Quarterly Report




SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 13, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-35611  
Del Frisco’s Restaurant Group, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-8453116
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

 
920 S. Kimball Ave., Suite 100,
Southlake, TX
 
76092
(Address of principal executive offices)
 
(Zip code)
(817) 601-3421
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒     No   ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ☒     No   ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  
Large accelerated filer
  
Accelerated filer
 
Non-accelerated filer
☒  (Do not check if a smaller reporting company)
  
Smaller reporting company
 

 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.    Yes   ☐     No   ☒
As of July 20, 2017 , the latest practicable date,  21,127,754  shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.

1

Table of Contents

Table of Contents:
 
 
 
 
 

2

Table of Contents

PART I
FINANCIAL INFORMATION
Item 1.        Financial Statements
DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets—Unaudited
(Dollars in thousands, except per share data)
໿

June 13, 2017
 
December 27, 2016
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,145

 
$
14,622

Inventory
16,225

 
16,400

Income taxes receivable
969

 
3,599

Lease incentives receivable
3,988

 
4,025

Prepaid expenses and other assets
5,476

 
8,034

Total current assets
28,803

 
46,680

Property and equipment, net of accumulated depreciation of $94,409 and $88,190 at June 13, 2017 and December 27, 2016, respectively
208,045

 
195,992

Goodwill
75,365

 
75,365

Intangible assets, net
37,364

 
37,409

Other assets
14,079

 
15,336

Total assets
$
363,656

 
$
370,782

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,486

 
$
12,791

Deferred revenue
13,835

 
18,735

Sales tax payable
2,196

 
2,531

Accrued payroll
6,433

 
7,359

Current portion of deferred rent obligations
3,836

 
4,225

Other current liabilities
5,489

 
5,435

Total current liabilities
42,275

 
51,076

Long-term debt
22,750

 

Deferred rent obligations
41,672

 
37,697

Deferred income taxes
17,311

 
18,189

Other liabilities
16,231

 
17,454

Total liabilities
140,239

 
124,416

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at June 13, 2017 or December 27, 2016

 

Common stock, $0.001 par value, 190,000,000 shares authorized, 24,325,979 shares issued and 21,602,050 shares outstanding at June 13, 2017 and 24,234,909 shares issued and 23,272,274 shares outstanding at December 27, 2016
24

 
24

Treasury stock at cost: 2,723,929 and 962,635 shares at June 13, 2017 and December 27, 2016, respectively
(47,763
)
 
(17,823
)
Additional paid in capital
144,916

 
143,325

Retained earnings
126,240

 
120,840

Total stockholders' equity
223,417

 
246,366

Total liabilities and stockholders' equity
$
363,656

 
$
370,782

See notes to condensed consolidated financial statements.

3


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income—Unaudited
(Dollars in thousands, except per share data)

໿

12 Weeks Ended
 
24 Weeks Ended

June 13, 2017
 
June 14, 2016
 
June 13, 2017
 
June 14, 2016
Revenues
$
82,301

 
$
79,916

 
$
166,191

 
$
161,110

Costs and expenses:
 
 
 
 
 
 
 
Costs of sales
23,433

 
22,637

 
47,214

 
45,855

Restaurant operating expenses
40,388

 
38,017

 
81,280

 
76,643

Marketing and advertising costs
1,618

 
2,133

 
2,918

 
3,454

Pre-opening costs
1,619

 
591

 
2,008

 
685

General and administrative costs
5,921

 
6,030

 
12,076

 
11,780

Consulting project costs
597

 

 
2,633

 

Reorganization severance
563

 

 
719

 

Lease termination and closing costs
540

 
20

 
538

 
41

Depreciation and amortization
4,997

 
4,163

 
9,813

 
8,448

Total costs and expenses
79,676

 
73,591

 
159,199

 
146,906

Insurance settlements
308

 

 
348

 

Operating income
2,933

 
6,325

 
7,340

 
14,204

Other income (expense), net:
 
 
 
 
 
 
 
Interest, net of capitalized interest
(9
)
 
(24
)
 
(19
)
 
(55
)
Other  
(10
)
 
(5
)
 
(11
)
 
(5
)
Income before income taxes
2,914

 
6,296

 
7,310

 
14,144

Income tax expense
824

 
1,852

 
1,910

 
4,289

Net income
$
2,090

 
$
4,444

 
$
5,400

 
$
9,855


 
 
 
 
 
 
 
Basic earnings per common share
$
0.10

 
$
0.19

 
$
0.24

 
$
0.42

Diluted earnings per common share
$
0.09

 
$
0.19

 
$
0.24

 
$
0.42


 
 
 
 
 
 
 
Shares used in computing earnings per common share:
 
 
 
 
 
 
 
Basic
21,722,126

 
23,349,718

 
22,390,745

 
23,332,397

Diluted
22,060,927

 
23,436,983

 
22,719,891

 
23,418,735


 
 
 
 
 
 
 
Comprehensive income
$
2,090

 
$
4,444

 
$
5,400

 
$
9,855


See notes to condensed consolidated financial statements.




4


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity—Unaudited
(Dollars in thousands)

໿

Common Stock
 
Additional Paid
In Capital
 
Treasury Stock
 
Retained Earnings
 
 

Shares
 
Par Value
 
 
 
 
Total 

 
 
 
 
 
 
 
 
 
 
 
Balance at December 27, 2016
23,272,274

 
$
24

 
$
143,325

 
$
(17,823
)
 
$
120,840

 
$
246,366

Net income

 

 

 

 
5,400

 
5,400

Share-based compensation costs

 

 
1,327

 

 

 
1,327

Stock option exercises
52,327

 

 
447

 

 

 
447

Shares issued under stock compensation plan, net of shares withheld for tax effects
38,743

 

 
(183
)
 

 

 
(183
)
Treasury stock purchases
(1,761,294
)
 

 

 
(29,940
)
 

 
(29,940
)
Balance at June 13, 2017
21,602,050

 
$
24

 
$
144,916

 
$
(47,763
)
 
$
126,240

 
$
223,417


See notes to condensed consolidated financial statements.

