Bravo Brio Restaurant Group, Inc. (NASDAQ:BBRG) Q4 2015 Earnings Conference Call February 23, 2016 5:00 PM ET
Brian O'Malley - President, Chief Executive Officer
Jim O'Connor - Chief Financial Officer
Andy Barish - Jefferies
David Carlson - KeyBanc
Please stand by. We're about to begin.
Good day, ladies and gentlemen. Thank you for standing by. And welcome to the Bravo Rio Restaurant Group Fourth Quarter 2015 Earnings Conference Call.
After the presenters opening remarks, there will be an opportunity for question and answers. [Operator Instructions]
On the call, we have Brian O'Malley, President and Chief Operating Officer, and Jim O'Connor, Chief Financial Officer. At this time, I'd like to turn the conference over to Jim O'Connor. Please go ahead, Sir.
Thank you, and good afternoon everyone. We appreciate you joining us today. After the market closed, we issued our fourth quarter and full-year 2015 earnings press release, which can be found in the Investor Relations section of our corporate website at www.bbrg.com.
Please note that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and one should not place undue reliance upon them. Forward-looking statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. And like all of our earnings and other press releases, webcasts and presentations, these filings can be accessed through the Investor Relations section of our corporate website.
I would like to now turn the call over to Brian O'Malley for our opening remarks. Brian?
Thank you, Jim. And good afternoon everyone. We appreciate your time and participation on our call today. I'm going to start with a brief review of this past year, but we'll spend the bulk of my remarks later in the call, detailing our plans for 2016 and specifically how we intend to grow restaurant sales and guest counts by delivering exceptional dining experiences for each guests at each meal, each and every day.
While full-year adjusted diluted EPS was within the range we provided in our most recent guidance we are obviously far from satisfied with our performance in 2015. Negative comparable restaurant sales were a function a week traffic, which was only partially offset by a higher average check. We've been able to mitigate the impact of lower traffic by increasing our average check through various initiatives including the roll-out of our online reservation platform and menu engineering.
While we've also done a fairly good job controlling our cost in 2015, we are singularly focused on the need to drive our traffic and sales, in order to be successful over the long-term. With this in mind, here are some of the initiatives we have put in place to achieve this goal. We are currently implementing a strategy honing in on four key areas of our business that will keep us focused on driving traffic, sales, and improving our operating margins.
The core objectives of this approach are to elevate the guest experience by returning to our heritage of culinary innovation, implementing a service model focused on a "yes" and the fact that "everything matters" attitude, reallocating dollars in marketing to regional and national campaigns and investing capital in restaurant image enhancements focused on certain stores which will improve the energy and approachability of our restaurants.
Now, I'm going to turn the call over to Jim, for our financial review. Afterwards, I will discuss in greater detail the initiatives and focal points for BBRG in 2016.
Thanks, Brian. For the 13 week period ending December 27th, 2015, revenues grows 0.6% to 107.3 million from 106.6 million, primarily because of 92 net additional operating weeks, compared to the year-ago period. These operating weeks were provided by six new restaurants opened in 2015 and four new restaurants opened in the last quarter of 2014; net of one closure in the fourth quarter of 2015. Comparable restaurant sales decreased 4.6% and was comprised of an 8.2% decrease in guest counts, partially offset by a 3.6% increase in average check. Restaurant revenues at Bravo! Decreased 0.5% to 39.7 million, from 39.9 million, as revenues from 43 net additional operating weeks were more than offset by a 5.2% decline in comparable sales.
The decrease in comparable sales was due to an 8.2% reduction in guest counts, which was partially offset by a 3% increase in average check. Average weekly sales for comparable Bravo! restaurants were $60,400. There were 45 Bravo! restaurants out of a total of 51 included in the comparable revenue base.
Restaurant revenues at Brio grew 0.9% to 66.4 million from 65.8 million as the result of an additional 49 operating weeks, which was partially offset by a 4.3% decrease in comparable sales. The decline in comparable sales, consisted of an 8.2% reduction in guest counts, which was partially offset by a 3.9% increase in average check. Average weekly sales for comparable Bravo! Brio restaurants were 79,700. There were 58 Brio restaurants out of a total of 64, included in the comparable revenue base.
