Accounting Adjustments aside, the prospects are dependent on store level economics, the probability that margin improvement can be achieved within the existing store base, which could fuel a long term expansion program for company and franchised locations. Management is candid about the continuing emphasis on improving store level margins, before considering aggressive unit expansion, new franchising, or franchising of existing company locations. The store level margin at Taco Cabana is not productive enough to attract franchisees, and the revenues per store have now been in the $1.8M range for the last five years. While the store level margins at Pollo Tropical are attractive, success outside of the original Florida core market has been problematic, so that brand is a work in progress as well. Store level revenues and margins at PT were higher six or seven years ago, came down as stores were built outside of Florida, are going up again as the chain has consolidated once again within Florida. Considering the unforgiving industry wide environment, we have our doubts that dramatic operating progress can be made at Taco Cabana in the near to intermediate term. On the Pollo Tropical side of things, margins could edge up somewhat, after unproductive stores have been closed and/or impaired, but the success outside of Florida continues to be a wild card. Notwithstanding the fact that Jefferies/Leucadia owns 14% of FRGI and they are very smart people, last I looked they don’t have a magic wand. If they want to own the rest of it, I wish them luck, seriously. Overall, we consider FRGI “fairly priced” at the current time.
COMPANY OVERVIEW (2018 10-K):
Fiesta Restaurant Group operates and franchises two distinct restaurant brands: Pollo Tropical and Taco Cabana.
Pollo Tropical was founded in 1988 in Miami, FL. From the outset the concept’s strategy was to grill the marinated chicken (signature product created from Latin American influences) in full view of the customers. There was to be no prepackaged, precooked menu items and no microwaves in the kitchen. This standard is still maintained today. Menu favorites include MOJO Roasted Pork and Tropi Chops – a Create Your Own Bowl of Fire-Grilled Chicken Breasts or Crispy Pollo Bites, Roasted Pork or Grilled Vegetables served over Rice.
Pollo Tropical restaurants are designed to create an inviting dining experience with a tropical, festive atmosphere. As of December 2018, there was a total of 169 Pollo Tropical restaurants; 139 of which are Company owned, all located in Florida. There are 30 franchised locations: 24 located in Puerto Rico, Panama, the Bahamas and Guyana. There are 5 non-traditional locations on college campuses and 1 located in a hospital in Florida. In 1998 Pollo Tropical was sold to Carrol’s Restaurant Group which is the largest Burger King franchise.
Taco Cabana was founded in 1978 in San Antonio, TX and is a Fast Casual restaurant specializing in Mexican cuisine. Taco Cabana is known for its pink stores and sunny enclosed patio dining areas. The enclosed patio along with the pink décor provide a vibrant, contemporary ambiance and relaxing atmosphere. The menu’s primary features are: Tacos, Flame Grilled Fajitas, Quesadillas and Burritos. Most locations offer live music at different times during the week. Most menu items are hand-made daily on site in an open display cooking area. The open air design is to create a patio café effect. As of December 2018, there were a total of 170 Taco Cabana restaurants; 162 of these are Company operated and all are located in Texas. The 8 remaining locations are franchised and located in New Mexico. In 2001 Carrol’s Restaurant Group acquired Taco Cabana and made it a part of their restaurant portfolio.
In May, 2012, Carrol’s divested itself of Pollo Tropical and Taco Cabana in a spinoff to the public, the combination named Fiesta Restaurant Group.
Store Closures: Based on their strategic renewal plan (launched in February 2017), Fiesta Restaurant Group has closed a number of their restaurants from both concepts. Since that date a total of 77 restaurants were closed (60 Pollo Tropicals and 17 Taco Cabanas); all locations were considered under-performing.
LONG-TERM GROWTH STRATEGY (2018 10-K)
Strategic Renewal Plan:
On February 27, 2017 Fiesta Restaurant Group announced the appointment of Richard Stockinger as CEO and President of the Company. Shortly thereafter, Fiesta launched the “Plan” designed to significantly improve their core business model and drive long-term shareholder value. The “Plan” consisted of the following:
- Revitalizing restaurant performance in core markets,
- Managing capital and financial disciplines,
- Establishing platforms for long-term growth, and
- Optimizing each brand’s restaurant portfolio.
Strategies for Growth:
Fiesta’s long-term growth strategy is focused on profitably building their base business, growing new distribution channels including catering, delivery, licensed and franchised locations, and developing new restaurant locations.
These growth strategies primarily include:
- Focus on consistency of operations and food quality – to date they have improved system processes and equipment, added incremental labor, implemented tighter managers’ span of control and enhanced field leadership. Additionally, Fiesta has implemented food preparation processes to insure high quality freshness and consistency.
- New product innovation.
o As part of both brands DNA, their menus are centered on freshly prepared, quality food offerings that have broad appeal and provide everyday value. Both brands have their own product development team that enables them to continually reaffirm current offerings and develop new products.
- Focus on effective advertising to highlight everyday value proposition.
Fiesta utilizes an integrated, multi-level marketing approach that includes periodic system-wide promotions, outdoor marketing, in-store promotions, local trade area marketing, social media, digital and web based marketing, and other strategies which include the use of radio and TV, limited time offerings, emails and app based loyalty programs. This broad media approach reinforces the key attributes of each brand. Pollo Tropical and Taco Cabana’s advertising expenditures in 2018 were 3.5% and 3.4%, respectively.
- Grow off-premise sales.
o Fiesta’s inclusion of portable menu items such as wraps, sandwiches, bowls, and salads as well as home replacement meals, and increased focus on catering and delivery continues to be a key focus for both brands. Thus far Fiesta has invested in catering resources utilizing leadership and enhanced digital capabilities, enhanced online ordering and smartphone apps. Additionally, in late 2018, Pollo Tropical began utilizing portable point of sale tablets which accept payment to improve speed of service.
