Q2 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 second quarter 2021 earnings conference call at the time, all participants have been placed in a listen only mode and the lines will be opened some of your questions. Following the presentation.
At that time, if you have a question. Please press the 1 followed by the 4 on your telephone.
If at any time during the conference you need to reach an operator, Please press star and zero.
Note that this conference is being recorded today August 5.2021 of.
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 would like to turn the conference over to Larry Roberts.
Thank you operator and good afternoon.
Now everyone should have access to our second quarter 2021 series release.
It can be found at www plenty of logo dotcom.
Dotcom and the Investor Relations section.
Before we begin our formal remarks I need to remind everyone standard.
The discussion today will include forward looking statements, including statements related to the impact of the COVID-19 pandemic and of our business and strategic actions. We are taking in response as well as our marketing initiatives cash flow expectations capital expenditure plans and plans for new store openings among others.
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 second quarter of 2021 Tomorrow.
We 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 reconciliation to comparable GAAP measures are available in our earnings release.
Before I turn the call over to President and Chief Executive Officer for the Arctic Coca.
I can note that Bernard and I are in different locations today. Please.
Please bear with US if you experience any slight delays from minor audio quality issues. Bernard. Please go ahead.
Thank you Larry good afternoon, everyone and thank you for joining us today.
We're very pleased with the continued sales recovery in both of our Los Angeles and out of market restaurants during the second quarter.
Culminating in a 21% increase in system wide comparable restaurant sales.
On the 2 year basis, which I believe captures the more complete picture of our performance coming out of this pandemic.
Our system wide comparable sales grew 14, 8%.
As mentioned in our previous earnings call. This was the quarter in which we achieve not only our number 1 and number 2 highest sales volume days in company history, with our National Brito day and cycle day promotions, respectively, but also achieved company comparable restaurant weekly average unit volumes.
<unk> of over $40000 for 18 straight weeks further highlighting the strength, we're seeing in our business.
With the further relaxation of restrictions.
Our positive sales trajectory has continued into the third quarter.
Through July 28, our third quarter to date system comparable sales are up 10, 6% and on the 2 year basis system comparable sales have increased 14, 6%.
From a profitability standpoint, despite some pressure on labor and food costs, we were able to leverage our increased sales and post a strong restaurant operating profit margin of 28% during the quarter and pro forma earnings per share of 29.
Looking at our sales in a bit more detail restaurants outside of Los Angeles continued their positive sales trajectory during the second quarter.
In addition, I'm, especially pleased to report that our la market has strengthened since the lockdowns were lifted.
In fact, the GAAP and system comparable sales performance between our la <unk> and the outer market restaurants improved throughout the second quarter with la system comp sales exceeding out of markets in June by 150 basis points.
You May remember that we began in the second quarter with our la restaurants operating at approximately 50% capacity.
Increasing to 100% on June 15 in accordance with state and local law.
Not surprisingly our diamond traffic has increased at a steady pace and currently runs between 8% to 9% of transactions.
This is still well below pre COVID-19 levels, which is 1 reason why we are optimistic about continued sales growth in the la market.
Helping to drive our strong sales results during the quarter, where a number of marketing initiatives, starting with our tostada promotion, which demonstrated the power of the unique consumer insight to drive sales.
The promotion did not include any new menu items, but instead the advertising focused on the many unique ways you can eat of toast startup with the tagline, how do you toe startup.
The execution of this insight was so well received that we achieved record sales of <unk> during the promotion period and they have remained strong as we've transitioned into our next promotion.
Our $5 of fire grilled combos.
As with the status our $5 fire grilled combo promotion does not include any new products.
Debt, our advertising continues to exploit meaningful consumer insights and targets in the older. Gen Z younger millennial demographic, who are seeking higher quality value meal options.
The tagline value yourself.
We believe that this approach will broaden our consumer base and drive incremental sales over a sustained period of time.
During the quarter. We also introduced our new thermo to go packaging, which was optimized to retain heat given how important our off premise business has become and also eliminates the use of styrofoam from our brand completely.
