Fiesta Restaurant Group Inc

NASDAQ:FRGI

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, and welcome to the Fiesta Restaurant Incorporated First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Raphael Gross, ICR. Please go ahead.

[Raphael Gross, ICR]

Thank you, operator. Fiesta Restaurant Group's first quarter 2023 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 and financial position and results of operations, business strategy, budget, projected costs and plans and objectives of management for future operations.

Actual outcomes may 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 Chief Executive Officer, Dirk Montgomery; and Chief Accounting Officer and Acting Chief Financial Officer, Tyler Yoesting.

And now I'll turn the call over to Dirk.

[Dirk Montgomery, Chief Executive Officer]

Thank you, Raphael. I'd first like to thank all the investors and other participants on the call today for their continued support. I'll be covering three topics this afternoon. A business update and overview of our quarterly results, the status of our strategic growth initiatives and thoughts on our plans for the remainder of 2023. Tyler will then provide a financial update before we open the call for questions. First, here are the highlights from our first quarter. In summary, we had a strong first quarter with continued measurable progress across all key areas of focus. Our efforts to build traffic gained momentum over the quarter as we generated positive comparable transaction growth of 1% and continued our strong comparable restaurant sales momentum with an increase of 9.7%.

We also grew both restaurant level and total company profit and margins and made meaningful progress on our key strategic priorities. We were particularly pleased with the acceleration of our monthly positive comparable transaction growth throughout the quarter to 1.9% in March with positive quarterly comparable transactions in all of our key South Florida markets. We also experienced positive traffic growth of 1.1% in April versus 2022, inclusive of the negative impact of approximately 80 basis points due to severe rainstorms and flooding in South Florida. We believe the growth initiatives we shared previously, including increased staffing levels, thoughtful pricing and successful promotions combined with improved operations execution contributed to four consecutive months of positive year-over-year traffic trends through April for the first time in over five years.

Hourly team staffing levels improved in the first quarter of 2023 versus the fourth quarter of last year, while April staffing levels increased to the highest levels in 2023, along with a reduction in hourly turnover rates. These results demonstrated our retention efforts are working. As we mentioned in prior quarters, our commitment to operations leadership development is contributing to higher leadership retention levels compared to 2022, and we believe that greater leadership stability and effectiveness was a catalyst for faster speed of service and higher guest satisfaction scores in the first quarter versus the fourth quarter.

Our pricing, innovation and promotion strategies are contributing to revenue growth momentum. The pricing action of 5% we took in March was grounded by marketing insights and competitive pricing benchmarks that supported our confidence that the additional pricing action would allow us to expand margins while maintaining value perceptions and mitigating traffic risk. We are also maintaining our barbell approach by pairing lower price increases on our high-value affordable items like Pollo Time and Family Meals to solidify our value proposition combined with offering check-accretive, limited time offers, or LTOs, and menu innovation. In the first quarter and throughout 2023, we are focusing on fewer and more impactful promotion items across longer windows of time that allow for higher quality and more consistent execution.

First quarter promotion results were encouraging with improved speed of service and higher sales per promoted item in the first quarter versus the fourth quarter of 2022 and continued check accretion versus non-promoted items. In addition to limited time new item promotions, we are increasing – increasingly utilizing higher – highly targeted promotions to drive transactions and channel growth by increasing visit frequency aiming to increase our share of customers' prepared food purchases and acquiring new customers. We're doing this through a highly disciplined test-and-learn approach, evaluating each promotion against targeted incremental traffic and profit goals. Overall, we will continue to target our marketing activity at building profitable traffic. We are clearly seeing that our coordinated efforts to balance menu innovation, promotional activity and analytic-based pricing is helping to build revenue and win back traffic. The value perceptions continue to be above our peer group. And for the first quarter, we realized share gains based on Pollo traffic trends compared to Knapp-Track Florida fast casual comp traffic trends.

