Del Frisco's Restaurant Group (DFRG) CEO Norman Abdallah on Q3 2018 Results - Earnings Call Transcript

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About: Del Frisco's Restaurant Group (DFRG)
by: SA Transcripts
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Earning Call Audio

Del Frisco’s Restaurant Group Inc. (NASDAQ:DFRG) Q3 2018 Earnings Conference Call November 12, 2018 8:30 AM ET

Executives

Neil Thomson - Chief Financial Officer

Norman Abdallah - Chief Executive Officer

Analysts

Will Slabaugh - Stephens Inc.

Brian Vaccaro - Raymond James

Nicole Miller - Piper Jaffray

Operator

Good morning, ladies and gentlemen, thank you for standing by, and welcome to the Del Frisco’s Restaurant Group Inc. Third Quarter 2018 Earnings Call. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a Q&A session. Instructions will be provided for you at that time to queue up for questions.

I would now like to turn the conference over to Neil Thomson, Chief Financial Officer. Please go ahead, sir.

Neil Thomson

Thank you, Tara. Good morning, everyone and thank you for your time and interest in Del Frisco’s Restaurant Group. Joining me today is Norman Abdallah, our Chief Executive Officer. After Norman and I deliver our prepared remarks, we will be happy to take your questions.

As you have probably already seen, we issued our Q3 earnings release this morning, and our 10-Q last Friday, afternoon. Both documents can be found at our corporate website www.dfrg.com, under the Investor Relations section, as well as on numerous financial websites. But first, let me read our Safe Harbor statements.

As part of our discussion today, we would include forward-looking statements. Please be advised that these statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We refer you to today’s press releases 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 be referring to restaurant-level EBITDA, adjusted EBITDA and adjusted net income or loss, which are all non-GAAP measures as part of our quarterly review. 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 now, I would turn the call over to Norman.

Norman Abdallah

Thank you, Neil, and good morning, everyone. Q3 was a very busy quarter at Del Frisco’s Restaurant Group and we have accomplished a great deal in setting up our company for long-term success. First, we have made significant headway integrating our emerging brands, Barcelona Wine Bar and bartaco into our ecosystem.

So apart from the third-party integration experts, the initial transition period is now complete. Key members of the emerging brand team have been relocated to our Irving, Texas restaurant support center and we are making strong progress on systems integration.

While our dedicated brand teams operate autonomously, they know they are also part of a disciplined larger organization where they can learn from each other and share experiences and knowhow. Together, we are all dedicated to a singular mission to help our guests celebrate life through great food, great wine and superior hospitality.

We are also continuing our engagement with Sasa Mahr-Batuz, the Co-Founder of Barcelona and bartaco as an outsourced resource for his expertise in design. His vision for these brands has been instrumental in making them what they are today. By keeping him on board as an advisor, we will ensure that both brands can maintain their heart and soul for many years to come.

Notably, our combined organization now has significantly more leverage with developers and landlords than ever before. This is because we not only bring to the negotiating table distinctly positioned growth brands with industry-leading yield economics, but also the respect that Del Frisco’s name has in the marketplace.

Integration of our major back-end support system are on track to go live during the first half of 2019. Therefore, we now expect integration of emerging brands business to be completed by the middle of 2019.

Notably this is at the early end of the 12 to 18 month timeframe we laid out when we first announced the transaction. Once completed, we will see cost saving opportunities in G&A and purchasing across the portfolio because of greater scale, combined knowhow and capabilities for a best-in-class supply chain.

These savings are now likely to be at the high-end of our $3 million to $5 million range with significant runrate savings beginning in the second half of 2019.

During the third quarter, we also successfully completed several important transactions for our capital structure. We completed a secondary offering of common shares and used all of the net proceeds of $97.8 million to reduce our long-term debt.

This was followed by the syndication of our term loan at LIBOR plus 600 basis points. After that, we sold Sullivan’s for $32 million, plus customary adjustments and used all the proceeds to reduce debt on our revolver.

At the quarter end, we added term loan balance of $310 million and a zero revolver balance. We have strong liquidity plans which we regularly review with ability to access [$50] [ph] million to our revolver and a capacity to raise incremental debt of $25 million through our existing credit agreement.

On a related note, following ongoing reviews of our development pipeline, we have cut our CapEx budget for 2019 relative to our original plans. This moderates the more aggressive acceleration of Barcelona and bartaco openings planned by a previous ownership while still providing strong growth plans for both concepts. We expect this to enhance our ability to execute high-quality restaurant openings and move our CapEx and openings within the long-term guidance previously shared.

CapEx for next year is now expected to be $50 million to $60 million. In 2019, we are scheduled to open two Double Eagles at Century City and Santa Clara California with our Pittsburgh openings now scheduled for 2020.

With the Barcelona Wine Bar and bartaco moving from originally scheduled 2018 to early 2019 openings, and after a close review of our pipeline, we now have plans to open three to four Barcelonas and six to seven bartacos in 2019. Leases are signed for all of these sites. As previously announced, there are no plans to open grills in 2019 or 2020.

