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Carrols Restaurant Group, Inc. (TAST - Snapshot Report) reported second quarter 2012 adjusted earnings of 10 cents per share which surpassed the Zacks Consensus Estimate of loss of a cent per share. However, on a GAAP basis, the company reported a loss of 4 cents, which includes after-tax charges of 6 cents per share related to the extinguishment of debt and acquisition costs, compared with earnings of a cent in the year-ago quarter.

Restaurant sales jumped 37.8% year over year to $122.1 million, owing to the 278 restaurants acquired from Burger King Corporation on May 30, 2012. However, total revenue lagged the Zacks Consensus Estimate of $145 million.

Quarter Highlights

Comparable restaurant sales crept up 8.8%, aided by increased traffic of 4.9% and average check of 3.9%, including an effective price increase of 2.3%. This marks the third consecutive quarter of positive comps. 

Adjusted EBITDA, inched up 2.6% to $7.9 million in the quarter compared to $7.7 million in the prior-year, but adjusted EBITDA margin slipped 220 basis points (bps) to 6.5%.

In the reported quarter, cost of sales rose 120 bps, attributed to higher commodity costs and discounting. General and administrative expenses jumped 65.3% year over year to $8.1 million including the acquisition expenses related to Burger King Restaurants, increased field and corporate overhead costs for the acquired restaurants, higher bonus expenses and legal charges related to litigation. As a percentage of sales, general and administrative expenses spiked 110 bps to 6.6%.

Operating income plummeted 86.4% to $0.4 million in second-quarter 2012. Interest expenses increased 13% to $2.6 million compared to the prior year.

Store update

During the quarter, one restaurant was closed and 278 restaurants were acquired. As of July 1, 2012, Carrols owned and operated 574 Burger King Units versus 303 in the prior-year quarter.

Outlook

For full year 2012, management expects same-store sales to increase in the range of 4%–6%. Commodity expenses are projected to increase in the range of 3%–4%. Capital expenditure is anticipated to be in the range of $40 million to $45 million including $28 million to $33 million for remodeling more than 80 restaurants.

Our Take

We expect the company to continue to drive traffic by introducing new products and products enhancement, new advertising and marketing campaigns and a remodeling program.

However, fierce discounting wars among restaurant operators, lower consumer confidence and higher input costs remain areas of concern.

Carrols, which competes with Sonic Corp. (SONC - Snapshot Report), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are maintaining our long-term Neutral recommendation on the stock.

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