Q4 2020 El Pollo Loco Holdings Inc Earnings Call
Good day, ladies and gentlemen, thank you for standing by welcome to the El Pollo Loco fourth quarter 'twenty 'twenty earnings conference call at.
At this time, all participants have been placed on listen only mode and the length of of yoga for your questions. Following the presentation.
These notes at this conference is being recorded today March 11th.
2021.
On the call today, we have Bernard of Coca President and Chief Executive Officer of El Pollo Loco, and Larry Roberts, Chief Financial Officer, and now I'd like to turn the conference over to Larry Roberts.
Thank you operator and good afternoon.
Now everyone should have access to our fourth quarter 2020 earnings release, if not it can be found at www.
You, let go of Dot com in the Investor Relations section.
Before we begin our formal remarks I need to remind everyone that our discussions today will include forward looking statements, including statements related to the impact of the COVID-19 pandemic honor of business and strategic actions, we're taking in response as well as our marketing initiatives cash flow expectations capital expenditure plans.
And plans for new store openings among others. These forward looking statements are not a guarantee of future performance and therefore, you should not put undue reliance on them.
These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect.
Refer 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 for 2020 Tomorrow. It would encourage you to review that document at your earliest convenience.
During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations of comparable GAAP measures are available.
Our earnings release.
Before I turn the call over to President and Chief Executive Officer, Bernard of Coca I'd like to note that Bernard and I are in different locations today. Please.
Please bear with US if you experience any speculation or minor audio quality issues. Bernard. Please go ahead.
Thank you Larry good afternoon, everyone and thank you for joining us today I hope that you and your families are staying safe and healthy.
As previously communicated in our January 12 press release system comparable restaurant sales for the fourth quarter declined by <unk>, 2%.
Our sales performance combined with $2 9 million of COVID-19 related expenses resulted in pro forma fourth quarter earnings per share of <unk> 16.
Our fourth quarter performance continued to be a tale of two cities.
Our after market sales performance restaurants outside of Los Angeles remained strong during the quarter, while Los Angeles and the surrounding areas were heavily impacted by the ongoing and increased spread of COVID-19, particularly during November and December.
This resulted in staffing shortages, forcing us to temporarily close and reduced hours of operations in a number of our restaurants.
In addition, we believe that high unemployment in the L. A area, which has been well above the national average exacerbated the negative impact during the quarter.
All in all we believe our la sales trends are largely macro driven and that.
As a result temporary as demonstrated by the system wide L. A comparable sales decline of negative two 1% compared to the comparable sales increase of three 3% and our outer markets during the fourth quarter.
As we have entered 2021, we have finally begun seeing COVID-19 cases in California decelerate beginning in mid January allowing the majority of our restaurants at a state to open with regular hours and all modes of service with the exception of dining rooms, while.
We have reopened patios throughout California dining rooms to remain closed at this time in accordance with state regulations how.
However, a number of counties have begun to ease restrictions and it is expected at Los Angeles, and Orange County will allow dining rooms to reopen to 25% capacity next week.
Given current COVID-19 case levels, we are increasingly optimistic that restrictions will continue to be relaxed and we will be able to reopen our dining rooms in California in the near future.
In the meantime sales trends in the first quarter to date continue to reflect trends experienced in the fourth quarter of 2020.
System comparable restaurant sales in Los Angeles continue to be negative while restaurants in our outer markets, particularly in Phoenix, Salt Lake City, and Dallas are performing well.
With COVID-19 cases recently trending downward in California, we expect sales to improve in Los Angeles as businesses reopen and economic activity picks up.
We are optimistic at the worst is behind us and we can now focus more of our efforts on the future.
Despite the challenges of 2020, our team was largely able to complete our three year transformation agenda that was guided by four key strategies.
Establish a people first culture.
Nearly differentiate the brand simplify operations, which then creates the conditions for long term business expansion.
Accomplishing these during a pandemic is truly a testament to the resilience and dedication of our support center employees restaurant teams and franchise partners and I am proud to be able to work alongside each and every one of them.
With that I'm excited to speak with you today about our next phase of growth, which we are internally, calling our three year acceleration of agenda.
In a nutshell our acceleration of agenda is all about scaling for rapid and successful growth over the next three years by leveraging the operations and brand work, we've completed over the past three years and implementing and expanding our beautiful new L. A mex restaurant design, which we believe will deliver improved unit economics.