Turning to our expenses, cost of sales as a percentage of revenue improved 130 basis points to 25.2%, reflecting the more favorable commodity environment, particularly for seafood and poultry. Labor cost as a percentage of revenue, rose 50 basis points to 35.1%, due to higher salary and hourly wages as well as the increase in fringe benefit expenses, mostly related to higher health insurance cost for our full-time hourly employees.
Operating cost as a percentage of revenues, rose 50 basis points to 16%, primarily due to increases in utility and repairs and maintenance cost. Occupancy cost as a percentage of revenues rose 60 basis points to 7.7% primarily due to sales de-leveraging as well as some restaurant closure cost.
Taking these four expense categories together, total restaurant operating cost increased 0.7 million or 0.8% to $90 million, from $89.3 million in the same period last year. Our overall restaurant level [profit decreased] slightly to 17.3 million from 17.4 million and restaurant level margins fell 20 basis points to 16.1%, compared to 16.3% in the prior year period. In summary, the more favorable commodity environment, almost entirely offset the sales de-leveraging we experience within our four walls.
General and administrative expenses increased to 7.3 million from 5.9 million in the same period last year and as a percentage of revenues, rose a 130 basis points to 6.8% from 5.5%. This increase was primarily due to the up front cost associated with selling Bravo! gift cards during the fourth quarter through our new partnership with Costco. We are pleased with the volume of gift cards sold through this program and note that approximately 80% of the gift cards sold were not redeemed as of year-end.
Preopening costs were $0.6 million, compared to $1.5 million in the year-ago period. During the fourth quarter, we opened the Brio in Cincinnati, Ohio, and had two locations under construction, whereas last year we opened four restaurants and had another four locations under construction. Additionally, late in the fourth quarter, our first restaurant under our franchise agreement, Brio, was open in San Juan, Puerto Rico. Non-cash impairment cost were $10.2 million, related to six restaurants and there were no comparable charges in 2014.
Depreciation and amortization expenses were $5.9 million and, as a percentage of revenue, increased 60 basis points to 5.5% due to sales deleveraging. Net interest expense fell to $0.4 million from $0.6 million on lower average outstanding debt. Outstanding debt declined $12.7 million for the year to $43.3 million compared to $56.0 million at the end of fiscal 2014. Also during the fourth quarter, we purchased $4.6 million shares under our existing $15 million share repurchase authorization.
GAAP net loss was 2.7 million or $0.18 per diluted share compared to GAAP net income of 3.8 million or $0.20 per diluted share in the same period last year. On an adjusted basis which excludes net of taxes the asset impairment in the fourth quarter of 2015 and the write-off of an amortized loan origination fees in the fourth quarter of 2014 adjusted net income was $3.6 million or $0.23 per diluted share, compared to adjusted net income of $4.2 million or $0.22 per diluted share. Please see the reconciliation from GAAP to adjusted non-GAAP net income in the financial table on the earnings release for further information.
During 2016, we are providing the following annual outlook for the 52 week period ended December 25, 2016. Revenues are estimated to be in the range of $424 million to $432 million inclusive of comparable restaurant sales between -2 and flat. We are reducing our capital expenditures related to new restaurant development and we will reallocate a portion of this reduction to reinvest in our existing store base. For 2016, we will open three restaurants, two Bravo! and one Brio.
So far this year, we've already opened a Bravo! in Dayton, Ohio, and we just opened another Bravo! in Grand Rapids, Michigan, late last week. Our third and final opening of the year will be a Brio outside of Los Angeles, during the fourth quarter. Estimated preopening cost will be between $1.5 million and $2 million.
As I previously mentioned and as Brian will more fully describe in a few minutes, we are allocating additional capital dollars into our existing restaurant base, including adding private dining rooms at several of our restaurants as well as taking the first steps in the reimaging program focused on some of our more mature restaurants.
Total net capital expenditures of 2016 will be between 12 million and 14 million, inclusive of both new development as well as our reinvestment efforts.