Turning to our progress on margins. For the third consecutive quarter, we generated year-over-year growth in restaurant-level operating profit, a non-GAAP financial measure, driven by our comparable restaurant sales growth and margin enhancement actions. The first quarter 2023 loss from operations was $2.1 million and 2% of restaurant sales compared to a loss from operations in the first quarter of 2022 of $1.4 million and 1.5% of restaurant sales. The increase in loss from operations was primarily driven by the net impact of impairments and other lease charges, partially offset by the growth in restaurant sales and higher restaurant level operating profit compared to the first quarter of 2022. First quarter 2023 restaurant-level operating margins of 16.7% increased above both the fourth quarter of last year and the first quarter of 2022 by 50 and 60 basis points, respectively.

Additionally, margin run rates increased meaningfully in March compared to the beginning of the first quarter following our 5% price increase and we expect to see continued margin growth toward our targeted restaurant-level operating profit margin of 18% or greater through transaction growth and ongoing margin improvement initiatives. Tyler will provide additional details on our margin and expense trends as part of his financial update. Overall, we were pleased with our progress in the first quarter traffic and margin growth both of which we expect to accelerate as we fully implement our sales growth and operational excellence initiatives.

Now I'll provide a brief update on the status of our strategic growth initiatives. Following my recent appointment to CEO, we have reconfirmed our priorities across the following four pillars, all aimed at improving transaction growth and margin expansion. One, building operations excellence; two, creating a great guest experience across all channels; three, enhancing the Pollo Tropical brand; and four, developing great teams. I'd like to expand on our efforts to improve operations excellence and we've identified four focus areas to build on the effectiveness of our operations.

First, raise our consistency of execution by refocusing on debt experience fundamentals; second, simplify the operating model while maintaining the key elements of the customer experience; third, improve peak time productivity; and fourth, continue to enhance cross-functional operations support. We made real progress across those focus areas in the first quarter compared to the fourth quarter of last year reflected in the following key metrics: drive-thru speed of service times in the first quarter improved by approximately 15% and compared to the 2022 average.

Guest satisfaction as measured by Net Promoter Scores increased 19% in the first quarter compared to the 2022 average. In addition, monthly March and April NPS scores were the highest since 2021. As noted, stability of our restaurant team members is a driver of improved execution and guest satisfaction. Hourly turnover in the first quarter reached the lowest level since before 2019, with turnover down 11% compared to the 2022 quarterly average and first quarter 2023 management turnover was well below the first quarter of 2022.

As we move forward, we are going to continue reevaluating our organization structure and processes to improve effectiveness and efficiency. We have already seen the positive impact of our consolidation of consumer insights, digital and marketing resources into a more focused and streamlined marketing organization. As we more closely align marketing strategy and execution to the goal of growing profitable traffic, we expect the marketing function to be a key contributor to accelerating growth going forward. In addition, we are also working on optimizing our above-restaurant operations organization and processes to improve execution.

In conclusion, we entered the second quarter with positive traffic momentum and improving margins, and our team is focused and aligned on a shorter list of high-impact growth opportunities. As a result, we feel extremely confident about our prospects and our ability to unlock the great potential this brand clearly has and look forward to accelerating our positive traction during the balance of the year.

Now Tyler will provide a more detailed financial update.

[Tyler Yoesting]

Thanks, Dirk. Overall, we're pleased with our financial results for the quarter with growing sales and transactions while also improving margins. We were very excited to see strong comparable restaurant sales growth in the first quarter of 9.7% versus 2022, which included a 1% increase in comparable transactions. We continued to see strong performance into April with comparable restaurant sales of 7.1% and comparable transaction growth of 1.1%, inclusive of the negative impact of severe rainstorms and flooding in South Florida, which we estimate reduced comparable restaurant sales by approximately 80 basis points. The most encouraging news on our sales trend is clearly our continued improvement in comparable transaction trends, which were positive in the first quarter versus 2022 and continued through April. Regarding sales performance, total revenues increased 8.1% to $103.4 million in the first quarter of 2023 from $95.6 million in the first quarter of 2022, driven by the comparable restaurant sales and transaction increases.