Mix versus what we have today.
Our transformation agenda established the foundation and fundamentals required for successful growth and now the acceleration of agenda establishes a three year strategic roadmap thrilled flow logo to execute our growth plans and grow new units and dnas, where we currently do not have a presence.
There are four strategies that underpin our acceleration of agenda.
One expand the brand grow in new geographies with franchisees.
To support the brand build the right organization for asset light growth.
Three evolve the brand digitize the business to compete.
And for focus of the brand exaggerate what makes us so special and different.
We will expand the brand by growing our footprint in new geographies.
This all starts with our partnership with existing franchisees and our renewed efforts to attract and recruit new franchisees.
Through the work we've done in the past several years, we believe we have strengthened our foundation streamlined our operations and evolved our brands at the point that we can jumpstart our new unit development.
We will initially focus our expansion on contiguously penetrating western and southwestern Dnas before eventually moving east.
Our efforts to recruit new franchisees, which we began in January will go hand in hand, with the rollout of our new L. A mex design, which will modernize and reset our brand through Remodels and new builds.
For 2020, one we are planning to complete at 55, Remodels with a longer term goal to complete over 300 remodels over the next four to five years.
In terms of new builds we are targeting six new restaurants with the La Mex design in 2021.
Our second strategy support the brand translates into building the right organization for asset light growth.
As we transition to a greater focus on franchise growth, we will reallocate resources to provide more support to our franchisees.
We will focus not just non compliance, but more on building the operational capabilities of our franchise partners, including the development of franchise specific leadership training programs.
Our third strategy is to evolve the brand through the use of technology.
This includes growing our digital channels, which encompasses our loyalty program local rewards.
As I've said in the past our loyalty program is the centerpiece of our go to market strategy for the long term.
We're very pleased with the progress we made in 2020 growing digital sales from 5% to 10% of total sales and growing the number of loyalty members nearly 40% to the current total of $2 3 million.
We were also very pleased that Newsweek magazine recently rated local rewards among the top 10 of 241 loyalty programs in the United States across 43 categories.
Our focus on digital will continue in 2021 as we recently engaged a new digital agency named organic which is a subsidiary of Omnicom.
It is important to note that digital now comprises 40% of our total media spend which is indicative of the progress we have made on this front.
We will work with organic and our other partners to continue to enhance and accelerate our digital programs with the goal being to increase digital sales to 30% of our total sales over the next three years.
Another aspect of evolving the brand is leveraging our technology and processes to offer more frictionless convenience and further improve our speed of service line.
At September we implemented GPS enabled curbside pickup, which is now available at over 97% of our system wide restaurants.
This service enables our guests to conveniently placed their order through our app.
Park in one of our dedicated curbside parking spaces and have their orders delivered to their car with the restaurant being notified of their arrival through the GPS functionality.
We're very pleased with the execution at our restaurants with customer wait times, averaging about 90 seconds at company owned restaurants, which is significantly faster than competitors offering the service.
While still representing a small mix of our total sales at is steadily growing and we do expect curbside to continue to gain popularity as more customers download our app and take advantage of the convenience it offers.
With regards to speed of service, we continue to focus on our drive through channel.
Drive through has become an essential sales channel because of COVID-19, and we believe we have a massive opportunity to enhance the customer experience with improvements in both speed and accuracy.
During the fourth quarter of 2020, we successfully implemented a number of measures to improve speed of service at our drive through Windows.
These included more efficient labor deployment readiness guidelines pre packing side items in Tulsa and better positioning of equipment.
We are now testing order, taking tablets at enable team members to take orders and payments from customers. While they are in the drive through Q.
We are very excited about this test and our goal is to significantly increase drive through capacity by cutting in half the time it takes for customers to place orders and pick them up at the drive through window.
This brings us to our last strategy focus of the brand, which is designed to exaggerate what makes El Pollo Loco special and different.
This will be accomplished through our L. A mex positioning which combines the traditions of Mexico with the healthier lifestyles and edgy culinary innovation of la.
While we will continue to sell the food customers have come to love at El Pollo Loco. We will also look to broaden our reach by expanding our portfolio of better for you products.
We believe expanding our product portfolio in this way combined with our commitment to digitize our business enables us to cast the widest net and attract new customers to the El Pollo Loco franchise.
