Carrols Restaurant Group, Inc.

Good morning. Welcome to the Carroll's Restaurant Group fourth 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 call, please press star zero on your telephone keypad. I would like to remind everyone that this conference call is being recorded today, Thursday, February 24, 2022, at 8 a.m. Eastern Time and will be available for replay. I will now turn the conference over to Tony Hull, Chief Financial Officer.

Please go ahead, sir. Actually, we're going to turn it over to Greta Miles. Greta, go ahead.

Thank you, Paul and Tony, and good morning, everyone. By now, you should have access to our earnings announcement released earlier this morning and our earnings presentation. that are both available on our website at www.carols.com under the Investor Relations section. Before we begin our remarks, I would like to remind everyone that our discussion, including answers to questions posed to management, may include forward-looking statements or comments with respect to our strategies, intentions, or plans, and the future direction of revenues, input costs, or other aspects pertaining to our business. 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 with 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 prepared in accordance with generally accepted accounting principles. And a reconciliation to comparable gap measures is available with our earnings relief. With that, I will now turn the call over to our chairman and CEO, Dan Accardino. Dan?

Thanks, Greta, and good morning, everyone. Let me begin by addressing the elevated labor and commodity costs affecting us and the entire restaurant industry because these headwinds meaningfully impacted our adjusted EBITDA and margins during the fourth quarter of 2021. Later, I will discuss our top-line trends and how we are using a combination of pricing, menu, and promotional activity optimization to offset a portion of the margin pressures we have been experiencing. During the fourth quarter, we worked diligently to keep our restaurants open from at least 6 a.m. until 11 p.m., but given the competition to recruit and retain workers, we also had to increase average hourly wages of our team members by approximately 14% compared to the prior year before overtime so that we could meet customer demand. Looking ahead, although we are seeing some stabilization in hiring and wage challenges early on in 2022, we believe labor rates will continue to rise throughout the year. Further, we believe that on a year-over-year basis, our labor costs will increase faster in the first half of 2022, after which we expect comparisons to ease. Supply chain constraints also greatly impacted our fourth quarter 2021 results, as they did during the third quarter. Beef represents about a quarter of our commodity basket, and beef costs increased 33%. compared to last year as we lapped very low beef costs in 2020. On a sequential basis, from the third to fourth quarters in 2021, beef costs rose only 1%. Domestic food, paper producers, and distributors supplying most of our commodities are dealing with labor constraints along with higher fuel costs and are passing these increases on to us. As a result, Commodity inflation overall was approximately 16% this past quarter compared to the prior year period, including the previously mentioned impact of higher beef costs. While we cannot predict when these inflationary cost pressures will end, we can say that we believe that in the back half of 2022, the year over year percentage increases for labor and commodity costs will moderate. We also intend to continue to move pricing to partially offset inflation to the extent possible. without impacting traffic. On a cumulative basis, this should also benefit margins in the back half of the year. As you may have recently read, the Burger King brand has about a dozen menu and promotional initiatives, some of which have already been implemented and some that will be implemented over the course of this year. These actions contributed incrementally to our average check increases this past quarter and are designed to limit the impact of higher input costs and help improve restaurant-level profitability. Recent actions in this regard from our franchisor include lifting price caps on value menu items and reducing the number of nuggets and meals from 10 pieces to 8. The Whopper, the brand's most popular product by a wide margin, has also been removed as a core discount item and is no longer available in the 2 for 6 or 2 for 5 promotions. We believe this to be one of the most impactful initiatives underway. Turning to sales, comparable Burger King restaurant sales rose 7.4% during the quarter. Our monthly results fluctuated, which we attribute to the impact of COVID variants on both consumer behavior and staffing. For the entire quarter, we estimate that we lost about 1% of operating hours due to COVID and staffing-related challenges. Eat-in and take-out channels combined contributed about 14% to total sales at our Burger King restaurants, while drive-through was approximately 80%. This was on par with the third quarter as well. We also benefited from a delivery sales mix of 5%, which compared favorably to a 3.5% mix in the fourth quarter last year. The average check size for delivery rose to $17.58 compared to $17.53 in the third quarter, while the average check overall, including delivery, rose to $9.57 compared to $9.23 in the third quarter. The Burger King average check increased 12.1% year over year as a result of higher menu prices and reduced promotional discounting. In terms of sales trends at Burger King by day part, we were most encouraged by the recovery of our breakfast and evening late night day parts compared to the same quarter in 2020. Breakfast increased 9.5% and contributed 12.8% to our sales, while evening late night improved 15% and contributed 11.2%. to our sales in the fourth quarter. We also outpaced the US Burger King system in comparable restaurant sales, as we have now done for 22 out of the last 24 quarters. On a calendar comparison basis, our comparable Burger King restaurant sales for the fourth quarter exceeded the US Burger King system by approximately 600 basis points, which is among the largest gaps in recent history. We believe that this was accomplished through a combination of quick execution of menu price actions, and actively maintaining restaurant hours. Turning now to January 2022, this was a challenging month for comparable sales as three major snowstorms hit most of our largest markets and due to staffing issues caused by the spread of the Omicron variant. Comparable sales at our Burger King restaurants decreased 1.4% in January 2022 compared to January last year, but we're up 4.1% compared to January 2020, one of our last pre-COVID months. During January of 2022, we estimate that we lost about 4% of Burger King restaurant operating hours compared to January of 2021 due to these unplanned restaurant closures that meaningfully reduced traffic to our Burger King restaurants. More encouragingly, as of last week of January, COVID-related staffing closures and reduced operating hours had abated for the most part and for the first several weeks of February have been promising. Burger King's Royal Perks loyalty program is now available to our dining room and drive-thru guests as well as through the BK mobile app. Mobile orders represent a small but growing part of our sales mix, and we believe the brand has a significant opportunity to increase one-on-one engagement through the digital channel while reducing the use of paper coupons, There is no question that our current cost challenges are among the toughest, if not the toughest, I have seen in all my decades as a restaurant operator. We are combating these headwinds as best we can through aggressive pricing, menu changes, and lower promotional discounts. We believe that these efforts will serve to alleviate margin pressure, which we further believe will be most evident in the back half of the year as cost comparisons ease on a relative basis. And with that, let me turn the call over to Tony to review our quarterly financials.

