FRGI - Fiesta Restaurant Group

[DTEJD1997]

Hey all:

 

Anybody else looking at Fiesta Restaurant Group (FRGI)?

 

I circled back to it this weekend.  It is trading at multi-year lows.  About a year ago, they shut down most of their Pollo Tropical locations OUTSIDE of FL.  They have also been hammered by two hurricanes, both in TX and FL.

 

I have never been to a Pollo Tropical, but I've eaten at Taco Cabana more times than I can count. 

 

For some reason, Taco Cabana is having difficulty outside of TX, and Pollo Tropical is having difficulty outside of FL.

 

If you were to eat at a Taco Cabana, you would probably never want to eat a Taco Bell ever again.  Their food is maybe $1-2 a meal or so more expensive, but it is FAR superior in terms of quality & taste.

 

Put aside anecdotal observations, and it appears that there might be some good stuff at the company?

 

The core Pollo Tropical locations do about $2.7mm a year in sales.  Pretty darn good.

 

Taco Cabana looks to do about 65% of that.

 

They appear to have some free cash flow coming up?  Somewhere between $5mm and $20mm of free cash flow.  They probably will open 5-6 new locations for the year coming up.

 

They have international franchisees for Pollo Tropical.  Mainly in S. America and the Caribbean.  I think their Venezuela locations have shut down/looted?

 

Balance sheet is probably better than it appears at first glance, as leases are now being treated as long term debt.

 

Management seems to be retrenching, working on improving basics, and just executing properly.

 

There is a good amount of sales behind every share. 

 

Could earnings maybe hit $1/share in a couple of years?  Could be?

 

Any thoughts?

[Foreign Tuffett]

Here's my n = 1: There used to be a Pollo Tropical down the street from my house. I never went there. Apparently no one else did either, as it closed and is now a Chipotle.

 

 

[BG2008]

My take on restaurant and retail investing is to not bother with bad to mediocre concepts.  In these two spaces, you want to be invested in the TJX, Costco, Chipotle, etc of the world.  In short, there has to be some readily available value proposition to the concept that gets you really excited as an investor.  Long term SSS trends is almost the single most important metric in this business. In short, you want to own things that will grow organically in the long run.  Think Starbuck, addicted caffeine.  Chipotle, new, better ingredients, fresh, etc.  Almost everything else is a pure value trap.  If Taco and Pollo are truly good concepts with great fanfare, it's worth looking into. 

 

I would like to invest in Chick-a-fila and In-N-Out burgers.  These are loyal die hard concepts. 

[SHDL]

My take on restaurant and retail investing is to not bother with bad to mediocre concepts.  In these two spaces, you want to be invested in the TJX, Costco, Chipotle, etc of the world.  In short, there has to be some readily available value proposition to the concept that gets you really excited as an investor.  Long term SSS trends is almost the single most important metric in this business. In short, you want to own things that will grow organically in the long run.  Think Starbuck, addicted caffeine.  Chipotle, new, better ingredients, fresh, etc.  Almost everything else is a pure value trap.  If Taco and Pollo are truly good concepts with great fanfare, it's worth looking into. 

 

I would like to invest in Chick-a-fila and In-N-Out burgers.  These are loyal die hard concepts.

 

This has been my experience as well.  And the good stuff rarely becomes quantitatively cheap, so to do well in this space you almost always need think like a growth investor and pay less attention to cheapness per se and more attention to things like ROIC, growth potential, whether the concept is a fad or not, and whether there is a “secret sauce” of some kind that keeps copy cats away.  I think one reason Buffett hasn’t done so well in this area is that he’s too cheap for the game.

[Packer16]

I went to a Pollo Tropico was underwhelmed so I never bought the stock.  I agree you need a special something or these things can languish for a long time.

 

Packer

[DTEJD1997]

Hey all:

 

Thanks for the replies.

 

For all of you that actually have eaten there, what state did you in?

 

Evidently the FL units do very well....out state units did not do well at all and I think almost all were closed down.

[nspo]

Funny that my first post on here is food related... not surprising if you knew me!;D

 

Being born and raised in FL I've have had many interactions with Pollo. The food is good, especially considering the ability to hit the drive through and not feel as guilty as you would going through a MCD... My observation is people who want an authentic experience go to the more traditional mom & pops. The problem for Pollo is small mom & pop chains have been expanding recently. For example: La Granja, and El Bacon (both private companies) whom are generally located in close proximity to Pollo.