Over time, the ultimate goal is to establish an popularize L. A mex cuisine and make it as well known as Tex Mex cuisine.
In addition to firmly establishing law ex cuisine, we will also seek to differentiate ourselves by forging an emotional connection with our customers or what we call moments of connection via the service we provide in our restaurants and online primarily via our loyalty program.
Moments of connection at about creating memorable experiences that delight, our customers by acknowledging who they are as individuals and what they need from us as of brands.
To that end, we will continue to train our general managers to be powerful coaches, whose main responsibility is to build the restaurant teams that feel not just empowered to take care of our customers, but to build relationships with them over time.
Similarly, we will look to humanize, our digital experiences by surprising and delighting our customers with events and offers that demonstrate that we know them better than any other brand.
In closing I'd like to thank each and every one of our team members and franchise partners for their tremendous job operating in this highly uncertain environment.
We successfully completed our transformation agenda. Despite the pandemic and we are well positioned to accomplish our acceleration of agenda through the strategies I just laid out.
Most importantly, as we continue to navigate the COVID-19 pandemic as of people first company. We will continue to take all necessary measures to ensure the health safety and wellbeing of our employees franchisees and customers.
We are very optimistic about the future of our business and are confident that our go forward strategies combined with everything we've done to date will drive sales and profit growth. When we returned to a more normalized operating environment.
Now I'd like to turn the call over to Larry to review, our fourth quarter results in more detail.
Thanks Bernard.
Before we get into our fourth quarter results.
Just wanted to highlight that during the quarter one new franchise restaurant was opened in California and at.
Additionally, we completed two remodels using our new L. A mex design and Los Angeles.
Now onto our financial results.
For the fourth quarter ended December 32020, total revenue was $110 $3 million compared to $107 $5 million in the fourth quarter of 2019.
<unk> operated restaurant revenue was $96 $4 million compared to $94 $8 million in the same period last year.
The increase in company operated restaurant sales was primarily due to $4 $6 million from an additional week of operation during the quarter compared to last year's fourth quarter, an increase of zero point $9 million and non comparable restaurant sales and ease of <unk> 2 million dollar increase in revenue recognized from our loyalty program.
This was partially offset by a 3% decrease in company operated comparable restaurant sales, primarily we believe due to the impact of the COVID-19 pandemic, a decrease of zero point $6 million from the closure of two restaurants and the sale of five company operated operating restaurants to franchisees during the fourth quarter of the prior year.
Zero point $8 million decrease due to temporary restaurant closures also due to the COVID-19 pandemic.
Franchise revenue was $7 $9 million during the fourth quarter compared to $7 $2 million net prior year period. This increase was primarily due to a franchise comparable restaurant sales increase of one 8% as well as the opening of one new franchise restaurant and additional revenue generated from five company operated restaurant.
So all of the franchisees by the company during the fourth quarter of 2019.
This increase was partially offset by the closure of eight franchise locations during the same period.
Turning to expenses food.
Food and paper costs as a percentage of company restaurant sales decreased 180 basis points year over year to 26, 4% the.
The improvement with predominantly due to higher menu prices lower food and paper usage, resulting from dining room closures affect of waste management and favorable sales mix. These are partially offset by commodity inflation of one 5%.
In 2021, we expect commodity inflation to be flat to 1%.
Labor and related expenses as a percentage of company restaurant sales increased 230 basis points year over year to 32, 4%.
The increase was primarily due to highly hourly wages in California, and $2 $8 million of labor costs related to leave of absence pay overtime associated with the COVID-19 pandemic.
These were partially offset by increased menu prices and operating efficiencies in 2021, we expect wage inflation of 4% to 5%.
Occupancy and other operating expenses as a percentage of company restaurant sales increased 240 basis points to 25, 5%.
Primarily due to sales deleverage and increases of the operating cost and marketplace delivery fees.
General and administrative expenses decreased by $1 $3 million year over year to $8 $9 million, primarily due to decreases in legal fees lower labor costs related to a decrease of management bonus expense and lower pre opening costs. This was partially offset by increases in stock compensation expenses and other miscellaneous at.
<unk> as a percentage of total revenues general and administrative expenses decreased approximately 130 basis points to eight 1%.
We recorded a provision for income taxes of $2 million in the fourth quarter of 2024 at an effective tax rate of 26, 3%. This compares to a provision for income taxes of zero point $7 million and at an effective tax rate of 17, 2% at prior year fourth quarter.
