Del Frisco's (DFRG) Reports Prelim. Q3 Comps Decline of 1.9%

Del Frisco’s Restaurant Group, Inc. (“Del Frisco’s” or the “Company”) (NASDAQ: DFRG) today announced that it will file its SEC Form on 10-Q for the third quarter ended September 25, 2018 on Friday, November 9, 2018 after the market close. We will then host a conference call to discuss these financial results on Monday, November 12, 2018 at 7:30 AM Central Time. The dial-in instructions will be provided in an earnings release that we will furnish that same morning.

The third quarter was a transformational one for the Company, which included four significant transactions: the acquisition of Barteca Restaurant Group, the disposition of Sullivan’s Steakhouse, a secondary offering of common stock, and a debt syndication. We are utilizing the additional time to properly record the preliminary purchase price allocation of the acquisition of Barteca Restaurant Group and the disposition of Sullivan’s Steakhouse, including discontinued operations presentation, along with completing our third quarter deferred tax valuation analysis. Today, we are presenting a preliminary update on third quarter results, integration efforts and other strategic initiatives, and their effects.

Integration Update

Norman Abdallah, Chief Executive Officer of Del Frisco's Restaurant Group, Inc., said, "We are positioning ourselves for long-term success by executing our brand strategies, ensuring liquidity and investment behind our three major growth brands -- Del Frisco’s Double Eagle Steakhouse (“Double Eagle”), Barcelona Wine Bar and bartaco -- through capital restructuring, shedding underperforming assets, and divesting Sullivan’s Steakhouse. ‘Front-end’ operations for Barcelona Wine Bar and bartaco have now been substantially integrated into the Del Frisco’s eco-system with their respective management teams working from our Irving, TX support center while ‘back-end’ support systems are on track to be fully integrated ahead of schedule by mid-year 2019. Encouragingly, general and administrative and purchasing synergies are now anticipated at the high end of our previous $3 million to $5 million range with significant savings run-rate beginning in the second half of 2019.”

Abdallah continued, “Our restaurant portfolio is benefitting from greater diversification and balance than ever before with contributions from our Emerging Brands strengthening our top-line, enabling synergies and providing new restaurant opportunities to support Del Frisco’s growth targets.”

Comparable Restaurant Sales

Based on our unaudited, preliminary results for the 13 weeks ended September 25, 2018, we expect to report that comparable restaurant sales decreased 1.9% for the third quarter, consisting of a 5.5% decrease in customer counts, partially offset by a 3.6% increase in average check.

Del Frisco’s Double Eagle SteakhouseAt the Double Eagle, comparable restaurant sales during the third quarter declined by 2.4% due to a 4.7% decline in customer counts partially offset by a 2.3% increase in average check. The Double Eagle’s comparable restaurant sales decline primarily reflected anticipated internal competition in Boston from our new Back Bay opening which, whilst significantly increasing our total revenue in the Boston market, had a negative 1.4% impact on the comparable restaurant sales calculation, a 1.1% impact from a decline in patio sales and a 0.3% impact from the continued under performance in Chicago. Excluding these three impacts, comparable restaurant sales increased 0.4% and customer counts declined 1.9%.

Under new Brand leadership, and despite these headwinds, comparable restaurant sales turned positive towards the end of the third quarter and this trend continued through our first five week period in the fourth quarter of 2018 with comparable restaurant sales rising in the low single digits. Private dining comparable sales increased close to 20% in this same period and bookings for the remaining weeks of the quarter are more than 20% above where they were at the same time in 2017.

Barcelona Wine BarAt Barcelona Wine Bar, comparable restaurant sales during the third quarter increased 2.5% and revenues increased 10.7%. Customer counts increased by 1.0% and average check increased 1.5%.

bartacoAt bartaco, comparable restaurant sales during the third quarter declined 7.0% while revenues increased 11.8%. The comparable restaurant sales decline consisted of a 5.9% decrease in customer counts and a 1.1% decrease in average check. The comparable restaurant sales decline was principally due to the negative year over year impact of an incident at one location which we have now started to lap in the fourth quarter. Excluding this location, comparable restaurant sales would have fallen 2.1% in the third quarter versus a year ago. Notably we were also lapping our highest quarterly comparable restaurant sales from 2017 with a year-ago comparison of 11.1%.

