Carrols Restaurant Group, Inc.

Good morning. Welcome to Carol's Restaurant Group, Inc., second quarter 2021 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 require operator assistance during the conference, please press star zero on your telephone keypad. I would like to remind everyone that this conference call is being recorded today, Thursday, August 12th, 2021 at 8.30 a.m. Eastern Time and will be available for replay. I will now turn the conference over to Tony Hall, Chief Financial Officer. Please go ahead, sir.

Thank you, Doug, and good morning, everyone. By now, you should have access to our earnings announcement released earlier this morning and an earnings presentation that are both available on our website at www.carolls.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 forward-looking statements, as well as risks that could impact our business and results, including, among other things, 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 compared in accordance with general accepted accounting principles. A reconciliation to comparable GAAP measures is available with our earnings reliefs. With that, I will now turn the call over to our Chairman and CEO, Dan Accordino. Dan?

Thanks, Tony, and good morning, everyone. I would like to begin with some color on our recent performance before discussing the special cash dividend we announced earlier today. Afterwards, Tony will review our quarterly financials and outlook in greater detail. Beginning with our top line, comparable sales rose 12.6% during the second quarter at our Burger King restaurants, which was driven mostly by the 31.5% increase in April. Recall that in May 2020, comps declined only slightly, while in June of 2020, comp sales already turned positive. As a result, our sequential trend of comp sales growth slowed through the three-month period this year, but we're still positive throughout the second quarter. Importantly, relative to 2019, our quarterly comparable Burger King restaurant sales increased 7.8%. despite only serving approximately 89% of the traffic in the second quarter of 2019. We once again outpaced the overall U.S. Burger King system, as we have done for 20 out of the past 22 quarters. Using a calendar basis rather than the physical period basis we used to report, our second quarter 2021 comparable Burger King restaurant sales increased 14.2% compared to 13% for the entire U.S. Burger King system, reflecting a positive differential of 120 basis points. In July 2021, comparable sales at our Burger King restaurants increased 1.8% compared to July 2020 and improved 4.4% compared to 2019 on a same-store basis. Turning to the promotional calendar, Burger King emphasized several new product and value offerings during the second quarter, Most notably among these was the hand-breaded chicken sandwich, which was promoted with extensive national advertising beginning in June. The campaign established tremendous awareness for Burger King's new chicken sandwich, which we believe is best in class, and we doubled our crispy chicken sandwich sales per store. From a value standpoint, Burger King's focus was on the buy one, get one, plus a dollar offer as an alternative to the two-for-five platform. Interestingly, and perhaps not surprisingly, the new chicken sandwich has fared better within our Northeast and Midwest regions, but sales have not been as strong in the South Central and Southeast. We believe that the concentration of chicken-based QSR restaurants based in the South, coupled with numerous chicken sandwich introductions across the industry by our peers, has weighed more heavily on its reception in these regions. We are encouraged by the rollout of Burger King's Royal Perks Loyalty Program, which is geared towards increasing the level of one-on-one engagement Burger King has with its customers, reducing the use of paper coupons and driving traffic to weaker day parts. This platform provides the brand with valuable data and insights, and members of these types of programs typically show higher spending frequency as compared to non-members. So far in 2021, mobile orders accounted for about 1% of our sales. We are confident Burger King's new loyalty program will accelerate the growth of this distribution channel and drive increased traffic by improving customer engagement. During the second quarter, all of our dining rooms were open, and they remain so today despite the emergence of the Delta variant. Dining room usage increased during the quarter at our Burger King restaurants, where eat-in and take-out combined were tracking at about 14% of total sales by June, and drive-through was down to approximately 80% of total sales compared to the mid 80s during most of our COVID impacted months. Last year during Q2, only about 20% of our dining rooms were open. On a related note, delivery comprised 4.7% of our total Burger King restaurant sales during Q2, up from 2.8% in Q2 last year and flat with 4.8% in Q1 of 2021. The average check size rose sequentially to $17.56 from $17.51 for delivery The overall second quarter average check for Burger King was $9.01, including delivery. Integrated delivery services are available at about 90% of our Burger King restaurants in most of our Popeyes locations. At its current $20 million quarterly run rate, review this convenience option as an ongoing sales contributor, even when the pandemic