let's review our individual brands in further detail.

For Del Frisco's Double Eagle, comparable sales decreased 1.9% driven by a 0.7% decrease in average check and a 1.2% decrease in entrée counts. While we had a few strong performers in our comp base, most of our restaurants generated slightly negative results, especially those that have had the greatest exposure to the energy industry. Now, this decline in sales caused by the downturn in oil began for us in Q3 of last year, so we will soon be rolling over those softer sales.

Regarding profitability, Del Frisco's restaurant-level EBITDA fell 180 basis points to 28.2%. Cost of sales held steady and a modest price increase kept labor costs at bay. But we experienced higher operating costs due to maintenance expenses and we also increased our marketing spend, both on an absolute and relative basis compared to last year, which negatively impacted profitability. The increase was primarily attributed to market research and digital testing for the brand.

Turning to Sullivan's, comparable sales increased 2.9% and this was driven by a 1.1% increase in average check and a 1.8% increase in entrée count. This was our best comp performance since the first quarter of 2015 and included the drag from our Houston restaurants' exposure to the oil industry.

As the numbers suggest, our rejuvenation plan through leadership, menu, messaging and remodeling is demonstrating positive results, facilitating momentum in our sales trend and generating greater profitability. We'll continue to build on our progress to-date as we move through the back half of this year.

Sullivan's restaurant-level EBITDA margin increased 140 basis points to 15%, due to favorability in cost of sales, and was further assisted by minimal pricing taken early in the second quarter. These more than offset the minimum wage impact and the increased sales provided leverage against certain fixed operating expenses.

Looking ahead, we will begin celebrating the concept's 20th anniversary this October with parties, new food and wine pairings, and an enhanced marketing campaign.

Now let's turn to Del's Frisco's Grille. Comparable restaurant sales decreased 2%, driven by a 1.7% decrease in average check and a 0.3% decrease in customer count. Applying the learnings from the class of 2015 to the classes of 2013 and 2014 restaurant base is ongoing, and we're gaining traction in this area.

As you know, we are focused on driving traffic by positioning the Grille as an every-day, affordable, upscale dining and drinking destination. This was best exemplified during the quarter by our comp-based lunch business, which increased by 6.2%. We are now utilizing this increased lunch traffic to induce the same guests to our more accretive dinner business. We firmly believe that our growing base of lunch guests will return for dinner in other locations once they have experienced the Grille's approachable and energetic environment.

There's still much to do. But we're pleased with our initial accomplishments and will continue building upon this messaging to further convey the quality, the pace, the fun, and the value of the Grille.

Regarding profitability, the Grille's restaurant-level EBITDA margin held steady at 15.6% compared to last year's period as the improved sales and operating performance at most Grille's, coupled with the pricing we took at the very end of the first quarter, helped us mitigate the minimum wage increases. That pricing again was minimal, as it was at Del's and Sully's.

At the Grille, we were able to contribute to the entertainment of this year's election season when we promoted the Donald and the Hillary burgers, which added some political flair to our burger menu and to our restaurants. We're convinced that with the Grille brand, social and digital media, the two most effective means to get our messaging out, and with this type of limited-time offering we have a platform to do more to enhance communicating through these channels in the future.

We're at an early stage of improving our social and digital presence. We have engaged a third-party provider to advise us on how best to approach this opportunity and our marketing spend, and we'll update you in the coming quarters as our plan evolves.

Lastly, let me quickly discuss our Happy Hour offering at the Grille. As of the end of the second quarter, we have rolled out this offering to four of our Grille locations – great items, lobster corn dogs, flatbreads, cheesesteak egg rolls, many more delicious food items and some discounted drinks. What we're excited about is not only the energy and excitement and guests that it brings in during Happy Hour, but our guests are staying past the 06:30 PM stop time of Happy Hour, which helps create energy, fun and excitement for the rest of our guests that evening.

Our over-achieving theme this year is utilizing 2016 as a transitional period upon which to build a stronger foundation for our brands and position our company for the growth in 2017 and beyond. The success of all of our initiatives starts with our people and the structural changes we made last December. As you may recall, we placed three high-performing and long-tenured individuals from within in charge of leading the growth and the operational direction for each of our three brands. Since that time, I'm happy to say that these brand leaders have made great progress in developing our talent pool, which I know will pay dividends for a long time to come.

So with that, I'll turn it over to our Chief Financial Officer, Tom Pennison.

Thomas J. Pennison Jr. - Chief Financial Officer

Thank you, Mark. For the 12-week period ended June 14th, consolidated revenues increased 8.3% to $79.9 million from $73.8 million in the year-ago period. We benefited from a net 47 additional operating weeks across our concepts, which offset a blended 0.7% decrease in comparable restaurant sales.