First quarter improvement compared to 2022 resulted from an increase in the net impact of pricing and product channel mix of 8.7% and an increase in comparable restaurant transactions of 1%. First quarter 2023 pricing and mix was driven by menu price increases of 10% and positive mix impact increases in dine-in and delivery average check compared to first quarter 2022. First quarter 2023 net loss was $1.9 million or $0.08 per diluted share. That compares to the first quarter of 2022 net loss of $1.4 million or $0.05 per diluted share.

On an adjusted basis, first quarter 2023 consolidated net income from continuing operations was $0.6 million or $0.02 per diluted share, compared to an adjusted net loss of $0.6 million or $0.02 per diluted share in the first quarter of 2022. Please see the non-GAAP reconciliation table in our earnings released for more details.

Consolidated adjusted EBITDA, a non-GAAP financial measure grew to $6.5 million and 6.3% of total revenue in 2023 compared to $5.3 million and 5.5% of total revenue in 2022.

Loss from operations was $2.1 million or 2% of restaurant sales in the first quarter of 2023, compared to a loss from operations of $1.4 million or 1.5% of restaurant sales in the first quarter of 2022.

Turning to restaurant level results, restaurant level operating profit margin, formally restaurant level adjusted EBIDA margin and a non-GAAP financial measure was 16.7% in 2023 compared to 16.1% in 2022.

Restaurant level operating profit margins increased during the first quarter compared to 2022, primarily due to the impact of higher restaurant sales driven by higher pricing and transaction growth partially offset by higher labor costs and insurance costs. We were pleased with our margin growth in the quarter compared to 2022, as well as our 50 basis point improvement over the fourth quarter 2022.

Margin improvement was most significant in March after a 5% price increase. Regarding first quarter trends and key expense categories, cost of sales as a percentage of restaurant sales in the first quarter of 2023 decreased to 31.6% compared to 32.3% in 2022, primarily due to the impact of menu price increases and higher restaurant sales partially offset by a negative impact of sales mix.

Restaurant wages as a percentage of net sales increased to 25.6% in the first quarter of 2023 from 24.8% in 2022, driven primarily by higher wage rates in staffing stabilization with increased operating hours, partially offset by the impact of higher restaurant sales.

Other restaurant operating expenses as a percentage of restaurant sales decreased in the first quarter compared to 2022, due primarily to the impact of higher restaurant sales on utility costs and delivery fee expense partially offset by higher property and casualty insurance costs.

General and administrative expenses increased to $13.2 million for the first quarter of 2023 from $12.3 million for the first quarter of 2022. And as a percentage of total revenues decreased 12.8% in the first quarter of 2023 from 12.9% in the first quarter of 2022.

G&A expenses for the first quarter of 2023 included $1.6 million in non-recurring expenses comprised of $0.7 million of restructuring costs, $0.7 million of general and administrative efficiency initiative costs, which primarily consisted of accelerated charges related to deferred implementation and service contract costs related to the prior accounting system. $0.2 million of professional fees and $0.1 million of digital platform costs.

G&A expenses for the first quarter of 2022 included $1.3 million in non-recurring expenses comprised of $0.7 million of professional fees, $0.3 million of digital platform costs and $0.3 million of G&A efficiency initiative costs.

Now turning to cash flow related comments. In the first quarter of 2023, our total cash balance decreased $2.1 million from the fourth quarter of 2022 to $33.7 million, including $3.6 million of restricted cash. The decrease was partially due to the timing of working capital payments due primarily to the prepayment of annual insurance premiums.

Capital expenditures in the first quarter of 2023 were $5 million. We expect to generate positive operating cash flows and increase our balance – cash balance through the balance of the year through traffic growth and margin improvement.

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. In the first quarter of 2023, we executed a final settlement on the 2021 winter storm insurance claim related to Taco Cabana for $1 million, which we expect to receive in the second quarter. Further, we filed an insurance claim related to the impacts of the 2022 hurricanes and expect to receive proceeds once settled.

