Q1 2021 El Pollo Loco Holdings Inc Earnings Call
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Good day, ladies and gentlemen, and thank you for standing by welcome to the El Pollo Loco first quarter 2021 earnings conference call at.
At this time, all participants have been placed in a listen only mode and the line will be opened for your questions. Following the presentation.
Most of this conference is being recorded today may six 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, I would now like to turn the conference over to Larry Roberts.
Thank you operator and good afternoon.
Everyone should have access to our first quarter 2021 and earnings release.
Not at can be found at Www portola.
And with Dot Com and the Investor Relations section.
Before we begin the formal remarks I need to remind everyone of our discussion today will include forward looking statements, including statements related to the impact of the COVID-19, pandemic and our business and strategic actions we have taken in response.
And as well as our marketing and issues cash flow expectations capital expenditure plans and plans for new store openings. Among others. These forward looking statements are not guarantees 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.
We refer you to our recent SEC filings, including our form 10-K for a more detailed discussion of the risks that could impact our future operating results and financial condition.
We expect to file our 10-Q for the first quarter of 2021 Tomorrow and.
And 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 to comparable GAAP measures are available and the earnings release.
Before I turn the call over to President and Chief Executive Officer for the Arctic Coca and I'd like to note that Bernard and I are in different locations today.
Lease bear with us if you experience any slight delays for minor audio quality issues Barnard. 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.
We are very pleased with our solid start to 2021 and the sales trends. We are currently experiencing which we believe indicates that we are at start of a strong recovery.
After a sluggish start to the first quarter, which was largely a result of an increase and COVID-19 case rates and southern California and heightened restrictions.
Sort of steady sales improvement throughout the quarter, culminating and a 26, 1% increase and system wide comparable restaurant sales in March.
With the acceleration enabled us to deliver systemwide comparable sales of seven 4% for the first quarter.
Sales trends that we saw in March have continued to accelerate into the second quarter.
I am pleased to report that through April 28, our second quarter to date system comparable sales are up 39, 1% and.
And on the two year basis system comparable sales of increased 13, 5%.
In addition to the strong comparable restaurant sales performance and late March and early April.
We achieved record Systemwide weekly average unit volumes for three straight weeks and on April 1st we posted our highest single day of sales ever on National Burrito day.
Stephen These results at a time when most of our restaurants are operating at limited capacity.
Really impressive and would not have been possible without the hard work and dedication of our team members and franchise partners.
As I noted the ongoing improvement and our greater Los Angeles area restaurant has been a key part of our recent sales improvement.
As restrictions have been lifted we're seeing overall economic activity and the region accelerate and COVID-19 appears to be having of declining impact on a restaurant and employees.
Most of our La area restaurants are currently able to operate at 50% capacity.
And while dine in traffic remains understandably muted we are optimistic that it will gradually increase as our customers continue to get vaccinated and are more comfortable eating indoors.
Outside of Los Angeles, we continue to be pleased with the sales trajectory of our outer market restaurant.
We have consistently achieved positive same store sales growth since June of last year.
While the smaller subset of our overall restaurant base, we have seen out of market comparable sales improved more dramatically than at our la <unk>.
Which not only bodes well for the health of our overall system, but gives us even greater confidence about the future of our core la market as economic activity continues to rebound and southern California.
Our restaurant contribution margin for the quarter was 16, 1%, which primarily reflects the challenges we experienced in January and February at.
At the sales and labor impacts of COVID-19 abated during the quarter.
Company operated restaurant margins quickly improved with March coming in at over 20%.
With sales trends recovering our team is also making great progress on the four key strategies that make up our acceleration of agenda, which are.
One.
Spanned the brain grow and new geographies with franchisees.
Two.
The port the brand build the right organization for asset light growth.
<unk>.
Evolve the brand.
Digitize the business to compete.
And for focus of the brand exaggerate what makes the so special and different.
While I won't focus on each of these strategies and great detail I would like to give you a brief update.
Evolving our brand is all about utilizing technology to better serve our customers during.
During the quarter, our digital business continued to grow and is now approaching 11% of total system sales, primarily driven by third party delivery.
In addition, our enhanced efforts to grow our loyalty customer base are paying dividends as we have added approximately 200000, new members since the beginning of the year.
Equally as important we are seeing an uptick and loyalty transactions, which are the centerpiece of our go to market strategy for the long term.
We also continue to make progress improving our speed of service as the result of several measures implemented late last year, Inc.
<unk> efficient labor deployment.
And its guidelines, the packing side items, and salsa and better positioning of equipment and our restaurant.
Moreover, during the first quarter, we expanded our test of order taking tablets, the 10 restaurants the.