We have three restaurant openings during Q3 a Double Eagle Boston at the Prudential Center, a small prototype Double Eagle in Atlanta and a bartaco in North Hills, North Carolina. Through our first three quarters, we have opened a total of four restaurants consisting of two Double Eagles, one Del Frisco’s Grille and one bartaco.

Additionally, two bartacos and one Barcelona Wine Bar were opened in the first half of 2019 under a previous ownership. Collectively, we are encouraged by the initial traction we are experiencing in the seven restaurants and the results continue to prove out the strong economic models that underlie our disciplined growth plans.

As you know, the Double Eagle brand has one of the highest AUV and EBITDA margins in the industry. Our comparable restaurant group we use for the same-store sales, but excluding Chicago, which is closing have an AUV of $14.6 million, sales per square feet of over $950 and restaurant-level EBITDA margins of 26% over the last 12 months.

CapEx typically ranges from $7 million to $9 million after tenant allowance and excluding pre-opening costs. Barcelona has a strong track record of consistent growth with mature restaurants opened in 2016 or earlier achieving high AUVs of $4.4 million despite being primarily a dinner-only concept and restaurant-level EBITDA margins of 24% over the last 12 months. We expect CapEx to range from $2.8 million to $3.2 million.

Bartaco enjoys one of the highest sales per square feet in the restaurant industry at over $1000 with AUVs for restaurant opened at 2016 or earlier, excluding the two recent closures, averaging $5.2 million and restaurant-level EBITDA margins of 29%.

Port Chester, despite the impact of the incidents in Q4 2017 continues to be an above-average restaurant in the portfolio in both sales and EBITDA. CapEx is expected to range from $2.5 million to $2.8 million. As part of our disciplined approach to growth, we set a high bar to improve new restaurant openings which ensures a high-quality pipeline.

All new sites are approved based on achieving a minimum of 35% to 40% return on invested capital after tenant allowances, and excluding pre-opening costs in their third year of operation. In Q4, we have already opened one Double Eagle, our first on the West Coast in downtown San Diego, while our Century City opening has been postponed from December until the first quarter next year.

We also expect to open two Del Frisco’s Grille in Philadelphia and Fort Lauderdale, one Barcelona Wine Bar in Charlotte and two bartacos in Four Points, Massachusetts and Dallas, Texas in Q4. This will bring our total 2000 openings 10 for a total of 13 across all four concepts including those restaurants opened under previous ownerships.

This is a record number of annual openings for DFRG and these new restaurants will help drive strong revenue and EBITDA growth for business in the future years.

We have also closed underperforming bartaco restaurants in Nashville, North Carolina, and Homewood, Alabama in early Q4. These bartaco closures were the results of due diligence pre-acquisition and were anticipated at that time. Similarly closed the Del Frisco’s Grille in Houston in Q3 and have one remaining Del Frisco’s Grille planned for the closure as soon as feasible.

Finally, we have decided to close a Double Eagle in Chicago in early 2019 after a difficult few years in that market. No other restaurant closures are currently contemplated. All of these steps are necessary to optimize our portfolio to ensure high return and solidify our platform for future growth.

As you know, we foresee significant growth opportunities for our brands relative to the current footprints. Between now and the end of 2021, our intention is to grow our footprint by 10% to 12% annually focused on our three highest returning brands typically consistent of two to three Double Eagles, two to three Barcelona Wine Bars and important six bartacos each year.

We have signed leases for all of our 2019 openings and are far along with LOIs for our projected 2020 openings.

Turning to our Q3 financials, please note the following: as contributions from Barcelona and bartaco to our results demonstrates our portfolio is benefiting from being more diversified and balanced than ever before and these brands have not only strengthened our top-line, but have also enhanced our restaurant-level EBITDA and margins.

Restaurant-level EBITDA was steady in year-over-year and dollars compared to the same 13-week period a year ago for all four brands. With the margin decreasing slightly to 17.7%, as contributions from these two high margin brands which expanded their own margins by 100 and 260 basis points each, largely offset short-term headwinds at the Double Eagle from our new restaurant inefficiency and closures or remodels.

At the Double Eagle, we experienced slightly negative comparable sales due primarily to sales transfer at our Boston Seaport Restaurant from our new Boston Back Bay openings, the continued underperformance in Chicago which is now scheduled for closure in January 2019 and a decline in patio sales driven by weather.

On a more encouraging note, with reinvented credit, sorry, marketing plans following a change in brand leadership, and the arrival of our new Chief Marketing Officer, together with moderate pricing taking in September, we have seen an uptick in sales trends towards the end of Q3 which has continued into the early weeks of Q4 with comparable restaurant sales, low-single-digit positive through our first period of the five weeks of the quarter.

With a tougher lapse in later weeks of the quarter from lapping our Q4 2017 menu launch, we expect to end Q4 with same-store sales between negative 1% and plus 1%. At Del Frisco’s Grille, we experienced flat comp trends in Q3, despite adverse weather impacting our patio sales and competitive intrusions in one market which has resulted in double-digit sales declines in that restaurant.

