Carrols Restaurant Group, Inc.

Good morning. Welcome to the Carroll's Restaurant Group, Inc. Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session and instructions will be given at that time. If anyone should need operator assistance during the call, please press star zero on your telephone keypad. I would like to remind everyone that this conference call is being recorded today Wednesday, March 3, 2021, at 8.30 a.m. Eastern Time, and will be available for replay. I will now turn the conference over to Tony Ho, Chief Financial Officer. Please go ahead, sir.

Thank you, Melissa, and good morning, everyone. By now, you should have access to our earnings announcement released earlier this morning, an earnings review presentation that are both available on our website at www.cows.com under the Investor Relations section. Before we begin our remarks, I would like to remind everyone that our discussion will include forward-looking statements, which may consist of comments regarding our strategies, intentions, or plans. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed on them. We also refer you to our filings of the SEC for more details, both with respect to the forward-looking statements as well as risks that could impact our business and results, including the impact of COVID-19. During today's call, we will discuss certain non-GAAP measures that we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles. The reconciliation to comparable GAAP measures is available with our earnings release. With that, I will now turn the call over to our Chairman and CEO, Dan Accordino. Dan?

Thanks, Tony, and good morning, everyone. Let me begin by briefly recapping the current state of our business and then briefly review our quarterly results. Tony will follow by discussing our financials in greater detail. After enduring one of the most challenging periods in our country's history, we believe the fundamentals of our business and the health of our company are extremely strong. Our liquidity position has improved substantially. Our near-term capital requirements are very manageable. We continue to deleverage, and we have grown comparable restaurant sales for the company's Burger King restaurants for three consecutive months through January. We further believe that the combination of vaccinations, continued stimulus aiding our core customer base, and easier year-ago comparisons will add to that momentum this year. For a long time, a recurring concern we have heard from investors regarding franchisees, including large ones like Carol's, was that we'd be perpetually hampered by onerous capital requirements imposed by the franchisors. Any free cash flow generated by the business would be required to go towards seemingly endless new store construction, refurbishments, and renovations. Additionally, some portion of those projects would inevitably have low returns on invested capital. Over the last three quarters and even through a pandemic, we believe we have demonstrated that those concerns were misguided. The nature of the franchisee-franchisor relationship can, in fact, be equitable, and despite being a franchisee, our business model enables us to generate significant pre-cash flow and direct a thoughtful capital allocation program to benefit our shareholders. In January, we shared that we had elected to amend our area development agreement with Burger King Corporation. forfeiting our right of first refusal on any Burger King franchise sale in portions of our geographic footprint. We felt then, as we do now, that Carroll's was being given little to no value for it. We also believe strongly that our ability to opportunistically acquire stores, should that be attractive, won't suffer as a result. In fact, we are still pre-approved to acquire up to 500 Burger King restaurants in territories where we currently operate. Under our new arrangement with our franchisor, we have the flexibility to grow our business organically and through acquisitions in a manner that we believe will best optimize our profit growth potential while generating consistent and enhanced free cash flow and keeping our leverage in check. What has permanently changed as a result of amending the Area Development Agreement is a meaningful reduction in our multi-year capital obligations. Long-time investors and followers of the sector have to reorient their thinking to this new reality. While acquiring restaurants in both brands remains a strategic objective, if compelling store-level returns aren't there, we won't chase them. We'll simply build free cash flow, further deliver our balance sheet, and return cash to shareholders through the repurchase of our own shares. We generated free cash flow of $56.1 million during the full year of 2020 and utilized $10 million of cash to repurchase 1.5 million shares in the fourth quarter after we reinstated our repurchase program. We think growing free cash flow while permanently retiring shares on an opportunistic basis will be beneficial