The technology enables our team members to take orders and payments from customers, while they are and the drive through Q with the goal of cutting our drive thru times and half by achieving a 45 second order and window of time.
It's early days, but we are very encouraged by the results, we're seeing and our test restaurants with.
We currently plan to further expand the test and May and are targeting pending achievement of our kpis to begin rolling out the platform the company restaurants. This fall.
Turning to our strategy to focus of the brand.
Our team has been working tirelessly to exaggerate what makes the so special and different.
To that end and addition to our regular marketing activities, we will be executing several brand Sparks and 2021.
We believe that these will give us the opportunity to more deeply connect with our target audience and build brand love and affinity.
The first spark will be to celebrate this upcoming mother's day.
Our strong like of moderate Mothers' day Grant initiative was designed to recognize and.
Celebrate and support greater Los Angeles area of Moms, who have to put their career and personal pursuits on pause because of the COVID-19 pandemic.
Nominations for Moms via Instagram are open now for May 14, and each of the 12 selected winners will receive a $5000 module shipped grant that gives them the opportunities and resources to get back to pursuing their dreams.
The role of the mother is never simple and the past year of pandemic and economic strength has made the world's toughest job even tougher from.
And for mothers of color and single Moms. This crisis has been amplified as these communities have been disproportionately impacted by job losses and workforce.
This is what inspired El Pollo loco to give back the moms and help them regain their footing after a year of constant setbacks most.
Have you have heard me discuss our focus to build a culture at El Pollo Loco centered on leadership with heart.
And this is another example of building our culture, while also strengthening the bonds with and making a difference and the communities we serve.
Finally, we continue to focus our efforts on expanding the brand as we work with existing franchisees and recruit new franchise partners to develop new market.
We feel good about the progress, we're making and expect to be announcing new development agreements over the next several months.
In summary, our confidence is steadily growing at the worst of the pandemic is behind us with.
With positive sales trends.
<unk> progress and implementing our acceleration of agenda and vaccines, becoming more widely available and our team members and franchise partners are ready to capitalize on a more normalized operating environment.
As always I'd like to thank our dedicated employees and franchise partners, who courageously steered us through and incredibly trying period and are now leading us to capitalize on accelerating our growth.
Now I'd like to turn the call over to Larry to review, our first quarter results and more detail.
Thanks Bernard.
Before we get into our first quarter results I just wanted to highlight at two new company restaurants were opened during the quarter one each in the Las Vegas, and California and.
In addition, we completed three remodels and using our new L. A mex design and Los Angeles.
We expect capital spending for 2021 to be in the range of $20 million to $25 million.
Now onto our financial results for.
For the first quarter ended March 31, 2021, total revenue was $107 $7 million compared to $105 $2 million and the first quarter of 2020.
Company operated restaurant revenue was $94 $2 million compared to $92 $6 million and at the same period last year.
The increase in company operated restaurant sales was primarily due to a three 3% increase and company operated comparable restaurant sales and an increase of zero point $5 million and non comparable restaurant sales, partially offset by a $1 million decrease due to the temporary closures as a.
Out of the COVID-19 pandemic.
The increase in company operated comparable restaurant sales was comprised of a 15, 7% increase and average check partially offset by a 10, 7% decline and transactions.
During the quarter, our gross pricing increase versus 2020 was 3%.
Franchise revenue was $7 $6 million during the first quarter compared to $7 $1 million from the prior year period. This.
This increase was driven by franchise comparable restaurant sales increase of 10, 5%.
As well as the opening of three new franchise restaurants during or subsequent to the first quarter of 2020.
Was partially offset by the closure of seven franchise restaurants during the same period.
Turning to expenses food and and.
Paper costs as a percentage of company restaurant sales decreased 170 basis points year over year to 25, 9%.
Proven was predominantly due to higher menu prices lower food and paper usage, resulting from dining room closures and the effect of waste management.
These were partially offset by slightly unfavorable menu mix.
We currently expect commodity inflation to be around 1% for 2020 one.
Labor and related expenses as a percentage of company restaurant sales increased 160 basis points year over year to 32, 6%.
The increase was primarily due to higher hourly wages in California, and compared to last year and $2 $7 million of labor costs related to leaves of absence pay and overtime associated with the COVID-19 pandemic. These are partially offset by increased menu prices and operating efficiencies and 2021, we expect.
Inflation of around 5%.
Occupancy and other operating expenses as a percentage of company restaurant sales increased 140 basis points to 25, 3%, primarily due to higher maintenance spend operating cost and marketplace delivery fees.
General and administrative expenses increased by approximately $1 $1 million year over year.
