Del Frisco's Restaurant Group's (DFRG) CEO Mark Mednansky on Q3 2016 Results - Earnings Call Transcript

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Del Friscos Restaurant Group (NASDAQ:DFRG)

Q3 2016 Earnings Conference Call

October 14, 2016 8:30 AM ET

Executives

Mark Mednansky - Chief Executive Officer

Thomas Pennison - Chief Financial Officer

Analysts

William Sherrill - Stephens Inc.

Nicole Miller Regan - Piper Jaffray & Co.

Brett Levy - Deutsche Bank

Brian Vaccaro - Raymond James & Associates, Inc.

Jason West - Credit Suisse

Joseph Gomes - Wm Smith & Co.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Del Friscos Restaurant Group Incorporated Third Quarter 2016 Earnings Conference Call. Todays 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 Pennison

Thank you, Ashley, and good morning, everyone. By now, you should have access to our earnings press release for the 12-week period ended September 6, 2016. If you have not already reviewed it, it 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 todays 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.

Additionally, we will also be referring to restaurant-level EBITDA and adjusted net income this morning, which are both non-GAAP measures. We have, therefore, provided a reconciliation of these measures in the earnings press release tables to the most directly comparable financial measure, presented in accordance with GAAP.

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

Mark Mednansky

Thank you, Tom. Good morning, everybody. Our seasonally slow fiscal third quarter yielded lower overall topline growth and negative comparable restaurant sales across all three of our restaurant concepts. This led to deleveraging at the restaurant level, although we were able to hold adjusted EPS steady compared to the year-ago period.

We experienced sales choppiness throughout the quarter, although we were encouraged that our guests began to indulge and spend more. In addition, through the first five weeks in the fourth quarter, our comparable restaurant sales trends are positive at Del Friscos Grille; slightly positive at Del Friscos Double Eagle; and slightly negative, single-digit negative, at Sullivans.

Due to our lower than expected sales and profitability in the third quarter, we have lowered our annual guidance for both sales and earnings per share. While were encouraged by our Q4 sales trends, were making this revision out of caution due to the current softness in our industry.

Now lets look at the individual brands in further detail. For Del Friscos Double Eagle Steak House, comparable sales decreased 3.7%, driven by a 6.8% decrease in entrée counts and partially offset by a 3.1% increase in average check. About half our restaurants generated positive comps, but the two locations with greater exposure to the energy industry continued to experience weakness.

In addition, a significant reduction in European summer tourists and the devaluation of the British pound earlier this year negatively affected our late-night sales on our East Coast Del Friscos. Regarding profitability, Del Friscos restaurant-level EBITDA fell 110 basis points to 23.2%.

Cost of sales decreased due to more favorable beef costs, while modest price increase kept labor costs steady. Still, we experienced higher operating costs due to the deleveraging effect of lower sales and experienced higher operating costs during the refurbishment of our flagship New York Del Friscos location.

Turning to Sullivans Steakhouse, comparable sales decreased 3.2% during the quarter, driven by a 3.6% decrease in entrée counts and a 0.4% increase in average check. The decrease in comp sales unfortunately masked the progress we continue to make in rejuvenating the brand across our four pillars: leadership, menu, messaging and remodeling.

Were committed to revitalizing our restaurants, as evidenced by our current full remodel of our Sullivans Naperville location, which will modernize the design and the decor while maintaining many elements and make this location so appealing to our loyal guest base. This month, weve been celebrating Sullivans 20th anniversary with a great dining deal: a three-course meal for $35.

And then in the spirit of this milestone, weve also launched new food and wine pairings. Regarding profitability, Sullivans restaurant-level EBITDA margin decreased 200 basis points to 9.3%, as slightly lower cost of sales was not sufficient to offset deleveraging across fixed management and occupancy costs.

Now lets turn to Del Friscos Grille. Comparable restaurant sales decreased 1.4% during the third quarter, driven by a 1.7% decrease in guest counts, partially offset by a 0.3% increase in average check; and did improve sequentially throughout the quarter to end up positive in the last period of Q3. This momentum has continued into the fourth quarter. Just to note, the one Grille location with the most energy-related exposure did have a 140 basis point drag during the third quarter for the Grille.

We have great confidence in the Grille despite the macro challenges that weve been facing and our initiatives are gaining traction. We are particularly encouraged by our guest satisfaction scores, which have been rising year-over-year and sequentially for six consecutive months. Across several criteria that include overall satisfaction, food quality, pace of dining and willingness to recommend, we are seeing that guests are valuing the constructive steps weve taken to improve their dining experience.

Once again, we are also seeing greater strength at lunch versus dinner at the Grille because its being recognized as everyday affordable, upscale dining and a drinking destination across multiple day parts. We expect all these guests to return to experience our more accretive dinner and our fun brunch business.

Regarding profitability, the Grilles restaurant-level EBITDA margin held steady at 12.7% compared to last years period, as favorable cost of sales offset higher labor costs. Notably, while weve improved labor productivity during the third quarter versus prior year, this was more than offset with increased wage rates.

Now as you may recall, weve been spending 2016 building a stronger foundation for our brands. What then will pay dividends for years to come? The leadership in structural changes, the focus on operational excellence, innovative marketing, much stricter site selection discipline and a development of a new prototype design for Del Friscos Grille are collectively serving as a bridge between this transitional period and what we believe will be a better and stronger 2017.

