Fiesta Restaurant Group, Inc. (NASDAQ:FRGI) Q4 2022 Earnings Call Transcript

Fiesta Restaurant Group, Inc. (NASDAQ:FRGI) Q4 2022 Earnings Call Transcript March 3, 2023

Operator: Good day, and welcome to the Fiesta Restaurant Group Fourth Quarter 2022 Earnings Call. Alll participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Raphael Gross from ICR. Please go ahead.

Raphael Gross: Thank you, Jason. Fiesta Restaurant Group’s fourth 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 operation, 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 Interim Chief Executive Officer, Dirk Montgomery; and Chief Accounting Officer and Acting Chief Financial Officer, Tyler Yoesting.

And now I’d like to turn the call over to Dirk.

Dirk Montgomery: Thank you, Rafe. 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 today: a business update and overview of fourth quarter results, the status of our strategic growth initiatives and thoughts on our plans for 2023. Tyler will then provide a financial update, before we open the call for questions. First, key takeaways on fourth quarter results. During the fourth quarter, we continued the double-digit comparable restaurant sales momentum from the third quarter with improved margins, while continuing to make progress on the key priorities we communicated previously, including continued increases in operation staffing levels and tangible headway on G&A expense reduction.

As discussed in prior quarters, we are intensely focused on transaction growth, and we are beginning to see positive momentum on this front. Year-over-year comparable transactions, which had slowed in previous quarters and reached negative 2.4% in December, turned positive to modest year-over-year transaction growth at the start of 2023 and further improved in fiscal February month-to-date. In addition, early 2023 transaction momentum has been strong in our key South Florida markets, which are generating positive transaction growth in 2023 versus 2022 year-to-date. Our accelerating comp transaction momentum was the direct result of the actions we shared previously to improve staffing, expand our sales growth initiatives and continue our successful pairing of value item pricing with check-accretive limited time offers.

As we noted previously, improved staffing levels had been a key enabler to transaction growth. Hourly team staffing levels continued to improve in the fourth quarter versus the first half of 2022 and have further improved year-to-date in 2023. In addition, during the fourth quarter of 2022 and into 2023, we have seen a continued reduction in hourly turnover rates, indicating that our retention levels are also improving. As we mentioned in prior quarters, we placed a high focus on the development of our restaurant managers in 2022, which in part has led to a significant reduction in unit manager vacancies from the first quarter of 2022 to the first quarter of 2023. Our pricing, innovation and promotion strategies are contributing to revenue growth momentum.

Fourth quarter pricing action that was originally targeted for December 2022 was deferred to allow us to obtain additional marketing insights and competitive benchmarks that support selective pricing action that now will be taken in March 2023. In addition, we continue to maintain our promotion barbell approach by pairing lower price increases on our high-value affordable items, like Pollo Time and family meals, to ensure we maintain our value proposition, combined with offering check-accretive, limited time offers and menu innovation. 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. In the fourth quarter, we saw a positive impact on check averages from the pricing action of 4% in September, while maintaining a higher value perception level compared to our peer group.

Another point of evidence that our revenue optimization strategies are continuing their effectiveness is our modest share gain in 2022 based on Pollo Tropical comp traffic trends, slightly outpacing Knapp-Track Florida fast-casual comp traffic trends, even with our phased pricing actions over the course of the year. We were pleased with our margin improvement in the quarter, after considering our originally planned December pricing that was deferred to March. Similar to the third quarter of 2022, we generated continued year-over-year growth in restaurant-level operating profit, a non-GAAP financial measure, driven by our comparable sales growth and targeted margin improvement actions. Restaurant-level operating profit margins of 16.2% improved versus third quarter 2022 margins of 14.1% and versus fourth quarter 2021 margins of 14.3%.

This year, we are targeting restaurant-level operating margins of 18% on a run rate basis through the combination of continuing transaction growth and pricing. In his financial review, Tyler will provide additional details on our expense and margin trends. Now I’ll provide a brief update on the status of our strategic growth initiatives. We made good progress through 2022 on the strategic growth initiatives that we discussed in prior quarters and believe that those initiatives should largely be continued. After transitioning to the interim CEO role in December, I moved quickly to ensure that we maintain momentum, while sharpening our focus on operations excellence and reprioritizing the opportunities that we believe will have the biggest impact on transaction growth and margin expansion, with an eye toward accelerating the key initiatives that will have the biggest impact.

