Q4 2019 Earnings Call
Greetings and welcome to El Pollo Loco fourth quarter 2019 earnings Conference call.
At this time, all participants are in listen only mode.
A brief question answer session will follow the formal presentation.
If anyone should require operator assistance during the call. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to Mr., Larry Roberts CFO.
Mr. Robert you may begin.
Thank you operator, and good afternoon by now everyone should have access to our fourth quarter 2019, particularly if not it can be found that www <unk> no pull your local dotcom.
After relations section.
Before we begin our formal remarks I need to remind everyone. There are discussions today will include forward looking statements, including statements related to our key initiatives for 2020 can be on plan for a new store openings.
And our financial outlook between 29.
These forward looking statement are not guarantees of future performance and therefore, you should not put undue reliance on now.
These statements are also subject to numerous risks and uncertainties that could cause actual results could differ materially what we expect.
We refer all to you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
We expect to file our 10-K between 19 tomorrow. It would encourage you to review the document at your early convenient.
On today's call, whether it's got non-GAAP measures, which we believe can be useful in evaluating our performance. It presentation of this additional information should not be considered isolation, where I think that's due to poor results prepared in accordance with gap and reconciliations to comparable GAAP measures are available in our earnings release.
I'd now like to turn the call over the President and Chief Executive Officer bring Artico.
Thanks, Larry Good afternoon, everyone and thank you all for joining us today.
We ended 2019 on the strong, though with our highest system wide comparable restaurant sales growth resulted the year at 3.9% for the quarter.
Not only did this mark our sixth consecutive quarter of positive system wide comparable restaurant sales growth, but it was also achieved against the tough industry backdrop, and a challenging 4.4% sales comparison from 2018.
The successful lapping of these compares generated an impressive two years system comp of 8.3%, which is the best we've had in four years.
The results generated in the quarter also helped propel our 2019 full year system wide comparable restaurant sales growth to its highest level since 2015.
I'm proud of these results and even more so the fact that the comp sales in the quarter were driven predominantly by traffic.
Before discussing our key initiatives for 2020.
I'd like to provide a little more detail on our successes in the fourth quarter 2019.
Sales growth across the months was relatively consistent despite more difficult rollovers in November and December.
We're pleased to report this momentum has continued into 2020, which we believe is attributable to our differentiated L.A. Max culinary innovation.
Expansion of our delivery capabilities.
Statements of our five dollar value platform.
The diversification of our media strategy strengthening operation and the ongoing success of our transformation agenda.
The fourth quarter was predominately focused on our holiday promotion.
The holidays or a season, we believe we are uniquely qualified to be associated with and own El Pollo Loco.
To achieve this we approached this year's holiday promotion very differently from years past.
Holiday 2019 was designed to create a seasonal experience for our customers as much as it was intended to deliver holiday relevant food. They look forward to all year and love.
For the first time never our restaurants turned red and were enveloped in holiday centric merchandising and packaging.
Our menu boards cups.
<unk> packaging and point of sale materials, all the boat the festive spirit of the holidays.
The music played no restaurants was a curated lists the both holiday classics and Latin favorites.
And then array of six beautifully designed gift cards were produced to capitalize on the gifting season, and we complemented these physical gift cards with the same array of eat gift cards, which we offered for the first time online.
Against this backdrop, we were proud to bring back with the new innovative spend are below handmade chicken tamales, which we paired with different items in our unique holiday kamali bowls.
This year, we expanded our portfolio of seasonal favorites by introducing a pin sold a better they soup a Mexican staple for the holidays and our news signature Mexican Hot chocolate made with I believe that chocolate.
We believe this comprehensive approach to the holidays made them, even more special for our customers and employees alike, and we look forward to building. Upon this tradition in the years to come.
As we look to transition our business away from Overreliance on limited time offerings to investing in more evergreen platforms.
We sustained our very successful five dollar fire grilled cabos value lineup, which we introduced at the beginning of September and continue to promote throughout Q4.
Based on its strong mix and popular following we have continued to make it available in our restaurant and will promote it for the duration of 2020.
Also in September we expanded our third party marketplace delivery portfolio by adding breeds and Postmates, which contributed to positive transaction and sales during the fourth quarter.
