Why Fiesta Restaurant's Turnaround Could Take Multiple Quarters To Bear Fruit

Fiesta Restaurant Group IncFRGI

, the parent company of fast-casual

restaurant brands including Pollo Tropical and Taco Cabana, disappointed investors in its

first-quarter report

, which consisted of top- and bottom-line misses.

Following the report, Will Slabaugh of Stephens downgraded

Fiesta's stock rating

from Overweight to Equal-Weight with an unchanged $25 price target. The analyst highlighted the fact that the company's report was in-line with a prior same-store sales pre-announcement, which consisted of negative 6.7 percent at Pollo Tropical and negative 4.5 percent at Taco Cabana.

Moreover, the company's reported earnings per share of $0.25 fell short of the analyst's own estimate of $0.23 per share, which was attributed to slightly better COGS (cost of goods sold), higher labor and sales deleveraging.

Turnaround Will Take Time

Slabaugh further argued Fiesta's initiatives to turn around its business, including closing underperforming stores, are commendable. But while this is happening, the analyst is still "somewhat concerned" over rapid declines seen at core Pollo locations that previously posted industry-leading average unit volume, margins and growth.

Slabaugh added he is also worried Fiesta's revitalization plan could "take multiple quarters to bear fruit," which implies investors will be greeted with "soft results for an extended period of time."

Finally, the analyst explained Fiesta's stock is currently trading at 8.7x his 2017E EBITDA estimate and 26.3x his 2017 adjusted earnings per share outlook. A $25 price target assumes like multiples of 8.9x and 27.0x.

At time of publication, shares of Fiesta Restaurants were down 5.75 percent at $22.95.