This comparable decrease was solely the result of a reduction in average check, as blended traffic was flat for the quarter. We did experience this reduced average check despite a blended price increase during the second quarter of approximately 1.2%.

During the second quarter, blended comparable restaurant sales did experience a 140-basis point drag from three locations in the 40-location comp base most affected by energy-related challenges. As we have mentioned and Mark mentioned previously, that softness began in the third quarter last year and while we expect this condition to persist through the remainder of 2016, the drag on comp store sales should lessen as we begin to lap over it this quarter.

For Del Frisco's Double Eagle, revenues increased 2.1% to $37.9 million in the second quarter from $37.2 million in the year-ago period. This top line improvement was due to 12 additional operating weeks related to our Orlando, Florida opening during the third quarter of 2015. Comparable restaurant sales during the quarter decreased 1.9%, consisting of a 0.7% decrease in average check and a 1.2% decrease in traffic.

For Sullivan's, revenues increased 0.6% to $17.6 million in the second quarter from $17.5 million in the year-ago period. This increase in revenues was due to a 2.9% increase in comparable restaurant sales, consisting of a 1.1% increase in average check and a 1.8% increase in traffic. This increase was partially offset by 10 fewer operating weeks during the quarter as a result of a restaurant closure last year.

Average weekly sales for Sullivan's increased from $77,000 in the second quarter of 2015 to $81,000 in the second quarter of 2016.

For Del Frisco's Grille, revenues increased 27.6% to $24.4 million in the second quarter from $19.1 million in the year-ago period. This top line improvement was due to a net 45 additional operating weeks related to openings in the last three quarters of 2015, and was partially offset by a decrease in comparable restaurant sales.

Comparable restaurant sales decreased 2% driven by a 1.7% decrease in average check and a 0.3% decrease in traffic. There were 11 restaurants within the Grille comparable base during the second quarter, out of the total of 20 restaurants operating. Average weekly sales for the Grille increased from $98,000 in the second quarter of 2015 to $102,000 in the second quarter of 2016.

Turning to costs, total cost of sales as a percentage of revenues improved by 50 basis points to 28.3% from 28.8% in the year-ago period, primarily due to the continued downward trend of beef cost which fell about 5% year-over-year in the quarter as well as the benefit from the Grille's growing weight on the restaurant portfolio.

By concept, Del Frisco's cost of sales as a percentage of revenue held steady year-over-year at 29.6%, Sullivan's experienced a 100-basis point improvement to 29.7%, and the Grille experienced a 30-basis point improvement to 25.4%.

Restaurant operating expenses as a percentage of revenues increased by 120 basis points to 47.6% from 46.4% in the year-ago period. By concept, Del Frisco's operating expenses as a percentage of revenue increased by 140 basis points to 40% as we experienced deleveraging on fixed costs in certain locations, and incurred higher repair and maintenance costs overall during the quarter.

Sullivan's operating expenses improved 60 basis points to 52% as a percentage of revenue due to leveraging achieved on increased comparable restaurant sales as well as continued initiatives to improve labor and reduce other restaurant operating expenses.

Finally, the Grille experienced a 40-basis point increase to 51.6% with higher labor cost due to minimum wage increases as well as deleveraging on fixed costs related to decline in the average check.

Marketing and advertising costs increased approximately $400,000 from a year-ago, which represented a 30-basis point increase as a percentage of revenue. Taking all these together, restaurant-level EBITDA increased 3.8% to $17.1 million in the second quarter from $16.5 million in the year-ago period, while the margin decreased to 21.4% versus 22.4% in the prior year.

By concept, Del Frisco's restaurant-level EBITDA margin decreased 180 basis points to 28.1% due to the higher restaurant operating and marketing expenses. Sullivan's restaurant-level EBITDA margin increased 140 basis points to 15% due to lower cost of sales in restaurant operating expenses, which was slightly offset by higher marketing and advertising cost.

Del Frisco's Grille restaurant-level EBITDA margin held steady at 15.6% as improvements in cost of sales and marketing expenses were offset by higher restaurant operating expenses. Pre-opening cost during the quarter decreased to $0.6 million from $1.5 million last year due to the timing of new restaurant openings versus the prior year.

General and administrative expenses increased slightly to $6.0 million from $5.9 million in the prior year, but as a percentage of revenues decreased 50 basis points to 7.5% from 8.0%. Our depreciation and amortization expenses increased to $4.2 million from $3.6 million due to new restaurant development as well as refresh expenditures over the past year. As a percentage of revenues, depreciation and amortization increased 30 basis points to 5.2%.

Taking these together, we generated net income for the second quarter of $4.4 million or $0.19 per diluted share and this compared to the prior year net income of $3.7 million or $0.16 per diluted share, nearly 20% increase.