Excluding patio sales, our regular and private dining same-store sales were up 3.6%. Early Q4 same-store sales is running low-single-digit negative, also impacted in early weeks by patio sales declines.

Notable at the Del Frisco’s Grille is the strength of our wine business with sales up 9.3% in Q3 and our private dining business which continued its run of impressive growth rising 54% year-over-year in Q3. Our traction in these areas is not only indicative of the health of the business guests, but also our own emphasis on marketing, improving our private dining menu offerings and our internal management systems and processes.

As we head into the holiday season, private dining becomes an even greater opportunity for us to really demonstrate our capabilities and we are pursuing these with centralizing resources using a new software platform and a focus on ensuring a flawless experience from beginning to end.

Double Eagle’s private dining is up almost 20% in the first few weeks of the quarter in bookings for the rest of Q4 are up over 20% compared to last year at this time. Though we are encouraged, we will end Q4 on a high note with our increasing private dining business.

Barcelona Wine Bar continues its strong year with same-store sales rising 2.5% which is consistent with what the brand has experienced throughout this year. Early Q4 same-store sales trends are flattish.

At bartaco, same-store sales fell 7%, principally due to the negative year-over-year impact of an incident at one location which we have now started to lap in Q4, but also due to the weather impacts on the brand’s northeast location. Q4-to-date, trends continued at a similar level through the first few weeks of Q4 that have now turned strongly positive since we lapped the incidents from Q4 2017.

I will now turn the call back to Neil for a more comprehensive financial review. Neil?

Neil Thomson

Thank you, Norman. Let’s begin with a discussion on the 13-week third quarter ended September the 25th, 2018 for continuing operations. For comparison purposes, I will use the recast third quarter 2017, the 13-week period ending on September the 26, 2017, which is contained in the back of our earnings press release. The earnings press release also contains the shorter 12-week quarter as we had reported last year.

Note that with the completion of our sale of Sullivan’s on September the 23rd of 2018, operating results of Sullivan’s and the related impairment and loss on sale, are included in discontinued operations for all periods presented. And we will therefore not discuss the brand in any detail.

Q3 consolidated revenues for the continuing business consisting of Del Frisco’s Double Eagle, Del Frisco’s Grille and Barcelona and bartaco as they’ve had all been part of our company in the year ago period as well, increased by 3.6% to $105.3 million. This was driven primarily by 10.7% growth at Barcelona and 11.8% at bartaco.

Incremental operating weeks from new openings were only partially offset by the overall decline in comparable restaurant sales. Total comparable restaurant sales decreased 1.9%, consisting the 5.5% decrease in customer counts, partially offset by a 3.6% increase in average check.

Turning to our cost line items, total cost of sales as a percentage of revenues decreased by 60 basis points to 27.3% from 27.9% in the year-ago period due to margin improvements at Double Eagle, Barcelona and bartaco, offsetting a slight uptick at the grille.

Restaurant operating expenses as a percentage of revenues increased by 50 basis points to 53.2% from 52.7% in the year ago period, primarily due to higher operating expenses and occupancy costs, slightly offset by improved labor efficiencies.

Marketing and advertising expenses rose by 40 basis points as a percentage of revenues to 1.8% as we have spent our annual marketing budget more evenly across the four quarters of the year compared to 2017 when we had significant menu launches and marketing supports during Q4 in our heritage brands at Double Eagle and Grille.

For all the reasons just stated, restaurant-level EBITDA increased by $0.4 million to $18.6 million in Q3 although the margin decreased 30 basis points to 17.7% versus 18% in the prior year.

Preopening expenses increased to $3.6 million from $0.8 million in the year-ago period, reflecting the developments of four Double Eagles two Grilles, two Barcelona Wine Bars and six bartaco restaurants that have or will open this year or early next year.

Note the preopening costs include non-cash straight-line rent, which is incurred during construction and typically precedes restaurant opening by four to six months.

General and administrative expenses rose to $11.8 million from $10.7 million in the year-ago period, and as a percentage of revenues, increased 70 basis points to 11.2% versus 10.5% in the year-ago period. The higher costs were due to investments to support new restaurant developments.

As Norman mentioned earlier, we are now expecting G&A and purchasing synergies from the bartaco acquisition be at the high end of our previous guidance of $3 million to $5 million and while we are already starting to see some benefits, we expect the majority of the G&A savings to be realized by the middle of 2019 when the transition of back-office systems and support is complete.

Costs related to acquisition and dispositions was $6 million. We did not incur any such costs in the year-ago period. Interest expense of $24.4 million includes one-time cost related to syndication of $310 million term loan. The effective interest rate was 9.3% excluding one-time costs which is based upon the term loan interest rates, LIBOR plus 600 basis points, along with the amortization of syndication costs across the life of the line.

