8. Commitments and Contingencies
The maximum potential liability for future rental payments that the Company could be required to make under these leases at October 1, 2017July 3, 2022 was $4.1$4.5 million. The Company could also be obligated to pay property taxes and other lease relatedlease-related costs. The obligations under these leases will generally continue to decrease over time as the operating leases expire. The Company does not believe it is probable that it will be ultimately responsible for the obligations under these leases.
reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(InDollars in thousands, of dollars, except share and per share amounts)data)
9.11. Recent Accounting Pronouncements
In May 2014, and in subsequent updates,March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers2020-04, Reference Rate Reform (Topic 606)848) ("ASU No. 2020-04"), which amendsprovides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective as of March 12, 2020 through December 31, 2022. As of July 3, 2022, the guidance in former Topic 605, Revenue Recognition, and provides for either a full retrospective adoption in whichCompany's only exposure to LIBOR rates was the standard is applied to allundrawn $10.0 million revolving credit facility under its senior credit facility. Upon cessation of the periods presented orLIBOR, the senior credit facility would use a modified retrospective adoption in which the cumulative effectbenchmark replacement rate. According to ASU No. 2020-04, modifications of initially applying the standard is recognized at the date of initial application. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are inwithin the scope of other US GAAP requirements. The guidance also provides a modelTopic 470 Debt should be accounted for by prospectively adjusting the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as property and equipment, including real estate. The Company is currently evaluating the impact of the provisions of Topic 606; however, the Company does not believe the standard will impact its recognition of revenue from Company-owned restaurants or its recognition of franchise royalty revenues, which are based on a percent of gross sales. The Company expects the provisions to primarily impact franchise and development fees as well as gift card programs and does not expect the standard to have a material effect on its financial statements.effective interest rate. The Company does not plan to early adopt the standard and plans to use the modified retrospective approach to adopt the standard. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2017.
In February 2016, the FASB issuedexpect ASU No. 2016-02, Leases (Topic 842), which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required with an option2020-04 to use certain practical expedients. The new guidance is required to be applied at the beginning of the earliest comparative period presented. The Company is currently evaluating thehave a significant impact on its financial statements. Although the impact is not currently estimable, the Company expects to recognize lease assets and lease liabilities for most
ITEM 2-MANAGEMENT'S2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of financial condition and results of operations ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying financial statement notes. Any reference to restaurants refers to Company-owned restaurants unless otherwise indicated. Throughout this MD&A, we refer to Fiesta Restaurant Group, Inc., together with its consolidated subsidiaries, as "Fiesta," "we," "our" and "us."
We use a 52-5352–53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended January 1, 20172, 2022 contained 52 weeks. The three and ninesix months ended October 1, 2017July 3, 2022 and October 2, 2016July 4, 2021 each contained thirteen and thirty-ninetwenty-six weeks, respectively. The fiscal year ending December 31, 2017January 1, 2023 will contain 52 weeks.
Company Overview
We own, operate and franchise two fast-casualthe restaurant brands,brand Pollo Tropical® and Taco Cabana®, which have almosthas over 30 years and 40 years, respectively, of operating history and a loyal customer bases in their core markets.base. Our Pollo Tropical restaurants offer a wide variety oflocations feature fire-grilled and crispy citrus marinated chicken and other freshly prepared tropical inspired food, while our Taco Cabana restaurants offer a broad selection of freshly prepared Mexican inspired food.menu items. We believe that both brands are differentiated from otherthe brand offers a distinct and unique flavor with broad appeal at a compelling value, which differentiates it in the competitive fast-casual and quick-service restaurant concepts and offer a unique dining experience. We are positioned within the value-oriented fast-casual restaurant segment, which combines the convenience and value of quick-service restaurants with the variety, food quality, décor and atmosphere more typical of casual dining restaurants. Our open display kitchen format allows guests to view and experience our food being freshly-prepared and cooked to order. Additionally, nearly allsegments. All but one of our restaurants offer the convenience of drive-thru windows. As of October 1, 2017, ourJuly 3, 2022, we operated 138 Pollo Tropical Company-owned restaurants, included 149 Pollo Tropical restaurants and 168 Taco Cabana restaurants.all of which are located in Florida.
We franchise our Pollo Tropical restaurants primarily internationallyin international markets, and as of October 1, 2017,July 3, 2022, we had 2622 franchised Pollo Tropical restaurants located in Puerto Rico, Panama, Guyana, Ecuador, and the Bahamas, Venezuela, Panama, Honduras and Guyana, and sixseven licensed locationsPollo Tropical restaurants located in Florida consisting of four on college campuses and locations at a hospital in Florida.and two sports and entertainment stadiums. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets.
As of October 1, 2017, we had five franchised Taco Cabana restaurants located in New Mexico and two non-traditional Taco Cabana licensed locations on college campuses in Texas.
Recent Events Affecting ourOur Results of Operations
HurricanesCOVID-19 Pandemic
DuringThe novel coronavirus (COVID-19) pandemic has affected and is continuing to affect the thirdrestaurant industry and the economy. Based on current conditions, we do not expect sales trends to significantly deteriorate further as a direct result of COVID-19. However, labor shortages may negatively impact sales trends and there can be no assurance that sales trends will not deteriorate further. We have implemented measures to control costs to mitigate any negative impact from the COVID-19 pandemic and labor shortages.
Labor Challenges and Inflationary Factors
Hours of operations have been limited due to labor shortages which are affecting our brand and the restaurant industry. In the second quarter of 2017, Texas2022, we estimate that operating hours were reduced by approximately 3.0% as a result of labor shortages. Additionally, we experienced increased overtime due to training and Florida were struck by Hurricanes Harveystaffing shortages. In response to these labor shortages and Irma (the "Hurricanes"). 43 Taco Cabanacompetition for labor, we implemented special incentive pay in affected locations and two Pollo Tropical Company-owned restaurants in the Houston metropolitan area and all 149 Pollo Tropical Company-owned restaurants in Florida and the Atlanta metropolitan area were closed and affected by the Hurricanes to varying degrees (e.g. property preparation and damage, inventory losses, payment of hourly restaurant employees while restaurants were closed, lost business related to temporary closures, limited menu and modified hours of operations). Other Texas markets where we operate Company-owned restaurants including San Antonio were also affected by Hurricane Harvey, but to a lesser degree. Allfor particular days of the restaurants that were closedweek, and we have re-opened exceptintroduced sign-on bonuses payable after a specified term of service. We believe these labor cost increases for one Taco Cabana restaurantovertime and two Pollo Tropical restaurants that remain closedstaffing-related incentives are short-term in Houston.
nature. We estimate that the Hurricanes negatively impacted Adjusted EBITDAhave intensified our focus on accelerating labor optimization efforts to improve staffing efficiency, which we believe will increase both staff availability and income (loss) from operations by approximately $3.0 million to $4.0 million for Pollo Tropical and approximately $1.0 million to $1.5 million for Taco Cabana and negatively impacted comparable restaurant sales and transactions by approximately 5.5% to 6.5% for Pollo Tropical, and approximately 2% to 3% for Taco Cabana for the third quarter of 2017.
margins. As a result of the Hurricanes, we recorded inventory losses of $0.6 million for Pollo Tropicalour efforts, staffing levels improved in June 2022, enabling us to open all service channels, particularly dine-in, curbside and $0.2 million for Taco Cabana within cost of salesdigital.
Inflationary factors have been experienced primarily in the third quarter of 2017. We recorded wages paidlabor, food costs, and other operating costs categories. Due primarily to hourly employees who were unable to work of $0.3 million and $0.1 million for Pollo Tropical and Taco Cabana, respectively, withinhigher wage rates, restaurant wages and costs associated with hurricane preparation and repairs of $0.2 million and $0.1 million for Pollo Tropical and Taco Cabana, respectively, within other restaurant operatingrelated expenses for the third quarter of 2017. In addition, we recognized an impairment loss of $0.1 million related to one Taco Cabana restaurant in the Houston metropolitan area that will be closed for an extended period due to storm damage. We also incurred fixed costs while the impacted restaurants were temporarily closed due to the Hurricanes such as restaurant management wages and rent expense.
Hurricane Maria severely impacted our Pollo Tropical franchise operations in Puerto Rico, causing temporary closures of all of the franchised Pollo Tropical restaurants in late September. The majority of the 17 franchised Pollo Tropical restaurants in Puerto Rico re-opened in October with limited hours and menu offerings. The challenging current economic conditions in Puerto Rico will likely have a negative impact on our future franchise revenue.
We maintain comprehensive insurance coverage on all of our restaurants including property, flood and business interruption. We are in the process of assessing the extent of damage and loss, and expected insurance proceeds. A full assessment is expected to be completed in the weeks ahead. In the third quarter of 2017, we recorded expected insurance proceeds of $0.2 million, which represents a portion of expected insurance proceeds for a Taco Cabana restaurant with extensive flood damage. We will record additional expected insurance proceeds related to this and other hurricane affected restaurants in future periods when the amounts are estimable or, for business interruption coverage for lost profit, at the time of final settlement.
Strategic Renewal Plan
On April 24, 2017, we announced a Strategic Renewal Plan (the "Plan") designed to significantly improve our core business model and drive results in the future. The Plan consists of the following: 1) revitalizing restaurant performance in core markets; 2) managing capital and financial discipline; 3) establishing platforms for long term growth; and 4) optimizing each brands' restaurant portfolio.
As part of the Plan, we relaunched the Pollo Tropical brand in October 2017 and intend to relaunch the Taco Cabana brand in early 2018 once the material aspects of the Plan are in place. The relaunch of both brands was delayed as a resultpercentage of the Hurricanes.
The items detailed below reflect our meaningful progressnet sales increased to date:
Revitalizing Restaurant Brands in Core Markets
We have implemented refined recipes that improve food quality with fresh and clean ingredients, positively impacting approximately 90% of each brand's menu.
We have uniquely vertically integrated our chicken supply chain for Pollo Tropical, allowing us to control the feed and breed of all chickens purchased with the objective of "no antibiotics ever" by 2018.
Multiple operational initiatives have been put in place to deliver high quality execution with consistency.
Pollo Tropical launched a new creative TV, radio, billboard and social media advertising campaign in late October 2017 which features freshly prepared menu offerings.
In October 2017, Pollo Tropical rolled out a new menu featuring new menu items which is demonstrating promising initial results including higher check averages. Research validates the new menu direction including new and future opportunities.
Taco Cabana recently launched a new advertising campaign that features for a limited time three new chicken fajita tacos with composed topping recipes.
New digital menu boards are in the process of being rolled out across both brands featuring enhanced displays with flexibility to rotate by daypart and feature promotions and videos.
New labor models have been implemented at both brands to improve speed of service, transaction flow, and the quality and consistency of hospitality.
We continue to upgrade our kitchens and restaurant presentation, including added signage and exterior lighting to improve visibility.
Regional chefs were added to the field structure to enhance food knowledge, provide culinary training and ensure adherence to high quality operating and food safety standards.
Managing Capital and Financial Discipline
Based on research and financial modeling, we have introduced a tiered menu pricing strategy across both brands in October 2017.
Nine Pollo Tropical Company-owned restaurants have been remodeled this year and one Taco Cabana restaurant will be remodeled by the end of 2017.
We are in the process of developing a preventative maintenance program to improve the longevity of our restaurant base.
Restaurant prototypes for both brands are being redesigned to optimize the guest experience and deliver attractive investment returns at lower costs.
Establishing Platforms for Long Term Growth
We launched an outsourced call center to answer guest inquiries and handle catering orders initially at Pollo Tropical, This is a significant source of future growth at both brands.
We are working with new partners to establish comprehensive digital capabilities that will include refining delivery, catering, mobile apps, online ordering and loyalty platforms for implementation in 2018.
We continue to refine the positioning of both brands in core markets and outside of core markets beginning with Pollo Tropical locations in North Florida and the Atlanta metropolitan area.
Optimizing our Restaurant Portfolio
We have rationalized our restaurant portfolio at both brands with the closure of several unprofitable restaurants.
We are updating our franchise disclosure documents to support potential franchise growth in the future.
We plan to update our site selection and restaurant optimization models for future expansion outside of core markets.
