From a top-line perspective, Fiesta Restaurant Group has blazed a comeback story over the past year. This reenergized direction began in earnest when the parent company of Taco Cabana and Pollo Tropical launched a “strategic renewal plan” in early fiscal 2017. It was coming off same-store sales declines of 4.5 and 6.7 percent, respectively, at its legacy brands, and the closure of 30 restaurants. For a progress update, this past quarter—Q3 of 2018—Taco Cabana’s comps were up 12.2 percent, year-over-year, marking two consecutive quarters and six consecutive months of gains, and Pollo Tropical’s lifted 6.5 percent, good for three consecutive quarters and 10 straight months of improvement.
The company announced Thursday that the “strategic renewal plan” is complete. But there is some collateral in its “comprehensive restaurant portfolio review.” The company said it would close 14 Pollo Tropical restaurants in Florida and Georgia, include all nine Pollo Tropicals in the greater Atlanta metropolitan area. The company is also shuttering nine Taco Cabana units in Texas.
As of September, there were 150 company-run Pollo Tropical units, 171 corporate Taco Cabanas, 30 franchised Pollo Tropicals in the U.S., Puerto Rico, the Bahamas, Guyana and Panama, and eight franchised Taco Cabana restaurants stateside. Fiesta opened one Taco Cabana in Texas in Q3.
The company said nearly all employees impacted by the Florida and Texas closures would be offered positions at nearby locations.
“In completing our Strategic Renewal Plan with this comprehensive restaurant portfolio review, we will enter 2019 with a keen focus on building traffic, improving margins, and rebranding Pollo Tropical for future expansion outside of South Florida. We believe that these steps will build the foundation for growth beginning in 2020,” Fiesta president and chief executive officer Richard Stockingher said in a statement. Stockinger, the former president and CEO of Benihana, was named to the same role at Fiesta last February
The 14 closed Pollo Tropical locations contributed about $15.1 million in restaurant sales and $4.6 million in restaurant level pre-tax operating losses, including 2 million in depreciation expense, for the 11 months ended December 2. The nine closed Taco Cabanas contributed roughly $9.1 million and $1.5 million in restaurant level pre-tax operating losses, including $0.7 million in depreciation expense.
Fiesta expects to recognize non-cash impairment charges of about $12 million to $13 million from the closures, and repeated lease and other charges of about $3 million to $3.5 million during Q4. This will be determined by the timing of the restaurant closures, which was not shared.
“We continue to be optimistic about the future of Pollo Tropical and Taco Cabana and are pleased with recent progress made on several growth initiatives that we believe should have a meaningful impact on our business,” Stockinger added. “New loyalty programs will be in place at both brands by the end of this year, we have rebranded and built an infrastructure to support Pollo Tropical catering and are in the process of doing the same at Taco Cabana, and third-party delivery is being piloted at select Pollo Tropical restaurants.”
Much of Fiesta’s climb back to profitability has taken the long-term picture into account. This past quarter, total revenues upped 10.1 percent, year-over-year, to $174.6 million, due primarily to the aforementioned same-store sales growth. However, when the report surfaced, Wall Street hammered shares with a 20-plus percent drop on the stock market. There were a few reasons why.
To start, while impressive, both results lapped an extremely difficult Q3 2017 period pummeled by hurricanes Harvey and Irma. In that quarter, Pollo Tropical’s comps fell 10.9 percent and Taco Cabana’s dropped 12.6 percent. Fiesta estimated the hurricanes negatively impacted adjusted EBITDA and income loss from operations by about $3–$4 million at Pollo Tropical and $1-$1.15 million at Taco Cabana, and that same-store sales and transactions were hurt 5.5–6 percent at Pollo Tropical and 2–3 percent at Taco Cabana, respectively.
But beyond the hurricane tailwind, estimated at 2–3 percent for Taco Cabana alone, Fiesta still showed solid profitability growth with consolidated adjusted EBITDA up 14.2 percent in Q3. Here’s where investors expressed concern, however.
Earnings per share of 11 cents missed the Zacks Consensus Estimate of 19 cents per share by a significant amount. And, perhaps more notable, the company said it expects total capital expenditures in 2018 to be at the high-end of the $60 million to $70 million range it set earlier “due in part to additional restaurant investments being made to improve food quality and support new menu, catering, and technology platforms.”
Simply, this turnaround has come with a price.
Stockinger said in the company’s Q3 call that the near-term investments were worth the big-picture gain. “… they have also led to enhanced guest experiences through improved food quality and hospitality, and have enabled us to build a track record of comparable restaurant sales momentum and increased profit per transaction,” he said. Each brand relaunched this past year, with massive menu overhauls core to the changes. The product upgrade alone affected almost 90 percent of Taco Cabana’s menu. At Pollo Tropical, the change touched 90 percent of the offerings with food and ingredient enhancements, including removing artificial ingredients.”
Up next for Fiesta will be improving margins and cost controls, adding incremental off-premises sales, and optimizing its restaurant portfolio, Stockinger said at the time. We now know what that last note looks like.
Stockinger noted that Fiesta anticipates spending less capital in 2019 compared to 2018 as it opens fewer restaurants and continues to refine its four-wall model. The chain is also working on labor initiatives, including labor-scheduling forecasting. These labor controls include increasing the use of shift leaders to promote leadership development with the added benefit of reducing costs.
A large part of this boosted comp sales has come from average check. But Fiesta didn’t raise prices simply to accelerate the top line. The chain did so, especially in the case of Taco Cabana, to court a healthier customer base and remove some of the those value-seekers from its everyday lineup. Essentially, Fiesta wanted to create a loyal traffic pattern that was built on repeat guests and users who seek the brands for quality and differentiation—not to cash in on the latest deal, which could be attached to any brand in any market. And also, Fiesta has been on a yearlong path to refocus its brands into core markets, which accounts for some of the closures and the strategy that goes along with it.
Back on the pricing note, the third-quarter gain at Taco Cabana consisted of a 12.1 percent increase in average check, inclusive of 7.7 percent in pricing and positive sales mix associated with higher-price promotions and new menu items with higher food costs. Restaurant transactions increased 0.1 percent, negatively impacted by the reduction in overnight operating hours, which hit comp sales by about 0.9 percent.
At Pollo Tropical, the comps growth comprised of a 5.2 percent increase in average check, inclusive of a 4.9 percent gain in pricing, and a 1.3 percent increase in comparable restaurant transactions.
This pricing will thin out as the company laps its own efforts. At Taco Cabana, the near term will be over 6 percent. Pollo Tropical should see pricing drop into the low 4 percent range in Q4, the company said.
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