Fiesta Restaurant Group Inc (FRGI) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Fiesta Restaurant Group, Inc. third-quarter 2013 earnings conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the conference over to Ms. Lynn Schweinfurth, Chief Financial Officer. Please go ahead, ma'am.

Good afternoon and thank you for joining our call. Our third-quarter 2013 earnings release was issued after the market closed today. If you have not already seen it, it can be found on our website, www.frgi.com under the Investor Relations section.

Before we begin, I must remind everyone that our call today may include statements that are not based on historical information. These forward-looking statements include, without limitation, statements regarding our future financial position and results of operations, business strategy, budgets, projected costs and plans, and objectives of management for future operations. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. And we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements can be found in our SEC filings.

Please note that during today's call we may discuss certain non-GAAP financial measures which we believe can be useful in evaluating our performance. Any discussion of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. And a reconciliation to comparable GAAP measures is available in our earnings release.

And now I would like to turn the call over to Tim Taft, Chief Executive Officer, to begin with some opening comments and a brief update on our business.

Thank you, Lynn. And good afternoon, everyone.

We are pleased to have delivered a robust quarter in what was generally a challenging period for our industry. And are very optimistic about our future. On the top line, we experienced a healthy 9.8% increase in revenues, with positive comp sales at both brands. While on the bottom line grew diluted EPS through effective P&L management despite some rising costs. We also made G&A investments to complete the transition from Carrols by year end, and built resources to manage our growing restaurant companies.

As I will dive into a little bit more detail shortly, we are focused primarily on development of Pollo Tropical in select markets in the Southeast. We will also begin testing a more upscale Taco Cabana concept in Georgia beginning next year. In short, we believe that we are in the early stages of an exciting and significant growth story that will reward shareholders over time.

The consistent track record we have generated since the spinoffs, and our determination to deliver a sustainable level of results over the long term, is predicated on the execution of our business model, as we have articulated on prior calls. There is no single catalyst that we use to spur comp sales or performance. But rather a myriad of factors that go into building sustainable awareness and differentiation, satisfying the guest, encouraging their frequency, and of course managing our four-wall operations, as well as corporate expenditures. I will talk further about specific brand initiatives shortly. But overall I think we're doing a much better job improving the caliber of our teams, elevating the effectiveness of our marketing, ensuring our order accuracy, speed, and consistency, as well as promoting products that satisfy the needs of our customers. Products that are fresh, customizable, and, in many cases, portable.

We believe our new media planning and buying agency, Southwest Media, will make our TV and radio expenditures go further. And this is particularly relevant in the view of a noticeable increase in restaurant industry advertising. Since the relaunch of our brand websites early this year, we have experienced a 250% to 300% increase in site visits. And have also significantly increased our number of Facebook fans, which both reflect tangible demonstrations of interest in our brands.

Our focus on operational excellence has enabled us to manage the middle of our P&L despite rising costs for items not directly tied to growing restaurant sales, such as medical and other benefits, along with general liability expenses. In addition, and as we have stated previously, G&A cost would be higher this year during what we consider a transitional. And this is for two reasons. First, we have been working through the aftermath of the spinoff and taking many functions in-house that previously had been handled by Carrols. This has incurred many upfront costs, not all of which can be capitalized as we build out our IT systems and processes.

By the end of December, we will be self sufficient, as we have effectively completed the administrative transition from Carrols, with all finance, HR and IT functions. If you'll recall, our original agreement with our former parent company had called for up to three full years of transition services. But through a lot of hard work and great team effort we have been able to cut that time in half. And, second, from a resource standpoint, we have also been building our corporate team, strategically adding talent so we are best positioned to achieve our long-term vision of sustainable restaurant sales growth development and profitability.

So, with that introduction, let's discuss individual brand highlights and development before Lynn reviews the financials and our outlook in greater detail. Pollo Tropical comparable restaurant sales grew 6.5% in the third quarter, as compared to a 7% gain in the same period last year. Our flagship brand has now generated positive comparable sales growth in each of the last 16 quarters. On a two-year basis, Pollo Tropical has grown comparable restaurant sales by 13.5%. Specific to the quarter, the 6.5% comp sale gain was well balanced between 3.2% in transaction growth and a 3.3% in average check growth. While the system average unit volume has climbed to $2.6 million.