Additionally, we are conducting a thorough evaluation of our restaurant portfolio which may lead to the closure of certain restaurants currently not meeting our financial targets. We expect these closures will be in part through these expirations and relocations depending upon their availability of quality real-estate. We expect our commodity cost to increase between 0% and 1%, although we may see some upper pressure on cost of sales as a percentage of sales, given a greater focus on growth items as well as the impact of various menu initiatives.
Additionally, as we experienced last year, we will continue to see some labor cost headwinds, principally due to minimum wage increases as well as wage pressures associated with a tightening labor market. We estimate G&A will be roughly $26 million which will include budget incentive, which includes budgeted incentive compensation targets versus low actual payouts in 2015. Some incremental cost related to technology upgrades, including the roll out of the Olo, online ordering platform, which will replace our legacy system as well as additional cost associated with our ongoing gift card partnership with Costco.
We expect our annual effective tax rate range, will be between a 20% and 23% and our estimated diluted share count for the year will be 15.5 million shares. Finally, we estimate that our diluted EPS range to be between $0.65 and $0.73. Our board of directors, previously authorized the repurchase of up to 15 million of our common shares through the end of fiscal '16 of which we have approximately $10.4 million remaining. As always, we will continue to efficiently deploy our capital in the manner that best enhances long-term shareholder value.
Now, I'd like to turn the call back to Brian. Brian?
Thank you, Jim. As I mentioned earlier, we are disappointed with our traffic in sales in 2015. With that said, we have already begun Phase I of comprehensive plan for both Bravo! and Brio for 2016 and beyond. Inside the Bravo! Italian for Bravo! and Brio fresco for Brio, these two programs will address all four initiatives of our business that we believe will ultimately drive traffic in sales. In regards to looking at our service mile, I have kicked off an initiative called "everything matters." I'm personally visiting with our general managers and executive chefs in every market to better understand what their needs are in order to ensure we are taking care of our team members so they in turn will take care of our guests.
I am engaging them in open conversation to see what they feel and what we need to do to enhance their ability to create life time guest in our restaurants. At the same time, I am speaking to our focusing commitment to the overall guest experience and our "yes" approach. A commitment to the basics of service and hospitality will be addressed as we take on a new restaurant opening approach to both front and back of the house training. Teams of trainers have been assembled to reinvigorate our team members to have them focus on a mantra of everything matters. The second initiative of our programs focuses on returning to our heritage of culinary innovation for both Bravo! and Brio.
As an immediate impact to traffic, we started this year with Bravo!'s classic combinations which featured three classic entree; Chicken Parmesan, Shrimp Scampi with Angel Hair, and a Grilled Chicken Pakora with the choice of Super Salad for $10.99. Brio's first quarter LTO, was the "Tale of Two Risotto's." In line with our culinary routes and commitment to higher-end products, we featured a shrimp risotto with a lobster tail and pan seared sea scallops with a ratatouille risotto. Both of these offers have been well received.
We are finalizing a new menu taste for Bravo! at the end of Q1, the menu will consist of 16 to 18 new items that will promote the culinary forward focus of the brand with the introduction of fresh pasta, housemade ricotta, and fresh and grilled high-end items. We will be testing different items in multiple markets at the same time. The menu will take on a new look to highlight those changes. Brio will undergo the same focus and a new menu is going to enter at the end of Q1. Brio will be focusing on its culinary roots. New grill, center of the plate steaks, chops and sea food, accompanied by new side selections allowing for personal customization.
In addition, shareable appetizers, as well as new desserts will be just the beginning of our new culinary direction. Both Bravo! and Brio continue to see their lighter side menus perform well as a mix of item sold is in the mid-teens. We realized that while many of our guests like to remain true to their favorites, they are now substituting in a lighter item more than ever. To meet that need we continue to develop items that are lighter in the calories but full on flavor. The bar program, recently awarded by its best Happy Hour Cocktail Program, will add more featured handcrafted cocktails, local craft beers and an updated and regional food menu.