The addition of these third party delivery providers and the execution of our bifurcated menu strategy, where we focus on a curated delivery menu emphasizing family meals and combos drugs system wide delivery mix of approximately 3% in the quarter.
Moreover, we recently added grubhub to our portfolio, making it the fourth marketplace on which our customers can access our food for delivery.
During the fourth quarter, we continue to make excellent progress against their operation strategies.
Highlights included completing the implementation of our new automated inventory management system. The company operated restaurants as well as the system wide rollout of our new streamlined operations manual and our simplified chicken cooking process.
We are confident that these efforts to reduce back of house complexity will drive sales over the longer term as more time is freed up for our employees to engage with our customers.
In fact research data by NPD group and independent market Research company indicates that we continue to make significant progress in improving our restaurant operations.
While our food satisfaction scores continue to far exceed those of our QSR and even fast casual competitors. According to NPD group.
Our service scores were the best they had been in several years and are now well above both the QSR and fast casual averages.
Great food and improved service resulted in improved value scores, which we believe are reflected in our sales results.
Looking ahead to 2020, we will continue to execute against our transformation agenda, which as you'll recall, it's based on for strategic pillars.
One develop that people first culture to invest in and grow our talent.
To differentiate the brand.
Accentuate our strengths and build upon.
Three simplify operations make it easier to be a franchisee and employee El Pollo Loco.
And for grow the business responsibly and profitably for the long term.
2020, we will continue to make investments in our culture centered around our mission, which is the feed the loved that makes us all feel like family and focus on employee recognition and community involvement or what we refer to as hard centered leadership.
We believe that creating a mission, let culture will result in a more meaningful and uplifting work experience for our employees, which in turn will lead to better engagement in connection with our customers.
This year, we will continue to build upon our culture defining initiatives started in 2019, which includes the implementation of a food donation program system wide that good leftover food at the end of every evening to local shelters.
The donation of 75000 tacos to homeless shelters in our communities through our National Taco day by one feed many initiative.
And our day of service when 500 support center employees restaurant General managers franchisees and customer volunteers came together to beautify Historic Theodore Roosevelt High School and East Los Angeles in honor of says our charters day last April.
A major highlight this year will be our August restaurant General manager Conference.
At which time, we will celebrate our success recognize top performing employees and provide leadership training to company and franchise restaurant leaders. It will be our first restaurant General manager conference in 10 years.
In 2020, we will continue to differentiate our brand and we believe that culinary innovation is our biggest opportunity to sustain and accelerate our momentum.
Our emphasis will be on meaningful innovation that reinforces our el amex positioning, which combines the commentary traditions of Mexico with the healthier lifestyles of Los Angeles.
We believe that El Pollo Loco can democratize better for you eating and the way that no other brand can.
And you will see a greater number of healthier options in the coming months based on our customers diverse lifestyles.
We have built a robust product pipeline and are excited about the new products, we will showcase this year.
Each of our marketing modules during 2020, well pivot away from focusing on a singular limited time offer our approach of the past to showcasing one or two truly innovative product platforms.
Some products are designed to drive increased frequency among our core customers. While others are intended to recruit new users to our brands, particularly younger consumers. We call. This approach casting a wider net.
Our first promotion of this year in which we highlighted our pool football's as well as our whole cut wings is a perfect example would this approach.
Our apoyo fit both our delicious better for you bowls made with locally sourced organic spinach that helped our more health minded customers keep their new years resolutions.
Two of the Bulls or Quito certified and the others Paleo friendly.
These both deliver on taste freshness and high quality ingredients targeting a younger more health conscious consumer.
At the same time, we introduced our citrus marinated whole cut wings coded neither sweet potato salt or a garlic put tia driver.
He's delicious swings were geared toward our core Hispanic customer.
We believe this two pronged approach enables us to cast a wider net and can attract more new users to our brand while at the same time driving increased visit frequency from our core users.
When combined with the Sustainment of certain evergreen platforms like our five dollar fire grilled combos. We believe we can successfully reach multiple customer consistencies in a way that makes our brand more broadly appealing.
In addition to a focused on product innovation.
During 2020, we will continue to evolve our go to market model, expanding our social media and digital presence with special emphasis on ramping up our loyalty program.