to shareholders over time. Our business generated a meaningful level of free cash flow last year, and we believe that we can continue to generate strong free cash flow. While we will leave it to the analysts and investor communities to determine what the right multiple is for our business, we certainly believe that our current stock price doesn't reflect our current level of free cash flow generation. I would also note companies can boost their free cash flow metrics for periods of time by starving their business of much-needed capital. We have not done that, and we will not do that in the future. We are targeting a $60 million net capital expenditure spend for 2021. This is modestly higher than our earlier plan, but reflects what we believe will be strong ROI initiatives, such as an acceleration of our digital menu board rollout, some new equipment at our Burger King restaurants related to preparing the brand's new chicken sandwich, and remodels and new builds that will be at or slightly above our previous intentions. Still, we feel very comfortable making these investments in our brands, and they do not detract from our commitment to generate meaningful free cash flow. Longer term, we feel good about the promotional calendar ahead of us with its emphasis on value and new product offerings and are excited by the testing of a new loyalty program. We are also pursuing a number of acquisition opportunities now that we are close to completing the integration of the large number of stores we acquired in 2019 and And we see white space in our geographies for high-value, high-return new store development. Turning to our fourth quarter results, we demonstrated our resiliency with improving trends at our Burger King restaurants in November and December compared to October, despite the challenging operating environment. Our Popeye's restaurants lapped the full introduction of the well-received chicken sandwich, yet still delivered positive comparable restaurant sales on a two-year stack basis of 8.3%. Comparable restaurant sales in January for our Burger King restaurants improved 5.5%, which was greater than we expected. February has been another story, however, due to some unprecedented severe winter weather in all of our regions, but particularly in the South Central region. Fortunately, spring is around the corner, and we expect to show renewed momentum in March as we begin to lap COVID-impacted 2020 performance in the latter part of the month, and Burger King launches what we believe to be a best-in-class chicken sandwich offering. Our geographically diverse restaurant portfolio of nearly 1,100 restaurants across 23 states has provided us somewhat of a cushion in dealing with the pandemic, given the shifting rise in cases. It has also helped limit short-term staffing and supply issues across our portfolio. In the fourth quarter, we performed relatively better in the Northeast, but worse in the South Central region, as Tony will elaborate more specific terms. As you all know, our service model is centered on convenience through drive-through at the counter, takeout, and small but growing delivery business. These attributes have enabled us to navigate COVID better than our full service peers because these channels are more resilient sales platforms than depending primarily on sit-down dining. Whether it's indoor or outdoor and subject to ever-changing capacity restrictions, the majority of our dining rooms remain closed in the fourth quarter based upon mandates or at our discretion. We are open for takeout only. Delivery comprised approximately 3.5% of our Burger King restaurant sales during the fourth quarter, with an average order size of $17.02. In January, delivery accounted for 4.6% of sales. These improvements are up from 2.9% in the third quarter as more customers sought out this enhanced level of convenience, particularly in colder climates. Our four delivery partners, DoorDash, Uber Eats, Postmates, and Grubhub, are now providing fully integrated delivery services at approximately 889 of our Burger King restaurants, up from 870 at the end of the third quarter. Looking ahead, we believe that more of our Burger King restaurants can provide a delivery option as providers begin servicing their markets in a meaningful way. Turning now to fourth quarter profitability, we were able to improve restaurant-level EBITDA. adjusted EBITDA, and adjusted net income compared to the same period a year ago. Even excluding the impact of contributions from the additional operating week, we still enhanced profitability margins on lower comparable restaurant sales. Within our four walls, our traction was reflected in lower food waste as we have adjusted our production requirements based on our shifts in certain day parts, and even more so in labor where we have incurred higher wage rates but have been able to modify labor hours based on day part sales trends. Our current team size for Burger King Restaurant averaged 21 employees during the fourth quarter, up