In fact, the removal of styrofoam from our restaurants will eliminate 21 Olympic sized swimming pools of styrofoam from the waste stream annually.
We also continue to drive our off premise business and are currently running a free delivery promotion for dispatch orders placed directly through El Pollo Loco dot com or our app.
To date, we are seeing very positive impact from this promotion, which has doubled our system dispatch sales and increased overall delivery sales to 7.7% over the past 3 weeks.
The highlight of our free delivery offer and new Thermo to go packaging, we became the first national restaurant company to deliver food the customers' homes through the air via a drone delivery service, which we have branded are local.
The drones are capable of delivering our food up 2 of 2 mile radius.
While the lot of work remains to be done to make drone delivery a viable everyday option. We are excited about its potential.
You can learn more about air logo on the go air logo Dot com.
Finally, we continue to enhance our loyalty program loco rewards and are extremely pleased with the progress we are making.
Since the beginning of the year, we have added 330000 members to the program for a total of $2.6 million.
Equally exciting is the progress we are starting to see with transactions in the program.
Through targeted offers and greater engagement with our loyalty members loyalty transactions continued to grow 14% from the first to the second quarter with significant increases in frequency amongst our heavy and medium users.
As our loyalty program continues to build momentum we are confident that it will become an even greater driver of sales in the future.
On the new unit development side I'm very excited to announce that during the quarter. We concluded a 4 unit development agreement for a portion of the Denver market with an existing franchisee.
This marks our first agreement and the new market and we expect more to follow.
In addition on July 1 we concluded the sale of our 8 company owned restaurants in Sacramento to an existing franchisee.
The transaction included an agreement to build 3 additional restaurants in the market.
We are encouraged that these transactions highlight the desire of our existing franchisees to grow with El Pollo Loco.
With that let me briefly discuss 2 challenges that we along with many other businesses are currently confronting.
First labor availability.
The better navigate the current tight labor market, we have implemented several steps geared towards staffing and labor retention in our restaurants.
These include increasing our recruiting resources to surface more candidates, increasing applicant flow and processing applications faster.
Increasing our discretionary budget in order to get pay raises the key employees in particular of ship supervisors.
Increasing pay if restaurants hit certain high volume thresholds as the means of rewarding our general managers, while creating the right kind of performance incentives.
And also we've increased our training budget for new employees.
Over the past month. These initiatives have significantly increased our number of new hires and improve retention and we've been able to avoid any significant disruptions to our business.
We expect these and additional efforts will exert some pressure on our labor costs during the second half of the year.
Secondly, our teams continue to work hard to ensure that our restaurants are continuously supplied with the products they need to feed our customers.
While the product supplies of improved transportation and logistics continue to be the biggest challenges.
Through the efforts of our teams and vendors to date, we have effectively managed through the supply challenges and have experienced very few product outages.
While we expect supply issues to start improving in the fall.
We expect higher inflation for the balance of the year as we source chicken outside of our contracts and packaging costs.
Main elevated.
In order to contend with these inflationary pressures.
Bold with our confidence in our ability to continue to command pricing power given the strengthening of our brand. We have moved up a planned price increase to start in September of.
Our second of the year to mitigate some of these cost headwinds.
Just to close out my comments about the quarter I couldnt be more proud of what our team has accomplished.
Despite labor and supply challenges the hard work and dedication of our restaurant and support center teams have enabled us to ramp up our restaurant operations to 100% as efficiently.
And safely as possible, while also delivering exceptional financial results.
As we look toward the back half of the year, we will continue our efforts to execute on the 4 pillars of our acceleration of agenda ratio agenda to build on the momentum of our core business and further scale, our brand for rapid and successful growth, especially in new geographies.
As a reminder, these pillars include 1 expanding the brand by growing of new geographies and asset light fashion with franchisees.
Supporting the brand and building the right organization for asset light growth.
3 evolving the brand by continuing to digitize the business to compete.