In addition to reevaluating our strategic priorities, my near-term focus has been placed on working with the leadership team to optimize the organization for effectiveness and efficiency. Our initial organization changes have been aimed at continuing to improve our capability for operation support and realigning and consolidating our customer insights, digital and marketing resources under one streamlined marketing function that we believe will enable us to accelerate growth across all channels. We have developed four key themes to guide our revised strategic focus, all still aimed at growing traffic and improving margins, but with a more focused and disciplined approach. Number one, building operations excellence; number two, creating a great guest experience across all channels; number three, enhancing the Pollo Tropical brand; and number four, developing great teams.

I’d like to expand on two of the four themes today, building operations excellence and developing great teams. Regarding operations excellence, we have identified four key areas of focus to improve the effectiveness of our operations. Number one, improve our consistency of execution by refocusing on fundamentals through back-to-basics training and challenging our operating routines to place an increased focus on the key elements of guest experience, food quality, speed, accuracy and hospitality; number two, simplify the operating model; number three, improve peak time productivity; and number four, continue to improve cross-functional operations support, including IT infrastructure, HR field support and reporting tools. A number of the initiatives that fall within our operations excellence theme have been discussed in prior quarters, and we are now making them a top priority because we believe they will accelerate traffic growth and margin expansion.

Regarding the fourth theme, developing great teams, we made great progress in 2022 on the establishment of leadership development for operations management. We believe that we are already seeing leading indicators of the positive benefits of that investment in reduced turnover and improved retention of our restaurant manager level. Based on that success, our plans in 2023 are to complete the roll €“ the ongoing rollout of the leadership development platform across all levels of operations leadership. In addition, we are also developing operations best practices training modules to support our operations excellence initiatives. G&A efficiency and effectiveness will continue to be a high priority, and we made measurable progress on a number of efficiency initiatives since the third quarter, including the implementation of accounting outsourcing and downsizing the Dallas office in February 2023 and service vendor renegotiations in multiple expense categories.

Those initiatives, completed or underway are expected to meaningfully contribute toward our target of reducing our G&A expense run rate to 8.5% to 9% of restaurant sales. After less than 90 days in my new role, our strategy development, initiative assessment and organizational optimization are still a work in process, but our management team is very excited about the steps we have taken since December that we believe will focus and accelerate our efforts to grow traffic and expand margins. Reflecting on the year as a whole, it is easy to see the progress we have made, less so the multitude of challenges we faced as we navigated the turbulent, economic and industry waters throughout the year. Comparable restaurant sales finished the year in double digits at 11% compared to 8% in the first quarter of 2022, while slightly improving our share of traffic.

The most significant business interruption from challenging staff levels seems to be mostly behind us, allowing us to increase our focus on providing a consistent and high-quality guest experience. Year-over-year transaction trends in the first quarter of 2022 were negative 7% and are now trending positive as we start 2023. Restaurant-level EBITDA margins are rebounding and are now on an upward trend after dipping in the middle of the year. Margins are trending up and are targeted to hit 18% in 2023, while continuing to focus on growing traffic and maintaining positive sales comps. Our G&A reduction plan is now firmly in place, and we have made major progress towards delivering the anticipated savings we have previously shared with you. Finally, we exited 2022 having moved forward on all key strategic initiatives, and our 2023 agenda is now freshly prioritized and closely aligned to the growth opportunities we see for our brand.

As a consequence, we feel extremely confident about our prospects and our ability to harvest the potential this brand clearly has. Now, Tyler will provide a more detailed financial update.