 

Also, there's been a substantial increase (especially South FL) in comps over the last 5-6 years as these families whom in the past were selling goods have switched their retirement plan to selling services. Nearby there's a plaza that has both a Pollo and a Chipotle (200 ft apart). While Pollo still does okay, Chipotle pretty much dominates the plaza.

 

I can't say that this observation should be extrapolated over every such instance but it gives a good micro feel as to what's happening.

[Foreign Tuffett]

My take on restaurant and retail investing is to not bother with bad to mediocre concepts.  In these two spaces, you want to be invested in the TJX, Costco, Chipotle, etc of the world.  In short, there has to be some readily available value proposition to the concept that gets you really excited as an investor.  Long term SSS trends is almost the single most important metric in this business. In short, you want to own things that will grow organically in the long run.  Think Starbuck, addicted caffeine.  Chipotle, new, better ingredients, fresh, etc.  Almost everything else is a pure value trap.  If Taco and Pollo are truly good concepts with great fanfare, it's worth looking into. 

 

I would like to invest in Chick-a-fila and In-N-Out burgers.  These are loyal die hard concepts.

 

To BG2008's point, which I think is a very good one:

 

https://twitter.com/BrianSozzi/status/1154727238044176384

[NBL0303]

 

I think one reason Buffett hasn’t done so well in this area is that he’s too cheap for the game.

 

 

He's done great with Dairy Queen and a number of wholly-owned retail concepts like Nebraska Furniture Mart, Borsheim's, and many others. I'm not sure I recall Buffett investing any significant amount in the stock of any public restaurant or than Burger King/Restaurant Brands Int'l - but that was a special/preferred Buffett-special investment I believe, otherwise I don't think he has outlaid any meaningful amount of capital to a restaurant stock. And since the aborted department store acquisition in the 1960s/1970s, I don't recall major swing and misses on department store type retailers - am I forgetting something? Of course, he correctly identified Wal-Mart and intended to buy a huge stake that would have been a great investment - but of course due to his "thumb-sucking" he stopped buying when it moved up immediately and was waiting for it to come back to his price which it never did - which at one point he called the most important missed opportunity to Berkshire that he should have gotten. But as an investor he accurately identified the retailer, Wal-Mart,

 

In other areas, he's had significant troubles - some financial investments over the years, airlines famously and some consumer products companies have been notable areas where Buffett has had poor investing outcomes. Energy too, he has struggled significantly with energy investing (the Energy Futures default, major Conoco losses, stagnation/underperformance of Phillips).

[BG2008]

I'll add a bit to this thread since Food has played such a huge role in my life.  It encompasses everything from learning to cook at a very young age, working in the family restaurant business, shopping for grocery, and having a very "un-value" food budget in my household, so this is a bit of a rant

 

I have looked at a lot of restaurant and retail concepts in my investing career, I have not really had any success with them.  Here are the names

 

Ruby Tuesday (real estate play) - Never invested

JCP (real estate play) - Bought small LEAP position, lost money

Macy's (real estate play) - owned shares, lost money

Hudson Bay - Observed from a bit away, never owned any

Sears - Got asked by a gazillion people, stayed away because it's a flaming bag of dog poop, and never got involved

Chipotle - Thought about buying last year, but never pulled the trigger

Carroll's/Burger King - Broke even or lost a bit of money, too high of a multiple, can't ever figure out what's the true return on capital, this used to be the parent company of Fiesta

QSR - Looked at it and thought it was too pricey

MCD - followed, but never looked at too seriously

Cosi - Talked about it in the thread and never invested

Chick Fila - Admire the chain and would invest, but it's private

In-N-Out Burger - Love the chain and would invest, but it's private

Shake Shack - Used to love the concept, but experience has been diluted since they went public, multiple too high

Luby's - Looked for the real estate, but operation too weak

Poppeye's - Looked at but never invested, in hindsight was probably a mistake not investing as the customer loyalty is quite high

Yum Brands - Never invested, but admire the fanfares of Taco Bell and KFC

Subways - Ate there quite a bit in younger days, but have noticed that ingredient has lots of fillers, meat and bread isn't the best quality

