Fiesta Restaurant Group operates 19 Pollo Tropical units outside of Florida.
The parent company of Taco Cabana and Pollo Tropical is shuttering 30 company-owned restaurants as it prepares to “relaunch” both brands.
Fiesta Restaurant Group (Nasdaq: FRGI) announced Monday that it plans to close 30 Pollo Tropical restaurants in North Texas, Austin and Nashville. The closures will happen Monday, and where possible, impacted employees will be offered jobs at nearby Fiesta restaurants.
Five of the locations in Texas could be rebranded as Taco Cabana units. With the closures, Fiesta will own 19 Pollo Tropicals outside of Florida, including 13 in Atlanta and six in South Texas.
“(These restaurants will be used) to apply and prove successful regional strategies for future Pollo Tropical expansion beyond Florida,” Fiesta said in a prepared statement.
Closing the restaurants is expected to incur non-cash impairment charges between $33 million and $37 million during the first quarter, and another $9 million to $12 million in lease and other charges during the second quarter.
“Fiesta’s recent growth initiatives diverted resources from our core markets and some amount of renewal is required to restore momentum in these markets,” Fiesta’s president and CEO Richard Stockinger said in a prepared statement. “While the decision to close restaurants is never easy, we believe it is vital to focus the company’s resources and efforts on markets and locations that have proven successful for our brands.”
This isn’t Pollo Tropical’s first round of closures in the past year. In November, the brand announced plans to shutter 10 units in Texas, Georgia and Tennessee,expecting to incur total charges between $20 million and $24 million.
As a result, the company’s stock tumbled, and Craig Weichmann, founder of Fort Worth-based Weichmann & Associates, an investment banking consultancy specializing in restaurants, said Fiesta had landed itself in what he terms Wall Street’s “penalty box.” He predicted it would be a hard slog for the company to regain investor confidence and share price.
“They set the bar too high, so Wall Street came back with a resounding selling off of the stock,” Weichmann added. “It takes a long time of getting back to the basics of performance, performance, performance before Wall Street will trust you again.”
Shares of opened at $22.90 on Monday, down more than 34 percent over the past 12 months.
John Gordon, principal and founder of restaurant consulting firm Pacific Management Consulting Group , attributed Pollo’s latest round of closings to overexpansion and misaligning with customers’ tastes.
“Pollo’s challenge in DFW isn’t confined to just that brand,” Gordon said. “DFW has become the chain restaurant headquarters focal point in the U.S., and DFW is a major US market for chains moving either west or east. As a result, too many restaurants, especially fast casual brands have been built over the last ten years, and the demand is simply spread around too many stores, making the store sales levels too low.”
“In addition, restaurants that have a unique flavor profile like Pollo that work in some home markets have to be carefully introduced to new, expansion markets,” he added. “While the U.S. is becoming more diverse culturally, consumer’s buying circles and economic activity tend to cluster in influence groups. It is really important for restaurants to tap into the right clusters from a site selection standpoint.”
But the company also announced Monday a “renewal plan” it says will aim to drive long-term value for both concepts. Among its initiatives will be relaunching the Pollo Tropical brand in September and the Taco Cabana brand later in the year.
The relaunches will include differentiating the brands with new positioning, marketing and digital strategies; improving catering, delivery and online ordering capabilities; enhancing food quality and service; repositioning each brand for future growth outside core markets; and refining restaurant prototypes to maximize cash returns and appeal to more customers.
Also in the plan are initiatives like implementing operational efficiencies and digital platforms, looking at pricing across Fiesta’s restaurant portfolio and curtailing new restaurant development until after the relaunch.
“Our strategic renewal plan is based on our comprehensive review of all aspects of our business to improve the guest experience and drive our results,” Stockinger added. “We are … concentrating on being a leader in comp store transaction growth and margins, growing intelligently both organically and through other avenues while enhancing shareholder value.”
In its Monday announcement, Fiesta reported comparable restaurant sales declined 6.7 percent at Pollo Tropical and 4.5 percent at Taco Cabana during first quarter 2017. The company blamed industrywide headwinds and sales cannibalization.
Full first quarter results will be released May 8, with a conference call at 3:30 p.m.
News of Fiesta’s renewal plan comes after the company has been urged to look at options to increase value. In February, concerned by Fiesta’s “massive decline in value,” activist investor JCP Investment Management nominated three candidates to shake up the company’s board of directors.
At the time, JCP, which owns 8.7 percent of Fiesta stock and is its third-largest institutional shareholder, said the company “refused to engage meaningfully” on the composition of its board and other corporate governance matters, adding that Fiesta’s current board has minimal ownership int he company and little restaurant experience.
“ JCP strongly believes that the board must be reconstituted with direct stockholder representatives and experienced restaurant operators,” the firm stated in documents filed with the U.S. Securities and Exchange Commission. “JCP’s director candidates collectively bring not only significant operating experience in the restaurant industry, but a strong track record of creating shareholder value.”
JCP has also criticized the board for allocating $70 million to expand Pollo Tropical in Texas, an effort that was suspended in September.
And the firm said Fiesta has failed to recognize, or at least capitalize on, the value of Taco Cabana. In September, Fiesta scrapped plans to spin off Taco Cabana into its own publicly-traded company.
Since then, Fiesta has added Paul Twohig to its board. Twohig, who joined in February, currently serves as president of Dunkin’ Donuts U.S. and Canada, and has experience at Starbucks and Panera Bread.
The company has also said it will consider adding one of JCP’s board candidates and another member to be chosen by the board at a later date.
However, JCP continues to push for the addition of two “highly-qualified director candidates,” it said in a letter to the board.
“W e believe adding such individuals to the board would remedy the board’s apparent lack of restaurant expertise and avoid a seemingly unnecessary election contest, which we believe could only benefit the entrenched directors who we do not believe belong on the board,” the letter states.
Fiesta declined to give further comment and said it would provide additional details in its quarterly earnings call.