Tyler Yoesting: Thanks, Dirk. Overall, we are pleased with our financial results for the quarter, with growing sales momentum and improving margins. We are very excited to see strong comparable restaurant sales growth in the fourth quarter of 11% versus 2021, despite the impact of the hurricanes in the first half of the quarter, which we estimate reduced comparable sales by approximately 60 basis points. Our momentum continued into January with comparable restaurant sales of 10.2%. The most encouraging news on our sales trend is clearly our improvement in comparable transaction trends, which were positive in January 2023 compared to January 2022 and have continued into fiscal February month-to-date. Regarding sales performance, total revenues increased 9.3% to $97.6 million in the fourth quarter of 2022 from $89.3 million in the fourth quarter of 2021, driven by the comparable restaurant sales increase and partially offset by the impact of the hurricanes, estimated at approximately $0.5 million.

Fourth quarter improvement compared to 2021 resulted from a 16.3% increase in the net impact of product channel mix and pricing and a decrease in comparable restaurant transactions of 5.3%, including approximately 0.5% due to the impact of the hurricanes. Fourth quarter 2022 positive mix impact was driven by the addition of check building higher ticket menu items such as pork chunks, the GrillMaster Trio and Churrasco protein items as well as the continued success of check-accretive limited-time offers, including the return of ribs in the fourth quarter. The fourth quarter 2022 net loss was $4.1 million or $0.16 per diluted share. This compares to net loss in the fourth quarter of 2021 of $4.7 million or $0.19 per diluted share. On an adjusted basis, fourth quarter 2022 consolidated net loss from continuing operations was $1.9 million or $0.08 per diluted share compared to an adjusted net loss of $4.3 million or $0.17 per diluted shares in the fourth 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 $6.9 million and 7.1% of total revenue in 2022 compared to $2.5 million and 2.8% of total revenue in 2021. Loss from operations was $4.4 million or 4.5% of restaurant sales in the fourth quarter of 2022 compared to a loss from operations of $7.1 million or 8% of restaurant sales in the fourth quarter 2021. Turning to restaurant-level results. Restaurant-level operating profit margin, formerly restaurant-level adjusted EBITDA margins and a non-GAAP measure was 16.2% in 2022 compared to 14.3% in 2021. Restaurant-level operating profit margins increased during the fourth quarter compared to 2021, primarily due to the impact of higher restaurant sales driven by higher pricing and lower special incentive pay, partially offset by higher commodity costs and repairs and maintenance costs.

We were pleased with our margin growth in the quarter compared to 2021 as well as our 210 basis point improvement over the third quarter of 2022. Regarding fourth quarter trends in key expense categories, cost of sales as a percentage of restaurant sales in the fourth quarter of 2022 increased to 31.2% compared to 30.1% in 2021, due to higher commodity costs and sales mix, partially offset by our phased menu price increases and improvements due to operational efficiencies. Restaurant wages as a percentage of net sales decreased to 25% in the fourth quarter of 2022 from 27.9% in 2021, driven primarily by lower special incentives 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 fourth quarter compared to 2021, due primarily to the impact of higher repair, maintenance costs, higher utility costs and higher property and general liability insurance costs.

General and administrative expenses increased to $15.1 million for the fourth quarter of 2022 from $12.7 million for the fourth quarter of 2021, due primarily to the higher employee and other support costs. General and administrative expenses for the fourth quarter 2022 included $3.5 million in non-recurring expenses comprised of $1.6 million of general and administrative efficiency initiative costs including $1.3 million for accelerated charges related to the deferred implementation and service contract costs related to our current accounting system; $1.4 million of restructuring costs related to the departure of our former CEO; and $0.3 million of digital platform costs. General and administrative expenses for the fourth quarter of 2021 included $1 million related to non-recurring digital platform costs.

Turning now to cash flow-related comments. In the fourth quarter of 2022, our total cash balance decreased $10.4 million from the third quarter of 2022 to $35.8 million, including $3.6 million of restricted cash. Capital expenditures in the fourth quarter of 2022 were $6.4 million, and we also made final payments related to our accounting system for $2.5 million and final CARES Act deferral payment of $1.7 million. The fourth quarter cash balance has historically been lower than the third quarter due to annual payments, primarily for real estate taxes. We are targeting an increase in the cash balance over the course of 2023. 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 making progress finalizing the settlement of €“ on the 2021 winter storm insurance claim we noted previously and expect a resolution in the first half of 2023. In addition, we expect to file insurance claims associated with the impact of the 2022 hurricanes upon completion of our final assessment of damages and losses. Regarding investment performance. Our refresh remodel program is generating consistent sales lift in comparison to Pollo Tropical local market unit restaurant sales trends. We completed 32 refreshes and remodels through the end of the fourth quarter. Refreshers are realizing an average lift of 4%, with remodels realizing an even higher average lift. I’ll close with a few comments on our outlook for 2023. We are encouraged by our sales momentum in 2022 that continued to accelerate in January 2023.