And with that, Ill turn it back over to our CFO, Tom Pennison.

Thomas Pennison

Thank you, Mark. For the 12-week period ended September 6, consolidated revenues increased 4% to $71.4 million from $68.6 million in the year-ago period. We benefited from a net 37 additional operating weeks across our concepts, which offset a blended 3% decrease in comparable restaurant sales.

During the quarter, blended comparable restaurant sales experienced a 120 basis point drag from three locations most affected by energy-related challenges. We anticipated this impact to lessen this quarter, which it did slightly, but was still significant. We do expect this condition to persist through the remainder of 2016, but should lessen in Q4.

For Del Friscos Double Eagle, revenues decreased 2.7% to $32.2 million in the third quarter from $33.1 million in the year-ago period. This topline reduction was due to a 3.7% decrease in comparable restaurant sales consisting of a 6.8% decrease in traffic that was partially offset by a 3.1% increase in average check.

There was a net five additional operating weeks related to the Orlando, Florida opening during the third quarter of last year, which were offset by three loss weeks related to our closure of the Dallas, Texas location preceding its relocation.

For Sullivans, revenues decreased 3.2% to $15.2 million in the third quarter from $15.7 million in the year-ago period. This reduction in revenues was due to a 3.2% decrease in comparable restaurant sales consisting of a 3.6% decrease in traffic that was slightly offset by a 0.4% increase in average check. Average weekly sales for Sullivans decreased from $72,500 in the third quarter of 2015 to $70,100 in the third quarter of 2016.

In addition to the continued softness in energy-related areas, comparable sales were negatively impacted by loss operating days and reduced operations in our Baton Rouge, Louisiana location related to the significant flooding that occurred during the quarter in that area.

For Del Friscos Grille, revenues increased 20.9% to $24.1 million in the third quarter from $19.9 million in the year-ago period. This topline improvement was due to a net 32 additional operating weeks related to the openings in the back half of 2015 and the Huntington, Long Island location opened in the third quarter this year. These were partially offset by a decrease in comparable restaurant sales.

Comparable restaurant sales decreased 1.4%, driven by a 1.7% decrease in traffic slightly offset by a 0.3% increase in average check. There were 13 restaurants within the Grille comparable base during the third quarter out of a total of 21 restaurants. Average weekly sales for the Grille increased from $91,000 in the third quarter of 2015 to $96,000 in the third quarter of 2016.

During the quarter, we saw a sequential improvement in comparable restaurant sales for the Grille with the last period of the quarter being comp positive. All three concepts are tracking better in comparable restaurant sales quarter-to-date in Q4 versus Q3 with both Del Friscos Double Eagle and the Grille positive through the first five weeks of the quarter.

Turning to cost, total cost of sales as a percentage of revenue improved by 70 basis points to 28.3% from 29% in the year-ago period primarily due to continued favorability in beef costs. By concept, Del Friscos cost of sales as a percentage of revenue experienced a 60 basis point improvement to 29.7%. Sullivans experienced a 30 basis point improvement to 30% and the Grille experienced a 40 basis point improvement to 25.5%.

Restaurant operating expenses as a percentage of revenue increased by 190 basis points to 52.4% from 50.5% in the year-ago period. By concept, Del Friscos operating expenses as a percentage of revenue increased by 120 basis points to 44.6% as we experienced deleveraging on fixed costs in certain locations related to reduced comparable sales during our seasonally slowest quarter.

Sullivans operating expenses increased by 300 basis points to 57.4% as a percentage of revenue as we experienced deleveraging on fixed management costs and occupancy costs.

Finally, the Grille experienced a 70 basis point increase to 59.7% due to the deleveraging on fixed management costs and higher hourly labor costs. While our team achieved improved productivity versus the prior year, it was not sufficient during the quarter to offset minimum wage increases.

Marketing and advertising costs held steady at $1.8 million compared to a year-ago period, but did improved 10 basis points as a percentage of revenue. Taking all of these together, restaurant-level EBITDA decreased 3.3% to $11.9 million in the third quarter from $12.3 million in the year-ago period, while the margin decreased to 16.7% versus 18% in the prior year. Pre-opening costs decreased to $1.3 million from $2 million last year due to the timing of new restaurant openings versus the prior year.

General and administrative costs held steady at $5.2 million compared to the prior year period, as increases in management education expenses and infrastructure investments were offset by lower short-term incentive compensation. As a percentage of revenues, general and administrative costs decreased 40 basis points to 7.2% from 7.6%.

Depreciation and amortization expenses increased to $4.3 million from $3.8 million due to new restaurant development as well as refresh expenditures over the past year. As a percentage of revenues, depreciation and amortization increased 40 basis points to 6%.

Included in other expense, we incurred a $500,000 charge to clear an easement right on the property of our Dallas, Texas Del Friscos location that we closed during the quarter. This clearance of this easement was required to complete the sale of the property. Taking these together, we generated GAAP net income for the third quarter of $0.7 million or $0.03 per diluted share and this compared to a prior year GAAP net loss of $1 million or $0.04 per diluted share.

