Fiesta Restaurant Group, Inc. (NASDAQ:FRGI) Q3 2022 Earnings Conference Call November 10, 2022 4:30 PM ET
Raphael Gross - ICR
Rich Stockinger - President and CEO
Dirk Montgomery - CFO
Conference Call Participants
Edward Riley - EF Hutton
Good day, and welcome to the Fiesta Restaurant Group Third Quarter 202 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now I like to turn the conference over to Rafael Gross from ICR. Please go ahead.
Thank you, operator. Fiesta Restaurant Group's Third Quarter 2022 earnings release was issued after the market closed today.
If you have not already accessed it, it can be found on the company's website www.frgi.com, under the Investor Relations section. Before we begin, I'd like to inform you that during the call, the company will make various statements that are not based on historical information.
These forward-looking statements include, without limitation, statements regarding the company's future financial position and results of operations, business strategy, budget, projected costs and plans and objectives of management for future operations.
Actual outcomes might differ materially from these forward-looking statements, and the company can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements can be found in the company's SEC filings.
Please note that during today's conference call, certain non-GAAP financial measures will be discussed, which the company believes can be useful in evaluating its performance. Any discussion of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and a reconciliation to comparable GAAP measures is available in the company's earnings release.
On the call with me today are President and Chief Executive Officer, Rich Stockinger; Chief Experience Officer and Senior VP of Strategic Initiatives, Patty Lopez-Calleja; and Chief Financial Officer, Dirk Montgomery.
And now I'd like to turn the call over to Rich.
Thank you, Rafe. I'd first like to thank all of our investors and other participants on the call today for their continued support.
I'll be covering 3 topics. A business update and overview of our third quarter results, the status of our strategic growth initiatives and thoughts on our plans to successfully close out 2022. Dirk will then provide a financial update before we open the call for questions. We also have Patty Lopez-Calleja, our Chief Executive -- Chief Experience Officer and Senior VP of Strategic Initiatives here with us available to provide more color on our strategic initiatives during the Q&A session.
First, key takeaways on the third quarter results. The third quarter of 2022 was a positive quarter for the business with progress being made on all fronts and meaningful quarter-over-quarter improvements in our results after factoring the impact of Hurricane Ian, on our operations.
We saw continued traction across our key priorities of driving traffic growth and improving margins, and our strategic growth initiatives are building momentum.
Providing more color on our accelerating sales trend, our comparable restaurant sales improved to double-digit growth in the third quarter. Excluding the estimated impact of hurricane, and further accelerated in October. Moreover, our traffic comps improved approximately 140 basis points from the second quarter to the third quarter, inclusive of the negative impact of Hurricane E of approximately 220 basis points.
Our accelerating comp transaction momentum was a direct result of the actions we shared previously, improve staffing, expand our sales growth initiatives and continue our successful pricing of value item price with check accretive limited time offers.
As we noted previously, improving staffing levels has been a key enabler to transaction growth. Staffing levels improved measurably in the third quarter versus the second quarter and further improved in October, which along -- with the ongoing impact of our growth initiatives should enable us to further accelerate comp traffic growth in the fourth quarter.
Our top line momentum is building not only in total but in each of our key markets. All key markets improved their comp transaction trends versus 2021 in the third quarter versus the second quarter after adjusting for the estimated hurricane impact.
In addition, the West Palm and Orlando markets generated positive comparable transaction growth versus 2021 in the third quarter after factoring the hurricane impact. Our key Miami day market meaningfully improved its overall staffing levels in the second, the third quarter, which was a key driver in the approximately 600 basis point improvement in comp transaction trends in the second quarter to the third quarter.
With the third quarter comp transactions down only 1.5% compared to 2021, excluding the hurricane impact. In addition, our pricing, innovation and promotion strategy are contributing to revenue growth momentum. Regarding pricing, we continue to take a phased and targeted approach to pricing with assistance from our pricing analytics consultant for Sonic to opportunistically recover margins while minimizing the negative traffic impact of pricing actions.