Late last year, we added marketing resources to specifically focused on social and digital media delivery and loyalty.
For context, one year ago, 98% of our media spend was focused on television and print.
This year, 60% of our media buy is focused on television and print, 20% on digital 10% on radio and 10% on out of home are more diversified media approach is another way, we cast a wider net reaching more customers more often than before.
As we previously discussed we believe that we have a huge opportunity to both increased loyalty program membership and drive incremental sales through highly segmented relevant campaigns.
Our goal is to make our loyalty program local rewards the cornerstone of our digital flywheel.
While we have over 1.7 million loyalty members up until now we have done little to engage them on a sustained and meaningful basis, we plan to change that in 2020.
We just completed the behavioral segmentation of our entire loyalty database and are moving from a once a mass approach to a much more targeted personalized way to drive incremental sales and visits with our customers.
The program, which currently represents nine and half percent of our sales mix will be completely relaunched in the third quarter. This year to further accelerate its growth and impact to our business.
As part of this program relaunch, we've identified opportunities to attract new members and drive increased frequency by lowering the reward redemption threshold.
Currently members get a 10 dollar gift card for every 100 dollar spent.
This will become a five dollar gift card for every $50 spent.
By reducing the time it takes to redeem loyalty points. We believe we will attract more new members and sent more members to remain in the program and drive greater purchase frequency.
Our team has done an incredible job in very short order, eliminating some of the friction points in this program.
We have developed a detailed roadmap for the balance of the year and are extremely excited by the potential. This program holds for our business.
Our goal by the end of 2020 is for loyalty the comprised 12.5% of sales and become a more meaningful contributor of comp sales.
As I mentioned earlier, we credit our transformation agenda with laying the groundwork for accelerating comparable sales performance.
Simplifying operations has been a key pillar of our transformation agenda.
And we're very pleased by the progress, we've made and making it easier to be in El Pollo Loco employee and franchisee.
This is evidenced by the reduction in year over year turnover for 2019, which we experienced with every restaurant position across the board.
Overall management turnover is down three percentage points over 2018.
And overall crew turnover is down 15 percentage points.
This puts us 13 percentage points below the industry average with management and 39 percentage points below the industry average with crew.
In the fourth quarter, we began the process of reviewing labor deployment, and formerly clarifying roles and responsibilities for each of our employees.
This ensures the best utilization of labor, especially during peak sales periods since each employee knows exactly what is expected of him or her in the restaurant.
We're also rolling out a new cleaning system in the first quarter, which includes revamp processes, new tools and cleaners.
This new cleaning system works hand in hand, with the clarified roles and responsibilities to determine exactly who is responsible for specific job on a daily weekly or monthly basis.
And there's a simple card system to ensure that cleaning tests are completed.
In addition to these we continue to look at equipment.
Back of House technologies, and further process improvements.
As with the previous operational improvements these initiatives should not only drive lower turnover for both crew and management.
But we also believe they will have a positive impact on the customer experience.
While there's still a lot of work to be done on this front in 2020.
We're proud of the enhancements to operations, we've made thus far and are thrilled with the resulting positive impact on the customer experience.
Finally work on our new restaurant at the future design continues to progress well and we're very excited by what it can do for our brand.
We expect to complete three or four new image remodels by mid year.
If all goes as expected all Newbuilds and Remodels will use the new design, starting the second half of this year.
Before I turn the call over to Larry as always I would like to emphasize that these results are only possible due to the hard work and dedication of our employees and our franchisee partners.
They are the living embodiment of the Allpoint local brand and our successes are directly attributable to that I'd like to thank them for the daily sacrifices they make to create memorable brand experiences with their fellow employees and customers.
I'll now hand, the call over to Larry to review, our fourth quarter results in detail.
Thanks, Bernard you.
Before we get into our fourth quarter results.
First like to provide update on our store development.
During the quarter, we opened one new company operated restaurant in Los Angeles.
For the full year 2019, we opened two company operated restaurants, along with two franchise restaurants.
Looking ahead to 2020.
We expect to open three to four company operated and five to eight franchise restaurants.
We have shifted gears somewhat and now expect to enter our next new market with franchise development as opposed to company operated restaurants.
