Industry News | February 28, 2017

Restaurant Sales Decline at Pollo Tropical, Taco Cabana

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Fiesta Restaurant Group, Inc., parent company of the Pollo Tropical and Taco Cabana fast casual restaurant brands, reported results for the 13-week fourth quarter and 52-week full year 2016, which ended on January 1, 2017.

Select fourth quarter 2016 results (13 weeks) as compared to fourth quarter 2015 results (14 weeks) include:

Total revenues decreased 4.6 percent to $171.3 million. Excluding the extra week in 2015, total revenues increased 2.1 percent.

Comparable restaurant sales at Pollo Tropical decreased 4 percent and comparable restaurant transactions decreased 7.3 percent, partially attributable to Hurricane Matthew which negatively impacted comparable restaurant transactions by approximately 1.3 percent and sales cannibalization that negatively impacted comparable restaurant transactions by approximately 1.1 percent.

Comparable restaurant sales at Taco Cabana decreased 3.5% and comparable restaurant transactions decreased 4.5 percent.

Six company-owned Pollo Tropical and two company-owned Taco Cabana restaurants were opened.

Select full year 2016 results (52 weeks) as compared to full year 2015 results (53 weeks) include:

Total revenues increased 3.5 percent to $711.8 million. Excluding the extra week in 2015, total revenues increased 5.4 percent.

Comparable restaurant sales at Pollo Tropical decreased 1.6 percent and comparable restaurant transactions decreased 3.1 percent, partially due to sales cannibalization that negatively impacted comparable restaurant transactions by approximately 1.5 percent.

Comparable restaurant sales at Taco Cabana decreased 2.5 percent and comparable restaurant transactions decreased 3.6 percent.

32 company-owned Pollo Tropical and four company-owned Taco Cabana restaurants were opened.

Net income of $16.7 million, or $0.62 per diluted share, compared to net income in

Fourth Quarter 2016 Financial Review

Consolidated Results

Total revenues decreased 4.6 percent to $171.3 million from $179.5 million compared to the prior year period as sales contributions from 26 net company-owned restaurant openings were offset by declines in comparable restaurant sales amid continued industry-wide softness, and the effect of an extra week in 2015. Comparable restaurant sales decreased 4 percent at Pollo Tropical compared to a 0.4 percent gain in the prior year period and decreased 3.5 percent at Taco Cabana compared to a 3.3 percent gain in the prior year period. The extra week in 2015 contributed approximately $11.8 million to total revenues.

Cost of sales as a percentage of restaurant sales improved 160 basis points compared to the prior year period due primarily to favorable chicken and other commodity costs and menu price increases.

Restaurant wages and related expenses as a percentage of restaurant sales increased 50 basis points compared to the prior year period due primarily to higher labor costs, including the impact of new company-owned restaurants and sales deleverage, partially offset by lower workers compensation, incentive based compensation and medical expenses.

Other restaurant operating expenses as a percentage of restaurant sales increased 90 basis points compared to the prior year period due primarily to higher repair and maintenance and insurance costs, and sales deleverage.

Restaurant rent expense as a percentage of restaurant sales increased 100 basis points compared to the prior year period due primarily to new company-owned restaurants, which generally have higher rent, and sales deleverage.

General and administrative expenses increased $0.6 million to $13.5 million compared to the prior year period due primarily to higher labor costs and infrastructure investment expenses associated with current and future growth and financial and legal advisory fees associated with the Company’s review of strategic alternatives, partially offset by performance-based compensation expense. As a percentage of revenues, general and administrative expenses increased 70 basis points compared to the prior year period.

The company recognized impairment and other lease charges of $7.0 million in the fourth quarter of 2016 that included $4.5 million related to the 16 Pollo Tropical restaurants that were previously impaired in the third quarter, $1.5 million related to one additional Pollo Tropical restaurant and $1.0 million primarily related to six Taco Cabana restaurants with declining sales.

Many new Pollo Tropical restaurants in its emerging markets have opened at lower sales volumes than expected and have not yet achieved the sales volumes required to generate positive cash flows. Pollo Tropical’s emerging markets include Atlanta, Nashville and Texas. Generally, restaurants in Atlanta have performed better than restaurants in Nashville and Texas due primarily to higher average sales volumes and lower average wage rates, rent expense and real estate taxes. Combined carrying values of the restaurants in Atlanta, Nashville and Texas are $26.7 million, $3.2 million and $48.3 million respectively.