We reported GAAP net income of $5 $5 million or <unk> 15 per diluted share net fourth quarter compared to net income of $3 $5 million or 10 cents per diluted share net prior year period.
Pro forma net income for the quarter was $5 $7 million or <unk> 16 per diluted share compared to pro forma net income of $6 $2 million or <unk> 18 per diluted share in the fourth quarter of last year.
For a reconciliation of pro forma net income and earnings per share to the comparable GAAP figures. Please refer to our earnings release.
Let me quickly touch on our liquidity as discussed previously in March we fully drew down the balance of our $150 million revolving credit facility, adding $34 $5 million of cash to our balance sheet.
During the fourth quarter, we paid down $21 million of debt at as of December 30 of 2020 at $62 $8 million of debt outstanding and $13 $2 million in cash and equivalents.
Subsequent to the end of the fourth quarter, we paid down an additional $7 million of debt, bringing our current debt outstanding to $55 $8 million.
I'd now like to provide a brief update on our business during the first quarter of 2021 at.
At Renard highlighted earlier, the COVID-19 pandemic has continued to significantly impact our business during the first quarter.
All company owned and the vast majority of franchise restaurants, located in California, which make up 80% of our restaurants continue to operate with close dining room.
While comparable restaurant sales in January and February decreased three 6% at one 8% respectively.
As of February 24th 2021 year to date comparable restaurant sales decreased two 7% consisting of a six 9% decline at company operated restaurants, and a <unk>, 4% increase at franchise restaurants.
While comparable restaurant sales declined by five 6% in Los Angeles and surrounding areas, while increasing two 7% at other markets bear.
Bear in mind at system comparable restaurant sales during the first 10 weeks of 2020 were approximately four 2% net.
In addition, as of February 24, 2021, the company incurred at $2 $3 million of COVID-19 related expenses, which were primarily related to these of Apple pay and overtime pay.
These costs have been trending downward as the number of COVID-19 cases continues to decline in California.
Due to the uncertainty surrounding the COVID-19 pandemic. The company has not yet providing a financial outlook from the 2021 fiscal year <unk>.
However, we are providing of falling limited guidance.
The opening of three to five company owned restaurants, and four to six franchise restaurants.
And a pro forma income tax rate of 26, 5%.
This concludes our prepared remarks.
Thank you again for joining us on our call today, and we are not happy to answer any questions that you may have.
Thank you at.
At this time, we'll be conducting a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad and of confirmation tone will indicate your line is in the question queue.
You May press Star two of you would like to move your questions from the queue.
Hi, Richard instead of using speaker equipment at may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you.
Our first question comes from the line of Jake Bartlett with choice Securities. Please proceed with your question.
Great. Thanks for taking the question.
My first one is about the experience in the outer markets outside of California, where restrictions have eased quicker. Obviously there has been in California, what is the mix of sales.
Looking like in terms of in store dining presuming you of reopening the dining rooms also of a mix of of drive through and whether that's sustained at elevated levels.
Okay.
Well, Jake but I can provide you is at.
At varied across the markets in terms of the dine in business.
<unk>.
I would say on average just thinking of Texas, we're probably running low teens in terms of percent mix on dine in.
Vegas is a little lower than at.
Again, they've been open at 50% capacity now for a while.
So that's where they're mixing the drive thru I don't have off the top of my head handy.
But I would expect that.
They're probably running similar to what we're seeing in L. A less maybe that incremental dine in traffic.
That's something I can get for you later, if that's helpful. But I do know that traffic is roughly.
Kind of low to mid teens.
In those markets.
Got it.
And has that been at places like Texas has had.
Less restrictions for a while but it has been.
At the dine in.
Right.
Next day, and increasing more recently or over over time or.
How is the business kind of shifting as the cases are going down and restrictions.
Economic activities improving.
Wow.
Really and I'm really looking fence.
Call at December last year, I don't go farther back from that.
It's I mean again, it's been up and down but I would say, it's been kind of at roughly flattish in terms of that diners mix overall.
So we haven't really seen an acceleration of that made it.
Some of these markets now I'd hoped at.
Dallas, and Houston, and East, Texas markets you'd start seeing at now as they're further opening those dining rooms. So of course at just started.
So we'll keep an eye on that to see that trend starts to move up on dine in but certainly since early December.