from 20 in the third quarter and 19 in the second quarter. This slight increase was due to the normalization of certain labor elements depending on geography and local conditions related to the expansion of hours. We view this average as a reasonable target run rate going forward. By way of comparison, in the fourth quarter of 2019, we averaged 23 employees. In addition to favorable expense trends at the restaurant level, we've also benefited from reduced regional and corporate overhead by having streamlined our regional management structure and our training process. For the full year, we opened seven new Burger King restaurants, including one in the fourth quarter. We also permanently closed 34 underperforming Burger King restaurants. These locations were losing money in a post-COVID environment, and their closure should benefit our EBITDA in 2021. We believe we have a stronger company as a result of the actions taken last year, particularly with the addition of meaningful and profitable delivery sales and the implementation of certain cost savings initiatives that we expect will continue to benefit us throughout the year. Turning to our balance sheet, we remain in a strong position financially. We ended the year with $65 million in cash and $136 million available to be borrowed under our revolving credit facility. We believe we have a very manageable debt level of $494 million, given the attractive current interest rate environment with no near-term maturities, and we have no outstanding borrowings under our revolving credit facility. One recurring theme we have been asked about lately is the discussion in Washington about a federal minimum wage increase to $15 an hour. While it is unknown if and on what timeframe this could become a factor in our business, we would like to point out some of our thoughts on the topic. In New York State, where we will reach a minimum wage rate of $15 an hour this summer for fast food workers specifically, this change has not altered the fact that these are some of the best performing restaurants in our portfolio. In fact, EBITDA of our New York restaurants has grown 10% over the past five years, despite that increase in the minimum wage rate during the same period. We have seen that in an environment where just a small proportion of employees are earning upwards of $15 an hour, our sales benefit even without the ability to raise prices. We believe that in a situation where all workers benefit from higher minimum wages, we will have the ability to reassess restaurant staffing levels and raise product prices more aggressively to offset rising labor costs. In closing, we believe that we are well positioned to execute on our stated goals and can now step up our organic and non-organic growth efforts in a balanced way while keeping our capital expenditures and leverage in check. Our game plan is to continue generating a significant level of free cash flow, and we are confident in our ability to execute on this objective. Finally, I would like to now end my prepared remarks by welcoming two new individuals to the Carol's team. First, Carl Houck recently joined us as chief operating officer. Carl has proven experience managing large-scale restaurant and retail operations, as well as a well-deserved reputation for growing businesses and managing costs. Most recently, he served as the president and CEO of the Wendy's division of NPC International, the largest Wendy's franchisee in the system. During his tenure there, Mr. Houck led that Wendy's organization to their most successful year in 2020. prior to their recently announced sale. Prior to that, Carl served as vice president of stores and co-CEO for Barnes & Noble, senior vice president of national operations and customer experience with Advanced Auto Parts, and worked in a variety of operational positions, including a district manager, director of operations, and regional vice president at Starbucks over a 14-year time frame. He also ran national operations in Australia and became a CEO managing director of Starbucks Switzerland and Austria where he led a complete turnaround of the business in the span of 24 months. I previously served as COO of Carol's from 1993 to 2011 before becoming CEO in 2012. While I do not have any immediate plans to retire, we do think it is crucial to build our bench especially given our anticipated growth. Second, Gerald Landau recently joined us as General Counsel. Prior to joining Carol's, Gerald was the Chief Operating Officer in General Counsel Barrington Capital Group, a value-oriented investment firm, Vice President of Law at International Specialty Products, and an attorney at Skadden Arps. We are confident that both Carl and Gerald will be valuable members of our executive team and want to thank Bill Myers, who we cajoled out of retirement after nearly two decades with Carol's to serve as our interim general counsel this past year. With that, let me turn the call over to Tony to review our quarterly financials.