And expand frictionless convenience for our customers no matter, how they choose to interact with us and for <unk>.
Focusing the brand on our most valuable core equities and exaggerating the them to the point, where we really stand out in terms of what makes us so special and so unique.
With that I'd like to turn the call over to Larry to review, our second quarter results in more detail.
Thanks Bernard.
Let me start with a development update.
During the second quarter, no new company or franchise restaurants were opened.
We successfully completed 2 company reroute using our new La mix design and Los Angeles.
Looking ahead, we expect the opened 2 to 3 company owned and 4% to 6 franchise restaurants during the back half of the year.
All in all we continue to expect our capital spending for 2021 to be in the range of $20 million to $25 million.
Now onto our financial results.
For the second quarter ended June 32021, total revenue increased 22, 5% to $122 million compared to $99.6 million in the second quarter of 2020.
The company operated restaurant revenue increased 22% to $107 million compared to $87.7 million in the same period last year.
The increase in company operated restaurant sales was primarily due to a 16, 4% increase in company operated.
Comparable restaurant sales and an increase of $2.4 million and non comparable restaurant sales.
The increase in company operated comparable restaurant sales was comprised of a 0.4% increase in average check and a 15, 9% improvement in transactions.
During the quarter, our gross pricing increase versus 2020 was 3.6%.
As Bernard mentioned earlier, our sales momentum has continued into the third quarter.
Through July 28th third quarter Systemwide comparable restaurant sales increased 10, 6% consisting of a 7.2% increase of company owned restaurants, and a 13, 1% increase net franchise restaurant.
Franchise revenue was $8.4 million during the second quarter compared to $6.7 million from the prior year period. This increase was driven by a franchise comparable restaurant sales increase of 24, 5% as well as the opening of 2 new franchise restaurants during or subsequent to the second quarter of 2002.
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Was partially offset by the closure of 3 franchise restaurants during the same period.
Turning to expenses food.
Food and paper costs as a percentage of company restaurant sales held steady year over year at 26, 1% as higher menu prices offset the impact of increased commodity costs and unfavorable sales mix.
We expect commodity cost pressures to continue and now expect full year inflation to be around 2% compared to our prior guidance of 1%.
Labor and related expenses as the percentage of the company restaurant sales decreased 10 basis points year over year to 29, 5% as higher menu prices offset the impact of wage increases overtime and increased labor hours, resulting from higher transaction.
While we have been able to manage through the tight labor market with its debt that Bernard laid out earlier, we expect labor cost the increase during the second half of the year as a result of 4.5% of 5% wage inflation and continued investments in recruiting training and retaining restaurant team members.
Occupancy and other operating expenses as a percentage of company restaurant sales decreased 130 basis points to 23, 7% as higher sales revenue offset increased maintenance spend operating costs rent and marketplace delivery fees.
As a result of these cost pressures, we expect third quarter restaurant operating margin to be 250 to 300 basis points lower than the second quarter average.
As a reminder, our third quarter 2020 restaurant margin included the benefit of a 1 time $2 million insurance reimbursement for COVID-19 related costs.
General and administrative expenses held steady year over year at $10.5 million as higher labor related expenses, primarily due to higher bonus and stock option expenses were offset by a legal settlement that was incurred in Q2.2020.
As a percentage of total revenues G&A decreased approximately 190 basis points to 8.6% as a result of higher revenues versus last year.
We recorded a provision for income taxes of $3.4 million in the second quarter of 2021 for an effective tax rate of 27, 8%. This compares to a provision for income taxes of zero point $8 million and an effective tax rate of 12% net prior year second.
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We reported GAAP net income of $8.8 million or 24 cents per diluted share in the second quarter compared to GAAP net income of $5.5 million or <unk> 16 per diluted share in the prior year period.
Pro forma net income for the quarter was $10.7 million or 29 cents per diluted share compared to pro forma net income of $6.9 million or <unk> 20 per diluted share in the second quarter of last year.