Consequently, we don't have as much control over the timing and while we are currently in active negotiation for new territory. The new market entry may slip into 2021.
We continue to make progress on a remodel effort.
During the quarter, we completed two company operated restaurant Remodels.
Please report their new asked design work is nearly complete.
During the first half between 20, we expect to remodel three to four stores using new design, which will then be used for all new build their next round of Remodels beginning in the back half of the year.
Over the next several years the company and franchisees are required to remodel over 300 restaurants, and we're very excited by the impact Eagle have using our new asset design, which better exemplified and communicate our LMS positioning.
Now onto our financial results.
For the fourth quarter ended December 25th 2019, total revenue was $107.5 million as compared to $106.3 million in the fourth quarter 2019.
Many operated restaurant revenue increased slightly to $94.8 million compared to $94.6 million and the same period last year.
Quite increasing company operated restaurant sales was driven by strong company operated comparable restaurant sales growth of 4.3% as well as by the contribution from the four new restaurants opened during and subsequent to the fourth quarter of 2018.
This increase was partially offset by the sale of 16 company operated restaurants to franchisees during 2019 and the closure of five restaurants during and subsequent to the fourth quarter of 2018.
The increase and company operated comparable restaurant sales was comprised of a 2.5% increase in transaction and a 1.8% increase average check.
As Bernard noted, we're pleased with the consistency of sales growth throughout the quarter as well as with our current first quarter mental.
Franchise revenue increased 11.4% in the fourth quarter to $7.2 million compared to $6.4 million. Prior year period. The increase was driven by 3.6% increase in comparable restaurant sales.
The transfer of the 16 company operated restaurants to franchisees as mentioned earlier and the contribution from four new franchise restaurants opened during and subsequent to the fourth quarter. A 2018. The increase was partially offset by four restaurant closures during the same period.
Turning to expenses.
Food and paper cost as a percentage of company restaurant sales decreased 20 basis point year over year to 28.2%.
Improvement was predominately due to higher menu prices, which were partially offset by higher weight and unfavorable sales mix as result of our holiday promotional calendar for 2020, we expect commodity inflation of approximately 1% to 2%.
Labor and related expenses as a percentage of company restaurant sales increased 80 basis point year over year to 30.1%.
The increase in labor expenses was due primarily to higher hourly wages in California, especially Los Angeles hires workers' compensation expense and lapping the reversal of an accrual for federal unemployment taxes in the fourth quarter of 2018.
These were partially offset by increased menu prices in the transfer of lower performing restaurants to franchisees during 2019.
We continue to expect labor inflation of 6% to 6% in 2020, reflecting the tight labor market and minimum wage increases.
Occupancy and other operating expenses as a percentage of company restaurant sales decreased 50 basis points year over year to 23.1% as higher prices lower advertising costs in a sale of our claim the proceeds of a visa Mastercard interchange fee class action lawsuit offset increases in occupancy.
Costs and marketplace delivery fees.
General and administrative expenses decreased by $2.2 million year over year to $10.2 million were approximately 230 basis points to 9.4% of total revenue.
Included in DNA or approximately $370000 of legal expenses associated with securities litigation compared to approximately $3 million a securities litigation legal expenses and executive transition costs incurred in the fourth quarter of 2018.
Excluding the costs associated with the Securities litigation and executive transition costs GA expenses in the fourth quarter of 2019 were $9.8 million compared to $9.4 million in 2018, an increase of approximately $413000 year over year for approximately 30.
Eight basis points to 9.1% the total revenue.
The increase in Gina expenses was primarily due to higher stock option expense increase and project spending in our year end bonus accrual.
Depreciation amortization expense decreased to $4.3 million from $4.8 million that fourth quarter of last year or 50 basis point year over year as a percentage of company revenue, primarily as a result to the sale of restaurants to franchisees.
As a reminder, during last year's fourth quarter, we incurred a total of $36.3 million a pre tax expense related to agreements in principle to settle several class action lawsuits.
Settlement agreements associated legal expenses have an adjusted out of our pro forma net income tax lateness. Additionally, last years fourth quarter, we received $2.3 million related to the reimbursement of legal costs associated with Illegals class action lawsuit.