We are very focused on achieving our growth objectives through our four key growth themes. We expect the sales benefits will continue to build momentum as we realize the full impact of those initiatives. Our outlook for food and labor costs is for continued inflation in 2023, but more moderated than inflation pressure we saw in 2022. The pricing action of 4% that we took in September 2022 should more than offset anticipated ongoing inflation in 2023. As a result, we expect our additional pricing action planned for March 2023 to result in margin improvement on a run rate basis above Q4 2022 margin levels. We are targeting restaurant-level margins in 2023 of 18% on a run rate basis through the combination of our continuing transaction growth and additional pricing actions, barring any unforeseen changes in our cost structure and operating environment.

We expect 2023 G&A expense to decline versus 2022, driven by efficiency efforts, including, but not limited to, the ongoing outsourcing of accounting transaction processing and downsizing of our Dallas service center office space 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 growth as well as ongoing margin improvement in the fourth 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 for questions. Operator?

See also 10 High Growth Low Dividend Stocks to Buy and 12 High Growth Financial Stocks to Buy.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Our first question comes from Edward Reily from EF Hutton. Please go ahead.

Edward Reily: Hey guys. Just curious about the price hike in March. I’m wondering if you’re able to quantify that and maybe share do you have any other plans to increase prices throughout the rest of the year?

Dirk Montgomery: Yes. Thanks. Thanks, Eddie. It’s Dirk here. So we’re expecting a low to mid-single-digit increase. We’re still firming that up. But as it relates to the balance of the year, we’re going to evaluate additional pricing action based on competitive benchmarking. As we mentioned in our prepared remarks, we’ve been served very well by benchmarking the competitive set, and we feel really comfortable that we can make the price move that we’re contemplating this month while still maintaining value perceptions. So €“ and that pricing action that we’re taking in March, combined with the pricing action that we took in September well offsets the cost increases that we are anticipating in 2023, and actually will accrete margin. So we expect a margin pickup as a result of that phased pricing action that I just mentioned.

Edward Reily: Okay. And it’s also nice to see transaction growth picking up again. Is that also in the mid-single-digit range or so to the start of the year?

Dirk Montgomery: Yes, I’m sorry, Eddie. Yes, can you repeat that question please? I apologize.

Edward Reily: Yes, sure. Just on the transaction growth beginning in 2023, is that growing mid-single digits as well? I’m wondering if you could maybe quantify that for me a little bit?

Dirk Montgomery: Sure. I mean, it was up modestly in January. So in the release, it was just €“ it was up slightly 20 basis points. In February, our fiscal February is not over yet, and so we cannot €“ we can’t disclose the run rate, but it’s favorable relative to January so far month-to-date. We actually are finishing the month out this week, and so still have a few days left in our fiscal February, but the trend is definitely better, and we’re building momentum.

Edward Reily: Okay. And last one for me. On G&A efficiencies, you mentioned 8.5% to 9% run rate. So are you expecting that figure to be more towards the end of this fiscal year? Or should we maybe anticipate 8.5% to 9% of sales a bit sooner than that?

Dirk Montgomery: So I mean we are absolutely expecting meaningful year-over-year reductions in 2023. So 2023 against 2022, we are going to see a significant reduction. So our percentage of €“ G&A as a percentage of sales, we expect to be declining over time as the benefits of the initiatives that we mentioned really hit their full impact. It’s €“ sometime between late 2023 and early 2024, we expect to hit that run rate. We actually have to €“ there are a couple of initiatives that will not be fully implemented until 2024, so we won’t get the full benefit of certain initiatives until early 2024.

Edward Reily: Okay. Great. Thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dirk Montgomery for any closing remarks.

Dirk Montgomery: No closing remarks, and thanks, everyone, for joining.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.