Tag Archives: FRGI



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.


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.


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:

  1. Revitalizing restaurant performance in core markets,
  2. Managing capital and financial disciplines,
  3. Establishing platforms for long-term growth, and
  4. 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.

  1. Growth of non-traditional licenses and international franchise development.
  • Currently, Fiesta is updating their FDD to support franchise growth in the future.
  1. 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.
  1. 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.


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.
  • 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




The long term investment appeal of well established franchising companies is accepted by the investment community. Most of the prominent franchisors’ equities sell at price to trailing twelve month EBITDA multiples in the mid to high teens (Denny’s (DENN), Dine Brands (DIN), Dunkin’ Brands (DNKN), Pollo Loco (LOCO), McDonald’s (MCD), Restaurant Brands (QSR), Wendy’s (WEN), even higher in a couple of instances Domino’s (DPZ), Shake Shack (SHAK), Wingstop (WING), lower in a number of “challenged” situations like Jack in the Box (JACK), Red Robin (RRGB), Brinker (EAT), Fiesta Rest. (FRGI).

The attraction of asset light franchisors revolves around the presumably free cash flow for franchisors, a steady stream of royalty income unburdened by capital expenditures to build stores. The operating leverage is at the store level.  Franchisees are responsible for building the stores, then controlling food costs, labor, rent and all the other operating line items. Franchisors receive the royalty stream and have the obligation of supporting the system with brand development, site selection advice, marketing support, and operating supervision. These supporting functions, it should be noted, are optional to a degree, and we have written extensively about system support sometimes being short changed by corporate priorities such as major stock buybacks.


We acknowledge that in every franchise system there will be some operators less satisfied than others. In the same way, customer reviews on Yelp or Facebook are more frequently written by critics. Bad news is more noteworthy and more customers are inclined to criticize than applaud, so we have to listen to the complaints but dig further for the reality. With that in mind, we hear the following from franchisees of various restaurant systems:

“I’ve been in this business for thirty years, and I’ve never seen it this bad. Everyone is making money but me; the landlords, the franchisor, the banks. My margins have been killed, and I’m up against my lending convenants”.

“All the franchisors want to do is build sales to build their royalties. The dollar deals are trading people down. My franchisor doesn’t care about my margins. I can’t maintain my margins, especially with the increasing cost of labor, let alone build it”.

“The franchisor is putting pressure on me to sell, even though I’ve always been considered a good operator, with high performance scores. I’m up to date on my development agreement, but they want somebody else to take me out, and the new buyer will agree to what I consider to be a ridiculously aggressive development contract”.

“The franchisor has replaced experienced long term field support with lower priced (and inexperienced) younger people. They’re cutting corporate overhead, but these kids, who never ran a store, are telling me to how to control costs.””

“I’m doing my best with the development objectives, but it is almost impossible to build stores with today’s economics. Rents are too high, labor costs are killing me, and I can’t raise prices in this promotional environment”.

“As if things aren’t tough enough, I’m being nickeled and dimed with demand for higher advertising contributions and fees on services (including software) that I thought would be provided”.

The valuations provided to the publicly held companies do not reflect the situation as described by the admittedly anonymous franchisees. The commentators quoted above don’t want to aggravate their franchisor, and we don’t want to be unfair or misleading to particular companies by relying on just a few conversations, though they do support one another. For the most part, franchisees are strongly discouraged from talking to the press or investment community. The companies will say that “competitive” issues require some secrecy, but there are few secrets in this industry.

The optimistic view, as represented by the valuations in the marketplace, is that the comments above are not typical or representative of the health of the subject franchise systems. Allow me to provide a short story which leads to a suggestion.


Twenty six years ago, in 1992, IHOP had just come public. I was a sell side analyst, thought the numbers were interesting and the stock was reasonably priced. The company, led by the now deceased CEO Kim Herzer, invited me to attend their franchisee convention, which I did. I obviously had the opportunity to interface with many franchisees and it was clear that, while all was not perfect, the franchisor was providing a great deal of support that was embraced by an enthusiastic franchise community. IHOP stock tripled over several years for me and my clients who owned millions of shares. I attended several more of their annual conventions and maintain some of those relationships to this day. Obviously, the conviction I gained from their open attitude was critical to the success of the investment. I should add, that many of those buyers in 1992 owned the stock for many years, not living and dying on quarterly reports.


As you are no doubt by now anticipating, my suggestion to publicly held franchising companies: open up your franchisee conventions to the investment community. The companies may quickly respond that lenders are already invited to franchise conventions, but franchisees are unlikely to express their system oriented concerns when they are making a pitch to a potential lender. Companies may also respond that their lawyers think it would be a bad idea, not consistent with full disclosure and analysts would be getting “inside information”. Let’s not allow the lawyers to provide “cover”. A good lawyer will provide a solution to the problem, not just provide the pitfalls. Analysts attending a franchise convention are not being told what sales or profits are going to be. Attending a franchise convention is  a “channel check”, no more than talking to a supplier or customer of a manufacturing company, which any decent analyst will do.

The anecdotal critical comments, as described above, have likely been heard by others, but may be atypical of most restaurant franchising companies. There are no secrets in this business. One of the investment appeals of this industry is its transparency. Notable news is going to leak out anyway. The objective of any publicly held company is to build stock ownership by well informed investors. Investment analysts pride themselves on their ability to “build a mosaic”, enhance the information provided in quarterly reports, SEC filings, and conference calls, with “channel checks”. What channel check would be more pertinent than meeting the franchisees of a company that is dependent on franchisee success? Putting it another way, and taking the highest valuation relative to EBITDA as an example: Wingstop (WING) is a company I have the highest regard for. However, you could call it irresponsible to pay almost fifty times trailing EBITDA for Wingstop stock (and I haven’t) if I couldn’t talk to franchisees of my own choosing?

There’s no particular need to invite this writer if I’m not considered influential enough. I have not spoken to these analysts on this subject, but qualified industry followers such as David Palmer, Nicole Reagan, Matt DiFrisco, David Tarantino, Jeff Bernstein, Andy Barish, Bob Derrington, Mark Kalinowski, Michal Halen, Gary Occhiogrosso, Howard Penney, Jonathan Maze, Nicholas Upton, John Hamburger and John Gordon provide the beginning of an invitation list.  I rest my case.

Roger Lipton


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