We recorded a provision for income taxes of $720000 in the fourth quarter of 2019 for an effective tax rate of 17.2%.
This compares to an income tax benefit of $8.4 million at an effective tax rate at 26.4% NAV prior year fourth quarter.
We reported GAAP net income of $3.5 million or 10 cents per diluted share and a fourth quarter compared to a net loss of $23.4 million or 60 cents per diluted share in the prior year period.
Pro forma net income for the quarter was $6.2 million as compared to pro forma net income of $6.1 million that fourth quarter of last year.
Pro forma diluted earning per share were 18 cents for the fourth quarter of 2019 compared to 16 cents in the prior year period.
For a reconciliation of pro forma net income earning per share to the comparable GAAP measures. Please refer to our earnings release available in the Investor Relations section of our website.
In terms of our liquidity and balance sheet, we had $8.1 million in cash and equivalents as of December 20, Fiveth 2019 in $97 million and debt outstanding.
For the foreseeable future, we expect to finance, our operations, including New restaurant development and maintenance capital through available cash cash from operations and borrowing under our credit facility.
For 2020, we expect our capital expenditures that totaled 20 to 25 million dollar.
During the quarter, we've purchased 10872 shares for approximately $118000 or an average price of $10, an 89 cents excluding brokerage fees.
These purchases completed a 30 million dollar 2019 stock repurchase plan.
Turning to our outlook, we're providing a falling guy and for 2020, which is a 53 week fiscal year.
We expect pro forma diluted net income per share a 75 cents to 80 cents.
Our pro forma net income per share guide for 2020 is based in part on the following annual assumption.
We expect system wide comparable restaurant sales growth to be approximately 2% to 4%.
As I noted, we expect to open three to four new company owned restaurants, and expect our franchisees opened five to eight new restaurants.
We expect restaurant contribution margin between 18 and 18.7%.
We expect DNA expenses between 8.5%, 8.8% of total revenue, excluding legal fees related to securities class action litigation.
We expect adjusted EBITDA between 51, and $64 million and we're using a pro forma income tax rate the 26.5%.
This concludes our prepared remarks, we'd like to thank you again for joining us on the call today and we are now happy to answer any questions that you may have.
Thank you.
At this time will be conducting a question answer session.
If you like to ask a question. Please press star one on your telephone keypad and a confirmation tone indicate your line is in the question Q.
You mean fresh start to feel relate to move your question for in the queue. So.
So just mentioning speaker equipment, maybe necessary to pick up your handset before pressing the star Keith.
One moment, please so we pull for questions.
Thank you. The first question is coming from the line of Jake Bartlett with Suntrust. Please proceed with your questions great. Thanks for taking the question you know my first is really on the 800 pound virus in the room.
And the question is whether your your guidance for 2020 up for same store sales. It is contemplating much of an impact from the krona virus and into kind of the spread and the concerned about it from from consumers, but also whether what you're seeing now we think investors be curious to see what would the near term experience has been especially as.
Sure, yes fairly dense concentration in the L.A. market.
Yeah Jake.
So our guidance does not include any impact from the current virus.
Weve left that out of our guidance.
I'd also highlight that the even as up today.
We had not seen any impact on our sales our transactions in our restaurants.
So again, no impact that and seen yet and I restaurants, and our guidance does not include anything on the credit buyers.
Okay. That's really helpful and then on <unk> the comments about the momentum into 2020, I know whether it was was difficult early part of the first quarter last year can you provide some just context as to issue maybe quantify that where you where you stand right now quarter to date and maybe what you were comparing against it.
Can get a a better sensor that momentum.
Yeah, So again from quarter to date, we feel really good about momentum we have in the business.
I like that we are continue to be positive and transactions.
This quarter.
So we feel good I don't want to get into a more detailed on that.
But I would say last year the impact of the weather was somewhere probably around.
50 to 100 basis points as a as of now that will decline as we work through the quarter because.
March.
The weather last year is good so I thought the overall quarter impact will decline a I'd also highlight that.
While we did have that time, whether upside and this year that even now in the business, we're seeing the good levels of momentum.
And now we're lapping good weather versus good weather last year.