On an adjusted basis, net income was $9 million or $0.04 per diluted share in both periods. As detailed in our press release, the adjustments primarily add back the aforementioned $500,000 easement charge in the current year quarter and a $3.3 million impairment charge in the prior year and implies a 30% effective tax rate.

In terms of our liquidity and balance sheet. As of September 6, we had cash and cash equivalents of approximately $0.8 million and no outstanding debt under our credit facility. During the third quarter, we did not repurchase any shares of outstanding stock. As of the quarter end, we still have $22 million in authority remaining under the approved repurchase program.

Finally, due to the results year-to-date, we are revising some of our guidance for the 52-week period ended December 27, 2016. The specific guidelines that we are adjusting are as follows. We now anticipate our annual comparable restaurant sales to be minus 1% to minus 0.5%. This factors in the results year-to-date but does represent a positive comparable restaurant sales expectation during the fourth quarter.

Cost of sales of between 28.3% to 28.6% of consolidated revenues, restaurant-level EBITDA of 20.9% to 21.1%, general and administrative costs of approximately $24.5 million to $25 million, pre-opening costs of approximately $3.6 million to $3.8 million and an effective tax rate of approximately 29.5% to 31%. Given these changes, we now look for adjusted earnings per diluted share between $0.79 and $0.81.

With that, Ill now turn the call back to Mark.

Mark Mednansky

Thanks, Tom. Before we go to Q&A, let me review our recent and upcoming developmental activities. Starting with Del Friscos Double Eagle. Last month, we opened at McKinney & Olive, which is frankly the most remarkable building in Uptown Dallas.

Our nearly 13,000-square-foot restaurant features modern design elements and luxurious touches, including a second-story terrace that offers sweeping views of Uptown and Downtown Dallas. We are very pleased with the guest and media reception we received, which has created a real buzz around this restaurant and helped drive strong initial sales.

In fact, were thrilled that Zagat just recognized this restaurant as one of the top 15 sexiest restaurants in the country. Were welcoming a healthy mix here of guest of all ages, including many local and loyal patrons that used to dine at Dels on Spring Valley Road. They have come to experience the hospitality and the culinary excellence that our namesake brand is so well-known across this nation. And now we have this new beautiful and vibrant setting to welcome our guests in Dallas.

Under the direction of our culinary team, were also serving some exciting new menu items, which we may roll out to future – in the future to other Del Friscos. And by opening ourselves up to a whole new group of guests in Uptown, we are also setting the stage for our Double Eagle in Plano, Texas, which will open next year in a $2 billion Legacy West development.

Turning to Del Friscos Grille, we opened a restaurant in Huntington, Long Island early in our fiscal third quarter at the newly-renovated Walt Whitman Shops where guest feedback and initial sales have also been quite strong. At the end of this month, well open our next Grille in The Gulch area of Nashville, and thats between Downtown and Music Row. And in late November, well open a Grille in Brentwood, an affluent Nashville suburb, just in time to welcome the holiday traffic.

Although these two restaurants are in different trade areas, were going to benefit from synergies in areas of managerial oversight, training and publicity. You may recall that the Brentwood location was expected to open in early 2017, so were excited to be opening ahead of our initial schedule. These Nashville area restaurants also reflect our intention to create a more scalable, more efficient and more cost-effective growth vehicle for the Grille. Both of these restaurants are less than 8,000 square feet, which is below our current portfolio average of 8,400.

However, our future prototypical restaurants will target a square footage range of 6,500 to 7,200 square feet. The design efficiencies of the Grille of the future prototype will facilitate better labor cost management to higher productivity that will help mitigate future wage headwinds. It also creates more real estate options with this smaller footprint. Its going to have similar seating if not more capacity and an environment where our guests can still enjoy the upscale and distinctive experience that we offer, but at a substantially reduced build-out costs.

In May of next year, we are going to open in Manhattan, at Brookfield Place. This smaller-footprint Grille encompasses two levels with expansive outdoor space for dining, drinks and socializing to attract guests seeking a more modern and fun destination in the financial district. We are really excited about this location, as it has all the sales drivers that anyone would want. Strong office density, high-end hotels, high-end shopping and a strong, growing residential population, which provide for dynamic lunch and dinner throughout the week.

We have also signed a lease for a Grille in Westwood, Massachusetts and thats southwest suburb of Boston. This location will open either late 2017 or early 2018. And it all depends on landlord delivery timeframe and will complement our existing Grilles in the greater Boston area. We are also in various stages of negotiation on multiple additional outstanding sites.

In closing, we certainly cant describe Q3 as a banner quarter for our business, but we made strides with our organizational initiatives and progress in solidifying our foundation to strengthen our brands, particularly at the Grille. Our passionate and driven team will build on the momentum that weve experienced so far in the fourth quarter. And we will work tirelessly to improve our operational metrics to closeout this year strong.

So with that, operator, I am going to turn it over to you and open the lines and take any questions from our listeners.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Will Slabaugh with Stephens Inc. Please go ahead.

William Sherrill

Hey. Thanks, guys. This is actually Billy on for Will this morning. I just wanted to ask, could you speak a little bit more to the year-over-year comp cadence during the quarter and into that first five-week period of the fourth quarter of last year so we can get a better idea of the improvement you are seeing?