Pollo Tropical has initiated operational and transactional growth plans to drive improved performance in the emerging markets with strategies focused on enhancing guest experience and brand recognition and will continue to evaluate the long-term viability of these markets. The Company’s estimates of future cash flows for restaurants that were not impaired assume these plans will succeed and sales will reach the levels required to generate cash flows that exceed the carrying value of the restaurants. Our cash flow projections include, among other things, significant sales growth as the result of the introduction of broadcast media, dedicated sales positions to build the brand’s catering business, increased frequency with the launch of a loyalty program, third party delivery and local store marketing. If these assumptions change in the future or the performance of the restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material.

Thirteen Pollo Tropical restaurants open more than twelve months in markets outside of Florida with a combined carrying value of $22 million have projected cash flows that exceed the restaurant's carrying value by a small margin. The thirteen restaurants contributed approximately $6.1 million in operating losses to income from operations, including $2.7 million in depreciation expense, for the 12 months ended January 1. In addition, 16 Pollo Tropical restaurants opened during 2016 in markets outside of Florida with a combined carrying value of $30.2 million have initial sales volumes lower than expected, but do not have significant operating history to form a good basis for future projections. The 16 restaurants contributed approximately $6.0 million in operating losses to income from operations, including $1.5 million in depreciation expense and $2.9 million in pre-opening costs, for the twelve months ended January 1, 2017. If expected performance improvements are not realized, an impairment charge may be recognized in future periods, and such charge could be material.

In addition, three Taco Cabana restaurants with a combined carrying value of $2.5 million have projected cash flows that exceed the restaurants carrying value by a small margin. These restaurants contributed approximately $0.4 million in operating losses to income from operations, including $0.3 million in depreciation expense, for the twelve months ended January 1, 2017.

Brand Results

Pollo Tropical restaurant sales decreased 1.1 percent to $95.6 million in the quarter compared to the prior year period due primarily to a comparable restaurant sales decrease of 4 percent and the effect of an extra week in 2015 of approximately $6.5 million, offset by sales contributions from 22 net Company-owned restaurant openings. The decrease in comparable restaurant sales resulted from a 7.3% decrease in comparable restaurant transactions, partially offset by a 3.3% increase in average check. Hurricane Matthew negatively impacted comparable restaurant transactions by approximately 1.3 percent and sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant transactions by approximately 1.1 percent. Average check was primarily driven by menu price increases that positively impacted restaurant sales by 1.8 percent.

Taco Cabana restaurant sales decreased 8.7% to $75.0 million in the quarter compared to the prior year period due primarily to a comparable restaurant sales decrease of 3.5 percent and the effect of an extra week in 2015 of approximately $5.3 million, offset by sales contributions from four company-owned restaurant openings. The decrease in comparable restaurant sales resulted from a 4.5 percent decrease in comparable restaurant transactions and an increase in average check of 1.0%. Average check was driven by menu price increases that positively impacted restaurant sales by 2.5 percent. Adjusted EBITDA for Taco Cabana, a non-GAAP financial measure, decreased 21.6 percent to $7.6 million compared to the prior year period (see non-GAAP reconciliation table below).

Full Year 2016 Financial Summary

Total revenues increased 3.5 percent to $711.8 million compared to $687.4 million in the prior year due to 26 net Company-owned restaurant openings. Excluding the extra week in 2015, total revenues increased 5.4 percent. Comparable restaurant sales decreased 1.6% at Pollo Tropical compared to a 3.8 percent gain in the prior year and decreased 2.5% at Taco Cabana compared to a 4.4 percent gain in the prior year. The decrease in comparable restaurant sales at Pollo Tropical resulted from a 3.1 percent decrease in comparable restaurant transactions and an increase in average check of 1.5 percent. The decrease in comparable restaurant sales at Taco Cabana resulted from a 3.6 percent decrease in comparable restaurant transactions and an increase in average check of 1.1 percent.

Restaurant Portfolio

During the fourth quarter 2016, Fiesta opened six company-owned Pollo Tropical restaurants, four in south Florida and two in San Antonio, Texas. In addition, the Company opened two Company-owned Taco Cabana restaurants in San Antonio, Texas.

As of January 1, 2017, Fiesta had 177 company-owned Pollo Tropical restaurants, 166 Company-owned Taco Cabana restaurants, 35 franchised Pollo Tropical restaurants in the U.S., Puerto Rico, the Bahamas, Guatemala, Guyana, Panama, Trinidad & Tobago and Venezuela and seven franchised Taco Cabana restaurants in the U.S.

News and information presented in this release has not been corroborated by QSR, Food News Media, or Journalistic, Inc.