Regarding investment performance, our refresh/remodel program continues to generate a consistent sales lift in comparison to Pollo Tropical local market unit restaurant sales trends. We have completed 35 refreshes and remodels through the end of the first quarter, and we are targeting 15 to 20 refreshes and remodels for 2023 having completed for in the first quarter.

I'll close with a few comments on our outlook for the remainder of 2023. We are encouraged by our sales momentum in 2023 that continued into April. We are very focused on achieving our growth objectives through our four key growth themes, which we expect the sales benefits will continue to build momentum as we realized the full impact of those initiatives.

Regarding food and labor costs, we expect stable cost trends, the balance of the year compared to the first quarter as our key commodities are contracted for the full year and we completed hourly wage increases in the first quarter with no material wage rate increases play in the balance of the year.

The pricing of 5% that we took in March, 2023 should more than offset the expected annual costs increases in food and labor costs in 2023 compared to 2022. We expect margins to continue to improve above first quarter 2023 for the balance of the year and are targeting restaurant level operating profit margins in 2023 of 18% on a run rate basis through the combination of continuing transaction growth and additional pricing action, barring any unforeseen changes in our cost structure and operating environment.

We expect 2023 G&A expense to decline versus 2022 from the first quarter of 2023, driven by efficiency efforts including but not limited to the ongoing outsourcing of accounting transaction processes and downsizing of our Dallas Service Center office space, both completed in February 2023, as well as expense reduction from service vendor renegotiations, 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 project full year 2023 capital expenditures to be in the range of $22 million to $28 million.

In closing, we demonstrated strong sales and transaction growth as well as ongoing margin improvement in the first quarter, which we expect to continue as we build on the momentum of our strategic growth initiatives.

Thank you for listening, and we will now open the call up for questions. Operator?

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Edward Reilly of EF Hutton. Please go ahead.

[Edward Reilly, EF Hutton]

Hey guys. Congrats on a great quarter. Just wondering if you could maybe take me through the cadence of the G&A reduction throughout the year? Should Q2 look more like Q1 or do you expect a reduction to come in the back half of the year?

[Dirk Montgomery, Chief Executive Officer]

Yes, we do expect a reduction in Q2 and continued through the remaining of the year with the completion of the outsourcing and the office space reduction in February. That should see improvement in Q2 and then our ongoing initiative should see continued improvement through the balance of the year.

[Edward Reilly, EF Hutton]

Okay. And with the anticipated increase in cash balance, wonder maybe if you could talk a little bit about capital allocation and how you weigh repurchasing shares or building out new units?

[Dirk Montgomery, Chief Executive Officer]

Sure. So our capital expenditure priorities this year are going to be primarily on refreshes and remodels and other required maintenance and technology investments. Going forward, we are developing plans right now in working a new unit pipeline for new units – potential new units in the state of Florida. And so in 2024 and 2025, we are targeting the re-commencement of new unit openings in the state of Florida for very attractive high opportunity, higher AUV units. Our Board of Directors on a regular basis, Eddie, is evaluating ideas to improve shareholder value. We do have a small number of shares left on our authorized existing repurchase program and they continue to evaluate opportunities to drive shareholder value.

[Edward Reilly, EF Hutton]

Okay. And then last one for me. Looks like you've added coconut shrimp to the menu. Any new menu items being added this year?

[Dirk Montgomery, Chief Executive Officer]

We did add coconut shrimp as a limited time offer, and it was – it's actually still being offered and has been – has performed very well. The per – average sales per store per day are – have definitely been above the average for our limited time offers. But it is a limited time offer. So we are planning to move to a different LTO over the coming weeks. But it did do well and it was check accretive in terms of the average check compared to non-promoted items.

[Edward Reilly, EF Hutton]

Okay. Great. Thank you.

[Dirk Montgomery, Chief Executive Officer]

Thank you.

[Operator]

This concludes our question-and-answer session. And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.