Within the quarter itself, August was the strongest month. However, the brand underwent a tropical storm from last year, which on a comparison basis is estimated to have provided 150 point comp sales benefit. Excluding this weather benefit, the month-to-month trend was fairly consistent. You may recall that earlier this year we engaged a new advertising agency for Pollo Tropical, and rolled out a new tagline -- Life's better under the palm -- along with new library food photography. We believe that these efforts are being received positively by our guests, and proven effective. And we are clearing identifying a Caribbean influence. The most common misconception about Pollo Tropical is that we serve traditional Mexican fare. And we believe that this messaging is helping to both educate the public and further differentiate the brand.

We promoted a guava barbecue chicken TropiC hop during the third quarter, which was supported by a combination of TV, billboard and direct mail. While in the fourth quarter we are promoting a chipotle chicken sandwich with harvest soup. We also recently launched a new Tropical light menu test in our West Palm Beach market that consists of five unique items that are all under 510 calories. We believe that our focus of grilled versus fried chicken lends itself quite naturally to lower calorie fare, as many people are seeking flavorful yet healthier offerings in the fast casual setting. However, since it has only been a few weeks since the launch it would be premature to comment specifically on this menu's reception.

Taco Cabana comparable restaurant sales rose 1.8% in the third quarter as compared to the prior-year gain of 1.8%, as well, in the same period. Notably, we had 283 remodel store weeks this year versus 381 last year. Which makes our year-ago sales comparison even more challenging than how it appears on the surface. The brand has now generated positive comparable sales growth for 13 consecutive quarters. While on a two-year basis Taco Cabana has grown comparable restaurant sales by 3.6%. Specifically to the third quarter, the 1.8% comp gain consisted of a 1.9% increase in average check and a 0.1% decrease in guest traffic.

We promoted sizzling steak fajitas, along with an individual portion of steak fajita nachos as part of our Favorites Under $5 umbrella during the third quarter. While currently in the fourth quarter we are promoting our beef taco combo meal. In addition, we are also offering a $3 happy hour with half-price nachos and margaritas. In late September we introduced a Loteria, a game where guests can win food and other prizes instantly, or by collecting a combination of stamps over time. Taco Cabana completed 10 remodels in the third quarter, including the restoration of our original 35-year-old restaurant in San Antonio, with a special grand reopening Fiesta event that included the family of Taco Cabana's founder, Felix Stehling. Our intention is to continue to invest in Taco Cabana's remodeling program in 2014, which we believe will generate incremental sales left off these investments while raising the perception of the brand.

Turning to restaurant development in the third quarter, we opened up four company-owned Pollo Tropical restaurants, one in each of Stuart and Brandon, Florida, one in Franklin, Tennessee, our second in the Nashville area, and our 100th Pollo Tropical in the continental US in Haynes Bridge, Georgia. Which is also our fourth restaurant in the metropolitan Atlanta area. We also recently opened a franchise restaurants in Santo Domingo, Dominican Republic, which is the largest, at of roughly 7,500 square feet, along with our second franchise restaurant on the island of Trinidad and Tobago. During the fourth quarter we have opened Carrollwood, outside of Tampa, and Cumming outside of Atlanta. And last week we opened up our 18th and final company-owned restaurant this year. So we, final, ended up with 12 Pollo Tropical restaurants and six Taco Cabana restaurants. Our direction, as discussed, will be to ramp up to an annual 8% to 10% Company restaurant growth rate, with a primary emphasis again on Pollo Tropical.