Thank you, Dan. Total restaurant sales for the fourth quarter, a 13-week period, were $416.1 million compared to the 14-week period of $420.5 million in the prior year. The 2020 sales number included $28.4 million in the additional operating week. Adjusting out the extra week in 2020, restaurant revenue increased 6.1%. Our Burger King comparable restaurant sales increased 7.4% during the quarter. Average check growth came in at 12.1%, which reflects menu price increases taken during the year and lower promotional activity, partially offset by a traffic decline of 4.2%. Average weekly sales per Burger King restaurant were $29,812, representing an improvement of 6.6% from 2020 levels, while exceeding 2019 levels by 5.6%. During 2021, we acquired 19 restaurants, opened four new restaurants, and closed six restaurants. Let's now discuss our Burger King quarterly performance by region as we operated 1,026 restaurants at the year-end across 23 states. In the Northeast, representing 21% of our Burger King restaurants, comparable sales were up 10.3%. In the Midwest, representing 29% of our Burger King restaurants, comparable sales were up 8.4%. In the South Central, representing 24% of our Burger King restaurants, comparable sales were up 8.3%. And finally, in our Southeast region, representing 26% of our Burger King restaurants, comparable sales were up 2.5%. Turning to our Popeyes restaurants, which represented 4.8% of total revenues in the fourth quarter, comparable restaurant sales increased 1% versus a decrease of 12.9% during the same period in the previous year. Staffing challenges during evening hours were particularly impactful on our Popeyes sales. Nevertheless, we outperformed the Popeyes U.S. system by 300 basis points in the fourth quarter of 2021. As a result of the inflation challenges experienced in the fourth quarter, adjusted EBITDA decreased $17.9 million to $13.9 million, while adjusted EBITDA margin decreased 430 basis points to 3.3% of restaurant sales. Cost of food, beverage, and packaging as a percentage of net sales increased 138 basis points, primarily because of higher beef, pork, and other commodity costs, and in contrast to the extremely favorable commodity conditions in the fourth quarter of 2020. In particular, beef costs during the most recent quarter were $2.71 per pound compared to $2.04 in the year-ago period. They were also only slightly higher than the cost per pound in the third quarter, which was $2.68. Sequentially, cost of food, beverage, and packaging as a percentage of net sales improved 30 basis points between the third and fourth quarters of 2021. Restaurant labor expense rose 170 basis points as a percentage of restaurant sales in the fourth quarter of 2021. compared to the same quarter a year ago. Compared to the third quarter, labor expenses as a percentage of net sales only rose 50 basis points. Excluding the impact of the extra week of labor in 2021, labor costs increased, excuse me, excluding the impact of the extra week of labor in 2020, labor costs increased 15.3 million to, or excuse me, 2021 labor costs increased 15.3 million to 141.4 million in the fourth quarter of 2021. This increase was primarily due to the higher hourly wages, which, inclusive of overtime, increased $8.3 million, or about half the total increase this past quarter, compared to the same number of weeks last year. The remainder of the increase was due to the necessity of paying team members premiums to take on additional responsibilities, such as opening and closing our restaurants and higher management labor expense due to salary increases for our assistant managers to improve retention. Restaurant rent expense in the fourth quarter increased 50 basis points as a percentage of sales, compared to the prior year period, primarily due to the benefit from the extra week in 2020. Other restaurant operating expenses increased 45 basis points due to a number of factors, including higher recruiting spend