Got it and then last question is really on menu pricing and then and then the impact on margin. So if you could I know you gave us what the check was in the fourth quarter. If you could break out what the menu pricing was in the fourth quarter.
And then also and what do you expect for it for menu pricing in 2020.
Yes in the fourth quarter, we had pricing of around 3.7%.
On our business and then as we head into.
2020.
Obviously, it could vary as we worked through the year, but right now the target is to be somewhere around 3.5%.
That could go up or down depending on how we see the reaction. We just took pricing of about 1.8%.
Just a couple of weeks ago. So we'll see what your reaction to that.
I think I'd highlight is.
We we actually could lean in a little bit on pricing, depending on what we see.
Because as we look at the last round of pricing, we took which was November last year.
Which is about 810th of a percent and looking at our value scores through the fourth quarter of last year, we actually saw an improvement in value and I think thats all that has to do a service and probably the menu offerings. So again, we'll assess where we are right now targeting around 3.5%.
Could go up or down depending on the reaction in what we see from consumers, but feeling good about where our value scores are in the fat. Despite the fact that we took a probably somewhere around 3.5% pricing last year and still the value scores are strong and actually improved a little in the fourth quarter and rate transaction and the end the transaction to transact.
Positive.
Great. Thank you very much.
The next question is from the line of Matthew Difrisco. It was Guggenheim. Please proceed with your questions.
Thank you very much gosh I'm just a question I think you've talked a little bit thereabout, and we try to number there about 300 and the Remodels can you called it out a little bit as far as the timeline of that and then if you look at sort of almost 500 stores and assist them.
Thank you Sir.
Nearly 300 franchise 200 company, how should we think about 300 breaking out is it assumed that company is going to lead and then maybe Ah. So the majority of your companies. So two thirds of about 370 company and then maybe the remainder is going to be franchise and you expect the restaurant franchise to follow how should we think about that.
Yeah, Matt if it's early days and the thing I would say is is that.
Based on last we have a seven year remodel cycle.
And we actually finished that cycle really last year. So we're now at the point, where we're starting it overdue on Remodels now we've told everybody to hold off including ourselves until we work through the new asset design.
And then once the work that through through the first half of this year and then start building Remodels second half. This year, then we'll start ramping up the program and so I think from there it will be fairly even over the next several years and probably I would expect a 60 40 split franchise company I think.
[music].
As can be fairly even everybody has remodels do and now its obligation our franchise agreement and we think with the options will be providing with the new asset design that people want to sign up our yeah. I also want to provide a little strategic context for really where we are in the journey in regards to the new registered.
On design so.
A quick ironically.
Our coincidentally, we're really at the two year Mark of our transformation agenda, which we've always said is a three year transportation.
And what we've managed I think over the course of the past two years to successfully demonstrate.
Is the consistency and comparable restaurant.
Sales.
Which you know now Weve indicated were six consecutive quarters of that the improvement in the simplification or operations and again the back half of 2019 certainly.
With us increasing strength in the fourth quarter demonstrated that our operations are improving and continue to improve and that has resulted in a much stronger value proposition for the consumer which makes us feel a bit confident that should this continue we can command a bit more pricing power.
And now we find ourselves as we're about to embark in year three at a really exciting juncture in the company's history, because we have all these remodels in front of us and the thing that is quite frankly been holding the brand back a bit if you take a look at again independent research is our environment scores. So.
The ability to remodel the stores over the course of the next few years, we'll take that anchor off our next if you will modernize the brand and I think at that point, we'll have all guns blazing in terms of how we want to present ourselves of the world and the potential upside that can present.
Excellent I appreciate that color just spend on last point you mentioned also that the new market is probably going to be more timeline around 2021, and that's kind of your Franchisors company market. So your 20 development plan of three to four company in five to eight franchised I assume is it correct to assume that 21.
Beyond with that new market being a franchise market that.
In theory, you would grow more franchise stores, maybe three to four company, but maybe that five to eight goes higher so your percentage of future growth is going to be even more skewed towards franchise and what your current store basis.
Yes that would be the correct assumption.
Thank you so much.
Our next questions from the line of David Tarantino with Robert W. Baird. Please proceed with your question.
Hi, good afternoon, and congrats on a strong finish to 2019.