We have accounted $18.3 million in the quarter as a one-time adjusting item related to writes-off of deferred financing cost from the original debt financing. $200 million of the term loan is currently hedged with a cap of 3% LIBOR for four years.

Lease termination and closing costs totaled $0.9 million and were related to the closures of three Grilles and South Lake office.

GAAP net loss was $41.2 million or $1.49 per share. This compared to the prior year GAAP net loss of $1.1 million or $0.05 per share. Excluding one-time items, adjusted net loss was $1.9 million or $0.07 per share, compared to prior year adjusted net loss of $0.8 million or $0.04 per share. Note that add value to share counts is 27.6 million in Q3 this year compared to 21.1 million in Q3 last year.

Now, let’s discuss our individual brand performances on a 13-week-to-13-week basis. At Del Frisco’s Grille Double Eagle Steakhouse, revenues were $38.1 million in Q3, compared to $38.3 million in the year-ago period. We had nine additional operating weeks during the quarter that were offset by a decline in comparable sales.

Comparable restaurant sales fell 2.4% and consisted of a 4.7% decline in traffic, partially offset by a 2.3% increase in average check. Of these declines, we have 51.4% to an estimated 10% sales transfer from the Boston Seaport location, to the new Boston Back Bay restaurant which opened in mid-July. This equates to a 10% sales transfer which is exactly what our investment committee signed off in developing Back Bay which our early analysis confirmed by some pre, post-opening results.

While there is a negative impact to the same-store sales calculation, this does not capture the fact that we expect to grow our revenue in the Boston market by more than 75% through the addition of a new Back Bay restaurant which with its six private dining rooms compared to the two private dining rooms in our Boston Seaport location, also enables us to capture a much greater share of the private dining market attributed to another 1.1% to a decline in patio sales driven by weather.

And finally, we attribute another 0.3% of this decline to continuing underperformance of the Chicago Double Eagle, which fell 9% from Q3.

We have since exercised that right to go dark under the lease and we’d expect to close the restaurants in early 2019 as we are now working with the landlord on terms of our exit. Consequently, we also took an impairment charge of $2.1 million in the quarter. The concept, this generated negative $0.4 million in restaurant-level EBITDA during Q3 and negative $1.2 million in the last 12 months.

Excluding Chicago from our Q3 results, the weather - would had a 160 basis point benefit to restaurant-level EBITDA margins. Without these impacts, same-store sales at the Double Eagle would have increased 0.4% and traffic would have declined 1.9%.

Q4 comparable restaurant sales have started strong and are up low-single-digits in our first period of Q4 which is a five-week period and this is despite the continuing impact of Boston sales transfer and Chicago underperformance.

We attribute our traction here to a few things. A strength in marketing calendar, which has been a key focus for our new Double Eagle Presidents, a new Chief Marketing Officer, strong private dining sales which were up almost 20% in the first five weeks of Q4 behind increased marketing focus year-over-year.

Bookings for the remainder of Q4 over 20% ahead of the same time prior year. This is very encouraging as we enter the most important time of the year for private dining. Growth in wine sales, which were up 4.3% versus 2017 due to increased operational focus and a modest price increase at the start of Q4 to help offset labor inflation of 5% to 6%.

Del Frisco’s Double Eagle restaurant-level EBITDA margin decreased 400 basis points to 15.5% in Q3 due to higher restaurant operating and marketing costs, the exclusion of cost of sales. There were several factors at play here that are worth mentioning, specifically, cost of sales benefited from commodity price reductions in beef. We had also locked our tenderloin purchase for the second half of 2018 at the start of Q3 and are now benefiting from below market pricing.

New restaurant inefficiencies due to the opening of Boston Back Bay in early Q3, which had a negative 250 basis points impact to margins although Atlanta had only minimal impact which is opened late in the quarter.

Remodels in Las Vegas and Denver that were completed in Q3 which resulted in 42 days of restaurant closures and $1 million of lost sales during the closure period. The labor and other ongoing costs of this closure period had a detrimental one-time impact of 180 basis points on margins.

Our remodel work in the Double Eagle is now substantially complete and we do not anticipate incurring significant remodel costs in the immediate future. Without new restaurant inefficiencies and remodel impact, labor would have reduced by 240 basis points versus prior year continuing the trend of labor reductions in the Double Eagle to see implementation of new systems and processes and increased operational focus.

We’ve also incurred 130 basis points of occupancy costs due to sales deleverage and the abovementioned new restaurant inefficiencies. And finally, we experienced a negative impact of 90 basis points from marketing timing.

Our most recent Double Eagle openings continued to perform well. In the Dallas market we have approximately tripled revenue by closing our original Dallas locations and our opening at Dallas uptown restaurant in 2016 and our Plano restaurant in 2017. Both new restaurants are performing well and they are on track to beat our third year 40% return on invested capital target with combined revenues of $23 million to $24 million.

This year, our first opening at Boston Back Bay, which opened in early Q3, is off to a good start with sales tracking in line with year one expectations.