Store Closures
We closed 30 Pollo Tropical restaurants in April 2017, including all Pollo Tropical locations in Dallas-Fort Worth and Austin, Texas, and Nashville, Tennessee, three Pollo Tropical locations in Georgia and eight Pollo Tropical locations in southern Texas. In September 2017, due to the ongoing uncertainty created in Houston by Hurricane Harvey, we did not re-open our two Houston Pollo Tropical restaurants. Due to limited awareness of the Pollo Tropical brand and high relative overhead costs needed to support the four remaining restaurants in San Antonio, we decided to permanently close all six Pollo Tropical restaurants in Texas and focus on revitalizing core markets and brand repositioning outside of core markets. Up to four Pollo Tropical restaurants that closed in 2017 in Texas may be rebranded as Taco Cabana restaurants. We continue to own and operate 13 Pollo Tropical restaurants in Atlanta, Georgia, of which five were impaired in the third quarter of 2017. We continue to evaluate the long-term viability of the Pollo Tropical restaurants in Georgia and may decide to further impair or close some of these restaurants if their performance does not improve as projected.
We also closed four Company-owned Taco Cabana restaurants in Texas in July 2017 which were impaired25.1% in the second quarter of 2017.
In2022 from 24.1% in the thirdsecond quarter of 2017, we recognized impairment2021. Commodity costs as a percentage of net sales increased 6.2% in the second quarter of 2022 compared to the second quarter of 2021. The increase was partially due to non-recurring additional chicken costs of approximately $0.9 million as a result of utilizing a back-up supplier from May to early July 2022 due to a short-term capacity disruption experienced by our primary chicken supplier. Chicken costs, the primary protein purchased, are not expected to increase significantly for the remainder of 2022. Utilities costs as a percentage of net sales also increased to 4.0% in the second quarter of 2022 from 3.6% in the second quarter of 2021 primarily due to higher energy prices in 2022.
Pricing action has been taken to offset labor, food and other lease charges associatedoperating cost increases. In order to maintain value perceptions with our customers, we implemented a phased approach to menu price increases and took lower pricing increases on items purchased by value-conscious customers including our "Pollo Time" promotional items. Recent price increases include a 5.2% price increase in mid-December 2021, a 5.0% increase in March 2022, and a 1.4% increase in June 2022. As a result of this phased approach to menu price increases, margin improvement is trailing the six closed Pollo Tropical restaurantsimpact of cost increases noted above, with improved margins expected in Texas, as well as impairment charges with respectfuture quarters compared to six additional Pollo Tropical restaurants, including five in Georgia and one in Florida and two Taco Cabana restaurants in Texas that we continue to operate.
Impairment and other lease charges for the three and nine months ended October 1, 2017 for Pollo Tropical consist of impairment charges of $15.6 million and $51.3 million, respectively, and other lease charges, net of recoveries, of $(1.9) million and $5.0 million, respectively. Impairment and other lease charges for the three and nine months ended October 1, 2017 for Taco Cabana consist of impairment charges of $0.9 million and $1.4 million, respectively, and other lease charges, net of recoveries, of $1.3 million for both periods.
For the nine months ended October 1, 2017, the 36 closed Pollo Tropical restaurants and four closed Taco Cabana restaurants contributed approximately $12.0 million and $2.1 million in restaurant sales, respectively, and $7.2 million and $0.6 million in restaurant-level operating losses to income from operations, respectively, including depreciation expense of $2.2 million for Pollo Tropical.
Industry Conditions
The fast-casual restaurant industry experienced a continued general slowdown in 2016 that continued into the thirdsecond quarter of 2017, specifically2022, barring unforeseen changes in Floridaour cost structure and Texas. We believe the challenging market and industry conditions in Florida and Texas contributed to a decline in comparable restaurant transactions and sales for the nine months ended October 1, 2017.operating environment.
Executive Summary - Summary—Consolidated Operating Performance for the Three Months Ended October 1, 2017July 3, 2022
Our thirdsecond quarter 20172022 results and highlights include the following:
Net loss increased $3.7 million to $(8.3) million in the third quarter of 2017, or $(0.31) per diluted share, compared to•We recognized a net loss of $(4.5)$(6.2) million, or $(0.17)$(0.25) per diluted share, in the thirdsecond quarter of 2016,2022 compared to a net loss of $(0.1) million, or $0.00 per diluted share, in the second quarter of 2021 due primarily to lower comparable restaurant sales andthe impact of higher cost of sales, as a percentage of sales, attributable in part to the impact of the Hurricanes, which caused temporary closures, modified hours of operations, loss of inventory and limited menu offerings, as well as ongoinglabor costs, incurred during the temporary closures and modified hours of operations. The increase in net loss is also due to higher repair and maintenance costs, partially offset by the impact of closing unprofitable restaurants and lowerutilities costs, insurance costs, general and administrative expenses, advertising and impairment and other lease charges.charges, and delivery fees in the second quarter of 2022, partially offset by increased comparable restaurant sales at Pollo Tropical in the second quarter of 2022. The loss in the second quarter of 2021 was primarily the result of the loss from discontinued operations.
•We recognized a loss from continuing operations of $(6.5) million, or $(0.26) per diluted share, in the second quarter of 2022 compared to income from continuing operations of $2.7 million, or $0.11 per diluted share, in the second quarter of 2021 primarily as a result of the foregoing.
•Total revenues decreased 12.9%increased 8.0% in the thirdsecond quarter of 20172022 to $158.7$98.5 million compared to $182.3$91.2 million in the thirdsecond quarter of 2016,2021, driven primarily by a decreasean increase in comparable restaurant sales partially attributable to the Hurricanes combined with the impact of permanent restaurant closures in the fourth quarter of 2016 and in 2017.at Pollo Tropical. Comparable restaurant sales decreased 12.6%increased 8.4% for our Taco CabanaPollo Tropical restaurants resulting primarily from an increase in the net impact of product/channel mix and pricing of 15.1%, partially offset by a decrease in comparable restaurant transactions of 14.3% partially offset by an increase in average check of 1.7%6.7%. Comparable restaurant sales decreased 10.9% for our Pollo Tropical restaurants resulting primarily from a decrease in comparable restaurant transactions of 13.1% partially offset by an increase in average check of 2.2%.
During the third quarter of 2017, we opened two Company-owned Pollo Tropical restaurants and three Company-owned Taco Cabana restaurants. We closed six Company-owned Pollo Tropical restaurants and four Company-owned Taco Cabana restaurants during the third quarter of 2017. During the third quarter of 2016, we opened nine Company-owned Pollo Tropical restaurants.
•Consolidated Adjusted EBITDA decreased $10.4$3.5 million in the thirdsecond quarter of 20172022 to $13.2$5.7 million compared to $23.5$9.1 million in the thirdsecond quarter of 2016,2021, driven primarily by lower comparable restauranthigher labor costs, repair and maintenance costs, utilities costs, insurance costs, general and administrative costs and delivery fee expense, and commodity costs and sales highermix within cost of sales, as a percentagepartially offset by the impact of sales and higher repair and maintenance costs.restaurant sales. Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see "Management's Use of Non-GAAP Financial Measures".Measures."
Results of Operations
Unless otherwise noted, this discussion of operating results relates to our continuing operations.
The following table summarizes the changes in the number and mix of Pollo Tropical and Taco Cabana Company-owned and franchised restaurants.restaurants:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pollo Tropical | | |
| Owned | | Franchised | | Total | | | | | | |
January 2, 2022 | 138 | | | 31 | | | 169 | | | | | | | |
New | — | | | 1 | | | 1 | | | | | | | |
Closed | — | | | (1) | | | (1) | | | | | | | |
April 3, 2022 | 138 | | | 31 | | | 169 | | | | | | | |
New | — | | | — | | | — | | | | | | | |
Closed | — | | | (2) | | | (2) | | | | | | | |
July 3, 2022 | 138 | | | 29 | | | 167 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
January 3, 2021 | 138 | | | 29 | | | 167 | | | | | | | |
New | — | | | — | | | — | | | | | | | |
Closed | — | | | — | | | — | | | | | | | |
April 4, 2021 | 138 | | | 29 | | | 167 | | | | | | | |
New | — | | | — | | | — | | | | | | | |
Closed | — | | | — | | | — | | | | | | | |
July 4, 2021 | 138 | | | 29 | | | 167 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| Pollo Tropical | | Taco Cabana |
| Owned | | Franchised | | Total | | Owned | | Franchised | | Total |
| | | | | | | | | | | |
January 1, 2017 | 177 |
| | 35 |
| | 212 |
| | 166 |
| | 7 |
| | 173 |
|
New | 3 |
| | 2 |
| | 5 |
| | 1 |
| | — |
| | 1 |
|
Closed | — |
| | (3 | ) | | (3 | ) | | — |
| | — |
| | — |
|
April 2, 2017 | 180 |
| | 34 |
| | 214 |
| | 167 |
| | 7 |
| | 174 |
|
New | 3 |
| | 1 |
| | 4 |
| | 2 |
| | — |
| | 2 |
|
Closed | (30 | ) | | (3 | ) | | (33 | ) | | — |
| | — |
| | — |
|
July 2, 2017 | 153 |
| | 32 |
| | 185 |
| | 169 |
| | 7 |
| | 176 |
|
New | 2 |
| | — |
| | 2 |
| | 3 |
| | — |
| | 3 |
|
Closed | (6 | ) | | — |
| | (6 | ) | | (4 | ) | | — |
| | (4 | ) |
October 1, 2017 | 149 |
| | 32 |
| | 181 |
| | 168 |
| | 7 |
| | 175 |
|
| | | | | | | | | | | |
January 3, 2016 | 155 |
| | 35 |
| | 190 |
| | 162 |
| | 6 |
| | 168 |
|
New | 6 |
| | 1 |
| | 7 |
| | — |
| | — |
| | — |
|
Closed | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
April 3, 2016 | 161 |
| | 36 |
| | 197 |
| | 162 |
| | 6 |
| | 168 |
|
New | 11 |
| | 2 |
| | 13 |
| | 2 |
| | 1 |
| | 3 |
|
Closed | — |
| | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
|
July 3, 2016 | 172 |
| | 37 |
| | 209 |
| | 164 |
| | 7 |
| | 171 |
|
New | 9 |
| | — |
| | 9 |
| | — |
| | — |
| | — |
|
Closed | — |
| | (3 | ) | | (3 | ) | | — |
| | — |
| | — |
|
October 2, 2016 | 181 |
| | 34 |
| | 215 |
| | 164 |
| | 7 |
| | 171 |
|
Three Months Ended October 1, 2017July 3, 2022 Compared to Three Months Ended October 2, 2016July 4, 2021
The following table sets forth, for the three months ended October 1, 2017July 3, 2022 and October 2, 2016,July 4, 2021, selected consolidated operating results as a percentage of consolidated restaurant sales and select segment operating results as a percentage of applicable segment restaurant sales.sales: | | | | | | | | | | | | | | | Three Months Ended |
| Three Months Ended | | July 3, 2022 | | July 4, 2021 | |
| October 1, 2017 | | October 2, 2016 | | October 1, 2017 | | October 2, 2016 | | October 1, 2017 | | October 2, 2016 | |
| Pollo Tropical | | Taco Cabana | | Consolidated | |
Restaurant sales: | | | | | | | | | | | | |
Pollo Tropical | | | | | | | | | 55.6 | % | | 56.9 | % | |
Taco Cabana | | | | | | | | | 44.4 | % | | 43.1 | % | |
Consolidated restaurant sales | | | | | | | | | 100.0 | % | | 100.0 | % | |
| Costs and expenses: | | | | | | | | | | | | Costs and expenses: | | | | |
Cost of sales | 32.5 | % | | 31.5 | % | | 29.4 | % | | 28.3 | % | | 31.1 | % | | 30.1 | % | Cost of sales | 33.2 | % | | 30.4 | % | |
Restaurant wages and related expenses | 24.1 | % | | 23.6 | % | | 33.4 | % | | 29.6 | % | | 28.2 | % | | 26.2 | % | Restaurant wages and related expenses | 25.1 | % | | 24.1 | % | |
Restaurant rent expense | 5.3 | % | | 4.9 | % | | 6.3 | % | | 5.7 | % | | 5.8 | % | | 5.2 | % | Restaurant rent expense | 6.1 | % | | 6.4 | % | |
Other restaurant operating expenses | 14.8 | % | | 13.9 | % | | 16.8 | % | | 14.5 | % | | 15.7 | % | | 14.2 | % | Other restaurant operating expenses | 17.1 | % | | 15.7 | % | |
Advertising expense | 5.7 | % | | 4.9 | % | | 1.3 | % | | 3.2 | % | | 3.7 | % | | 4.1 | % | Advertising expense | 3.3 | % | | 3.2 | % | |
Pre-opening costs | 0.3 | % | | 1.4 | % | | 0.4 | % | | 0.1 | % | | 0.3 | % | | 0.8 | % | |
|
Consolidated Revenues. Revenues include restaurant sales and franchise royalty revenues and fees. Restaurant sales consistsconsist of food and beverage sales, net of discounts, at our Company-owned restaurants. Franchise royalty revenues and fees represent ongoing royalty payments that are determined based on a percentage of franchisee sales and the amortization of initial franchise fees associated with new restaurant openings, and area development fees associated with the opening of new franchised restaurants in a given market.restaurants. Restaurant sales are influenced by new restaurant openings, closures of restaurants and changes in comparable restaurant sales.