subsides. Turning now to profitability, adjusted restaurant level EBITDA declined by 11.6% compared to the same period in 2020. as margins decreased by 340 basis points to 11.3% of restaurant sales. The magnitude of the margin compression we experienced in the second quarter was driven by two main factors. First, our objective to increase the operating hours of our stores to take advantage of the strengthening post-COVID economy in the face of severe labor constraints. And second, a spike in food and labor input costs as the entire economy opened at the same time. Food, beverage, and packaging costs as a percent of net sales increased primarily because of higher pork and other commodity costs along with the incremental impact related to higher delivery activity. Although these increases were partially offset by menu price actions we instituted in March of 2021. Labor costs as a percent of net sales also rose sharply due to the contrast between the beneficial labor environment that was in place in the second quarter of 2020 during the early stages of the pandemic and the incredibly tight labor market experience in the second quarter of 2021 during the reopening phase of the pandemic. I can tell you that the velocity and magnitude of the change was greater than anticipated as the second quarter unfolded. The most significant unexpected headwind was the nearly 12% increase in average hourly wages for our team members, including overtime. This cost us approximately $3 million more than we had planned and was driven by competitive pressures as well as difficulty filling positions during operating hours. The other major labor headwind came from our inability to staff our restaurants properly with managers at the beginning and end of each day. We were required to pay premium to team members to open and close restaurants, and this also cost us about $3 million. In the second quarter of 2021, we also provided standard overtime hours to assistant managers that were restricted in the year-ago period. Our team size per Burger King restaurant averaged 21 employees during the second quarter of 2021, which was similar to the first quarter, but higher than the 19 we averaged in the second quarter of last year. As a consequence of the expansion of operating hours, however, these employees are having to work more hours per week. In late July, we increased menu pricing by another 2% and plan to do the same in October, as well as implement other menu price increases that we may deem necessary as the year progresses. You may recall that we had intended to hold pricing at about 2% for the entire year, but given the challenges we are seeing with respect to restaurant-level input costs, we intend to use the flexibility we have to take additional pricing in the midst of this more elastic economic environment. We expect that the incremental benefit to our bottom line from these pricing actions should help us largely offset the current high-cost environment. Turning to our restaurant portfolio, we acquired 19 Burger King restaurants late in the second quarter in two separate transactions. These restaurants are located in Indiana and Michigan, two Midwestern states where we already have a significant presence. We believe that we can improve upon the average sales volume of these restaurants and increase their margins over time as we integrate them into our existing operations. We currently have no additional multi-restaurant acquisitions in the pipeline, given the high multiples we are seeing being paid for QSR acquisitions in the private market. In the past year, we have not only increased our available liquidity to over $175 million, but also reduced our total net leverage to 3.8 times from last 4.18 times a year ago. Today, we believe our liquidity is ample, as is our ability to generate consistent earnings. Consequently, we expect to be able to continue to invest in strong return, producing organic growth through remodeling our existing restaurant portfolio and building new restaurants, as well as acquiring restaurants in both brands when they can be purchased at reasonable multiples. Given this backdrop, as well as confidence in the outlook for our business, our Board of Directors concluded that the company should move ahead with plans to return capital to our stockholders in order to further enhance shareholder value while keeping our leverage in check at under four times over the cycle. As highlighted in our earnings release this morning, our Board of Directors approved a special cash dividend of $0.41 per share, which will be paid October 5, 2021, to stockholders of record as of August 25, 2021. This $25 million special cash dividend marks the first dividend we have paid in nearly 15 years as a public company. So to conclude, we are facing our cost challenges head-on with more aggressive pricing, which we believe will stabilize margins in the back half of the year and positively impact overall EBITDA levels. Our franchisor is also working with us and other Burger King franchisees to optimize value menu items in order to relieve margin headwinds At the same time, the flexibility we now have with respect to our balance sheet is enabling us to tangibly demonstrate our commitment to using resources at our disposal to enhance value for our stockholders. With that, let me turn the call over to Tony to review our quarterly financials. Thank you, Dan.