5


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows—Unaudited
(Dollars in thousands)
໿

24 Weeks Ended

June 13, 2017
 
June 14, 2016
Cash flows from operating activities:
 
 
 
Net income
$
5,400

 
$
9,855

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,813

 
8,448

Loss on disposal of restaurant property
13

 

Loan cost amortization
3

 
1

Equity based compensation
1,327

 
1,386

Deferred income taxes
(878
)
 
(18
)
Amortization of deferred lease incentives
(158
)
 
(496
)
Changes in operating assets and liabilities:
 
 
 
Inventory
175

 
1,115

Prepaid expenses and other assets
5,281

 
3,286

Insurance settlement
594

 

Accounts payable
(2,947
)
 
(4,733
)
Income taxes
2,630

 
1,172

Deferred rent obligations
(172
)
 
(1,469
)
Deferred revenue
(4,900
)
 
(4,080
)
Other liabilities
(1,106
)
 
3,096

Net cash provided by operating activities
15,075

 
17,563


 
 
 
Cash flows from investing activities:
 
 
 
Purchase of trade name

 
(400
)
Insurance settlement for property and equipment
535

 

Purchases of property and equipment
(21,192
)
 
(13,263
)
Other investing activities
31

 

Net cash used in investing activities
(20,626
)
 
(13,663
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
22,750

 

Net payments of credit facility

 
(4,500
)
Purchases of treasury stock
(29,940
)
 

Cash settlement for share-based awards
(183
)
 
(81
)
Proceeds from exercise of stock options
447

 
140

Net cash used in financing activities
(6,926
)
 
(4,441
)

 
 
 
Net change in cash and cash equivalents
(12,477
)
 
(541
)
Cash and cash equivalents at beginning of period
14,622

 
5,176

Cash and cash equivalents at end of period
$
2,145

 
$
4,635


 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
70

 
$
54

Income taxes
$
406

 
$
3,203

Non cash investing and financing activities:
 
 
 
Capital expenditures included in accounts payable at end of period
$
1,610

 
$
183

Acquisition of trade name financed by current liabilities
$

 
$
200

See notes to condensed consolidated financial statements.

6


DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements—Unaudited
໿

1 . BUSINESS AND BASIS OF PRESENTATION

As of June 13, 2017 , Del Frisco’s Restaurant Group, Inc. ("we," "us," "our," or the “Company”) owned and operated 52 restaurants under the concept names of Del Frisco’s Double Eagle Steak House (“Del Frisco’s”), Sullivan’s Steakhouse (“Sullivan’s”), and Del Frisco’s Grille (“Grille”). Of the 52 restaurants we operated at the end of the period covered by this report, there were 13 Del Frisco’s restaurants, 16 Sullivan’s restaurants and 23 Grille restaurants in operation in 23  states and the District of Columbia.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. Operating results for the 12 weeks ended June 13, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2017 . In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 27, 2016 filed with the SEC on February 28, 2017 (the “2016 10-K”).

We operate on a 52- or 53-week fiscal year ending the last Tuesday in December. The fiscal quarters ended June 13, 2017 and June 14, 2016 each contained 12 weeks and are referred to herein as the second quarter of 2017 and the second quarter of 2016 , respectively. Fiscal 2017 will be a 52-week fiscal year as was fiscal 2016 .

Accounting Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual amounts may differ from those estimates.

There have been no material changes to the significant accounting policies from what was previously reported in the 2016 10-K.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers which will supersede Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. In August 2015, the FASB deferred the effective date of this new standard by one year. The FASB later issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations, in March 2016, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, in April 2016, ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients, in May 2016, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, in December 2016, all of which further clarified aspects of Topic 606. A core principle of the new guidance is that an entity should measure revenue in connection with its sale of goods and services to a customer based on an amount that depicts the consideration to which the entity expects to be entitled in exchange for each of those goods and services. For a contract that involves more than one performance obligation, the entity must (a) determine or, if necessary, estimate the standalone selling price at inception of the contract for the distinct goods or services underlying each performance obligation and (b) allocate the transaction price to each performance obligation on the basis of the relative standalone selling prices. In addition, under the new guidance, an entity should recognize revenue when (or as) it satisfies each performance obligation under the contract by transferring the promised good or service to the customer. A good or service is deemed transferred when (or as) the customer obtains control of that good or service. The new standard permits the use of either the retrospective or cumulative effect transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted, but no earlier than fiscal years beginning after December 16, 2016. We have elected to adopt these ASUs using the retrospective method. The primary items affected by these ASUs are our loyalty program liability and the breakage income associated with our gift card program, however we do not expect the adoption of these ASUs to have a material effect on our consolidated financial statements, as our current accounting policies are consistent with the new revenue recognition standard.


7


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. ASU 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the potential impact of ASU 2016-02 on our consolidated financial statements, however we have preliminarily determined that this ASU will significantly impact the accounting of all of our real estate leases, and have a material effect on on our consolidated balance sheets. We expect to adopt ASU 2016-02 using the required modified retrospective transition method at the beginning of fiscal 2019.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting. The FASB issued this ASU as part of its Simplification Initiative. The amendments in this ASU affect all entities that issue share-based payment awards to their employees. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability and classification on the statement of cash flows. Specifically, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The threshold to qualify for equity classifications permits withholding up to the maximum statutory tax rates in the applicable jurisdiction. Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. Under ASU 2016-09, to the extent that the related compensation ultimately recognized for tax purposes exceeds the book expense, a permanent benefit will be recorded to income tax expense and through the effective tax rate for the excess benefit. Where the tax expense recognized is less than book, the shortfall is charged to income tax expense. Under the new guidance, entities can estimate forfeitures or recognize forfeitures when they occur. We have historically estimated forfeitures at the grant date and trued them up when vesting events occur. In addition, the simplification of ASU 2016-09 allows us to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction. We adopted ASU 2016-09 on December 28, 2016, and the impact on our consolidated financial statements was immaterial for the first two quarters of 2017 .

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to clarify the presentation of cash receipts and payments in specific situations. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted. We are currently assessing the impact of this ASU on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which removes the second step of the goodwill impairment test and requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, and early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently assessing the impact of the adoption of this ASU on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarity and reduces complexity when an entity has changes to the terms or conditions of a share-based payment award, and when an entity should apply modification accounting. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted for interim or annual periods. We are currently assessing the impact of the adoption of this ASU on our consolidated financial statements.


