New image spurs lace Cabana gains through second quarter

Nation's Restaurant News, August 10, 1998 by Ron Ruggless

For the quarter ended June 28, the company reported net income increased 277 percent, to nearly $3.3 million, compared with $876,000 in the second quarter of fiscal 1997. Sales for the most recent second quarter increased 6 percent, to $36.3 million this year, from $34.2 million in the year-ago quarter.

In addition to the reimaging program, company executives credited higher average weekly sales at existing restaurants, cost controls, the closing of underperforming restaurants, a reduction in depreciation and amortization expense, and some income tax benefits.

The net income recorded in the second quarter of 1998 does not include any income tax expense because of unrecognized net operating loss carry-forwards resulting from a special charge in the fourth quarter of 1997. The company estimated the tax savings at about $2.1 million.

For the first half of the year ended June 28, Taco Cabana reported net income of nearly $5.2 million compared with a little more than $1.4 million in the same period of 1997. Restaurant sales increased 7 percent, from $64.2 million last year to $68.5 million this year. Total revenues also increased 7 percent, from $64.4 million for the period in 1997 to $68.7 million for half of 1998. Including a pro-forma income tax expense using the same rate as that of the prior year, the company would have reported net income of about $3.3 million.

"Our core markets continue to perform very solidly," said Steve Clark, president and chief executive of the chain. "We continue to see very strong comp sales in the second quarter."

Comparable-store sales, using a base of restaurants that have been open 18 months or more at the start of the quarter, increased 4.2 percent.

The Houston market had comparable-store-sales increases of 11 percent in the quarter, Clark said, but the El Paso market is struggling because of peso weaknesses and other problems in the city, which borders Mexico. For July comparable-store sales systemwide were running increases of 3 percent despite the Texas heat wave, Clark added.

Initiatives during the quarter continue to pay dividends, Clark said. They include the store-reimaging project, a $2.99 value-meal promotion and labor-savings programs.

"Taco Cabana is doing absolutely terrific," said Stephen Spence, an analyst with Southwest Securities Inc. in Dallas, after he reviewed the company's second-quarter financial report. "Their earnings are coming in ahead of plan, their revenues are good, they are holding down their expenses. Things appear to be going very, very well."

The reimaging of older stores and the new-prototype stores seems to be achieving sales that are "better than the systemwide average," Spence said. "As they keep adding new stores, that will tend to bring up the average systemwide. I would see continued good growth over the next several quarters."

Clark pointed out that an eight-restaurant-reimaging test in 1997 has been expanded to 21 more thus far this year. Five remain this year and will be completed ahead of schedule in August. Taco Cabana is spending about $150,000 per store in the reimaging program. Projections call for completion of 30 to 35 reimaging projects in 1999.

The renovated restaurants are showing solid sales increases, according to David G. Lloyd, chief financial officer and senior vice president.

"The market that has the most reimages is the Houston market," Clark said, adding that it explains the strong comparable-store-sales increases in that area.

Taco Cabana also completed the systemwide June rollout of its first wave of four pre-prepared products to ease operations at the store level, Clark said. The four products are protein items: taco meat, stewed chicken meat, carne asada and chili con carne. A second wave of four products has started in the Dallas-Fort Worth market.

The company has opened six restaurants this year. It closed one company-owned restaurant in the second quarter, and a franchisee closed another as well. Taco Cabana's 111 restaurants include 101 company-owned, one joint-venture and nine franchised units.

Taco Cabana has opened 12 prototype restaurants in the past 18 months, Clark said. The cost is about $1.4 million per unit. A second prototype, expected early in 1999, is in the works to reduce square footage from 3,300 to 2,700 to simplify the back-of-the-house but retain 80 interior seats and 40 patio seats. The company hopes to keep the cost to $1.1 million to $1.2 million per unit.

Taco Cabana, in announcing its second-quarter results, also said it plans to buy back 1 million shares of its stock. That follows a repurchase of 1.5 million shares earlier this year.