and other employee-related incentives, as well as utility rate increases. We also now have smart safes in the majority of our Burger King locations that provide for labor efficiencies, faster cash collection, and greater security, but this initiative added to operating expenses. General and administrative expenses fell to $22.4 million in the fourth quarter of 2021 from $24.2 million last year and declined 40 basis points to 5.4% of restaurant sales. The decrease in dollar terms was due to lower incentive compensation accruals this year and was partially offset by higher regional administrative costs. Our net loss was $16.4 million in the fourth quarter of 2021, or 33 cents per diluted share. On an adjusted basis, excluding certain non-operating items, fourth quarter adjusted net loss was $7.5 million, or 15 cents per diluted share. In the prior year period, adjusted net loss was $5,000, or 0 cents per diluted share. Free cash flow for the fourth quarter of 2021 was $8.8 million, compared to $9.4 million in the prior year period. For the full year, we generated $22.9 million of free cash flow. We ended the fourth quarter with cash and cash equivalents of $29 million, and long-term debt, including the current portion of debt and finance lease liabilities of $449 million. There were no borrowings drawn under our $215 million revolving credit facility, and we had $9 million of letters of credit issued under such facility at the end of the year. This left $206 million of unused availability under our credit facility, and when added to our cash balance, provided us with $235 million in liquidity at that time. As of February 23, 2022, we had $25 million drawn on our credit facility, which we expect to repay as we get into our stronger seasonal period. As a reminder, our ability to utilize our revolver capacity requires compliance with one senior secured leverage ratio and is only in effect when more than 35% of the available capacity is being used. We are currently below that threshold and have no maintenance covenant requirement. When in effect, we need to stay under compliance. 5.75 times senior secured net debt to Covenant EBITDA. Our senior secured leverage ratio was 1.67 times at the end of the fourth quarter. So we have headroom to use our current available revolver capacity. Our total net debt compared to Covenant EBITDA was as defined in the senior credit facilities to the 5.02 times at the end of the fourth quarter. We did not repurchase any shares of our common stock during the fourth quarter as we were above the leverage guidelines set by our board. Once again, from an M&A perspective, we do not have any multi-restaurant transactions in the pipeline. We currently intend to use cash flow generated this year primarily to repay debt. Net capital expenditures for 2021 were $48 million, which included seven completed remodels and four new restaurants. This total also includes $10 million that was used to commence work on a number of remodels and new restaurants that are scheduled to be completed in 2022. Our net capital expenditures have been under $50 million per year over the last two years. For 2022, we expect our net capital expenditures to come in at a similar level, which is reflective of the construction supply chain delays we have been experiencing. To conclude, while the ongoing cost headwinds affecting our business model are clearly evident and pronounced, we have made and are continuing to make adjustments to our pricing menu and promotional strategies that would enable us to gain a portion of the margin erosion we experienced in 2021. This should be particularly true in the back half of 2022 from a combination of continuing average check gains along with potentially easing cost pressures on a year-over-year basis. And with that, Paul, let's go ahead and open the lines for questions. Thank you.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that 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.