The third initiative of our program is marketing. We have reallocated dollars to our regional and national marketing campaigns. We will continue to place an emphasis on our social media and digital marketing in our efforts to attract new guests. Our social engagement as ranked by nation's restaurant news has entered into the top 10 for both brands. We have consistently grown our Facebook, Twitter, and Instagram followers by double digits and promoting our executive chefs and emphasizing their culinary strength. As an example one of our marketing focuses in 2016 is to appeal to our more price sensitive guest, by featuring limited time offer that zero in on our culinary expertise and value propositions that will run for approximately eight weeks in each quarter.
From a technology perspective, we continue to put an emphasis on our apps for both brands that were developed a little over a year ago. The apps can be used to track your loyalty rewards, place online orders, and make reservations quickly at your favorite Bravo! or Brio restaurant. Another technology objective is partnering with Olo to upgrade our online ordering platform, [SQL] continues to become more integral part of our business.
The fourth initiative, consists of a group of a more mature restaurants in which we have begun to re imaging project similar to our new Bravo! look, which is less theatrical and Roman ruin and more contemporary. The design will put an emphasis on a more approachable feel and good ambiance. New finishes, flowing color schemes in bar atmosphere are just a few of the changes in these particular restaurants.
Next, the banquet dinning segment of our business has continued to grow over the last three years. As part of this initiative, the addition of private dining rooms in many restaurants will address the request for private banquets and parties, allowing for incremental sales as well as create energy in the dining room by shrinking the size of ceiling on non-capacity shifts. The rooms will be flexible enough to allow for comfortable dinning for overflow seating when the rooms are not booked. We are introducing new banquet menu packages to address all three day parts of that business. While there is a great deal of work to be done, there are many exciting initiatives under way.
With that said, we have already implemented many changes and have already created energy out in the field and we will continue to execute our strategy to address our biggest focus, with traffic and sales. Everyone on the team realizes task at hand and is committed to doing what is necessary to move the business forward. I'm fortunate to be surrounded by a great team and would like to thank them for all they have done and more importantly all they are doing to help us reach our goals. Everything matters.
Operator, would you please open the line for questions.
Certainly. [Operator Instructions] And now we'll take our first question from Andy Barish, with Jefferies.
Hey, guys. I am wondering, Brian, in the transition here, you guys have kind of gone back and done some more research or looked at sort of guest satisfaction scores and what has changed that sort of driving some of the initiatives that you just laid out on the call. Wondering kind of if there's been any real shifts in what you've seen in your consumer feedback.
Andy, I don't think there has been any broad shift in terms of our consumer feedback. I think what we've done is we really said that we have been consistent in a lot of things that we've done over the last few years. And one of our goals is to really look at where we felt like that consistency is probably hampered our ability to reach out to attract new guests and to do things a little bit different. We played it really safe down the middle and so by looking at the menu you're getting back to a little bit more of what we've done in the past. We rolled out, first Brio, and we're really a little bit more culinary food forward. And we're trying to get back to that high-end grill center of the plate focus for Brio and again continue to take it to another level, not as much worried about the details of where that cost right now is going fall, in terms of because as Jim mentioned, one of the things that we are looking at is that we may see some increase, a slight increase in some of those cost of good. But we're really focusing on traffic. Every initiative that we have right now, all of the things that we're talking about is driving traffic. And so, there is one message going out there and I think that what the guests have told us, as we look at their feedback are price point and really looking at some higher-end items that we used to have.
Okay. And then on the marketing reallocation, sort of where, where are those dollars coming from and what's the thought on a regional or national basis?
It's a shift in dollar. We had over the last few years, the dollar has been spent mostly and managed mostly by the local restaurants, individual general managers, and while we're still actively involved in the community, we've taken a chunk of the money that they would spend and said let’s shift that to a national program and promotional pieces. So, if we're rolling out a limited time offer for example for the Risotto's or for the LTO for Bravo! with the $10.99 classics, it's really taken it and said okay, search engine optimization, getting the right terminology, getting out there with our chefs through paid advertising, through Twitter, Facebook, Instagram. So, we're taking it and really promoting it more into those programs, versus trying each restaurant to do their own individual promotion. Value is going to be key; we pulled it from maybe some direct mails or mailers that we have done in the past and really put it into this part of our business.
Okay, thank you.
Take our next question from David Carlson with KeyBanc.