For a reconciliation of pro forma net income and earnings per share to the comparable GAAP figures. Please refer to the earnings release.
Before discussing our liquidity I'd like to highlight that we are in the process of applying for employee retention credits, which are part of the cares and American rescue plan acts.
As we discussed on previous calls we incurred significant costs in 2020 in Q1.2021 in order to keep our employees of the safest hospital.
1 of a lot of work remains to be done to quantify and apply for these credits if approved they may result in a significant benefit to our results during the second half of the year.
In terms of the our liquidity during the second quarter, we paid down $13.8 million of debt and as of June 30 of 2021, we had $40 million of debt outstanding and $12.6 million in cash and cash equivalents.
Lastly.
Due to the uncertainty surrounding the COVID-19 pandemic. The company is not yet providing a financial outlook for the year ending December 29.2021.
However, we are reiterating the following limited guidance.
The opening of 3% to 5 company owned restaurants, and 4 to 6 franchise restaurants <unk>.
Remodeling of 15 company owned restaurants, and 40 franchise restaurants, and pro forma income tax rate of 26, 5%.
This concludes our prepared remarks, we.
We'd like to thank you again for joining us on the call today and we are now happy to answer any questions that you may have.
Okay.
Thank you.
To register for a question on the phone lines PMA path from 1 followed by the 4 on your telephone.
Here are 3 telecom technology Jeremy class.
That question has been answered and you'd like to withdraw from the registration. Please press the 1 followed by the 3.
As a reminder for any questions you may pass the 1 follow up either for 1 moment. Please.
Okay.
The.
I mean do you have a question coming from the line of Jake Bartlett with <unk> Securities. Please go ahead.
Hey, guys, it's actually Jack on for Jake Thanks for taking the question and congrats on some some strong results here.
The first I just wanted to ask about.
Current sales trends.
And what's really driving that.
It's good to see the dine in business coming back, but I think pre COVID-19 you.
We're about 30%.
Of your sales mix was dynamic do you see of getting back to that level or.
Do you think the enhancements that you've made to your drive through in your digital platforms are.
Are you really targeting something below that.
The consumer who is coming back.
To the dine in is that your core Hispanic consumers returning some of the new consumers you've picked up during COVID-19.
Yes, so I think what we're seeing is the longer the market has been opened.
The California was 1 of the last if not the last open.
Overtime that dine in business continues to get stronger and stronger.
Will it return back to pre Covid levels tough to say because I think some consumer behaviors have a row irrevocably changed.
Given how much they've gotten accustomed to the convenience of the off premise side of the business.
But what's interesting is that we.
We're looking at this and it's while it's too early to tell some of the dine in business is now starting to look at maybe a bit more incremental to the business than we previously anticipated.
So it's coming back, albeit slowly will it come back to pre COVID-19 levels tough to say.
But right now we're just encouraged by the fact that it's the steady build.
Great that's really helpful.
And then I guess on your planned price increase in the second half to would you give the details of of how much do you think the price you think you can take at this point are you still working on that.
But we're still working through it.
I would say, it's going to be somewhere in the range of the 2% to 3% range.
At.
But again, we still have a little work to do in terms of analyzing it and determining what the final price increase will be.
Great. Thanks, I'll pass it along.
Thanks for the question.
Alright.
Our next question comes from the line of Todd Brooks with CL King and Associates. Please proceed.
Hey, good afternoon, and congrats on the momentum in the quarter.
Hey, Tom Thanks, a couple of.
Couple of quick questions, 1 if going.
Going back to that price increase question.
What will you be running for price kind of in late Q3 and Q4.
The stack the anticipated increase off of what you are running right now.
Yes, so Q3 would be again since we're still determining exactly the amount.
If numbers the.
Q3 would be somewhere in the kind of 4.5% range.
And then Q4 would be anywhere from it could be 4.5 to 5 in that range.
Okay.
And then you talked about.
Just some.
Labor cost pressure in the back half of the year.
