Description

Overview

Fiesta Restaurant Group (FRGI), in our view, is an undervalued company in the early innings of a turnaround. The company has two proven, yet separate concepts with top notch management. On February 27, 2017 FRGI announced the appointment of Richard Stockinger as CEO and President in the midst of proxy fight, which FRGI successfully won on June 7, 2017. Prior to joining FRGI Mr. Stockinger guided a successful turnaround and significant shareholder value creation of Benihana a s President and CEO. During his tenure, Benihana rose from $1.88 to $16.30 per share over a period of three years, and was finally acquired by PE firm Angelo, Gordon for $296MM.

Upon his arrival at FRGI Mr. Stockinger developed and began implementing “The Strategic Renewal Plan” designed to improve the core business model and drive long-term shareholder value creation consisting of the following: 1) revitalizing restaurant performance in core markets 2) managing capital and financial discipline 3) establishing platforms for long-term growth 4) optimizing each brands’ restaurant portfolio. And while this is plan being implemented FRGI has declined -62.5% presenting patient and opportunistic investors a very compelling opportunity.  We believe shareholders of FRGI will be rewarded either by refranchising or other strategic alternatives.

Fiesta Restaurant Group (FRGI) owns, operates and franchises two restaurant brands Pollo Tropical and Taco Cabana, which have almost 30 and 40 years, respectively of operating history. Pollo Tropical features citrus marinated, fire-grilled chicken and other freshly prepared tropical inspired menu items, while Taco Cabana restaurants specialize in Mexican fare made fresh by hand.

Pollo Tropical

Pollo Tropical opened its first restaurant in 1988 in Miami, Florida. Pollo Tropical locations are generally freestanding and range from 2,800 to 3,700 square feet, average sales transaction is $11.63, with sales at dinner and lunch representing 52.9% and 47.1% respectively.

Taco Cabana

Taco Cabana pioneered the Mexican patio concept with its first restaurant in San Antonio, TX in 1978. Taco Cabana’s are typically freestanding and average approximately 3,500 square feet, average sales transaction was $10.47, with sales at dinner, lunch and breakfast 24.9%, 22.3% and 23.4% respectively.

FRGI’s corporate headquarters are based in Addison, TX, which gives FRGI three corporate headquarters, which was repeatedly highlighted in the in 13D’s during the proxy fight. This is obviously a big area where real expenses can be cut. Please note that during his tenure at Benihana, Stockinger reduced the corporate headcount from 100 to 60 people.

·        For the fiscal year ended December 31, 2018, average annual sales per restaurant was ~$2.5MM for Pollo Tropical restaurants and ~$1.8MM for Taco Cabana restaurants.

·        As of December 30, 2018 FRGI, owned 139 Pollo Tropical restaurants in Florida and 163 Taco Cabana restaurants located in Texas.

·        FRGI franchises 24 Pollo Tropical restaurants primarily in international markets; and five domestic non-traditional Pollo Tropical licensed locations on college campuses and one location in a hospital in Florida. There are six Taco Cabana franchised restaurants in New Mexico and two domestic non-traditional Taco Cabana licensed locations on college campuses in Texas.

·        FRGI is updating their franchise disclosure documents to support potential franchise growth in the future and currently primarily focused on growing non-traditional domestic licensed locations and modestly growing international locations

·        FY 2018 FRGI generated $668.6MM and comp sales increased 2.2% for Pollo Tropical and 4.5% for Taco Cabana; EBITDA of $81.7MM on an enterprise value of $630MM a conservative multiple of 10x is reasonable.

Insider Ownership & Board Representation

Jefferies Financial Group is the largest shareholder of FRGI with an ownership stake of 19.15% or 5.2MM shares.

·        5/31/2019 Jefferies bought 60,000 shares at $13.93

·        5/9/2019 Jefferies bought 167,809 shares at $13.03

·        Brian Friedman the Chairman of the Executive Committee of Jefferies Group LLC has been on the board of FRGI for 8.4 years; Mr. Friedman was a board member of California Pizza Kitchen which was acquired in 2011 by Golden Gate Capital at almost 15x EBITDA where the comp median is 10.8x.

Management Upgrades

·        8/21/2019 FRGI announced Dirk Montgomery as the new CFO; significant experience as a financial and operational executive in the restaurant, retail apparel, and consumer products industries, including multiple roles as CFO at various public companies. 

o   CFO of $1B Hooters International, where he was responsible for accounting, finance, technology and global supply chain

o   CFO of Bloomin’ Brands Inc. (BLMN) $1.78B market cap; responsible for supply chain and IT during his tenure at BLMN

o   CFO of HIIQ and ASNA

o   CPA from the state of Ohio and MBA from the University of Chicago

·        9/9/2019 FRGI announced that it appointed Hope Diaz as Chief Marketing Officer (CMO); a highly successful marketing executive with over 20 years of proven experience focused on developing bold and effective brand strategies and marketing campaigns; expertise in marketing and brand analytics which she previously utilized to successfully evolve Popeyes’ and Burger King’s brand identities; being a Miami native, Hope is very familiar with the Pollo Tropical brand “and its potential.”

o   Variety of leadership roles at Restaurant Brands International, one of the largest QSR companies which owns Burger King, Tim Hortons and Popeyes; most recently Hope was the Global Chief Marketing Officer at Popeyes, where she led all global marketing efforts, including the brand’s visual identity and restaurant image initiatives.

Conclusion

Overall, FRGI is low risk, high reward well managed dual brand restaurant concept with a lot of levers to pull for equity value creation from current levels. We believe patient investors will be rewarded by the progress of the turn around.

Catalyst

Turn Around taking hold