At Barcelona Wine Bar, revenues increased 10.7% to $17.2 million in Q3 from $15.6 million in the year-ago period. The top-line improvement was due to 14 additional operating weeks, along with an increase in comparable restaurant sales.

Comparable restaurant sales, which also included the Vinoteca Shop in this segment increased 2.5% comprised of a 1.5% increase in average check and a 1% increase in traffic. There were no openings in the quarter, but the Denver restaurant which opened earlier this year is performing strongly ahead of its first year sales targets.

Barcelona’s restaurant-level EBITDA margin increased 100 basis points to 22.8% due to continued strong operational execution including a reduction of 40 basis points in cost of sales and a reduction of 40 basis points in labor.

At bartaco, revenues increased 11.8% to $22.7 million in Q3 from $20.3 million in the year-ago period. This top-line improvement was due to 50 additional operating weeks that was partially offset by a decrease in comparable restaurant sales. Comparable restaurant sales decreased 7% comprised of a 1.1% decrease in average check and a 5.9% decrease in traffic.

Notably, we were lapping our highest quarterly same-store sales from 2017 helped by good weather last year with a year-ago comparison of plus 11.1%. Port Chester continued to have a significant drag on overall comps. Excluding this location, comparable restaurant sales would have fallen 2.1% in Q3 versus a year ago.

On a two-year basis, excluding Port Chester, same-store sales improved sequentially in Q3 to 8.4% from 7.5% in Q2 demonstrating the continuing strength of the brand.

We have now lapped the incidents in Port Chester from late October 2017 which also had a more limited impact on other Connecticut restaurants notably Stanford. As expected, cycling over this has resulted in same-store sales turning from negative to positive and the brand is up 9.9% in the first 12 days since lapping this incident.

Breaking down performance by market in Q3, the northeast region experienced 30 more days of rain and twice as much rainfall in Q3 this year versus Q3 last year. This led to five bartacos in the northeast experiencing a 14.1% decline in comparable restaurant sales or a 7% decline experienced in Port Chester.

The rest of the comp footprints across Atlanta, Nashville and Florida decreased 1.9%. So as you can see the northeast was clearly impacted by weather while brand performance across the other half of the comp group was solid.

Bartaco’s restaurant-level EBITDA margin increased an impressive 260 basis points to 27.8% due to 130 basis points of cost of sales improvement due to menu changes and commodity favorability, 50 basis points of improvement in labor due to hourly training improvements and 100 basis points of improvement in operating expenses, partially offset by a small increase in occupancy costs.

We are very encouraged by the strong EBITDA growth of 15.8% in Barcelona and 23.4% in bartaco during Q3. The first quarter for our emerging brands under DFRG leadership. This is clear evidence that the transition process is going smoothly and having a positive impact on business results.

Bartaco’s three 2018 openings are also performing well with two of three performing ahead of expectation and one slightly below expectations. Overall, we are on track to exceed our 40% return on invested capital target.

At Del Frisco’s Grille, revenues were $27.3 million in Q3 compared to 27.5 million in the year-ago period, primarily due to 13 fewer operating weeks. Comparable restaurant sales decreased 0.4% comprised of an 8.6% increase in average check and a 9% decrease in traffic. There are also several factors here to note. The changes in our menu and related marketing focus which we started to implement in Q4 2017 following extensive market research and analytics with the third-party consultants that targeted our core guests which we call Experienced Spenders and Social Scenesters.

Shifting our focus away from discounting and a lower mix of value-focused guest has resulted in a loss of 19.1% to traffic with a PPA below $30 at lunch and $40 at dinner, while we’ve increased traffic of guest with a per person average above $30 at lunch and $40 at dinner by 9.9%.

Patio sales was significantly impacted by weather, particularly in our northeast and Texas markets. Patio sales mix declined to 13.7% in Q3 2018 from 17.7% from Q3 2017 and total patio same-store sales was down 22.7%. Regular and private dining same-store sales combined excluding patio same-store sales was up 3.6% in Q3.

Additionally, our Plano restaurants had a 1.1% drag in total on Q3 same-store sales. This was due to the opening of new developments nearby at Legacy West and The Star. However, private dining remains very strong rising 55% in Q3 with our focus on wine and the reintroduction of sommeliers is also working, driving wine sales up from 9.3%.

Del Frisco’s Grille’s restaurant-level EBITDA margin increased 70 basis points to 9% due to lower labor costs, partially offset by higher cost of sales as menu mix changes more than offset commodity price reductions operating, marketing and advertising costs.

The improvement in labor cost by 230 basis points to 33.5% was due impart to the implementation of HotSchedules, our labor scheduling tool, along with some restructuring of our management labor model. We have opened one Grille in 2018 at Westwood Massachusetts which continues to perform above internal expectations.

Now let’s turn to our updated guidance of fiscal year 2018, which ends on December the 25th, 2018. Our new ranges reflect our year-to-date performance, disposition of Sullivan’s ahead of schedule, some delays to our new restaurant opening plans which will also impact preopening costs, as well as our operating expectations for Q4.