Kind of mid teens low to mid teens diners in percentages had been fairly constant at <unk>.
Gross time period.
Got it and then shifting to L. A county, and you've mentioned.
The impact of of having the dining when it's being closed but also the impact of high unemployment and how.
How do you expect or what's your expectation for the recovery.
And at places like L. A and next week as they reopen at 25% is at the trigger for you to reopen your stores I think earlier when they reopened at 25% you had reopened stores, but just trying to gauge what your what your ex <unk>.
Action is going to be as as being of.
Restrictions ease a little bit.
But also just the.
Context of having a still very high unemployment rate.
How quickly do you expect sales to kind of start to rebound in a place like L. A.
Well.
If we look at the La story.
You know that our business has.
Ben.
Dependent on the Hispanic consumer at 50% of our customer base that we serve every single day.
Naturally that demographic group has been disproportionately impacted by Covid.
At the height of the pandemic during the winter I mean, 72% of all hospitalizations in La County, where those of at where folks who are Hispanic.
And naturally as we've mentioned.
<unk> also been disproportionately impacted economically so.
Our strong as consumer segment has been affected by what's going on at La <unk> now the good news is both from a Covid case count which is on the decline and also from an economic standpoint, certainly with the arrival of more stimulus.
We expect to.
Hopefully be the beneficiaries of both those things.
We will although probably we were not inclined in the past to open up the dining rooms at 25% because of that business is coming back a little bit more slowly than we expected I think we will capitalize on the opportunity when certain counties do reopen up to open up at 25% to rebuild that business once again.
We think we can do that without adding any incremental labor at 25%. So there's no harm in doing it.
So, it's really going to be a little bit of a wait and see as things start to open up we're encouraged by the fact that.
Schools look like they will open up shortly as well and again I can't stress enough I think what we're seeing with dining rooms more than anything else.
Is it disruption of consumer patterns right. So we see at not only in the work day.
We had lunch has been softer than it historically has been and that's a really that's always been a strong day part for us free.
Covid, but also you know.
With kids being at home and.
And parents being at home more often as a result.
Once those the disruption to those patterns start to return back to more normalized behaviors. We think that there is upside for us there as well.
Great and then it will make sense and one last question and that is just really on the <unk>.
Interest you have received so far from existing franchisees. It sounds like you are just starting to look for newer franchisees, but im wondering about the if you could share of any kind of number of commitments that you've already secured for this re acceleration of growth just to just think of us some insights as to how much visibility you have on of cheaper yes.
Yes, Jake so I mean, obviously, we kicked off the process in January so it's still early days.
Yes.
We're on track, where we were hoping to be we've got a few.
This new franchisees, who are interested in expanding outside of <unk>.
Normal core markets new markets.
And then we also have a number of.
New people who've reached out to become franchisees again targeting the seeds, we've been targeting so I would say we're pretty much on track in turn for our plans and we're in the vetting process now obviously with our existing franchisees.
Thats pretty easy since we know them, we know their financials and things.
At the newer ones theyre going through the bidding process now and assuming that we get through that then we'll really start talking to them.
A lot more detail about exactly what parts of the markets well look for them to develop end and reach agreements with them.
Great. Thank you very much I appreciate it.
Okay.
The next question is coming from the line of Andy Barish with Jefferies. Please proceed with your questions.
Hey, guys good afternoon.
Just as you shift to asset light.
Wondering I think.
I think you purposely raised at this way Bernard on at <unk>.
Reallocation of resources just wondering.
Do you expect.
At ramp or an impact on net on the run rate G&A, Although I know that that's tough to figure out these days, but just kind of your thoughts on.
Giving us a little bit more color as it pertains to G&A in a in a reallocation moving to the new franchisees and the support system you mentioned.
Hey, Andy why don't I take that one.
Yes.
I think are of equal first of all of that I'd say is I think we have a little time before we're making investment of those resources, because really that investment will depend on the timing of when.
New people will start developing a new market. So I think we have a while before will even make those investments and then my thinking is you know.
There might be some incremental but I really would challenge the organization around can we figure out of way to reallocate resources.
So theres not a lot of incremental G&A, it's more again just.
Pulling it from resource from one area and devoting more into this franchise development and franchise expansion. So.
That's my current thinking, but again I think the timing is not immediate we have got a little time before we'll start making those investments on the.
Franchise side.
Got you and then.
