Q1 2021 Del Taco Restaurants Inc Earnings Call
Thank you for standing by and welcome to the fiscal first quarter 2021 conference call and webcast for del Taco restaurants, Inc. I would now like to turn the call over to Mr. Raphael gross managing director of ICR to begin.
Thank you operator, and thank you all for joining us today on the call with me is John <unk>, President and Chief Executive Officer, and Steve brake Chief Financial Officer have weird. After we deliver our prepared remarks, we will open the lines for your questions, but first let me remind everyone that part of our discussion today will include forward looking statements.
These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We do not undertake to update. These forward looking statements at a later date and refer you to today's earnings press release, and our SEC filings for more detailed discussion of the risks that could impact del Taco as future operating results and financial.
Condition today's earnings press release also includes non-GAAP financial measures such as adjusted net income adjusted EBITDA and restaurant contribution along with reconciliations of these non-GAAP measures to the nearest GAAP measures. However, non-GAAP financial measures should not be considered as alternatives to GAAP measures.
As net income or loss of operating income or loss net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance.
Let me now turn the call over to John Captisol, Our President and Chief Executive Officer.
Thank you Raphael and we appreciate everyone joining us today.
We're pleased to have delivered a very strong first quarter that sets us up for a great year of del Taco.
Although the operating environment remains very difficult due to continued COVID-19 related impacts in very challenging labor availability. Our team is doing an outstanding job growing sales by serving guests through our drive through takeout and delivery channels, while managing cost effectively.
This resulted in significant first quarter restaurant contribution and adjusted EBITDA growth margin expansion.
First let's review, our first quarter of performance and highlights.
Following positive company and franchise same store sales trends through the first 10 weeks of the quarter, which sequentially improved compared to the fourth quarter, we experienced accelerated sales growth in the final two weeks of the quarter as we cycled over the onset of COVID-19 last year.
This resulted in first quarter system wide comparable restaurants sales growth of nine 1% consisting of a 14% increase at franchise restaurants, and a four 9% increase at company operated restaurants.
Our sales trends continue to be of geographic story as our non California restaurants, which are primarily franchise operated drove impressive comparable restaurants sales growth of 12%. During the first 10 weeks prior to lapping the pandemic, which accelerated the growth of over 16% during the full 12 week fiscal first.
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Restaurant contribution margin increased by 330 basis points to 16% due.
Due primarily to strong comparable restaurants sales, including 4% menu price, coupled with food deflation and labor efficiencies.
In terms of profit adjusted EBITDA increased $2 $9 million or over 33% to $11 6 million from $8 7 million, while adjusted net income per diluted share increased to seven.
From adjusted net loss per diluted share of <unk> last year.
Finally, while our net debt remained relatively consistent with Q4 last year, our adjusted EBITDA growth reduced our net debt to adjusted EBITDA leverage ratio to approximately $1 eight seven times from 196 times.
Our operations team is driving results through our focus for better initiatives that prioritizes four critical dimensions of our business trusted and safe, making our teams and guests smile productivity and ultimate convenience.
In Q1. This focus delivered continued improvement in key performance indicators, including a three 6% increase in overall guest satisfaction versus the prior year and a 3% improvement in drive thru speed during our busiest lunch day part.
Focus for better has done a great job narrowing our focus in the restaurants and driving performance. It also provides for an ongoing framework for our restaurant general managers to pivot their leadership based on the various opportunities they face in their specific restaurants.
And many of our pivoting once again based on the industry wide staffing challenge.
We are executing a two pronged approach to attack. This challenge with the combination of bottoms up best practices that we of mind from successful stores and brand wide enhancements designed to increase candidates and are hiring funnel and reduce friction in the application process.
Our focus for better execution is serving as the backbone to deliver on our five drivers of sales acceleration.
And those are value leadership menu innovation brand engagement digital transformation and ultimate convenience.
Since we discussed these five drivers at length on our last conference call I'll be brief with my updates today.
Our value leadership strategy focuses on great everyday value across our barbell menu and is supported by ongoing menu innovation to keep our menu platforms fresh and interesting.
For example, we started the year with the delicious new honey mango flavor that spans our barbell menu strategy from a dollar of crispy chicken Taco on our Dallas dollar deals menu up to a five dollar crispy chicken epic burrito.
We then launched our seasonal promotion led by our crispy Jumbo shrimp L T O, including our new Honey mango flavor.