In terms of our liquidity and balance sheet, as of June 14, we had cash and cash equivalents of approximately $4.6 million and no outstanding debt under our credit facility. During the second quarter, we did not repurchase any shares of outstanding stock.

Finally, we are reiterating our 2016 earnings per share outlook for the 52-week period ended December 27, 2016 although we have made some adjustments to the ranges of our comparable restaurant sales and cost of sales outlook. Specifically given the performance of the first half of the year, we have reduced the top end of our comparable restaurant sales range from 1.5% down to 1.0% and lowered the cost of sales range by 20 basis points.

For details on this outlook, please refer to our earnings press release. With that, I will now turn the call back to Mark.

Mark S. Mednansky - Chief Executive Officer

Thanks, Tom. Before we go to Q&A, let me update you on our development plan for the balance of 2016 and beyond. Let's start with Del Frisco's Double Eagle Steak House. Our relocation project from North Dallas to Uptown Dallas is progressing nicely. This is going to be a dynamic Del's, and we're expecting to open our doors to this vibrant area early in our fiscal fourth quarter.

We were there last week on-site with management, both culinary and front of the house, and the excitement is tremendous, walking in this restaurant with an exceptional balcony and patio, overlooking a park, facing The Ritz-Carlton, in the middle of the biz district, (17:19) business and the social center of Uptown Dallas. This should be a great Del Frisco's for us.

Next year, we have also announced we'll open a Double Eagle in Plano, Texas, in the $2 billion Legacy West development, again the right place, the right times for the growth of the Double Eagle.

Turning to Del Frisco's Grille, we opened in Huntington, Long Island, New York early in our fiscal third quarter. This restaurant is located at the newly developed Walt Whitman Shops, which is a perfect fit for our approachable and energetic restaurant in this trade market. We are extremely pleased with our initial sales and guest feedback. This has been a tremendous reception for us in Long Island.

In mid-October, we'll open a Grille in Nashville, Tennessee on the ground floor of a new mixed-use building in The Gulch area, that's between downtown and uptown in a new growing hot area of Nashville. Then in late November this year, we're going to open a Grille in Brentwood, Tennessee, which is an affluent suburb of Nashville, and that's just in time to welcome the holiday traffic.

Just a reminder to all that this Brentwood location was originally expected to open in Q1 of 2017, so we're excited to be opening ahead of our original schedule. Now, these two Nashville area restaurants are approximately 30 minutes away from each other and they're in different trade areas, but we will be applying the learnings of what we get from Nashville as we're on the ground right now for our Brentwood opening that will be coming later in the year. But, we're going to use the proximity of these two locations and use their synergies in areas of managerial oversight, training and publicity.

Please note that our current portfolio of Grilles average about 8,400 square feet. Our two Grilles in Nashville will be below 8,000 square feet and then beginning in 2017, we intend to reduce the Grille's footprint by approximately 1,500 square feet to create a more scalable, more efficient, more cost-effective growth vehicle.

This past year, we have been working hard to develop a prototype with optimal efficiency at 6,500 square feet to 7,200 square feet. This Grille of future will enable us to better manage labor cost by improving productivity and mitigating the impact of future minimum wage increases, while improving the pacing in both our dining room and back of the house, and we're going to do this with fewer labor hours.

This also increases our real estate options, while allowing us to maintain the upscale and very distinctive experience our guests enjoy, with approximately the same amount of seatings but at a substantially reduced build-out cost. This is real important for the future growth and profitability of the Grille concept.

Last month, we announced an exciting lease signing for a new downtown New York Del Frisco's Grille at Manhattan's Brookfield Place. This is slated to open next summer. This smaller footprint Grille encompasses two levels with expansive outdoor space for dining, drinks and socializing. The downtown Grille will complement our midtown Rockefeller Center location, which we have successfully operated since 2011. This Grille will attract guests seeking a modern and social destination in the financial district. This patio and its location is truly exceptional, and our team is very excited to build another New York City Del Frisco's Grille.

We have also signed a lease for a Del Frisco's Grille in Westwood, Massachusetts, that's a suburb of Boston to the southwest, and again, an affluent suburb. This restaurant will complement our existing Grilles in the Greater Boston area. Additional restaurants will be named in the coming quarters as leases are signed.

So to conclude, we're solidifying our foundation and are fortunate to have the right team in place to execute our initiatives effectively and efficiently. With the first half of the year behind us, we're confident that this transitional period will become a stepping stone for strong future growth of our three next-generation brands.

So with that, operator, we will turn the call over to you. We will open up the lines for any questions from our listeners.

Question-and-Answer Session

Operator

Thank you. And we'll take our first question from Nicole Miller with Piper Jaffray.