- Continue reimage program.
o Fiesta continues to implement enhancement initiatives, updating interior and exterior elements to the current standard to be more relevant with their guests.
- Growth of non-traditional licenses and international franchise development.
- Currently, Fiesta is updating their FDD to support franchise growth in the future.
- Improve profitability and optimize infrastructure.
- Focus on operational efficiencies while prudently growing their restaurant base, with profit enhancement initiatives focused on food and labor costs.
- Develop new restaurants.
- Opportunities to develop both brands in Florida and Texas; as well as potential future expansion opportunities in other regions of the U.S.
SOURCES OF REVENUE (2018 10-K)
In 2018, total revenues were $688,597,000. 99.6% of revenues were derived from sales of Company operated restaurants with the remainder from franchise royalties and fees.
- Selected Financial Data – The following table sets forth summarized consolidated data for each of the years ended December 30, 2018 and December 31, 2017, each 52 weeks long.
UNIT LEVEL ECONOMICS (2018 10-K)
- Pollo Tropical:
The average net sales for a Company operated Pollo Tropical were $2,521,000 with average food costs of 32.9%, restaurant wages and related expenses of 23.2%, and occupancy and other expenses of 18.5%; leaving a 25.4% restaurant level EBITDA (before advertising of 3.5%).
- The average Pollo Tropical ranges in size from 2,800 to 3,700 square feet with interior seating for approximately 70-90 guests. Per the ’18 10K, the “historical” costs of constructing a store have been $0.5 to $0.7M for Interior costs and signage plus $0.9 to $1.8M for Exterior costs. Since these costs vary, depending on new construction vs. conversion, and owning vs. leasing land and/or building, it is difficult to generalize as to typical “cost” of a new unit.The average check in 2018 was $11.63. Meal period breakdown: dinner representing 52.9% and lunch 47.1%.
- Taco Cabana:
The average Taco Cabana net sales for a Company operated unit were $1,846,000 with average food costs of 30.8%, restaurant wages and related expenses of 32.5%, and occupancy and other expenses of 21.8%; leaving a 14.9% restaurant level EBITDA (before advertising of 3.4%).The average Taco Cabana is approximately 3,500 square feet with indoor seating for 80 guests and additional outside patio seating for 50 guests. Similarly, as in the Pollo Tropical discussion above, the “historical cost” of opening a Taco Cabana location have been $0.4 to $0.6M for Interior costs and signage and $0.4 to $1.2M for Exterior costs, but it is difficult to generalize.The average check was $10.47 in 2018. Meal period breakdown averages were: dinner 24.9%, lunch 22.3%, and breakfast 23.4%.SHAREHOLDER RETURN (2018 10-K):
•On February 26, 2018, the Company announced that its board of directors approved a share repurchase program for up to 1,500,000 shares of the Company’s common stock. The Company repurchased 112,358 shares of its common stock under the program in open market transactions during the twelve months ended December 30, 2018 for $2.8 million.
- RECENT DEVELOPMENTS (per Q4 and 12 mos.’18 report)Comp sales in Q4 were down 1.9% at Pollo Tropical and up 5.1% at Taco Cabana. For the full year, comp sales were up 2.2% at PT and up 4.5% at TC. Restaurant level Adjusted EBITDA in Q4 was 21.0% of sales at PT, up from 17.7%. At TC, restaurant level Adjusted EBITDA was 11.8% of sales at TC, up from 7.0% a year earlier. Consolidated Adjusted Corporate EBITDA was $15.8M, up 77% from $8.9M in ’17.In Q4, PT’s 1.9% comp decrease was the result of 4.4% increase in average check and a 6.3% decrease in transactions. Cannibalization cost about 60 basis points and menu price increase was about 4.3%. The improvement in store level Adjusted EBITDA was the result of lower advertising and repairs and maintenance, lower cost of sales and labor, partially offset by higher real estate taxes.In Q4, TC’s 5.1% comp increase was the result of a 9.6% increase in average check and a 4.5% decrease in transactions. Menu price increase was 6.2%, the remainder of the average check increase from higher priced promotions and brand repositioning. The improvement in store level Adjusted EBITDA was the result of lower advertising and repairs and maintenance, lower labor (medical benefits), lower cost of goods, partially offset by higher incentive bonuses and higher real estate taxes.
Below the store level, G&A was $13.5M, up from $12.9M, 8.1% of revenues vs. 7.9% in ’17, due to “board and shareholder matter costs”, severance costs, investment in resources to build off premise business, partially offset by lower incentive based compensation. There were impairment charges of $10.1M at PT and $4.5M at TC in Q4, primarily related to 14 PTs and 9 TCs closed, as well as 4 underperforming PT and TC restaurants that are still operated. Adjusted EBITDA for the Taco Cabana division increased to $3.4M in Q4, up from a loss of $0.7M in ’17. Adjusted EBITDA for the PT division was $12.4M in Q4, up from $9.7M in ’17.
On the conference call, management indicated that during Q1’19, through 2/17, PT comp sales were running down 3.7%, with cannibalization costing about 90 bp.Taco Cabana comps were running up 1.8% through 2/17. Doordash has been employed as a delivery partner during Q 1’19. Management talked, at both brands, about new products, an expanded loyalty program, the increased use of kiosks and ordering tablets, the potential benefit from Doordash, remodeling of 10-13 locations at each brand, and expanded emphasis on catering.
Conclusion: Provided at the beginning of this article