Bravo Brio Restaurant Group, Inc. (NASDAQ:BBRG) Q4 2016 Earnings Conference Call February 8, 2017 5:00 PM ET
Jim O’Connor – Chief Financial Officer
Brian O’Malley – President and Chief Executive Officer
Joshua Long – Piper Jaffray
Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Bravo Brio Restaurant Group Fourth Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. On the call today, we have Brian O’Malley, President and Chief Executive 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 2016 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 the 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 conditions. And like all of our earnings and other press releases, webcasts, et cetera, these filings can be accessed through the Investor Relations section of our corporate website.
I would now like to turn the call over to Brian O’Malley for opening remarks. Brian?
Thank you, Jim. Good afternoon, everyone, and thank you for your time and welcome to our fourth quarter earnings call. 2016 has been a transitional year for BBRG and while our results for the year within the range of our most recent outlook, our performance have not been reflective of the full potential. We’re confident that the financial investments made during the year in several key operational initiatives, as well as our ongoing initiatives will translate into improved financial performance in the future.
In a few minutes, Jim will review the financial results for the fourth quarter and provide guidance for 2017. But first I would like to discuss our 2016 initiatives and how they will impact 2017 and beyond. While overall 2016 results may not indicate that these actions of showing traction many were completed or became operational in the second half of the year. We expanded our banquet and private dining businesses, upgraded our online ordering platform, meaningfully expanded our delivery capacity.
We grew our partnership with Costco and broaden to market for our gift cards, we completed the significant updated menus at each of our brands. We grew our online reservations over 13% at each brand. And we developed in open a new look Brio late in the fourth quarter.
The goal of each of these initiatives and the determining factor of whether we choose to undertake any other such program is and has been to increase guest traffic, provide the better experience for our guest and ultimately increase sales.
Our banquet and private dining business grew 5.4% in the fourth quarter. Our new banquet menu, the implementation of new technology design to enhance that is a planning executing large parties and the addition of several private dining rooms at existing locations during the year all contributed to this growth.
The addition of private dining rooms allows us to improve the guest experience and optimize the seating capacity as the restaurant throughout the course of the week. We will continue to invest in additional private dinning rooms in 2017 to further growth this segment of our business.
Improvements we have made to our carry-out program through the addition of a new online ordering platform introduced in the back half of the year, the rapid expansion of the third party delivery services in some restaurants in the fourth quarter, as well as currently testing and updated catering to go menu have all contributed to growth in this segment of our business.
Comparable to-go sales for BBRG grew 7.6% in the fourth quarter and 5.2% for the year. And this growth has accelerated in the first two periods of 2017. During 2016, we entered into a partnership with Grubhub to enhance our delivery capabilities in several markets. The roll out of delivery to Amazon Prime is in process and we expect that roll out with DoorDash to commence in April.
We expect to add more services and expand our existing services into additional markets as the year progresses with the goal providing meaningful growth in to-go sales in 2017. Casual dining guests have a growing number of options to enjoy prepared food at home and BBRG will be prominent in this market.
Our partnership with Costco as well as other third party distributors continues to offer us the opportunity to introduce both BRAVO! and BRIO to new guests, specifically during the holiday season. For the full year 2016, gift card sales increased 35% with the majority of this growth occurring in the fourth quarter.
We expect that most of the gift card sales during the fourth quarter will be redeemed in 2017 adding to our sales growth potential. The implementation of redesign menus last June was a critical launching point to revitalizing both brands and as contributing to the ongoing increases in our guest satisfaction scores.
Our investment in training and commitment to the guest experience is also evident as we have seen our company’s highest growth in guest satisfaction scores as it relates to both food and service. In 2016, these investments in new menus and training impacted our cost of goods and labor.
Since our implementation, we’ve thought to identify opportunities to improve our efficiency and commence programs to further enhance our ability to manage these prime costs. We install the new food and beverage inventory systems that allows us to more accurately forecast and planning purchases as well as data in the prepping process.