Total revenues decreased 12.9%increased 8.0% to $158.7$98.5 million in the thirdsecond quarter of 20172022 from $182.3$91.2 million in the thirdsecond quarter of 2016.2021. Restaurant sales decreased 12.9%increased 8.0% to $158.1$98.0 million in the thirdsecond quarter of 20172022 from $181.6$90.8 million in the thirdsecond quarter of 2016.2021.
The following table presents the primary drivers of the increase or decrease in restaurant sales for both Pollo Tropical and Taco Cabana for the thirdsecond quarter of 20172022 compared to the thirdsecond quarter of 20162021 (in millions).:
| | | | | |
| |
Increase in comparable restaurant sales | $ | 7.5 | |
Decrease in sales related to closed restaurants, including temporary and partial closures | (0.2) | |
Total increase | $ | 7.3 | |
| |
| |
| |
| |
| |
|
| | | |
Pollo Tropical: | |
Decrease in comparable restaurant sales | $ | (9.6 | ) |
Decrease in sales related to closed restaurants, net of new restaurants | (5.9 | ) |
Total decrease | $ | (15.5 | ) |
| |
Taco Cabana: | |
Decrease in comparable restaurant sales | $ | (9.5 | ) |
Incremental sales related to new restaurants, net of closed restaurants | 1.5 |
|
Total decrease | $ | (8.0 | ) |
Comparable restaurant sales include restaurants that were temporarily closed due to the Hurricanes for both brands, with the exception of one Taco Cabana restaurant in the Houston metropolitan area which will be closed for an extended period due to storm damage. Comparable restaurant sales for both brands were negatively impacted by the Hurricanes.
Comparable restaurant sales for our Pollo Tropical restaurants decreased 10.9% in the third quarter of 2017. Comparable restaurant sales for our Taco Cabana restaurants decreased 12.6% in the third quarter of 2017. Restaurants are included in comparable restaurant sales after they have been open for 18 months.Restaurants are excluded from comparable restaurant sales for any fiscal month in which the restaurant was closed for more than five days. Comparable restaurant sales are compared to the same period in the prior year.
Comparable restaurant sales increased 8.4% for Pollo Tropical restaurants in the second quarter of 2022 compared to the second quarter of 2021. Increases or decreases in comparable restaurant sales result primarily from an increase or decrease in comparable restaurant transactions and in average check. The increaseChanges in average check is generallyare primarily driven by menu price increases. increases net of discounts and promotions and changes in sales channel and sales mix.
For Pollo Tropical, an increase in the net impact of product/channel mix and pricing of 15.1% was partially offset by a decrease in comparable restaurant transactions of 13.1%6.7% in the second quarter of 2022 compared to the second quarter of 2021. The increase in product/channel mix and pricing was partially offsetdriven primarily by menu price increases that drove an increaseof 14.4% and increases in dine-in and delivery average check. We believe staffing challenges had a negative impact on sales trends driven by reduced operating hours and sales channels in the second quarter of 2022. Comparable restaurant sales of 1.2% in the thirdsecond quarter of 2017 as compared to the third quarter of 2016. For Taco Cabana, comparable restaurant transactions decreased 14.3%, partially offset2022 were negatively impacted by menu price increasesremodels and refreshes that positively impacted restaurant sales by 1.7% in the third quarter of 2017 as compared to the third quarter of 2016.
The decrease in comparable sales for both brands was partially attributable totemporarily closed dine-in and counter take-out operations. We estimate that these temporary dine-in closures limited menu offerings and modified hours of operations as a result of the Hurricanes, which we estimate negatively impacted comparable restaurant sales and transactions for Pollo Tropical by approximately 5.5% to 6.5% and Taco Cabana by approximately 2% to 3%0.4% in the thirdsecond quarter of 2017. As a result of new restaurant openings, sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by 0.6% in the third quarter of 2017. Comparable restaurant sales for both brands continue to be negatively impacted by the general fast-casual industrywide slowdown in restaurant sales in Florida and Texas. In addition, third quarter 2017 comparable restaurant transactions and sales for Taco Cabana were negatively impacted by reduced promotional discounts and our planned reduction in advertising, including media and promotions, while we implemented initiatives related to the Plan.2022.
Restaurant sales for Pollo Tropical for the third quarter of 2017 compared to the third quarter of 2016 were also negatively impacted by the restaurant closures that occurred in the fourth quarter of 2016 and the second and third quarters of 2017.
Franchise revenues remained relatively stable and decreased by $0.1 millionincreased to $0.6$0.5 million in the thirdsecond quarter of 20172022 from $0.7$0.4 million in the thirdsecond quarter of 20162021 due primarily to a net decrease of twohigher sales at franchised Pollo Tropical restaurants.
Operating costsCosts and expenses.Expenses. Operating costs and expenses include cost of sales, restaurant wages and related expenses, other restaurant expenses and advertising expenses. Cost of sales consists of food, paper and beverage costs including packaging costs, less rebates and purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken and beef, are generally purchased under contracts for future periods of up to one year.
Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including minimum wage increases and increasedchanges in costs for health insurance, workers' compensation insurance and state unemployment insurance.
Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, general liability insurance, real estate taxes, sanitation, supplies and credit card and delivery fees.
Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities.activities and agency fees.
Pre-opening costs include costs incurred prior to opening a restaurant, including restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period. Pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening.
The following tables presenttable presents the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana for the thirdsecond quarter of 20172022 compared to the thirdsecond quarter of 2016.2021. All percentages are stated as a percentage of applicable segment restaurant sales.
|
| | | | |
Pollo Tropical: | |
Cost of sales: | |
Menu offering improvement costs related to the PlanHigher commodity cost | 1.06.2 | % |
Hurricane inventory lossSales mix | 0.70.8 | % |
Lower commodity costsHigher promotions and discounts | (0.50.4 | )% |
Menu price increases | (0.3(4.7) | )% |
OtherOperating efficiency | 0.1(0.2) | % |
| |
| |
Other | 0.3 | % |
Net increase in cost of sales as a percentage of restaurant sales | 1.02.8 | % |
| |
Restaurant wages and related expenses: | |
LowerHigher labor costs due to closurehigher wage rates, overtime pay and training costs, partially offset by the impact of restaurantshigher restaurant sales(1) | (1.51.6 | )% |
| |
Higher workers' compensation costs | 0.4 | % |
Higher medical benefits costs | 0.2 | % |
Lower other labor costs including special incentive pay and sign-on bonuses | (1.1) | % |
| |
| |
| |
Higher labor costs for comparable restaurantsLower incentive bonus(1) (2)
| 1.8(0.3) | % |
Higher medical benefit and payroll tax costs(2)
| 0.2 | % |
Other | 0.2 | % |
Net increase in restaurant wages and related costs as a percentage of restaurant sales | 0.51.0 | % |
| |
Other operating expenses: | |
Higher repair and maintenance costs(2) (3) | 1.00.6 | % |
Higher utilityutilities costs(2) | 0.4 | % |
Hurricane preparationHigher property and repairgeneral liability insurance costs | 0.3 | % |
Higher sanitation costsdelivery fee expense due to increased delivery channel sales(2) | 0.20.3 | % |
Lower real estate taxesoperating supplies(2) | (0.5(0.3) | )% |
Other | (0.5 | )% |
| |
| |
| |
| |
| |
| |
| |
Other | 0.1 | % |
Net increase in other restaurant operating expenses as a percentage of restaurant sales | 0.91.4 | % |
| |
Advertising expense: | |
Impact of lower restaurant salesIncreased advertising | 0.80.1 | % |
Net increase in advertising expense as a percentage of restaurant sales | 0.80.1 | % |
| |
Pre-opening costs: | |
Decrease in the number of restaurant openings | (1.1 | )% |
Net decrease in pre-opening costs as a percentage of restaurant sales | (1.1 | )% |
(1) Includes the impact of restaurant wages incurred during temporary restaurant closures due to the Hurricanes.
(2) Includes the impact of lower sales on fixed and semi-fixed costs.
(3) Includes costs related to the Plan.
|
| |
| |
Taco Cabana: | |
Cost of sales: | |
Menu offering improvement costs related to the Plan | 1.3 | % |
Sales mix | 1.2 | % |
Hurricane inventory loss | 0.3 | % |
Lower promotions and discounts | (1.4 | )% |
Menu price increases | (0.5 | )% |
Other | 0.2 | % |
Net increase in cost of sales as a percentage of restaurant sales | 1.1 | % |
| |
Restaurant wages and related expenses: | |
Higher labor costs(1) (2)
| 3.7 | % |
Higher payroll tax costs(2)
| 0.2 | % |
Other | (0.1 | )% |
Net increase in restaurant wages and related costs as a percentage of restaurant sales | 3.8 | % |
| |
Other operating expenses: | |
Higher repair and maintenance(2) (3)
| 1.3 | % |
Higher utility costs(2)
| 0.4 | % |
Higher real estate taxes(2)
| 0.3 | % |
Higher sanitation costs(2)
| 0.2 | % |
Lower insurance costs(2)
| (0.6 | )% |
Other(2)
| 0.7 | % |
Net increase in other restaurant operating expenses as a percentage of restaurant sales | 2.3 | % |
| |
Advertising expense: | |
Reduced advertising | (1.9 | )% |
Net decrease in advertising expense as a percentage of restaurant sales | (1.9 | )% |
| |
Pre-opening costs: | |
Increase in restaurant openings | 0.3 | % |
Net increase in pre-opening costs as a percentage of restaurant sales | 0.3 | % |
(1)Includes the impact of higherHigher wage rates, overtime pay and restaurant wages incurred during temporary restaurant closurespayroll taxes due in part to labor shortages in 2022.
(2) Primarily due to Hurricane Harvey.guaranteed bonus payments in 2021.
(2) Includes the impact of lower sales on fixed and semi-fixed costs.
(3) Includes costs related to the Plan.
Consolidated Restaurant Rent Expense. Restaurant rent expense includes base rent, and contingent rent onand common area maintenance and property taxes related to our leases characterized as operating leases, reduced by amortization of gains on sale-leaseback transactions.leases. Restaurant rent expense, as a percentage of total restaurant sales, increaseddecreased to 5.8%6.1% in the thirdsecond quarter of 20172022 from 5.2%6.4% in the thirdsecond quarter of 20162021 due primarily as a result ofto the impact of lower comparablehigher restaurant sales.sales which were partially offset by higher rental costs related to renewed leases.
Consolidated General and Administrative Expenses. General and administrative expenses are comprised primarily of (1) salaries and expenses associated with the development and support of our companyCompany and brandsbrand and the management oversight of the operation of our restaurants; and (2) legal, auditing and other professional fees, corporate system costs, and stock-based compensation expense.
General and administrative expenses were $12.1$12.8 million infor the thirdsecond quarter of 20172022 and $14.5$11.1 million infor the thirdsecond quarter of 2016,2021 and, as a percentage of total revenues, general and administrative expenses decreasedincreased to 7.6%13.0% in the thirdsecond quarter of 20172022 compared to 8.0%12.1% in the thirdsecond quarter of 2016,2021 due primarily to lower legal settlement costsincreased professional fees, higher employee and lower write-offs of site development costs, partially offset by higher stock-based compensation costs and the impact of lower current year sales. General and administrative expense for third quarter of 2017 included a $0.2 million reduction in board and shareholder matter costs, a $0.2 million favorable adjustment related to costs associated with restructuring Pollo Tropical management in Miami, Florida and
Dallas, Texas and $0.1 million in Plan restructuring costs and retention bonuses.other support costs. General and administrative expenses infor the thirdsecond quarter of 20162022 included a $0.8$1.7 million charge for estimated costs related to a class action settlement plus legalin non-recurring expenses comprised of $1.2 million of professional fees, and other costs incurred in defending the action, a $0.6 million write-off of site development costs related to locations that we decided not to develop, $0.3 million in board and shareholder matterdigital platform costs, and $0.2 million in office restructuringof general and relocation costs associated with restructuring Pollo Tropical management in Miami, Floridaadministrative efficiency initiative costs. General and Dallas, Texas.
administrative expenses for the second quarter of 2021 included $0.3 million related to non-recurring digital platform costs.
