Q3 2021 El Pollo Loco Holdings Inc Earnings Call
Good day, ladies and gentlemen, and thank you for standing by and welcome to the El Pollo Loco third quarter 2021 earnings Conference call. At this time, all participants have been placed in a listen only mode and the lines will be opened for your questions. Following the presentation.
Please note that this conference is being recorded today November 4th 2021.
Now I would like to turn the conference over to Larry Roberts Interim Chief Executive Officer, and Chief Financial Officer.
Thank you operator and good afternoon.
Now everyone should have access to our third quarter 2021 earnings release, if not it can be found at www <unk> <unk>.
Dot com in the Investor Relations section.
Before we begin our formal remarks.
Need to remind everyone that our discussion today will include forward looking statements, including statements related to the impact of the COVID-19 pandemic on our business and strategic actions, we're taking in response as.
As well as our marketing initiatives cash flow expectations capital expenditure plans and plans for new store openings among others.
These forward looking statements are not guarantees of future performance.
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 third quarter of 2020, One tomorrow 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.
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 in our earnings release.
Before I go into the quarterly results.
I'd like to quickly touch on the recent announcement of our CEO transition.
On behalf of everyone boiler go.
I would like to thank Bernardo Coca for his valuable contributions to the company.
As you know during Bernard's tenure as CEO, our team developed a culture predicated on Sergant led leadership, which we continue to drive throughout the organization.
In addition, under his leadership, we develop their L. A mex brand positioning accelerated our digital penetration through our delivery loyalty and mobile ordering platforms and simplify their operations.
These initiatives have positioned the company for success over the coming years.
This transition I look forward to continuing to build upon these accomplishments and working with our management team franchisees and the board to fully capitalize on the growth opportunities ahead.
With that let me share our third quarter results and discuss our course forward.
We are thrilled to see the continuation of our strong sales performance during the third quarter as we posted a nine 3% increase in system wide comparable restaurant sales, resulting in a two year system wide comparable sales growth of 11, 9%.
This momentum has continued into the fourth quarter with system wide comparable sales growth.
As of October 27th of eight 4%.
During the third quarter system average weekly unit volumes again exceeded $40000 and nine dnas achieved record sales here.
These measures point to the strength of our business coming out of the pandemic.
Further our restaurant contribution margin was 24%, which included a $3 2 million dollar employee retention payroll tax credit and pro forma earnings per share for the quarter was 27 cents.
Our strong top line performance was partly driven by solid marketing and insightful advertising during the quarter as we promoted our $5 fire grilled combo offerings instead.
Instead of relying on introducing new products. This particular promotion took advantage of our consumer insight to effectively target an older Gen Z younger millennial demographic.
Tagline value yourself has proven to resonate very well with this particular demographic group as they seek higher quality value meal options. This promotion was followed closely by new double chicken nachos that was introduced in early September.
This past Monday, we continued to build on our authentic roots with a day to day promotion that featured two free lows a pan to my auto bread with every family meal.
Also issued a new set of gift cards, highlighting the holiday, which helped more than double gift card sales versus the same period in 2020.
On Tuesday, we kicked off the holidays with our Blessed togetherness marketing campaign, which taps into the desire for families and friends to reconnect with each other over the holidays, especially in light of the challenges posed by the Covid pandemic over the past 20 months.
The campaign features new Tamale bowls, chicken bizarre way and Mexican Hot chocolate.
These traditional holiday products, along with the new packaging and point of sale graphics will help create a festive environment at our restaurants and have historically driven strong sales from previous years.
Our delivery and loyalty programs continue to grow as ecommerce sales averaged over 12% of total sales during our last marketing module.
It is up over two percentage points from the beginning of the year.
E Commerce will only continue to grow as we continue to invest in knee sales channels, including the addition of two new management positions to oversee our off premise and CRM platforms.
We are also finalizing discussions to partner with a third party to enhance our CRM and consumer data platform capabilities, which we expect to be implemented by early 2022.
As we've consistently highlighted we agree we are excited about the progress we've made in our e-commerce business and believe that we've only just begun tapping into its full potential to build customer loyalty and drive sales.
We also believe that E. Commerce is critical the casting a wider net in order to attract younger consumers don't put your logo.