Note this guidance represents continuing operations, so this excludes discontinued operations at Sullivan’s Steakhouse and also excludes results for our Barcelona Wine Bar and bartaco brand, prior to Del Frisco’s ownership.

Total comparable restaurant sales of minus 1.5% to plus 0.5%. Ten restaurant openings consisting of three Del Frisco’s Double Eagle Steakhouses, three Del Frisco’s Grilles, and post-acquisition one Barcelona Wine Bar and three bartacos. Five to six restaurant closures consisting of three to four Del Frisco’s Grilles and two legacy bartacos. Three Grilles and both bartacos are already closed.

Restaurant-level of 19.5% to 20.5% of consolidated revenues. General and administrative cost of approximately $39 million to $42 million, which excludes items we consider non-recurring in nature, pre-opening expenses $10million to $11 million, net capital expenditures after tenant allowances of $75 million to $80 million, and adjusted EBITDA of $34 million to $38 million.

With respect to fiscal year 2019, please be aware that it’s a 53-week year ending on December the 31st of 2019 and as Norman stated earlier, CapEx for next year is expected in the $50 million to $60 million range in line with our long-term CapEx guidance. We plan to open 11 to 13 restaurants and expect one to two closures within the Chicago Double Eagle and the remaining Grille we are targeting to close.

And finally, we are also targeting net debt-to-adjusted EBITDA of 2.5 x to 3 x by t he end of fiscal year 2021 as we anticipate strong EBITDA growth from the addition of our emerging brands and growth in the Double Eagle in particular.

Now, I’d like to hand it back over to Norman for some closing comments.

Norman Abdallah

Thank you, Neil. We realize that there is a great deal of skepticism around the new DFRG given the risk of integration, our elevated debt levels, coupled with the dilution from our recent secondary offering. We hope we were able to alleviate some of those fears this morning given the progress we have already made with the integration, the additional cost savings we intend to realize in G&A and purchasing and how we have taken concrete steps to improve our debt leverage through the Sullivan’s sale and a more conservative approach to CapEx in 2019.

It is also worth noting, how our brands performed during the last major recession in 2008 through 2009, as this has been topical in our recent conversations with investors. While bartaco and the Grille were not operational at that time, Barcelona had positive same-store sales despite the recession as the brand benefited from guests trading down from higher priced concepts.

We would anticipate a similar effect at bartaco with its lower price menu items. At the Double Eagle, even though same-store sales declined 19% in 2009, due to the high variable cost structure which enabled a quick adjustment to adverse EBITDA trends, EBITDA margins improved 110 BPS in 2009. So restaurant EBITDA dollars only fell just over 5%.

Double Eagle also emerged quickly and strongly from recession with lost revenues fully recovered by 2011 and 14% higher than 2008. The acquisition of our emerging brands certainly strengthened our ability to manage effectively through a recession, lowering risk and with growth CapEx forming over 90% of our total CapEx, we are also well-positioned to manage the liquidity of our business and generate free cash flow.

Our energized leadership team is executing towards our long-term targets, 15% plus adjusted EBITDA growth is based upon top-line growth of at least 10% disciplined development with high return on invested capital, maintaining strong restaurant-level EBITDA margins, and leveraging G&A.

As a reminder, by the end of fiscal year 2021, we expect to generate at least $700 million in consolidated revenues and $100 million in adjusted EBITDA and by doing so, we will create a lot of value for our shareholders.

As we have detailed in the past, we had three overarching initiatives this year and I am pleased to say that we have largely accomplished what we set out to do. We solidified our foundation in processes and technology. These efforts support our integration of the emerging brands which has been completed operationally and will be fully completed by mid-year of 2019.

We innovated within our Double Eagle and Grille brands, establishing brand pillars and essences through R&D, marketing messages and service. We activated growth by accelerating development of the Double Eagle with marquee locations while also benefiting from Barcelona and bartaco’s development plans that we laid out prior to the acquisition.

Looking ahead, we have a pipeline already for openings well into 2020 that will support 10% to 12% annual growth. We also hold our portfolio of underperforming assets which will strengthen our position going forward.

Lastly, I am pleased that last week, we announced our partnership with St. Jude’s Children’s Research Hospital to raise $5 million over the next five years in a support of their effort in pioneering research and treatment for pediatric cancer and other life-threatening diseases. This marks the first time in our company history that we launched a multi-year relationship with a national charity partner to make a difference.

St. Jude's embodies the core of our company mission celebrating life in this historic partnership establishes a philanthropic platform for our team members and guests to further engage with our communities on both a local and national level outside of our restaurants. There is no greater call than one that strives to ensure children live and see the other side of cancer.

We hope that you will contribute generously to this worthy cause during your next dining experience at any of our restaurants.

Thank you very much for your time and support.

Now I will turn it over to the operator, please open the lines for questions. Tara?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will now take our first question from Will Slabaugh from Stephens Inc. Your line is open. Please go ahead.