Total restaurant sales for the second quarter increased 15.2% to $424.5 million. compared to the prior year period of $368.4 million. Our Burger King comparable restaurant sales increased 12.6% during the quarter, with average weekly sales per Burger King restaurant of $30,700. This is an improvement of 14.7% from 2020 levels, and more importantly, exceeded 2019 levels by 7.8%. Increased contributions from new and post-COVID reopened restaurants is the primary reason for the difference between comparable and total sales growth in the quarter. Let me quickly give you our Burger King performance rate region as we operated nearly 1,030 restaurants as of the end of the Q2 across 23 states. In the Northeast, representing 21% of our Burger King restaurants, comparable sales were up 19.7%. In the Midwest, representing 29% of our Burger King restaurants, comparable sales were up 12.4%. In the South Central, representing 24% of our Burger King restaurants, and consisting mainly of Tennessee, comparable sales increased 10.6%. And finally, in our southeast region, representing 26% of our Burger King restaurants, comparable sales were up 6.6%. With respect to our Popeyes restaurants, comparable restaurant sales decreased 5.3% versus a positive 17.1% during the same period last year. While the brand experienced some pressure from competitors launching new chicken sandwiches themselves, Our results are favorable over the two-year period, and the majority of the growth is related to the continued strength of the brand's chicken sandwich. Our Popeyes restaurants represented 5.2% of our second quarter revenue. As a result of the inflation challenges experienced in the second quarter, adjusted EBITDA decreased $8.7 million to $29.3 million, while adjusted EBITDA margins decreased 340 basis points to 6.9% of restaurant sales. Food, beverage, and packaging costs, the percentage net sales increased 140 basis points, primarily because of higher pork and other commodity costs. Beef prices averaged $2.35 per pound during the second quarter, which was only a 50 basis point increase from the same period a year ago, when ground beef prices were at $2.34 per pound. Last quarter, we stated that our food supplier forecasted beef costs would be elevated during the summer months, but returned to roughly $2.30 per pound for the remainder of 2021. They have revised their forecast to between $2.40 and $2.45 a pound from September to December of 2021. They believe the same easing trajectory is likely to occur over the remainder of 2021 for all other commodities, including chicken. The one exception to this is pork, which they believe will remain elevated for the rest of 2021. Restaurant labor expense increased 200 basis points as a percent of restaurant sales in the second quarter of 2021 compared to the prior year quarter. Again, the dramatic contrast between the restrained operating environment we experienced in the second quarter of 2020 and the economy reopening during the second quarter of 2021 is something that we believe is unprecedented and certainly was not anticipated. It is worth noting that labor costs as a percent of net restaurant sales, which reached 32.4% in the second quarter of 2021, were lower by 70 basis points compared to that margin during the second quarter of 2019. In fact, adjusted EBITDA in the second quarter of 2021 was $5.2 million greater than the amount we earned in the second quarter of 2019. This is relevant as it compares this year's results to where we were prior to the onset of any pandemic related volatility that has impacted us over the past 18 months. Restaurant rent expense in the second quarter decreased 70 basis points as a percent of sales compared to the prior year period, primarily due to sales leverage. Other restaurant operating expenses increased 60 basis points as a percent of sales compared to the prior year period due to higher repair and maintenance, security, and equipment rental costs compared to a period of restricted operating experience in the prior year. General and administrative expenses rose to $20.7 million in the second quarter of 2021 from $18.6 million in the prior year but fell 10 basis points as a percent of restaurant sales. The increase in dollar terms was due to the lapping against training costs, short-term pay, and travel reductions experienced in 2020, and a half-million-dollar higher stock compensation expense this year. Our net loss was $9.6 million in the second quarter of 2021, or 19 cents per diluted share. This loss includes $8.5 million of non-cash charge relating to the write-off of original issue discount and other debt issuance costs that were paid and capitalized in earlier periods. On an adjusted basis, excluding certain non-operating items, second quarter adjusted net income was $16,000 or zero cents per diluted share. In the prior period, adjusted net income was $9.6 million or 16 cents per diluted share. Free cash flow for the second quarter of 2021 was $4.2 million compared to $48.6 million in the prior year period. Recall that in the second quarter of 2020, we reduced capital expenditures and took aggressive actions to shore up cash by managing working capital. In comparing the two quarters, these two items account for about $30 million, the reduction in free cash flow generation. The rest of the difference is primarily due to the $8.7 million reduction in adjusted EBITDA. We ended the second quarter with cash and cash equivalents of $56.2 million and long-term debt and finance lease liabilities of $521.5 million. We had $46 million drawn on our $175 million revolving credit facility and had $9 million of credits issued under such facility. This left $120 million of unused availability under our credit facility, and when added to our cash balance, provided us with $176.2 million of liquidity at the end of Q2. Our net debt compared to Covenant EBITDA as defined in our senior credit facility stood at 3.82 times at the end of the second quarter, compared to 4.18 times in the year-ago period. Dan mentioned our acquisition of 19 restaurants during the second quarter, for which we paid $30.8 million. I want to point out that we intend to complete sale-leaseback transactions on 12 of these acquired restaurants and expect to receive proceeds of approximately $20.1 million during the third quarter of this year. Adjusting our second quarter and net debt for this incoming cash lowers our net debt leverage ratio to 3.65 times and resulted in a net purchase price for the restaurants of $10.7 million. As previously announced, we completed a private offering of $300 million of senior unsecured notes due 2029. This transaction reduced our secured debt to $220 million and our secured debt to covenant EBITDA ratio to 1.36 times. As a result of this transaction, we now have a fixed interest rate on all of our debt for the next four years. During the second quarter of 2021, the company did not repurchase any shares of its common stock due to a limited trading window as a result of the private debt offering. The Board of Directors has approved an extension of the company's 2019 stock repurchase program, which was set to expire on August 2nd, 2021, and has approximately $11 million of its original $25 million in capacity remaining. The program will now expire on August 2nd, 2023, unless terminated earlier by the Board of Directors. In our last conference call, we provided a few guidelines on food, beverage, and packaging costs and labor trends for the remainder of 2021. After the unprecedented cost volatility that we experienced in our second quarter, we are reluctant to provide a revised outlook. The only knowns at this point are A, we increased menu prices in July and intend to do so again in October, and B, having drive-through and delivery channels provides us and other QSR operators with resilient top-line stability. In terms of commodity costs, we have no other guidance to provide other than Our food supplier believes that some of the levels we have seen this summer should begin to retreat with the exception of pork as the year progresses. We believe that labor cost margins will get some relief if higher menu pricing lifts net sales, and we continue to expect our labor margins for the full year of 2021 will remain below that of 2019 levels. We are also maintaining our net capital expenditures target at $60 million, consisting of rolling out outdoor digital menu boards to 450 restaurants this year, including our Popeyes restaurants. As of today, 689 of our restaurants have outdoor digital menu boards in place. New kitchen equipment that was installed at our Burger King restaurants for the preparation of the new hand-breaded chicken sandwich was also a part of the $60 million net capital expenditure number. Third, we expect in that number to remodel approximately 25 restaurants, of which seven will be Popeyes. And finally, we expect to build nine new Burger King restaurants, two of which have already opened and two of which should go online next year. We are also building one new Popeyes restaurant this year. To conclude, the quarter certainly brought us some unexpected challenges, but we think they are manageable and we continue to believe that we will generate meaningful free cash flow this year. In addition, the payment of a special dividend demonstrates our commitment to enhance shareholder value while keeping our leverage in check. And with that, Operator, Let's go ahead and open the line for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would 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 key. Our first question comes from the line of Jake Bartlett with Truist Securities. Please proceed with your question.