In Q2. This was followed by our newest crispy chicken flavor Honey Chipotle barbecue and today, we relaunched our crunch Taco platform with new items, leveraging signature del Taco ingredients of top of large six and a half inch freshly fried tortilla or.
Our crunch 'tatoes are akin to a two of startup or of Mexican pizza. Our lineup will feature our traditional dollar of being in cheese Crunch, Tata as well as new mid tier offerings at $2 with queso beef and at $3 with grilled chicken and fresh guacamole.
These trade up products highlight our <unk> plus positioning with quality ingredients like our fresh guacamole and queso, while offering guests best in class value for the money.
In terms of day parts, although breakfast and graveyard have been challenged in recent quarters I am happy to report that thus far in the second quarter. Our graveyard business has accelerated to become one of our top day parts on a same store basis compared to 2019 with double digit growth.
Although breakfast remains negative on a same store basis compared to 2019. We are currently finalizing our plans to launch of new breakfast platform late summer anticipating morning routines are likely to further normalize as the vaccine vaccination rates improve.
We expect this to put us in a position to capitalize on strong breakfast seasonality in the fall.
Turning to our digital transformation during the first quarter delivery mix for company and franchise restaurants was approximately 7% of sales representing sequential improvement from the second half of 2020, Despite an increased menu price premium enacted during Q3 last year.
To expand our ability to offer low friction opportunities for guests to order del Taco, we are happy to announce and other digital ordering channel.
Beginning in May we will rollout Google ordering across the system as.
As guests use Google to find the del Taco They can instantly order directly from those search results, including dine in takeout drive thru and delivery options.
Our del App currently has more than one 4 million users, which provides a solid foundation as we plan for the launch of our new holistic CRM play of platform by this fall, which will enable us to further digitize del Taco and incentivize and reward our fans for their loyalty.
The launch will include a host of features and improvements to the del App. The launch of our loyalty program as well as a data and attribution capability to drive personalized and valued experiences for our guests to increase sales and frequency over time.
Turning to development our system growth will be led by franchisees, who will open eight new restaurants. This year of which four have opened to date.
Four of company operated restaurants will also open this year of which two of open to date across infill locations in core markets and our first restaurant in our new company seed market in Orlando by this fall.
We are excited to announce we have recently signed two new development agreements totaling 18 restaurants in the southeast with two experienced multi concept <unk> franchise groups. One agreement includes commitments for eight restaurants in the Greenville, Spartanburg, South Carolina region, and three restaurants in the making Albani, Georgia.
The region. The other agreement includes a seven restaurants commitment in the Sarasota Bradenton region on Florida's West Coast.
We believe these signings and other active discussions are enabled by several factors including.
Our unique <unk> plus brand position and ubiquitous menu that drives broad appeal of strong track record of eight consecutive years of franchise comparable restaurant sales growth across a broad franchise geography that spans 15 states coast to coast.
And the relevance of our new fresh <unk> prototype, which has been very well received.
<unk> is designed to propel growth with new and existing franchisees by expanding real estate opportunities to help lower net investment through multiple buildout options as well as modernizing the guest experience. We are very excited about its distinct design and look forward to our first fresh flex building in our new company.
Seed market in Orlando by this fall.
We are continuing to test our remodel program with this year expected to complete up to 10 extensive remodels of older facilities and up to 10 remodels of more modern facilities with primarily cosmetic upgrades at a lower investment level.
We are optimistic about the potential returns of these projects, particularly given the encouraging results on our initial 2019 and 2020 Remodels and the integration of our new fresh flex prototype into our remodel design.
We expect this final phase of testing will lead to a formal system wide remodel program as we move into 2022.
Finally.
We announced our second quarterly cash dividend as part of our strategy to deliver shareholder returns through three key levers driving our core business deploying of disciplined investment strategy and returning excess capital.
Our core business drove strong restaurant contribution and adjusted EBITDA growth during the first quarter and our disciplined investment strategy of features continued growth led by franchising alongside a remodeling program, which each leverage our new fresh flex design.
This approach is expected to enable the return of excess capital inclusive of the quarterly cash dividend program, along with opportunistic debt debt repayment and share repurchases.
In closing, while COVID-19 is certainly not yet fully behind us our core business acceleration and development strategy led by fresh Flex has set us up to drive continued growth this year and beyond.