Thomas Pennison

Sure. We actually had a varying cadence among concepts. So as we touched on already, the Grille came out of the box really tough in our period seven, which with our fiscal calendar the period seven starts at the really tail end of June, but we saw that was the worst period for us. The Grille was only slightly negative middle of the quarter and then was nicely positive in our last period of the quarter.

As we alluded to already, were seeing that positive momentum continue into Q4, which is, with a lot of the initiatives we put in place, as Mark and I have shared, really sensed it early part of this year, is that we felt pretty confident we should be able to bring the Grille to positive comps by the end of this year, specifically Q4. We were definitely disappointed by what we saw in macro spending in Q3 because it could have really been stronger with some of the initiatives.

As we look to the other concepts, there were really a lot of individual stories that were going on. We try to stay away from individual stories, but on Del Friscos outside of the ones in the Houston area, we saw in the Northeast we were still having some challenges, as Mark alluded to, with the tourism, with our mid-day dining that really intensified in the middle and late in the quarter.

So for Dallas, for example, while it is positive, going more positive now in Q4, we did see it more challenging middle and late Q3 and right into the core of the summer tourism time. And we also had that played into it. We had some restaurant weeks that moved from Q3 to Q4 that impacted one of our high-volume Dels. And we had construction in front of another Dels. You have all of those things in a low-volume quarter.

As you guys all know, Q3 is low seasonality, so these things have greater impact in Q3. And thats why for Dels we saw it go from that strong negative to being right back to positive now as were getting into the better time of the year. And then with Sullivans, in addition to – Mark alluded to some of the remodel work we are doing in Naperville, which that restaurant had some of its rooms that were limited in use, but its still in the comp base and we also had Baton Rouge impact us. So for Sullivans, we had the greatest impacts around the time of the flooding in Baton Rouge, which was the middle of the quarter. So Id say each concept was different.

Mark Mednansky

Yes. Billy, this is Mark. Good morning. What was very encouraging to our team was it started off tough in the summer. And you always worry during the summer months when its slow, when the guests arent coming in to the same rate you expect and are spending in it. What was very encouraging was the spend of the upscale guests. And thats really different than what youre seeing in retail and in other factors that we look at, so we were pretty excited. As you all know, we had a little less than 1% menu increase that were going on.

So its not menu pricing. Its our team offering our guests to live it up a little more and willingness of the guests to spend. So when we closed out Q3, in all three brands there was an upbeat in our morale of our team. And some of the individual stories that held us back in the last period for two of the brands, we knew what it was. We were positive. And weve got into the Q4 positive with the two brands and slightly negative at Sullivans, with the Sullivans team still carrying out our four pillars and moving forward.

William Sherrill

Got you. Thats very helpful. Just one quick follow-up, if I could, just regarding the new prototype of the Grille. I believe, you have spoken to its going to focus more on the back of house. Just wondering, one, is there an opportunity to capture any of those efficiencies by maybe retrofitting some of the older Grilles? Or is that already in place there? And then the second part being, can you give us a number on, you said substantially reduced build-out costs. Can you give us an idea what that might look like?

Mark Mednansky

Yes, Billy. Its Mark. Sure, I will. Id say what I am so proud of our team. All the stakeholders at Del Friscos Restaurant Group have put in time on this project, along with some great third-party partners. Were going to be able to take this 8,400-square-foot building today, take it down under 7,000 square feet. Weve been telling everyone approximately the same scene. Actually, its were going to have a few more seats in this prototype than what we currently have.

As you stated, most of the work, its going to be done in the kitchen, but were also doing the front of the house and designing the front of the house a little better than what we did to add a few more seats by reducing the hostess area, being more efficient with bus stations. A lot of them are technical stuff that really youre going to add seats.

Now to your question, can we retrofit? In some cases, well be able to use some of the new equipment, some of the design elements in our restaurants. Not – were still going to have the same design, but what its going to do is help us be a little more efficient with labor. We think thats whats really important for the future in our industry.

Its how can we do more with less employees and thats what were working hard on. First, I want to get this, the Westwood, out of the box. I want to get New York out of the box. And then well go into refurbishing some of the older units after weve opened two.

William Sherrill

Got you. And on the build-out costs, whats that going to look like, you think?

Mark Mednansky

Yes, the build-out costs of the new one right now conservatively, if we look at the averages where weve been, were in a $700,000 to $800,000 reduction, which is pretty meaningful for the ROI calculations.

William Sherrill

Got you. Thanks a lot for taking the question guys.

Mark Mednansky

Thanks Bill.

Thomas Pennison

Thank you.

Operator

Our next question comes from Nicole Miller with Piper Jaffray.

Nicole Miller Regan

Thanks. Good morning. Great update, especially around development. What Im wondering is how do you think about the future development? When you grow the Grilles, does it need to be in conjunction with an existing or new Double Eagles? Do they do better when theyre in a market together or do they survive well out on their own separately? Do you see any trends, if theyre semi-attached, right in the same market, maybe Grilles do better?