Thanks, Dan. Total restaurant sales for the 14-week fourth quarter of 2020 increased 5.8% to $420.5 million compared to the prior year 13-week period of $397.6 million. During the incremental 14th operating week, we generated $28.4 million in restaurant sales. Comparable restaurant sales for our Burger King restaurants decreased 0.9% during the fourth quarter of 2020, outpacing the U.S. Burger King system by 200 basis points. You can see that our trends strengthened in November and December relative to the October results we previously reported. Similar to what we provided in P3, we believe it is helpful to give greater visibility to our Burger King performance by region. as we operate 1,009 restaurants as of the end of Q4 across 23 states. In the Northeast, representing 22% of our Burger King restaurants, comp sales were up 2.6%. In the Midwest, representing 27% of our Burger King restaurants, comp sales in the fourth quarter were off 1.8%. In South Central, representing 25% of our Burger King restaurants and consisting mainly of Tennessee, comp sales declined 4%. And finally, in the Southeast region, representing 26% of our Burger King restaurants, comp sales were down 0.7%. With respect to our Popeyes restaurants, comparable restaurant sales decreased 12.9% against a 21.2% increase a year ago as we lapped the bull roll out of the chicken sandwich in November 2019. Our Popeyes restaurants are located in the brand's weakest region, South Central, and this entire business represents less than 5% of our total revenues. Adjusted EBITDA increased $9 million in the quarter to $31.8 million, or just under 40% compared to $22.8 million in the fourth quarter of 2019. Adjusted EBITDA margin increased 190 basis points to 7.6% of restaurant sales. Note that the 14th week of the quarter contributed an estimated $5.3 million to this result and was responsible for about half of the margin increase. Looking more broadly, Comparing 2020 on a 52-week basis to 2019, adjusted EBITDA increased 18.8% year-over-year. Adjusted restaurant level EBITDA also increased $9 million in the quarter to $51.9 million from $42.9 million in the fourth quarter of 2019. Restaurant level adjusted EBITDA was 12.3% restaurant sales and increased 160 basis points compared to the prior year period. This year includes an estimated impact of $6.3 million or 70 basis points from the 14th week of the quarter. Even without the impact of the extra week in 2020, margins improved to the lowest cost of sales, labor costs, and other operating expenses as a percentage of revenue. Cost of sales improved 20 basis points and benefits from both less food waste and lower ground beef prices, which averaged $2.04 per pound during the fourth quarter. This marked a 10% decline from the year-ago period at $2.26 per pound. Greater promotional activity was offset by a favorable sales mix. Restaurant labor expense decreased 80 basis points as a percentage of restaurant sales compared to the prior year period, despite a near 6% increase in hourly wage rate and lower comfortable restaurant sales. The improvement is a reflection of the adjustments made to our labor requirements and hours based upon operating day part sales trends, along with having reduced our costs across most restaurants that are not operating dining rooms. Late night hours are still weaker than prior to COVID, and restaurants that were previously open 24 hours are still closing at midnight. Restaurant rent expense decreased 30 basis points as a percentage of sales compared to the prior year period, primarily due to the impact of the extra week in 2020. Other restaurant operating expenses decreased 60 basis points as a percentage of sales compared to the prior year period due to lower utility repair maintenance and other operating costs that benefited from dining room closures. Operating expenses in the fourth quarter included $337 of COVID-related supplies, including face masks, thermometers, sneeze cards, and sanitizers. General and administrative expenses were $24.2 million in the fourth quarter of 2020, which includes a half a million dollar higher bonus expense due to improved operational performance compared to last year. The quarter also includes the impact of many corporate cost deficiencies such as streamlining our regional management structure and reengineering of the training process that were completed earlier last year. These savings are expected to carry over into 2021. Our net loss was $18.6 million in the fourth quarter of 2020, or 37 cents per diluted share. This includes an adjustment of about $12.9 million in the fourth quarter of 2020 to record an incremental valuation allowance for certain income tax credits that may expire prior to their usage by the company. On an adjusted basis, excluding certain non-operating items in the tax adjustment, fourth quarter adjusted net loss was $5,000 or $0 per share. In the year-ago period, adjusted net loss was $6.1 million or $0.12 per share. Free cash flow generation was strong in 2020, and as a result, our adjusted leverage ratio under our credit agreement stood at 3.82 times at January 3rd compared to 4.06 times at September 27th of last year. While we are not providing a full outlook for 2021, here are a few guidelines to keep in mind. We believe that with the current outlook for lower beef costs in 2021 compared to last year, our cost of sales and percentage of restaurant sales will remain in line with 2020 levels, and such savings are likely to be largely offset by higher delivery and food distribution and other commodity cost increases. We expect modest labor due leveraging as a result of wage increases of about 4% across our restaurants, as well as higher staffing levels expected in the back half of the year. G&A costs are expected to increase modestly on an adjusted basis due to the short-term pay and travel reductions experienced in 2020, but are expected to remain flat as a percentage of sales. As Ben said, our net capital expenditure this year are targeted at $60 million. This is obviously higher than the $50 million range we provided previously and is changed based on the following items. First, we decided to accelerate the rollout of our digital menu boards to 500 or outdoor digital menu boards to 500 restaurants this year, which is up from our original plan. Second, we will be installing new kitchen equipment at our Burger King restaurants for sandwich preparations in anticipation of the brand's new crispy chicken sandwich which cost an additional $5 million and was not included in our original range. Third, we are now planning on remodeling about 30 restaurants, of which about five will be Popeyes. This is at the high end of our previous plan. And fourth, we now expect to develop and build 9 to 11 new restaurants this year, of which we believe all but a few will go online during 2021. Note that in 2020, our net capital expenditure spend was about $47 million and consisted of 19 remodels and seven new restaurants, in addition to $13 million in maintenance capex. With a continued favorable QSR environment, the near-term launch of a loyalty program, and a meaningful new food product coming in the next few months, we are optimistic about the year ahead. We expect to generate strong free cash flow again this year and plan to allocate that cash flow in a way that we believe will be beneficial to our shareholders. And with that, Operator, let's go ahead and open the lines for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Jake Bartlett with Truist Securities. Please proceed with your question.