Now I'll turn the call over to Steve to review, our first quarter financial results and reiterate our annual guidelines for 2021.
Thank you John during our 12 week fiscal first quarter total revenue increased five 2% to $115 5 million from 100 of nine 8 million in the year ago first quarter company restaurant sales increased three 2% to $103 6 million from $100 3 million in the year ago period.
This growth was primarily driven by the positive comparable restaurant sales franchise revenue increased 18, 5% year over year to $5 2 million from $4 $4 million last year. The growth was driven by the increased franchise comparable restaurant sales coupled with additional franchise operated restaurants compared to last year.
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System wide comparable restaurants sales increased nine 1% consisting of the four 9% increase at company operated restaurants, and a 14.0% increase at franchise restaurants.
I want to also add perspective to our recent sales trends.
John noted the final two weeks of our first quarter experience outsized sales growth as we lapped the initial COVID-19 impact to help neutralize the impact of lapping of the pandemic I'm happy to share that on the same store basis compared to 2019, our first quarter grew at a low single digit rate for company restaurants.
And at a high single digit growth rate for franchise restaurants and.
In addition, thus far in the second quarter on a same store basis compared to 2019, our growth has accelerated to a mid single digit rate for company restaurants, and a low double digit rate for franchise restaurants.
It is also important to note that this same store growth compared to 2019 has been achieved despite certain day parts of geographies that were particularly challenged by the pandemic spin.
Specifically for company restaurants on a same store basis compared to 2019 during the first quarter. Our breakfast day part was negative high single digits, but has improved to negative mid single digits, thus far during the second quarter.
However, on a same store basis compared to 2019, the graveyard day part began 2021 in the negative mid single digit range and turn positive as the first quarter progressed, achieving negative low single digit performance compared to 2019 during the full first quarter.
Since then graveyard has improved significantly to become one of our top day parts on the same store basis compared to 2019 with double digit growth thus far during the second quarter.
In terms of geographic performance for company restaurants on the same store basis compared to 2019 during the first quarter, although both la and Orange counties remained negative.
Arc County, covering greater Las Vegas improved to flat.
Also thus far during the second quarter on a same store basis compared to 2019 and La County has turned positive and Clark County is up high single digits with Orange County, improving sequentially to slightly negative.
All other California counties, and our Atlanta restaurants were significantly positive on the same store basis compared to 2019 during the first quarter and the second quarter to date.
Turning now to the rest of our P&L.
Food and paper costs as a percentage of company restaurant sales decreased approximately 250 basis points year over year to 25, 7% from 28, 2% the.
This was primarily driven by of menu price increase of approximately 4% coupled with food deflation of approximately 2%.
That was driven by reductions in produce beef and Cheddar cheese looking ahead, we expect slight food inflation in Q2, followed by modest inflation during the second half, resulting in full year inflation of approximately 1%.
Also please note that during 2020, the first quarter was our highest food percentage at 28, 2% followed by the remaining three quarters, which each ran in the mid to high 26% area, representing more challenging comparisons for the balance of this year.
Despite the $1 increase in California minimum wage of $14 an hour in January 2021, our labor and related expenses as a percentage of company restaurant sales decreased 50 basis points to 34, 3% from 34, 8% the.
This was driven by effective management of variable labor and the favorable impact of comparable restaurants sales growth, including 4% menu pricing along with reduced workers' compensation expense based on favorable underlying trends, partially offset by the impact of the California minimum wage increase.
Occupancy and other operating expenses as a percentage of company restaurant sales decreased by approximately 30 basis points to 24.0% from 24, 3% last year.
The decrease was due to lower advertising expense repairs maintenance and supplies coupled with leverage from the comparable restaurants sales growth most of the offset by an increase in delivery fees as delivery grew to 7% of sales compared to three 3% last year and incremental net direct COVID-19 costs.
Looking ahead, we expect our delivery fees to level compared to the prior year and the potential reduction of Inc. And the incremental direct COVID-19 costs as vaccination rates improve however, during the second and third quarter, we will lap of muted 2020 advertising expense of approximately 3% compared to a <unk>.
<unk> advertising spend of approximately 4% of restaurants sales.
Restaurant contribution grew 36% to $16 6 million compared to $12 7 million in the prior year, while restaurant contribution margin increased approximately 330 basis points to 16.0% from 12, 7%.