Mark Mednansky

Hey, Nicole, what a wonderful question. What, weve seen both actually. Weve opened up in cities without a Del Friscos Double Eagle and really have opened strong. Ill just point to the West Coast. We dont have a Dels yet in California, but our Santa Monica location crushes it. We dont have a Grille in Long Island. Theres one in New York, but Huntington has taken off well; as of course, Hoboken and Atlanta, where we dont have a Del Friscos.

We have a gorgeous location in Buckhead that does extremely well. But what we have with Del Friscos Double Eagle, though, is a small base but a huge fan base that stretches across the country. And as you know, Nicole, someday, hopefully, itll be an international vehicle for us, but what were going to be doing in the future is trying to group restaurants; to make it all the efficiencies I talked about earlier, managerial, operational, publicity, marketing.

So were now going to be able to go back and fill in some of these huge areas, whether its Boston; New York; Atlanta; even here in Dallas. Look at where we have the density of the Grille. All the Grilles in Dallas do well, and they dont cannibalize one another. And most importantly, as you know, they do not cannibalize the Double Eagle.

Nicole Miller Regan

Great. Thanks. And just a last question from me, if you think about alcohol sales and then the bar food and app sales versus the main entrée sales mix, and I suppose that this would mostly be at the Grilles, what does it signal for the restaurant in-store that you would want to emphasize? Are there any patterns that you would call out?

Mark Mednansky

Well, one of the reasons - I mean there are so many reasons that we as a group decided to create Del Friscos Grille. And one of them was - not today, but in future challenging times, people still love to drink. They love to go out together. They love to entertain. They love to nosh and thats what weve built - thats part of the allure of this concept.

So we think that, when we have a vehicle that - and especially, younger people, Gen X, and to some extent millennials, have a place to go just to unwind and have a wonderful time. Were constantly working on updating the food and the drinks and keeping them fresh and vibrant at this concept.

We think that, when they need a place for dinner, when they need a place for lunch, when they need a place to celebrate, the Grille will come to mind. So it was strategic in how we did it. At times, you can lower your check average. At times, you can lower your sales because they might take seats of someone eating a steak and a bottle of red wine, but overall as a company were concentrated on guests. And thats the strength and the strength of this brand.

Thomas Pennison

And Id add to that, Nicole, with the Grille specifically, while its not across the system, we have been expanding our happy hour test. And quite honestly, we come from the history of pure steakhouses where you discount entrées as your traffic. And one of those things that we see here in Q3 was, with the exception of the first period of Q3, the Grille outperformed the two steakhouses both our second and third periods of the quarter.

We think some of that was the nature of the spending of the consumer in Q3, but we also feel we saw some great strength, in addition to the lunch, to those happy-hour periods that we added in some restaurants; and to your point, really enjoying some of the bar food menu, which in many cases had some new items we did introduce during the third quarter.

Mark Mednansky

Yes. And I want to be clearer so everyone understands and the best way to find out is to go see it yourself, but on happy-hour, we dont want to make a mistake that weve seen others make and do deep discounting just to get people in the restaurant. But its very important to us that this Del Friscos Grille still has the panache of its namesake founder, Del Friscos Double Eagle.

So happy-hour are things like lobster corn dogs and pulled pork nachos; and some really cool, innovative food slightly discounted and some cool drinks, but its not there – the happy-hour is not there just to drive traffic that is not profitable.

Thomas Pennison

But were trying to track our guests, not solely just the 100% discounted drink guest.

Mark Mednansky

100%

Thomas Pennison

Thank you, Nicole.

Nicole Miller Regan

Thank you.

Operator

Our next question comes from Brett Levy with Deutsche Bank.

Brett Levy

Good morning.

Mark Mednansky

Good morning, Brett.

Brett Levy

Thank you. If you could share a little bit more about where you were seeing the biggest pockets of consumer strength? You said half were positive, half were negative. If you could share a little bit more on the recovery in P10? Is that Texas and East Coast based on an easier comparison or was there something else within that? And then I just have a couple of technical questions.

Thomas Pennison

P10 – our period 10, we did have an easier compare versus what we were comparing in Q3. Our Q4 compares are easier than what we had in Q3 in general with P10 was our softest period a year-ago. As I alluded to, there was definitely some general consumer differences we saw, but then we had some individual areas of impact.

Obviously, we still continue to see the challenges in the Houston area, but the Dallas area, DFW area was fine. As we alluded to, it was really more in parts of the country where we had some of the tourism. We saw some of those challenges in New York, D.C. where you have a little bit more international tourists coming in. But weve seen it – weve seen those improve. Still some of them arent where wed like them to be, but weve seen that improve in P10.

Mark Mednansky

Yes. If you look – I travel a lot. I know many of you travel a lot, too. And I was inundated this summer with deals for hotels that Ive never seen before in New York City, Boston and D.C., but really in New York. Thats changing. Go get a hotel today in Boston and New York and D.C. youre going to spend $400 for a hotel in the city. We love that. And weve seen it turn around for us out there.

This was a summer tourist phenomenon in the East Coast for us. We are seeing strength. That New York store is the flagship for the brand and that New York store is positive for the year. So were bullish. This concept has gone through different cycles in the last 20 years and its always been steady, its always been strong.