8


2 . EARNINGS PER SHARE

Basic earnings per share (“EPS”) data is computed based on the weighted average number of shares of common stock outstanding during the periods. Diluted EPS data is computed based on the weighted average number of shares of common stock outstanding, including all potentially issuable shares of common stock. Diluted EPS for the 12 weeks ended June 13, 2017  excludes 55,064  shares of restricted stock, and options to purchase 484,690  shares of common stock, which were outstanding during the period, but were antidilutive. Diluted EPS for the 24 weeks ended June 13, 2017  excludes 116,796  shares of restricted stock and options to purchase 523,449  shares of common stock, which were outstanding during the period, but were antidilutive. Diluted EPS for the 12 weeks ended June 14, 2016 excludes 189,054  shares of restricted stock and options to purchase  634,177  shares of common stock, which were outstanding during the period but were antidilutive. Diluted EPS for the 24 weeks ended June 14, 2016 excludes 130,729  shares of restricted stock and options to purchase  643,923  shares of common stock, which were outstanding during the period but were antidilutive. The following table details our basic and diluted earnings per common share calculation (dollars in thousands, except per share data):
໿

12 Weeks Ended
 
24 Weeks Ended

June 13, 2017
 
June 14, 2016
 
June 13, 2017
 
June 14, 2016
Net income
$
2,090

 
$
4,444

 
$
5,400

 
$
9,855

Shares:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
21,722,126

 
23,349,718

 
22,390,745

 
23,332,397

Dilutive shares
338,801

 
87,265

 
329,146

 
86,338

Total Diluted Shares
22,060,927

 
23,436,983

 
22,719,891

 
23,418,735


 
 
 
 
 
 
 
Basic earnings per common share
$
0.10

 
$
0.19

 
$
0.24

 
$
0.42

Diluted earnings per common share
$
0.09

 
$
0.19

 
$
0.24

 
$
0.42



3 . STOCK-BASED EMPLOYEE COMPENSATION

2012 Long-Term Equity Incentive Plan

On July 16, 2012, we adopted the Del Frisco’s Restaurant Group, Inc. 2012 Long-Term Equity Incentive Plan (the “2012 Plan”), which allows us to grant stock options, restricted stock, restricted stock units, deferred stock units and other equity-based awards to directors, officers, key employees and other key individuals performing services for us. The 2012 Plan provides for granting of options to purchase shares of common stock at an exercise price not less than the fair value of the stock on the date of grant. Equity-based awards vest or become exercisable at various periods ranging from one to four years from the date of grant. The 2012 Plan has 2,232,800 shares of common stock authorized for issuance under the plan. There were 753,223 shares of common stock issuable upon exercise of outstanding options and 511,388 shares of unvested restricted stock outstanding at  June 13, 2017  with  834,850 shares of common stock available for future grants.

The following table details our total share-based compensation cost, as well as where the costs were expensed (in thousands):
໿

12 Weeks Ended
 
24 Weeks Ended

June 13, 2017
 
June 14, 2016
 
June 13, 2017
 
June 14, 2016
Restaurant operating expenses
$
61

 
$
103

 
$
134

 
$
197

General and administrative costs
731

 
632

 
1,193

 
1,189

Total stock compensation cost
$
792

 
$
735

 
$
1,327

 
$
1,386



9


Restricted Stock and Restricted Stock Units

The following table summarizes restricted stock and restricted stock unit activity:
໿

24 Weeks Ended June 13, 2017

Shares
 
Weighted average grant date fair value
 
Aggregate intrinsic value ($000's)
Outstanding at beginning of period
345,519

 
$
17.51

 
 
Granted
279,900

 
17.34

 
 
Vested
(49,081
)
 
17.41

 
 
Forfeited
(64,950
)
 
17.34

 
 
Outstanding at end of period
511,388

 
$
17.42

 
$
8,515


As of June 13, 2017 , there was $4.1 million of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a period of approximately 2.5 years

Stock Options

The following table summarizes stock option activity:

24 Weeks Ended June 13, 2017

Shares
 
Weighted average exercise price
 
Weighted average remaining contractual term
 
Aggregate intrinsic value ($000's)
Outstanding at beginning of period
927,675

 
$
18.33

 
 
 
 
Exercised
(52,327
)
 
13.00

 
 
 
 
Forfeited
(122,125
)
 
21.22

 
 
 
 
Outstanding at end of period
753,223

 
$
18.23

 
5.8 years
 
$
981

Options exercisable at end of period
648,348

 
$
17.73

 
5.7 years
 
$
981


A summary of changes in and the status of non-vested stock options is presented below:
໿

24 Weeks Ended

June 13, 2017

Shares
 
Weighted average grant-date fair value
Non-vested stock options at beginning of period
151,625

 
$
8.44

Vested
(10,500
)
 
7.85

Forfeited
(36,250
)
 
8.51

Non-vested stock options at end of period
104,875

 
$
8.48


As of June 13, 2017 , there was $0.1 million of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a period of approximately 0.5 years .

10


4 . LONG-TERM DEBT

On October 15, 2012, we entered into a credit facility that, as last amended on May 24, 2017, provides for an unsecured credit facility with a credit commitment of $10.0 million , subject to increases in increments of $5.0 million , with a maximum amount of  $50.0 million . The credit facility expires on October 15, 2019 .  Borrowings under the credit facility bear interest, at our option, based on (i) LIBOR plus 1.50% or (ii) the prime rate as defined in the credit facility. We are required to pay a commitment fee equal to 0.25%  per annum on the available but unused credit facility. The credit facility is guaranteed by certain of our subsidiaries. The credit facility contains various financial covenants, including a maximum ratio of total indebtedness to EBITDA and minimum fixed charge coverage, both as defined in the credit agreement. The credit facility also contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, the payment of dividends, the incurrence of indebtedness and providing financing or other transactions with affiliates.