On the on the unit growth and Remodels. The franchise unit growth I think is more towards the low end of what maybe you were originally thinking does that have to do with.
Some of the remodel ramp up as you got the first view behind you at.
Although I know it's early.
What kind of same store sales <unk>.
Impact you sort of pencil out to generate an appropriate return for <unk>.
Both the company and the franchisees as you endeavor on remodeling.
Two thirds or so of the system over the next several years.
Yeah. So on the franchise development side I don't think that really has much of due with the remodel program I think it has more to do with the fact that we pretty much shut things down last year and so now you've got a ramp back up again I'll also say that the.
And I think other constant price at the same thing is at the permitting process and a lot of these jurisdictions has gotten.
Very cumbersome and very time consuming so those are really the two factors that have.
It brought our.
Of our franchise development number is down to a use of probably the lower part of that range that you had in terms of remodels.
I've, usually said that we need to be somewhere between 4% and 6%.
Obviously, it depends a lot on of unit volume of the restaurant that you're remodeling what sales growth you need I would say for an average unit you need to be somewhere in the five to six percentage point range in terms of.
Pre post comp growth I think that gets you to a call at a.
Kind of mid teen ish cash.
Cash on cash return.
On the company side. That's what also gets you to a at least net income breakeven if not a little bit of positive on income line. After you take into account depreciation.
Okay. Thanks, and then just one other quick.
Quick one if you could on.
The temporary closures and the cost impact.
And the <unk> versus <unk>.
<unk> it looks like about a point of.
Same store sales or so is the <unk> actually running a little bit higher than that.
Given January February.
And on the cost side as well it seems like that.
I guess, a little bit lower as things normalize.
Well on the cost side, we highlight I think fourth quarter was $2 nine so far through February February 24th at the end of our second period. It's.
It's around $2 3 million and really that two three is driven heavily by January.
It got a lot less costly in February and continue the dropdown so for the quarter I still think two three plus a little bit more from March.
But again those costs are coming way down on the comp side.
No.
It's hard it's probably roughly equivalent at because in the fourth quarter of what you saw was a ramp up at impact in December and even late November and then first quarter of this year. What you saw was of heavy impact on the comp side in January and it starts to tail off.
Core at the late January February so, it's kind of a curve that peaks right around the holidays and gradually comes down through January. So I mean, just to give you a sense right now a little more detail on that.
If you look at the performance of our restaurants that had never been closed versus those that have been closed at least some point during COVID-19.
We're still running at about a two to two 5%.
Difference at same store sales.
Okay very helpful. Thank you.
Yes.
The next question is coming from the line of David Tarantino at with Baird. Please proceed with your questions.
Hi, good afternoon folks at Bell.
They are doing well.
My question is kind of kind of comes back to the la market and I fully appreciate and understand a lot of the macro issues you are dealing with but as you've looked at.
The data internally.
Do you see anything underneath the surface that might be.
Explaining some of the weakness related to value proposition, our customer satisfaction scores or anything that might be more brand specific in that market.
So.
Not not as it pertains to customer satisfaction regarding the brand, but but I can say that probably where we're losing a bit of frequency.
As I mentioned earlier with our core Hispanic segment with our core of Hispanic customer group.
That that group with both Covid end.
The macroeconomic environment here and how it's affected them.
It has.
Perhaps.
Force them to not visit us as often as they once did.
And I think we're seeing a little bit of a frequency issue with them.
That is.
Group that has.
Sustained us at.
And the best of times, but Inc.
<unk> times like this I think we feel.
More of the effect of what they're going through.
<unk>.
There is that impact that.
That we are experiencing now as as the situation improves here.
We expect.
That business to slowly come back.
How quickly it comes back as has yet to be determined nevertheless.
We continue to figure out ways to speak to that demographic group in ways that are relevant to them certainly as it pertains to value.
But I think it's going to.
It really depends on how much DLA economy comes back I know, we're not the only brand experiencing this even more value centric brands brands that.
Drive a lot more discounting than we do are experiencing similar declines so so net net.
That's kind of what we're experiencing there I don't think its a fundamental brand issue because all of our brand health measures continue to remain very very strong.
I do think at as a function of how many of our restaurants.
In the La area, our dependence on our Hispanic consumer.
Got it on the <unk>.
<unk> side.
I think you are writing pricing close to 4% is at.