Great. Thanks for taking the questions. You know, my first is kind of a broad one, but it's really the impact of reopening, you know, post-COVID or as COVID wanes and the impact on the QSR industry. And so it was really helpful to see your same-store sales by region, but I'm also noting that there seems to be a correlation between the positive same-store sales and markets that are most closed from a restaurant perspective. So broadly, do you expect the reopening or what impact do you expect the broad reopening and consumers getting out and about and also going and dining in to have on the QSR space and, for instance, the spike in drive-thru sales that you've had?

Jake, this is Dan. You know, our experience has been that as states reopen in whatever fashion, and it's difficult to define what reopen means because they'll open dining and then close dining and reduce capacity and that sort of thing. As more people are out and about, excuse me, and on the road, our sales benefit, whether you have more casual dining or full-service restaurants open with any seating or not. So I would expect that fast food sales in general will still continue to be a very resilient sector as it relates to increased delivery, which is ever increasing, and continual utilization at a very high level of takeout and drive-through.

Okay, great, helpful. And then also, as we think about kind of recent trends, and it was helpful to see and encouraging to see the spike in January, it sounds like there's been a reversal in February and understandable with weather. But could you give us a sense as to how the kind of the February sales have been on a regional basis up here in the Northeast? And it seems pretty normal year over year. But, you know, any kind of comfort we can have with the trajectory of the business by looking at the regions maybe least impacted by the weather?

The Northeast is still performing at the highest level, and that's been least impacted on a year-over-year basis by the weather. The primary weather impact has been in Tennessee, Mississippi, some of the Carolinas in that area. Tennessee was particularly hit hard. At one point in time, Memphis had more snow than Syracuse.

Right. As you look at the Northeast in February, was it similar to to January, or was there anything else impacting the trajectory of sales than weather that you can tell?

Yeah, as soon as the stimulus, we got a big impact as soon as the stimulus came out, and then as the stimulus was used, you could see a bit of a sales deterioration across the board. So the stimulus absolutely helped, and we're very much looking forward to the next round of stimulus checks

Great. And then last question. What influenced your decision to step up capital spending and increase remodels, open a few more stores? What was the driver of that versus a couple months ago when you had a lower expectation?

Well, the number of remodels – oh, go ahead, Tony.

I was just going to say that, yeah, we were on the high end of remodels and remodeling we just saw the opportunity to step up those restaurants and improve those restaurants. We had room under our dollars budget. The biggest thing, I think, was the restaurant equipment that was neat that we didn't really foresee as much as it came to light in the fourth quarter in terms of what we had to spend both at Popeye's and at Burger King for the equipment. I think that plus the outdoor You know, the outdoor digital menu boards added about $15 million. So that's really the delta between where we were and where we are. And, you know, once those are installed and once that equipment is installed, you know, we'd expect it to be kind of a one-time issue. But we still wanted to build the base and have the organic growth in the base that we had forecasted before and actually are at the high end of those levels.

And just to understand, I'm surprised that the equipment was a surprise, I mean, I understand You know, the sandwich has been in test. Has there been a shift in or some sort of a change in how, you know, operationally how this is going to be executed?

No. We only had the chicken sandwich in half a dozen restaurants, so we had only bought the equipment for that number of restaurants. So now that we're in the throes of a national rollout, we've had to buy that equipment for the whole balance of the Burger King system.

Okay. Thank you very much. I appreciate it.

Thank you. Our next question comes from the line of James Rutherford with Steven Zink. Please proceed with your question.

Hey, Dan and Tony. Good morning. And sorry in advance, I've been bouncing between calls. So if you've talked about this, my apologies. But I wanted to talk about that chicken sandwich. You noted that it is best in class in your view. Can you talk about what portion of your sales the previous chicken sandwich drove, at least roughly, and then what kind of uplift you're seeing in tests. So really that uplift to help us kind of gauge that. And then if you expect you would need to modify labor hours given the additional complexity of the sandwich production.

James, this is Dan. We're just now in the very early stages of the chicken sandwich, so And it has not yet been advertised, so I can only respond to, you know, what's happened in the other test markets outside of Carol's where there's been more restaurants involved. And as I said on the last call, I think it was doing quite a bit better than the – significantly better than the existing chicken sandwich. But at this point in time, I would be reluctant to put any sales lift on what we think it will do because we're just now rolling it out. In terms of the labor impact, it will require a dedicated person if the number of sandwich units that we hope for in terms of when it's marketed, if it generates that level of revenue, it will be one more person.