Quiznos - Ingredient is great, but somehow franchisee can't stay in business

Costco - Loyal shopper and can't ever walk out of the store spending less than $200 (embarrassing to admit as a value investor, but sometimes my tab is $500-700 when we really deplete our inventory)

Restaurant Depot - Love this place, it's a wholesaler to the restaurant industry, we buy 10 lb bags of mussels for $13, Bronzino for $4 a pound, lobsters for $8-10 a pound, hanger steaks, prosciutto, portabella mushrooms for $9 for a case, if you call yourself a value investor and you have a lot of mouths to feed, try to get a membership here and shop here. 

 

As an aggregate, I have lost money in the food and retail business.  So it's probably an area that I should avoid.  I thought that I should just share some of my experience and observations in this space and try to see what is important.  Since I have cooked 99.99% of the meals in my household since I got married, I am in essence a 21st century house husband when it comes to shopping for grocery and making meals. TB Continued 

 

 

 

 

[BG2008]

I want to illustrate a restaurant that I think did everything right and have a very long term competitive moat.  It is a place in Long Island City called Astoria Seafood.  It is a restaurant that can be best described by that Yogi Berra quote "Nobody goes there anymore, it's too crowded."  What makes this place so special? 

 

1) Tremendous value proposition for customers - Customers get to experience great Greek style grilled seafood at 1/2 the price of typical NYC/5 Burroughs prices 

2) Cheap rent location - Located in Long Island City in an industrial location.  But it has become a destination that people make a trip out of going there. 

3) Extremely high turnover - High turnover of tables and low margins.  High turnover also ensures that the seafood is as fresh as it gets.  This is a very unique dynamic for a seafood restaurant.  Nobody wants 2 day old fish.  Everyone wants seafood that goes from ocean to table with as little time in between as possible.  If you constantly sell out seafood, it is guaranteed to be fresh

4) Probably highest dollars per sqft that I have seen of any place

5) Mark ups on cost - Technically this is a seafood counter/market that sells seafood at a discount to most seafood locations in NYC.  For $3 more per pound, they can either grill or fry the seafood for you.  For most people in NYC, the finish price is cheaper than buying seafood from a trader Joe's, WholeFoods, or any of the major super markets.  Prices at comparable restaurants will run 2-3x of this place.  Yet the seafood here is likely fresher and better ingredient than a high end steakhouse. 

6) Product offerings - This place offers 40-50 different kinds of seafood that is guaranteed to be fresh.  I was a fish monger in my youth and loved the job.  From my experience, the salmon, shrimps, cod, tuna, clams, and mussels, will always be fresh, because there is so much volume.  Don't buy the catfish.  Because the supermarket that I worked at is in a primarily Jewish/Catholic neighborhood, there isn't a lot of demand for catfish filet.  Those filet can sit there for 3-7 days (I know gross) before they are sold.  Because Astoria seafood move their product so quickly, they can offer lots of offerings.  For a customer, this is very attractive.  For 3-4 people, we would get 4 giant prawns, a pound of grilled scallops, 2-3 pounds of fresh (never frozen) whole calamari to be grilled, fried sardines/anchovy, a grilled whole bronzino, a plate of grilled octopus, a large Greek salad, etc.  Most restaurants have "integer" cost to ordering entrees.  They pre-determine what an entree will cost.  Here, we can sample a plate of fried sardines/anchovy by buying just 1/2 pound of it which will probably cost only $8 with the cooking charge.  In short, we can order 7-8 different items during our visit.     

7) What's the catch (pun intended)?  It's not a true sit down restaurant experience.  It's loud, crowded, and the service isn't great.  But people put up with this due to the price, quality, and offering.  This is not a place to take a new date for dinner.  This is a place where you bring your hardcore foodie or "value eaters". 

