09 Aug Carrols Restaurant Group (TAST) Q2 2019 Earnings Call Trans…
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Carrols Restaurant Group (NASDAQ: TAST)
Q2 2019 Earnings Call
Aug 08, 2019, 8:30 a.m. ET
Welcome to the Carrols Restaurant Group second-quarter 2019 earnings conference call. [Operator instructions] I would now like to remind everyone that this conference is being recorded today, Thursday, August 8, 2019, at 8:30 a.m. Eastern Time, and will be available for replay. I will now turn the conference over to Paul Flanders, chief financial officer.
Please go ahead, sir.
Good morning, everyone. By now, you should have access to our earnings announcement released earlier this morning, which is available on our website at www.carrols.com under the Investor Relations section. Before we begin our remarks, I would like to remind everyone that our discussion will include forward-looking statements, which may consist of comments regarding our strategies, intentions, guidance or plans. 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 more details, especially the risks, that could impact our business and results. During today’s call, we will discuss certain non-GAAP measures that we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles. A reconciliation to comparable GAAP measures is available with our earnings release.
With that, I will now turn the call over to our chairman and CEO of Carrols Restaurant Group, Dan Accordino.
Dan Accordino — Chairman and Chief Executive Officer of Carrols Restaurant Group
Thanks, Paul, and good morning, everyone. Our second-quarter financial results were disappointing, and I want to address those directly this morning. Total restaurant sales were $368.6 million and grew by nearly 22% compared to the prior-year period due to our acquisition of 233 restaurants in the second quarter of 2019 and over 270 restaurants since the second quarter of last year. However, our comparable restaurant sales were flat compared to the second quarter of last year, with adjusted EBITDA decreasing $8.7 million and adjusted EBITDA margin declining over 400 basis points.
Let me address the more significant factors affecting our results. First, our restaurant-level profitability and adjusted EBITDA were challenged by a number of factors, most significantly by the deleveraging from flat comparable restaurant sales. Our comparable restaurant sales increased a modest 0.1% as we lapped a very strong 5% increase in the prior-year quarter. This was a disappointing result that prevented us from increasing our restaurant-level leverage to offset some of the significant cost and margin pressures that we experienced.
Of note, we experienced relatively softer sales in our southeast markets, which account for about a third of our restaurants. We also experienced underperformance in our breakfast and lunch day parts. Secondly, as we mentioned on prior calls, promotional levels have increased over the past year. And while the discounting levels have declined sequentially from the last couple of quarters, as we expected, the impact of higher promotions over the second quarter of last year continued to weigh in on our results.
As evidenced by our sales performance, these promotions were less effective in driving sales in the second quarter. The impact of the higher year-over-year promotional levels on restaurant margins at our core restaurants was approximately 60 basis points or approximately a $2 million decrease in EBITDA. Third, we experienced elevated commodity costs, including from beef prices that were 4.3% above our costs in the second quarter of last year. Increased commodity costs negatively impacted restaurant margins by over 100 basis points or approximately $3 million at our core restaurants.
Fourth, we experienced continued labor cost pressures as our average wage rate rose 5.2% in the second quarter. In tandem with a flat comparable sales performance, we deleveraged almost 90 basis points on restaurant labor. And finally, we were impacted by a lower contribution profile from the Cambridge restaurants, which we just recently acquired. The results from these restaurants do not yet reflect improvements in sales or margin efficiencies that we expect to achieve once our integration is complete.
In addition to the — I’m sorry, it is clear that our second-quarter and first-half results were significantly impacted by the combined effect of these headwinds occurring at the same time. As a result of these near-term pressures, we have lowered our expectations for the full year. However, I am confident that these results do not reflect the shift in the fundamentals of our business model. With two world-class brands, a supportive franchisor partner, an experienced management team and growth opportunities across multiple attractive geographies, we believe that we are positioned to deliver strong growth and value creation to our investors going forward.
To that end, during the second quarter, we completed several key transactions, which position us to build long-term value across the business for the next number of years and beyond. In late April, we closed our acquisition of Cambridge Franchise Holdings, which added 165 Burger King restaurants and 55 Popeyes restaurants to our portfolio in a number of southern states. This transaction significantly expands our growth opportunities across attractive new markets, enhances our growth potential by adding a strong second brand that provides a long runway to continue expanding our business with increasing diversity and scale. It is early in our integration of Cambridge, and it will take some time to see the benefit of this acquisition flow through to our financial results.
However, we are confident based on our experience and track record that we can improve the sales and overall financial performance of these restaurants over time as we assimilate them into our platform and implement our financial and operating systems. In conjunction with the Cambridge transaction, we also finalized a new development agreement with Burger King, which expands our ability to acquire an additional 500 restaurants and assigns us Burger King’s right of first refusal, or ROFR, in 17 states. This agreement extends our ROFR territory to Arkansas, Louisiana, Mississippi and Tennessee. This agreement, along with a Popeyes development and two state ROFR agreement acquired with the Cambridge transaction provides us substantial runway for growth and long-term value creation through both acquisitions and new unit development across two great brands.
Lastly, we completed a $550 million refinancing in the second quarter that provides us with a covenant-light capital structure and significantly enhanced our liquidity and flexibility to support the execution of these attractive growth opportunities going forward. We believe that we are better positioned than most operators and that this is an opportune time to pursue additional acquisitions within both the Burger King and Popeyes systems. We are confident that we can improve overall financial performance at restaurants that we acquire, including the Cambridge restaurants, while opportunistically executing our acquisition strategy. We believe that this strategy will enable us to build an even stronger foundation to drive our growth going forward and are currently evaluating a number of acquisition targets.
Our capital allocation strategy will continue to favor investments that enhance our EBITDA growth, namely acquisitions and new restaurant growth, which generate attractive long-term returns for our investors….