Given the initiatives and operational changes taking place behind closed doors, it isn’t surprising to see Del Frisco's Restaurant Group, Inc. take some lumps in the second quarter. The operating company of Del Frisco’s Double Eagle Steak House, Sullivan’s Steakhouse, and Del Frisco’s Grille missed expectations with total comparable restaurant sales declines of 2.2 percent. Consolidated revenues grew 3 percent to $82.3 million from $79.9 million.
CEO Norman Abdallah said in a statement the company expects sales trends to remain volatile through the third quarter, “as our new menu rollouts and associated marketing campaigns designed to yield higher check averages and penny profits do not begin in earnest until the fourth quarter.”
With that, Del Frisco’s lowered its outlook for the year to comparable sales declines of 2 to 1 percent (it was negative 0.5 to positive 0.5 percent before).
Base line, the biggest drop came at Sullivan’s Steakhouse, where comps fell 5.2 percent amid an 8.6 percent decrease in customer counts. The company credited some of this to the elimination of lunch at select Sullivan’s. If you excluded that factor, comps dropped 2.5 percent and customer counts just 1 percent.
Sales were down 0.5 percent at Del Frisco’s Double Eagle Steak House, where average check increased 1.8 percent and customer counts fell 2.3 percent. Comps declined 3.2 percent at Del Frisco’s Grille as average check boosted 4.4 percent and customer counts rose 1.2 percent.
Abdallah said in a conference call that “the future of Del Frisco’s is very bright.” The company recently completed a customer research program that helped Del Frisco’s “define guest segments, core occasions, and competitive opportunities for each concept.”
In this, Brandon Coleman, Del Frisco’s chief marketing officer, said in the call that based on the research, the Grille brand has around 20 percent comparable restaurant sales growth potential in the next five years.
The research focused on three questions, Coleman said: “No. 1, which customers on occasion provide profitable sales opportunities? No. 2 what positioning for the Grille will maximize capture of the available markets? And No. 3, how can we most effectively improve our value proposition and expand our footprint?”
Three rounds of research with 3,000 customers shows that the brand’s base—identified as a social and nighttime audience—cares more about top-notch service than price.
“Our core customers identified menu innovation as an opportunity for the brand. To address this challenge, we have established an innovation pipeline and new testing process. Currently, we have four new items and six product upgrades that are being run through this process for a nationwide launch in the fourth quarter,” Coleman said.
The premise of a wide-open runway for Del Frisco’s growth was a theme throughout the call.
One reason being new menu and beverage program initiatives across the three concepts.
Del Frisco’s Grille launched a new menu in late June in four test locations. The Double Eagle Steak House menu is being tested in Plano and Dallas, Texas, and Sullivan’s is gearing up for a new liquor program as well as menu offerings, which include a bone-in section.
“All three menus, which will be fully implemented by late September to mid-October, are designed to facilitate mix shift that will drive higher revenue and higher penny profit,” Abdallah said.
The New York City Double Eagle Steak House recently became one of 89 restaurants around the world to hold Wine Spectator’s Grand Award.
Del Frisco’s opened two restaurants—a Double Eagle Steak House in Plano and a Del Frisco’s Grille in New York City—in fiscal 2017. In the last 12 months, the company added three Grilles, two Double Eagles, and completed five remodels. Three stores closed in that span.
In fiscal 2018, Del Frisco’s expects to open four to six restaurants, including at least two Double Eagles and two Grilles.
Abdallah said Del Frisco’s Double Eagle Steak House will serve as the company’s primary growth engine moving forward. An upcoming Atlanta location will be the first developed in the smaller Double Eagle prototype. The model presents a comparable atmosphere, experience, and menu to the larger store but with a reengineered kitchen. Abdallah said Del Frisco’s is confident it can build 20—25 new units “over time” and nearly double the concept’s current footprint. “The smaller prototype will enable us to further increase the potential for the brand,” he said.
In 2019, Del Frisco’s plans to remodel a Sullivan’s Steakhouse that will showcase a new prototype as well, one that involves a highly efficient kitchen and architecture that “pays homage to the brand’s roots,” as well as added focus on the bar. The company is currently negotiating a lease for a Dallas store to test the model.
Meanwhile, Del Frisco’s is working toward franchising the brand and is writing out the contract to determine royalty fees. Abdallah said the program will launch in 2018.
"Our intention is for Sullivan's to employ a capital-light approach in order to grow the overall value for the business model," Abdallah said. "We will therefore use this restaurant to showcase the brand as part of our refranchised program targeting small- to medium-tier markets."
He added that there's "a lot of work to do" before Sullivan's can engage with potential franchisees, including shoring up operation systems and processes.