 

[BG2008]

https://www.yelp.com/biz/astoria-seafood-long-island-city

 

I am going to go out on a limb and say that this is the restaurant equivalent of Nebraska Furniture Mart

Why is this comparison valid?  Both have high turnover, low margin, extremely high value add to the customers, etc.  Apparently Buffet used to sit in the parking lot of NFM and noticed that people from out of state would drive to NFM to buy stuff.  This restaurant has the same dynamic.  It is also unique in that there are lots of amazing Italian restaurants that has similar dynamic of fair prices, high turnover etc.  This place is unique in that there aren't too many seafood restaurant with this type of model.  Despite low margins, the return on capital is extremely high.  The location is not desirable, but people actively seek out this place.  I think any restaurant concepts where people go out of their way to eat at is something that is very interesting. 

 

When I travel to California, I make sure to eat at In-N-Out.  The same goes to when I travel down south with Chick-Fila.  It used to be that way with Shake Shack.  From time to time, I still go to Astoria Seafood, but I time it for weekday lunches.  Any other time, I will go crazy due to the wait time.  I am also claustrophobic.  So it will be a terrible experience. 

 

We used to go here more often.  We would spend $150 for 3 people and then I would order additional items to go to take home because it is literally cheaper to buy it cooked than sourcing it yourself. 

 

When investing in a restaurant chain, I think you need to see characteristics and traits like these.  Years ago, I stopped by a Ruby Tuesday and I was so underwhelmed that I knew I couldn't invest in the company.  When SSS falls, your solution is to reduce staff which tends to lead to a worse experience. 

[Gregmal]

Thats probably the only thing I regret missing out on by not being in the city. Once you get outside of the high density urban areas, great speciality seafood places go extinct. Largely for the reasons you cited in your post. The result, is that the only real options for seafood are probably(in order) Costco, and then Shoprite/Stop and Shop. I kid you not. Where there is an occasional fish market type store, its stuff like Peter's Seafood in Midland Park, NJ. Average selection and 40% overpriced simply because its the only true seafood market in the area. So you'll just never get the environment you just described with Astoria Seafood.

 

Otherwise for some real good stuff, its ordering in overnight lobsters from Maine at $13 a pound or getting whole Lionfish from south Florida for around $15/lb. Both totally worth it but the hassle means eating your average run of the mill stuff like Salmon and Cod most of the time.

[BG2008]

Thats probably the only thing I regret missing out on by not being in the city. Once you get outside of the high density urban areas, great speciality seafood places go extinct. Largely for the reasons you cited in your post. The result, is that the only real options for seafood are probably(in order) Costco, and then Shoprite/Stop and Shop. I kid you not. Where there is an occasional fish market type store, its stuff like Peter's Seafood in Midland Park, NJ. Average selection and 40% overpriced simply because its the only true seafood market in the area. So you'll just never get the environment you just described with Astoria Seafood.

 

Otherwise for some real good stuff, its ordering in overnight lobsters from Maine at $13 a pound or getting whole Lionfish from south Florida for around $15/lb. Both totally worth it but the hassle means eating your average run of the mill stuff like Salmon and Cod most of the time.

 

Greg,

 

Try https://www.restaurantdepot.com/

 

They have a location 34 mins from Midland Park, NJ in Pine Brook and another location about one hour from Midland in South Hackensack.  You have to buy in bulk which is higher than 3 pounds.  But it's worth it. 

[BG2008]

Thats probably the only thing I regret missing out on by not being in the city. Once you get outside of the high density urban areas, great speciality seafood places go extinct. Largely for the reasons you cited in your post. The result, is that the only real options for seafood are probably(in order) Costco, and then Shoprite/Stop and Shop. I kid you not. Where there is an occasional fish market type store, its stuff like Peter's Seafood in Midland Park, NJ. Average selection and 40% overpriced simply because its the only true seafood market in the area. So you'll just never get the environment you just described with Astoria Seafood.

 

Otherwise for some real good stuff, its ordering in overnight lobsters from Maine at $13 a pound or getting whole Lionfish from south Florida for around $15/lb. Both totally worth it but the hassle means eating your average run of the mill stuff like Salmon and Cod most of the time.

 

I find that Costco's seafood offerings pales in comparison to Restaurant Depot or some of the Chinese supermarkets.  We always have issues with freshness when we buy mussels or clams from Costco.  Costco tend to be better with the frozen shrimps and crab legs etc. 

[Gregmal]

+1 on the Chinese superstores. Kam Man Market in Hanover is tremendous. Worth the 40 minute hike for me. I’m a sucker for different types of rice and noodles as well so it’s great.