Taking a peak into next year, we are anticipating development of approximately 22 to 26 restaurants, which includes a near doubling of the number of Pollo Tropicals opening from 2013. Specifically, we will be opening 20 to 22 Pollo Tropical units, which will consist primarily of backfilling with end markets of Florida, and, where volumes have risen by roughly 20% in just two years. And increasing our penetration in Georgia and Tennessee so that we can move closer to reaching media efficiency. In addition, we will also be opening our first Pollo Tropical location in the central time zone near our corporate office in Addison, outside of Dallas. The particular location will be within an extremely dense 3-mile radius of fast food, quick casual and casual chains. And will therefore provide us a great way to monitor performance. We believe that if we can succeed in a competitive market such as this one, we will be positioned to build a scalable footprint in Texas over time, where we already have a meaningful presence with Taco Cabana.

Clustering Pollo Tropical in DMAs such as Dallas, Houston, and Austin, San Antonio will enable us to share infrastructure, manage our oversight, labor force training, and supply chain optimization. We will also be extremely efficient from a marketing standpoint as it relates to TV and radio and local store coupon drops. We are therefore in the process of selecting sites and identifying resources and restaurant management that could help support a large presence for Pollo in Texas.

Our developing team has also completed value engineering in a new Pollo Tropical prototype. And was able to eliminate about $150,000 in upfront costs for the Dallas restaurant. We think there are also continuing opportunities when our labor staffing parameters are reworked, and our time-motion study is completed. We are not done optimizing our operations. But we are encouraged by the progress that we have made so far.

We anticipate opening two to four Taco Cabana restaurants next year. Although we expect to close up to four Taco Cabana locations, two of which are because of highly construction. So the unit count will not change that much, if at all. Most of the Taco Cabana openings and all four of the Taco Cabana closings will be in Texas. While the first opening outside of Texas in recent memory will be in the Atlanta market. The Atlanta restaurant will operate under a different business model that includes elevated ambience, service, and menu. It will also be open for lunch and dinner, whereas most Taco Cabanas are 24 hours. If our test case in Atlanta proves successful, we very well may have a powerful secondary growth vehicle at Fiesta.

Before turning the call back over to Lynn, I want to express my appreciation to the entire team for what they have accomplished in the third quarter, and year to date specifically. And thank them in advance for what we expect to accomplish in 2014 and beyond. I know I have speak for the entire organization when I say that we take our responsibility of enhancing shareholder value very seriously, and make all of our decisions in what we believe are the best strategic and financial interests of our brands over the long term. This includes disciplined expansion, but focused primarily on Pollo Tropical because of its strong cash-on-cash returns, that we will complement with limited development of Taco Cabana.

For our existing restaurant base, we will focus on strengthening operations to ensure that the gains we make in comparable restaurant sales positively impact our profitability. We will leverage our G&A investments and continue to focus on realizing greater efficiencies, while effectively supporting our restaurant operations. In summary, this is an exciting time for Fiesta, with great progress already made. And we believe even greater progress still to come.

And now, allow me to turn the call back over to Lynn.

Thank you. I share Tim's enthusiasm for what we accomplished this year and in the third quarter. And would like to similarly express my gratitude to the team for their meaningful contributions that will enable our Company to implement a robust business model in the years to come. I would also like to thank the team at Carrols for their support and positive collaboration as we wind up our transition services arrangement with our former parent company.

In addition to walking you through our financial results, I would also like to provide you a preliminary view of initial 2014 operating target. First, turning to the quarter, for our three-month period that ended on September 29, we grew total revenues by 9.8% to $140.7 million, from $128.2 million through higher volumes at comparable restaurants, along with sales contributions from newer restaurants that are not yet in the comparable base. Tim already shared the average check and transaction growth metrics at each of the brands. To supplement this information, average check was positively impacted by price increases -- 2.3% at Pollo and 1.9% at Taco during the third quarter. And consistent with what we had stated on prior calls, we are comfortable taking prices needed to offset higher cost input. But are also sensitive to the macro environment and the economic reality facing many of our customers. We therefore balance whatever pricing actions that we take with other cost-savings initiatives. We believe maintaining and accentuating our price value proposition is critical to both brands' positioning and we view this as a sustained competitive advantage.