Nicole M. Miller Regan - Piper Jaffray & Co. (Broker)

Thanks, good morning. I was wondering if you could help characterize the oil impacted markets, how much pressure that is? And then, as oil maybe is bouncing off the bottom, what's the lagged (22:49) improvement? So, is it a certain level of an oil price, or is it the duration that it stays at that price that you will see an improvement in those markets?

Thomas J. Pennison Jr. - Chief Financial Officer

Thank you, Nicole. Good to hear you this morning. To start with the magnitude, when you look at three locations on a 40-comp base having 140 basis points impact, as you can imagine, they are definitely double-digit negatives of the three locations in Houston and that's the three that we're referencing, one in each concept. It's pretty much the lowest performer in each of the concepts. So, that has had a magnitude of -- it's north of 10%, less than 20%, but toward the higher end of that range. As we see the -- I don't know that today it as much ties to a specific stock price as well as it's the sentiment of what people feel about their jobs there, and there's still some companies that are doing layoffs there.

Mark S. Mednansky - Chief Executive Officer

Yes. Hey, Nicole, it's Mark. Good morning. As you know, and I know you really understand this, the high-end consumers' sentiment and their confidence level really determines the spend in our segments with the upscale diner. We believe that once it has stabilized, which we're starting to see somewhat, this stabilization, hopefully a floor, with upward mobility coming. We're starting to hear from our general managers who talk to their guests in the industry that they're starting to feel better, and once they have cleared a hurdle, and that hurdle always is that they see daylight, that's when they start spending more in entertainment.

So we think that's coming, but we have not put that down in our model for this year. We're going to slug through this year and, hopefully, next year we'll see the rebound in those cities, the Houstons, the Denver, the Baton Rouge, somewhat in Dallas, and that's about it. So we're going to hold the line this year and look for improvement in 2017.

Nicole M. Miller Regan - Piper Jaffray & Co. (Broker)

And then just one last follow-up. The advertising line, it was down in 1Q, up in 2Q. Where do you expect it, just so we can have better models for 3Q and 4Q? Would there be any notable difference in those quarters year-over-year, or will they just be kind of flattish?

Thomas J. Pennison Jr. - Chief Financial Officer

From our expectations on a year-over-year basis, we're expecting right now Q3 to be comparable as a percentage to prior year, and Q4 -- probably a little bit of leveraging in Q4, but pretty comparable to prior year.

Nicole M. Miller Regan - Piper Jaffray & Co. (Broker)

Thank you.

Operator

And we'll take our next question from Will Slabaugh with Stephens, Inc.

Will Slabaugh - Stephens, Inc.

Yeah. Thanks, guys. On the Grille, I'm wondering how you would grade the operational improvements you mentioned that have been happening at the Grille so far, and then where you still see the biggest opportunity to continue to drive margin improvement here in the coming quarters?

Mark S. Mednansky - Chief Executive Officer

Great. I'll start -- I'll start with that, Will. Where we have seen an impact, an improvement with our guest feedback scores is in pacing and food quality. That's something that we took to heart last year -- said "hey, today's guests, especially the guests that would enjoy a concept like the Grille, are not only focused on great food but they're focused on pace and they're focused on a seamless yet a fun atmosphere."

I mean that's something that we hear from them and that we're seeing, and we're moving in the right direction. So, I would say that our pacing is getting much better, always room for improvement, but we're moving in the right direction.

Quality of food, really that the consistency of the preparation of food has improved and we continue improving, part of that is through some new equipment in the kitchenette, some of it is training and some of it was really trying to make the menu a little -- while still providing a great experience, trying to consolidate the items to make them easier to execute during those prime times. Our culinary team has worked hard and has had a good response.

Moving forward, we continue now -- this last two quarters -- to really look at the data and analyze it and see what else is left. One of the things, Will, that we're very excited about is all the work we have been doing for the past 12 months with third-party providers working on this prototype for the Grille of the future really has -- it's all said about, not just lowering the space, it's not just about lowering the build-out costs which will help ROI but it's also to help us better take care of our guests in the future.

So the smaller kitchens, not only are they going to be more efficient, less time consuming for product, less labor needed, but they're going to take a lot less space. You know, we keep saying that substantially the same amount of seats, you know in 1,500 less square feet but, as the model stands today, we're actually going to pick out a few seats in this new Grille of tomorrow, lower the cost of the build-out and we think help the efficiency of the production of food and beverage in our restaurants.

Will Slabaugh - Stephens, Inc.

Got it thanks. And one more quick follow-up on the Grille, if I could, curious if you could talk about for the lunch versus dinner dynamic that you saw this quarter. Clearly, you have done a really good job of driving sort of the guest who might have wanted more value, and has found it now at launch, with the 6% plus comps there. I'm curious sort of what you have been seeing at dinner, why you think that might have slipped a little bit further, if that is just more sort of oil market driven, and then what initiatives you can put in place to get that dinner guest coming more frequently?