Consolidated Adjusted EBITDA. In 2017, our Board of Directors appointed a new Chief Executive Officer who initiated the Plan and uses anConsolidated Adjusted EBITDA, a non-GAAP financial measure, for the purpose of assessing performance and allocating resources to segments. The Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants.
Adjusted EBITDA is the primary measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance and is defined as earnings attributable to the applicable segment before interest expense, income taxes, depreciation and amortization, impairment and other lease charges (recoveries), goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants.
Consolidated Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, development, and other administrative functions. Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Adjusted EBITDA and Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see the heading entitledtitled "Management's Use of Non-GAAP Financial Measures".Measures."
Consolidated Adjusted EBITDA for Pollo Tropical decreased to $9.4$5.7 million, or 5.7% of total revenues, in the thirdsecond quarter of 20172022 from $13.8$9.1 million, or 10.0% of total revenues, in the thirdsecond quarter of 20162021 due primarily to the impact of lower comparable restaurant sales, higher cost of sales as a percentage of sales and higherlabor costs, repair and maintenance costs, as well as the negative impactutilities costs, insurance costs, general and administrative costs and delivery fee expense, and commodity costs and sales mix within cost of the Hurricanes,sales, partially offset by the impact of closing unprofitable restaurants, lower general and administrative expenses, and a decrease in pre-opening costs. Adjusted EBITDA for Taco Cabana decreased to $3.8 million in the third quarter of 2017 from $9.8 million in the third quarter of 2016 primarily as a result of the impact of lower comparable restaurant sales, higher cost of sales as a percentage of sales and higher restaurant wages and repair and maintenance costs, as well as the negative impact of Hurricane Harvey, partially offset by a decrease in advertising expense. Consolidated Adjusted EBITDA decreased to $13.2 million in the third quarter of 2017 from $23.5 million in the third quarter of 2016.sales.
Restaurant-LevelRestaurant-level Adjusted EBITDA. We also use Restaurant-level Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Consolidated Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses).
Restaurant-level Adjusted EBITDA for Pollo Tropical decreased to $15.5$14.9 million, or 15.2% of restaurant sales, in the thirdsecond quarter of 20172022 from $22.0$18.4 million, or 20.3% of restaurant sales, in the thirdsecond quarter of 20162021 primarily due to the foregoing. Restaurant-level Adjusted EBITDA for Taco Cabana decreased to $9.0 million in the third quarter of 2017 from $14.7 million in the third quarter of 2016 primarily as a result of the foregoing. For a reconciliation from Consolidated Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading entitledtitled "Management's Use of Non-GAAP Financial Measures".Measures."
Depreciation and Amortization. Depreciation and amortization expense decreasedincreased to $8.5$5.2 million in the thirdsecond quarter of 20172022 from $9.5$4.9 million in the thirdsecond quarter of 2016 due2021 primarily to decreased depreciation as a result of impairing closed restaurant assets, partially offset byincreased depreciation related to newongoing reinvestment and enhancements to restaurants openings.that have been made since the second quarter of 2021.
Impairment and Other Lease Charges.Charges (Recoveries). Impairment and Other Lease Charges decreased to $15.9 million in the third quarter of 2017 from $18.5 million in the third quarter of 2016. In the third quarter of 2017, we recognized impairment charges of $15.6 million with respect to the six Company-owned Pollo Tropical restaurants that closed in September 2017 and six additional Company-owned Pollo Tropical restaurants that we continue to operate, including five in Georgia and one in Florida. In addition, we recognized a net reduction to other lease charges, net of recoveries, of $1.9 million related to previously closed Pollo Tropical restaurants as a result of lease terminations, assignments and other adjustments to estimates of future lease costs, partially offset by lease charges related to Company-owned Pollo Tropical restaurants closed in September 2017. In the third quarter of 2017, we also recognized impairment charges of $0.9 million primarily related to two Company-owned Taco Cabana restaurants that we continue to operate, and $1.3 million in other lease charges related to the closure of four Company-owned Taco Cabana restaurants in July 2017. Impairment and other lease charges (recoveries) increased to $2.1 million in the second quarter of 2022 from $(0.2) million in the second quarter of 2021.
Impairment and other lease charges (recoveries) for the third quarter of 2016 includedthree months ended July 3, 2022 include impairment charges of $18.5$2.2 million related
primarily to sixteenimpairment of assets from four underperforming Pollo Tropical restaurants, that were subsequently closed in the fourth quarterpartially offset by net gains from lease terminations of 2016less than $(0.1) million.
Impairment and second quarter of 2017 and one Taco Cabana restaurant that was subsequently closed in the third quarter of 2017. There is uncertainty in the estimates of future lease costs and sublease recoveries. Actual costs and sublease recoveries could vary significantly from the estimated amounts and result in additionalother lease charges or recoveries, and such amounts could be material.(recoveries) for the three months ended July 4, 2021 consist of gains from lease terminations of $(0.3) million partially offset by a lease termination charge of $0.1 million.
Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve monthtwelve-month cash flows are below a certain threshold. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets, exclusive of operating lease payments, to their respective carrying values.values, excluding operating lease liabilities. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset group's carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, and for right-of-use lease assets, current market lease rent and discount rates, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material. Due to the uncertainty associated with the unprecedented nature of the COVID-19 pandemic and the impact it may continue to have on our operations and future cash flows, it is reasonably possible that the estimates of future cash flows used in impairment assessments will change in the near term and the effect of the change could be material.
For fivetwo Pollo Tropical restaurants including one in Atlanta, Georgia and four in central and southwest Florida and three Taco Cabana restaurants with combined carrying values (excluding right-of-use lease assets) of $5.0$0.9 million, and $1.3 million, respectively, projected cash flows are not substantially in excess of their carrying values. If the performance of these restaurants does not improve as projected,deteriorates from current projections, an impairment charge could be recognized in future periods, and such charge could be material.
Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income, was $0.4 million for the second quarter of 2022 and consisted of closed restaurant rent and ancillary lease costs of $2.1 million net of sublease income of $(1.7) million. Closed restaurant rent expense, net of sublease income, was $1.0 million for the second quarter of 2021 and consisted of closed restaurant rent and ancillary lease costs of $2.3 million net of sublease income of $(1.3) million.
Other Expense (Income), Net. Other expense (income), net, was $0.5 million infor the thirdsecond quarter of 20172022 primarily consisted of closed restaurant related costs of $0.1 million. Other expense (income), net, for the second quarter of 2021 was $0.2 million and primarily consisted of $0.6 million in costs related tofor the removal, of signs and equipment and equipment transferstransfer, and storage forof equipment from closed Pollo Tropical restaurants partially offset by $0.2 million in estimated insurance proceedsand other closed restaurant related to a Taco Cabana restaurant that was temporarily closed due to Hurricane Harvey damages.costs.
Interest Expense. Interest expense increased to $0.7remained flat at $0.1 million in the thirdsecond quarter of 2017 from $0.5 million in2022 compared to the thirdsecond quarter of 2016 due primarily to higher interest rates on borrowings under our revolving credit facility.2021.
Provision for (Benefit from) Income Taxes. The effective tax rate was 36.9%(21.2)% and 37.8%(45.7)% for the thirdsecond quarter of 20172022 and 2016,2021, respectively. The benefitprovision from income taxes for the thirdsecond quarter of 20172022 was derived using an estimated annual effective tax rate of 36.8%,(9.1)% which includes changes in the valuation allowance as a result of originating temporary differences during the year and excludes the discrete impact of a tax benefit deficiency from the vesting of restricted shares and the tax benefit resulting from impairment and other lease charges of $0.2 million and $21.6 million, respectively.million. The provision forbenefit from income taxes for the thirdsecond quarter of 20162021 was derived using an estimatedthe actual effective annual income tax rate excluding discrete items,for the year to date period, which includes changes in the valuation allowance as a result of 36.3%.originating temporary differences during the year.
Income (Loss) from Discontinued Operations, Net of Tax. All revenues, costs and expenses and income taxes attributable to Taco Cabana have been aggregated within income (loss) from discontinued operations, net of tax, in the condensed consolidated statement of operations for all periods presented. During the second quarter of 2022, we recognized $0.4 million of income, primarily related to insurance proceeds, slightly offset by expenses related to workers' compensation claims within income (loss) from discontinued operations, net of tax, in the condensed consolidated statement of operations. See Note 2—Dispositions in our unaudited condensed consolidated financial statements.
Net Income (Loss).Loss. As a result of the foregoing, we had a net loss of $8.3$(6.2) million in the thirdsecond quarter of 20172022 compared to a net loss of $4.5$(0.1) million in the thirdsecond quarter of 2016.2021.
Nine
Six Months Ended October 1, 2017July 3, 2022 Compared to NineSix Months Ended October 2, 2016July 4, 2021
The following table sets forth, for the ninesix months ended October 1, 2017July 3, 2022 and October 2, 2016,July 4, 2021, selected consolidated operating results as a percentage of consolidated restaurant sales and select segment operating results as a percentage of applicable segment restaurant sales:
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended |
| July 3, 2022 | | July 4, 2021 | | | | | | | | |
| | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | |
Cost of sales | 32.8 | % | | 30.7 | % | | | | | | | | |
Restaurant wages and related expenses | 24.9 | % | | 23.7 | % | | | | | | | | |
Restaurant rent expense | 6.2 | % | | 6.6 | % | | | | | | | | |
Other restaurant operating expenses | 17.3 | % | | 15.4 | % | | | | | | | | |
Advertising expense | 3.2 | % | | 3.0 | % | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| October 1, 2017 | | October 2, 2016 | | October 1, 2017 | | October 2, 2016 | | October 1, 2017 | | October 2, 2016 |
| Pollo Tropical | | Taco Cabana | | Consolidated |
Restaurant sales: | | | | | | | | | | | |
Pollo Tropical | | | | | | | | | 55.7 | % | | 56.5 | % |
Taco Cabana | | | | | | | | | 44.3 | % | | 43.5 | % |
Consolidated restaurant sales | | | | | | | | | 100.0 | % | | 100.0 | % |
Costs and expenses: | | | | | | | | | | | |
Cost of sales | 31.1 | % | | 31.7 | % | | 28.4 | % | | 28.6 | % | | 29.9 | % | | 30.3 | % |
Restaurant wages and related expenses | 23.8 | % | | 23.4 | % | | 32.3 | % | | 29.1 | % | | 27.5 | % | | 25.9 | % |
Restaurant rent expense | 5.2 | % | | 4.8 | % | | 6.0 | % | | 5.5 | % | | 5.5 | % | | 5.1 | % |
Other restaurant operating expenses | 14.0 | % | | 13.4 | % | | 15.3 | % | | 13.5 | % | | 14.6 | % | | 13.4 | % |
Advertising expense | 4.0 | % | | 4.1 | % | | 2.9 | % | | 3.9 | % | | 3.5 | % | | 4.0 | % |
Pre-opening costs | 0.4 | % | | 1.4 | % | | 0.4 | % | | 0.1 | % | | 0.4 | % | | 0.9 | % |
Revenues. Total revenues decreased 6.2%increased 8.2% to $506.9$194.1 million in the ninesix months ended October 1, 2017July 3, 2022 from $540.5$179.4 million in the ninesix months ended October 2, 2016.July 4, 2021. Restaurant sales decreased 6.2%increased 8.2% to $505.1$193.2 million in the ninesix months ended October 1, 2017July 3, 2022 from $538.4$178.6 million in the ninesix months ended October 2, 2016.July 4, 2021.
The following table presents the primary drivers of the increase or decrease in restaurant sales for both Pollo Tropical and Taco Cabana for the nine months ended October 1, 2017 compared to the nine months ended October 2, 2016 (in millions):
|
| | | |
Pollo Tropical: | |
Decrease in comparable restaurant sales | $ | (22.3 | ) |
Decrease in sales related to closed restaurants, net of new restaurants | (0.3 | ) |
Total decrease | $ | (22.6 | ) |
| |
Taco Cabana: | |
Decrease in comparable restaurant sales | $ | (16.5 | ) |
Incremental sales related to new restaurants, net of closed restaurants | 5.8 |
|
Total decrease | $ | (10.7 | ) |
Comparable restaurant sales for Pollo Tropical restaurants decreased 8.5% infor the ninesix months ended October 1, 2017. July 3, 2022 compared to the six months ended July 4, 2021 (in millions):
| | | | | |
| |
Increase in comparable restaurant sales | $ | 14.5 | |
Increase in sales related to closed restaurants, including a temporary closure | 0.1 | |
Total increase | $ | 14.6 | |
| |
| |
| |
| |
| |
Comparable restaurant sales increased 8.2% for Taco CabanaPollo Tropical restaurants decreased 7.2% in the ninesix months ended October 1, 2017. July 3, 2022.