Cost of sales as a percent of restaurant sales improved 10 basis points this quarter compared to the prior year period, as commodity cost increases were largely mitigated by supply chain management initiatives and modest price increases. Note that we continue to look for annual cost of sales as a percent of restaurant sales to be similar to that of last year. Restaurant wages and related costs improved 10 basis points year over year, primarily due to sales leverage and lower workers compensation claims that were partially offset by higher medical and other benefits. Rent expense held steady as a percentage of restaurant sales. Note that this is the first full quarter that our lease accounting is on a comparable basis year over year as a result of the qualification of certain leases for sale-leaseback treatment as of the spin-off in May of 2012.

Other restaurant operating expenses increased slightly as a percentage of restaurant sales, primarily due to (inaudible), as one additional restaurant was opened compared to the prior-year period in addition to expenses incurred for new restaurants that have opened already in the fourth quarter, or will be opened early next year. Note that costs can be incurred beginning four to six months prior to the restaurant opening.

Turning to general and administrative expenses, they were $0.5 million higher than the prior-year period at $11.7 million as a result of higher costs and timing associated with the transition of the corporate infrastructure, Company management and team additions, and costs associated with our acceleration of new restaurant development. As Tim mentioned, we will substantially complete the transition of administrative functions from Carrols by the end of next month. Depreciation and amortization increased $0.6 million to $5.1 million due to new Company-owned restaurant openings. Impairment and other lease charges in the third quarter of 2013 consisted of $0.3 million of lease charge recoveries related to previously closed locations. Interest expense was favorable, $0.6 million in the third quarter 2013, compared to the prior-year period, due to the year-to-date capitalization of interest in the third quarter of 2013, driven by an increase in new store construction. Our provision for income taxes in the third quarter of 2013 was derived using an estimated annual effective income tax rate for 2013 of 36.5%. While the provision for income taxes for the third quarter of 2012 was derived using an estimated annual effective income tax rate of 39.3%. Both excluding discrete items. The improvement in the tax rate year over year is primarily due to the positive effect of the Work Opportunity Tax Credit which was renewed in early 2013.

Net income increased $1.4 million to $5 million in the third quarter of 2013, or $0.21 per diluted share, from a net income of $3.6 million or $0.16 per diluted share in the third quarter of 2012. At the end of the quarter, we had a cash balance of $5.9 Million. There were no outstanding borrowings under the senior credit facility. And we were in compliance with all covenants related to our indenture and senior credit facility. Leverage ratios continued to improve given our financial growth. After reserving for $8.4 million for letters of credit guaranteed by the senior credit facility, $16.6 million remained available for borrowing under our senior credit facility at the end of the quarter. We continue to believe cash generated from operations, availability under our senior credit facility, and proceeds from any sale-leaseback transactions we may choose to do will provide sufficient cash to cover our anticipated capital needs. During the third quarter we closed two sale-leaseback transactions and purchased one property for future sale-leaseback, which together generated a net $3.9 million in cash.

Now, in terms of our 2013 full-year outlook, and as we discussed last quarter, we believe Pollo will be at the high of our 3% to 5% full-year comp sales range, while Taco Cabana is expected to be below the 3% to 4% full-year comp sales range that we projected earlier this year. Pre-opening expenses will relate primarily to our 18 Company restaurant openings, of which 15 had opened through the end of the third quarter and 3 have opened after the end of the quarter. Pre-opening expenses also relate to our pipeline of new restaurants that will open in early 2014. Capital expenditures are expected to fall on the high end of the range of $45 million and $50 million this year, consistent with earlier projections. G&A is estimated to be approximately $48 million, consistent with prior expectations. And includes expenses associated with the secondary offering we did earlier this year, and expenses associated with the transition of our back office and resources we are adding to prepare for accelerated development in the years to come.

For 2014 we are providing the following preliminary operating targets. Pollo is expected to grow comp sales by 3% to 5%, while Taco is expected to grow comp sales by 1.5% to 3.5%. As we build out Florida and new markets, keep in mind that we are expecting some sales cannibalization at Pollo. In 2014, this cannibalization may represent up to 1 percentage point of comp sales. Tim mentioned that we intend to build 22 to 26 new restaurants, of which 20 to 22 will be Pollo. We are also anticipating closing up to four Taco restaurants during the year due to condemnation or redevelopment projects, or with the intent to offset the closed restaurant with a new restaurant in the same trade area. We are also extremely excited to validate our new Pollo prototype in Texas this year. And to prove our new elevated Taco concepts that could potentially result in another growth vehicle for our Company.