And with the highly tenured leadership team, we have at Del Friscos Double Eagle, we feel great about the future. The guests are spending more money. Its not just on the East Coast. I mean, were seeing that across the country. The one area that, frankly, Tom and I thought by now, wed see a stabilization is Houston.

At the Houston area, where we have a Sullivans and a Dels and a Grille in the same trade area, theres still some slowness there. We expect that, by this quarter, to stabilize, but didnt happen. It started at the end of the third quarter last year and we were hopeful that it would stabilize by our middle of Q3. But it was tough. I mean, it was tough for us and tough for some of our competitors.

Brett Levy

Would you be able to share what beef deflation was in the quarter, whats locked, thoughts within the cost of goods for fourth quarter, any thoughts on next year as well as what kind of labor wage you saw in the quarter and your turnover. Thank you.

Thomas Pennison

Thank you, Brett. To cover your questions, in the quarter, we did see beef deflation; actually pretty nicely were just under 5% with our mix. We do anticipate in the Q4 to continue to see a favorable year-over-year commodity environment for us. I mean, there is a few areas. The most part of the commodities have been flat to lower even outside of beef. So its been a nice tailwind right now, based on the partners we work with. Next year looks to still be favorable, probably not as year-over-year reduction as we saw in 2016, but still to be some additional reduction in 2017 from 2016.

So from a commodity standpoint, we feel we will continue to be in a good position. The labor side of the equation, as far as Q3, we saw, depending on parts of the country and on a blended basis, on an effective wage rate, we saw that probably north of 5% to 6%. Now percentages can be deceiving. To put in perspective, a large portion of that is, for example, front-of-house labor where you have a tip wage.

And to put that in perspective, New York, where we do have some heavy-waiting operations, New York, from a front of the house basis, put in a 50% minimum wage increase with the tip wage that they put in place. So that weights that percentage up, but were going to see those pressures – more so, its been in Northeast and in California. Quite honestly, I dont think that we have, what Id say, a final fourth – what we think about 2017 until we get past November 8. And then well figure out just what were looking at in 2017.

Mark Mednansky

Yes. Brett, one of the great potentials for us is all this work were doing on the Grille prototype. And its not just structural. It is recipe, the makeup of the recipe. While keeping it fresh and just quality-driven, how can we perform at the same quality with less staff? And its not just in the kitchen. Its how can you design a front of the house dining room that is more efficient at the same time? Easier for service, using technology, easier for servers to get orders in to have the guest be able to leave without waiting.

Theres a lot of work right now in the hopper that our technology team, our culinary team, our training and development team are working in conjunction. Were going to rollout a lot of these improvements at the Grille, but youll see a lot of this application at Sullivans and Del Friscos in 2017 because we believe that commodities go up and down. The increased labor is going to be with us as an industry. So its so important that we get that taken care of today for future good results.

Brett Levy

Thank you, gentlemen.

Operator

[Operator Instructions] We will take our next question from Brian Vaccaro with Raymond James. Please go ahead.

Mark Mednansky

Hi, Brian.

Brian Vaccaro

I just wanted to clarify the comments on sales and the headwinds youre seeing from energy-related markets. It sounds like youre seeing the magnitude of year-on-year declines lessen in P9 or P10, but your thoughts maybe have changed a bit on how long that headwind could sustain. Did I interpret that correctly?

Mark Mednansky

I think thats a fair statement. We are starting to see it as – if you just look at a pure percentage. As weve come into Q4 period to date, its less of a drag than what it was in Q3, but we thought it would be even less than it is. So it still is a little bit heavier than we had originally anticipated, is what wed say there. But its, like you said, its getting better, just not as good as we hoped it would be at this point.

Brian Vaccaro

All right. Thats helpful. And as you think about the fourth quarter, can you give an update on what youre seeing in terms of early booking trends in private dining?

Mark Mednansky

Yes. Right now, Brian, were consistent. I say consistent with last year, but it really takes shape once you get to Halloween. I mean, its November 1, thats when the phones start going wild. But were excited about potential of holiday bookings this year. Weve added more infrastructure at our home office with the sales team. We have tenured, just outstanding sales individuals in every Del Friscos, in every Sullivans and led by a great leader.

So were being cautiously optimistic about holiday bookings. And what leads us to believe that it can be a strong Q4 that we havent – were not – we havent put it in the guidance, of course. What I like is the, personally, the willingness of our guests to spend and we werent seeing that last year at this time. So the fact that theyre spending more money is very encouraging to me.

Brian Vaccaro

Okay. And also I just wanted to ask about the relocation of the Double Eagle in Dallas to Uptown. I know its still early days, but whats your expectation in terms of the sales improvement you could see in this unit versus the run rate of the older location?

Mark Mednansky

Yes. This is a huge opportunity for this Company. So we are very proud of our restaurant on Spring Valley. Over 20 years there, built a great reputation, but frankly, that trade area just left us. It went far – for those of you who know Dallas, it went far north to Plano and Frisco or went to Uptown and Downtown. So even though it was emotionally a tough decision, it was an easy business decision to close that restaurant and build in Uptown.

Now to give you an idea, the restaurant on Spring Valley did less than $8 million in sales Great store, but it didnt produce the volume that were used to it at Del Friscos. We firmly believe that on our track and on track that we can do substantially more at both locations that will open in Dallas. Lets say double-digit sales at both Uptown and in Plano. And Plano will open sometime in late spring of 2017.