For Pollo Tropical, aan increase in the net impact of product/channel mix and pricing of 15.1% was coupled with an decrease in comparable restaurant transactions of 10.7%6.9% in the six months ended July 3, 2022 compared to the six months ended July 4, 2021. The increase in product/channel mix and pricing was partially offsetdriven primarily by menu price increases that drove an increaseof 14.1% and increases in dine-in and delivery average check. We believe staffing challenges had a negative impact on sales trends driven by reduced operating hours and sales channels in the six months ended July 3, 2022. Comparable restaurant sales of 1.8% in the ninesix months ended October 1, 2017 as compared to the nine months ended October 2, 2016. For Taco Cabana, comparable restaurant transactions decreased 7.6%, partially offsetJuly 3, 2022 were negatively impacted by menu price increasesremodels and refreshes that drove an increase in restaurant sales of 2.0% in the nine months ended October 1, 2017 as compared to the nine months ended October 2, 2016.
The decrease in comparable sales for both brands was partially attributable totemporarily closed dine-in and counter take-out operations. We estimate that these temporary dine-in closures limited menu offerings and modified hours of operations during the third quarter of 2017 as a result of the Hurricanes, which we estimate negatively impacted comparable restaurant sales and transactions for Pollo Tropical by approximately 1.5% to 2.0% and Taco Cabana by approximately 0.5% to 1.0%0.4% in the ninesix months ended October 1, 2017. As a result of new restaurant openings, sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by 0.6% in the nine months ended October 1, 2017. Comparable restaurant sales for both brands continue to be negatively impacted by the general industrywide slowdown in restaurant sales. In addition, comparable restaurant transactions and sales for the nine months ended October 1, 2017 for Taco Cabana were negatively impacted by reduced promotional discounts and our planned material reduction in advertising, including media and promotions, while we implemented initiatives related to the Plan.
Restaurant sales for Pollo Tropical for the nine months ended October 1, 2017 compared to the same period in 2016 were also negatively impacted by the restaurant closures that occurred in the fourth quarter of 2016 and the second and third quarter of 2017.July 3, 2022.
Franchise revenues decreasedincreased to $1.8$0.9 million in the ninesix months ended October 1, 2017July 3, 2022 from $2.1$0.8 million in ninethe six months ended October 2, 2016July 4, 2021 due primarily due to the closurehigher sales at franchised restaurants.
The following tables presenttable presents the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana for the ninesix months ended October 1, 2017July 3, 2022 compared to the ninesix months ended October 2, 2016.July 4, 2021. All percentages are stated as a percentage of applicable segment restaurant sales.
|
| | | | |
Pollo Tropical: | |
Cost of sales: | |
Higher commodity costs | 5.5 | % |
Sales mix | 0.9 | % |
Higher promotions and discounts | 0.3 | % |
Menu price increases | (0.7(4.6) | )% |
Lower commodity costsOperating efficiency | (0.3(0.4) | )% |
Lower promotions and discountsOther | (0.20.4 | )% |
Improved operating efficiency | (0.2 | )% |
Hurricane inventory loss | 0.2 | % |
Menu offering improvement costs related to the Plan | 0.1 | % |
Sales mix | 0.1 | % |
Other | 0.4 | % |
Net decreaseincrease in cost of sales as a percentage of restaurant sales | (0.62.1 | )% |
| |
Restaurant wages and related expenses: | |
Higher labor costs for comparable restaurants(1) (2) | 0.8 | % |
Lower labor costs due to closurehigher wage rates, overtime pay and training costs, partially offset by the impact of restaurantshigher restaurant sales(1) | (0.51.8 | )% |
Higher workers' compensation costs | 0.2 | % |
Lower other labor costs including special incentive pay and sign-on bonuses | (0.6) | % |
| |
OtherLower incentive bonus(2)
| 0.1(0.2) | % |
| |
| |
| |
Net increase in restaurant wages and related costs as a percentage of restaurant sales | 0.41.2 | % |
| |
Other operating expenses: | |
Higher utility costs(2) | 0.3 | % |
Higher repairsrepair and maintenance costs(2) (3)
| 0.30.9 | % |
Higher sanitationutilities costs(2) | 0.20.4 | % |
OtherHigher delivery fee expense due to increased delivery channel sales
| (0.20.3 | )% |
Higher property and general liability insurance costs | 0.3 | % |
Lower operating supplies | (0.2) | % |
| |
| |
Other | 0.2 | % |
Net increase in other restaurant operating expenses as a percentage of restaurant sales | 0.61.9 | % |
| |
Advertising expense: | |
ReducedIncreased advertising | (0.10.2 | )% |
Net decreaseincrease in advertising expense as a percentage of restaurant sales | (0.10.2 | )% |
| |
Pre-opening costs: | |
Decrease in the number of restaurant openings | (1.0 | )% |
Net decrease in pre-opening costs as a percentage of restaurant sales | (1.0 | )% |
(1) Includes the impact of restaurant wages incurred during temporary restaurant closures due to the Hurricanes.
(2)Includes the impact of lower sales on fixed and semi-fixed costs.
(3) Includes costs related to the Plan.
|
| |
| |
Taco Cabana: | |
Cost of sales: | |
Lower commodity costs | (0.7 | )% |
Menu price increases | (0.6 | )% |
Lower promotions and discounts | (0.2 | )% |
Menu offering improvement costs related to the Plan | 0.5 | % |
Sales mix | 0.4 | % |
Hurricane inventory loss | 0.1 | % |
Other | 0.3 | % |
Net decrease in cost of sales as a percentage of restaurant sales | (0.2 | )% |
| |
Restaurant wages and related expenses: | |
Higher labor costs(1) (2)
| 2.8 | % |
Higher medical benefit and payroll tax costs(2)
| 0.3 | % |
Other(2)
| 0.1 | % |
Net increase in restaurant wages and related costs as a percentage of restaurant sales | 3.2 | % |
| |
Other operating expenses: | |
Higher repairs and maintenance costs(2) (3)
| 0.7 | % |
Higher real estate taxes(2)
| 0.3 | % |
Higher utility costs(2)
| 0.2 | % |
Higher operating supplies(2)
| 0.2 | % |
Other(2)
| 0.4 | % |
Net increase in other restaurant operating expenses as a percentage of restaurant sales | 1.8 | % |
| |
Advertising expense: | |
Reduced advertising | (1.0 | )% |
Net decrease in advertising expense as a percentage of restaurant sales | (1.0 | )% |
| |
Pre-opening costs: | |
Increase in restaurant openings | 0.3 | % |
Net increase in pre-opening costs as a percentage of restaurant sales | 0.3 | % |
(1)Includes the impact of higherHigher wage rates, one-time initiatives relatedovertime pay and payroll taxes due in part to the Plan and restaurant wages incurred during temporary restaurant closureslabor shortages in 2022.
(2) Primarily due to the Hurricanes.guaranteed bonus payments in 2021.
(2) Includes the impact of lower sales on fixed and semi-fixed costs.
(3) Includes costs related to the Plan.
Consolidated Restaurant Rent Expense. Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by amortization of gains on sale-leaseback transactions. Restaurant rent expense, as a percentage of total restaurant sales, increaseddecreased to 5.5%6.2% in the ninesix months ended October 1, 2017July 3, 2022 from 5.1%6.6% in the ninesix months ended October 2, 2016July 4, 2021 due primarily as a result ofto the impact of lowerhigher comparable restaurant sales.sales which were partially offset by higher rental costs related to renewed leases.
Consolidated General and Administrative Expenses. General and administrative expenses were $47.2$25.1 million infor the ninesix months ended October 1, 2017July 3, 2022 and $42.6$21.7 million infor the ninesix months ended October 2, 2016July 4, 2021 and, as a percentage of total revenues, general and administrative expenses increased to 9.3%12.9% in the ninesix months ended October 1, 2017July 3, 2022 compared to 7.9%12.1% in the ninesix months ended October 2, 2016July 4, 2021 due primarily to increased professional fees, and higher boardemployee and shareholder matterother support costs, Plan restructuring costs and retention bonuses and charges for terminated capital projects.partially offset by higher total revenue. General and administrative expense for the ninesix months ended October 1, 2017July 3, 2022 included $3.7$3.0 million in non-recurring expenses comprised of $1.9 million of board and shareholder matterprofessional fees, $0.6 million digital platform costs, related to shareholder activism matters and Chief Executive Officer and board member searches, $2.1 million related to Plan restructuring costs and retention bonuses, $0.8 million in charges for terminated capital projects and $0.5 million in write-off of site development costs related to locations that we decided not to develop, partially offset by a benefit of $0.5 million related to litigation mattersgeneral and a $0.2 million favorable adjustment related
to costs associated with restructuring Pollo Tropical management in Miami, Florida and Dallas, Texas.administrative efficiency initiative costs. General and administrative expenses for the ninesix months ended October 2, 2016July 4, 2021 included $1.0$0.7 million in board and shareholder matter costs primarily related to the previously proposed and terminated separation transaction, $0.9 million in write-off of site development costs related to locations that we decided not to develop, $0.5 million in severance and related costs associated with restructuring Pollo Tropical management in Miami, Florida and Dallas, Texas, and $0.5 million net charges related to litigation matters.non-recurring digital platform costs.
Consolidated Adjusted EBITDA. Adjusted EBITDA is the primary measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance and is defined as earnings attributable to the applicable segment before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense, other expense (income), net and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants.
Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, development, and other administrative functions. Consolidated Adjusted EBITDA, is a non-GAAP financial measure, decreased to $10.9 million, or 5.6% of performance.total revenues, in the six months ended July 3, 2022 from $18.8 million, or 10.5% of total revenues, in the
six months ended July 4, 2021 due primarily to higher commodity costs, labor costs, repair and maintenance costs, and utilities costs, partially offset by the impact of higher restaurant sales. For a discussion of our use of Adjusted EBITDA and Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see the heading entitledtitled "Management's Use of Non-GAAP Financial Measures".
Adjusted EBITDA for Pollo Tropical decreased to $41.3 million in the nine months ended October 1, 2017 from $43.8 million in the nine months ended October 2, 2016 primarily due to the impact of lower comparable restaurant sales and the negative impact of the Hurricanes, partially offset by decreases in cost of sales as a percentage of sales, pre-opening costs and advertising expense, and the impact of closing unprofitable restaurants. Adjusted EBITDA for Taco Cabana decreased to $17.3 million in the nine months ended October 1, 2017 from $30.5 million in the nine months ended October 2, 2016 primarily due to the impact of lower comparable restaurant sales, higher restaurant wages and operating expenses, and the negative impact of Hurricane Harvey, partially offset by decreases in advertising expense and cost of sales as a percentage of sales. Consolidated Adjusted EBITDA decreased to $58.5 million in the nine months ended October 1, 2017 from $74.4 million in the nine months ended October 2, 2016.Measures."
Restaurant-LevelRestaurant-level Adjusted EBITDA. We also use Restaurant-level Adjusted EBITDA,a non-GAAP financial measure, as a supplemental measuredecreased to evaluate the performance and profitability$30.2 million, or 15.6% of our restaurantsrestaurant sales, in the aggregate, which is defined as Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses).
Restaurant-level Adjusted EBITDA for Pollo Tropical decreased to $62.3six months ended July 3, 2022 from $37.0 million, or 20.7% of restaurant sales, in the ninesix months ended October 1, 2017 from $68.8 million in the nine months ended October 2, 2016July 4, 2021 due primarily due to the foregoing. Restaurant-level Adjusted EBITDA for Taco Cabana decreased to $34.2 million in nine months ended October 1, 2017 from $45.3 million in the nine months ended October 2, 2016 as a result of the foregoing. For a reconciliation from Consolidated Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading entitledtitled "Management's Use of Non-GAAP Financial Measures".Measures."
Depreciation and Amortization. Depreciation and amortization expense decreasedincreased to $26.3$10.3 million in the ninesix months ended October 1, 2017July 3, 2022 from $26.5$10.0 million in the ninesix months ended October 2, 2016July 4, 2021 due primarily to a decrease in depreciation as a result of impairing closed restaurant assets, partially offset by increased depreciation related to new restaurant openings.ongoing reinvestment and enhancements to our restaurants that have been made since the second quarter of 2021.