G&A is expected to be $48 million to $50 million, including equity-based compensation of between $3 million and $3.5 million. We are planning for an effective tax rate of approximately 37% to 38%, which assumes the reinstatement of the Work Opportunity Tax Credit in 2014. And, finally, capital expenditures are projected in the range of $60 million to $65 million, which encompasses new development in the ongoing Taco Cabana remodeling program, capital maintenance, and additional systems investments to realize efficiencies and improve management tools used by our restaurant management team. Overall, I am very pleased with our results to date. And I am confident that the entire organization is working in unison to support our restaurant teams and meet our growth plans in the coming years.

With that, let's open up the line for questions.

(Operator Instructions)

Alex Slagle of Jefferies.

Thanks. Development question for 2014. The Pollo side, it looks like pretty strong development outlook. And I'm just wondering if that is in line with your previous internal expectations or is there something, like better momentum in the construction process, that makes you feel better about that?

I think, Alex, the big step was opening up Texas. And when we opened up Texas, that allowed us the flexibility to build a lot more Pollo restaurants, while we took our time and backfilled the existing markets to get to media efficiency. But I think more to your point, we decided in the last earnings call announce that we were going to be really focusing on Pollo as our main development vehicle. And we are going to continue to do that and build out that pipeline until such time as Taco proves itself in the Southeast.

Okay, thanks. And wonder if you could provide a little more about the response you are seeing in newer markets -- Tennessee and Georgia -- with the Pollo Tropical brand.

We still remain very pleased with the results of our new restaurants that we are opening up in areas where we do not have any market penetration, where we do not have media efficiency. The results thus far have been, frankly, exactly where we thought they would be. And we are pleased with the results.

Okay. Thanks.

Nicole Miller Regan, Piper Jaffray.

Great, thanks. This is Josh on for Nicole. I wanted to circle back to the development, as we look to those 20 to 22 new Pollo Tropical units for next year. Could we talk about some of the investments that have been put into place ahead of this to support this meaningful uptick in the absolute number of units? And then, also, could you touch on the timing that we should expect throughout the course of the year?

First of all, I think timing, you will see that those restaurants will be open fairly consistently across the 12 months next year. What's happened in the last 12 months is that John Todd, the new Chief Development Officer, came in and brought together, and built a brand-new team to allow us to get to the point where we could open up as many restaurants as we planned to. That included the value engineering of the building, really opening up the pipeline to be less restrictive, as it has been in the past.

Obviously opening up Texas was a big moment for us. But there has not been a part of the development process that has not been reworked. And the team that will be building those restaurants and the ones to come in the future are already onboard.

That's helpful. As we think about the buildout of Texas -- or building out Pollo Tropical in Texas, should we expect, or is there an opportunity really to leverage the Taco Cabana human capital pipeline? Or will you be looking to bring in completely new people from the organization from other restaurant concepts or perhaps retail concepts to support the buildout of that geography?

Josh, great question. I think the answer is a clear one, that once we get the restaurants open and running, and we continue to build more restaurants in the marketplace, then we will have the facilities to grow, to bring people from those and transplant them into new restaurants.

In the interim, though, the vision has always been that we would be able to use Taco Cabana not only for media -- because we can split radio and TV, billboards -- but we can also use their human capital, not only just the hourly but also management, as well. Because, in large part, the jobs that we do inside the Taco Cabana are very similar to the jobs and training that is necessary to run a Pollo.

That's very helpful. And then, as we think about the franchise aspect, or the franchise inside of the Pollo business, any initial indications on what that pipeline looks like for FY14 that you could share with us?

I think what we may have shared last quarter was that we were going to open up about 10 restaurants internationally, between a combination of domestic and international. And that probably is the number that you should use for next year -- about 10.

We have, though, as we mentioned last quarter -- we are now proactive in that we have an outside firm that is helping us with the non-traditional franchising element inside the US. So they will be, on our behalf, recruiting and vetting potential franchisees for airports, malls, universities, and the like.