Mark S. Mednansky - Chief Executive Officer

Yes. Well, listen I want to be clear, the oil energy slowdown has not affected the brands. We're talking about individual stores. So I don't want to make that as an excuse that the dinner business isn't as robust as we want it right now.

But what we are seeing at lunch, there are things that we can apply to dinner, Will. I firmly believe in our guest status shows that our guests today who come in to Grille, they don't want to be rushed, but they want things at their pace. And as you know, you're busy, we're all busy, and we're taking some of the pacing issues that we focused on at lunch and we're applying them now to dinner.

We firmly believe that once our guests try us we're able to keep them, but we need to find an effective, efficient use primarily of social and digital marketing to drive the awareness of our dinner business, and that's -- we're testing some items right now across our store base. And you will be hearing from us soon on what we'll be doing to increase the messaging for dinner at the Grille, and that's where we hope to see a pickup in guest traffic at the Grille.

Thomas J. Pennison Jr. - Chief Financial Officer

I'll add there, Will, as we look at the Grille portfolio, overall there's much more I would say confidence in the Grille. We're seeing more positive things happening where we still have a few locations that really had not concept issues, but call it event issues in their areas that may have had some negative impact during the quarter that impacted some of our traffic, especially at dinner in certain key really prominent locations for us that are high indexing.

So as far as the number of restaurants that were positive for us both in traffic and sales in the Grille is increasing. And like I said, you kind of feel it when that movement is starting and we're definitely more encouraged as we go forward with it to where it's not an across the board that dinner is suffering, it's just a handful of locations. When you're dealing, once again, with a very small base and we're dealing with small numbers with single digits, positive and negative, it doesn't take much to impact that. But overall, we're definitely more encouraged with what we're seeing.

Will Slabaugh - Stephens, Inc.

Understood. Thank you.

Operator

And we'll take our next question from Brett Levy with Deutsche Bank.

Brett Levy - Deutsche Bank Securities, Inc.

Good morning.

Mark S. Mednansky - Chief Executive Officer

Brett.

Brett Levy - Deutsche Bank Securities, Inc.

If you could just do a favor and just expand a little bit more on what Nicole was asking about with related -- with respect to your macro thoughts, not just the energy impacted, but also what you're seeing behaviorally from your core customers, whether that is across dayparts, whether that's across how they're driving the check, ancillary items, wine, private dining. And then also, if you could give us a little bit more detail on your commodity and labor with respect to wage rate inflation, turnover and also what level of supply is locked in and at what kind of inflation especially on beef.

Mark S. Mednansky - Chief Executive Officer

Hey Brett, I'm writing really fast your questions, but I didn't get it all. So let me start. I'll let Tom fill in with some of the cost issues here. But, as far as the general overall macro, there's still some choppiness. Tom will give you the exact numbers, but we ended the quarter strong. The first period of Q2 was good, it was strong, it was positive, and we just hit April. And it was just a bad month and it wasn't energy-related, it wasn't -- it was across the board. I mean it was at three concepts, so it was the high-end dinner, it was the Grille concept. Just a slowness, a choppiness to what we saw, and that was in traffic, it was in what they were buying.

You couldn't really put your finger on it because there wasn't one or two definitive reasons what we saw, but then we -- as the quarter progressed, the third and final period of the quarter we started seeing things coming back. We start seeing guest traffic improve, the spend improve, private party bookings, not just for -- not just for the last period of the quarter but for future parties for the rest of this calendar year you start seeing it improve.

So, there's -- wherever you get into -- and we have done this now. Tom and I have been around for a while in the restaurant industry and we have a very tenured senior management team and GMs, so we have been around this. It's some of the expectations, whether it's the election, some people really watching the market on a daily basis expecting it to fall this summer, it hasn't.

And so whenever there's any hesitancy, we think it affects consumer confidence and the willingness to indulge and have a great time and take care of yourself. Because at Del Frisco's Restaurant Group, it's not just the business diner, like it isn't a lot of white tablecloth steakhouses. People enjoy our three concepts with their aspirational dollar and that's across the board.

And that's why when business travel is down, we're not as affected as some of the white tablecloth steakhouses. I tell you that, well we saw an uptick at the end of the quarter. We think that things are staged for us to conclude the year on plan as we've reiterated and looking for better results in 2017.

Thomas J. Pennison Jr. - Chief Financial Officer

And just as – since Mark kind of test on the cadence, our first period of our quarter which just everyone for the fiscal you are talking about a late March through mid-April, we were positive both in traffic as a company and sales, as we were also in our third period of the quarter which went from May 18th to June 14th, we were positive a company both in sales and traffic.