As of June 13, 2017 , there was $22.8 million of outstanding borrowings on the credit facility, and we had approximately $26 million of borrowings available, with $1.2 million in outstanding letters of credit commitments. As of December 27, 2016 , there were no outstanding borrowings on the credit facility and $1.2 million in outstanding letters of credit.  The increase in borrowings under the credit facility during the first two quarters of 2017 related to our share repurchase activities during the period. We were in compliance with all of the financial debt covenants as of June 13, 2017 and December 27, 2016 .

5 . INCOME TAXES

The effective income tax rate for the 12 weeks ended June 13, 2017  was 28.3% , compared to 29.4%  for the 12 weeks ended June 14, 2016 . The effective income tax rate for the 24 weeks ended June 13, 2017 was 26.1% , compared to 30.3% for the 24 weeks ended June 14, 2016 . The factors that cause the effective tax rates to vary from the federal statutory rate of 35% include the impact of FICA tip and other credits, partially offset by state income taxes and certain non-deductible expenses.

6 . FAIR VALUE MEASUREMENT

Under GAAP, we are required to measure certain assets and liabilities at fair value, or to disclose the fair value of certain assets and liabilities recorded at cost. Pursuant to these fair value measurement and disclosure requirements, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities includes consideration of non-performance risk, including our own credit risk. Each fair value measurement is reported in one of the following three levels:
Level 1—valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2—valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

The following table presents our financial assets and liabilities measured at fair value on a recurring basis at June 13, 2017 and December 27, 2016 , respectively (in thousands):
໿

Fair Value Measurements

Level
 
June 13, 2017
 
December 27, 2016
Deferred compensation plan investments (included in Other assets)
2
 
$
13,831

 
$
15,054

Deferred compensation plan liabilities (included in Other liabilities)
2
 
$
14,192

 
$
15,212



11


There were no transfers among levels within the fair-value hierarchy during the first  two quarters of fiscal 2017 and fiscal 2016 . The carrying value of our cash and cash equivalents, receivables and accounts payable approximate fair value due to their short-term nature. The fair value of the credit facility approximates its carrying value since it is a variable rate credit facility (Level 2).

7 . SEGMENT REPORTING

We operate the Del Frisco’s, Sullivan’s, and Grille brands as operating segments. The restaurant concepts operate solely in the U.S. within the full-service dining industry, providing similar products to similar customers. Sales from external customers are derived principally from food and beverage sales, and we do not rely on any major customers as a source of sales. The restaurant concepts also possess similar economic characteristics, resulting in similar long-term expected financial performance characteristics. However, as Del Frisco’s restaurants typically have higher revenues, driven by their larger physical presence and higher average check, the Del Frisco’s, Sullivan’s, and Grille operating segments have varying operating income and restaurant-level EBITDA margins due to the leveraging of higher revenues on certain fixed operating costs such as management labor, rent, utilities, and building maintenance.

The following tables present information about reportable segments (in thousands):

12 Weeks Ended June 13, 2017

Del Frisco's
 
Sullivan's
 
Grille
 
Corporate
 
Consolidated
Revenues
$
40,194

 
$
15,620

 
$
26,487

 
$

 
$
82,301

Restaurant-level EBITDA
10,909

 
2,102

 
3,851

 

 
16,862

Capital expenditures
2,588

 
2,457

 
5,065

 
33

 
10,143

Property and equipment
122,925

 
52,179

 
124,784

 
2,566

 
302,454


12 Weeks Ended June 14, 2016

Del Frisco's
 
Sullivan's
 
Grille
 
Corporate
 
Consolidated
Revenues
$
37,945

 
$
17,575

 
$
24,396

 
$

 
$
79,916

Restaurant-level EBITDA
10,692

 
2,642

 
3,795

 

 
17,129

Capital expenditures
3,898

 
388

 
4,356

 
40

 
8,682

Property and equipment
109,652

 
48,156

 
104,997

 
2,498

 
265,303


24 Weeks Ended June 13, 2017

Del Frisco's
 
Sullivan's
 
Grille
 
Corporate
 
Consolidated
Revenues
$
79,955

 
$
33,402

 
$
52,834

 
$

 
$
166,191

Restaurant-level EBITDA
21,607

 
5,559

 
7,613

 

 
34,779

Capital expenditures
7,063

 
6,373

 
8,352

 
140

 
21,928

Property and equipment
122,925

 
52,179

 
124,784

 
2,566

 
302,454


24 Weeks Ended June 14, 2016

Del Frisco's
 
Sullivan's
 
Grille
 
Corporate
 
Consolidated
Revenues
$
76,288

 
$
36,476

 
$
48,346

 
$

 
$
161,110

Restaurant-level EBITDA
21,405

 
6,190

 
7,563

 

 
35,158

Capital expenditures
5,182

 
596

 
5,626

 
47

 
11,451

Property and equipment
109,652

 
48,156

 
104,997

 
2,498

 
265,303


In addition to using consolidated results in evaluating our performance and allocating our resources, our chief operating decision maker uses restaurant-level EBITDA, which is not a measure defined by GAAP. Management also uses restaurant-level EBITDA to gauge the overall profitability of our core restaurant operations and believes this information is therefore also useful to investors. Restaurant-level EBITDA on a consolidated basis should not be considered a substitute for, or superior to, net income, which is calculated in accordance with GAAP, and the reconciliations to net income set forth below should be carefully evaluated.


12


We define restaurant-level EBITDA as income before income taxes, other income (expenses), net, pre-opening costs, general and administrative costs, consulting project costs, reorganization severance costs, lease termination and closing costs, depreciation and amortization, and insurance settlements. Pre-opening costs are excluded because they vary in timing and magnitude and are not related to the health of ongoing operations. General and administrative costs are only included in our consolidated financial results as they are generally not specifically identifiable to individual operating segments as these costs relate to supporting all of the our restaurant operations of and the extension of our concepts into new markets. Lease termination and closing costs, consulting project costs, reorganization severance costs, depreciation and amortization, and insurance settlements are excluded because they are not ongoing controllable cash expenses, and they are not related to the health of ongoing operations. Property and equipment is the only balance sheet measure used by our chief operating decision maker in allocating resources.