Additionally, we have taken to similar approach to managing our labor and have implemented a system to improve our forecasting of weekly staffing needs as well as the timeliness of schedule audits at the store level. We opened our third and final restaurant of 2016 in December in Torrance, California. This restaurant featured a redesigned look in feel when that is more casual and alliance with the expectations of today’s guest.
The initial feedback to social medial is yielding some of the highest review scores today. Our objectives were clear as we develop this restaurant. Reduce the number of menu items to allow us become more consistent in execution. Create a menu emphasizing light, fresh, shareable options. Increase our alcohol sales by offering new and exciting crab cocktails from a larger bar area.
Increase our dessert sales by introducing fewer but more unique dishes allowing us to build or check organically. Broaden our guest base and appeal to younger demographics and redesign our statics by eliminating table cloth, updating plateware and uniforms, while also evoking that occur to incorporate brighter colors, expose brick walls and concrete floors.
Thus far, we are pleased with the outcome of this redesign as the initial guest response has been positive. As we gather more feedback and are better able to assess what is resonating with our guest, we will begin to formulate ways in areas while we can incorporate these new culinary and designed elements into our existing system of restaurants as well as those we plan to develop in the future.
As we continue to look at our portfolio of restaurants, we intend to close a minimum of six underperforming restaurants in 2017. This will primarily be accomplish in the back half of the year to the full financial benefit of these closes will not be realized until fiscal 2018.
We are also explaining multiple options with our landlords to enhance our ability to sustain the long-term growth for BBRG. I would also like to remind everyone that earlier this month we announced our intention to explore other alternatives to enhance shareholder value. We will not be providing any additional updates unless we have something material to share.
We believe that the investments being made to evolve our brands will translate to better sales, traffic, and profitability in 2017. Trend so far in the first quarter have improved sequentially as a comparable sales are down just under 2% year-to-date, despite the negative impact of calendar shifts with New Year’s Eve and Valentine’s Day.
Our team is working very hard to achieve our objectives, while upholding our commitment to providing a best in class dining experience. I would like to thank each and every team member for their ongoing commitment to being the best year at BBRG.
Now, I’d like to turn the call over to Jim for look at our financials for 2016 and guidance for 2017. Jim?
Thanks, Brian. Of the 13-week period ended December 25, 2016, revenues fell 5.2% to $101.7 million from $107.3 million as we experienced 5.5% decrease in comparable restaurant sales offset by the addition of three net operating weeks relative to the previous year. The decrease in comparable restaurant sales was comprised of 6.2% decrease in guest counts, partially offset by a 0.7% increase in average check.
The December period, similar to others in casual dining whilst our softest month driven impart by lower months for traffic as well as some negative year-over-year weather impacts particularly at BRAVO!.
Restaurant revenues at BRAVO! decreased 7% to $36.9 million from $39.7 million due to a 7.5% decrease in comparable sales in four fewer operating weeks. The decrease in comparable sales was due to a 7.6% reduction in guest counts offset slightly by a 0.1% increase in average check. Average weekly sales for comparable BRAVO! restaurants were $56,500. There are 46 – 48 BRAVO! restaurants out of a total of 51 included in the comparable revenue base.
Restaurant revenues at BRIO decreased 4.2% to $63.6 million from $66.4 million as revenues from seven net additional operating weeks were more than offset by a 4.3% decrease in comparable sales. The decline comparable sales consisted of 5.2% reduction in guest counts and the 0.9% increase in average check. Averages weekly sales for comparable BRIO restaurants were $77,000. There are 61 BRIO restaurants out of the total of 65 included in the comparable revenue base.
Turning to expenses, as a percentage of revenue cost of sales was 80 basis points to 26%, primarily due to mix shifts touches the greater emphasis on their growth section of the menu at BRIO.
Labor cost rose 20 basis points to 35.3% primarily due to the deleveraging. Combined operating and occupancy costs increased 10 basis points to the sales deleverage on lower comparable sales and higher marketing costs offset partially by lower utilities and insurance reserves. Taken these for expense categories together, total restaurant operating costs decreased $3.6 million or 4% to $86.4 million from $90 million in the same period last year.