One moment, please, while we poll for questions. Thank you. Our first question is from Jake Bartlett with Truist Security.

Please proceed with your question.

Great. Thanks for taking the question. You know, my first is on menu pricing, you know, and related to that, you know, your comfort in taking pricing, you know, given concerns about the lower-intent consumer, you know, potentially being squeezed by inflationary pressures. So one question is, you know, what was menu pricing? I'm sorry if I missed it, if you've mentioned, but what was the total menu pricing in the fourth quarter, and how should we think about menu pricing progressing throughout 2022? And second year as part of that, are you seeing any signs? It sounds like mix is still very positive, but are you seeing any signs of fade down in the menu or maybe increased value mix? Anything that would address some of the concerns around the lower income consumer?

Dan, I can take that if you want me to. Yeah, go ahead. The 8%. Jake, 8% was the menu price increase in the fourth quarter. The remainder was lower promotions and discounts. We improved our promotions and discounts by about 4%. You know, we're looking at price increases for this year, and we think that we're in, you know, given what the competitors are doing, we're in a mode, which is probably something we couldn't have said for sure in 2019 or 2018, but we're in a mode and the industry is in a mode where we think we can take price without affecting traffic that dramatically. And, you know, we expect to continue to do that during the year as we lap some of the price increases we put in place last year. So, and we're not seeing, you know, we're not seeing any, you know, traffic indicators that would, you know, say that we're going too fast on price increases, on menu price increases.

Okay, okay. And the 8% that you saw in the fourth quarter, just considering what you're lapping, do you expect that to go up? I think the comment in the press release is that maybe pricing would help more in the back half of the year. So I think the implication would be higher than we're seeing now. But is that the – just so we understand how that progresses throughout the year.

Yeah, we expect to take pricing in 2022. So that will – you know, on a cumulative basis, that'll get the average check, you know, above the nine, you know, whatever it is, 940. It'll continue to grow next year. So when we get on a cumulative basis, when we get to the back half of 2022, you know, we should see a steady growth of the average check. Okay.

And then the other question I had was on some of the other, you know, offsets to the inflationary pressures that you're seeing. You mentioned operating efficiencies. And my impression is that Carol runs a very tight ship, probably, I mean, I think better than most in the system. So can you talk about the opportunity there that you have to support margins through better operations, maybe what some of those more efficient operations, what some of those are,

And maybe if there's any way you can kind of quantify what kind of benefit you think that there's to be had on that front.

Yeah, I think the point on the operating efficiencies is that, you know, in the first half of this year, we'll see the same kind, you know, we expect to see the same kind of increases for labor year over year and for commodities year over year that we saw in the third and fourth quarter of last year. And then in the back half, when we start to lap those higher levels, we think the increases of those two categories will be less. At the same time, we're seeing comps going up because of average check going up. So I think that's where we think we'll get some leveraging on cost of sales and labor costs in the back half of the year. I think in terms of efficiencies, we would agree that we run the business pretty effectively. I think the Some of those efficiencies are really coming through. The price increases that, you know, that our franchisor is allowing us to do on, like, the value menu went from $1 to $1.29, like, last week or I think on the 10th of February or so. You know, the 2 for 5, the 2 for 6 became 2 for 5, but the Whopper came out. So that's very valuable to us to have the Whopper come out of the combo meal or not at the combo meal, but the value menu. So those types of things that our franchisor is doing is really helping us offset some of those, the higher costs we're seeing, the higher input costs we're seeing.

Got it. And just to be clear, you didn't mention anything you're going to be doing differently operationally. And I'm thinking maybe of the you know, how much the slimmed-down late-night menu might impact, but are there any changes to operations that you're kind of proactively doing, or is there really no opportunity there because you already run such a great ship?

No, we're not. This is Dan. We're not doing anything differently from an efficiency standpoint in that respect. You're right. I think we're pretty efficient. We've looked at hours of operation and which hours make the most sense to stay open in which restaurants. And we've adjusted for that. But as Tony said, the efficiencies are going to come from various promotional activities from Burger King, as well as the opportunities that we have to take price.

Okay, great. And then the last question is on G&A. You know, it was – G&A increased pretty, you know, sharply in the fourth quarter from the third, and it was the highest of the year. Is that the fourth quarter G&A the right run rate as we think about 2022, or was there anything, you know, abnormal in the fourth quarter G&A that wouldn't be recurring going forward?

Yeah. Yeah.

You have to adjust out some of the, I mean, the biggest thing in G&A last year was we had lower, you know, merit, you know, lower bonus compensation. So that actually got us to a pretty low number as a percentage of sales. So, you know, I think the kind of level, I don't think the level of G&A, you know, excluding the bonus is really going to change between this year and next year. you know, i.e. 21 versus 22, the big difference in G&A in 22 is going to be restoration of the, you know, the bonus, which is about a $5 million headwind on G&A.