I guess, if youre looking at your inflationary.
Cost him quite small relative to the.
Our planned pricing increase how much how much of the pressure youre looking to absorb of how do we think about how.
Labor, especially should be pressured in the back half of the year.
Yes, so we're still looking at.
Said in my opening remarks that the full year wage inflation number will be somewhere in the 4.5% to 5% range. So let's just call it wage.
Wage rates increased pay.
That will have.
But on top of that we've got the other impacts which is around some of the things that Bernard highlighted in his section.
The extra training dollars.
So the additional pay for key employees, mainly shift supervisors would be the area, where we think we need to boost the pay a little bit the to be competitive with what's going on in the marketplace.
And then as we highlighted we also have done a general manager stipend and which we're paying some.
Extra paid to Gms, who are managing our high volume restaurants.
Which 1 is.
Compensate them for the end of complexity, but also create the greatest center for them to continue growing sales in those restaurants. So.
I guess I'd frame it up as you kind of get your base wage inflation of $4.5 5% and then you've got these additional costs in the business.
We've invested in to attract and retain people.
Okay, Great and then the final 1 from me if I could if you look at it.
And Bernard you talked about.
Some of your product focus activities here in the second quarter of that were.
Focus on existing products, so whether it was the $5 fire grilled combo or the or the tostada and finding new way to market and make them relevant within the period.
As you look to the second half I mean, I guess, if we can talk about.
Potential menu newness or new platforms that youre excited about are you finding efficiencies with.
Messaging against the existing menu that you feel like you can drive the same type of traffic lifts, if youre successful and how you.
Promote them and trumped the awareness of them. Thanks.
Yes, Todd yes, so it's always it's always the balance right I think in the in the case of Tostada and $5 combos, we were a bit deliberate.
<unk>.
While we chose those well I'd say, it's the dual dual purpose of dual 2 reasons 1.
We again as I mentioned in my opening comments.
Through consumer research identified ways to present these in a fresh new way as being even more relevant to the customers that we're going after that's 1 but 2 we actually wanted to kind of clear the decks of little bit for a period of time in this case 16 straight weeks for all of our franchisees and our company.
<unk>, because we saw where labor was going we saw how challenging the environment was going to be and so what we didn't want to do was.
Add any more additional complexity in regards to training new Skus what have you during already what is already a trying period of time for the entire restaurant industry.
I think we have fared far better than most hence you see it in our sales.
And I think relatively minimal disruption to our business.
And so I think it was a smart move in that regard now with that being said looking to the fall being a little bit more bullish and optimistic that the macro environment is going to improve a bit.
We are returning back to new product news for the balance of the year and so I am extremely excited about what we have in the pipeline.
And can't wait to be very candid with you too to launch some very exciting products starting in the September.
That's great Super helpful. The makes ton of sense with the labor challenges for.
Or why are you focused on that sort of thank you Anne could change good luck.
Thanks, Tom Thanks, Doug.
And our next question comes from the line of true North with Baird. Please proceed.
Great. Thanks for taking the question I wanted to ask about the recent sales momentum and the slightly differently. If we can get some perspective, there wondering if management thinks that when youre seeing the day in July or in Q3 of the new run rate from the business in terms of the absolute volume.
The depressed due to the pandemic or inflated I guess by any macro or company specific factors any perspective from a high level.
You could provide would be helpful. I'd say from about the second half.
Yes, I mean, I think that's why we're really focusing in on our 2 year comps.
And how strong those of Ben is the kind of maybe take out some of the noise from last year I think we're very bullish on our sales momentum and the.
Gross drivers we have in place to continue the sustained strong positive same store sales growth for the balance of the year.
We're growing this business through transactions.
The nice thing is even though we had huge checklist last year, we're still seeing check growth.
Albeit not what we used to see but.
But we're really encouraged by the trends of the sales trends that we've been seeing particularly on the 2 year front and so that coupled with what I just mentioned in terms of really marketing.