General and administrative expenses were $11 3 million up from $9 $9 million last year and as a percentage of total revenue increased 70 basis points to nine 7% the.
The increase was primarily driven by increased performance based management incentive compensation as we lap the minimal incentive compensation accrual in 2020 due to performance compared to strong performance. This year as well as increased legal fees and noncash stock based compensation, partially offset by reduced executive.
The transition costs and travel expenses.
Adjusted EBITDA grew 33, 4% to $11 6 million compared to $8 7 million last year and increased as a percentage of total revenues to 10, 1% from seven 9% last year.
Depreciation and amortization was $5 9 million down <unk> down from $6 $1 million last year due to the impact of fully depreciated assets and decreased 50 basis points to five 1% as a percentage of total revenue.
Interest expense was <unk> 7 million compared to $1 $5 million last year. The decrease was due to a lower average outstanding revolver balance and lower one month LIBOR rate compared to 2020.
During the first fiscal quarter, our outstanding revolving credit facility borrowing remained at $115 million consistent with the end of fiscal year 2020, and the remaining availability under the revolving credit facility was $121 6 million and.
In addition at the end of the fiscal first quarter, our balance sheet debt net of cash to adjusted EBITDA leverage ratio declined to approximately 187 times compared to approximately 196 times at the end of fiscal 2020.
We also repurchased approximately 106000 shares of common stock and the average price of $8 92 per share during the first quarter for a total of <unk> 9 million at the end of the fiscal first quarter approximately $17 1 million remained under our $75 million repurchase authorization.
Net income was $2 6 million or <unk> <unk> per diluted share compared to a net loss of $102 5 million or $2 76 per diluted share last year. We also reported adjusted net income which excludes various items identified in our earnings release and the financial tables.
Adjusted net income was $2 5 million of approximately seven cents per diluted share compared to adjusted net loss of zero point $3 million or <unk> <unk> per diluted share last year.
We also announced our second quarterly dividend of <unk> <unk> per share of common stock that will be paid on may 27th 2021 to shareholders of record at the close of business on May 13 2021.
Finally, please refer to today's earnings press release for our fiscal 2021 guidelines that we furnished last quarter.
Our second quarter is off to a great start with strong system wide sales growth on a same store basis compared to 2019, which is expected to enable robust second quarter same store sales performance compared to 2020.
As we plan for a second half, we believe increase vaccination rates, coupled with our five drivers of acceleration will set us up to maintain our top line momentum as we lap more challenging comparisons due to normalized sales volume that drove positive low single digit company and positive mid single digit franchised.
Same store sales results last year, driven by the very successful third quarter 2020 launch of our crispy chicken menu in.
In addition, following our significant first quarter restaurant contribution margin expansion that was aided by food deflation and lapping of high food percentage in 2020, we are poised to lap more normalized restaurant contribution margins during the second and fourth quarters. This year recall, however that last year's restaurant contribution margin.
Was particularly high in the fiscal third quarter, primarily due to a lower than typical level of advertising spend due to the pandemic. We therefore continue to expect modest restaurant contribution margin expansion. This year on an annual basis.
That concludes our formal remarks as always thank you for your interest in del Taco and we are happy to answer any questions.
Thank you we will now be conducting a question and answer session. If you would.
Like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You May press star two if you'd like you have a question from the queue from participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment. Please wait for your questions.
Our first question comes from the line of Alex Slagle with Jefferies. Please proceed with your question.
Thanks, Hey, guys. Thanks for the question.
The good to see everything accelerating here. The question on development I know you've picked up the pace of conversations with new and existing franchisees about signed development agreements I'm. Just curious what these conversations have been like sort of the reaction to the new prototype in the performance of your existing.
Its basin.
If you've had any kind of evolution in the composition of those interested parties and maybe their preferences the used to be the buy and hold with the strategy, but I just wonder how that's evolved.
Yeah, Hey, Alex.
So first off definitely continue the theme from the last call, which is the combination of the launch of the fresh flex prototype, which which really creates nice.
Opportunity for any active developer as when you think about growing del Taco.
That's definitely a piece of the puzzle as we think about the kind of flexibility you need to add to access of real estate and then also the.
Obviously, having the tech integration to be able to meet consumer demands, so really getting lots of positives on fresh flax and feel really great about moving that prototype forward.
In addition, as we as we've been trumpeting here for a bit the <unk>.