Okay. Okay. Fair enough. And one more, if I may, on restaurant level margins, 12.3% in the quarter. I think I saw that 70 basis points of that came from the extra week. But even excluding that, it's still up nicely from the 10.7 year over year. What were the biggest pieces of that? And more importantly, how do you think about sustainability of these elevated unit margins for the full year of 2021? I heard some of the color changes. that Tony gave on the various lines within restaurant expenses, but just in terms of sort of the overall impact as we calibrate our models to restaurant margins and how those would progress through 2021. Thank you.

Yeah, the other item, the biggest item was labor in Q4 that drove the improved margins and then other operating costs were better than we had, you know, better than we had expected. So I think those two things were the big driver of you know, the $2 million deed on adjusted EBITDA. You know, going forward, you know, for the first half of the year, there are very few costs that are coming back. There's some increment in the number of managers in the stores coming back in the first half just to relieve some of the pressure there. And then, you know, we'll see how the market opens up. But, you know, we expect that there will be some headwinds on labor in the back half of the year. And then some of the other cost savings – You know, particularly in the corporate overhead that we put in place, you know, for the most part, especially related to trade training and that sort of thing, we expect to stay at sort of the lower levels that we saw last year because it was effective in the way we did it last year with less travel. But, you know, there will be some travel coming back on the G&A line this year, we expect. And, you know, there's some other, and as I mentioned, some labor issues. you know, some productive labor in the back half of the year should go up a little bit. So those are some headwinds that will come, you know, sort of post-COVID. But, you know, we expect to, you know, we expect to see things stay pretty steady state in the first half of the year.

Okay. Much appreciated. Thanks, guys.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Jeremy Hamblin with Craig Helm Capital Group. Please proceed with your question.

Thanks. And I wanted to just come back to the February results just to see if we could, you know, pin it down a little bit more. So obviously some deceleration. Could you quantify the magnitude of that in more detail?

Sure. Sure. We expect it to – be about a two to two and a half percent impact, you know, on February. But again, you know, it's weather related. It's very unusual what happened in February. So we really, you know, now that spring, you know, we've seen in February since the weather has sort of been past us that things are improving, you know, improving back towards what we were seeing in January and frankly the first week or so of So we're seeing, you know, we're seeing those things normalized pretty quickly post the storm. So it's a one-time blip. You know, everyone in the industry is going to feel the pain of that. But it's a modest, you know, it's 2%, 2.5% of, you know, we lost 2%, 2.5% in February. So it's not, you know, it's not a big thing. And, you know, overlapping, you know, as we start to lap the March COVID reductions last year that were, you know, 20 plus percent, we think that the comps will recover nicely for the quarter.

Gotcha. And in terms of thinking about that weather impact that, you know, just pointed out, you know, in the northeast, you know, it's kind of been somewhat typical type of weather. Are you seeing a bigger impact in that, you know, south central and southeast you know, more than that two and two and a half percent in terms of impact on the weather versus the Northeast maybe having a very minor or no impact. Definitely, definitely. Okay, fair enough. I wanted to ask about store closures for 21. You know, you ended up with like 34 total closures in 20. In terms of thinking about a range of expectation on 21, I might have missed that, but what are you looking at?

You know, our current view is, you know, we sort of took care of business, you know, that business in 2020, so maybe one or two in this year. So it shouldn't be, it won't be a big factor. You know, the growth is obviously going to outweigh, you know, outweigh the you know, the closure in 2021. That's our current expectation for sure.

Okay. And then the next question comes back to the chicken sandwich. And, you know, I think the last messaging corporate wide was a little bit of a cryptic message in terms of, you know, wanting to get the launch right, which, you know, we assume meant that it was going to be a little bit later than maybe previously had been viewed, in which I would have thought the launch was happening first half of the year, maybe, you know, even by April timeframe. Can you give us a sense for, you know, because this really implies, you know, a national marketing campaign and support for it. Is this something that we should now be thinking about in like the second half of 21 in terms of national support?

No. No, the launch will be completed in May.

Okay, great. And then just coming back to the trends on delivery, I think you quoted that the average ticket was like just over $17 in Q4. In terms of the trend on that, has that been slightly pulling back from what you had been I think the number was maybe a little closer to $18 before. Any noticeable trends that you're seeing in terms of the size of your average ticket on delivery?