It really as Mark highlighted is that our period five which went from April 20th to May 17th, where we are really saw some significant declines across the board where there was clearly some sentiment there and changed behavior. But it rebounded for us and we have three – while the -- of the three periods, two were positive. Unfortunately, that period five was down sufficiently to offset that to where we're still slightly negative as a company.

But to go ahead on to some of your questions, we still as we have had before when it comes to beef, we do not lock in. We are seeing a favorability and that's continuing to where we are in a position to truly or fully realize the downward turn in pricing which as anticipated, we said from the beginning while we thought to be favorable in the first half of the year, we expected to be more significant in the second half of the year.

And we think that's still going to play out. We are seeing some improvements come in right now to where while we blended about 5% in Q2, we think that has the potential to be a bigger savings year-over-year in Q3 for us to realize as we go through that.

One other thing I'd speak to in sales mix is, as we have been analyzing that is one of the – especially as a steakhouse and especially at Del's which is one that we've analyzed some of the comp group kind of year-over-year is we're seeing, and I don't know with – we have always done a great job and have great quality seafood which we feature.

We've actually seen a shifting in our core comp group of a little bit heavier seafood, which is still great offerings, but the average price of some of our seafood items isn't the same as some of our high end steaks, as well as we're seeing some of that check average come off from our appetizer section, which it wasn't that we sold less appetizers, just the average price of the appetizer, there's been some shifting. Some of that has been some new introductions that have really gone over well that just have a little bit lower price in some of the items, but has increased the frequency and the items counts.

So there's some good things that are happening there. It's just the -- we're seeing some of that mix shift happening that had a little bit more negative impact on the check average than we expected going into it. But, I wouldn't say we're seeing a behavioral change that people are just not ordering as robustly. There's just been some shifting during that period.

On the labor side, we definitely continue to see some increases on an average rate, which in Q2 we definitely saw some sizable increases in our front of house. We have had some good things happen with productivity. We're very focused on productivity right now, to improve that, which when we speak to productivity, we're looking at the labor hours versus the traffic measure to really take the dollar amount to see how we're doing that. We are very focused on the Grille, which the Grille is seeing some improvements front of the house. Back of house we still have opportunities, which is why we are so focused on the back of house design. But there definitely were some significant increases that ranged from mid-single digits to double digits across the concepts and depending on the position during the period.

Mark S. Mednansky - Chief Executive Officer

Hey Brett, we took minimal menu price increases in Q2 across three brands. And of course they weren't there to mitigate food pressure since cost of beef is reducing as we speak. But, we left some powder for increased menu pricing, maybe at the end of the year, mid-fourth quarter, to help mitigate the minimum wage increases we expect, again beginning of the year for 2017.

Brett Levy - Deutsche Bank Securities, Inc.

Thank you very much.

Mark S. Mednansky - Chief Executive Officer

Yes.

Operator

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

Jeff D. Farmer - Wells Fargo Securities LLC

Thanks. Tom, I apologize. I missed a couple portions of the call, but did you guys comment on same store sales and traffic trends through the first five weeks of Q3?

Thomas J. Pennison Jr. - Chief Financial Officer

No, we have not at this point, which, once again, that starts June 15th through current. What we can say, and it's been pretty much macro out there, there's definitely been some softness where we're seeing some low-single-digit negative right now. But like I said, there is some pockets of success and improvement. It was – out of the box, there was a few rough weeks.

Jeff D. Farmer - Wells Fargo Securities LLC

So that's a consolidated number you're referencing, when you talk about...

Thomas J. Pennison Jr. - Chief Financial Officer

Yes.

Jeff D. Farmer - Wells Fargo Securities LLC

Okay. And then, as always, any update on conversations, interactions with Fidelity National?

Thomas J. Pennison Jr. - Chief Financial Officer

No, Jeff, same as the last few quarters, no conversations, no contact whatsoever at this point.

Jeff D. Farmer - Wells Fargo Securities LLC

Okay. And then just one more, Tom, you did touch on it, I think you said the 11 Grille units in the comparable store base, obviously the Houston location an outlier in terms of underperformance. But if you just sort of control and look at the balance of, let's say, the 10 Grille units in the comparable store base, common themes between those comparable restaurants that are putting up nicely positive comps and those that are still struggling to get back to positive same store sales flow, what are some of the common themes there?

Thomas J. Pennison Jr. - Chief Financial Officer

I would say one of the common themes outside of -- I mean really some of the common themes, we had a few locations where we had some leadership opportunities that we have addressed as a company, that we've seen that. Based on what we see today, there's been some other locations that initially started out soft for us that we had some concerns that are performing much better today. We're staying away as a company from getting into the minutia of individual locations anymore, but there were some that we had touched on a couple of years ago that opened up to a slow start that we're seeing some positive comp momentum finally out of those locations, and they have been growing both top line and improving their profitability as a result.