First of all of that is that correct and do you think that that pricing level has had an influence here and maybe at maybe you need to kind of pivot tour.
A bit more of a value strategy in the next.
Several weeks of they come out of this.
Yes, David so in the fourth quarter, we ran a little bit over 4% pricing.
For the first quarter.
We will run more of like at 3%.
Gross pricing.
Because of our next price increase is scheduled I think for late April early may.
The other thing we are doing.
I feel like I mean, and this is my view and we will talk more about it as a senior team as we go forward is.
Because of the cost pressures, especially in our wages.
You almost have to take price.
During the year I think if we look at a value strategy. We may re look at the calendar and look at maybe going back to the $5 meals or something like that to drive value versus.
Not taking the pricing and of <unk>.
Of course, we will work with our outside.
Consulting firm that we use on pricing to figure out what's the best way to take price, which will have to at least impact.
On our value scores and our metrics.
With consumers.
I mean, I'll add a few things I think one.
Naturally you want to be really sensitive about pricing right now.
We've been a brand that's been very very fortunate.
To be able to take perhaps more in price increases over the past two years than we perhaps taken.
Three to four years before that.
Primarily because I believe that the brand has strengthened the total value equation that we provide the consumer in terms of both.
Food and service has improved based on all of our measures that we track in regards to brand health.
Providing that very balanced total value equation is what enables you to command pricing power at now with that being said.
We're always running of value layer in our business to be clear I mean, that's the beauty of having transitions are our media mix model two of largely digital business as it allows us to run more simultaneous messages and target those messages more effectively than we otherwise could say two to three years.
[noise] ago, when we were far more dependent on television and print so to be clear we are running value.
We will perhaps need to look depending on how the year shapes up a bit more.
See if whether we got to turn that value message up in terms of volume, but it.
It's something that we're always looking at.
Great.
And then on the acceleration of agenda.
I had a question around <unk>.
Your comments of asset light.
It makes sense from a kind of a growth or where you are heading more franchise oriented growth, but I guess it also has a cash.
<unk> that may be the system could evolve to be.
More heavily franchise through asset sales or are you considering refranchising as part of our strategy and maybe as a way to seed some some development agreements.
Well, David I mean, we're always looking at the asset base and determining what we can do I don't think we don't have any grand.
Scheme to re franchise a lot of restaurants, but I think we'll always take a look at whether it makes sense.
Case by case basis, given some of the restaurant performance, whether we want to.
Re franchise, some assets and to your point I think as we do that if we do that.
We might look to use at to get some new.
New franchisees into the system, but as of now we don't have any big scheme to go re franchise like 50, 60, 70% of our coming out of restaurants, nothing like that.
Yes, I mean, and the reason being is again I mean, the performance as we highlighted before.
L. A in Vegas are two biggest core markets continue to perform.
Very very well from both a sales and margin standpoint so.
<unk>.
They drive a lot of profitability for us.
Makes sense.
Thank you very much.
Thank you as a reminder to ask a question you May press Star one.
The next question is from the line of Todd Brooks with CL King. Please proceed with your questions.
Hey, good afternoon to you both one follow up and then one question about the acceleration of agenda on the.
55, Remodels planned for this year, what's the mix of kind of corporate stores to franchise locations getting remodeled.
Yes, Todd.
Roughly 15 company end 40 franchise.
Okay, great. Thank you.
And then around the fourth pillar of the acceleration of agenda, just really cementing that.
L. A mex focus what it stands for as a brand and also because.
As of menu offering is there any either broad strokes or specifics you could point to on the on the menu of product.
Development side that.
That youre looking to further pivot into or build out new platforms over.
Fiscal 'twenty, one to help accomplish that that fourth pillar of the agenda.
Yeah. So.
I think a perfect example of L. A mex cuisine was represented by what we just recently intra.
Introduced as our first promotion of the year, which are of Pollo fit bowls.
Which had organic Super Greens, which is not something you would expect from.
Traditional <unk>.
But was joined by more Mexican inspired ingredients like Chia cheese and peak of the Ghio.
Other ingredient there that was a little bit again and unexpected ingredients for <unk> is.
The colleagues cilantro lime cauliflower rice. So I think we started out the year kind of really with our with a product that really exemplifies la mex cuisine will will continue to do that.
Really throughout the course of the year I mean, what we've got right now.
In terms of our promotion.