In January, it went back over $18, Jeremy. And it was – I think it was like, as we said in the script, it was 4.5% of sales. So it's picked up in volume and it's picked up in – I mean, I think we generated – $6 million in January in delivery sales. So it's double what we were seeing, you know, when we first launched it or, you know, when we were sort of mid-launch. So it's definitely picked up. It's definitely picking up steam in January. So it was a temporary decline, you know, in that $17 number, I think. Definitely saw it pick up as the weather got colder.

Gotcha. Yeah. And then I think you cited B price, $2.04 a pound in Q4. Where is that level today? And then what are some of the other, because you noted the cost of sales expect to be in that kind of 21.2, 29.3% range for the year. What are some of the other commodity pressures or benefits that you're seeing? But where is B prices today? Okay.

Beef today is $2.07. And I would say the other, you know, I'd say chicken is, you know, probably some short-term pressure on chicken. But as I've learned in the last year of doing this job that, you know, the chicken supply can be filled faster than the beef supply. So I think that will adjust as we go forward. But that definitely, you know, we're seeing some increase there. And that's about 10. On the Burger King level, that's about 10%. pre-chicken sandwich salon, so it might go up a little bit in terms of the total commodity basket.

Tony, you can speak to the fact that we put our delivery fees and our cost of sales not in operating expenses as well.

That's true, too.

So when you're comparing, Jeremy, our cost of sales to others, we look at the delivery fee as a cost of sales expense. And I know at least in Burger King system, the majority of the operators put it as an operating expense.

That's helpful, Culler. And what was the delivery fee in terms of basis points on your COGS in 2020?

About 40 basis points.

Great, guys. Thanks so much, and best of luck this year in 21. Thank you.

Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your question.

Thank you, and good morning. I just wanted to circle back. I appreciate the incremental color on the February trends. Just to make sure I'm interpreting your comments correctly, I think you said you lost about two or two and a half percentage points of altitude That's versus January, so it's right to interpret that, that your Burger King system was somewhere in the threes. I just wanted to clarify that.

No, that was calculated. It's really as a percent of sort of the days in February that we lost compared to the total restaurant days in February. So it would be February versus February, not February.

Okay, but the underlying momentum of the business somewhere within the mid-single digits, the comparisons are pretty similar, February versus January before COVID hit. So could you just help us with what, you know, just to make sure we're all on the same page?

Well, I mean, I think the important thing is that March 2020 was down 16.8% last year, and, you know, and January was up 5.5%, and you're going to see stimulus. Again, you know, I view the one week in February as, first of all, industry-wide and not that material. I think the big comp momentum is going to come, you know, as we start lapping March 2020. And even if we stayed, you know, where we were, if we stayed flat to January, you know, obviously we'd see some nice numbers in March, and that'll really help the quarter. So I do, you know, I don't want to pay too much attention to a weather anomaly as a long-term driver of our value in our business when, you know, when March and April was down 22% last year. And, you know, we're going to see some very strong comps and, you know, from this month on for several months. And then we have the chicken sandwich and we have stimulus and, So, you know, again, I wouldn't put too much emphasis on a strange, you know, very anomalous winter storm that affected a week in February.

Tony, I couldn't agree with you more. I'm trying to level set expectations and models for the first quarter. It's noise that's under, you know, water under the bridge at this point. It's more about just setting expectations. Maybe I'll ask it this way. Could you level set where average weekly sales trends are quarter to date for each brand?

I don't have that quarter to date. I mean, January we were, you know, we were up 6.5% on AUV versus last year, I think. Okay.

I'll follow up offline on that. Switching to the dining room, status of the dining rooms, I think you said nearly all are still currently closed. What's the latest thinking on the potential timeline for when those might reopen across your system?

Well, closed is a, this is Dan, closed is a nebulous term. All of our dining rooms are open. We have opportunities for seating in probably 30% of our system. Whether or not they get used on a regular basis is another matter. But we've been open for takeout every place and still are. In terms of opening the dining rooms for a greater level of seating, it's store-specific, frankly. We've got some rural stores where the guests really want to sit there because that's a social gathering place and that sort of thing, and we have more seats available and, in some cases, the entire dining room available in those restaurants. So we're making those decisions individually by restaurants. But all of our dining rooms are open and have been open for takeout.

All right. Thanks for that clarification. And you talked about adding some hours as you move through 2021. Is part of that related to an assumption that you reopen dining rooms further or seating capacity further later in the year?