So the ones – I would say, there's many that are positive, there's some that are just slightly negative, and the ones that have had the negative -- or what I would say the ones that are more than 1%, there's clear reason. In some cases, it's a comparability issue with certain events in those locations. The others have been what I mentioned before, where we had some opportunities on some leadership which we addressed.

Mark S. Mednansky - Chief Executive Officer

Yeah, Jeff, you see the movement, I mean the management team, Ray Risley, Shang Skipper and the team at the Grille has everyone's attention, in a positive manner. I mean the team is excited with some -- you get these daily victories and they become weekly victories. The key is to get the consistency and get those weekly victories into period and then quarterly victories and – but that's how you start. You can feel it in the field, the team's jazzed and we're starting – this is starting to pick up and it's starting get sticky here. The traction is starting to happen.

Jeff D. Farmer - Wells Fargo Securities LLC

All right. Thank you, guys.

Operator

And we'll take our next question from Brian Vaccaro with Raymond James.

Brian M. Vaccaro - Raymond James & Associates, Inc.

Thanks and good morning. Just a couple quick ones from me. I wanted to ask about the Del's Double Eagle margin performance in the quarter, and I noticed the COGS were flat, you mentioned consolidated beef down 5% across the brand. What was the offset there on the Double Eagle side?

Mark S. Mednansky - Chief Executive Officer

Yes, Brian, part of it was shift. Tom talked about it. One of the things we realized years ago, and we start – we were deliberate in this, the landscape of the Diner and the upscale Diner is changing. So 10, 15 years ago, when you were building white tablecloth steakhouses, you were building restaurants that were frankly male dominated. You were building traditional looking steakhouses with wood paneling and white tablecloth and building a menu with big bone in steaks and big NapaCabs and trying to attract the businessman versus the businessperson. And not only do we as a company look at our internal base of guests as female and male driven, we look at that with our guest base.

So we -- through the designer restaurant, through the menus that we put together, we've really toned down just the big masculinity of the steakhouse brand. And what you see is exactly what Tom talked about. It's lighter items being purchased, more seafood being purchased, not just big Cabernets being sold, some lighter wines, which – a bottle Sauvignon Blanc is about $40 at a Del Frisco's versus a $200 bottle of cab, so you see some of that at the Del Frisco's brand. Our team of experienced chefs, and boy do they have tenure, they have it under hand. You will see improvements in cost of sales at Del Frisco's through this period, this quarter and for the rest of the year, but part of it more than anything else was menu mix.

Thomas J. Pennison Jr. - Chief Financial Officer

And I would say that if you break out the cost of sales between food and liquor, our food cost was slightly down, liquor cost was higher during the period of the beverage component, which once again has some mix -- similar mix components that drove that.

Brian M. Vaccaro - Raymond James & Associates, Inc.

Okay. Do you expect that liquor inflation year-on-year to continue as sort of the headwind, I'm not sure it's baked into your lower COGS guidance, but do you expect that dynamic to continue, (46:24) inflation?

Mark S. Mednansky - Chief Executive Officer

Yes, Brian, the nice thing about liquor inflation is that you're able to respond to it quicker. If you – while we haven't, we haven't taken a price increase across the board with liquor, beer and wine, but that's something that is pretty seamless, pretty easy to do as a company. And we so much at all three brands are just consistent and determined to provide value at all three levels. But we will be doing some minimal price increases on the alcohol side at the Del Frisco's Double Eagle here in the next quarter.

Thomas J. Pennison Jr. - Chief Financial Officer

Yes. And just as you just talked about the overall margin which we alluded to, the single most significant item that impacted our operating expenses for that concept was some maintenance costs, with our big boxes that are out there, we had some significant items in a few restaurants that were costly but not something that meets the capitalization test, that's more of a timing hit into the quarter.

Del Frisco's is like a big beautiful luxury liner, and because of what we are charging the guests that we serve, you can't wait until it needs to be changed out and then you can CapEx. It is a consistent, constant battle to keep them looking perfect for the guest because that's what our guests demand. And we went through with a real strong spring cleaning mindset as a management team and we spent significant funds this past quarter really making our buildings look fabulous for our dining guests.

Brian M. Vaccaro - Raymond James & Associates, Inc.

All right. That's helpful color. One last one if I could, shifting gears to Del Frisco's Grille, you mentioned seeing traction on sort of sharing the best practices from the class of 2016 back to the class of 2013 and 2014. I was curious could you share some numbers around that, maybe an update on the margins in the class of 2015, which I think have been strong and where the class of 2013 and 2014 are currently trending?

