Carrols' Loss Wider-than-Expected

Zacks

Carrols Restaurant Group, Inc. (TAST) recently reported third quarter 2012 adjusted loss per share of 10 cents, wider than the Zacks Consensus Estimate of loss of 3 cents per share. Dismal performance of the 278 restaurants acquired from Burger King on May 30, 2012, coupled with integration costs affected the results.

However, on GAAP basis, the company reported a loss of 29 cents, which includes after-tax charges of 14 cents per share related to integration costs and legal expenses as well as a tax expense charge of 6 cents for a valuation allowance against certain deferred tax assets, compared with earnings of 2 cents in the year-ago quarter.

Restaurant sales surged 87.1% year over year to $169.5 million, aided by the acquired restaurants. However, total revenue lagged the Zacks Consensus Estimate of $177 million.

Quarter Highlights

Comparable restaurant sales at legacy restaurants jumped 6.2%, aided by increased traffic of 3.6% and average check of 2.6%, as well as a price increase benefit of 1.9%. This marks the fifth consecutive quarter of positive comps.

In the reported quarter, cost of sales grew 240 bps to 32.1%, attributed to higher commodity costs and discounting. General and administrative expenses spiked 49.5% year over year to $9.3 million including the acquisition expenses related to Burger King Restaurants, increased field costs for the acquired restaurants and legal charges related to litigation. As a percentage of sales, general and administrative expenses spiked 20 bps to 5.5%.

Adjusted EBITDA, slipped 15.5% to $7.1 million in the quarter compared to $8.4 million in the prior-year, and adjusted EBITDA margin slipped 500 basis points (bps) to 4.2%.The drop in EBITDA margin was attributed to poor performance of the acquired restaurants and higher general and administrative expenses, partially offset by the favorable performance of legacy restaurant.

Store update

During the quarter, two restaurants were closed. As of September 30, 2012, Carrols owned and operated 572 Burger King Units versus 302 in the prior-year quarter.

Outlook

For full year 2012, based on the strength in its legacy business, management raised its same-store sales outlook for the legacy restaurants to 6%–7% from the prior range of 4%–6%.  The company expects commodity expenses to continue increasing in the range of 3–4%. Capital expenditure is anticipated to be in the range of $38 million to $42 million, which includes $24–$26 million for remodeling more than 80 restaurants.

Our Take

Despite the robust performance of the company’s legacy business, the acquisition of the 280 restaurants has weakened Carrols’ position. However, over time, Carrols, the largest franchisee of Burger King, anticipates performance at acquired restaurants to improve aided by better operations and effective cost management. To drive sales, the company is also aggressively pursuing the refurbishment of its restaurants and targets to remodel 80 restaurants in 2012.

However, fierce discounting wars among restaurant operators, lower consumer confidence and higher input costs remain areas of concern.

Carrols, which competes with Ruby Tuesday, Inc. (RT), currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are maintaining our long-term ‘Outperform’ recommendation on the stock.

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