Will Slabaugh

Yes, thanks guys. Wanted to ask a question, first on bartaco and about the impressive improvement you mentioned to October from the third quarter. I wanted to double check that that number was excluding the two stores that you just closed and that the 3Q number included those stores? And then, more broadly, how should we think about the runrate for that business at this point?

Neil Thomson

Sure. So, I’ll take that one, Will. So you had a – the two stores that we closed were included in our Q3 numbers and yes, excluded in Q4. It would be fair to say that, as you might expect what happened in Port Chester was most impactful in the first few days. I think the store was down 80% to 90% immediately after the incident and then it fairly quickly got back to about a 50% decline and then, trended up, so that we were one year after the event at about a 30% or so decline.

So, we have got a benefit in the first few days, probably an easier lap. But the benefit of the lap will last throughout the full next 12 months and will be meaningful for the brand. As we commented as well, Stamford has had a benefit as well. There was a little bit of an impact on that restaurant as well. So, we saw a change in Stamford’s same-store sales trends at the time of it lapping that incident, so.

Will Slabaugh

Got it. That’s helpful. And then, I want also ask about the private dining business, that’s also a nice jump you mentioned year-over-year for the 20% or so in private dining that you are seeing for target bookings. So, how do you think about that ROI for that business is going to be coming? And you mentioned some incremental marketing spend. I was just kind of curious if you would talk about maybe how much more spend – maybe if you don’t want to quantify, just sort of qualify how much more time and effort you are putting into that today? And how we should think about the ROI on those incremental dollars come in? It seems like that could be fairly significant for the fourth quarter?

Norman Abdallah

Yes, sure. This is Norman. I’ll take that one. So, since our new President joined [or covered] [ph] the Double Eagle about nine weeks ago, he rolled out a complete new private dining target and it really doesn’t count for many adding any additional headcount. We already had a sales and event planner in every Double Eagle. What it really results from is, is we promoted somebody to be the head of private dining sales that works with these 13 sales and event planners.

So, really, it took the focus of that private dining team. The President who is Scott Smith also introduced a private dining package to the private dining sales team which they are able to leverage as well. And then finally, we implemented the new technology that not only records private dining better but allows the sales and events planners to get back within 24 hours to book the party and have it set up, which has also driven top-line sales and private dining as well.

And as you noted Will, the return on invested capital is greater in private dining, because you know exactly how many people come in, we have a set menu and you also can have a set wine pairing as well. So, the return on invested capital in private dining is better and the flow-through is better from private dining sales.

Will Slabaugh

Got it. Thanks guys.

Norman Abdallah

You bet.

Operator

We will now take our next question from Brian Vaccaro from Raymond James. Your line is open. Please go ahead.

Brian Vaccaro

Thank you and good morning. Just a question starting out on the guidance, still working through all the supplemental information you provided. But the adjusted EBITDA guidance of 34 to 38, I just wanted to confirm that reflects year-to-date EBITDA in the press release of $21.5 million. Is that right Neil?

Neil Thomson

Yes, it’s the continuing operations at the business. We’ve taken out Sullivan’s. So there is no Sullivan’s EBITDA in our guidance at all and you basically got the EBITDA for Barcelona and bartaco in the second half of the year.

Brian Vaccaro

Okay. And similar question along the same line, just thinking about the store margins and given all the moving pieces, I just want to make sure we are all on the same page, would you be willing to provide what that implies for the fourth quarter given the sort of moving pieces on the historical year-to-date, excluding Sullivan, but we got a partial period on the bartaco brands?

Neil Thomson

So, Brian, that was on the same-store sales guidance of Q4?

Brian Vaccaro

No, sorry, on the store margin guidance.

Neil Thomson

Okay. Yes, I think, I mean, I don’t have the exact numbers in front of me right now. But we – I think you know, we have - the way the seasonality works for our business is that the Double Eagle has and Grille have a particularly strong EBITDA performance in Q4 and we are seeing – still seeing the benefits of the cost of sales reductions and the labor reductions that we called out. Barcelona was a little bit more [collapsed] [ph] in terms of seasonality, while bartaco was up at its lowest seasonality in Q4. So, I hope that, that gives you a little bit of a steer on what you might expect to see in margins in Q4.

Brian Vaccaro

Okay. All right. And, on Chicago, I appreciate the trailing 12-month EBITDA that you provided. Do you have what the sales were? Could you provide that as well, Neil, on that unit?

Neil Thomson

Yes, the sales has now fallen below $7 million on an annual basis and that was the trigger for our go-dark right in the lease.

Brian Vaccaro

Okay, excellent. And then, just last one from me. Thinking about the new unit inefficiencies at the Double Eagle in those store margins. You said, it was I think 250 basis points. Most of that I assume is in labor, but maybe a little bit in cost of goods.

So, if you could help us allocate that. And then also, how should we think about that the weight of those new unit inefficiencies maybe in the fourth quarter? Is that going to be a similar amount? Maybe a little more, because we’ve got San Diego and Atlanta. Any directional guidance would be helpful. Thank you.