Thomas Pennison

So definitely, what were looking there is – when Mark says double-digit north of the $10 million.

Mark Mednansky

Yes, both.

Brian Vaccaro

Okay. All right, thats really helpful. Last one for me. Just to shift gears to the Grille specifically. Can you give similar color on the upcoming menu launch? What your goals are around that? And also, where things stand in terms of your advertising strategy at the Grille? Thank you.

Mark Mednansky

Sure. Well, we held back in Q3. In Q2 and Q3, some of the dollars spent on advertising was done, again for research. First, we did a full menu and food survey, a lot of intercepts, a pretty substantial survey. What our guests love, what they like and what they didnt like with our food items and – I mean, this took our culinary team, our market team and our training team for two months working as a group.

And heres what weve come up with, is that there is a passion from our guests for some of our craveable items, but we needed to add a little more pop, a little more boldness to some of our food items. They also – as you all know, the movement towards fresh and healthy is here to stay. And its not a calorie driven, its not a fat-gram driven thought. Its fresh food that guests feel that is healthier for them. And thats where youll see is going.

Were going to have Quinoa and Tofu Tacos done in Lettuce Wraps up for the guests that want that. But the guest that wants that juicy, prime cheeseburger with an ice-cold beer and they love the Grilles cheeseburger are still going to have it. So youre going to see some innovative food, youre going to see a little more pop, I dont want – more fresh – freshness than just healthy, and thats also in combination with new alcoholic beverages.

We see our guests at the Grille as an experimental group. They love to try new food. They love to try new alcohol drinks. And were going to give it to them. So that will be out in about three weeks, three to four weeks from now, the menu will come out at the Grille. And the whole team – were testing it – weve been testing all summer. The team is pretty excited about the launch.

Thomas Pennison

One of the things youll see in that menu over the past year, we have really focused toward the value proposition. And for lack of better term, while were very proud of the steaks there, we didnt feature the steaks. We actually, even the menu, didnt highlight the steaks on that menu. And we have seen part of our check average reduction at the Grille was our steak mix had reduced pretty significantly in some restaurants.

Now its been great for the introduction, and now we feel that people understand the diversity of the menu of the Grille to where the new Grille menus will highlight better those Del Frisco steaks and not be afraid to focus on the steak component as well as in the, quite honestly, a higher-spend holiday time period. We will be doing some steak features, including some bone-in options that will help drive the check average at the Grille more so than we have really for the last 15 months.

Brian Vaccaro

Very helpful. Thank you.

Operator

Next, we have Jason West with Credit Suisse. Please go ahead.

Jason West

Yes, thanks. Good morning, guys.

Mark Mednansky

Good morning, Jason.

Jason West

I just want to circle back on the trends weve been seeing through the third quarter and into the fourth quarter. As youre seeing some improvement here early in 4Q, can you say – I mean it sounds like the energy markets are a little bit less negative, but then the Northeast is also improving with some of the tourism. Is there a notable improvement in either of those areas like thats more significant than the other?

Mark Mednansky

At least from a quarter-to-date basis, weve definitely seen and once again, its really not consistent among the different concepts. For example, on the Del side, when we talk about the Houston market, its definitely still negative, but greatly improved from where we were tracking in Q3, whereas some of the other concepts are slightly better, but not as improved as weve seen with Del Friscos.

What were seeing also is, as we alluded to, there is certain just one-off items that were beyond the consumer behavior. Lets say that were at a point in time. For example, our Baton Rouge, Louisiana location for Sullivans is doing much better as they were negatively impacted by the flooding and other events. Unfortunately, that went on in Baton Rouge during the quarter.

So its hard to pinpoint it to just one part of the country. So I apologize not being a very clear, distinct answer for you, but with such a small base and where youre looking at one location in a part of the country, its hard to make clear conclusions.

Jason West

Okay. But the issues I guess around tourism in the Northeast have definitely improved, though, and youre seeing a pick-up in those areas from where you were, is that fair to say?

Mark Mednansky

Yes. As we look to quarter to date right now, some of the areas that we touched on of New York and Boston, were seeing some better trends now in Q4 than what we were seeing in Q3.

Jason West

Okay. And just the consumer overall, I mean we saw the slowdown in the summer. How much of that do you guys think is related to just sort of a summer lull and some of the election noise out there versus more of a sustainable pullback in the consumer and maybe some oversupply issues maybe creeping into the sector?

Mark Mednansky

Jason, let me tell you first. There are economic experts who are arguing this point today, right, around the country and around the world. How it affected our Company, weve talked about it before. Summer tourists from Europe, especially Britain, there are late-night guests. Theyre the ones coming in at 9 oclock at night; get a big, juicy steak and some red wine. And we still got them, but not like we had in the past. I mean, they just werent there, like they were, with the devaluation of the pound. We think that there was some trepidation with our guests, whats going on. Well be very happy when all these debates are over.

Our guests, the upscale guests at all three brands are pretty well informed. And theyre like everyone else in this country. They were glued to the TV during the debates, confused maybe, whats going on. Weve always seen – Tom and I have been doing this a long time, over 30 years for myself.

