JCP Issues Letter To Fiesta Restaurant Group Stockholders

May 24, 2017

Dear Fellow Fiesta Stockholders:

JCP Investment Management, LLC, together with its affiliates and the other participants in its solicitation (collectively, "JCP" or "we"), collectively one of the largest stockholders of Fiesta Restaurant Group, Inc. ("Fiesta" or the "Company"), with aggregate ownership of approximately 9.0% of the Company's outstanding shares, is dedicated to maximizing value for Fiesta's stockholders, the true owners of the Company. Like all of Fiesta's other stockholders, we will only be able to achieve a return on our investment upon the appreciation in value of Fiesta's stock. As such, we are committed to ensuring that the Company's Board of Directors (the "Board") is comprised of the optimal set of individuals to serve as stewards of stockholder capital.

Under the leadership of the incumbent Board, including directors Barry J. Alperin and Brian P. Friedman (the Jefferies-affiliated directors we are seeking to replace), Fiesta has:

• Materially underperformed relevant indices and its peers;
• Suffered from poor corporate governance practices;
• Poorly allocated capital to negative cash flow investments;
• Experienced weak operating performance at both Pollo Tropical and Taco Cabana;
• Lacked a strategic plan for Taco Cabana; and
• Suffered from what appears to be a generally unengaged Board.

We believe that under the leadership of a properly functioning and well-qualified Board, the significant value destruction experienced by Fiesta stockholders over the past several years should not have occurred.

Since filing our initial Schedule 13D in September 2016, we note the occurrence of the following events that reinforces our belief that the incumbent Board is entrenched and further calls into question the incumbents' ability to effectively oversee the Company:

• Operating results and stock price performance have worsened;
• No non-executive director has stepped down from the Board despite Fiesta's troubling performance;
• Fiesta went 5 full months without a permanent CEO – indicating no succession plan was in place;
• Jefferies' parent company, Leucadia National Corporation, purchased approximately 3.7% of Fiesta after its stock declined by more than 20% in a single day;
• Nicholas P. Shepherd was unilaterally appointed to the Board – Mr. Shepherd also serves as a director (and Chairman of recently formed Operating Committee) of Spirit Realty Capital, Inc., which suffered a one-day share price decline of nearly 25% in the past few weeks; and
• Jack A. Smith was removed as Chairman of the Board, but somehow continues to serve as a director after overseeing Fiesta's underperformance.

Abysmal Total Shareholder Return

Pollo Tropical and Taco Cabana are both strong regional brands with good opportunities for growth within their regions and on a same store basis.  Under the leadership of the incumbent Board, Fiesta has failed to capitalize on these opportunities. The lack of strategic monitoring by the Board over the past several years is apparent in Fiesta's stock price as it has underperformed the Russell 2000 Restaurant Index and the Company's own 2016 Proxy Group.

Not only has Fiesta materially underperformed its peers and relevant indices over the past 5 years, Fiesta has produced negative total shareholder returns over the last 1, 2 and 3-year periods. Despite Fiesta's poor performance, the only person who has been held "accountable" in a sense is former Chief Executive Officer Timothy P. Taft, who is the only individual no longer on the Board. We find the lack of accountability to be troubling.

Poor Corporate Governance

The incumbent Board has utilized Fiesta's corporate machinery to insulate itself from the Company's stockholders, the most egregious example being the classified Board structure that subjects directors to re-election only once every three years.

In addition to the classified Board structure, we believe that Fiesta should take steps to eliminate the following stockholder unfriendly provisions:

• Stockholders cannot act by written consent;
• Stockholders cannot call special meetings;
• Supermajority voting requirement to amend organizational documents;¹ and
• Directors may only be removed for cause by a supermajority vote.

The two directors we are seeking to replace, Messrs. Alperin and Friedman, both former practicing attorneys, should fully appreciate the anti-stockholder nature of these entrenchment devices, and we are disappointed that they have allowed them to persist during their tenure.

Indicative of Fiesta's poor corporate governance is the outsized influence that Jefferies has maintained in the boardroom. There are still 3 Jefferies-affiliated directors on the Board despite Jefferies selling its last Fiesta shares in September 2013 after previously owning approximately 28.3% of the Company. As shown below, this has presented certain conflicts of interest that make us question the independence of the Jefferies-affiliated directors.

We are concerned that Fiesta's corporate governance shortcomings and potential conflicts of interest will persist unless stockholders take advantage of the opportunity to replace Messrs. Alperin and Friedman at the Annual Meeting.