Great. Thanks for taking the question. My first was on the wage inflation that you talked about, the 12% wage inflation. As we think about how temporary that level might be, can you break down the impact of overtime in maybe training or versus the kind of the core underlying wage inflation that you're seeing today?

Yeah, excluding overtime, it was 11.9%, and excluding overtime, the increase is 10.4% on average hourly rates. So the overtime was a factor, but it was not a huge factor. It was mostly the supply and demand dynamic in the quarter.

Got it, got it. And then, you know, just in terms of the chicken sandwich tenders, I think in the past you commented that you're coming out of the gate fairly strong in a number of stores. It seems to have decelerated from that. Can you give any thoughts as to maybe why the sandwich didn't hit some of the targets I think that you and the system was hoping to see? And then also just the trajectory of the chicken sandwich sales. Did it come out strong and then decelerate? Any evidence that momentum might be stabilized or building? Any thoughts there would be helpful.

Yeah, this is Dan. The sandwich did come out quite strong and remain strong, as Tony said, in the Northeast and Midwestern markets. We were at, on average, for the entire company, we were in the mid-60s during the advertised launch. and it has decelerated to the point where we're now in the mid-40s.

Okay. And, Danny, just in the context of that, I believe you were selling about 28 of the prior sandwich. So I think the comment was you kind of doubled in the quarter, but now you're doing less than that now?

No, I think, yeah, I think we're not doubling what we were doing previously, but we're selling about, 18 or 19 more per day at the same price that we were selling the previous sandwich.

Okay. And again, as you think about just the remainder of the year, and I know in the past you've expressed some confidence just in the marketing calendar, promotional calendar, menu innovation, but as you look at the remaining five months we have here, how confident are you that there's some driver to an acceleration of comps or maybe just kind of holding or gaining some market share? As you look at the plan, how good do you feel about it?

Well, I think as RBI said in their call, they're doing a lot of things in terms of menu innovation, looking at the value portion of the menu, looking at how we can increase the advertising and product development around breakfast. So I'm hopeful that those things will transpire between now and the end of the year.

Great. I'll pass it on. Thank you.

Our next question comes from the line of Brian Mullen with Deutsche Bank. Please proceed with your question. Hey, thank you.

I'm just curious, Dan or Tony, did the labor situation negatively impact your sales in any way in the quarter? I know in the prepared remarks, Dan, you referenced having some issues with managers at opening or closing times as an example. Is that something you can clearly see and measure in the business if you're able to quantify it? Yeah.

Yeah, Brian, we did measure that, and we think it's about a half, like 50 bps of our comp sales. Our comp sales are probably 50 bps lower than they would have been had we been able to staff everything optimally. So not a huge amount, but it was definitely, you know, it was definitely a factor in the quarter.