The following table reconciles net income to restaurant-level EBITDA (in thousands):

12 Weeks Ended
 
24 Weeks Ended

June 13, 2017
 
June 14, 2016
 
June 13, 2017
 
June 14, 2016

 
 
 
 
 
 
 
Net income
$
2,090

 
$
4,444

 
$
5,400

 
$
9,855

Income tax expense
824

 
1,852

 
1,910

 
4,289

Net income before income taxes
2,914

 
6,296

 
7,310

 
14,144

Interest expense, net of capitalized interest
9

 
24

 
19

 
55

Other  
10

 
5

 
11

 
5

Operating income
2,933

 
6,325

 
7,340

 
14,204

Pre-opening costs
1,619

 
591

 
2,008

 
685

General and administrative costs
5,921

 
6,030

 
12,076

 
11,780

Consulting project costs
597

 

 
2,633

 

Reorganization severance
563

 

 
719

 

Lease termination and closing costs
540

 
20

 
538

 
41

Depreciation and amortization
4,997

 
4,163

 
9,813

 
8,448

Insurance settlements
(308
)
 

 
(348
)
 

Restaurant-level EBITDA
$
16,862

 
$
17,129

 
$
34,779

 
$
35,158


8 . COMMITMENTS AND CONTINGENCIES

We are subject to various claims, possible legal actions, and other matters arising out of the normal course of business. While it is not possible to predict the outcome of these issues, management is of the opinion that adequate provision for potential losses has been made in the accompanying condensed consolidated financial statements and that the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

At June 13, 2017 and December 27, 2016 , we had outstanding letters of credit of $1.2 million , which were drawn on our credit facility (see Note 4,   Long-Term Debt ). The letters of credit typically act as guarantee of payment to certain third parties in accordance with specified terms and conditions.

9 . RELATED PARTY TRANSACTIONS

On March 10, 2017, we purchased 1,200,000 shares of our common stock for $20.3 million from Fidelity National Financial, Inc. (“Fidelity”). Fidelity was considered a related party to us at the time of the transaction due to the level of ownership interest in us. After this transaction, Fidelity’s ownership interest no longer qualifies it as a related party.

13


Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement
Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2016 , filed February 28, 2017 , or the 2016 10-K, as well as other factors that may affect our business, results of operations, or financial condition. Forward looking statements in this report speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward looking statements contained in this report will, in fact, transpire.
Overview
Del Frisco’s Restaurant Group develops, owns and operates three contemporary, high-end, complementary restaurants: Del Frisco’s Double Eagle Steak House, or Del Frisco’s, Sullivan’s Steakhouse, or Sullivan’s, and Del Frisco’s Grille, or the Grille. As of the end of the period covered by this report, we operated  52 restaurants in 23 states and the District of Columbia. Of these  52 , there were 13 Del Frisco’s restaurants, 16 Sullivan’s restaurants and 23 Grille restaurants.
Unless the context otherwise indicates, all references to “we,” “our,” “us,” or the “Company” refer to Del Frisco’s Restaurant Group, Inc. and its subsidiaries.
Our Growth Strategies and Outlook. Our growth model is comprised of the following three primary drivers:
 
Pursue Disciplined Restaurant Growth. We believe that there are significant opportunities to grow our concepts on a nationwide basis in both existing and new markets where we believe we can generate attractive unit-level economics. We are presented with many development opportunities, and we carefully evaluate each opportunity to determine that sites selected for development have a high probability of meeting our return on investment targets. Our disciplined growth strategy includes accepting only those sites that we believe present attractive rent and tenant allowance structures as well as reasonable construction costs given the sales potential of the site. We believe our concepts’ complementary market positioning and ability to coexist in the same markets, coupled with our flexible unit models, will allow us to expand each of our three concepts into a greater number of locations.
໿
 
Grow Existing Revenue. We will continue to pursue opportunities to increase the sales at our existing restaurants, pursue targeted local marketing efforts and evaluate operational initiatives, including growth in private dining, designed to increase restaurant unit volumes.
໿
 
Maintain Margins Throughout Our Growth. We will continue to aggressively protect our margins using economies of scale, including marketing and purchasing synergies between our concepts and leveraging our corporate infrastructure as we continue to open new restaurants.


14


In general, we believe there are opportunities to open four to six restaurants annually with our current resources and capabilities. It is our strategy to allocate capital for growth based on returns in each of our brands. As Del Frisco’s has attractive returns which are the highest in our portfolio, it is our intention to accelerate the pace of growth of that brand, and we expect to open at least two Del Frisco’s per year and potentially more as our pipeline strengthens and our capabilities increase. We have slowed growth of the Grille while we test findings from the consumer insights research we have conducted. We still expect to open at least two Grilles per year, and that number could rise if these tests are successful and returns increase. For the Sullivan’s brand, our plan is to adopt a “capital light” approach through franchising and re-franchising. We expect to open one company-owned unit as a prototype unit in 2019. During the second quarter of 2017 , we opened a Del Frisco's in Plano, Texas, and near the beginning of the third quarter of 2017 , we opened a Grille restaurant in New York City, New York.  We do not expect to open any other restaurants prior to the end of 2017 .

Performance Indicators. We use the following key metrics in evaluating the performance of our restaurants:
 
Comparable Restaurant Sales .  We consider a restaurant to be comparable during the first full fiscal quarter following the eighteenth month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time, and also reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 43 and 40 restaurants at June 13, 2017 and June 14, 2016 , respectively.
໿
 
Average Check. Average check is calculated by dividing total restaurant sales by customer counts for a given time period. Average check is influenced by menu prices and menu mix. Management uses this indicator to analyze trends in customers’ preferences, the effectiveness of menu changes and price increases and per customer expenditures.
໿
 
Average Weekly Volume. Average weekly volume, or AWV, consists of the average weekly sales of our restaurants over a certain period of time. This measure is calculated by dividing total revenues within a period by the number of restaurants’ operating weeks during the relevant period. This indicator assists management in measuring changes in customer traffic, pricing and development of our concepts.
໿
 
Customer Counts . Customer counts are measured by the number of entrées ordered at our restaurants over a given time period.
໿
 
Restaurant-Level EBITDA Margin . Restaurant-level EBITDA margin, a non-GAAP financial measure, represents income before income taxes, other income (expenses), net, pre-opening costs, general and administrative costs, consulting project costs, reorganization severance costs, lease termination and closing costs, depreciation and amortization, and insurance settlements as a percentage of revenues. By monitoring and controlling our restaurant-level EBITDA margins, we can gauge the overall profitability of our core restaurant operations. See Note 7 , Segment Reporting in the notes to our condensed consolidated financial statements for additional information on restaurant-level EBITDA.