This strategy includes applying a barbell approach by pairing lower price increases on our high-value affordable items like and family meals, to ensure we maintain our value proposition combined with offering check-accretive, limited time offers and menu innovation.
In the third quarter, we took pricing action of 4% in September, and we saw a positive impact on check averages from the return of our higher-priced RIB limited time offer as well as the continuation of the steak proteins and GrillMaster Trio.
Our revenue optimization strategies are continuing their effectiveness, evidenced by the following: value perceptions for the Pollo brand continue to be significantly above local QSR benchmarks based on recent NPS data provided by cultures.
Pollo comp traffic trends prior to the hurricane in July and August outpaced Navtrack Florida, fast-casual comp traffic trends. In addition, our customer price sensitivity as measured by Sonic, social media and consumer services has remained in line with historical levels. We are clearly seeing that our coordinated efforts to balance menu innovation, promotional activity and analytics-based pricing is helping to build revenue and win back traffic.
We are pleased with our margin improvement in the quarter after considering the hurricane impact and particularly the margin run rate that we saw at the end of the quarter following our 4% September price increase. We continue to drive margin improvement, and we expect to exit 2022 at our targeted restaurant level operating profit margin range of 18% to 20% on a run rate basis.
Dirk will provide additional details on sales and margin trends as part of this update. Now I'll provide a brief update on the status of our strategic growth initiatives. The priorities we communicated previously remain unchanged and we continue to make significant progress during the third quarter across all of those initiatives.
Most notably, our refresh remodel program continues to generate consistent sales growth in comparison to Pollo local market unit trends. Refreshes to date have generated a very good sales dip of approximately 4%. We completed 26 refreshes and remodels through the end of the third quarter and expect to complete 4 to 6 additional units in the fourth quarter.
Dirk and his team have begun a successful implementation of our G&A expense reduction plan, including, but not limited to, the outsourcing of accounting transaction processing and downsizing our Dallas service center and office space, which will meaningfully contribute to an ultimate reduction in G&A for a targeted rate of 8.5% to 9% of restaurant sales.
Our digital platform continues to gain momentum and is making a growing contribution to revenue growth. We made great strides in enhancing our digital platform with the ongoing rollout of our digital drive-thru technology with 5 units completed to date, generating encouraging average drive-through channel sales growth and 8 to 10 units to be completed by year-end.
In addition, we are seeing growing customer usage of our app, the QR code feature and curbside, which contributed to 14% digital platform comp sales growth in the third quarter versus 2021, inclusive of the hurricane impact.
The operations in HR team led by Pat have made great strides over the course of the year and a number of important areas to improve our overall talent level. Overall staffing levels have improved significantly through October to the highest level since the first quarter of 2021, and the improved staffing has contributed measurably to our building top line momentum.
Our talent development platform improvements have resulted in a decreased turnover and increased internal promotions due in part to the rollout of our enhanced and comprehensive restaurant leadership development and talent management training. Based on the success of the program, we are expanding this platform in the fourth quarter to include enhanced training for assistant managers that focuses on leadership skill and talent management.
In summary, we are encouraged by our continued strong sales momentum and the traction on our growth initiative thus far in 2022 and are intensely focused on driving ongoing traffic growth across all channels while also taking action to improve margins.
Now Dirk will provide a more detailed financial update.
Thanks, Rich. We turned in very good financial results for the quarter with growing sales momentum and improving margins. We were very excited to see strong comparable restaurant sales growth in the third quarter of 9.3% versus 2021 despite the impact of the hurricane, which we estimate reduced comparable sales by approximately 2.6%.
Our momentum further accelerated in October, with comparable restaurant sales of 12.9%, inclusive of the negative impact of the hurricane of 40 basis points. The most encouraging news in our sales trend is clearly our improvement in comparable traffic trends which improved 220 basis points from the second quarter to the third quarter even with the hurricane impact.
The action items we shared last quarter, including our focus on improving staffing, offering value-oriented promotions and ongoing menu innovation are all working in building top line momentum. Regarding sales performance, total revenues increased 7.9% to $95.6 million in the third quarter of 2022 from $88.6 million in the third quarter of 2021, driven by the comparable restaurant sales increase partially offset by the negative impact of the hurricane estimated at approximately $2.6 million.