Okay, thanks, Tony. And then just as my follow-up, you know, I saw you took 2% of price in July. You mentioned maybe take another price increase in October. Can you just speak to how you plan to approach that October decision? I mean, the comp sales are running nicely above 19, which is great. but the traffic's not all the way back, which is an industry issue, not a Carol's issue. But how do you strike that balance of keeping value for the consumer, but also protecting your margins when you make these decisions? Just how you plan to approach it.

Yeah, we approach the pricing decisions pretty much the same all the time, Brian, which is we look at what our competitors are doing in each of the markets. We don't take a broad-based approach across the entire company. We actually have 15 different levels of pricing across the company. So we look at the competitive pricing on a DMA basis as well as looking at what the promotional patterns are going to be in the marketing calendar, and then we adjust the pricing accordingly. What we don't want to do is simply increase prices and drive more people into whatever the promo might be. Okay, thank you.

Our next question comes from the line of James Rutherford with Stevens, Inc. Please proceed with your question.

Thank you, and good morning, Dan and Tony. I wanted to touch on this $0.41 per share special dividend. Clearly, it's a significant amount for your shareholders. I just was hoping you could talk a little bit about what led you and the board to make this decision and And please rank your capital allocation priorities for the remainder of the year.

Sure, James. What prompted us to this decision as a board was we wanted to return cash to our shareholders, which is something that we had been indicating for the entire year. We said that on the prior call, and we've said it since then. Share repurchases certainly will continue to be a part of the dynamic as we go forward, but the share repurchases that we did in 2020 really didn't have the impact that we had hoped that they would, and this is a direct contribution right back to our existing investor base, which has been loyal to us now for several years. As far as our capital priorities, we will continue to look at our $60 million capex number. Roughly $15 to $20 million of that is ongoing maintenance, capitalized maintenance and new equipment for stores and that sort of thing. And then the balance of that, the $40 million will be allocated against new builds and remodels. The priority being probably remodels because we have several of those where we're The franchises are coming to term, and we also think there would be an adequate return to do the remodel. That $60 million does not include any monies that we might spend on M&A activity.

Okay, got it. And then coming back to the staffing issue that the entire industry is dealing with, just curious, Dan, what are you all doing to address that? I mean, obviously just increasing wages is part of it. Do you think – your wages are where they need to be now to be competitive, or is there kind of more to come? Just what's your overall feeling about how you handle this in the next couple of quarters?

No, I think I haven't really seen a big spike in recent weeks, James. It looks like things are somewhat stable. The issue now is getting people who want to come to work. It's not so much, I mean, I think you saw in the industry press that there's more job openings than there is supposedly people who are on unemployment. So it doesn't seem to be so much a wage issue right now as it is just people who, for whatever reason, don't want to come to work. Our staffing levels at the store level right now are pretty good. The wage increases that we've done have been to retain the existing employee base and having enough employees so that we can not have to pay overtime. My primary focus is on the overtime issue because, frankly, you don't get much benefit for that at all. You're paying 50% more for less productivity.

Got it. Just last one for me, and I'll hand it back. But there was a comment at the end of the prepared remarks about, I think it was working with RBI to optimize menu for maybe better margins. I didn't catch all of that. Can you just give some more color on what that meant specifically? And also... Tony, if you could give us kind of what your total menu price is running today, including the most recent increase, plus what you did back in March. Thank you very much.

Yeah, what we're referencing in that sentence was the fact that RBI is adjusting, you know, in response to the commodity price, you know, the commodity pressures, RBI is actively addressing some of the value meals. So instead of having Ten chicken nuggets for $1.49, they're reducing it to eight chicken nuggets. Instead of having the bacon cheeseburger on the dollar menu, they're taking out the bacon because pork is such an expensive commodity right now. I think they're just being super responsive for the benefit of the franchisees to what's happening in the cycle for commodity pricing.

And some of the value menu items, some of the value menu items, the prices were capped at a certain number. Those caps have now been adjusted so we can increase the price of some of those items by either $0.20 or $0.40.

That as well, yeah.

Our next question. Go ahead, I'm sorry.

Sorry, James. The last part of your question was overall commodity cost inflation for the year? What was the?

Now, where is pricing? We're at 4% over last year right now, and when we look at the removal of the price caps, that could be another 1.5% to 2%, which takes effect today, actually. So I would expect that we could end the year at somewhere in the 6% range in terms of year-over-year pricing.

Our next question comes from the line of Fred Whiteman with Wolf Research. Please proceed with your question.

Hey, guys. Good morning. I just wanted to follow up on that last point. If you do get to 6% pricing, I'm wondering how you feel potentially being above broader food away from inflation and what that could mean for share versus some of the other QSR burger peers.