Eighth consecutive year of positive same store sales growth on the franchise business has been a big deal and it's been nice to be able to really kind of actively talk about that two prospects and sell them.
Those are probably the two big things that are going in our favor right now and causing.
The real influx of conversations do occur, especially in the territories that we're looking to grow in underserved are underpenetrated territories and that obviously culminated to a couple of deals getting signed here recently and there is many more of conversations kind of happening and how many of those come through the actual deals we'll see but we certainly have momentum in.
This area and I would say in regards to the quality of the candidate.
We're seeing it.
A really nice.
Quality candidate coming to the table that wants to grow.
From restaurant, one and it doesn't necessarily want to build but that are want to buy the data.
By dynamic is still out there and we hear that from time to time, but I'd say right now we're hearing a nice.
A bit of a mixture on that right now that's allowing.
For probably more media conversations across the board. So we feel good about the progress we've made on that front.
Great and then the.
Delivery pricing that you took in the third quarter.
It sounds like.
Not a whole lot of pushback.
Now that it's gone up to 7% of sales but.
And the interested in what the reaction has been.
And I guess some of that is is the price on the in that mix, but any thoughts on what the reaction has been.
Sure Alex It's Steve we did take that price increase up to 20% early Q3 last year.
All of the lengthy test of that during first half of 2020 and certainly during that test we did not censor detect any notable elasticity.
Which enabled us to make the move and clearly delivery kind of held in us since the accelerated sequentially as we moved into the new year. So we feel really good about the pricing level that we've enacted.
It goes a long way towards managing margins.
So overall, we feel good about the model of that we've created and we're at the point where.
We're limiting the impact on margins and we're getting a similar penny profit dollar if you will flow through on delivery of that we'd see it.
The restaurant transaction.
<unk> through might be a little smaller on a percent basis that could pressure margins, but really we also believe.
A good amount of this delivery is incremental which as you know creates leverage in other areas of the P&L. So overall the strategy of the 20% we think it really neutralizes any overall restaurant margin pressure and really puts us at the point, where we're generally agnostic between a delivery.
Transaction with a much higher check that we continue to see versus something at store. So we feel good about that.
Got it at the bank.
Yes.
Youre welcome.
Thank you. Our next question comes from the line of Nick session with Wedbush Securities. Please proceed with your question.
Hey, Thank you and congratulations on some really great results, great to hear the quarterly trends as well.
Steve.
Just given the the topline trends, particularly the stepped up trends in April here on the company owned stores.
Is there any chance you can maybe bracket.
The four wall margin guidance, a little bit more than modest.
Improvement.
I mean, it seems like the food cost inflation guidance is pretty much the same.
The marketing expense.
Through the year was already known.
Chance you can help us maybe bracket that a little bit more than the modest.
The improvement year over year.
Yes, we certainly are.
Feel pretty good about Q2, it's the more of a normalized outcome also pointing out the Q4 was more of a normalized margin. The one little deviation of the year ago Q3 was very strong came in at 18%.
The quarter each of food labor and Opex ran the lowest all year on the percent basis. Among the four quarters. So Q3 will certainly be the challenging quarter in terms of margin performance, but feel otherwise, particularly good about Q2.
On the food line overall.
Credible outcome in sub 26 in the first quarter.
We mentioned net that'll move from some slight inflation from deflation as we get into Q2 with second half having more notable.
Modest inflation on the line so the overall theres a little more color on the food line than labor and Opex of those two line items.
We move seasonally out of Q1 that historically has lower <unk> into higher seasonality quarters, certainly those two lines sequentially will lever as we move forward and really as we especially to think about second half, notably we're going over of great second half last year company was up.
Low single digits, the nice strong 2% in Q3 and franchise also great performance from them as well the new crispy chicken launch kind of was really the catalyst that drove some of those sales.
Notably the sales recovered last year.
Sort of strong labor and other operating efficiencies were kicking in so we had some pretty good performance second half. So as we look at back half of this year.
Our sales are in terms of magnitude of sales growth is going to heavily inform what that margin looks like in the second half so a.
A little early to put a finite caller on that we are still inching, our way out of the pandemic, but feel really good.
The thing John touched on me of the brands well positioned we feel great about the sales line, which should lead the comfort on the margin line.
But naturally things have to play out and hopefully that's a little added color for you.
And then obviously marketing spend this year should be.
A lot of ammunition just year over year in terms of the normalization of <unk> been as we.