The second half of the year, we're assuming that once the vaccinations are further ahead and COVID is in a different place, that we will have more opportunities for seating. As you have more opportunities for seating, we're going to have to add a bit of labor in order to, from a maintenance standpoint, for maintaining the restrooms and the dining rooms. So there will be some of that. But as I indicated around the chicken sandwich, the chicken sandwich, the expectation is that will be a dedicated person, not only in terms of the amount of sandwiches that we expect to sell, but you're dealing with a raw product. And as you're dealing with a raw product, that person has to be dedicated to that station. They can't move between areas. Yes.

Understood, understood. Last one for me, I just want to ask about the digital menu board. Can you remind me how many you have installed at this point, the outdoor digital menu boards, at the end of 20? And then could you expand on the benefits that you're seeing? What are you seeing in terms of average check, customer satisfaction, any improvements in terms of throughput and the drive-through? Thank you.

Yeah. It's difficult to determine what the impact of digital menu boards is in a COVID environment when you've got 80 plus percent of our sales coming through the drive-through and check averages are up, whether you have a digital menu board or you don't. Customer satisfaction from an NPS standpoint seems to be a bit higher because of the visibility of the boards. And in terms of throughput, the throughput is purely a function of whatever your staffing levels are in the restaurant and whether you have two windows so that you have a cash window and a pickup window and that sort of thing. The real benefits of the digital menu board, other than the existing visibility improvement, will occur when Burger King gets further along with interfacing digital menu boards with the loyalty program where they can identify guests as they go through the – the drive-through with artificial intelligence that we will have software implemented in the new digital menu boards, and the hope is that we'll have that in 2021 as well.

Brian, we're up to about 250, and then we'll add another 500 this year. Great. Thank you, Tony.

And we'll have them all in Popeyes, too, by the end of 2021.

Yeah, that was another addition to CapEx for the year.

Thank you. Our next question is a follow-up from the line of Jake Bartlett with Truett Securities. Please proceed with your question.

Thanks a lot. You know, Jen, I had a question about, you know, the Burger King's focus on food quality and, you know, taking preservatives out of the Whopper, et cetera, seems to be a real brand-building effort. What do you see maybe in terms of surveys or customer reactions to that? Do you think that's either a long-term or a near-term needle mover for sales or for brand perceptions?

You would have to ask Burger King in terms of the brand perception because I don't see the brand perception research In terms of our guest satisfaction surveys, it measures food temperature, food taste, food quality, that sort of thing. It doesn't speak to whether or not you've improved or eliminated any artificial ingredients. So in terms of overall brand perception of everything being natural, I guess that's where the industry is going. So I would expect that it would be positive for the brand. but I certainly couldn't put any sense of a sales improvement on it, no.

Okay, great. And then, Tony, you mentioned commodities, you know, certainly being favorable now, and it sounded like you expected them to be favorable for the year as a whole. You know, I have some commodity sources that, you know, that think that their estimates are for a spike in beef costs and beef trimming costs towards the back half of the year. How much visibility do you have on your supply, and how confident are you that you're going to see a, you know, a, you know, helpful kind of commodity environment.

I mean, we, we get our information from RSI, which is our food co-op and based on their research, that's what they're, that's how we get our forecast, which is that we put in our budget.

Okay. And then, and then again, maybe just lastly on, on acquisitions, you've talked a couple of times about some kind of bullet on acquisitions, not very big, Can you give us just a sense for modeling purposes how many of those might be or when they might be closed? And then also just any insight as you rebuild the acquisition pipeline, you know, how that's coming together. Is it a good environment to acquire stores right now? How confident are you that acquisitions can really become a part of the growth story here?

Yeah, we've got a few deals that we're currently working on, Jake. And I would expect that we will have two acquisitions with a total of 19 restaurants. We're going to go to contract on those within the next month. So I would expect that we would have those things closed in the early part of the second quarter. And beyond that, we've got a few more deals that we're taking a look at. But in the near term, I think it would be fair to model 19 restaurants.

Great. Are you feeling good about the supply of potential deals out there? I don't know what impact COVID has had, you know, on the dynamics that drive the transfers. But any insight there would be helpful.

I think, yeah, I think that the once, now that we have signaled to the world that we're back in an acquisitive mode, the number of inquiries certainly has increased, and I would expect that that will continue through the balance of the year, Jake.

Great. I appreciate it. Thank you.

Thanks, Jake.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Hull for any final comments.

I appreciate everyone joining us for this call, and we'll speak to you in May. Talk to you later. Bye-bye.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.