The most recent data that I've seen indicates that McDonald's right now is about 5%. pricing year over year. And my guess is that their franchise system probably will be looking at more pricing between now and the end of the year as well. So I think that's more relevant as a comparative base as opposed to the food-away-from-home phenomenon. So we will continue to make certain that our pricing is in line with our competitors'.

Okay, that's fair. And I guess just broadly, would love to get any updated thoughts on the stickiness that you're seeing on check. I know that you guys had sort of signaled that that was something that you had thought would be a tailwind relative to pre-COVID levels, but have you seen anything change in terms of, you know, either larger group orders persisting, delivery mix being a little bit stronger, longer than you thought, anything that you'd highlight there?

I would say the average check is holding up incredibly resiliently, you know, as we reopen. So, you know, it's staying above $9. And, you know, even as we're seeing, you know, traffic was up, you know, 12% in the second quarter. So even with that increase in traffic, the price, you know, the average ticket is staying at $9. So that's holding up really strongly.

Great. And then there was a comment about higher transaction multiples for stores in the private market. Could you just give an update on what you're seeing in the market and how we should think about that going forward? Because, Dan, I think you made a comment. There's no multi-unit deals in the pipeline. So maybe what you're seeing on the multiple side and then what, if anything, it would take for you guys to get more active in the market again.

Go ahead, Tony.

I was just going to say that on the stores, Fred, that we bought, you know, the 19 stores, the multiple on those, you know, net of the sale leaseback proceeds we're getting this month, you know, is under five times. So that's, you know, that's obviously, you know, very attractive for us. But, you know, we've seen in the marketplace a number of transactions in the nine and ten multiple range for multi-unit, you know, acquisitions, you know, mostly private equity, family offices, shifting assets around, that sort of thing. So that's what we're, you know, that's what we're not going to compete with. And, you know, also indicates, you know, it's another indicator of what we think is, you know, is undervaluation of our share price, that sort of thing.

And just one final one, is that 9 to 10x multiple for sort of multi-branded deals? What sort of concepts are trading at that multiple?

I think they were single brand deals. So that's what we've been seeing out there.

Okay. Thanks, guys. In terms of what would attract us back to the market, we have historically paid in the five-time range EBITDA, and that's where we'll continue to be. So that's what would attract us. back into the market, we'll continue to look for those deals. And if there are either Popeyes or Burger King operators who become available at that level, at those multiples, then certainly we've got the cash to be a player.

Makes sense. Thank you.

Our next question comes from the line of Jeremy Hamlin with Craig Hallam. Please proceed with your question.

Thanks. So I want to come back to the labor inflation. So real kind of initial thrust in the economy. You mentioned that was a challenge getting people on site. Wondering here now in August, the 12% wage inflation, are you starting to see any relief on that front? Or do you think that this is likely to be an issue until the supplemental unemployment benefits subside?

I don't see the rate continuing to increase. I think it's stabilized, but I also don't think that the rate, except for the overtime piece, I don't see the rate coming down. I think the rate is going to be the rate. I don't see that we're going to be able to hire employees for much less than the rates that we're currently paying, but it seems to have been stabilized over the past two or three weeks.

Got it. And then the special dividend, you know, 8% yield, really, you know, fantastic for shareholders. Is that something now, you know, as you mentioned, 15 years public, first time doing this, you know, You know, I am a little curious as to what changed in thinking about making that decision. I know you're on the board. And then secondly, is this a use of capital or capital allocation that is something that, you know, I know you're not instituting a regular quarterly dividend, but is this something as a means for potential dividends future distributions through this measure?

I think a special dividend is just that, Jeremy. It was a one-time event, and what the Board concludes that we're going to do on a go-forward basis as it relates to a current dividend, an ongoing dividend and or share repurchases in excess of the $11 million that currently been approved those those discussions will take place in the future so right now the only thing it has been agreed to is this one time 41 cents special dividend fair enough last thing I want to come back to is the acquired locations and

they continue to be laggards even though they're lapping actually much easier comps than the stores in the Northeast and the Midwest. I don't know that I can recall having so much challenge with particular geographies. When you've acquired locations, you generally have had a fantastic track record of bringing those locations up to legacy levels in terms of both AUVs as well as restaurant-level margins. And so it's been two years now. Do you need to change what you're doing in those stores? Can you help provide some color of why? Because the gap, I think, has actually widened pretty substantially versus where it was when you acquired them.

Yeah, the majority of that, the Cambridge deal, where you see the sales dislocation, there's really two markets. It's the Tupelo, Mississippi area and Memphis. And the operational metrics in those markets actually have improved dramatically, and they're quite close to where they are in terms of the legacy stores. So I don't think it's – It may be a Burger King brand issue. It may be a QSR issue in those markets. It may be an economic issue. We're working with RBI to try to drill down on that, but I don't think it's anything that's Carroll-specific, no.