You kind of go over second half.
You can kind of.
Even if you don't tell us the exact number of spending but at least directionally.
Q2, Q3, Q4, if theres certain quarters, where where marketing is.
Maybe more concentrated than others.
Where we are right now your overall our model is the deployed 4% in the given fiscal year, notably last year due to some reduction in the advertising during the height of the pandemic.
'twenty, we spent $3 seven so the rate there will have a 30 basis point headwind on the margin line just due to that.
Notably when we talk about modest restaurant margin expansion that includes absorbing that 30 bps, so as far as where we sit right now we spent a little under 4% during the first quarter in general. The next few quarters will be in that 4% area likely Q3 will be a bit higher that's our toughest sales comparison.
Want to really have the strong advertising deployment that quarter to help.
Sustaining our sales trends.
And what we're lapping Q2, and Q3 of those were the two quarters, where a year ago, we deployed around 3% so.
Right there of suggest Youre looking at a full percentage plus of headwind in each of those quarters.
And then the fourth quarter, probably more level and that kind of 4% area. So that's a little bit of the.
Color on the cadence of our advertising line that is inside operating expenses most of you know.
Got it and then just lastly.
Any chance, we could see where the price increases on delivery.
Going forward just given the.
The trend across the industry seems to be that.
Theres very little pushback on further increases.
Yes. Good question very topical of top of mind here. We are currently testing of <unk>.
5%, so that test is underway and will lead to a decision down the road here.
Thank you.
Youre welcome.
Thank you. Our next question comes from the line of Joshua long with Piper Sandler. Please proceed with your question.
Great. Thank you for taking my question I wanted to follow up on that last point on the testing of the 25% menu price and then some of your earlier comments, Steve in terms of being able to mitigate some of that margin pressure with the 20% increase and maybe really just summarizing the question.
The 25% really gets you to of your fully agnostic does that just narrow that gap a little bit more.
Just trying to get a sense of where.
Where we are in that ultimate long run potential of being truly agnostic between an in store and delivery.
Delivery.
I would say due to the of 185 time area average elevated check we're seeing on delivery with today's 20% premium.
The dollar flow through one of the delivery transaction truly is lined up with what we see at the restaurant on a more normalized check average so.
We're kind of already there so.
I mentioned that on a margin percent basis may be a slight drag, but if we indeed prove out and move to 25% I would say, we're clearly agnostic certainly on the dollar flow through line item and even on the margin point, where we might even be agnostic skewing towards the very much volume with delivery of its depth.
<unk> a proven meaningful channel that's not going to change. So naturally our view is to continue to nurture of that and it goes back to ultimate convenience, the making sure. The guests can use us how when and where they want to users. So that will remain core to our strategy.
Understood very helpful color. There. Thank you for that and then thinking back to maybe John coming from the geographic story and how this is playing out.
We've been talking about this for awhile, but the definitely makes sense and I was curious if we could dig deeper into understanding some of the consumer behavior.
Beneath the.
That trend when you think about or look at the transaction data and think about your consumers in those various markets are they acting differently above and beyond the just the restrictions and maybe the the changes in.
You know kind of behavioral patterns in terms of going to the office or having area.
Restrictions in terms of the daytime anything else you can glean in terms of how the consumer is using and engaging with your concept across those various geographies that's worth noting.
Yes sure.
I think first off the.
I think the good news on this is that you know.
Those three counties that we've been highlighting for a few calls now L. A orange and Clark head of.
Really lagged.
Relative to the other company markets, which of all generally been positive.
As of the good news is we're starting to see we're starting to see some positive trends in those markets from a perspective of you know they are moving in the right direction right, they're progressing so all.
Although they're not all where we want them to be just yet we definitely see that a combination of kind of factors are happening when.
You look at a couple of of the markets I think it's all a la county, and Clark in particular, they had significant unemployment headwinds.
As well relative to you know national trends and what we're seeing so.
The good news is some of those trends have started to improve with progress over the last few periods. Josh. So we think that'll help those of those particular counties.
As unemployment kind of normalizes, there a bit more and then the other dynamic you kind of hit the nail on the head which is a few of these counties of Orange County is a great example.
Lots of inflow into Orange County from other counties for daytime employment.
And.
Many more of kind of white collar jobs in Orange County of more office buildings things of that nature that have been.
