Del Frisco’s Restaurant Group Inc., fell short of expectations for its second quarter earnings as the company continued to reposition its three restaurant concepts: Del Frisco’s Double Eagle Steak House, Sullivan’s Steakhouse and Del Frisco’s Grille.
The stock closed down 4.5 percent after the Southlake, Texas-based company announced that same-store sales fell by 2.2 percent.
“Comparable restaurant sales trends during the second quarter were volatile and should remain so at least through the third quarter as our new menu rollouts and associated marketing campaigns designed to yield higher check averages and penny profits do not begin in earnest until the fourth quarter,” CEO Norman Abdallah said in a statement.
In a conference call, he said the decline in average checks was “self-inflicted by some programs that were rolled out over the past 12 to 14 months that we’re correcting.”
Abdallah was named CEO in November 2016.
Since then the company has conducted consumer research and found that their customers were not as price-sensitive as they realized. Abdallah said Del Frisco’s did away with discount pricing in March and began work on a new menu.
CMO Brandon Coleman said the brand is now moving to market the celebratory and the social evening focus. Previously the company emphasized its lunch and value offerings.
Sullivan’s had an especially difficult quarter, with same-store sales down by 5.2 percent, in large part because the chain stopped serving lunch at seven locations.
The Double Eagle Steakhouse saw a 0.5 percent decrease in same-store sales. Both of those concepts saw an uptick in average check (by 1.8 percent at the Steakhouse and by 3.4 percent at Sullivan’s), but a decline in traffic (by 2.3 percent at the Steakhouse and by 8.6 percent at Sullivan’s).
Del Frisco’s Grille, meanwhile, saw average check decline by 4.4 percent while customer counts were up by 1.2 percent.
Overall, revenue was up by 3 percent to $82.3 million for the quarter, compared to $79.9 million in the second quarter in 2016. Net income was $2.1 million or 9 cents per share, down from $4.4 million, or 19 cents per share, a year earlier.
The company revised downward its guidance of same-store sales to a decrease of between 2 percent and 1 percent, compared to a previously forecast range of -0.5 percent to +0.5 percent.
Going forward, Del Frisco’s said it planned to use the Double Eagle Steakhouse as its main growth vehicle, using a new, smaller, prototype based on its recently opened Atlanta location.
“The atmosphere, experience and menu will be similar to larger restaurants,” but the kitchen is smaller, Abdallah said.
“The smaller prototype will enable us to maximize the potential of the Atlanta market with two smaller stores compared to the one large format,” Abdallah said, adding that, he could see nearly doubling the number of Double Eagle Steakhouses to between 20 and 25 locations in the United States.
“The smaller prototype will enable us to further increase the potential for the brand. Together with international opportunities there is a long runway of growth for our flagship brand,’ he said.
Meanwhile, plans are underway to start franchising Sullivan’s Steakhouse.
Abdallah said the chain was negotiating a lease for a new Dallas location for Sullivan’s that would be a new prototype with a highly efficient kitchen and more focus on the bar.
“Our intention is for Sullivan’s to employ a capital-light approach in order to grow the overall value for the business model,” Abdallah said. “We will therefor use this restaurant to showcase the brand as part of our franchise program targeting small to medium-tier markets.”
He said an existing Sullivan’s location would be redesigned in 2018 to reflect the new prototype, and that the team led by brand president Scott Smith was currently writing franchising contracts, determining royalties and documenting standardized systems and processes that would allow franchising to begin in 2018.
Contact Bret Thorn at firstname.lastname@example.org
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