So you're saying the operational metrics relative to the AUVs that are being achieved, right? To me, it seems like it's more of a sales issue than a... Right, you've done a great job of improving the margin relative to the sales.

And the consumer metrics, which is generally what you work on to improve your sales. So the consumer metrics actually are pretty close to where we are across the board in terms of all the data we get back from the guest tracks and customer service data and that sort of thing. So it's not really – I can't put my finger on it and say that it's a specific operational issue. And therefore, I think it's more broad-based across the category and perhaps the entire economy in those two markets. Got it.

Got it. Thanks for that color, guys. Best wishes.

Thanks, Jeremy. 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 to the sales cadence you saw through the quarter and Dave, could you just frame what the monthly BK COPS looks like versus 19 moving through Q2? Tony can, yeah.

Yeah, let me just find that data. So versus... On a monthly basis versus 19... April was about 10%, and then it was about 6% for May and June versus 2019. Okay.

And then you said, I think, mid-4s for July, if memory serves? Yes. Okay.

Yeah.

Okay, great. All right. Thank you for that. And, Tony, I appreciate the color on the commodity front and the updated beef forecast, and Sorry if I missed it, but what was year-on-year commodity inflation on the basket in the second quarter? And I guess taking into account the later supplier forecast, what does that year-on-year inflation trend look like moving through the second half? Or maybe you could help frame the COGS ratio. Does it go down from here versus Q2 because of the pricing and maybe some of the sequential trend? Just if you could help us frame to make sure we're all on the same page.

Yeah, overall for the year, we're expecting... you know, six to six and a half percent commodity inflation. And again, you know, to your point, if, you know, to the extent that the menu price increases lift overall sales, you know, that should take pressure off the cost of sales margin, but it's really hard to, it's really hard to predict, you know, given the, you know, there's so much sure unprecedented stuff going on with commodities and, you know, Once it's like whack-a-mole, once one gets under control, another one comes up, or there's shipping issues. And so it's really hard to predict. But that's, you know, based on our supplier's latest forecast, we think it's sort of 6% to 6.5% for the year overall.

Okay. And where was that in Q2, or even if you have a first half? What was the commodity inflation you saw in the basket? Do you have that handy?

I do. It was about one point, you know, one and a half, two percent in the second quarter. Because remember, beef was really high. The reason it's not really indicative because beef was really high in the second quarter of 2020. So beef was actually, you know, pretty much flat. So, you know, I think we're going to see the harder comps on on beef is going to be, and first quarter was pretty, you know, the pricing was pretty good on beef in the first quarter. So I think, you know, even though it's expected to moderate somewhat, I think that's where they're going to, you know, that's where the headwind is going to be for the rest of the year.

Yeah. Yeah. Okay. That makes sense. And then I just wanted to circle back to on the acquisition of the 19 units. I think the dollar amounts a little under $11 million net of the real estate. Can you just give some more color to the performance of these units and average sales or profitability, and is there an opportunity for significant margin improvement as you've seen historically, Dan?

Yeah, I think that there are, I don't know about significant, but certainly there is opportunity in both labor and cost of sales. And certainly in the smaller acquisition, the five-store acquisition, there's a lot of opportunity in four or five hundred basis points. In the larger acquisition, It's pretty typical of what we've seen in other acquisitions, so we should be able to get 150 or so basis points.

Okay, great. I'll pass it along. Thank you.

Our next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

Great. Thank you very much. Just following up on the earlier question with regards to the same-store sales trends versus 2019, Like you mentioned, it started at 10% last quarter, and now we're in the fours. I'm just wondering to what you might attribute that, whether you've heard that that's indicative or similar with the broader industry, or is it maybe a Burger King-specific issue in terms of just the slowdown versus the more comparable 19 period? Any thoughts on that?

Yeah, it seems there's a little bit of softness out there right now. I don't think it's Burger King specific. Um, I think there's just, it just seems, you know, the childcare payments come in next week. And so that should help things in, um, the latter part of August. And, and, um, so I, I just think it's a general malaise out there and, you know, whenever we see sort of whenever, and the kind of the two examples we have of, um, you know, when COVID kind of picks up like it did obviously in March of 2020 and then over the summer in 2020 and now it's picking up again, there's a little bit of, you know, softness and then the QSR has kind of come through, you know, with pretty strong results. So I think, you know, my view, I don't know, Dan, I think we're just seeing a little bit of that given the Delta variant at this point. So, you know, things should stabilize soon. once that gets under control a little more or better understood, I guess.