Very virtual as we all know so as some of that starts to come back we expect the counting of like Orange to start to normalize a bit more relative to the type of occasions that we served during the day. So those are those are some of the some of the things relative to the <unk>.
Three counties, but Inc.
Thanks, Steven I sitting here today, we feel pretty good about the fact that theyre moving in the right direction Theyre, not exactly where we want them but.
Over time, we do believe that we'll get back to more normalized behavior in those counties, which will certainly help the company trend because.
As we've noted it's a high concentration of company stores coming out of those counties.
Understood. Thank you for that and my last question was circling back to your comments around the labor approach and how you were both working bottoms up and then kind of widening the funnel and I'm curious to the us.
Understand more about that and what you've learned the date or what maybe some of the early wins have been in terms of really being able to try that maybe out the new versus some of that.
What kind of a labor shortage, but some of the pressure just on really.
Refilling that or.
The building that human capital pipeline, which is the crucial piece to both the brand and your historical successes.
Yeah, Let me, let me give you more color on that so the on a system wide basis. So on a national basis for us for del Taco, We definitely seen applecare Apple can flow slow down right. So that's.
That's an early indicator of that's an important one of recognized but turnover has been very stable in Q1, and so far in Q2.
And then when you look at the operations further, but you're saying the fact that there hasnt been a major impact on our business just yet.
As I noted on the call are operating and guest metrics have been stable and improving and you heard the guest sat increased by three 6% in Q1, and then lunch drive thru speed was better by 3%. So it's safe to say that our system wide same store sales are not being material materially impacted at this point.
However, there are pockets of stores being effective and the big the big key here is we need to stay ahead of the applicant flow and stay focused on maintaining strong staffing levels system lights of this doesn't become a problem for del Taco and Thats, what what we're doing I mean thats. The Thats my comments on best practice sharing we're doing that with France.
As owners, we're doing that with our operators and then we've got edition of the addition of new recruiting tactics, including an enhanced employee referral program that we're rolling out in many of our franchisees of decided to do that as well. So it's both company and some franchise momentum and that we've also got new and improved restaurant signage. The has gone up that <unk>.
<unk> starting wage in the stores that really need to kind of.
Talk about that and make that top of mind for consumers coming in because sometimes those best consumers can turn into your best employees and.
And then we've got some new incident interview of new into an interview process to quickly connect with potential applicants. So that's about speed just getting them through the application very quickly and hired very quickly. So we don't Miss the opportunity. So again not not a issue that we're seeing in regards to business performance right now, but definitely some early indicators in regards to applicant flow.
That we're trying to stay ahead of.
Sure.
Understood and then just one point of clarification on that are the are these relatively new initiatives here at the state.
On the 21 or first quarter or have you been have you been layering in some of these over time, just trying to get a sense of the timing of of these pieces.
The combination there is some net we're layering in and there are some that were just reinforcing our <unk>.
Refreshing if you will.
Got it thank you.
Thank you once again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keys. Our next question comes from the line of Todd Brooks with CL King <unk> Associates. Please proceed with your question.
Hey, Thanks, and congratulations on the great momentum, we're seeing in the business really great.
Thank you Tom.
Welcome.
If we can talk first about kind of that pipeline of active discussions on the potential franchisee partner side.
Two announced deals.
Nice size in the southeast of.
Obviously, you said multi brand with other <unk> operators. So it seems like the type of franchisees that you want to be bringing into the.
The fold if you look at the pipeline of discussions are they skewing to the southeast just from the development opportunity, where I think you think that could be of.
A couple of hundred store market or what's what's the breadth of where you're seeing kind of that.
But best most intense level of franchisee interest.
Yeah.
It's really over the breadth of our operating geographies and some new territories that folks are interested in I mean, the reality is is you've got a lot of underpenetrated markets in the Western third where we currently operate in and we're seeing interest there and also seeing existing franchisees are really excited about fresh flash.
And then.
Obviously, the southeast has been a priority market for us and we've been doing a lot of work down there to grow our presence. So the good news there is both of these.
<unk>, obviously are in the southeast and there's more conversations happening in the southeast because of the presence and how the brand is building down there I think that.
It gives it gives folks more confidence in regards to the brand's ability to perform and that causes more material conversations that happen. So that certainly happened in the southeast and then we're getting approached.
From the new market perspective folks that want to go in and.
Greenfield of new market that they feel like they can be first mover in and so theres a few of those conversations happening Todd so.