Our business is subject to seasonal fluctuations. Historically, the percentage of our annual revenues earned during the first and fourth fiscal quarters has been higher due, in part, to increased gift card redemptions and increased private dining during the year-end holiday season, respectively. In addition, our first, second and third quarters each contain 12 operating weeks with the fourth quarter containing 16 or 17 operating weeks. As many of our operating expenses have a fixed component, our operating income and operating income margin have historically varied significantly from quarter to quarter. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year.


15


Results of Operations
The following table shows our operating results (in thousands), as well as our operating results as a percentage of revenues.


12 Weeks Ended
 
24 Weeks Ended

June 13, 2017
 
June 14, 2016
 
June 13, 2017
 
June 14, 2016
Revenues
$
82,301

100.0
 %
 
$
79,916

100.0
 %
 
$
166,191

100.0
 %
 
$
161,110

100.0
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Costs of sales
23,433

28.5

 
22,637

28.3

 
47,214

28.4

 
45,855

28.5

Restaurant operating expenses
40,388

49.1

 
38,017

47.6

 
81,280

48.9

 
76,643

47.6

Marketing and advertising costs
1,618

2.0

 
2,133

2.7

 
2,918

1.8

 
3,454

2.1

Pre-opening costs
1,619

2.0

 
591

0.7

 
2,008

1.2

 
685

0.4

General and administrative costs
5,921

7.2

 
6,030

7.5

 
12,076

7.3

 
11,780

7.3

Consulting project costs
597

0.7

 


 
2,633

1.6

 


Reorganization severance
563

0.7

 


 
719

0.4

 


Lease termination and closing costs
540

0.7

 
20


 
538

0.3

 
41


Depreciation and amortization
4,997

6.1

 
4,163

5.2

 
9,813

5.9

 
8,448

5.2

Total costs and expenses
79,676

96.8

 
73,591

92.1

 
159,199

95.8

 
146,906

91.2

Insurance settlements
308

0.4

 


 
348

0.2

 


Operating income
2,933

3.6

 
6,325

7.9

 
7,340

4.4

 
14,204

8.8

Other income (expense), net:
 

 
 
 
 
 
 
 
 
 
Interest, net of capitalized interest
(9
)

 
(24
)

 
(19
)

 
(55
)

Other  
(10
)

 
(5
)

 
(11
)

 
(5
)

Income before income taxes
2,914

3.5

 
6,296

7.9

 
7,310

4.4

 
14,144

8.8

Income tax expense
824

1.0

 
1,852

2.3

 
1,910

1.1

 
4,289

2.7

Net income
$
2,090

2.5
 %
 
$
4,444

5.6
 %
 
$
5,400

3.2
 %
 
$
9,855

6.1
 %
Fiscal Quarter Ended June 13, 2017 ( 12 weeks) Compared to the Fiscal Quarter Ended June 14, 2016 ( 12 weeks)
The following tables show our operating results (in thousands) by segment and on a consolidated basis, as well as our operating results as a percentage of revenues, for the 12 weeks ended June 13, 2017 and June 14, 2016 . The tables below include Restaurant-level EBITDA, a non-GAAP measure. See Note 7 , Segment Reporting in the notes to our condensed consolidated financial statements for additional information on this metric, including a reconciliation to net income, the most directly comparable GAAP measure.
໿

12 Weeks Ended June 13, 2017

Del Frisco's
 
Sullivan's
 
Grille
 
Consolidated
Revenues
$
40,194

 
100.0
%
 
$
15,620

 
100.0
%
 
$
26,487

 
100.0
%
 
$
82,301

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
11,912

 
29.6

 
4,771

 
30.5

 
6,750

 
25.5

 
23,433

 
28.5

Restaurant operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
9,611

 
23.9

 
4,676

 
29.9

 
8,889

 
33.6

 
23,176

 
28.2

Operating expenses
4,234

 
10.5

 
2,274

 
14.6

 
3,534

 
13.3

 
10,042

 
12.2

Occupancy
2,808

 
7.0

 
1,360

 
8.7

 
3,002

 
11.3

 
7,170

 
8.7

Restaurant operating expenses
16,653

 
41.4

 
8,310

 
53.2

 
15,425

 
58.2

 
40,388

 
49.1

Marketing and advertising costs
720

 
1.8

 
437

 
2.8

 
461

 
1.7

 
1,618

 
2.0

Restaurant-level EBITDA
$
10,909

 
27.1
%
 
$
2,102

 
13.5
%
 
$
3,851

 
14.5
%
 
$
16,862

 
20.5
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant operating weeks
150

 
 
 
202

 
 
 
276

 
 
 
628

 
 
Average weekly volume
$
268

 
 
 
$
77

 
 
 
$
96

 
 
 
$
131

 
 


16



12 Weeks Ended June 14, 2016

Del Frisco's
 
Sullivan's
 
Grille
 
Consolidated
Revenues
$
37,945

 
100.0
%
 
$
17,575

 
100.0
%
 
$
24,396

 
100.0
%
 
$
79,916

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
11,236

 
29.6

 
5,215

 
29.7

 
6,186

 
25.4

 
22,637

 
28.3

Restaurant operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
8,430

 
22.2

 
5,237

 
29.8

 
7,836

 
32.1

 
21,503

 
26.9

Operating expenses
4,395

 
11.6

 
2,612

 
14.9

 
3,266

 
13.4

 
10,273

 
12.9

Occupancy
2,371

 
6.2

 
1,289

 
7.3

 
2,581

 
10.6

 
6,241

 
7.8

Restaurant operating expenses
15,196

 
40.0

 
9,138

 
52.0

 
13,683

 
56.1

 
38,017

 
47.6

Marketing and advertising costs
821

 
2.2

 
580

 
3.3

 
732

 
3.0

 
2,133

 
2.7

Restaurant-level EBITDA
$
10,692

 
28.2
%
 
$
2,642

 
15.0
%
 
$
3,795

 
15.6
%
 
$
17,129

 
21.4
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant operating weeks
144