Poor Capital Allocation Decisions – Negative Cash Flow Investments

Fiesta has spent more than $350 million over the past 6 years on capital expenditures while experiencing an approximately $11 million decline in income from operations.² Chief among the abysmal capital allocation decisions was the Board's authorization to spend more than $70 million expanding into Texas with an unproven concept for a prospective market – opening more than 36 Pollo Tropical locations while neglecting the core Florida market. In fact, the failed expansion resulted in approximately $12.5 million of operating losses.³ Even Fiesta's new CEO Rich Stockinger seemingly agrees the expansion into Texas at the expense of core markets was a bad idea noting:

"While the decision to close restaurants is never easy, we believe it is vital to focus the company's resources and efforts on markets and locations that have proven successful for our brands."⁴

If elected, Messrs. Morlock and Pappas will bring capital allocation discipline to the boardroom and will focus on high return investments by assessing sales to investment ratio and restaurant level margins.

Weak Operating Performance at Pollo Tropical and Taco Cabana

Under the leadership of the incumbent Board, Pollo Tropical's Adjusted EBITDA margins have declined from 17.0% in 2011 to 13.8% currently,⁵ which has hurt its ability to generate higher free cash flow.

In addition, Average Unit Volume traffic at both brands has been falling, with the decline being most dramatic at Pollo Tropical. New CEO Rich Stockinger recently stated:

"Fiesta's recent growth initiatives diverted resources from our core markets, and some amount of renewal is required to restore momentum in these markets."⁴

Mr. Stockinger recognized the problem shortly into his tenure, why didn't the incumbent directors?

Lack of Strategic Plan for Taco Cabana

The Company's strategic plan for Taco Cabana has been in flux since February 2016 when Fiesta announced that it was spinning off Taco Cabana, only to change those plans in September 2016 (subsequently losing its Chief Operating Officer). While the Board pursued the failed expansion of Pollo Tropical into Texas, Taco Cabana was largely neglected. Taco Cabana has experienced anemic store growth from 158 stores in 2011 to 166 stores at the end of 2016. Meanwhile, Taco Cabana's operating expenses per store have gone from approximately $225,000 in 2011 to nearly $255,000 in 2016 – during a time when it was struggling to gain traffic momentum.

We believe Taco Cabana is a very strong brand in Texas, and with the wealth of experience Messrs. Morlock and Pappas bring with respect to the Texas market, we intend to fully explore all opportunities to grow Taco Cabana's store base and same store sales.

The Unengaged Board

Being engaged at the Board level, understanding which stores are cash flow positive and which are cash flow negative, is a key part of delivering stockholder value at restaurant companies. The same Board that agreed to add 47 new Pollo Tropical restaurants over the course of 4 years recently announced the closure of 30 of these locations. This, coupled with new CEO Rich Stockinger's list of 170 action items that must be taken to address Fiesta's ever-worsening performance, indicates to us that the incumbent directors were unaware of the deteriorating performance of the Company.

It is evident to us that Fiesta is desperately in need of directors who will bring proper oversight and an enhanced level of accountability. Even Fiesta's recently announced "Strategic Renewal Plan" appears reactionary as it is light on details and appears to simply offer the incumbent Board several more months to find strategic visions for its two brands. As more fully explained in our investor presentation, we have devised an illustrative plan to drive top line, margin and multiple expansion.

If elected, our nominees eagerly look forward to working with the new CEO and the other members of the Board to ensure that a precise operating turn-around plan is achieved.

We encourage stockholders to visit our website at www.FixFiesta.com to review our detailed investor presentation.

The time for accountability is now. We urge stockholders to send a clear message to the Board that Fiesta's continued underperformance and pattern of entrenchment will not be tolerated by voting the GOLD proxy to elect our highly qualified candidates John B. Morlock and James C. Pappas. 

VOTE THE GOLD PROXY CARD TO ELECT JOHN B. MORLOCK AND JAMES C. PAPPAS TODAY

If you have any questions, or require assistance with your vote, please contact InvestorCom, toll-free at (877) 972-0090, call direct at (203) 972-9300

About JCP Investment Management:

JCP Investment Management, LLC is an investment firm headquartered in Houston, TX that engages in value-based investing across the capital structure.  JCP follows an opportunistic approach to investing across different equity, credit and distressed securities largely in North America.

Investor Contacts:

James C. Pappas
JCP Investment Management, LLC
(713) 333-5540

John Glenn Grau
InvestorCom
(203) 972-9300

Media Contact:

Gotham Communications
Bill Douglass, (646) 504-0890
[email protected]

¹ Including all Bylaw provisions and stockholder unfriendly provisions in the Charter.
² Fiesta Form 10-K filings.
³ Calculated based on information contained in Fiesta's earnings release issued February 27, 2017.
⁴ Fiesta April 24, 2017 Press Release.
⁵ Fiesta Form 10-K filings.

SOURCE JCP Investment Management, LLC

Related Links

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