Impairment and Other Lease Charges.Charges (Recoveries). Impairment and Other Lease Chargesother lease charges (recoveries) increased to $59.1$1.4 million in the ninesix months ended October 1, 2017July 3, 2022 from $18.6$(0.3) million in the ninesix months ended October 2, 2016. As discussed under "Recent Events Affecting our Results of Operations", on April 24, 2017, we announced the Plan to drive long-term shareholder value creation that included the closure of 30 Pollo Tropical restaurants located outside our core Florida markets during the second quarter of 2017. In April 2017, we closed all of our Company-owned Pollo Tropical locations in Dallas-Fort Worth and Austin, Texas, and Nashville, Tennessee. We closed the six remaining Company-owned Pollo Tropical restaurants in south Texas in September 2017, including two restaurants in Houston, Texas that did not reopen after Hurricane Harvey and four restaurants in San Antonio, Texas. Up to four Pollo Tropical restaurants that closed in 2017 in Texas may be rebranded as Taco Cabana restaurants. We continue to own and operate 13 Pollo Tropical restaurants in Georgia, of which five were impaired in the third quarter of 2017. We also closed four Company-owned Taco Cabana restaurants in Texas in July 2017 which were impaired in the second quarter of 2017.4, 2021.
Impairment and other lease charges (recoveries) for the ninesix months ended October 1, 2017 for Pollo Tropical consist ofJuly 3, 2022 include impairment charges of $51.3$2.2 million and otherrelated primarily to impairment of assets from four underperforming Pollo Tropical restaurants, partially offset by net gains from lease charges, netterminations of recoveries, of $5.0$(0.7) million. Impairment charges are related to 36 restaurants closed in 2017, seven of which were impaired in 2016, and six restaurants that we continue to operate, as well as an additional impairment charge related to a restaurant closed in 2016 as a result of the decision not to convert the location to a Taco Cabana restaurant. Other lease charges, net of recoveries, are related to restaurants closed in 2017 as well as previously closed restaurants.
Impairment and other lease charges (recoveries) for the ninesix months ended October 1, 2017 for Taco Cabana consistJuly 4, 2021 include net gains from lease terminations of $(0.4) million, partially offset by impairment charges of $1.4$0.1 million related primarily to impairment of equipment from previously impaired and other lease charges,closed restaurants.
Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of recoveries,sublease income was $0.8 million for the six months ended July 3, 2022 and consisted of $1.3 million. Impairment charges are related to four Taco Cabana restaurants that were closed in July 2017restaurant rent and five Taco Cabana restaurants that we continue to operate. Otherancillary lease charges,costs of $4.3 million net of recoveries, are related to restaurantssublease income of $(3.6) million. Closed restaurant rent expense, net of sublease income was $1.7 million for the six months ended July 4, 2021 and consisted of closed in 2017 as well as previously closed restaurants. There is uncertainty in the estimates of futurerestaurant rent and ancillary lease costs andof $4.6 million net of sublease recoveries. Actual costs and sublease recoveries could vary significantly from the estimated amounts and result in additional lease charges or recoveries, and such amounts could be material.
Impairment and other lease charges for the nine months ended October 2, 2016 primarily included impairment chargesincome of $18.5 million related to sixteen Pollo Tropical restaurants that were subsequently closed in the fourth quarter of 2016 and second quarter of 2017 and one Taco Cabana restaurant that was subsequently closed in the third quarter of 2017.
Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve month cash flows are below a certain threshold. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.
For five Pollo Tropical restaurants including one in Atlanta, Georgia and four in central and southwest Florida and three Taco Cabana restaurants with combined carrying values of $5.0 million and $1.3 million, respectively, projected cash flows are not substantially in excess of their carrying values. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material.$(2.9) million.
Other Expense (Income), Net. Other expense, (income) net was $1.3$0.1 million infor the ninesix months ended October 1, 2017July 3, 2022 and primarily consisted of $1.6 million in costsclosed restaurant related to the removal of signs and equipment and equipment transfers and storage for closed Pollo Tropical restaurants and severance for restaurant employees, partially offset by $0.2 million in expected insurance proceeds related to a Taco Cabana restaurant that was temporarily closed due to Hurricane Harvey damages and $0.1 million in expected business interruption proceeds related to a Taco Cabana restaurant that was temporarily closed due to a fire.costs. Other income, of $0.2net was $0.3 million infor the ninesix months ended October 2, 2016July 4, 2021 and primarily consisted of proceedscosts for the removal, transfer, and storage of equipment from closed restaurants and other closed restaurant related to a Taco Cabana location that closed in 2015 as a result of an eminent domain proceeding.costs.
Interest Expense. Interest expense increased to $1.9$0.2 million infor the ninesix months ended October 1, 2017July 3, 2022 from $1.6$0.1 million infor the ninesix months ended October 2, 2016 primarily due to higher interest rates related to borrowings under our revolving credit facility.July 4, 2021.
Provision for (Benefit from) Income Taxes. The effective tax rates were 35.9%rate was (13.3)% and 53.0% for the ninesix months ended October 1, 2017July 3, 2022 and 36.1%July 4, 2021, respectively. The provision for the nine months ended October 2, 2016. The benefit from income taxes for the ninesix months ended October 1, 2017July 3, 2022 was derived using an estimated annual effective tax rate of 36.8%,(9.1)% which includes changes in the valuation allowance as a result of originating temporary differences during the year and excludes the discrete impact of a tax benefit deficiency from the vesting of restricted shares and the tax benefit resulting from impairment and other lease charges of $0.2 million and $21.6 million, respectively.million. The provision for income taxes for the ninesix months ended October 2, 2016July 4, 2021 was derived using the actual effective tax rate for the year to date period, which includes changes in the valuation allowance as a result of originating temporary differences during the year and excludes an estimated effective annualout-of-period adjustment that increased our income tax rate, excluding discrete items,provision.
Income (Loss) from Discontinued Operations. During the six months ended July 3, 2022, we recognized $0.2 million of 36.3%. As discussedincome, primarily related to insurance proceeds and a reduction of stock-based compensation, slightly offset by expenses related to workers' compensation claims within income (loss) from discontinued operations, net of tax, in the condensed consolidated statement of operations. See Note 1, tax benefit deficiencies and excess tax benefits created upon the vesting of restricted shares are now recorded as a discrete item within the income tax provision. These amounts were previously recorded as an adjustment to Additional paid-in capital.2—Dispositions in our unaudited condensed consolidated financial statements.
Net Income (Loss).Loss. As a result of the foregoing, we had a net loss of $25.5$(7.6) million infor the ninesix months ended October 1, 2017July 3, 2022 compared to a net incomeloss of $14.3$(2.2) million infor the ninesix months ended October 2, 2016.July 4, 2021.
Liquidity and Capital Resources
Unless otherwise noted, this discussion of liquidity and capital resources relates to our combined operations.
We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are ableAlthough, as a result of our substantial cash balance, we did not have a working capital deficit at July 3, 2022, we have the ability to operate with a substantial working capital deficit (and we have historically operated with a working capital deficit) because:
restaurant•Restaurant operations are primarily conducted on a cash basis;
rapid•Rapid turnover results in a limited investment in inventories; and
cash•Cash from sales is usually received before related liabilities for food, supplies and payroll become due.
Capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us. We believe our cash reserves, cash generated from our operations, and availability of borrowings under our senior credit facility will provide sufficient
cash availability to cover our anticipated working capital needs and capital expenditures and debt service requirements for the next twelve months. We used the net proceeds from the sale of Taco Cabana to repay the outstanding term loan under our senior credit facility in the third quarter of 2021.
Operating Activities. Net cash provided fromby operating activities in the first ninesix months of 20172022 and 20162021 was $47.7$10.7 million and $66.4$21.5 million, respectively. The decrease in net cash provided fromby operating activities in the ninesix months ended October 1, 2017July 3, 2022 was primarily driven by thea decrease in Consolidated Adjusted EBITDA, and increaseincluding contributions from discontinued operations, the receipt of income tax refunds in deferred income taxes, partially offset by2021, and the timing of payments.
Investing Activities. Net cash used in investing activities in the first ninesix months of 20172022 and 20162021 was $38.5$8.2 million and $61.8$4.7 million, respectively. Capital expenditures are generally the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling/reimaging, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems.
The following table sets forth our capital expenditures from continuing operations for the periods presented (in(dollars in thousands).:
| | | | | | | | | | | | | | | | | | | |
| Pollo Tropical | | | | Other | | Continuing Operations |
Six Months Ended July 3, 2022: | | | | | | | |
New restaurant development | $ | — | | | | | $ | — | | | $ | — | |
Restaurant remodeling | 3,311 | | | | | — | | | 3,311 | |
Other restaurant capital expenditures(1) | 3,895 | | | | | — | | | 3,895 | |
Corporate and restaurant information systems | 1,185 | | | | | 54 | | | 1,239 | |
Total capital expenditures | $ | 8,391 | | | | | $ | 54 | | | $ | 8,445 | |
Number of new restaurant openings | — | | | | | | | — | |
Six Months Ended July 4, 2021: | | | | | | | |
New restaurant development | $ | — | | | | | $ | — | | | $ | — | |
Restaurant remodeling | 592 | | | | | — | | | 592 | |
Other restaurant capital expenditures(1) | 3,750 | | | | | — | | | 3,750 | |
Corporate and restaurant information systems | 719 | | | | | 545 | | | 1,264 | |
Total capital expenditures | $ | 5,061 | | | | | $ | 545 | | | $ | 5,606 | |
Number of new restaurant openings | — | | | | | | | — | |
|
| | | | | | | | | | | | | | | |
| Pollo Tropical | | Taco Cabana | | Other | | Consolidated |
Nine Months Ended October 1, 2017: | | | | | | | |
New restaurant development | $ | 15,863 |
| | $ | 8,131 |
| | $ | — |
| | $ | 23,994 |
|
Restaurant remodeling | 2,243 |
| | 37 |
| | — |
| | 2,280 |
|
Other restaurant capital expenditures(1) | 4,033 |
| | 3,617 |
| | — |
| | 7,650 |
|
Corporate and restaurant information systems | 1,069 |
| | 1,702 |
| | 1,844 |
| | 4,615 |
|
Total capital expenditures | $ | 23,208 |
| | $ | 13,487 |
| | $ | 1,844 |
| | $ | 38,539 |
|
Number of new restaurant openings | 8 |
| | 6 |
| | — |
| | 14 |
|
Nine Months Ended October 2, 2016: | | | | | | | |
New restaurant development | $ | 48,857 |
| | $ | 3,971 |
| | $ | — |
| | $ | 52,828 |
|
Restaurant remodeling | 956 |
| | — |
| | — |
| | 956 |
|
Other restaurant capital expenditures(1) | 1,508 |
| | 3,117 |
| | — |
| | 4,625 |
|
Corporate and restaurant information systems | 1,392 |
| | 970 |
| | 2,272 |
| | 4,634 |
|
Total capital expenditures | $ | 52,713 |
| | $ | 8,058 |
| | $ | 2,272 |
| | $ | 63,043 |
|
Number of new restaurant openings | 26 |
| | 2 |
| |
| | 28 |
|
(1)Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our unaudited condensed consolidated financial statements. For the ninesix months ended October 1, 2017July 3, 2022 and October 2, 2016,July 4, 2021, total restaurant repair and maintenance expenses were approximately $15.6$7.5 million and $14.1$5.4 million, respectively.
In 2017, we expect to open nine new Company-owned Pollo Tropical restaurants in Florida and six new Company-owned Taco Cabana restaurants in Texas, including one Pollo Tropical restaurant closed in October 2016 that we plan to convert to a Taco Cabana restaurant. In addition, up to five Pollo Tropical restaurants in Texas that were previously closed in October 2016, April 2017 and September 2017 may be converted to Taco Cabana restaurants in 2018. Total
The following table sets forth our capital expenditures in 2017 are expected to be $60.0 million to $70.0 million. Capital expenditures in 2017 are expected to include $22.0 million to $25.0 million for development of new restaurants, approximately $22.0 million to $26.0 millionfrom discontinued operations for the ongoing reinvestmentperiod presented (dollars in thousands):
| | | | | |
| Taco Cabana |
| |
| |
| |
| |
| |
| |
| |
Six Months Ended July 4, 2021: | |
New restaurant development | $ | — | |
Restaurant remodeling | 645 | |
Other restaurant capital expenditures(1) | 2,708 | |
Corporate and restaurant information systems | 110 | |
Total capital expenditures | $ | 3,463 | |
Number of new restaurant openings | — | |
(1) Excludes restaurant repair and maintenance expenses included in discontinued operations in our Pollo Tropicalunaudited condensed consolidated financial statements. For the six months ended July 4, 2021, total restaurant repair and Taco Cabana restaurants for capital maintenance expenditures,expenses from discontinued operations were approximately $2.0 million to $3.0 million for remodeling costs and approximately $13.0 million to $16.0 million of other expenditures which primarily includes information technology and systems projects and indoor video menu boards.$4.2 million.
