Fiesta Restaurant Group Inc. has raised its Pollo Tropical opening targets for this year and plans some new units as “purposeful cannibalization” to relieve stress on high-volume restaurants, executives said Thursday.
After releasing earnings Thursday for the June 28-ended second quarter that showed income up 20.8 percent and same-store sales increasing at both the Pollo Tropical and Taco Cabana brands, Fiesta Restaurant Group told analysts it was ramping up development.
“We are expecting our largest number of restaurant openings in a single quarter this quarter, one Taco Cabana and 15 Pollo Tropical restaurants,” said Tim Taft, CEO and president of the Addison, Texas-based Fiesta.
“We had previously targeted between 28 and 32 openings this year and are now raising our range to 32 to 34 restaurants. All but two openings will be Pollo Tropical restaurants. Of the Pollo Tropical openings, 13 will be in Texas, six will be in Atlanta, two will be in Tennessee and the balance will be in Florida.”
The “purposeful cannibalization” of trade zones will be in the older market of Florida, Taft said.
“In South Florida, cannibalization relieves some operational stress from high-volume restaurants, provides a better experience for our staff and our customers, while at the same time expands our total market share. In addition, cannibalization is not only happening in South Florida locations,” he said.
Taft said more than a third of the 50 restaurants that Fiesta has built in the past four years cannibalized some existing trade area.
“This has negatively impacted same-store sales and transaction by over one percentage point in 2014 and is projected to do the same in 2015 as we purposely build out existing markets,” he said.
In the second quarter, Fiesta reported same-store sales increased 4.3 percent at Pollo Tropical and guest traffic decreased 0.2 percent. Same-store sales at Taco Cabana rose 5.6 percent in the quarter, and comparable guest traffic increased one percent.
Nicole Miller Regan, senior research analyst at Piper Jaffray, wrote in a client note that Pollo Tropical’s same-store sales were softer-than-expected “as trends did not bounce back as quickly as expected from the ‘pinch’ related to what the company believes was an incremental healthcare enrollment cost impacting consumers' spending trends.”
Regan said her team was “encouraged to hear that trends at both concepts have accelerated to date” in the third quarter with Pollo Tropical same-store sales up 6.4 percent and Taco Cabana same-store sales up 7.1 percent.
Lynn S. Schweinfurth, Fiesta’s chief financial officer, noted that Taco Cabana has eliminated combo meals from its menu boards.
“While guests can still order an off-menu combo meal, we continue to see our guests ordering more plates and adding side items such as drinks or chips and queso to their order,” Schweinfurth said. “This change produced incremental sales mix and profitability over the prior year.”
She also said cost of sales improved because of those new menu boards.
Taft noted that Fiesta’s research-development and supply-chain teams were working on ways to reduce poultry costs because of the avian flu outbreak in the Midwest.
“There has been a contraction of chicken supplies for smaller whole birds that we use for our Pollo chicken platters and sandwiches, causing relative cost increases substantially this year over last,” he said. “Current initiatives are centered around offering more dark meat, chicken options and purchasing larger chickens for dice chicken meats while ensuring we are delivering high-quality products. We currently expect to have these initiatives rolled out by the end of the year.”
Taft noted that that as Fiesta builds out new Pollo Tropical markets in Atlanta, Nashville, Tenn., and areas in Texas, it was holding back on marketing spending.
He said the company walked the line “between building rooftops without driving topline awareness via media and cannibalizing by adding additional rooftops.” He told analysts that radio and television would be part of the marketing mix in 2016.
Earlier Thursday, Fiesta reported said net income in the second quarter was $11.2 million, or 42 cents a share, up from $9.3 million, or 35 cents a share, in the same period a year ago. Revenues increased 11.5 percent, to $171.9 million from $154.2 million in the same period a year ago.
As of June 28, Fiesta owned and operated 136 Pollo Tropical restaurants and 163 Taco Cabana restaurants. It franchised 35 Pollo Tropical U.S. restaurants in the United States and abroad and six Taco Cabana U.S. restaurants.