So to be clear, the bonus did not get paid, so all else equal, at the very least, we should see G&A up $5 million in 22. Is that what you're saying?

Mm-hmm.

Okay. Thank you very much. Appreciate it. Thank you. Our next question is from Jeremy Hamlin with Craig Hallam Capital.

Please proceed with your question.

Thanks. And first I just wanted to ask about B prices, as you noted, 25% of COGS. So I think, Tony, the math is like about $2.70, $2.71 a pound in Q4. And I just wanted to get a sense of where the current run rate was. It's at about that level. Hasn't really moved. Okay. And in terms of thinking about, you know, restaurant-level margins for the year carrying, you know, quite a bit of menu pricing, which seems to be helping some degree, but obviously pretty hard to cover the labor costs. numbers, the hourly wages that you're talking about. But in terms of thinking about for the year, where menu pricing needs to be for restaurant-level margins to be up, you're 9.5% for the year in 21. Are your expectations, given the current conditions and the expectations, at least for the first half of the year, do you think that restaurant-level margins can be up? you know, in 22? And if so, what's the menu pricing that you need for that to happen?

Well, we haven't, you know, we have a budgeted number for menu price increases, but obviously we're going to be, you know, testing and, you know, looking pretty hard to make sure anything we put into effect doesn't, you know, doesn't hurt traffic. And, you know, we're also going to take advantage of the things that, you that the franchisor is doing for our menu pricing. So that's going to have an interplay as the year progresses. But I guess on a big picture level, I think the first half, our expectations, the first half restaurant level margins are going to look a lot like the third and fourth quarter of last year. And then when you have that cumulative effect of the average check going up by the end of the year, plus moderating input cost increases, that's when we would expect to see restaurant-level margins start to improve.

Okay, got it.

That's helpful. And then just thinking about the geographic performance, notable call-out on the southeast as a laggard, is that more of, you think, a reflection of, you know, kind of COVID impacts or more a reflection in Q4? of, you know, weather impacts or, you know, because the three regions I think averaged, you know, close to 9% or maybe even a little over, Northeast, Midwest, South Central, and your Southeast was, you know, quite a bit behind that. But any color you might be able to share on that?

Sure.

Our sense is that the weakness in that region or the softness in that region is across the board for the Burger King system. It's not just our restaurants in that region. And there's been a lot of building of, you know, introduction of new competition in that region. And we think that's been the biggest challenge. You know, that was the biggest drag in the Q – you know, that was sort of the adjustment we saw in Q4. You know, after we get through that, we think we should, you know, see improvement in those comps as we start to lap that digestion of, you know, the new competitors in that market.

Okay, got it. And then last one from me. In terms of – There's just so much going on here, as Dan mentioned in his decades, maybe the most challenging headwinds in terms of inflationary pressures. When you look at what Parent is doing to help manage that, is the focus more on adjusting the items on the value menu and pricing thoughts as opposed to kind of new product pipeline. Is that something where we should be thinking for the BK brand that this is going to be less about new products this year as opposed to kind of reimagining the menu to fit the current operating environment?

This is Dan, Jeremy. You're going to see both. There are some new products in the pipeline. I think that the major change promotionally is going to be a focus on the core menu, the Whopper and variations of the Whopper and burger focus as opposed to 2021, which the primary focus was to King. So there will be some modifications in the chicken lineup, but the primary focus is going to be around burgers. And, yes, there is going to be variability in the menu as well as at breakfast. There's some new product introductions there as well in conjunction with, as Tony said, the modifications to some of the pricing on the value menu caps and that sort of thing.

So I think it's going to be a balance of the two.

Got it. Thanks so much. Best wishes, guys. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation time will indicate that your line is in the question queue. Our next question comes from William Rauder with Bank of America. Please proceed with your questions.

Good morning. My first is you mentioned that price for the fourth quarter was up 8%. And it sounds like margins in the first half of next year are expected to be relatively in line with the back half of this year. Is there any pricing actions that we're taking during the fourth quarter that might lead to modest sequential improvements?

No, but we are looking at a price increase.

you know, for next month of this year. But in the fourth quarter, I think all the price increases were sort of that we took in 2021 were before the fourth quarter. So you saw the impact of those in the fourth quarter.