 

I’ve heard great things about Restaurant Depot, but I’ve heard you need a restaurant license or something to that effect for membership. I’ve got a few buddies who own restaurants and occasionally grab me stuff from there. But from everything I’ve heard, including what you’ve stated, I’m sure I’d be like Lamar Odom in a whorehouse if I ever got a membership there.

[NBL0303]

The great all-time restaurant story is this restaurant pictured here:

 

http://money.com/money/4059707/how-to-get-free-chick-fil-a/

 

As outlined in this list...

 

https://www.qsrmagazine.com/content/qsr50-2018-top-50-chart

 

The AUV and the economics of Chick-fil-a (that I've read about elsewhere including their FDDs) - what they have done financially is unbelievable. To so much greater average unit volume that any type of comparable chain and to apparently be closed on Sunday, which is often the highest-volume day for chains like this (many QSRs do half their volume on weekends). By far the best financials of a QSR chain I've seen.

 

So here is an earnest question - what makes it such an incredible QSR business? Financially, the best chain like this of all-time. I don't understand it and would love to know what has allowed them to achieve this business feat. I'm sure their food is good, but its just chicken and fries after all, surely just "good chicken" can't be the entire story here - or is it? I don't know and would love to learn more if anyone can explain it.

 

 

 

[Gregmal]

The great all-time restaurant story is this restaurant pictured here:

 

http://money.com/money/4059707/how-to-get-free-chick-fil-a/

 

As outlined in this list...

 

https://www.qsrmagazine.com/content/qsr50-2018-top-50-chart

 

The AUV and the economics of Chick-fil-a (that I've read about elsewhere including their FDDs) - what they have done financially is unbelievable. To so much greater average unit volume that any type of comparable chain and to apparently be closed on Sunday, which is often the highest-volume day for chains like this (many QSRs do half their volume on weekends). By far the best financials of a QSR chain I've seen.

 

So here is an earnest question - what makes it such an incredible QSR business? Financially, the best chain like this of all-time. I don't understand it and would love to know what has allowed them to achieve this business feat. I'm sure their food is good, but its just chicken and fries after all, surely just "good chicken" can't be the entire story here - or is it? I don't know and would love to learn more if anyone can explain it.

 

I thought the same too until I tried it. It’s just chicken but it’s awesome and relatively speaking, healthy in comparison. I have one of my offices in Parsippany, and 5 minutes away a new Chic-fila opened. One of the few in NJ. The Spicy Chicken sandwich is 450 calories and no lie, I grab 2 a day for lunch at least twice a week. Happily waiting 20 minutes for the drivethru as the lines are always insane. Somehow incredibly, when I visit Florida, these restaurants are scattered every 5 miles. And yet, they’re always packed and there’s always a wait.

 

On the other side, I have a few family contacts with pretty extensive knowledge of the operations, and the franchising options, as an investor are just not very attractive or friendly. If you want to give up your day job and run a restaurant, IE wearing the uniform and dealing with customers, you can make a good but not spectacular living. Like 150-200k as an owner operator. But if you ever want to sell or move on, the terms are quite onerous. These guys are not interested in having investors, just hardcore fans and owners who care. Probably part of the secret sauce.

[Tim Eriksen]

Hey all:

 

Thanks for the replies.

 

For all of you that actually have eaten there, what state did you in?

 

Evidently the FL units do very well....out state units did not do well at all and I think almost all were closed down.

 

I spend a lot of time in West Palm Beach.  I have eaten at Pollo Tropical twice.  It is okay.  The location stinks.  I have been to Chick-fil-a probably fifty times or more and PDQ a handful.  They are both far above the local Pollo tropical in quality and are price competitive.  I am yet to try Zaxby's cause it is on the other side of town.  For Chick-fil-a it is the quality of employees.  The kindness is far beyond other QSRs.  There is something about there responding "my pleasure" when you say thank you.  It is genuine.  Is that trained or just who they hire?

[hillfronter83]

+1 on the Chinese superstores. Kam Man Market in Hanover is tremendous. Worth the 40 minute hike for me. I’m a sucker for different types of rice and noodles as well so it’s great.

