Carrols Restaurant Group, Inc. Q2 2010 Earnings Call Transcript

Carrols Restaurant Group, Inc. Q2 2010 Earnings Call Transcript
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Carrols Restaurant Group, Inc. (TAST)

Q2 2010 Earnings Call Transcript

August 9, 2010 4:30 pm ET

Executives

Paul Flanders – VP, CFO and Treasurer

Dan Accordino – President and COO

Alan Vituli – Chairman and CEO

Analysts

Bryan Hunt – Wells Fargo Securities

Reza Vahabzadeh – Barclays Capital

Jeff Omohundro – Wells Fargo Securities

Bryan Elliott – Raymond James

Greg Ruedy – Stephens Inc.

Robin Broudy – Waterfront

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to Carrols Restaurant Group's second quarter 2010 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would now like to turn the call over to Mr. Paul Flanders, Carrols' Chief Financial Officer, for opening remarks. Please go ahead.

Paul Flanders

Good afternoon. By now, everyone should have access to the announcement released this afternoon, which you can also find on our Web site at www.carrols.com under the Investor Relations section.

Before we begin our formal remarks, I will remind everyone that our discussion today may include forward-looking statements that reflect our expectations for the future. These statements are not guarantees of future performance and therefore undue reliance should not be placed on them. We also refer you to our filings with the SEC for a more detailed discussion of the risks that could impact our business and our financial results.

On the call with me today is Alan Vituli, our Chairman and CEO; and Dan Accordino, our President and Chief Operating Officer. Dan and I will review our operating results for the second quarter and then we’ll be happy to address any questions that you might have. With that I will turn the call over to Dan.

Dan Accordino

Thanks, Paul, and good afternoon, everyone. In many ways, our second quarter was similar to last quarter in so far as operating results and profitability were challenged primarily by our Burger King business. At the same time, we are encouraged by encouraged by trends at both Pollo Tropical and Taco Cabana, bitch experienced improvements in their comparable sales as well as positive customer traffic. We primarily attribute their performance through a combination of new menu items along with our promotional and marketing activity.

In terms of the macro environment, the consumer recovery appears to be slow as customers remain cautious in their spending, unemployment levels remain high, particularly with the 18 to 34 male demographic, which is mostly significant affecting our Burger King results. With respect to our two owned Hispanic brands, we have intently focused on driving sales growth by capitalizing on opportunities to enhance the customer experience at our restaurants and through new product introductions and effective promotions.

We are investing in both Pollo Tropical and Taco Cabana to elevate the best service models, enhancing the facilities through restaurant remodeling, and in general further differentiating these quick casual brands from conventional quick serve competitors. Our remodeling programs are progressing well, and initially yielding favorable results in terms of both customer perception and the sale trends at those restaurants.

More importantly, we see the elevation of these brands as an important step as we look to further broaden their appeal into more aggressively accelerated expansion in the future as the economic environment improves. In the meantime however, we have limited capital spending for new unit development this year so that we can continue to reduce debt.

With that said, I’ll now discuss our three brands in greater detail. Comparable restaurant sales for Pollo Tropical increased a solid 6.3% in the second quarter of 2010 and customer traffic, which has continued to improve sequentially increased 8.9% in the period, and has been positive since the third quarter of last year. We also improved segment EBITDA for Pollo Tropical to $8.1 from $6.8 million and EBITDA margin by 222 basis points to 17.4%.

Our average check, while declining 2.6% during the period, primarily reflects our own marketing emphasis and new product pricing. During the second quarter, our promotional and advertising focus was primarily directed to our new sandwich and wrap line launched earlier in the year, specifically our $4.99 combo meal. This handheld product line targeted to better serve the consumer’s need for grab and go and later meal has been very successful. Overall growth in both traffic and comparable sales more than offset the lower average check in this quarter, enabling us to improve overall profitability at the restaurant level.

As we said, we are in the midst of elevating the Pollo Tropical experience at a number of our restaurants to better align the dining experience with the quality of our food. Changes include upgrades to our restaurants, the addition of real plates and silverware and limited table service, free WiFi, and the introduction of several new menu items. We have also had the full service coffee bar, including lattes, espresso, and cappuccino, and in many locations added sangria, wine, and beer.

Through the end of the second quarter we had converted 11 locations and we anticipate the roll-out of these initiatives to 15 or 20 locations by the end of the year, including restaurants in Tampa Bay, Naples, Orlando and the north-east. (inaudible) sales lists have varied, but are averaging 8% to 10% on an overall basis compared to pre-conversion trends, and generally seem to be stronger in some of the locations that have a less Hispanic customer base. The average capital cost in conjunction with this upgrade is estimated to be a little over $100,000 per restaurant.

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