While we are excited about the sales driving initiatives we have in place.
I would now like to turn your attention to one of the biggest near term challenges that we are experiencing along with the rest of the restaurant industry. The.
The challenges of recruiting and labor retention have impacted our restaurants system wide, but especially our company owned restaurants. We believe that this issue is a primary driver of the performance gap between franchise and company restaurants during the third quarter with $12, 6% comp growth for our franchise restaurants versus $4 eight.
Sent comp growth in our company owned restaurants.
There may be a number of reasons for the sales performance gap fundamentally we believe that our franchisees have done a better job adapting to the realities of the new labor market that.
We have in our company owned restaurants.
During the third quarter, the number of restaurants impacted by labor availability challenges increase and we've had to reduce operating hours and or service modes.
A company owned restaurants this.
This is negatively impacting our company owned comparable restaurant sales by four to six percentage points.
Addressing this issue is our number one business objective to that end, we're maniacally focused on employee recruiting and more importantly retention.
With regard to recruiting in addition to ensuring that the wages, we offer our competitive with increased resources to resurface more candidates and process applications faster and are assisting our early years and restaurant managers.
Actively recruit team members in their respective trade areas.
To further improve our labor retention, we've increased our training budget to better onboard new employees.
We're launching employee appreciation month in November which will include an employee engagement survey to better understand what's in the minds of our team members.
Most importantly, we are increasing our efforts to create a familiar culture in each and every one of our restaurants by increasing employee recognition and continuing to develop servant leaders.
Lastly, in addition to staffing our restaurants.
Other top priority is to further simplify our operations in an effort to make our team members' jobs easier to execute and more rewarding.
As highlighted previously we have made good progress on this but we must do more if we were going to continue to retain employees and deliver great service to our customers.
This will include a system wide initiative that include both franchise and company operators together, we will implement short and long term initiatives that we believe can significantly simplify our operations further.
Several of these have already been implemented including removing certain product offerings and packaging options from our restaurants, beginning last Tuesday.
These efforts are critical given our staffing challenges that plagued our industry.
I have two other topics I'd like to briefly touch on.
First we have not been immune to the global supply chain challenges facing our industry and many others.
Ensuring supply to our restaurants continues to be challenging. However is now primarily isolated to packaging.
Our teams have done an outstanding job managing this difficulty it would not suffer any significant disruptions to the business. We will continue to closely monitor all aspects of our supply chain for challenges as they arise.
We signed our second for restaurant development agreement for Denver with an existing franchisee.
This further highlights the strength of our concept and the confidence of our franchisees haven't haven't had success in new markets.
Despite the current challenges as we look forward to the end of the year into 2022.
Not be more excited about our brand position today and the growth opportunity. We have ahead of us.
I assure you that our strategy has not changed we will continue to focus on our acceleration agenda to build on the momentum in our core business for rapid and successful growth over the next three years. This roadmap is built upon the following four key pillars.
First expand our brand by growing in new geographies and asset light fashion.
Second support the brand and building the right organization for asset light growth.
Third evolve the brand through digital innovation and expand frictionless convenience for our customers no matter, how they choose to interact with us.
Lastly, focus the brand on our most valuable or equities exaggerate them to the point, where we really stand out in terms of what makes us a special and unique.
With that let me now review, our third quarter financial results in greater detail.
For the third quarter ended September 29th 2021 total revenue increased four 3% to $115 $7 million compared to a $111 million in the third quarter of 2020.
Company operated restaurant revenue increased two 8% to $100 million from $97 $3 million in the same period last year.
The increase in company operated restaurant sales was primarily due to a four 8% increase in company operated comparable restaurant sales an increase of zero point $9 million non comparable restaurants sales and an increase of zero point $4 million from restaurants that were temporarily closed due to that.
Deneke during last year's third quarter.
The increase in company operated comparable restaurant sales was comprised of a three 5% increase average check and a 1.2% improvement in transactions.
During the third quarter, our gross pricing increase versus 2020 was five 2%.
As I mentioned earlier, our sales momentum has continued into the fourth quarter through October 27th fourth quarter system wide comparable restaurant sales increased eight 4% consisting of a two 1% increase at company owned restaurants, and a 12, 9% increase at franchise restaurants, well to your system wide.