That makes sense. And then in terms of the menu, it would seem like in this environment, especially with the pricing you're taking and the success with some premium products, you might downplay the push of more value-oriented products. I'm just wondering whether that's a consideration or maybe when you look at your value mix, whether it's just dollar items or Any sort of promotion, like where is that mix today versus where perhaps it has been pre COVID to get a gauge whether the consumer is moving towards those value items or perhaps to the industry's benefit, maybe moving more towards premium.

There's really three components to it. The value menu will continue to be a value menu, even though, as I said earlier, the price points may be 20 cents higher than they were previously. So instead of a dollar, it would be $1.20, which is still a value. The breakfast component, which is generally the whole industry, is a two-for-four kind of thing for breakfast. That will continue. And the balance of the promotional calendar still will have some digital coupons in it, a fair amount of digital coupons. Paper coupons will be less than they were in 2019 and 2020. And there will still be value meals. Okay. some of the competitors are running a $4 meal, some are running a $5 meal, and Burger King will continue to participate in that realm as well.

Understood. And just lastly, are you seeing any easing in, maybe you mentioned this earlier, I apologize if I missed it, but in terms of getting applicants to work, I know you mentioned there's more available positions than there are unemployed, but in markets where perhaps they've already restricted or removed the extended unemployment benefits, um, have you seen where in those markets you're actually seeing an increase in applicants, which would be a positive with presumably the nationwide ending of that in early September?

The applicant flow has picked up. Uh, what we're challenged with more so now than, than I can recall is people continuing to show up for their shifts. Uh, if, uh, If the weather is good, somebody may just decide today is not a good day to come to work. That's the challenge that we primarily have right now. Yes, we're getting applicants and we've increased resources in terms of sourcing those applicants and interviewing them so that we hope we can recruit folks who are more reliable and responsible in terms of showing up for all their shifts.

Yeah, no, anecdotally, on Long Island, there's a couple of hurricane restaurants with signage out front saying they're paying $20 an hour for the 12 p.m. or the midnight to 6 a.m. shift. So it seems like the pay is definitely there.

We don't – yeah, we've reduced our 24-hour stores because in our world where we have stores, it just doesn't make any sense to keep restaurants open if you have to pay those kinds of rates regularly. So we don't have anything even approaching that. I mean, the highest rates that we have are mandated by the state of New York, which is $15. So we are at $15.25, $15.50 in some stores here. And that's as high as we go, $20 an hour, unless they've got fabulous pricing in these Long Island stores. That math just doesn't work for us.

Agreed. Thank you very much for the call.

Our next question comes from the line of Carew Martinson with Jefferies. Please proceed with your question.

Good morning. I want to just take a dive a different direction from the chicken sandwiches and talk about how you guys are doing on the breakfast front. Are you seeing people returning back to work? What's the thought here post-Labor Day as folks come back to the office and that breakfast part becomes a bigger part of your business again? Sure. Go ahead, Tony.

Um, breakfast, you know, you know, all day parts were, um, up in the second quarter. Um, so, uh, you know, I think the, the issue with breakfast is, is, is really going to be, you know, driving breakfast is going to be, um, some of the new products that, that RBI is coming out with for breakfast that we're excited about. So I think that's going to, you know, that's really going to help it. And obviously there's a lot of competition in that period, but you know, it, we have seen an improvement in that day part. And, um, we hope some of the product changes that are coming will further enhance that increase.

Yeah, in 2020, breakfast was negative about 26% during Q2. And this year, we were positive 34% during the breakfast day part in Q2. So yeah, it's what one would have expected given the fact that we're now open for normal breakfast hours and there's more people out now driving around for breakfast. So our breakfast sales are increasing, but there's still a very significant opportunity in breakfast relative to the entire space.

Okay. And then you talked about pulling back on M&A for the time being with multiples being that high. I mean, where do you see target leverage for yourself going, and where would you be willing to stretch that if an opportunity did present itself?

You know, I think, you know, we're trying – you know, our goal is to stay at four times or less through the cycle, and – you know, if we do an acquisition, obviously we'd pro forma, you know, we put the cost of the acquisition in our net debt number would be a, you know, add to that, but we'd also include the pro forma EBITDA from that acquisition. So if, if with that acquisition, it keeps us under four times or, you know, four times or less, then obviously it's attractive to us. If, you know, we probably steer, we would steer clear from an acquisition that would cause our, leverage ratio to bounce above four in any significant way on a pro forma basis.

Ladies and gentlemen, we have come to the end of our question and answer session. I'd like to turn it back to management for closing remarks.

Thanks, everyone, for speaking with us and listening to our conference call, and we look forward to talking to you in November.

Thanks. Bye-bye. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.