Part of this year so.
My question is a follow up on the unit growth.
And I think you mentioned the you've now pivoted, so focusing on franchisees answering the new markets and set a company and I was just wondering if you could.
Talk about why you made that change that's my first question.
Yes, so David this is Bernard.
I think for a few reasons one.
We are right on track, where we expected to be with our new restaurant design in the future and.
As we mentioned earlier, we are also on track to start building that new new design in our core market of Los Angeles, and a few different formats here and what we really wanted to do.
Is to vet that out.
We're very very excited about what that new design holds for the brand and holds for the company.
But we want to test that out in a company environment first.
See the returns that that new asset can bring us and then once we do that and start to build it out in the core market improve the model out then.
Unleash it if you will in new markets with franchisees local franchisees, who we believe quite frankly, no their local markets better can take full advantage of this proven asset.
That will be building in the second half of this year.
And can probably gain greater traction in speed with that model on a go forward basis. So those are the primary reasons for the change.
Great and then Bernard maybe the second part of the question is just the overall interest you're saying.
Franchises to build new units.
It would be.
Step up from.
You did in 2019, but just if you could talk about the overall interest are seeing.
Among your existing base and then also.
With potential new franchises to enter new markets at this point yeah.
Well I think we always have strong and franchisee interest to build new stores, new restaurants, I think we have kind of tempered that were held them back a bit with that because we've been playing catch up with this new restaurant design that we want to provide them to be able to open up these new restaurants added at a greater pace. So.
That's really why im so excited about what we have in front of US certainly in the back half this year and beyond.
So in regards to franchisees wanting to open up with us in in new markets.
Certainly we were always in discussions with our franchisees to do that but we are going to really start to more actively recruit new franchisees bring some some new franchisees into the system, which quite candidly, we haven't been very aggressive with over the past few years and so we've managed to.
Successfully grow the brand with.
Some very well established very very talented and.
Franchisees that had been with US a long time, but we are in the process of actively recruiting new franchisees to coincide with the development of this new restaurant design to future, Yes, I'd just add debt and there are few discussions going on right now you're fairly preliminary but there are discussions with franchisees new franchisees.
And at our markets.
Great and then last question on this front so I think.
Last year, maybe first half of last year, you talked about a goal to get to.
5% system.
Gross then and I just wanted to confirm is that still the plan and then how long do you think it'll take.
To that if that's the plan.
Did that is still the goal I think as we talked about that I see our.
Realistically, we're probably looking two to three years out to be at that.
Well again this year is a little bit a step up we're going to put a lot efforts around the printer just highlighted.
Both in our current franchisees and recruiting new franchisees, they get that ramped up but we're probably two to three years out from getting to a 5%.
New build number.
Great. Thank you very much thanks.
Thank you as a reminder, during my first start one to ask a question.
The next question is from the line of Sharon Zackfia with William Blair. Please proceed with your question.
Hi, Good afternoon, I was hoping to talk to average ticket because I think you've had some negative nextera, that's kind of blended on little bit of any price flow through so I'm, hoping you can give some color on and if that's been really the value dynamic that you've been introducing to the menu and when we when it comes.
Got to kind of neutralize there may be turned more positive and 2020 and how does a corollary to that how you view balancing kind of premiumization versus value on the menu today.
Yes, Sharon this is Bernard I'll, let Larry go into little bit more detail on some things, but I think I just want to set up the strategy for you because.
I think it's important for everyone to understand so our our menu is evolving and.
If I look back on 2019, you know in full transparency I am not as happy as as I say.
As I would let would've liked to have been based on the products, we had coming out of our pipeline. It took us a little bit of time to play catch up.
And now as I mentioned earlier I'm extremely excited about the robust product pipeline that we have that is fully consumer vetted.
That we are either have tested or in the process of testing or we'll test shortly.
And the reason why I bring that up is.
In the past there was a tremendous amount of reliance on a single LTL to carry the day you know our five dollar Fargo combos that we launched in Q3 of last year is a pretty good example of that.
It was a one trick pony.
And we sustained it as a layer of value layer, a permanent value layer in our business because it got such strong traction and quite frankly.