Comparable restaurant sales were up eight 5%.
Franchise revenue was $8 $9 million during the third quarter compared to $7 $8 million in the prior year period. This increase was driven by a franchise comparable restaurant sales increase of 12, 6% as well as the opening of one new franchise restaurants during or subsequent to the third quarter of 2020 and revenue.
Generate from eight company owned restaurants sold to an existing franchisee during the quarter.
This was partially offset by the closure of two franchise restaurants during the same period.
Turning to expenses.
Food and paper cost as a percentage of company restaurant sales increased 110 basis points to 26, 7% as higher menu prices were more than offset by increased commodity costs.
Friends that new packaging and higher usage of SASSA and beverages as a result of reopening dining rooms.
We expect commodity cost pressures to continue and now expect full year inflation to be around 3% compared to our prior guidance of 2%.
Labor and related expenses as a percentage of company restaurant sales decreased 180 basis points year over year to 27, 8% as higher wage inflation overtime cost and training expenses, along with increased labor hours due to increased transactions were more than offset.
Higher menu prices and a $3 2 million dollar employee retention credit, which was which was recorded as an offset the payroll tax expense and classified as part of labor and related expenses.
Well, we put steps in place to manage labor.
We continue to expect labor cost pressure for the remainder of 'twenty one as a result of five to five 5% wage inflation, which was raised from our prior guidance of four and a half of 5% and continued investments in recruiting training and retaining restaurant team members that I mentioned earlier.
Occupancy and other operating expenses as a percentage of company restaurant sales increased 60 basis points to 25, 1% due to higher utility costs rent and marketplace delivery fees.
Were partially offset by higher sales revenue.
During the third quarter 2020, we received an insurance reimbursement of $2 million.
Our restaurant contribution margin for the quarter was 24% and 17, 2% after adjusting for $3 2 million dollar employee retention payroll tax credits.
General and administrative expenses decreased slightly to $9 $4 million from $9 $8 million in the year ago period, due to a $1.3 million decrease in labor related costs.
Primarily related to a decrease in estimated management bonus expense.
This was partially offset by higher recruiting fees and outside services as well as an increase in legal and professional expenses.
As a percentage of total revenues G&A decreased approximately 30 basis points to eight 5% as a result of the decreased labor costs and a higher revenues versus last year.
Yeah.
We recorded a provision for income taxes of $3 $7 million in the third quarter of 2021 for an effective tax rate of 26, 5%.
This compares to a provision for income taxes of $1 $6 million and an effective tax rate of 14.2% the prior year third quarter.
We reported GAAP net income of $10 $2 million or 28 cents per diluted share in the third quarter compared to GAAP net income of $9 $9 million or 28 cents per diluted share in the prior year period.
Pro forma net income for the quarter was $10 million or 27 cents per diluted share compared to pro forma net income of $9 $9 million or 28 cents per diluted share in the third quarter of last year.
For a reconciliation of pro forma net income and earnings per share to the comparable GAAP measures. Please refer to our earnings release.
With that let me quickly review our development plan during the third quarter. There were no company or franchise restaurants opened however, we successfully completed five company and two franchise remodels using our new L. A mex design.
Looking ahead due to permitting and equipment delivery delays, we now expect to open two to three company owned restaurants, and one to three new franchise restaurants for 2021.
As a result of new units and remodel as we now expect our capital spending for 2021 to be in the range of $15 million to $20 million.
As we mentioned on our last call. We conclude the sale of our eight company owned restaurants in Sacramento to an existing franchisee during the third quarter. As a reminder, this transaction included an agreement to build three additional restaurants in the market.
In addition.
Along with a four unit development agreement mentioned earlier for Denver, We concluded three agreements for an additional six restaurants various territories in California during the third quarter.
Turning to liquidity during the third quarter, we did not pay down any debt and as of September 29th 2021 we had $40 million of debt outstanding and $24 $7 million in cash and cash equivalents.
Lastly, due to the uncertainty surrounding the COVID-19 pandemic. The company is not providing a financial outlook for the year ending December 29 2021.
However, we are updating the following limited guidance for fiscal 2020 one.
The opening of two to three company owned restaurants, and one to three franchise restaurants.
The remodeling of 10 company owned restaurants, and 10 franchise restaurants.