Working in conjunction with our with our franchisees and our company operating team to drive these strong results theres been a lot of nice growth levers in the business.
The highlight so you consistency of we're seeing in the business.
The move into the third quarter.
Great That's health, Paul and Larry did you mentioned like Q3 of restaurant level margin can be 250, the 300 basis points lower than Q3, then cute too and if that's the case how should we think about the Q4 margin do you expect it to pick back up a bit at that price increase takes hold and then just maybe higher level of how.
Were you thinking about the longer term margin that you'd like to deliver.
Yeah, Let me just care of your perspective on a Q3 relative to the queue too and that is normally in the business. If you go back historically you'll.
You'll see the Q3 margins are generally below Q too I mean, almost every year. They are and there's the reason for that cause although the sales volume will be roughly the same.
Would you see is a much higher cost of utilities in the third quarter, because it's the summer months and so you have higher of electricity and gas usage across the business.
And then.
We always have a wage rate increases the.
Basically the end of June or merit increases in our restaurants are restaurant managers increases.
Again, some of that will continue in the fourth quarter of some of it hopefully will not.
Great. Thank you I'll pass it on.
As a reminder to register for a question you May press the 1.4.
Our next question comes from Sharon Zackfia with William Blair. Please go ahead.
Hi, good afternoon.
I wanted to ask about California, since it's kind of recently been completely open is that of market, where you're seeing it build the week to week at this point.
Yes, I mean, I think as we've indicated you know Sharon you remember the story all too well we used to have this kind of a tale of 2 cities in our business throughout 2020 that carried into a little bit of Q1, and what we said was once we kind of put COVID-19 behind in our rearview mirror.
We expect L. A not only to come back but to come back really really strong strongly.
And I think we've seen that in the second quarter.
L. A restaurants started to outpace the outer market restaurants, which had fared well ever since.
<unk> of 2020 and.
So the CLA come back as strongly as it has is very very encouraging and that's our bread and butter business and if that's not strong vibrant and healthy.
The business is just off in general So we're very very pleased to see that come back as strongly as it has.
And I know of the the comp performance throughout the pandemic has been led by ticket until this quarter, but I think traffic is still below pre pandemic levels.
I'm curious I'm sure part of that is just the shift of off premises.
No more of more people per ticket, but I'm curious if you are able to kind of.
Lower of your labor hours per restaurant, because of European driven by ticket and whether there's more incremental hiring per unit that needs to happen as a transaction will start to come back up again.
Yeah.
Yes.
When you look year over year.
As you saw as you highlighted I mean the this.
This quarter, we saw a lot of the sales growth driven by transactions, which of course and of our labor model of me.
More labor, which is 1 of the drivers of year over year.
Labor costs.
And so as they move through the balance of the year.
The transactions are Youre correct are still a good level of below.
They were 2 years ago.
We would expect that we will continue having to bring more labor more labor hours as net sales growth continues.
As long as of this transaction driven.
Maybe a different way to ask the question is I mean, we're our labor hours today like as a percent of 2019 and do they have to come all the way back or have you learned kind of new efficiency is where you can do the transactions per unit of 2019, but do it in a more efficient way.
Okay.
Yeah, I'll be honest with you Im not sure where the labor hours are today relative to 2020, I know that the trend of 2012.2019, I know that the transactions are still I think around 10% or so below where they were 2 years ago. So roughly you would say, it's probably roughly the.
The same in terms of labor hours right.
As those come back.
Yeah.
You know, how we found ways to be more efficient.
I don't think so I think the reality is is that as those transactions come back we want to provide great service and so at this time I would expect that we'd stay with our labor model and add the hours as transactions come back assuming they come back to the levels that they were a couple of years ago.
Okay. Thank you very much.
Mr. Atco kind of there are no further questions at this time I will turn the call back to you for closing remarks.
Okay, well, thanks again, everyone for joining us today and continue to stay safe and have a good evening.
That does conclude the conference call for today, we thank you once again for your participation and ask that you. Please disconnect your lines.
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