Neil Thomson

Sure. So, of that 250 basis points, about 150 is labor and the majority of the rest of the 100 is in cost of sales. And then as we look to Q4, we have San Diego that has just opened and we have Atlanta opening in the back-end of Q3. So we anticipate an even higher impact of new store inefficiencies, because we still have a little bit from Boston Back Bay, which will roll into Q4 and pretty much the ramp up, both San Diego and Atlanta Double Eagle throughout the whole of Q4.

Brian Vaccaro

All right, that’s helpful. I’ll pass the floor on. Thank you.

Operator

[Operator Instructions] We will take our next question from Nicole Miller from Piper Jaffray. Your line is open. Please go ahead.

Nicole Miller

Thank you. Good morning. I want to start with the asset reviews first. Three questions. First, is it complete? Second, when you think about the bartaco fleet, and you have a one store kind of a one-off issue that you are lapping and the closure of the stores discussed today, what’s the volume and profitability of the fleet? Does it vary or is it in a very tight range? And then, finally, just given the additional total closures that you’ve talked about for this year and that’s a – this year and next, what might be the store level margin benefit we should be thinking about to the P&L next year?

Neil Thomson

So, the asset – so, let me for a second, the first question, Nicole. So yes, the asset review is complete. Once we have the Chicago Double Eagle closed and we have one more Grille to close, then that's our asset review done. Then, can you remind me what your second question was? Sorry.

Nicole Miller

The bartaco fleet. How?

Neil Thomson

Yes, yes.

Nicole Miller

How much does the volume and profitability vary across the board?

Neil Thomson

We – not too much. It’s actually a pretty tight range. One of the things that attracted us to the brand, when we were looking at the acquisition, we – as we mentioned on the call, we average about a – just over a $5 million AUV and it really ranges between $ 4 million - $6 million to $7 million all of the restaurants. And all are high restaurant-level EBITDA margins. These two restaurants that were closed were really the outliers in the suite.

And then, as we go into next year, the impact of the two closures will be – I think, just under a 100 basis points benefit to our restaurant-level EBITDA.

Nicole Miller

Okay. At that brand, is there – is that a point to review what the store level margin must – could be at all four concepts as you now complete the asset review? So that we model that appropriately.

Neil Thomson

Yes, so I think we mentioned on the call, that the Double Eagle, the Chicago closure would have improved that Q3 margins. But I think it was a 160 basis points and then, we’ve mentioned in the past, so, the grill closures, it’s under a 200 basis points benefit, if I recall correctly from the all of the four closures.

Nicole Miller

Okay. Two last questions for me, on holiday, we know that bookings are important at Eagle. So, how are the bookings? Are they weighted towards more bookings? Or more people spending more and more alcohol, what can you share? Is there anything that you do special at Barcelona for the holiday?

Norman Abdallah

Yes, this is Norman. So, if you look at the bookings for Double Eagle, that 20% is continued really on the guest side because the check is about average over last year. And so, it's really on the guest side where the bookings are going up. In Barcelona, they are following the same system that they have done in the past wherein markets they have individual people that are doing bookings.

They just put a new one in and one of the regions that they hadn’t had before they are just focused on one, now they are focused on both concepts just in pure bookings. As we move into Q1 of next year, part of the integration process or the systems that we currently have in place for the Double Eagle and the Grille and that is something going into next year.

We will add into both of those and we are working on something with bartaco right now that is outside of the four walls of bartaco, really focused on offices, and we're going to test on that and we will control the product 100% without having a third-party delivery. So we make sure that the product is executed in those office caterings as well.

Nicole Miller

Thank you. And just a final question. As you think through all the pushes and the pulls that have been discussed today, is there anything that would have you come ask your $100 million adjusted EBITDA guidance or goal for 2021?

Norman Abdallah

No, we are – again, because of the integration and the success that we are seeing on that, exiting Sullivan’s earlier, seeing what we see in Q4 and with the impact of new President is having on the Double Eagle brand, we still feel very good about the $100 million that we’ve modeled at the end of 2021.

Nicole Miller

Thank you.

Norman Abdallah

Thank you, Nicole.

Operator

It appears there are no further questions at this time. I would like to turn the conference back over to your host for any additional or closing remarks.

Norman Abdallah

Yes. Thank you, Tara. Now, as we have talked about, we accomplished quite a bit in Q3 to really, I call it, alleviates the noise in the DFRG as there is no loud noise over the last two quarters. As we go into Q4, the operations team with the noise out and the restaurant support center, are 100% focused on executing our Q4 and then leveraging that to go into next year as well.

So, we are very excited as we finish off this year and go into next year. We now have visibility at a high level, certainly, as we move forward with the DFRG platform with the three growth brands that we have today. So, thank you very much for the time today for supporting us and for the questions as well.

Have a good day.

Operator

This concludes today’s call. Thank you for your participation. You may now disconnect.