Accelerating commodity labor and utility costs, a further pressure margins in the fourth quarter of 2021 relative to the third quarter of 2021.
And pro forma income tax rate of 26, 5%.
This concludes our prepared remarks I'd like to thank you again for joining us on the call today and I'm now happy to answer any questions that you may have.
Ladies and gentlemen, we will now be conducting a question and answer session.
He would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your lungs in the queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question is from Andy Barish with Jefferies. Please proceed.
Hey, Larry.
Just a couple quick things on that.
Negative mix.
Mix that Youre seeing you know.
That's just the dining room reopening more kind of individual transactions or is there anything else.
To read into as we look at that check average person's pricing component.
Yeah, and I'm, not 100% sure what you're getting at but what we've seen around check is obviously, we've got the pricing.
And we're also seeing more items per check, which as you know continue to drive the check in again.
Yeah, we always thought that the average check wood.
You'll start coming down any negative by this time after lapping COVID-19, but sustained positive as a reflection of again a little bit.
More favorable mix than we expected as family meals.
And then we've got the pricing analytics.
We're also seeing more items per transaction all of which are are keeping a checkup.
Relative to where we thought it would be.
Given what we're lapping last year.
Okay.
And then just I I assume the margin base for the third quarter and 17 to that year.
Kind of looking off up to you know to see pressure in the fourth quarter am I thinking about that correctly.
That's correct yes.
Excellent okay.
I'll pass it on to anybody.
Anybody else ask questions. Thanks. Thank.
Thank you.
Our next question is from Jack Corrigan with true Securities. Please proceed.
Hey, Larry Thanks for taking my question.
First can.
Can I just ask about.
Commodity inflation and what that implies that the fourth quarter would be just to just as we're on the same page but.
Yeah, So fourth.
Fourth quarter commodity inflation is probably in the range of eight to eight 5% is what we're seeing.
It's really.
And across the board a number of the commodities are probably packaging is the one that has.
They are a little bit more surprising we thought and part of that inflation in packaging is I mean, you have the core inflate.
Inflation around just the makeup of packaging, but we're also.
Continue to see.
Packaging held up in the ports. So we're having to outsource additional different packaging, which is causing some of those increases in packaging costs.
Okay.
Paul.
And then I guess in terms of.
Current sales trends and the labor environment do you do you think that you know.
The labor situation has been the primary driver to the decelerating trends that you're seeing is there anything on the.
Consumer demand side that you think is impacting that as well.
And I guess do you think that the.
The labor has peaked.
Say.
In terms of your problems with.
Our environment.
Absolutely.
From here.
Let me give you a little more detail about the labor situation at we're seeing I mean first of all I mean, it's.
It's not across all of our restaurants and as we dig into it.
There is a number of restaurants.
That are more significantly impacted by the staffing challenges.
So those are the ones. We are really focused on right now and we put together the project teams.
In operations, we made investments in terms of adding more people to really support those restaurants that have really significant staffing changes and again, it's not all the restaurants is probably yes.
15% to 20% of our restaurants, where we're seeing it many of which are actually east of L. A that tends to be seen where were seeing more staffing challenges. So I just want to clarify it's not entirely across the entire business it's really.
A group of restaurants, very most significantly impacted that we're really really focused on.
And those are the ones that we're seeing.
Comp sales shortfalls, certainly relative to the balance so.
And then when we break it down.
Where we are.
We're pretty sure right now we're not seeing a consumer pushback on the brand number one as you're seeing the franchisees continue to drive strong transactions with strong comp sales.
If you break out the restaurants from those that are having the most significant staffing challenges to those that aren't.
Again, there's a big difference those that have not had as bad staffing challenges there.
They continue to be very positive sales positive in transactions.
Not insignificantly positive transactions.
And so that's why we really feel like this is a staffing challenge and probably more importantly, a retention challenge and that's why we continue to put more and more emphasis and programs against solving that issue and get that issue solved.
Our comp sales will be right back more in line with where we have been with franchisees.
And it will take care of itself. So that is the big focus again just to reiterate it's a it's a group of restaurants that are most significantly impacted outside of that from a consumer perspective.
You know things are still looking very positive.
Great that's really helpful.
Just one last one on development in the stores you.
And I believe also the big push.