Definitely the southeast is a priority and we're all over the southeast.
There is more conversations going on right now than just the southeast.
That's helpful. Thanks, John.
Second kind of following up on some of them of Joshua is questions about labor.
If you look at.
The way that you characterized it that it's not a constraint yet but the the front end of the pipeline of slowed so you want to bolster the African pipeline.
If you look at areas of the business that are coming back and I'm thinking specifically graveyard.
Is the labor pinch being felt with staffing that day part or maybe reopening that day part in some of the units because.
You are having challenges of staffing up for that does that.
Is that an opportunity once we get over this staffing challenge for even better same store sales of ourselves from what you're reporting now.
Yes, so we're not seeing that just yet outside of just a few obviously a few restaurants that are you know those pockets of opportunities that we're seeing and I'm sure. Many other brands are seeing.
So just just not yet.
In regards to the trends now hours of operations have had been a piece of.
The shoulder day parts for us over the last year or so as you know as you.
The call, we've we've pulled some hours here and there to optimize profitability.
We're not fully back to pre COVID-19 level hours of operations across the system just yet, although we're building our way back there.
That's part of the tail of tailwind that we're seeing at late night and it's certainly part of some of what we may see at breakfast over time here over the coming quarters, it's not material enough to as affected our Q1 same store sales, but obviously at the.
The day part in a vacuum.
From a percentage standpoint, it's kind of help the day part as you have more hours of operations. So so I think I think the balance that we're striking right now is where we have those issues were probably not adding those hours back just quite as quickly.
<unk> isn't in a lot of restaurants, and then a lot of markets just yet and in the other markets, where our restaurants, where we're not having the issue quite as bad on the staffing front.
<unk> still.
Not quite where we were pre COVID-19 in regards to hours of operations. So so.
It's a balancing act that we're that we're that we're playing right now in regards of the staffing and day parts, but like I said the key for US right now across the system is staying very focused on this applicant funnel and staying ahead of the game here I mean, we expect to how the few issues here and there, but we do not expect for this to be.
A system wide brand issue, because we are actively and vigorously managing it.
That's very helpful. Thank you and then the final one from me you talked the believers on the last conference call about.
The possibility of a couple of them.
<unk> product platforms. This year, you just talked about per.
First with the late summer launch timing of our kind of an early fall hopefully return to office type of scenario with the rebound that you're seeing in graveyard currently would that support.
Pivoting that way from a from a platform of product newness standpoint or.
Or does it.
Recovering all of its own actually gets you the pivot towards more of the core day parts as far as a potential of new platform.
Yeah, you know let me.
Platforms are going to continue to be let me just.
Get that first product platforms in particular are going to continue to be something that we.
We will actively be developing against and innovating against and every year, you, you'll likely see us deploy some level of product platform.
To keep keep our news fresh and interesting and then and then obviously <unk>.
<unk> products against those platforms are really key as well so excited about what's happening with breakfast I think we've got a great platform to deploy that represents value and mid tier them really well and consumers going to love it and.
We'll see what it does for the day part some of that is definitely a macro.
But we do expect to start to see more normalized behavior, especially as we move into the fall. So we're anticipating that and we want to try to get ahead of that with some new products and some new exciting news from del Taco at that day part in regards to late night.
Our late night and graveyard business.
Have really been heavily influenced by the delivery channel.
Both over index from from the percent of sales perspective compared to other day parts.
So as you heard we're running higher so far this year this year from a delivery perspective, both quarter to quarter of Q4 to Q1 as well as year on year, so that extra momentum we're feeling on delivery with that over index thing that's happening with graveyard and really late in the rate late night behavior is.
Definitely translating into those into those later day parts. So.
It feels like Todd to me that you know are.
The good play right now are the right play right now for US given that we're seeing that kind of momentum is to continue to harness delivery continue to leverage. The fact that maybe more folks are out and about again with more normalized evening activity of that will continue to build we believe through the summer and we probably don't need to go the route of of product platform just yet.
At late night, and just really operate well do delivery well and make sure we take advantage of the.
The added traffic that may be in the marketplace in the evening over the summer. So that's how we're thinking about it right now.
That's very helpful. Thanks, John.
Thank you we have reached the end of our question and answer session and the conclusion of today's call. Thank you for your participation. You may disconnect. Your lines at this time and have a wonderful day.
Yes.
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Okay.