In a way another way to reflect at La Mex cuisine, because we're doing it in a really kind of fund lighthearted way and Thats our local lunchboxes.
We really believe that design and packaging could be of big differentiator for the brand and here. We are trying to address what has been of softness for a lot of brands right now at lunch day part by getting people excited for lunch again.
Through a complete lunch offering packaged in a beautifully designed box so.
There'll be more of those kind of law mix influenced offerings throughout the course of the year I think what youll see with the menu. Just generally speaking is a focus on a few things better few products.
Portability, given how important the drive thru has become.
And three an attempt to expand day parts I really getting at the snacking occasion of little bit more than what we get today. So those of the three things that I.
I think you can come to expect from the menu of this year.
Okay, Great and just final follow up on the menu and then I'll hop back in the queue if from if.
If you look at year over year menu right now are you running at.
Any sort of streamlined item count that's helping to drive efficiency are you running basically the same number of Skus, just with maybe more of a mix towards some of these new.
Items like the pollo fit bowls, but other items sort of come off to keep the item count.
Relatively flattish or are we down year over year end can you talk about efficiencies that you have seen if you are down.
I mean generally speaking year over year I don't think we've added anything.
Significant it's probably I'd say year over year, the same by and large I think you got to take a step back a few years ago, where we are.
Actually reduced the menu skus by 20%.
We added some since that time took some off since that time I think we're always evaluating the.
The menu itself to determine for instance.
What we need to do to achieve that speed of service with the ultimate goal of being cut.
Cutting our drive thru times in half and really balancing that consideration with what we're leaving on our menu of what we are introducing on our menu.
Are you a small example of something we just recently took off for that reason.
Of our top of T O fries did well.
We were selling a decent amount, but we have to ask ourselves the question.
Was the amount we were selling does that justify.
The longer operational time, it took to fry and prepare that product given what we are trying to do with our drive thru times and we made the ultimate decision that it wasn't so we're constantly having those ongoing conversations to determine what earns its keep based on not just sales, but also the goal of reducing speed of service price.
Merrily via the drive thru.
Okay. Thanks, Bernard appreciate them from.
Yes.
Thank you.
Our next question is coming from the line of Jake Bartlett with true of Securities. Please proceed with your question.
Great. Thanks, Larry I, just had a quick question about G&A.
It came in in 2020.
Lower than.
Initial expectations.
Lower than we were expecting.
How should we think about the run rate for G&A going into 'twenty one.
Is the fourth quarter are good.
Base to grow from or you think abnormally low how should we any any kind of way to level set us or give us from the right spot for G&A for 2021.
Yes, Jay so in 2020, I mean, we had.
A number of things at <unk>.
Save money on G&A, some of which were COVID-19 related.
The biggest one was.
On the bonus payout, which.
Again would be in just that youre going to have to make at 2021.
The fact that we didn't pay at full bonus in 2020.
And then we always assume that we're going at full bonus payout in 2021, and that's a fairly good sized number.
On the G&A line I think the other big line item on G&A is that we have one more year of.
Equity compensation increase.
About four years ago.
<unk>.
Kind of expanded our equity program in the business.
And so over the four year end at a four year investing so as you.
Each of the next four years as you give equity to employees at builds up and then it will start it will flatten out because what will happen is as you add equity you'll be dropping off because a chunk of best So we've got one more year in which youre going to see the equity compensation increase pretty much in line with what you've seen over the last.
Several years and then in addition of that you've got.
Some merit.
<unk> got some of the savings that you had.
In 2020 year round.
Our insurance call or a group insurance people didn't go to the doctor as much as they had been previously so theres a number of items that will add to the G&A line in 2021 relative to the 2020.
Is there of what you can kind of just made me for one of those of those items.
Incentive comp just to Hell.
US understand how much lower it was end.
At the normal and at what.
What that could be for free G&A as it comes back next year.
Yes, so on the bonus at was somewhere two and a half of 3 million lower than say the full path.
Okay. Thanks, a lot helpful.
Thank you at this time of reach end of our question and answer session I'll hand, the flow back to Bernardo Coca for closing remarks.
Well. Thank you everyone for spending time with us today and always expressing an interest in our company and brand I want to wish everyone.
A safe and healthy transition to hopefully what will be.
A more normalized world soon so.
Best of luck to everyone. Thank you for calling in today.
Thank you everyone. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.