Carrols Beats Overall

Zacks

Carrols Restaurant Group, Inc. (TAST), reported first quarter 2012 adjusted earnings of 16 cents per share compared with 14 cents per share in the year-earlier quarter. However, the company reported GAAP loss of 16 cents, which includes after-tax charges of 32 cents per share, compared with GAAP earnings of 10 cents in year-earlier quarter.

This included impairment charges, lease charges and spin-off related expenses. Reported earnings beat the Zacks Consensus Estimate by a penny.

The company reported a 7.3% year-over-year increase in total revenue to $211.6 million. Total revenue beat the Zacks Consensus Estimate of $210 million.

Subsequent to the quarter end, Carrols announced the spin-off of its Fiesta Restaurants Group into an independent public company. The segment operates two brands namely Pollo Tropical and Taco Cabana. However, the reported quarter includes the financials related to the Fiesta Restaurants Group.

Quarter Highlights

Burger King revenues jumped 4.7% year over year to $85.5 million. Same-store sales at Burger King upped 5.9% compared to a 5.0% decrease in year-earlier quarter driven by restaurant level profitability.

Revenue for Fiesta Restaurants Group jumped 9.1% year over year to $126.1 million. Brand wise, revenue for Pollo Tropical climbed 10.7% to $57.8 million, while same-store sales grew 9.4%. Revenue for Taco Cabana upped 7.8% to $68.3 million, while same-store sales improved 6.1%.

In the reported quarter, general and administrative expenses jumped 25.2% year over year to $17.4 million and includes expenses related to the spin-off of Fiesta Restaurant Group, conversion of employee stock options to restricted stock and acquisition expenses related to Burger King Restaurants.

Operating income plummeted 83.5% year over year to $1.3 million in first quarter 2012. Interest expenses increased 37% to $6.3 million compared to the prior year.

Acquisitions and Dispositions

On March 26, 2012, Carrols entered into an agreement with the Burger King Corp. (:BKC) to acquire 278 company-owned restaurants in the Ohio, Indiana, Kentucky, Pennsylvania, North Carolina, South Carolina, and Virginia markets.

The transaction amount was around $15.8 million, of which $3.8 million is payable within 5 years. As a part of the transaction, the company will remodel 450 Burger Kings Restaurants over the next three and a half years, while BKC will hold a 28.9% equity ownership in Carrols. 

Store update

During the quarter, seven restaurants were closed, including one Burger King, restaurants, five Pollo Tropical Restaurants and one Taco Cabana restaurant. As of April 1, 2012, Carrols owned and operated 297 Burger King restaurants and 38 franchised restaurants. Fiesta Restaurants Group owns and operates 86 Pollo Tropical and 157 Taco Cabana restaurants.

In 2012, management expects to close two Carrols restaurants and six Fiesta restaurants. However, 10-12 new Fiesta restaurants are projected to be opened in Fiesta in 2012.

Outlook

For full year 2012, management expects same-store sales for Carrols to increase in the range of 3%-5%. Commodity expenses are projected to increase in the range of 3%-4%. Capital expenditure is anticipated to be in the range of $30-$35 million.

Same-store sales are expected to increase in the range of 6%-7% for Polo Tropical and 4%-5% for Taco Cabana in 2012. Commodity cost in expected to increase 1%-2% for Pollo Tropical and 2.5%-3.5% for Taco Cabana. Capital expenditure is expected to be in the range of $42-$46 million for 2012.

Our Take

We expect that company’s decision of acquiring Burger King may initially increase costs due to the remodeling program, but will drive same-store sales and overall revenue in the long run. We also see growth prospects in Fiesta Restaurants group as the segment has fared well.

Carrols has Zacks #3 Rank, representing a short term Hold rating. We have a long term Neutral recommendation on the stock. Carrols competes with Kona Grill Inc. (KONA), which currently retains a Zacks #1 Rank (short-term Strong Buy rating) and a long-term Outperform recommendation.

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