Got it. The pricing that was referenced in terms of 8%, that pricing is anticipated to be the pricing through 2022. The pricing that Tony's talking about is What we are attempting to do or what the company is attempting to do is to simply have price increases at the same time and same level as what we experienced in 2021, which will keep the price increase at roughly the same level. It's not incremental to the 8% that we had last year.

Okay. So to make sure I understand, I think it sounds like you're saying you've taken this pricing and you're not really – anticipating additional price increases on top of that at this point is that kind of the takeaway there you're going to lap the price increases that occurred the prior year therefore you will have an increase in the average check I know the average but yeah okay right there won't be sequential and we won't be sequential it'll be year-over-year changes because you push through the price increases in the back cap of 21 basically Okay, and then there was commentary about rising wages, and there was also some commentary about, you know, hey, a lot remains to be seen. Some of the data that we have about restaurant staffing kind of implies that we're actually seeing sequential improvements, and I was a little surprised to hear that we would still see sequential increases in wages through the year, even though we'll have year-over-year increases. I guess what are you seeing there?

Our wages are up about 1% over where they were in the fourth quarter. And I would expect that you'll see some increases just through the normal merit increasing and that sort of thing. But the year-over-year impact certainly will diminish as the year goes on because we had more significant increases in 2021 towards the second half of the year. But sequentially, yes, it slowed down dramatically from where we were.

Yeah. Okay. And then there were obviously many portions of 2021 that were challenged due to operational restrictions and lack of labor availability, excluding kind of the storms that we saw in January. Thinking about this year, is there any way to think about what the tailwind of just incremental operational hours will be on comps?

I mean, I don't think in the first and second quarter, well, the first quarter we had in February of the first quarter last year, we had severe, very severe weather. So I think, you know, the February comps are looking, you know, we're seeing in our current, you know, the first couple weeks of February, We're seeing pretty dramatic increases in our comp sales, but a lot of that is that we got whacked so hard a year ago in February. The one indicator I'm looking at that I think is pretty interesting is last year we were comping about, especially in the fourth quarter, we were comping about 15% traffic decline versus two years prior. you know, the pre-COVID period, and that has improved to be down 10%. So that sort of takes the weather out of the equation if you look two years before because there wasn't a weather event. You know, we had like COVID, but we did not have a weather event in February of 2020. So I think the fact that we're seeing, you know, this two-year increase, you know, improvement in traffic from down 15% to down 10%, is very encouraging. So I think, you know, we think that's, you know, we think that's a strong, you know, indicator for the balance of the year, even though it's just one month. And it's really noisy just to compare the two years and then January is, you know, looked a lot, it looked worse than obviously January of 2020 because of, you know, if you looked at those three snowstorms that hit in January, they line up perfectly with our, you know, with our store footprint. So, You know, I think I'm feeling pretty good, though, about what we're seeing in February about the traffic improvement versus two years ago.

Okay. And then just one last one. When you speak about new competition in the southeast, is this just additional store openings from traditional QSR competitors, or are you seeing new concepts? Okay. It's kind of more traditional competition.

A lot of – Cool. All right. Thanks. That's all for me. Thank you. Our next question comes from Jake Bartlett with Truist Securities.

Please proceed with your question.

Great. Thanks for taking the question. Mine was about abnormal costs in labor. You mentioned maybe retention bonuses, hiring bonuses, recruiting costs, overtime. How much of the costs you're seeing in labor are kind of, you know, abnormal that might, you know, wane as the year goes on that you saw in the fourth quarter, maybe some in the first?

I think it's going to be pretty similar in the first quarter.

You know, we haven't – I'm not – you know, because most of that incremental pay is due to, you know, having – team members open and close doors because there's not a man, you know, assistant manager available, that sort of thing. Um, and we haven't seen, you know, the, the, I'd say in terms of hiring trends, it hasn't gotten worse than it was in the fourth quarter, but it hasn't materially improved either. So I think until you see, you know, the, the manager, you know, the assistant manager ranks sort of those vacancies fill in, um, And we don't have to use the team members to do that. Those activities, I think you'll see some, you know, you'll probably see some improvement. But, you know, we haven't seen it yet. So we're not, you know, we're not sort of forecasting that, you know, we're forecasting a pretty tight labor market for the year.