Hey, guys. Several questions. Just back to the fourth quarter, the revenue guidance for the quarter that you guys gave in early November, what did it came out to, I think the 107.3 was really at the top end of the implied range. But the comp was below expectations based on the full-year guidance that you guys gave in November. And then also the one closed Bravo unit at some point during the quarter. So, all that said, can you speak to the performance of some of the non-comp units which I am assuming performed pretty solid during the quarter?
Yes. I think that a couple of things. One is, we opened a number of pretty solid restaurants at the end of 2014. These were for the base locations that came out of the gates really big. So, even though they came out their honeymoon, a little bit in Q4 of this year, the profit flow through from those units was very strong. We're also had a decent performance with our 2015, in the 6 new restaurants that we had this year. So, we are pleased with that. So, when you look at where we were, we came in with the Costco arrangement about what we said we were three to five cents on that when we originally guided, but also I think we just flowed through some of the dollars better, just because just the team’s doing a very nice job operationally.
Okay, that's good. In your portfolio review, can you guys discuss kind of how many restaurants are maybe on the short list and their performance relative to remainder of the source, I guess really trying to get a sense of where these source performance - how they were performing versus the rest of the set from a both a cash and earnings perspective?
Yes. I think there is going to be a handful of stores that we're looking at pretty closely. And I think each store has a different story. I think a couple of them, we're looking at lease expirations. So, the decision point right now is whether we're going to extend that lease or not, time will tell. But I expect a couple of them this year that we'll have to make a decision on fairly soon. And then, there is a handful more that are a bit longer term into 2017 and '18 that we'll be looking at.
I mean, were these stores cash flow positive. Any sort of details you can provide?
I think most of these stores are in the break-even range. Actually, a few of them are slightly cash flow positive, that's why it's not necessarily a slam dunk decision to make these. But we want to make sure that our core fleet, not only is profitable in hitting our targets but also is moving in the right direction. Because some of these restaurants have the surrounding demographic area as just not what it was maybe 10-years ago.
That's good. Sorry, go ahead.
No, Dave. I was just going to say. I think that along the lines that one more, piggy backing on what Jim was saying is if there is an opportunity for us to relocate in a market, as Jim's pointed, markets have shifted a little bit in a few of our more mature restaurants. And so if there is an opportunity for us to find another location in that market where we feel like it's the right city, the right location in terms of where we want to be demographically but that particular site maybe had shifted a little bit. So, we're going to continue to look at other opportunities to relocate those, if that particular market really is where we find ourselves necessary to be.
Okay, yes. Just one other, in the past you guys have provided a little color on quarter to date trends. I was hoping maybe we can get a little bit update on that which I am assuming there is probably going to be a gap given the gift card sales at Bravo!
Yes. I think right now we are running down about 2.5% in terms of our comp and a pretty - but half of that comp is driven by the impact of winter storm Jonas, which as you can imagine for where we are with your mid-West mid-Atlantic base was a pretty impactful story for us. And then in terms of the Costco, we will continue to see those gift cards be redeemed. They are having along with the LTO that Brian mentioned a impact, trend wise on our Bravo! guest counts. So, I would say both of those initiatives we are pleased with where we're going with them.
And then, just one last one and I'll get off -- I just missed to see. You said one Brio in the fourth quarter, what were the openings of the two Bravo! Units?
The mid-quarter, in the first quarter of this year and then we just opened the other one just late last week.
Got it. Thank you, guys.
[Operator Instructions] We will go next to Andy Barish with Jeffries.
Hey, guys. I was just wondering if you could quantify the fourth quarter cost of the Costco effort in what you saw in G&A?
Yes. It's about $0.04 a share, Andy, in terms of the overall cost about $700,000 or so.
Okay, thank you.
[Operator Instructions] Well, that does conclude today's question-and-answer session. At this time I would like to turn the conference back to Mr. Brian O'Malley for any concluding remarks.
Well thank you so much for joining us on our call today. We certainly appreciate your time this evening. And we're always available and we look forward to a great 2016 and beyond. So, thank you again for your time.
That does conclude today's conference. Thank you for your participation.
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