Our overall restaurant level operating profit fell to $15.3 million and restaurant level margins were 15% in the fourth quarter. This compared to the restaurant level operating – profit margins of $17.3 million and restaurant level margins of 16.1% in the fourth quarter last year.
General and administrative expenses increased $8.4 million from $7.3 million in the same period last year and as a percentage of revenues rose 150 bases points to 8.3% from 6.8%. The increase in G&A was driven primarily by higher gift cards marketing cost, as well as the increased legal cost.
Non-cash impairment charges of $14.2 million related to the impairment of eight restaurants compared to $10.2 million in as of the impairment charges related to the impairments of six restaurants in the prior year period.
Depreciation and amortization expenses were $5.6 million down slightly in dollar terms, but 10 basis points higher on a percentage basis relative to the prior year. Net interest expense rose $0.6 million due to cost associated with an amendment to our credit facility, as well as higher borrowing cost.
Our outstanding debt fell by $1.8 million to $41.5 million compared to $43.3 million at year end 2015, and fell by $9.5 million relative to the third quarter. Given our GAAP net income over the last few years driven the large part by the non-cash impairment charges, we are required by GAAP to provide a valuation allowance against our existing to net differed tax assets.
Accordingly our GAAP to income tax expense of $59.3 million reflected non-cash charge of $64.7 million reflect in the establishment of full valuation allowance against our net deferred tax assets. Of $4.4 million income tax benefit was recorded in the year ago period. Driven the large part by the aforementioned tax charge, our GAAP net loss was $73.3 million or $4.96 per diluted share compared to GAAP net loss of $2.7 million or $0.18 per diluted share recorded in the prior year period.
Adjusted net income was $1.8 million or $0.12 per diluted share compared to adjusted net income of $3.6 million or $0.23 per diluted share in the year ago period. Adjusted GAAP earnings consisted of number of discrete items, so please referred to the reconciliation table at the end of our earnings release for further details.
Turning to 2017, we are providing the follow annual outlook for the 53 week period ended December 31, 2017. Revenues are estimated to be in the range of $406 million to $416 million inclusive of comparable restaurant sales of between minus 2.5% in flat. We planned to open one new restaurant of BRAVO! was [indiscernible] Florida early in the fourth quarter.
Our revenue range assumes the closer of six restaurants mostly in the back half of the year. These closures to be an executed through various meetings including, but not limited to lease expirations, lease determination agreements and lease assignments.
The efforts of these restaurants have either been fully out here or written down to their net revisable value. Therefore, we don’t anticipate that we will incur additional material income statement charges in connection with these disclosures. As we move forward, we will continue to take the appropriate steps to optimize in our restaurant portfolio. For 2017, we anticipate a denying to moderate inflation environments and expected our cost to be within approximate range of flat to plus 1%.
We expect continue pressures in our labor cost giving the minimum wage increases, as well as the flat labor market. However, we do except our labor efficiency to improve as the year progress and wide a various labor productivity initiatives, as well as cycling over the labor investments we made in mid-2016 related to our new menu rollouts.
So the net capital expenditures in 2017 to be between $10 million and $12 million comprised of new developments, maintenance, reemerging capital. We estimate G&A will be modestly to approximately $29 million reflecting of 53rd week, as well as for budgeted incentive compensation targets versus our actual payouts in 2016. We expect our annual effective tax rate range to be approximately 10% and our estimated diluted share count for the year to be $15.4 million. And finally, we estimate that our diluted earnings per share range to be between $0.22 and $0.32 per share.
And with that operator, please open the lines for questions.
Thank you. [Operator Instructions] And we do have a question from Joshua Long with Piper Jaffray.
Great thanks for taking my question. I wanted to see, I you maybe able to talk a little about the cadence of those rather the split of disclosures by brand that we’re expecting for back half of the year.
Sure, so we have – of the six, we have two are BRAVO!’s and four are BRIO’s. And the cadence will be get the back half of the year will be where we are, that will be a couple in the fourth quarter and the rest of that will be in mid to late third quarter. And of course, these make change a little bit just pending on the finalisation of some of these items, but there will be in that third quarter and earlier year fourth quarter range.