Is that on both brands or just specifically Pollo?

Both brands.

Okay. In that 10, is that roughly split between both brands as well?

It is weighted more towards Pollo.

Okay. Thank you.

Jay Donnelly, Wells Fargo.

Hi. This is Jay Donnelly on for Jeff Farmer. Thanks for taking my questions. Has the continued traffic growth at Pollo Tropical occurred across all dayparts?

Both dayparts for the last two years, yes. It has been -- lunch is being driven by the portable line of menu items that we have been offering, and dinner has been driven by home meal replacement. But it is a pretty good mix, going back the last couple of years.

Okay. Thanks. And then, what opportunities are there for Taco Cabana to narrow some of the margin performance gap versus Pollo Tropical?

For starters, we hope to prove that out with the first opening in Atlanta, first quarter of next year. Right now, we have -- the two models are decidedly different. Obviously there is a volume, if you take away the average unit volume. But one is 24 hours a day in Taco Cabana, and Pollo is only open for lunch and dinner. Our research indicates that we have the possibility of running some pretty good numbers open just lunch and dinner, and so that obviously will be able to narrow the delta between the two brands.

Okay. Thank you very much.

Bryan Elliott, Raymond James.

Thanks. A couple of questions. First, actually it seems like, Lynn, you got cut out at some point earlier in the call as you were going through the results. So at occupancy expense, we lost you. And you came back with the $11.7 million of G&A -- or the other operating expense, rather. So we got rent flat. And then the NSA cut you off. No, I'm just kidding. It wasn't them. I don't know what happened, but somebody cut you off.

(laughter) What I mentioned was that rent expense just held steady as a percent of sales for the current quarter versus the prior quarter. And I just reaffirmed that this was the first full quarter that we did not have the incomparable lease accounting challenge that we've had to date because of the spinoff triggering a different accounting treatment for leases.

And then the other operating is where we lost you.

Okay, I'm sorry. It increased slightly and it was primarily due to the higher cost associated with general liability claims, partially offset by the positive impact of initiatives to reduce repair and maintenance costs, and lower utility costs.

Any guidance, Q4 guidance on that line?

No. These are all comments for 2013. I did not provide that kind of line item guidance for 2014.

No, I meant for fourth quarter. But, okay, you gave us fourth-quarter help on a couple others. Okay. And I think then you moved to G&A, right? So that is all we missed, was the general liability claims. Okay.

The other thing I did mention was pre-opening costs, but obviously those are driven by new restaurant development. So I don't know if there would be any questions around that.

Okay. All right. Fair enough. And then my questions -- it looked like -- was there one or two Pollo internationals closed in the quarter?

There were two in Puerto Rico, yes. Those were planned closings.

Right. Okay. That's right. And then, Lynn, you historically have given us quarter-to-date comps, and did not here. Is that a change in policy?

No. Actually there should be a table in the back of the press release that has that information.

Okay. I am sorry. I missed that. Didn't get through the press release before the call started.

Okay. No problem. Yes, quarter-to-date -- or, excuse me, year-to-date Pollo came in at 5.5% and Taco came in at 1.6%.

No, I'm sorry, I am talking about October, first few weeks of the fourth quarter. Historically, you told us what you are quarter to date in the new quarter during the previous calls, I believe.

Okay.

Yes. Pollo in October was a little north of 6%, and Taco Cabana was about 0.3% positive versus a year ago.

Okay, great. Thank you.

(Operator Instructions)

Will Slabaugh, Stephens.

Yes, thanks. Can you talk just a little bit more about the plans for Texas for Pollo the next year, both from a physical box standpoint, and then also how many of the 20-plus Pollo units you're talking about for next year do you think could end up in Texas both in 2014 and as you think about 2015, what that trajectory might look like?

First, I think the restaurant that we will be building in Texas nobody has seen before. It is a brand-new design from the ground up, both inside and outside. And the design of the kitchen. The feedback that we have received continuously about the restaurant that we built in the Southeast is, with the stucco and the Spanish tile, barrel roof, that it reminds a lot of people of Mexican.