 
 
 
216

 
 
 
240

 
 
 
600

 
 
Average weekly volume
$
264

 
 
 
$
81

 
 
 
$
102

 
 
 
$
133

 
 

Revenues. Consolidated revenues increased $ 2.4 million , or 3.0% , to $ 82.3 million in the second  quarter of 2017 from $ 79.9 million in the second quarter of 2016 . This increase was primarily due to 28 net additional operating weeks in the second quarter of 2017 , resulting from  five new restaurant openings over the past four quarters. This increase was partially offset by decreased revenue at our comparable restaurants, the closing of the Seattle, Washington and Houston, Texas Sullivan's restaurants and decreased traffic at the Indianapolis, Indiana Sullivan's restaurant due to remodel work. These three Sullivan’s locations were removed from the comparable restaurant base for the second quarter of 2017 . Comparable restaurant sales decreased 2.2% for the second quarter of 2017 comprised of a 2.1% decrease in customer counts and a 0.1% decrease in average check.
Del Frisco’s revenues increased $ 2.2 million , or 5.9% , to $ 40.2 million in the second quarter of 2017 from $ 37.9 million in the second quarter of 2016 .  This increase was primarily due to increased average weekly sales at the Orlando, Florida and the relocated Dallas, Texas Del Frisco’s restaurants, as well as an additional six operating weeks due to the opening of the Plano, Texas restaurant, partially offset by a decrease in comparable restaurant sales. Comparable restaurant sales decreased by  0.5% , comprised of a 2.3%   decrease in customer counts and a  1.8%   increase in average check.
Sullivan’s revenues decreased $ 2.0 million , or 11.1% , to $ 15.6 million in the second quarter of 2017 from $ 17.6 million in the second quarter of 2016 . The decrease in revenues was primarily due to the loss of 14 operating weeks due to the closure of the Seattle, Washington and Houston, Texas Sullivan’s restaurants during the second quarter of 2017, decreased traffic at the Indianapolis, Indiana Sullivan’s restaurant due to remodel work, and a decrease in comparable restaurant sales. Comparable restaurant sales decreased by 5.2% , comprised of a 8.6% decrease in customer counts and a 3.4% increase in average check. The decrease in comparable restaurant sales was primarily due to eliminating lunch at selected Sullivan's restaurants during the second quarter of 2017.
Grille revenues increased $ 2.1 million , or 8.6% , to $ 26.5 million in the second quarter of 2017 from $ 24.4 million in the second quarter of 2016 . This increase was primarily due to  36  additional operating weeks provided by three new restaurant openings over the past four quarters, partially offset by a decrease in comparable restaurant sales.  Comparable restaurant sales decreased by 3.2% , comprised of a 1.2% increase in customer counts and a 4.4% decrease in average check. 
Cost of Sales . Consolidated cost of sales increased $ 0.8 million , or 3.5% , to $ 23.4 million in the second quarter of 2017 from $ 22.6 million in the second quarter of 2016 . This increase was primarily due to a net additional 28 operating weeks in the second quarter of 2017 , as discussed above. As a percentage of consolidated revenues, consolidated cost of sales increased to 28.5% during the second quarter of 2017 from 28.3% in the first quarter of 2016 .
As a percentage of revenues, Del Frisco’s cost of sales  remained at   29.6% during the second quarter of 2017 compared to the second quarter of 2016 .
As a percentage of revenues, Sullivan’s cost of sales increased to 30.5% during the second quarter of 2017  from 29.7%  in the second quarter of 2016 . This increase in cost of sales, as a percentage of revenues, was primarily due to increased seafood, liquor, and beer costs.

17


As a percentage of revenues, Grille cost of sales increased to 25.5% during the second quarter of 2017 from 25.4% in the second quarter of 2016 .  This increase in cost of sales, as a percentage of revenues, was primarily due to increased produce, liquor, and beer costs.
Restaurant Operating Expenses. Consolidated restaurant operating expenses increased $ 2.4 million , or 6.2% , to $ 40.4 million in the second quarter of 2017 from $ 38.0 million in the second quarter of 2016 . This increase was primarily due to a net additional 28 operating weeks in the second quarter of 2017 , as discussed above. As a percentage of consolidated revenues, consolidated restaurant operating expenses increased to 49.1% in the second quarter of 2017 from 47.6% in the second quarter of 2016 .
 