And to $10 $5 million, primarily due to increase of the management bonus and stock compensation expense.
And as a percentage of total revenues general and administrative expenses increased approximately 80 basis points to nine 7%.
We recorded a provision for income taxes of $1 $6 million and the first quarter of 2021 for <unk>.
For an effective tax rate of 28, 7%.
This compares to a provision for income taxes of $1 $3 million and then the effective tax rate of 26, 6% the prior year first quarter.
We reported GAAP net income of $4 million for 11 cents per diluted share and the first quarter compared to GAAP net income of $3 $6 million for 10 cents per diluted share in the prior year period.
Pro forma net income for the quarter was $4 $7 million for 13 cents per diluted share compared to pro forma net income of $5 $5 million for 16 cents per diluted share and the first 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 all of liquidity.
During the first quarter, we paid down $9 million of debt and.
As of March 31, 2021, we had $53 $8 million of debt outstanding and $6 $7 million and cash and cash equivalents.
I'd now like to provide a brief update on our business during the second quarter of 2021.
And as Bernard mentioned earlier, all company owned and the vast majority of franchise restaurants, located in California, which make up 80% of our restaurants are now operating at 50% capacity.
Through April 28th second quarter Systemwide comparable restaurant sales increased 39, 1% consisting of a 32, 8% increase at company owned restaurants, and a 43, 9% increase at franchise restaurants.
System wide comparable restaurant sales increased by 36, 8% and Los Angeles and <unk>.
Surrounding areas and increasing 42, 9% and other markets.
As a reminder, our COVID-19 related expenses have been trending downward as the number of cases are declining and California and for the months of ending April 28, 2021, we estimate that the company incurred 100 to $150000 of COVID-19 related expenses, primarily related to leave of absence.
And overtime pay.
Lastly, due to the uncertainty surrounding the COVID-19 pandemic. The company has not yet providing a financial outlook for the year ending December 29 2021.
However, we are reiterating the following limited guidance the opening of three to five company owned restaurants, and four to six franchise restaurants.
Pro forma income tax rate of 26, 5%.
This and this concludes our prepared remarks I'd like to thank you again for joining us on the call today, and we were not happy to answer any questions you may have.
Thank you.
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And our first question comes from.
From the line of Sharon Zackfia with William Blair. Please proceed.
Hey, guys. This is Alex on for Sharon and I was just wondering if you could clarify and.
And the law and outer market comps through our second quarter is that is at that difference there really just based on easing restrictions and increase and consumer sentiment could you provide a little color on that.
Sure Yeah, no I think at.
Part of an ongoing trend that we've seen where.
Naturally southern California, particularly at La <unk>.
Harder hit by COVID-19 greater impact.
And COVID-19 related issues and that's one.
Two for more of a macroeconomic standpoint.
Our customer base.
And in L. A tend to skew very heavily Hispanic.
And.
Throughout the pandemic and continuing up into the pregnant and what we've noticed is that while that customer is recovering.
They're not recovering at the same rate as perhaps the general market consumers at this point.
So given that.
74% of our company restaurants are concentrated in L. A.
We are seeing still some catch up.
Taking place and the la market now and.
Encouraging news is we're seeing trends moving the right direction.
At a pretty rapid clip so we remain optimistic that.
La <unk> has a lot of room there.
It's still recover.
Okay, great. Thanks, I'll pass it on.
Our next question comes from the line of Jake Bartlett with <unk> Securities. Please go ahead.
Hey, guys. This is actually Jack on for Jade, Thanks for taking the questions.
And the kind of follow up on current.
Current sales trends I guess would you be able to break out how much of the.
The current trend is driven by guidance sales force drive through sales and maybe another way to think about it as just have the level of drive through the absolute level of drive the sales maintained even as the dining rooms are open.
Yeah. So.
The the drive from the business is the lion's share of them.
What's driving the business right now so we are still slightly below 70% of our business.
Coming through the drive through our dining rooms naturally are opened only the 50% capacity and while we're seeing.
The slight uptick and the growth of that business.
It certainly hasn't returned to where it was pre pandemic and naturally well and that would be of challenge with the 50% cap to begin with so so yes to answer your question, where we're seeing strength in the business is largely off premise.
Primarily driven by drive through and then we're seeing some nice growth as well and delivery and our to go business as well.
Okay, Great that's helpful and then.
I guess as.
At the Dine and business continues to come back to you do you expect that to have an impact on your average check and you've experienced a lot higher average share throughout the pandemic.
As of the dining comes back to us because that can have an impact on the average check and is there any implications on on your margins.
At that happens.
Well.