In 2018, we expect to open nine new Company-owned Pollo Tropical restaurantsNet cash provided by investing activities from discontinued operations in Floridathe first six months of 2022 included proceeds from insurance recoveries of $0.2 million. Net cash used in investing activities from discontinued operations in the first six months of 2021 included net proceeds of $3.1 million from the sale-leaseback of two restaurant properties and seven new Company-owned Taco Cabana restaurants in Texas including five closed Pollo Tropical restaurants that will be converted to Taco Cabana restaurants.net proceeds of $1.3 million from the sale of one restaurant property.
Total capital expenditures in 20182022 are expected to be $60.0 million to $68.0 million. Capital expenditures include $26.0 million to $28.0 million for the development of new Company-owned restaurants, $23.0 million tobetween $25.0 million for the ongoing reinvestment in our Pollo Tropical and Taco Cabana Company-owned restaurants including approximately $11.0 million to $13.0 million in deferred maintenance needs related to the Plan; approximately $4.0 million to $6.0 million for restaurant remodeling costs and approximately $7.0 million to $9.0 million of other expenditures which primarily include information technology and systems projects.
In the first nine months of 2016, cash used in investing activities also included $2.7 million for the purchase of a property for a sale-leaseback, partially offset by proceeds of $3.6 million from a sale-leaseback transaction related to our restaurant properties.$28.0 million.
Financing Activities. Net cash used in financing activities in the first ninesix months of 20172022 was $9.1$0.2 million and included net revolving credit borrowing repayments underprimarily consisted of payments to repurchase our senior credit facility of $9.0 million.common stock. Net cash used in financing activities in the first ninesix months of 2016 primarily2021 included net revolving creditterm loan borrowing repayments under our senior credit facility of $5.1$0.4 million partially offset by the excess tax benefit from vesting of restricted shares ofand $0.2 million.million in principal payments on finance leases.
Senior Credit Facility. OurOn November 23, 2020, we terminated our former amended senior secured revolving credit facility and entered into a new senior secured credit facility, which is referred to as the "senior credit facility." The senior credit facility provides for aggregatewas comprised of a term loan facility (the "term loan facility") of $75.0 million and a revolving credit borrowingsfacility (the "revolving credit facility") of up to $150$10.0 million (including up to $15 million available for letters of credit) and matures on December 11, 2018.November 23, 2025. The senior credit facility also provides for potential incremental term loan borrowing increases of up to $50$37.5 million in the aggregate, subject to, among other items, compliance with a minimum Total Leverage Ratio and other terms specified in the revolvingsenior credit facility. As required by the terms of the senior credit facility, the net proceeds from the sale of Taco Cabana were used to fully repay our outstanding term loan borrowings availableon August 16, 2021. The early repayment was subject to a 103% loan prepayment premium.
The senior credit facility provides that we be in compliance with the Total Leverage Ratio under the senior credit facility. On October 1, 2017, there were $60.9 millionfacility beginning January 3, 2022. We will be permitted to exercise equity cure rights with respect to compliance with the Total Leverage Ratio subject to certain restrictions as set forth in outstanding revolving credit borrowings under ourthe senior credit facility.
Borrowings under the senior credit facility bear interest at a rate per annum, rate, at our option, equal to either (all terms as defined in the senior credit facility):
1) the Alternate Base Rate plus the applicable marginApplicable Margin of 0.50% to 1.50% based on our Adjusted Leverage Ratio
(6.75% with a marginminimum Base Rate of 1.00% as of October 1, 2017)2.00%, or
2) the LIBOR (or Benchmark Replacement) Rate plus the applicable marginApplicable Margin of 1.50% to 2.50% based on our Adjusted Leverage Ratio (with7.75%, with a
margin minimum LIBOR (or Benchmark Replacement) Rate of 2.00% as of October 1, 2017)1.00%.
In addition, the senior credit facility requires us to pay (i) a commitment fee basedof 0.50% per annum on the applicable Commitment Fee margindaily amount of 0.25% to 0.45%, based on our Adjusted Leverage Ratio, (with a margin of 0.35% as of October 1, 2017) and the unused portion of the facility and (ii) a letter ofrevolving credit fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.
All obligations under the senior credit facility are guaranteed by all of our material domestic subsidiaries. In general, our obligations under our senior credit facility and our subsidiaries’ obligations under the guarantees are secured by a first priority lien and security interest on substantially all of our assets and the assets of our material subsidiaries (including a pledge of all of the capital stock and equity interests of our material subsidiaries), other than certain specified assets, including real property owned by us or our subsidiaries.facility.
The outstanding borrowings under the seniorrevolving credit facility are prepayable without penalty or premium (other than customary breakage costs). The outstanding borrowings under the term loan facility were voluntarily prepayable by us, and the term loan facility provided that each of the following required a mandatory prepayment of outstanding term loan borrowings by us as follows: (i) 100% of any cash Net Proceeds (as defined in the senior credit facility requires us to comply with customary affirmative, negative and financial covenants, including, without limitation, those limiting our and our subsidiaries’ ability to (i) incur indebtedness, (ii) incur liens, (iii) loan, advance,facility) in excess of $2.0 million individually or make acquisitions and other investments or other commitments to construct, acquire or develop new restaurants (subject to certain exceptions), (iv) pay dividends, (v) redeem and repurchase equity interests, (vi) conduct asset and restaurant sales and other dispositions (subject to certain exceptions), (vii) conduct transactions with affiliates and (viii) change our business. In addition,in the aggregate over the term of the senior credit facility will require us to maintain certain financial ratios, including minimum Fixed Charge Coverage and maximum Adjusted Leverage Ratios (all asin respect of any Casualty Event (as defined underin the senior credit facility). affecting collateral provided that we were permitted to reinvest such Net Proceeds in accordance with the senior credit facility, (ii) 100% of any Net Proceeds of a Specified Equity Contribution (as defined in the senior credit facility), (iii) 100% of any cash Net Proceeds from the issuance of debt issued by us or our subsidiaries other than Permitted Debt (as defined in the
senior credit facility), (iv) 100% of any Net Proceeds from the Disposition (as defined in the senior credit facility) of certain assets individually, or in the aggregate, in excess of $2.0 million in any fiscal year provided that we were permitted to reinvest such Net Proceeds in accordance with the senior credit facility and (v) beginning with the fiscal year ending January 2, 2022, an amount equal to the Excess Cash Flow (as defined in the senior credit facility) in accordance with the senior credit facility.
Our senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of our indebtedness having an outstanding principal amount in excess of $5.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.
The senior credit facility contains certain covenants, including, without limitation, those limiting our ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of our business in any material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends.
Our obligations under the senior credit facility are secured by all of our and our subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries).
Under the senior credit facility, the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, defaults on other indebtedness, certain judgments or upon the occurrence of a change of control (as specified in the senior credit facility).
As of October 1, 2017,July 3, 2022, we were in compliance with the financial covenants under our senior credit facility. After reserving $4.9 million for letters of credit issued under the senior credit facility, $84.2At July 3, 2022, $10.0 million was available for borrowing under the seniorrevolving credit facility at October 1, 2017.facility.
Off-Balance Sheet Arrangements and Contractual ObligationsCash Requirements
We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant properties.arrangements.
There have been no significant changes outside the ordinary course of business to our contractual obligationscash requirements since January 1, 2017.2, 2022. Information regarding our contractual obligationscash requirements is included under "Contractual Obligations""Cash Requirements" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017.
2, 2022.
Inflation
The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Labor costs in our restaurants are impacted by a number of factors such as labor supply and changing market conditions, as well as changes in the Federalfederal and state hourly minimum wage rates as well as changes in payroll related taxes, including Federalfederal and state unemployment taxes. Labor supply across other industries also negatively impacts the costs of supplies, commodities, logistics, and utilities. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future.
Application of Critical Accounting PoliciesEstimates
Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the “Significant Accounting Policies”"Basis of Presentation" footnote in the notes to our consolidated financial statements for the year ended January 1, 20172, 2022 included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017.2, 2022. Critical accounting estimates are those that require application of management's most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. These estimates involve a significant level of estimation uncertainty and are reasonably likely to have a material impact on the financial condition or results of operations. There have been no material changes affecting our critical accounting policies for the ninesix months ended October 1, 2017.July 3, 2022.
Management's Use of Non-GAAP Financial Measures
Consolidated Adjusted EBITDA is a non-GAAP financial measure. We use Consolidated Adjusted EBITDA in addition to net income (loss) and income (loss) from operations to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe this measure is an important indicator of our operational strength and the performance of our business.business and it provides a view of operations absent non-cash activity and items that are not related to the ongoing operation of our restaurants or affect comparability period over period. Consolidated Adjusted EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges (recoveries), goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Consolidated Adjusted EBITDA as calculated by us is not necessarily comparable to similarly titled measures reported by other companies, and should not be considered as an alternative to net income (loss), earnings (loss) per share, cash flows from operating activities or other financial information determined under GAAP.
Prior to the second quarter of 2017, Adjusted EBITDA and Consolidated Adjusted EBITDA were defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-compensation expense and other expense (income), net. In 2017, our Board of Directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to our segments. The Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants as set forth in the reconciliation table below. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, development and other administrative functions. See Note 6 to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
We also use Restaurant-level Adjusted EBITDA as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Consolidated Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs, and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-LevelRestaurant-level Adjusted EBITDA margin is derived by dividing Restaurant-level Adjusted EBITDA by restaurant sales. Restaurant-level Adjusted EBITDA is also a non-GAAP financial measure.
Management believes that Adjusted EBITDA for our segments, Consolidated Adjusted EBITDA and Restaurant-LevelRestaurant-level Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Adjusted EBITDA to Restaurant-LevelRestaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also these measures may not be comparable to similarly titled captions of other companies.
All such financial measures have important limitations as analytical tools. These limitations include the following:
such•Such financial information does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
such•Such financial information does not reflect interest expense or the cash requirements necessary to service payments on our debt;
although•Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and
such•Such financial information does not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges and gains (such as impairment and other lease charges (recoveries), closed restaurant rent expense, net of sublease income, other income and expense and stock-based compensation expense) have recurred and may recur.