And so we built a brand-new restaurant that really speaks to Caribbean -- the inspiration of Caribbean, and that whole attitude and lifestyle. So that restaurant looks completely different. As we've mentioned, we have taken $150,000 out of the cost of the building compared to what has been our prototype that we built in the Southeast.

Moving forward, I think next year a little less than half will be in the state of Texas, of the new builds. The rest, on a go-forward basis, our strategy will be the same, and that is filling out existing markets to the media penetration. That will obviously include the new markets that we open up next year in Texas.

Got it. That is helpful. And then, moving on to Taco, really quickly, if I could, just the state of the remodel campaign right now, how you feel like that is moving along. Still pleased with what you've seen from a one- and two-year lift standpoint? And then also, as you think about moving that into Atlanta and elsewhere, any changes you might see in that within the Taco box. And I know you mentioned some daypart movements around, without taking breakfast out of some of the units.

I think the easy answer is that, yes, when we move into Atlanta with Taco, what we plan on doing is just opening up for lunch and dinner. We will not have breakfast. We can always add breakfast, but we do not want to have to do that right off the bat. The other thing that we want to be able to prove is that, A, it can operate on its own, just lunch and dinner.

We also want to comment -- you asked the question about the success, or how we feel about the remodels. We feel really good about the remodels in the Texas market. We are entering, or I should say almost halfway done with the last two markets, and that is Houston and San Antonio. Which, by the way, are our two oldest markets. So we should be done by the middle of next year, say, with our remodeling, in large part.

I would say one last thing. And Jay asked the question about how you narrow the delta between the two brands. Average check is going to be something, too, that we think that the check average is going to be a lot closer to a Pollo, the ones that we build in Atlanta. So that, too, will help narrow that gap.

Got it. And one last one, if I could. Could you talk about the move to Southwest Media and what you expect to come from that?

I expect a great deal to come from that. Bob Nichol and his team are some of the smartest, most disciplined media planners and buyers that I have ever had the great pleasure to work with. We expect that our advertising dollars will be stretched further. I think our buys are going to be a lot better and a lot more effective. And I think that next year we should be close to establishing a baseline of sales that, for years and years to come, we're going to be able to grow onto.

Great. Thanks.

Nick Setyan with Wedbush Securities.

Thanks. Congrats on another great quarter. Mix has been a pretty solid contributor now for a couple of quarters. Is it the popularity of the seasonal offerings that are maybe a little bit higher priced? Is it increasing takeout orders that have an average check? Maybe you can tease out some of the success or the drivers behind the success of the mix contribution here.

I think, Nick, that the average check continues to go up with Pollo. And that really is a result primarily of home meal replacement with the activity for dinner -- moms and pops getting meals for six to eight to go. It think, too, our discounting continues to go down as we are discounting less and less. But that is really the same drivers that have been in play for the last two or three quarters.

Got it. And then, just thinking about pricing going forward, Lynn, what is the menu price in Q4? And then, in terms of the guidance for next year, what is the menu price assumption, the comp guidance?

Maybe touching on October first, Tim mentioned Taco came in at 0.3% in comp store sales for October. Part of the reason for the decline in sequential performance is that we just rolled off 1.2% in price. So we did just roll off that. Pollo continues to carry price of a little over 2% through the balance of the year. And Taco is at about 0.5 point, balance of the year.

As we think about next year, there is a few moving pieces. So we certainly have made some assumptions on price. The process we are going through right now is we test price at each of the two brands, and so that is in process. Pollo is intending to implement new price in December and Taco is intending to implement price in January.

We intend for price to help to offset our commodity cost increases, of which we still have some contracts that we are continuing to negotiate for 2014. So pricing may be up to 2% at Pollo and maybe up to 1.5% at Taco. However, those numbers may change depending on how our commodity basket comes in for 2014.

Got it. And just one quick question. Any closures anticipated for Pollo next year?

No.

Okay. Great. Thanks so much, guys.

And it does appear there are no further questions at this time. That does conclude today's teleconference. We thank you all for your participation.

Thank you.