And as you know, we have a highly tenured team. During any election cycle, once there is a victor, usually theres a big sigh of relief and people go out and spend, and theyre hopeful. And thats what we think will happen because its happened so many times in my history in this industry. So an economic expert will probably answer that question better. But were feeling pretty good about what theyre spending and how theyre coming into our restaurants right now.

Thomas Pennison

Now as we look at it internally as well as speak to our peers, its been hard to put one easy answer to what we saw in Q3.

Mark Mednansky

Yes.

Thomas Pennison

Yes. It was across the board, it was choppy.

Mark Mednansky

Yes.

Thomas Pennison

Its really hard to pinpoint what was going on.

Jason West

Okay. And just another one around sort of check and pricing. Can you give us an update on each brand, where the pricing will be in the fourth quarter? And then the check was actually up pretty significantly at Double Eagle in the third quarter. I dont know if that was just spin related or if there was a price increase that kicked in there.

Thomas Pennison

A big part of that, theres a few things that took place in Q3. One of our higher-indexing Del Friscos, we kind of alluded to the concept of restaurant week, which no one has just a restaurant week anymore. Its like most of them are two and three weeks. But what you see in our timeframe of a restaurant week is you normally have a little bit discounted pricing and it ends up being high volume, so its strong on the traffic, but it lowers your check.

One of our higher-indexing restaurants that does phenomenal during restaurant week, their restaurant week moved from our Q3 into our Q4. So right there, you had a – it impacted lowering the traffic, but increase in the check. That played pretty sizably when you have a comp base of only 10 restaurants.

One high-indexing location can play onto it. For Dels, we were under 1% in actual pricing and we basically had two locations that were up double-digit in the check, more driven to certain private dining special events that took place in the movement of some restaurant weeks.

Mark Mednansky

Hey, Jason. Tom talked earlier about in Q4 at the Grille with the new menu, really is starting to get back and flex our muscles a little with our steak sales, because were so proud of our – the steaks at Del Friscos. At all three brands, weve begun this summer and going to really retch it up at a higher speed in Q4 by offering more to our guests.

The upscale guest that wants to spend money, were going to allow them to do that if they so still wish. So youre seeing us feature extras on the steak, a little more lobster, crab, plateaus of fresh shellfish and a little more aggressive with some of our wine offerings that we feature on a hand sale basis.

Thomas Pennison

And just to finish your question, for Q4, well probably be about 80 basis points for Dels and Sullivans. And the Grille, well be – because we have a new menu going in, probably blend out slightly above 1%, driven predominantly by areas where weve had the highest minimum wage increases, because we have some that are hitting in January 1, and then probably a little bit more what were doing for mid-year next year.

Jason West

Okay. Got it. Thanks a lot.

Mark Mednansky

Thanks.

Operator

[Operator Instructions] We will take our next question from Joe Gomes with William Smith.

Joseph Gomes

Good morning.

Mark Mednansky

Good morning, Joe.

Joseph Gomes

Most of my questions have been answered. I know you guys have been on for a while here. But, just real quick, you guys said youre encouraged by the willingness of the guest to spend. And I was just wondering, is there anything different or out of the box that youre doing now or have planned to help drive additional guests into the restaurants?

Thomas Pennison

Sure. Weve been testing – now that – lets take the Grille first, Joe. I mean, since we created this brand and weve added units, we now have the ability, which we didnt have, two years ago, even a year ago, the ability to really test. I mean before we would have some new items or wed have a new procedure, when you have 10 stores, its hard to really do a test that can give you any clear definition.

Now over 20 units, were able to go in and as far as advertising goes, test different messages, test different vehicles and media and see whats the most effective and efficient use of our marketing spend. And thats what weve been doing for the last six months. So what well see, going into Q4 and into 2017 is some more targeted advertising from our testing results.

Dont want to share that, what exactly how were going to do it with our competitors who are on the call today. But I think its pretty safe to say us and many people in our industry understand the power of digital and the ability to follow our potential guests when theyre on the Internet and be available to them when theyre thinking about making a decision where to dine. So youll see our marketing team moving in that direction in the future.

Joseph Gomes

Okay. Great. And then just real quick on the balance sheet, you noted that cash is below $1 million at the end of the quarter, roughly $800,000. Do you see that as a low water mark? Are you going to be tapping, do you think, into the credit line here in the fourth quarter?

Thomas Pennison

No, we do see – I mean, our seasonal slow – I mean, third quarter is our low time of the year and where our balances are usually the lowest. If you look back a year ago, at the third quarter, we had $15 million borrowed on our line of credit when we were at this point a year-ago versus today, we got nothing borrowed on our line of credit. So the combination of our cash, which is going to grow now as well as being without debt and our slow development puts us in a strong position for cash through the fourth quarter, where any borrowings would be just for other matters we may consider.

Joseph Gomes

Okay. Great, thanks. Appreciated.

Mark Mednansky

Thank you.

End of Q&A

Operator

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

Mark Mednansky

Well, thank you, everyone. Come out to Dallas. Come see our new Double Eagle, see the future of the Company. You go into the Grilles and well talk to you in February when we present Q4. Have a great day.

Operator

And that concludes our presentation. We thank you all for your presentation and you may now disconnect.

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