Got it. And then in terms of that tight labor market, do you, I mean, maybe if you can help us understand kind of where you are now with staffing and where you'd like to be, maybe what percentage is, down you are from optimal staffing levels. And do you think that staffing is going to be a headwind to the sales recovery? Is that still kind of a gating factor towards a more material improvement in traffic?

Our staffing is better than it was throughout any of 2021, Jake. We're down, and again, there are pockets where there's more problematic than others, but we're down to two or three employees per restaurant, which is not a big deal. In terms of the staffing negatively affecting our sales, as you can see, our sales were pretty formidable in Q4, and we continue to outperform the Burger King system as well as other competitors in terms of our continual sales. sales increase year over year, and I would expect that to continue. So we make pretty certain that our stores are adequately staffed and our hours of operation are similar to what they ought to be in order to make sure that we continue with those sales dynamics.

Great. And then my last question is on promotions and new product innovation. And The first is on, I believe you're testing or you were testing the toasted breakfast sandwich in a number of stores or markets. Maybe if any update there on, you know, is that a material potential new product launch, you know, as we think about as a sales driver? And then the second question is, you know, recently, you know, the system launched the two for five with the big king, you know, taking out the Whopper from the two for six. What was the net impact of that? Is that neutral to sales and margins, beneficial? How should we think about how that promotion might be contributing to the February results?

It's a positive. The quarter pound king increased by about 20 units per store, and the whopper decreased by about 20 units per store. But the whoppers that decreased by 20 units per store, all the whoppers that we sell now are at full price. So it was a positive. In terms of breakfast, yeah, we're testing a lot of different things for breakfast, Jake. And in terms of the testing that you referenced, it's still in a test phase, and RBI has yet to decide whether or not it's going to be a wide-scale rollout, and if so, when. But there will be a breakfast focus, and there are other new products that,

are anticipated to be launched mid-year. Great. Okay. Thank you very much. I appreciate it.

Oh, yeah. Can I just – I do want to add one point to what Ken said. It's less about product innovation and more, you know, just sort of the environment is that we talked about how strong the breakfast, you know, day part was in the fourth quarter. In, you know, in February post-Omicron pandemic, or whatever is causing this, we're seeing this continued strength in breakfast. So whether that's people starting to go to the office again because we're sort of in a more relaxed environment or just people are out and about more in general, that is one day part that continues to, even without the product innovations that we have in the pipeline, continues to get better and better.

Got it. And then maybe last question, and this is for, for, for Dan, you've been around the, obviously the, the, the system for a long time in the, in the, in the brand and through good times and bad, but you know, a, I think a key investor question now is that lower income consumer. And, you know, you're taking, you know, an 8% price, reducing the, the, really the value kind of proposition in terms of the value items by increasing the prices there, maybe reducing them with items. I mean, How comfortable are you that the Burger King consumer specifically is not going to push back on that, that you might reach a point where both those two things together are going to really negatively impact traffic? How confident are you that the system might not be overstepping there with the lower-income consumers?

Well, I can't speak to the system. I can speak to Carol's, and we're mindful of that, Jake. And all of the pricing that we take is based upon competitive surveys that we do with our two major competitors, McDonald's and Wendy's. And our pricing relationship has been pretty consistent relative to pricing that they take in each of the geographies. So we have various pricing levels by region. by DMA and we make certain that we maintain our pricing on a relative basis to what they're doing as well. So to the extent that the entire industry perhaps is stretching the consumer, that's something that the industry will have to evaluate. But I think as it relates to Carol's, we're very mindful of our lower income consumer and we're making certain that our pricing is done in a very systematic manner.

Great. I appreciate it. Thank you. Dan, is this your last earnings call? This is it, Jake. I want to just wish you the best and congratulate you on a great long career and hopefully you'll have a lot of fun in the sun.

Thanks, Jake.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to Dan Accordino for any closing remarks.

Thanks, Operator. And as Jake said, you know, before signing off, I wanted to take this opportunity to say goodbye and to thank you to all of our investors and analysts who cover the company, as well as our great Syracuse team and our dedicated employees at our Over 1,100 restaurants who serve hundreds of thousands of guests every day. I have greatly enjoyed my career at Carroll's. And now as we welcome our new incoming CEO, Paulo Pena, I wish both Paulo and Carroll's the very best in the future. And with that, thank you and have a good rest of your day.

This concludes today's conference. You may disconnect your lines at this time.

Thank you for your participation.