As a percentage of revenues, Del Frisco’s restaurant operating expenses increased to 41.4% during the second quarter of 2017 from 40.0% during the second quarter of 2016.  This increase in restaurant operating expenses, as a percentage of revenues, was primarily due to higher labor and benefits costs and higher occupancy costs.
As a percentage of revenues, Sullivan’s restaurant operating expenses increased to 53.2% during the second quarter of 2017 from 52.0% in the second quarter of 2016 . This increase in restaurant operating expenses, as a percentage of revenues, was primarily due to higher labor and benefits costs and higher occupancy costs.
As a percentage of revenues, Grille restaurant operating expenses increased to 58.2% during the second quarter of 2017 from 56.1% in the second quarter of 2016 . This increase in restaurant operating expenses, as a percentage of revenues, was primarily due to higher labor and benefits costs and higher occupancy costs.
Marketing and Advertising Costs . Consolidated marketing and advertising costs decreased by $ 0.5 million to $ 1.6 million in the second quarter of 2017  compared to $ 2.1 million in the second quarter of 2016 . As a percentage of consolidated revenues, consolidated marketing and advertising costs decreased to 2.0% in the second quarter of 2017 from 2.7% in the second quarter of 2016 .
As a percentage of revenues, Del Frisco’s marketing and advertising costs decreased to 1.8% during the second quarter of 2017 from 2.2% in the  second quarter of 2016 . Marketing and advertising costs, as a percentage of revenues, decreased primarily due to lower print media, broadcast media and other marketing costs, partially offset by higher digital advertising costs.
As a percentage of revenues, Sullivan’s marketing and advertising costs decreased to 2.8% during the second quarter of 2017 from 3.3% in the second quarter of 2016 . Marketing and advertising costs, as a percentage of revenues, decreased primarily due to lower print media, broadcast media and other marketing costs, partially offset by higher digital advertising costs.
As a percentage of revenues, Grille marketing and advertising costs decreased to 1.7% during the second quarter of 2017 compared to 3.0% in the second quarter of 2016 .  The decrease in marketing and advertising costs, as a percentage of revenues, was primarily due to lower print media, broadcast media and other marketing costs, partially offset by higher digital advertising costs. 
Pre-opening Costs . Pre-opening costs increased by $ 1.0 million to $ 1.6 million in the second  quarter of 2017 from $ 0.6 million in the second quarter of 2016 due primarily the timing of new restaurants under construction versus the prior year comparable period. Pre-opening costs include non-cash straight line rent, which is incurred during construction and can precede a restaurant opening by four to six months.
General and Administrative Costs . General and administrative costs decreased to $ 5.9 million in the second  quarter of 2017  from $ 6.0 million in the second quarter of 2016 . As a percentage of revenues, general and administrative costs decreased to 7.2% in the second quarter of 2017 compared to 7.5% in the first quarter of 2016 . This decrease was primarily related to decreases in incentive employee compensation, partially offset by increased travel expenses and professional fees. General and administrative costs are expected to decrease as a percentage of total revenues over time as we leverage investments made in our people and systems.
Lease Termination and Closing Costs . During the  second  quarter of 2017 , we incurred approximately $ 0.5 million in charges related to the closure of the Seattle, Washington and Houston, Texas Sullivan's restaurants.  No such charges were incurred in second  quarter of 2016 .
Consulting Project Costs . Consulting project costs were $ 0.6 million in the second quarter of 2017 . These costs are primarily related to consumer insight research supporting the Grille restaurants and we expect minimal such costs after the second quarter of 2017 . No such costs were incurred in the second quarter of 2016 .
Reorganization Severance . Reorganization severance costs were $ 0.6 million in the second quarter of 2017 . These costs are primarily related to the costs associated with replacing certain employees in leadership positions as a part of strategic initiatives effected by our executive leadership team. No such costs were incurred in the second quarter of 2016 .

18


Depreciation and Amortization . Depreciation and amortization increased $ 0.8 million , or 20.0% , to $ 5.0 million in the  second quarter of 2017 from $ 4.2 million in the second quarter of 2016 . The increase in depreciation and amortization expense primarily resulted from restaurant openings and remodeled restaurants over the past five quarters.
Income Tax Expense.  The effective income tax rate for the  second quarter of 2017 was 28.3% compared to  29.4% for the second quarter of 2016 . The factors that cause the effective tax rates to vary from the federal statutory rate of 35% include the impact of FICA tip and other credits, partially offset by state income taxes and certain non-deductible expenses.
24 Weeks Ended June 13, 2017 Compared to the 24 Weeks Ended June 14, 2016
The following tables show our operating results (in thousands) by segment and on a consolidated basis, as well as our operating results as a percentage of revenues, for the first two quarters of 2017 and 2016 . The tables below include Restaurant-level EBITDA, a non-GAAP measure. See Note 7 , Segment Reporting in the notes to our condensed consolidated financial statements for additional information on this metric, including a reconciliation to net income, the most directly comparable GAAP measure.
໿

24 Weeks Ended June 13, 2017

Del Frisco's
 
Sullivan's
 
Grille
 
Consolidated
Revenues
$
79,955

 
100.0
%
 
$
33,402

 
100.0
%
 
$
52,834

 
100.0
%
 
$
166,191

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
23,682

 
29.6

 
10,025

 
30.0

 
13,507

 
25.6

 
47,214

 
28.4

Restaurant operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
19,299

 
24.1

 
10,080

 
30.2

 
17,896

 
33.9

 
47,275

 
28.4

Operating expenses
8,371

 
10.5

 
4,860

 
14.6

 
7,111

 
13.5

 
20,342

 
12.2

Occupancy
5,680

 
7.1

 
2,126

 
6.4

 
5,857

 
11.1

 
13,663

 
8.2

Restaurant operating expenses
33,350

 
41.7

 
17,066

 
51.1

 
30,864

 
58.4

 
81,280

 
48.9

Marketing and advertising costs
1,316

 
1.6

 
752

 
2.3

 
850

 
1.6

 
2,918

 
1.8

Restaurant-level EBITDA
$
21,607

 
27.0
%
 
$
5,559

 
16.6
%
 
$
7,613

 
14.4
%
 
$
34,779

 
20.9
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant operating weeks
294

 
 
 
410

 
 
 
552

 
 
 
1,256

 
 
Average weekly volume
$
272

 
 
 
$
81

 
 
 
$
96

 
 
 
$
132

 
 


24 Weeks Ended June 14, 2016

Del Frisco's
 
Sullivan's
 
Grille
 
Consolidated
Revenues
$
76,288

 
100.0
%
 
$
36,476

 
100.0
%
 
$
48,346

 
100.0
%
 
$
161,110

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
22,633

 
29.7

 
10,781

 
29.6

 
12,441

 
25.7

 
45,855

 
28.5

Restaurant operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
17,554

 
23.0

 
10,766

 
29.5

 
15,831

 
32.7

 
44,151

 
27.4

Operating expenses
8,325

 
10.9

 
5,314

 
14.6

 
6,357

 
13.1

 
19,996

 
12.4

Occupancy
4,932

 
6.5

 
2,487

 
6.8

 
5,077

 
10.5

 
12,496

 
7.8

Restaurant operating expenses
30,811

 
40.4

 
18,567

 
50.9

 
27,265

 
56.4

 
76,643

 
47.6

Marketing and advertising costs
1,439

 
1.9

 
938

 
2.6

 
1,077

 
2.2

 
3,454

 
2.1

Restaurant-level EBITDA
$
21,405

 
28.1
%
 
$
6,190

 
17.0
%
 
$
7,563

 
15.6
%
 
$
35,158

 
21.8
%