Thomas J. Pennison Jr. - Chief Financial Officer

From a class standpoint, I would highlight that the class from 2011 to 2013 continues to be strong and I would say both 2011 to 2013, the class of 2015, both of those are north of 18% restaurant level EBITDA, and they are still – the class of 2014 is dragging that down to the 15.6% that you see. We still have -- there's some improvements in several locations, there's still some opportunities, but it really is that class of 2014 that is the outliers to where that are dragging down the other classes that, like I said, are north of 18%, range between 18% and 20%.

Brian M. Vaccaro - Raymond James & Associates, Inc.

Great. And last one, Tom, can you just on the pricing, the effective menu pricing currently by brand, can you remind us by concept on that front?

Thomas J. Pennison Jr. - Chief Financial Officer

The overall branded was 1.2, which is pretty much -- it was pretty tightly around probably like 0.9 to 1.3, with the actual I believe the lowest was at Del's at 0.3 – excuse me at 0.9. And then I think the highest was at -- actually I think we are kind of Sullivan's at 1.3 and the Grille is right in that at 1.2.

And a lot of that comes into geographic locations. We have three Grilles in California. We have a Grille in New York area, clearly California, Chicago and New York have led, as well as on Sullivan's side had some markets where some significant minimum wage increases were taking place also. It's really about labor where our pricing is focused right now. Commodities, we really feel like that's going to be a tailwind for us. We talk about beef a lot because obviously that's very important to our concepts which is going to be favorable, but we have also had some favorability outside of beef too, to where we really feel good about the commodity basket through the end of this year.

Brian M. Vaccaro - Raymond James & Associates, Inc.

All right. Thank you.

Operator

And we'll take our next question from Jordy Winslow with Credit Suisse.

Jordy Winslow - Credit Suisse Securities (USA) LLC (Broker)

Hi. Good morning. This is Jordy on for Jason. Would you say that you're already rolling over the same-store sale declines in emerging markets from a year ago or did that happen later?

Mark S. Mednansky - Chief Executive Officer

That's later in the -- we saw it most pronounced in our period nine and really the second half of period eight. It was definitely in the second half of Q3. So we have not lapped over that just yet. But we'll definitely start seeing that set -- we're in our period eight right now, and we'll start seeing that in a couple of weeks where we lap that. And then, the period nine is where we start some, it was especially driven towards the private dining is where we saw it very sizably in period nine last year for both our Del's and Sullivan's concepts that we will be lapping over.

Jordy Winslow - Credit Suisse Securities (USA) LLC (Broker)

Okay. That's helpful. Thank you. And just one more at the Grille, I mean to what extent do you think lunch could be cannibalizing sales at dinner?

Mark S. Mednansky - Chief Executive Officer

That's a great question. It's something that we looked at, but from what we have seen from our data and what we see from our managers, Jordy, as you know, you've met many of them, they're the best in class and they know their guests, they talk to their guests and that's not the case.

The lunch guests today, especially at the Grille, they work within a 10 minute at the most walk or drive, that's it. That's everywhere in the country. So these are people who work, come in, enjoy lunch and then they go to where they live, whether it's 30 minutes away or an hour away. So it hasn't cannibalized dinner. And again, we believe firmly that it will be a great stepping stone, not just for dinner, but for happy hour as we put these happy hours in across the base of the Grille and we have a spectacular brunch that we will start pushing to our lunch guests here real soon.

Thomas J. Pennison Jr. - Chief Financial Officer

And I would add, Jordy, the increase are outpacing lunch for us is not a surprise, because out of the box we did not do a great job with pace and we had strong lunch when we -- usually when we first open restaurants, we were having strong lunch day part, but what took place is we didn't have the pace early on and we were losing the lunch business at a faster rate than the dinner business, because people are more comfortable with a longer dinner. And we've done a much better job on that pace component, so the strength of our lunch is maintaining and growing. And no different than our most recent opening here in Q3 in Huntington, we're seeing a very strong lunch and dinner day part out of the box.

Mark S. Mednansky - Chief Executive Officer

Yes, Huntington actually because it's in a -- the Walt Whitman shop is very upscale. We're getting a nice push late afternoon. So we're getting lunch, late afternoon and dinner, so very, very pleased with that opening.

Jordy Winslow - Credit Suisse Securities (USA) LLC (Broker)

Got it. Thank you.

Operator

And that concludes today's question and answer session. I would like to turn it back over to management for any additional or closing remarks.

Mark S. Mednansky - Chief Executive Officer

Listen, everybody. We really thank you for joining us and as always if you need to get a hold of us for questions, Tom and I always try to be available. Go out, check it out, go out to our new Grille in Walt Whitman and I think you will see the excitement of the brands.

Can't wait for you to see our new Del Frisco's in Dallas. Hopefully, some of you can make it to the opening and see what we do, and then we'll end the year strong with two Grilles in the Nashville area. Have a great day and thank you, everyone.

Operator

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

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