 

I’ve heard great things about Restaurant Depot, but I’ve heard you need a restaurant license or something to that effect for membership. I’ve got a few buddies who own restaurants and occasionally grab me stuff from there. But from everything I’ve heard, including what you’ve stated, I’m sure I’d be like Lamar Odom in a whorehouse if I ever got a membership there.

 

99 Market Ranch has a branch in Edison. They have much better sea food than Kam Man.

https://www.yelp.com/biz/99-ranch-market-edison

 

[BG2008]

Hey all:

 

Thanks for the replies.

 

For all of you that actually have eaten there, what state did you in?

 

Evidently the FL units do very well....out state units did not do well at all and I think almost all were closed down.

 

I spend a lot of time in West Palm Beach.  I have eaten at Pollo Tropical twice.  It is okay.  The location stinks.  I have been to Chick-fil-a probably fifty times or more and PDQ a handful.  They are both far above the local Pollo tropical in quality and are price competitive.  I am yet to try Zaxby's cause it is on the other side of town.  For Chick-fil-a it is the quality of employees.  The kindness is far beyond other QSRs.  There is something about there responding "my pleasure" when you say thank you.  It is genuine.  Is that trained or just who they hire?

 

I second this.  When my brother and I did a long road trip down South, we accidentally went into a Chick Fila and we were blown away by the hospitality.  Pick your run of the mill QSRs like MCD, Burger King, etc.  It has a corporate fell for it.  Everything within the store has been optimized by headquarter people to eek out profits for shareholders.  There is no culture to the place.  Chick Fila reminds me of my high school football team experience a bit when we got a new coach during my junior year.  The employees buy into the cult, religion, or corporate ethos or whatever you want to call it.  The employees are peppy and smiles at all times.  It's much more pleasant to order food when people aren't giving you miserable energy.  Most QSRs experiences are very transactional.  I am here for a whopper, fries, and drinks and you are here to earn your $x an hour.  We transact and we move on.  It is simply refreshing to walk into a QSR and have a wholesome and friendly interaction with the staff.  I used to think that none of this matters, but it does.  There is a certain kind of energy in the store.  This dynamic is more important to me after having children.  They are simply more understanding and more thoughtful. 

 

Food wise - I think their chicken sandwich is simply that much better.  Think about your MCD and Burger King chicken sandwich.  It's overly process ground chicken with fillers and a ton of breading.  ChickFila's chicken sandwich is an actual chicken breast that is fried or grilled with actual flavors. Burger King's fries feels overly processed.  The golden color is due to spraying sugar on it.  Chicken fila's waffle fries just feels and tastes like it's cut from an actual potato.  Their shakes are great! Although, I do try to limit it as much as possible.  They tend to be more friendly if you want to substitute something.  When I am in the South, I try to eat as much Chick Fila as possible. 

 

Going back to the high school football example.  I have seen it first hand in that I had new coaches who came in and took over for an old coach.  Sports is kind of like running businesses or investing, score more points than your opponent.  But how do you go about achieving that?  There were kids on my high school wrestling team who will sweat out 15 pounds every week just to wrestle (they weigh like 130 pounds).  Without a good and a buy in, it is very hard to get that kind of buy in.  I suspect that Chick Fila has something in their culture, training, and DNA that get people to do the equivalent of sweating 15 pounds just to wrestle.  The finish product is a cashier who smile at you when you order.  After you order, they will give you a number and they will bring the food to you.  MCD has started doing this recently.  They also tend to have an older employee who will bus your tray away and give you mints.  They tend to look like your grandma. 

 

If you were going to spend $7-12 at a QSR, would you rather interact with the miserable cashiers at MCD and BK or eat at Chick Fila? 

 

When it comes to restaurant investing, I think it is very important to have characteristics like these.  The truth is that most of the publicly traded QSR lack these characteristics as a public shareholder bases will likely look at the role of the grandma who bus your tray and say "we don't need this."  I think that when you have employees who buy into the deeply religious/cultish mission of ChickFila, the extra cost of the grandma is actually absorbed by the high efficiency of the overall workforce. 

 

Let's talk about the art of the fried chicken.  All fried food by definition has to be served freshly fried.  This is where the concept of high turnover is very important.  This is evident in the Astoria Seafood example.  High volume ensures that the fried chicken does not sit there too long and get soggy over time.