The third quarter improvement compared to 2021 resulted from a 14.6% increase in the net impact of product channel mix and pricing and a decrease in comparable restaurant transactions of 5.3%, including approximately 2.2% due to the negative impact of the hurricane.
The third quarter 2022 positive mix impact was driven by the addition of check building higher ticket menu items such as the GrillMaster Trio and Churasco as well as the continued success of check accretive limited time offers, including the return of our ribs offer that performed very well.
The third quarter 2022 consolidated net loss was $2.9 million or $0.12 per diluted share. There was a minimal impact from discontinued operations during the third quarter of 2022. This compares to consolidated net income in the third quarter of 2021 of $17.3 million or $0.56 per diluted share, including $0.78 per diluted share positive impact from discontinued operations as a result of the gain on the sale of Taco Cabana.
The third quarter 2022 loss from continuing operations was $2.9 million or $0.12 per diluted share compared to the third quarter 2021 net loss from continuing operations of $3.2 million or $0.12 per diluted share.
On an adjusted basis, third quarter 2022 consolidated net loss from continuing operations was $2.4 million or $0.10 per diluted share compared to the adjusted net loss of $2.4 million or $0.09 per diluted share in the third quarter of 2021.
Please see the non-GAAP reconciliation table in our earnings release for more details. Consolidated adjusted EBITDA, a non-GAAP financial measure, grew to $3.9 million and 4.1% of total revenue in 2022 compared to $3.7 million and 4.1% of total revenue in 2021.
We estimate that Hurricane Ian negatively impacted consolidated net loss from continuing operations and consolidated adjusted EBITDA by approximately $1.6 million.
Loss from operations was $3.2 million or 3.4% of restaurant sales in the third quarter of 2022 compared to a loss from operations of $3.8 million or 4.4% of restaurant sales in the third quarter of 2021.
Turning to restaurant level results. Restaurant-level operating profit margin, formerly restaurant-level adjusted EBITDA margin and a non-GAAP measure, was 14.1% in 2022 compared to 14.7% in 2021. Restaurant level operating profit margins declined during the third quarter compared to 2021, primarily due to the impact of the hurricane higher utility costs, repairs and maintenance costs, advertising costs, insurance costs as well as commodity costs, partially offset by the impact of higher restaurant sales.
The estimated impact from the hurricane on restaurant-level operating profit was approximately $1.6 million or 150 basis points of restaurant sales. After considering the hurricane impact, we were very pleased with our margin growth in the quarter, particularly the margin run rate at the end of the quarter following our 4% price increase.
Regarding third quarter trends in key expense categories, cost of sales as a percentage of restaurant sales in the third quarter of 2022 increased to 32.4% compared to 30.7% in 2021 due to higher commodity costs and sales mix, partially offset by our phased menu price increase and improvements due to operational efficiencies.
Restaurant wages as a percentage of net sales decreased to 26.2% in the third quarter of 2022 from 28% in 2021, driven primarily by lower special incentive and bonus pay partially offset by the impact of higher wage rates. Other restaurant operating expenses as a percentage of restaurant sales increased in the third quarter compared to 2021 due primarily to the impact of higher utility costs higher repair and maintenance costs and higher insurance costs, partially offset by lower operating supplies and delivery fee expense.
General and administrative expenses increased to $12.1 million for the third quarter of 2022 from $11.2 million from the third quarter of 2021 due primarily to higher employee and other support costs. General and administrative expenses for the third quarter of 2022 included $0.9 million in nonrecurring expenses comprised of $0.7 million of G&A efficiency initiative costs including $0.3 million for accelerated charges related to deferred implementation and service contract costs related to our current accounting system and $0.2 million of digital platform costs.
G&A expenses for the third quarter of 2021 included $0.2 million related to nonrecurring digital platform costs. Turning now to cash flow-related comments. In the third quarter of 2022, our total cash balance grew $3.3 million from the second quarter of 2022 to $46.2 million, including $3.6 million of restricted cash.