I guess I'll take that one is.
All along we've communicated that we think of average check and.
And obviously the growth of average check will certainly slow down and probably flatten out a little bit as transactions grow I think part of that is recognizing net.
And we will get transaction growth as the dine in traffic comes back and so I think the positive is there that I think we still feel like we will get incremental sales from the dine in traffic coming back I do think the the.
Check may dropdown of a bit just because of the thing you get more individual end and two party transactions and dine in versus.
Some of the delivery and.
And drive through.
Transactions that we do from a margin perspective.
I think of a potential impact of the dining room, which we haven't really done too much yet is just you know on the.
And Dan and traffic at significant enough that you do we need to put some incremental labor in to comply with the regulations around keeping restaurants clean and and.
Those types of things.
So thats to be determined, but I think that's where more of the at the margin impact with the versus just the drop and check because again I think we will get transaction growth as it takes place.
Great that makes a lot of sense.
Okay, and then I guess, just one last one.
A lot of other companies have talked about difficulty staffing up and this time is everyone's kind of trying to staff up at the same time.
Are you seeing any difficulties there and is that holding back.
And maybe some opening of dining rooms.
Yeah.
So naturally you know everyone's seen the tightening of the labor market and its impacted and somewhere and other I could tell you from the staffing perspective, what we're seeing that is that it's not universal across the board that we see a little bit of aggravation.
And staffing some of our restaurants, and some concentrated areas, but it's not universal.
That's one.
So right now we are doing a pretty good job contending with it but with that being said you know.
We are putting in place some additional.
Actions.
To ensure that we are increasing our staffing levels.
And that were kind of increasing our hiring practices more broadly.
But right now right now at present and it seems to be it seems to be manageable because as I mentioned, it's not widespread it's it's more primarily concentrated in some particular areas.
Alright, great. Thank you for the time.
As a reminder to register for a question you May press the one followed by the for.
Our next question comes from the line of Andy Barish with Jefferies. Please go ahead.
Hey, guys hope you're well.
Just one quick clarification, Larry on the on.
And the two year of system growth.
Is that comparing <unk> in April two.
To April of 2019, and I just wanted to make sure I'm thinking about that correctly.
Yeah, the two year comps, our 2021 versus 2019, yes, okay, Okay and then.
What was was it purely geographical I guess, the the gaps in the much wider gap and the franchise.
Tom says.
You reported and the first quarter.
Well.
And if the if I heard the question correctly.
The GAAP between franchise and company I think is really again falling and in a couple of areas. One of our strong company concentration of restaurants, and 74% of them roughly and L. A and the total that COVID-19 took the.
At the told the total COVID-19 took for for quite some time and a leading up into February and on the on the company restaurants, there, which.
And I don't think was as widely felt.
Is that a good way to think about things near term.
For you know maybe for the next couple of quarters in terms of.
The seasonality and the business and things like that.
[noise], Yeah. So just give you a little more detail around and I'm organs and.
Given you know assuming current trends continue on the sales line I expect queue to to be a swimmer to March in terms of margin of a strong.
The second quarter on the margin line.
Yeah, and and Q2 is usually are strongest margin quarter, you know absent any kind of one of off of adjustments Cuties, usually are our strongest margin quarter. So and then as you move through the year, you got a little bit of seasonality that will.
Rag margins a little bit.
The other headwinds that we have for balance of year or just around and some of the investments at the we're making the I could packaging, we're rolling at new packaging getting rid of all of our styrofoam and putting in uhm recycle packaging. So that's good and will cost of the business like a highlight of just earlier and one of <unk>.
Questions is we may need to make some investment and our dining rooms as dining room volumes increase for that.
At create a little bit of of of headwind and then you know kind of as I move through the year expect to see probably a little of pressure around utilities electric electric kristi rates are.
Our high and obviously electricity usage and the third quarter is always high because of the the heat that we get and L. A and Las Vegas and then the you know the food cause back half of the year I expect a little bit more.
The cost inflation.
Primarily around freight and.
And the oils like a soybean oil so I expect to see a little more of Cogs inflation back half of the year. So again queue to should be strong and the range of March and and you know I think there's gonna be a little bit more pressure back half of the year and of course, it always depends on what to say.
Those are in terms of of where the ultimately the margin has come out back and half of the year, but current trends are very positive around margins.
Great very very helpful. Thank you.
Yep.
And now for the questions at this time I'll try and the call back to you and the strike okay.
And I would like to thank you all for participating on today's call and we look forward to speaking to you all of those <unk> have a great day to day Sir.
And that's conclude the conference call for today and we thank you once again for your participation and ask that you. Please disconnect your line.
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