Bravo Brio Restaurant Group's (BBRG) CEO Brian O'Malley on Q3 2017 Results - Earnings Call Transcript

Bravo Brio Restaurant Group, Inc. (NASDAQ:BBRG) Q3 2017 Earnings Conference Call November 1, 2017 4:30 PM ET

Executives

Diane Reed - CFO, Treasurer and Secretary

Brian O'Malley - President & CEO

Analysts

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Bravo Brio Restaurant Group's Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded. On the call today, we have Brian O'Malley, President and Chief Executive Officer; and Diane Reed, Chief Financial Officer.

At this time, I'd like to turn the conference over to Ms. Diane Reed. Please go ahead, Ma'am.

Diane Reed

Okay. Thank you, operator, and good afternoon. We appreciate everyone joining us today for our quarterly conference call. After the market closed, we issued our third quarter 2017 press release, which can be found in the Investor Relations section of our corporate Web site 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 press releases, webcasts, etcetera, these filings can be accessed through the Investor Relations section of our corporate Web site.

I'd now like to turn the call over to Brian O'Malley for opening remarks. Brian?

Brian O'Malley

Thank you, Diane. Good afternoon everyone and thank you for joining our Q3 conference call.

I'd first like to welcome back Diane Reed to BBRG and congratulate her on her new role as our Chief Financial Officer. Diane was an incredible asset to BBRG, prior to her brief departure and her experience was missed. And while she certainly knows our business very well, her experience in multiple industries brings a fresh set of eyes to BBRG and will be an asset to our management team as we work through our key priorities and initiatives.

I’d also like to begin our call by reminding each one of our team members in both Texas and Florida who are personally and professionally impacted by the two storms that ravage their states that we're still keeping you on our thoughts.

I would also like to thank you for helping to secure your restaurants prior to the storm and for the work you did afterwards to reopen the restaurant and getting our team members back to work so that they can begin to put their lives back together. We are proud of the family first atmosphere that we have created here at BBRG to get a faster support for each other each and every day.

As we noted in our press release, hurricane Irma and to a lesser extent Harvey negatively impacted our financial results for the quarter. Florida is the strongest market for BBRG, specifically for Brio and we saw a significant impact due to the storm. We are pleased to say that all of our restaurants are 100% operational again and delivering on great guest experiences.

Overall, comparable restaurant sales fell 5.7% for the quarter. These sales were in part a reflection of the soft July and August in the industry trends, but also were inclusive of an estimated 1.4% drag related to the hurricanes or $1.3 million in lost sales. Again, Brio was more affected than Bravo giving its geographic concentration. Diane will discuss the specifics.

While sales missed our expectations, the teams increased operating profit as compared to the prior years in total dollars by over $900,000 and margins by a 160 basis points to 10%, despite the lower revenue and an estimated operating loss of approximately $450,000 due to the hurricanes. This is consistent with our expectations of delivering higher margins and profitability in 2017 and beyond.

We reported diluted EPS of negative $0.16 for the quarter, which was in line with analyst expectations, despite the impact of the hurricane, which was a negative $0.03 estimated per share on our quarterly EPS offsetting the impact of margin improvements we had achieved.

Our focus on off premises dining through third-party delivery, online ordering and a new catering to go menu continues to evolve and expand each quarter. We are encouraged with Bravo and Brio realized growth of 15% and 35%, respectively or 23% overall for BBRG.

Our operational focus continues to be on accuracy and timeliness of orders to improve the guest experience. We're currently realizing a nearly 20% higher average check for our online orders versus calling, so we're pleased to see continued growth in this avenue as well.

The new catering to go initiative is now in place and building momentum with family bundles for take home as well as office and meeting packages. We’ve recently engaged a new third-party partner who specifically markets catering programs for both home and businesses.

We maintain that these off premises programs are incremental and place BBRG as one of the few polished casual dining restaurants in this category. Banquet sales for Bravo grew over 7% for the quarter, while Brio saw a decline primarily due to the hurricane impact in Florida.

BBRG remains committed to the growth in this area as our year-over-year sales were up nearly 6% to date. The holiday season is nearly upon us and as holiday bookings are coming in, we believe we will see another positive quarter for both brands as it relates to private dining.

Our quarterly special features which both brands are running continue to perform at a high level. These limited time menu offerings allow us to test potential new food and beverage items prior to being permanently added to the menus. These features utilize seasonal ingredients providing for additional variety for guests and allowing us to take advantage of favorable seasonal commodity prices.

These offerings also allow us to bring back popular selection that excel as features and that our teams can consistently execute at a high level. The combination of introducing new potential menu items and the return of past favorites allow us to drive a day part check and value to ensure we're exceeding guest expectations.

As an example, October was national pasta month and we celebrated our menus at both brands by highlighting our best-selling pasta dishes, while bringing back the sensational hit from the past, our cocktail features undoubtedly on trend and appropriate for the season, but also design to improve margins and the ease of execution for our team members. These features are favorites for our team members and guests alike and over time we will be contributors to building sales and traffic.