Capital expenditures in the third quarter of 2022 were $3.7 million. In addition, we continue to have no debt on our balance sheet and have $10 million in undrawn revolver capacity as an additional source of liquidity as part of the loan agreement we executed in 2020.
We are continuing efforts to finalize settlements on the winter storm insurance claim we noted previously, which represents a potential future cash inflow once that claim is fully settled.
In addition, we expect to file insurance claims associated with the impact of Hurricane Ian upon completion of our final assessment of damages and losses. I'll close with a few comments on our outlook for the remainder of 2022. We are very encouraged by our sales momentum in 2022 that continued to further accelerate in October.
We are very focused on achieving our growth objectives through our 4 key growth initiatives, which are all on track and we expect the sales benefits will continue to build momentum as we realize the full impact of those initiatives.
We expect margins to improve in the fourth quarter, driven by continued revenue growth from our accelerating traffic trends from improved staffing, effective value-focused promotions, menu innovation and the impact of the pricing action we took in September, combined with stable wage rates and commodity costs in comparison to the third quarter.
We expect to exit 2022 at our targeted margin range of 18% to 20% on a run rate basis, barring any unforeseen changes in our cost structure and operating environment. During the fourth quarter, we will expand the implementation of our G&A efficiency efforts, including, but not limited to, generating savings from accounting service providers, the ongoing outsourcing of accounting transaction processing and the downsizing of our Dallas service center office space, which will meaningfully contribute to the ultimate reduction in G&A to the targeted range of 8.5% to 9% of restaurant sales.
Regarding capital expenditures, we expect full year 2022 capital expenditures to be in the range of $20 million to $25 million. In closing, we demonstrated strong sales growth as well as ongoing margin improvement in the third quarter, which we expect to continue as we build on the momentum of our strategic growth initiatives.
Finally, we will continue enhancing the customer experience across all service channels, further investing in our growing digital platform and the development of our field management teams, refining our brand position and new unit design features in addition to refreshing remodels to drive future growth and unlocking unmet demand to improve kitchen productivity. Thank you. And this concludes our prepared comments.
[Operator Instructions] We have a question from Edward Riley from EF Hutton.
Hope you're staying safe down there with the hurricane. I'm not sure if I missed this or not, but I'm wondering if you're able to comment on traffic trends for those restaurants not impacted by the hurricane for the month of October? .
Yes. Eddie, it's Dirk. So just to recap the quarter results, we did see a significant improvement in the third quarter in comp transaction trends relative to the second quarter after adjusting for the hurricane, it was actually 360 basis points.
We are seeing traffic trends continuing to show their improvement in October relative to Q2. And -- we actually have -- we'll provide a lot more details when we report the fourth quarter in terms of more specifics. So hopefully, that helps.
Okay. And then I noticed you guys went from 138 to 137 stores. I'm just wondering what led to that decision to close that 1 store.
Yes. It's Rich. We had a long relationship in the store in Gainesville that had been underperforming for some time and it needed a significant amount of capital to through a refresh and remodel decision was made best to use the capital elsewhere. So we shut that restaurant down.
Okay. Got you. And Dirk, just on an absolute basis, how much do you guys expect to save by outsourcing the accounting system and downsizing the office space in Dallas.
Yes. I mean we haven't disclosed that number, but I would -- as we said, we definitely expect the combination of those 2 events as well as the reduction in service provider fees that we've negotiated to be meaningful in terms of our reduction in G&A as a percentage of sales we won't realize the full benefit of those programs until early in 2023.
So we won't see the full benefit of that in the fourth quarter because we're still in implementation. But it is meaningful for sure.
Okay. Got you. And last 1 for me. Any new menu items that you guys are thinking about that maybe you're looking to put on for holiday season?
Yes, I'll take that, and I'll turn it over to Patty. I addition, especially at Pollo for pork around the holiday season. So we're bringing back a pork item that is very traditional and looking forward to the success that we've had in the past, but it's going to be led by a pork dish.
And this concludes the conference. Thank you for attending today's presentation. You may now disconnect.