We attributed to the time and are still attributing a good portion of our positive transactions right now to that value platform.
Since then since then we've managed to really ramp up the pipeline.
The first promotion of the year was a good example of that we talked about our play a fit both in our wings.
If you take a look at what's going on right now, where we launched our new mix and match Street Taco promotion, we've got a few things going on simultaneously that.
Make us a very different brand than we were even a year ago.
We've got a whole line up a whole platform the street tacos, seven tacos, whereas we were selling one before we're simultaneously sustaining our value.
Platform, our five dollar five will combos, we're out there with our 20 dollar high end family value meal or family dinner.
Neil.
So what I have articulated I see our and other occasions is that we do have a barbell strategy our difference compared to everybody else is we have 100 pound weight on the premium side of innovation and a 20 pound weight on the value side.
And so.
On a go forward basis, we're always going to put more focus on the premium side than we are on the value side. Although we recognize that value is important the second thing you're going to see come from us and you're seeing it right now.
Is a lot more.
Hello focused products.
That quite honestly, we're going to introduce at a pretty rapid clip what's going on right. Now is a good example of that so we introduced for instance, the world's first Quito Taco that came on the heels of our promotion at the beginning of the year, where we had a port to boil fit bowls that were Quito certified.
We just where the first brand to introduce system wide.
First spread to introduce eight meatless chicken alternative our plant based chicken lists polio, which you can now get in both the Taco in a brito and we've been quite pleased by the reaction we've gotten there and that's just the start so.
Value is important yes, it did lead to a little bit of check degradation, we expect that to mitigate as the year progresses, because we're going to have a lot more premium and varied offerings that will lessen our alliance on that plan that value platform itself, although we do recognize.
That we do have a segment of customers looking for value, which is why we decided to keep at it Jim.
No I think you had to now on the headwind in terms of.
The check.
Or the mix decline was really driven by the the $5 a combo menu, which basically we doubled the mix of that in a sustained very well and has been our highlight I'd expect to see the first half a year you guys still see that because we continue to talk about is still continues the knicks well and then I was picked as we lap it.
The negative impact on checked should decline back half a year.
Thank you very much.
Thank you. Our next question is coming from the line of Jake Bartlett with Suntrust because she is their questions.
Great I had a flow a question on delivery and I believe you mentioned that was about 3% of mix in the quarter in if you could remind us what it was in the fourth quarter last year that'd be helpful. I think it was under 1% and in the in that context, how much of the delivery increase in sales has been incremental.
Do you think how much do you think it's been contributed to the same store sales in the quarter.
Yes, so delivery mix a year ago, I think was around about 1% if I'm not mistaken slightly slightly below 1% we've grown it we brought into three.
We manage we just added grubhub about a week ago. So we expect that mix to continue to increase.
Due to answer the other part of your question how incremental as it that's always the tough question to answer.
No I think.
We definitely seeing some incrementality for from it we believe but it's hard to really ascribe a specific number two it on an OLED yet and we'll commentary there was the only thing I think the we talked a little bit bet. This on our.
On our last call because we're talking about September little bit last time was the one thing we have seen is as we brought on the the additional Barclays delivery providers.
Fourth quarter, we saw good transaction growth certainly I think a chunk of that was attributed to the addition of the.
Two more marketplace delivery providers. So I think if you ask me I think a good portion of it has been incremental to the business.
Okay, and then as we think about.
The potential risk from to the virus and in reaction to from consumers can you remind us what percentage of your business is is off premise and then also what percentage goes through the drive through.
Yes, so about 30% of our business is takeaway or off premise.
We are less reliance then.
Some other kind of typical QSR brands on our drive through but so we do about 40% of our business through that channel and then the rest is is done.
Got it so so just to get for so 30% of people, who walk in and take the food out 40% through the drive through and then it and the rest is 30%, yes dining okay got it okay. Thank you.
Thank you at this time Weve reached the end to the question answer session and I'll now turn the call over to Bernard Coca for his closing remarks.
Well, thank you for everyone for joining us this evening.
We were excited to share our results with you today and we look forward to sharing future quarterly results with you soon so.
Thank you have good evening.
Thank you. This concludes today's conference you may disconnect. Your lines at this time, we thank you for your participation.