Bravo rolled out a new Happy Hour menu this past quarter with new food and drinks, which has received great guest feedback and increased revenue for this day part. We believe our borrow offerings have been a big driver of traffic in the past, so we're excited to continue to evolve the offerings.

A new pepperoni pizza cheese dip with house made flatbread crisps, stuffed peppers, fingerling potato skins, along with multiple cocktails like the seasonal Midnight Mojito and very Berry Martini have added to the success of the program that are resonating with our guests.

We continue to build a positive relationship with Costco as the demographics for both brands are aligned perfectly. We expect to exceed the holiday gift card sales of 2016 in Q4 of 2017, which in turn will drive first quarter 2018 sales and traffic.

The guest average spent on a gift card check is higher than our normal check, which positively impacts our sales and helps to offset some of the incremental costs associated with third-party gift card sales.

A message internally to our team is about executing our mission each and every day. We believe that a focus on building a solid foundation and a better understanding of our guests expectations will build traffic over the long run. Our ongoing training, process simplification and delivering a unique experience is laying the groundwork for the future.

Our commitment to improving the bottom line performance of BBRG is a primary focus for our teams. We're evaluating our corporate overhead, our partnerships with vendors, as well as providing the resources necessary to improve our labor performance model for our restaurant leaders.

The teams has done an outstanding job of improving cost of goods through a focus on delivering a better product. And although our efforts to reduce labor have not yet met our expectations. The plan is in place and steps are been taken to positively impact our large area of opportunity as it relates to costs.

In Q3, we closed two restaurants through early these expirations, which makes five for the year. It is never an easy decision to close a restaurant, but it was the right decision both financially and from a human resource capital allocation perspective.

We're in the process of negotiating multiple lease amendments utilizing our recently engaged third-party real estate consultant which will assist in the long-term financial direction of those properties in the company while evaluating next steps for 2018 portfolio and beyond.

We opened a new restaurant in Siesta Key, Sarasota right before the hurricane Irma hit. While the timing of that opening was unfortunate, the reviews which have been very positive and we're excited to watch our latest restaurant grow. It has the same menu as our Brio Coastal that opened in California in December of '16, which is still receiving great reviews as well.

Our research is telling us that we are tracking a dynamic, younger guest with higher frequency at these restaurants, which we believe is directly related to the food and beverage and ambience provided, because the restaurant spaces are unique they can evolve in different ways.

As an example, we reduced the size of our Brio Liberty in Town Center -- in Liberty, Ohio by converting a 1,700 square foot section of the restaurant into a bar. The atmosphere is more casual and there was a different selection of food and beverage similar to our Brio Coastal restaurants.

By utilizing the existing kitchen, restrooms, and management, we've improved the top line and bottom line performance of the overall space, while creating two unique experiences for our guests. The management hourly team members are very excited about the opportunities. And redeploying the space in the selection of our larger restaurants is an avenue we are considering for future growth.

This concept will help us better utilize some of our larger footprints to drive traffic, sales, and increased profitability. We continue to monitor closely the three restaurants that we reimaged to Brio Coastal where we introduced new menus with the intention of attracting a younger demographic, while still appealing to our current guest face.

It is too early to draw conclusions, but we continue to tweak the menu and design in anticipation of analyzing the final outcome. The objective of creating an ambience that is comfortable for existing guest was attracted to a younger guests with a complementary menu in the end goal of these conversions.

The implementation of the new beverage program enhances their ability to stay current with industry trends as well. We continue to work with Piper Jaffray, our strategic banking partner on short and long-term alternatives for the company. Currently we're in the process of refinancing a loan which matures in December of 2018.

And while the third quarter was challenging, our initiatives continue to take hold and we will be the key drivers of our business as it relates to the top and bottom lines in Q4 and beyond. We continue to review G&A costs, occupancy costs, operating expenses and labor with high a level of scrutiny and expect incremental savings in future periods.

We also realized that in order to be the best, it starts with hiring, training, and holding people to the highest standards. We believe that our team members understand this challenge and will continue to provide amazing experiences for our guests, building our business, one meal at the time.

I thank them for their commitment and look forward to continuing to partner with each and every one of them going forward. Now we would like to turn the call over to Diane.

A - Diane Reed

Thanks, Brian. I’d like to review our financials for the 13 week period ended September 24, 2017 and discuss our updated annual guidance. Q3 revenue decreased 0.2% to 88.7 million from 94.6 million. This increase was primarily due to 39 fewer operating weeks that in the prior year, decline in comparable restaurant sales and the impact of the hurricane.

During the quarter, we closed two underperforming restaurants due to lease expirations for a total of 5 this year and opened one new location in Siesta Key, Florida. The 5.7 decrease in overall comparable sales was comprised of a 5.8% decrease in guest count and a 0.1% increase in average check.