Understood, appreciate that. Thinking about some of the strategic investments and initiatives that you put in place in 2016 and acknowledging the fact brand, you may that allows us we’re put in the back half of 2016. How do you kind of expect these platforms to build over the course of the year? Clearly we just – one of the bigger or stronger periods for the banquet and private dining sales. So, how do you think about the first part of this year from leveraging some of the strategic initiatives that you now have in place?
Hey, Josh thanks for jumped on the call. I think from our perspective, first start with our focus on carry-out with our new online ordering in delivery services, we expect meaningful growth and as Josh as to year goes on. We’ve set to pretty aggressive internal goals for both brands, specifically. We think that because of delivery services we can see growth in those two areas for both brands, I think that the banquets again, while fourth quarter certainly a significant banquet driving we have graduations, we have Mother’s Day, we have a lot of opportunity coming up for banquets to continue to grow. So we would expect to see all of those initiates play a large roll in the growth.
The key for us right now is just continuing to benefit from the investments we made in the gift card programme in the fourth quarter and then we’ve got some pretty exciting features that we ran in the first quarter already and some initiatives going with those features here – up here in the second quarter coming up. And we think we will be able to drive more traffic and check average as well going forward.
Appreciate that. Its sounds – when we take that and we later on the sequential improvement and comps that down to is a nice step up from where you ended up the back of last year. And that’s on top of what’s sound it like some unfavourable calendar shifts and may be some weather. Could you give us sense of what those calendar shifts into weather, how much that was laying down that down 2% year-to-date.
Yes I think the Valentine shift in particular, it was about half of that comps being down and then probably another couple of 20 basis points for the New Year’s Eve shift. So that was there. Our trends certainly have improved 4 to 500 basis points overall little bit more for BRAVO! so far. We’re pleased with the directions of what we’re driven on that topline.
Okay then – go ahead Brian.
Just going to add Josh, I think that the key – the parts we get really excited that. These things again as you didn’t made that, back half of the year last year. We really started to see some of these things resonate with the GAAP, especially the carry-out in this bankruptcy. So while it’s not necessarily the largest percentage part of our business. We know that this is the part of the business that’s going to continue to grow for us.
And that’s what we start to see some of the excitement is that to buying driving the gift cards, to getting the carry-out, the quick increase in – with the delivery services. Those are all new guest acquisition pieces for us. And so we think that that’s a great piece going forward for us we continued to deliver on the experiences that we feel our guest satisfaction scores are telling us we’re delivering. We should continue to see the growth in all those areas.
Understood, thank you for that. In that – in those check numbers you gave by brand, how much price you guys haven’t place right now.
For, the last year and half we’ve taken very little price, I think we are going to be little bit more aggressive in 2017, but we are not going to be aggressive given the environment. So I think we are not returned to that 1% to 2% price increase for 2017, we have a menu change here coming up within the next 30 days – 30 to 45 days and we’ll take a little bit more than 1% of that price increase and will kind of [indiscernible] by the back half of the year to see what the second menu change we’ll do. But will be in that 1% to 2% range for 2017.
Great. And then during the quarter, you provided some average check numbers for both BRIO and BRAVO! how much price did you have during the quarter of any.
Basically very little…
I mean, really probably you within the 0.5% of BRAVO! – BRIO and nothing at BRAVO!
Got it, thank you so much.
[Operator Instructions] And we do have a question from – I’m sorry, actually it appears we have no further questions. I will turn the call back over to management for any additional or closing remarks.
Well, we certainly appreciated we’re taken time to be on the call today. And I guess from our perspective and lastly we want to reiterate is that we’re really excited about the exposure that a lot of these pieces have offered us these initiatives have offered us. At the end of 2016 and in the 2017 and we’re confident that these are pieces that are part of the process that are going to see us continue to grow in 2017 and beyond. So, we appreciate your support and belief in the company and we look forward to delivering continued better results as we go forward. Thank you.
Thank you. And that does conclude today’s conference. Thank you for your participation.
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