A reconciliation from consolidated net income (loss)loss to Consolidated Adjusted EBITDA follows (in thousands):. All amounts are from continuing operations unless otherwise indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
| | | | | | | | |
Net loss | | $ | (6,221) | | | $ | (83) | | | $ | (7,577) | | | $ | (2,172) | |
Loss (income) from discontinued operations, net of tax | | (267) | | | 2,763 | | | (212) | | | 4,157 | |
Provision for (benefit from) income taxes | | 1,134 | | | (841) | | | 912 | | | 2,236 | |
Income (loss) from continuing operations before taxes | | (5,354) | | | 1,839 | | | (6,877) | | | 4,221 | |
Add: | | | | | | | | |
Non-general and administrative adjustments: | | | | | | | | |
Depreciation and amortization | | 5,232 | | | 4,875 | | | 10,346 | | | 9,963 | |
Impairment and other lease charges (recoveries) | | 2,110 | | | (202) | | | 1,408 | | | (254) | |
| | | | | | | | |
Interest expense | | 85 | | | 61 | | | 170 | | | 122 | |
Closed restaurant rent expense, net of sublease income | | 401 | | | 966 | | | 781 | | | 1,716 | |
| | | | | | | | |
Other expense (income), net | | 83 | | | 170 | | | 134 | | | 293 | |
Stock-based compensation expense | | 6 | | | 15 | | | 13 | | | 31 | |
| | | | | | | | |
Total non-general and administrative adjustments | | 7,917 | | | 5,885 | | | 12,852 | | | 11,871 | |
General and administrative adjustments: | | | | | | | | |
Stock-based compensation expense | | 1,388 | | | 1,046 | | | 2,011 | | | 2,040 | |
Non-recurring professional fees(1) | | 1,197 | | | — | | | 1,902 | | | — | |
G&A efficiency initiatives(2) | | 193 | | | — | | | 454 | | | — | |
| | | | | | | | |
Restructuring costs and retention bonuses | | — | | | 18 | | | — | | | 18 | |
| | | | | | | | |
| | | | | | | | |
Digital costs(3) | | 315 | | | 335 | | | 606 | | | 651 | |
Total general and administrative adjustments | | 3,093 | | | 1,399 | | | 4,973 | | | 2,709 | |
Consolidated Adjusted EBITDA | | $ | 5,656 | | | $ | 9,123 | | | $ | 10,948 | | | $ | 18,801 | |
Total revenues | | $ | 98,487 | | | $ | 91,155 | | | $ | 194,096 | | | $ | 179,370 | |
Consolidated Adjusted EBITDA as a percentage of total revenues | | 5.7 | % | | 10.0 | % | | 5.6 | % | | 10.5 | % |
|
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| | Three Months Ended | | Nine Months Ended |
| | October 1, 2017 | | October 2, 2016 | | October 1, 2017 | | October 2, 2016 |
| | | | | | | | |
Net income (loss) | | $ | (8,257 | ) | | $ | (4,531 | ) | | $ | (25,477 | ) | | $ | 14,280 |
|
Provision for (benefit from) income taxes | | (4,827 | ) | | (2,748 | ) | | (14,241 | ) | | 8,065 |
|
Income (loss) before taxes | | (13,084 | ) | | (7,279 | ) | | (39,718 | ) | | 22,345 |
|
Add: | | | | | | | | |
Non-general and administrative expense adjustments: | | | | | | | | |
Depreciation and amortization | | 8,483 |
| | 9,513 |
| | 26,265 |
| | 26,474 |
|
Impairment and other lease charges | | 15,905 |
| | 18,513 |
| | 59,081 |
| | 18,607 |
|
Interest expense | | 672 |
| | 542 |
| | 1,910 |
| | 1,635 |
|
Other expense (income), net | | 461 |
| | — |
| | 1,259 |
| | (238 | ) |
Stock-based compensation expense in restaurant wages | | 9 |
| | 35 |
| | 44 |
| | 111 |
|
Unused pre-production costs in advertising expense(1) | | — |
| | — |
| | 410 |
| | — |
|
Total Non-general and administrative expense adjustments | | 25,530 |
| | 28,603 |
| | 88,969 |
| | 46,589 |
|
General and administrative expense adjustments: | | | | | | | | |
Stock-based compensation expense | | 938 |
| | 330 |
| | 2,723 |
| | 2,523 |
|
Terminated capital project(2) | | — |
| | — |
| | 849 |
| | — |
|
Board and shareholder matter costs(3) | | (155 | ) | | 282 |
| | 3,748 |
| | 1,030 |
|
Write-off of site development costs(4) | | 8 |
| | 581 |
| | 462 |
| | 877 |
|
Plan restructuring costs and retention bonuses(5) | | 87 |
| | — |
| | 2,101 |
| | — |
|
Office restructuring and relocation costs(6) | | (152 | ) | | 193 |
| | (152 | ) | | 539 |
|
Legal settlements and related costs(7) | | — |
| | 834 |
| | (473 | ) | | 459 |
|
Total General and administrative expense adjustments | | 726 |
| | 2,220 |
| | 9,258 |
| | 5,428 |
|
Consolidated Adjusted EBITDA: | | $ | 13,172 |
| | $ | 23,544 |
| | $ | 58,509 |
| | $ | 74,362 |
|
(1)Unused pre-production costs for the nine months ended October 1, 2017, include costs for advertising pre-production that will not be used.
(2)Terminated capital project costs for the nine months ended October 1, 2017, include Non-recurring professional fees consist of costs related to the write-offgrowth initiatives.
(2) G&A efficiency initiatives consist of a capital project that was terminated in the first quarter.non-recurring retention bonus costs.
(3)Board and shareholder matter Digital costs for the three and ninesix months ended October 1, 2017,July 3, 2022 and July 4, 2021 include fees related to shareholder activism and CEO and board member searches. Board and shareholder matter costs for the three and nine months ended October 2, 2016, primarily include fees related to the previously proposed and terminated separation transaction.
(4)Write-off of site development costs for the three and nine months ended October 1, 2017 and October 2, 2016, includes the write-off of site costs related to locations that we decided not to develop.
(5)Plan restructuring costs and retention bonusesenhancing the digital experience for the three and nine months ended October 1, 2017, include severance related to the Plan and reduction in force and bonuses paid to certain employees for retention purposes.
(6)Office restructuring and relocation costs for the three and nine months ended October 1, 2017 and October 2, 2016, include severance and relocation costs and adjustments associated with restructuring Pollo Tropical management in Miami, Florida and Dallas, Texas.
(7)Legal settlements and related costs for the nine months ended October 1, 2017 and the three and nine months ended October 2, 2016, include benefits related to litigation matters.
our customers.
A reconciliation from Consolidated Adjusted EBITDA to Restaurant-LevelRestaurant-level Adjusted EBITDA follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
| | | | | | | | |
Consolidated Adjusted EBITDA | | $ | 5,656 | | | $ | 9,123 | | | $ | 10,948 | | | $ | 18,801 | |
Restaurant-level adjustments: | | | | | | | | |
| | | | | | | | |
Add: Other general and administrative expense(1) | | 9,698 | | | 9,651 | | | 20,160 | | | 19,007 | |
Less: Franchise royalty revenue and fees | | 464 | | | 391 | | | 873 | | | 766 | |
Restaurant-level Adjusted EBITDA | | $ | 14,890 | | | $ | 18,383 | | | $ | 30,235 | | | $ | 37,042 | |
Restaurant sales | | $ | 98,023 | | | $ | 90,764 | | | $ | 193,223 | | | $ | 178,604 | |
Restaurant-level Adjusted EBITDA as a percentage of restaurant sales | | 15.2 | % | | 20.3 | % | | 15.6 | % | | 20.7 | % |
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Three Months Ended | | Pollo Tropical | | Taco Cabana |
October 1, 2017: | | | | |
Adjusted EBITDA: | | $ | 9,396 |
| | $ | 3,776 |
|
Restaurant-Level Adjustments: | | | | |
Add: Pre-opening costs | | 230 |
| | 314 |
|
Add: Other general and administrative expense(1) | | 6,250 |
| | 5,089 |
|
Less: Franchise royalty revenue and fees | | 396 |
| | 195 |
|
Restaurant-Level Adjusted EBITDA: | | $ | 15,480 |
| | $ | 8,984 |
|
| | | | |
October 2, 2016: | | | | |
Adjusted EBITDA: | | $ | 13,782 |
| | $ | 9,762 |
|
Restaurant-Level Adjustments: | | | | |
Add: Pre-opening costs | | 1,456 |
| | 53 |
|
Add: Other general and administrative expense(1) | | 7,213 |
| | 5,087 |
|
Less: Franchise royalty revenue and fees | | 474 |
| | 190 |
|
Restaurant-Level Adjusted EBITDA: | | $ | 21,977 |
| | $ | 14,712 |
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| | | | |
Nine Months Ended | | Pollo Tropical | | Taco Cabana |
October 1, 2017: | | | | |
Adjusted EBITDA: | | $ | 41,257 |
| | $ | 17,252 |
|
Restaurant-Level Adjustments: | | | | |
Add: Pre-opening costs | | 1,013 |
| | 865 |
|
Add: Other general and administrative expense(1) | | 21,345 |
| | 16,610 |
|
Less: Franchise royalty revenue and fees | | 1,272 |
| | 568 |
|
Restaurant-Level Adjusted EBITDA: | | $ | 62,343 |
| | $ | 34,159 |
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| | | | |
October 2, 2016: | | | | |
Adjusted EBITDA: | | $ | 43,832 |
| | $ | 30,530 |
|
Restaurant-Level Adjustments: | | | | |
Add: Pre-opening costs | | 4,365 |
| | 342 |
|
Add: Other general and administrative expense(1) | | 22,208 |
| | 14,985 |
|
Less: Franchise royalty revenue and fees | | 1,559 |
| | 540 |
|
Restaurant-Level Adjusted EBITDA: | | $ | 68,846 |
| | $ | 45,317 |
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(1) Excludes general and administrative adjustments included in Consolidated Adjusted EBITDA.
Forward Looking Statements
This Quarterly ReportMatters discussed in this report and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, express or implied, regarding our anticipated growth, operating results, future earnings per share, plans, objectives, the impact of our other business initiatives, the impact of our initiatives designed to strengthen our liquidity and cash position, including those related to working capital efficiency initiatives and sales of real property and the impact of the COVID-19 pandemic and our initiatives designed to respond to the COVID-19 pandemic on Form 10-Q contains “forward-looking”future sales, margins, earnings and liquidity, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking statements”amended, (the "Exchange Act"). These statements are any statementsoften identified by the words "believe," "positioned," "estimate," "project," "plan," "goal," "target," "assumption," "continue," "intend," "expect," "future," "anticipate," and other similar expressions, whether in the negative or the affirmative, that are not based on historical information. Statements other than statements of historical facts included herein, including, without limitation, statements regarding our future financial position and results of operations, business strategy, budgets, projected costs and plans and objectives of management for future operations, are “forward-looking statements.” Forward-looking statements generally can be identified by the use offact. These forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” or “continue” or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions whichthat are difficult to predict. Therefore, actual outcomespredict, and results may differ materially from what is expressed or forecasted in suchyou should not place undue reliance on our forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could causestatements. Our actual results toand the timing of certain events could differ materially from those expressed or implied by theanticipated in these forward-looking statements or “cautionary statements,” include,as a result of certain factors, including, but are not limited to:
Increasesto, those set forth under "Risk Factors" and elsewhere in foodthis report and in our other commodity costs;
Risks associatedpublic filings with the expansion of our business, including increasing real estate and construction costs;
Risks associated with food borne illness or other food safety issues, including negative publicity through traditional
and social media;
Our ability to manage our growth and successfully implement our business strategy;
Labor and employment benefit costs, including the impact of increases in federal and state minimum wages, increases in exempt status salary levels and healthcare costs imposed by the Affordable Care Act;
Cyber security breaches;
General economic conditions, particularly in the retail sector;
Competitive conditions;
Weather conditions;
Significant disruptions in service or supply by any of our suppliers or distributors;
Increases in employee injury and general liability claims;
Changes in consumer perception of dietary health and food safety;
Regulatory factors;
Fuel prices;
The outcome of pending or future legal claims or proceedings;
Environmental conditions and regulations;
Our borrowing costs;
The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;
The risk of an act of terrorism or escalation of any insurrection or armed conflict involving the United States Securities and Exchange Commission ("SEC"). All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this report or other periodic reports represent our estimates as of the date made and should not be relied upon as representing our estimates as of any other nationalsubsequent date. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or international calamity; andotherwise.
Factors that affect the restaurant industry generally, including product recalls, liability if our products cause injury, ingredient disclosure and labeling laws and regulations.
ITEM 3—3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Where possible, we use these types of purchasing techniques to control costs as an alternative to using financial instruments to hedge commodity prices. Additionally, shortages in key ingredients may impact commodity prices. In many cases, we believe we will be able to address commodity cost increases that are significant and appear to be long-term in nature by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level operating margins.
There were no material changes from the information presented in Item 7A included in our Annual Report on Form 10-K for the year ended January 1, 20172, 2022 with respect to our market risk sensitive instruments.
ITEM 4—4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act")), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 1, 2017.July 3, 2022.
Changes in Internal Control over Financial Reporting.No change occurred in our internal control over financial reporting during the thirdsecond quarter of 20172022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—II. OTHER INFORMATION
Item 1. Legal Proceedings
None.We are a party to various litigation matters incidental to the conduct of business. We do not believe that the outcome of any of these matters will have a material adverse effect on our business, results of operations or financial condition.
Item 1A. Risk Factors
Part 1 - 1—Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 1, 20172, 2022, describes important factors that could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time-to-time. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017.2, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
NoneNone.
Item 3. Defaults Upon Senior Securities
NoneNone.
Item 4. Mine Safety Disclosures
Not applicableapplicable.
Item 5. Other Information
NoneNone.
Item 6. Exhibits
(a) The following exhibits are filed as part of this report. | | | | | | | | |
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101.INS | | XBRL Instance DocumentDocument—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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+ Compensatory plan or arrangement104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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+ Compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| FIESTA RESTAURANT GROUP, INC. |
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Date: August 11, 2022 | FIESTA RESTAURANT GROUP, INC. |
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Date: November 6, 2017 | /S/s/ RICHARD C. STOCKINGER |
| (Signature) |
| Richard C. Stockinger Chief Executive Officer
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Date: November 6, 2017August 11, 2022 | /s/ DIRK MONTGOMERYS/ LYNN S. SCHWEINFURTH |
| (Signature) |
| Lynn S. Schweinfurth
Dirk Montgomery Senior Vice President, Chief Financial Officer and Treasurer |
| (Principal Financial Officer) |
Date: November 6, 2017 | /S/ CHERI L. KINDER
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| (Signature) |
| Cheri L. Kinder
Vice President, Corporate Controller
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