As Brian said, we estimate that both hurricanes together, negatively impact the comparable sales by an estimated 1.4% or $1.3 million in revenues. Restaurant revenues at Bravo decreased 6.6% to $32.6 million from $34.9 million due to a 2.7% decrease in comparable sales as well as a 34 fewer operating weeks.

The decrease in comparable sales was due to a 3.0% reduction in guest count, partially offset by a 0.3% increase in average check. Hurricane Irma had an estimated 50 basis point negative impact on Bravo comp sales. Average weekly sales for comparable Bravo restaurants were $51,700. There are 47 Bravo restaurants out of a total of 49, included in the comparable revenue base.

Restaurant revenues at Brio increased 6.5% to $65 million from $58.8 million due to a 7.4% decrease in comparable sale and 5 fewer operating weeks. The decline in comparable sales consisted of a 7.7% reduction in guest count and a 0.3% increase in average check.

Both hurricanes had an estimated 200 basis point negative impact on Brio comp sales. Average weekly sales for comparable Brio restaurants were $67,300. There are 16 Brio restaurants out of the total of 63, included in the comparable revenue base.

Turning to expenses, as a percentage of revenue, cost of sales improved 110 basis points to 25.6%. We experienced operational efficiency, mix shit, modest price increase as well as we’re rolling over higher costs associated with the implementation of a new menu in 2016 and this was slightly offset by a commodity basket inflation of 40 basis points.

Labor costs improved 40 basis points to 38.7% as a percentage of revenue, as we leftover the investments and training made in the prior year associated with many rollout and sales deleveraging.

Operating costs were lower by $700,000 primarily due to a decrease in supply costs, but around 30 basis points as a percentage of revenue, a 17.7% primarily due to deleveraging. Occupancy costs, improved 50 basis points to 8% or $900,000 reflecting the cumulative effect of 7 restaurant closures consisting of five in 2017, and two in 2016.

Our overall restaurant level operating profit increased to $8.8 million and restaurant level margins rose 160 basis points to 10% in Q3. This compares to restaurant level operating profit of $7.9 million and restaurant level margins of 8.4% in the same period last year.

As Brian mentioned earlier, we believe the hurricane caused us an estimated $450,000 in loss restaurant level operating profit. Despite the hurricane impact, Q3 marked our second consecutive quarter of sequential improvement in the restaurant level operating profit.

General and administrative expenses dropped to $5.3 million from $6.9 million in the same period last year. And as a percentage of revenues fell 140 basis points to 5.9%. This was due primarily to a lower corporate balance accrual with estimated headcount as low as lower professional fees compared to last year.

Net interest expense rose to $677,000 from $405,000 due to the higher net borrowing costs. GAAP net loss was $2.5 million or a negative $0.16 per diluted share compared to GAAP net loss of $3 million or a negative $0.20 per diluted share in the prior year.

Adjusted net loss was $2.4 million or a negative $0.16 per diluted share in Q3 for both years. The difference between GAAP earnings and adjusted earnings in the current quarter consisted of a $69,000 write-off of unamortized loan origination fees due to the lease amendment, while the adjusted in the same quarter last year consisted of $624,000 related to the excess tax deficiency for stock option exercises.

Turning to the 2017 guidance, we are revising our previous projections primarily due to the impact of the hurricane and sales softening in early third quarter results. Revenues for the 53 week period ended December 31, 2017, are now estimated between $404 million and $409 million versus $405 million to $415 million previously.

Embedded within this new range is a comparable restaurant sales range of minus 3.2% to minus 2.5% adjusted to a comparable 52-week basis. This compares to our prior comp projection of minus 2.5% to flat. Commodity cost inflation will increase approximately 1% this year mainly due to sea food and poultry.

Net capital expenditures are now estimated at $8 million to $9 million, as compared to $9 million to $11 million previously. Our G&A costs are estimated to be between $28 million and $29 million, inclusive of increased legal expenses in Q1 of 2017. Our annual effective tax rate range remains at approximately 5% and our estimated diluted share count remains at 15.4 million shares.

We are tightening our adjusted diluted EPS range to be between $0.19 and $0.24 from $0.22 to $0.32 per share due to an estimated $0.03 per share impact on the third-quarter results from the hurricane and lower sales estimates.

As Brian mentioned, our current credit facility matures on December 1, 2018 and we’re working on having a new facility in place ahead of that maturity day. We believe that securing a new credit facility will provide the financial flexibility, and liquidity needed to be more aggressive in pursuing certain strategic alternatives and closing additional underperforming restaurants.

Although our debt increased in Q3, given the seasonality of our business, coupled with the storm impacts, we intend to pay down debt between now and the end of fiscal 2017.

And with that, operator, please open the line for questions.

Question-and-Answer Session

Operator

Q -

A -

Brian O'Malley

Well, we certainly appreciate everyone joining us on our call today. I realize there are a lot of other calls going on. So we appreciate your time, commitment to joining us today. And thank you for your support of Bravo and Brio Restaurant Groups and we look forward to continuing to service you down the road. Thank you.

Operator

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