On a two-year basis, excluding the restaurant impacted, comparable restaurant sales improved sequentially to 8.4% in the third quarter from 7.5% in the second quarter. In the first 12 days, since we have lapped the incident towards the end of October, bartaco’s comparable restaurant sales have risen 9.9%.

Breaking down performance by market in the third quarter, the Northeast region experienced 30 more days of rain and twice as much rainfall this year versus last year. This led to five bartacos in the Northeast experiencing a 14.1% decline in comparable restaurant sales or a 7.0% decline excluding the impacted restaurant noted above. The rest of the comparable restaurant footprint in Georgia, Tennessee and Florida, which did not see the same weather changes year over year, increased comparable restaurant sales 1.9% in the third quarter.

Del Frisco’s GrilleAt Del Frisco’s Grille (“Grille”), comparable restaurant sales during the third quarter declined 0.4% consisting of a 9.0% decline in customer counts partially offset by an 8.6% increase in average check. Approximately 5.3% of the customer count decline and 4.0% of the sales decline was due to a decrease in patio sales which, due to adverse weather compared to prior year particularly in our Northeast and Texas markets, resulted in a $1.0 million patio sales decline and a reduction in patio sales mix from 17.7% in the third quarter of 2017 to 13.7% in the third quarter of 2018.

We have also seen a significant switch in our business as a result of actions taken following extensive consumer research and work with a third party consultant in 2017. Focus on our core guests through menu changes, the removal of all discounting and targeted marketing has led to a decline of 19.1% in customer counts for all guests with a Per Person Average Spend (“PPA”) below $40 at dinner and $30 at lunch, whereas customer counts have increased by 9.9% for all guests with a PPA above $40 at dinner and $30 at lunch. This change is the principal reason for our growth in average check.

Development

Del Frisco’s Double Eagle SteakhouseWe opened a restaurant in Boston, MA early during the third quarter, which is performing in line with expectations, and a restaurant in Atlanta, GA late during the third quarter, our first “smaller prototype” test location.

We have also opened a restaurant in San Diego, CA during the fourth quarter, while the restaurant in Century City, CA is now expected to open in the first quarter of 2019. We have also signed leases for restaurants in each of Pittsburgh, PA and Santa Clara, CA.

Barcelona Wine BarWe expect to open a restaurant in Charlotte, NC during the fourth quarter.

bartacoWe opened a restaurant in North Hills, NC during the third quarter and expect to open restaurants in each of Fort Point, MA, and Dallas, TX during the fourth quarter with Madison, WI now scheduled to open in the first quarter of 2019.

Del Frisco’s GrilleWe expect to open a restaurant in each of Philadelphia, PA and Fort Lauderdale, FL during the fourth quarter.

Revised Guidance

Based upon current information, we are updating our guidance for the 52-week fiscal year 2018, which ends on December 25, 2018, to reflect our year-to-date performance, the sale of Sullivan’s Steakhouse ahead of schedule, and expectations for the fourth quarter of 2018.

• Total comparable restaurant sales of (1.5)% to 0.5%;
• Ten restaurant openings consisting of three Del Frisco’s Steakhouses, three Del Frisco’s Grilles, and post-acquisition one Barcelona Wine Bar and three bartacos;
• Six to seven restaurant closures consisting of three to four Del Frisco’s Grilles, one Sullivan’s Steakhouse and two legacy bartacos which were anticipated at the date of acquisition; and
• Net capital expenditure, after tenant allowances, of $75 million to $80 million.

Further guidance on Restaurant Level EBITDA, General and administrative costs, Pre-opening expenses and Adjusted EBITDA will be provided with the Company’s full earnings release.

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