To be around simplifying the operations again, we've done things our last couple of years.
That helped but I really believe that going forward with the environment, we're likely to see at least through most of next year and maybe in the future that we have a lot more we can be doing to make it easier to execute in our restaurants, so that it's easier to retain employees.
Potentially free up labor in the restaurants are focus on customers rather than doing some of the things we're doing today in the restaurants. So I think on top of the acceleration agenda. Those are the two big things right now that we are really really focused on.
That's helpful and on the staffing challenges I guess is there a way to frame up where you are today and more company restaurants versus optimal levels.
And are you seeing on the emotional songs that your initiatives are working.
Around hiring and retaining employees.
Yes, and yes.
I thought about it in my opening remarks talking about that a bit.
But.
Early into raised about three weeks into it we are seeing positive signs we are seeing.
Various restaurants.
Get up the staff the staffing level that need to be at we are seeing.
Some restaurants turnaround their comp sales.
And getting back to <unk>.
Certainly less negative even positive.
So we are seeing some early success, but in my view is.
That's nice, but you got to keep the focus and see that sustained so that's what we're focused on so yes, we are seeing progress.
Porting on every single week I know I have calls every week to go through with the team where we are with the progress is so we do feel very good about it we're working on the right things, we're seeing the progress in those restaurants, but again, we need to sustain that over time, we still have a ways to go in those restaurants.
<unk> short.
Probably several hundred staff members.
So that's across our business, but again a lot of that will be in the short staffed restaurants that I've talked about.
The levels they were before.
The same with natural gas.
And then labor of course, as you're adjusting rates and things that probably stays in the business longer term because it can be very hard to take down wages, but I do think some of the other costs and labor we're seeing around over time.
We'll break penalties in those types of things are really staffing related though should come down over time.
And get back to where they had been in the past.
So the offset maybe some of the structural issues.
We will be.
Obviously, we're doing pricing, we're looking at pricing.
As we go into next year.
From a pricing perspective is not just going to be quality across the board price increases, but I think there's more we can do around really getting targeted on certain menu items.
Our limited time offers I think we can adjust the pricing on.
I think we can look at other areas, where we can reduce pricing maybe it's discounting we used the discounting so it's going to be a very targeted approach to how else you actually get some pricing without just doing across the board menu price increases that.
Oftentimes done in the past.
In terms of fourth quarter margins I mean, it just there's so many variables going on I think what we're seeing is.
As Andy pointed out.
Work off the 17, two percentage point restaurant operating profit margin.
We're indicating that we will come in.
Below that given the inflationary pressures, we're seeing around commodities and then the labor costs and utilities.
And then also you have work in the comp sales.
But it will be.
Yes.
A bit below the 17, 2%.
Understood.
Thanks for the color.
And trying to fully insulate margins.
Early in 2022 if this persists I mean, how do we think about.
Kind of how quickly you would pull the trigger on some of these dynamics.
Well the first trigger appalling here is about a week from now.
We are going to take additional pricing here and there.
A week or so.
And that is going to take our Q4 pricing up to about six 8%.
And then that will roll into next year.
And as we're rolling that into next year.
We're also going to be looking at.
Very quickly to at least have ready to go.
We are targeting to have ready to go in January.
As I talked about earlier is some other areas, where we can look at pricing.
On the menu, but more specifically and it may be around limit time offer pricing and maybe about some of the deal offers what we do that we adjust the prices on those.
To bring it more in line with our menu prices are as a whole. So we used the discount amount forgiven. So theres a number of things we're going to be working on over the next couple of months.
To be ready to go early January where we could even take more effective pricing, if we need to depending on where commodities and labor are coming out as we enter 2022.
And I'm, sorry, if I missed this but are you <unk>.
Often at all on 21 on your commodities and <unk>.
So if you if you were we upbeat for 'twenty two today like how much additional inflation would you be seen.
There is going to be some additional inflation in 2022, mainly around the chicken contracts alright.
And so it gets hard to tell as I know I have chicken price increase is coming.
But I expect some of the other commodities will come down like Tomatoes, avocados, and those things should come down as we get into 2022, because some of them are somewhat seasonally driven.
But even from Q4, we highlighted eight 5% commodity inflation in the fourth quarter I expect that to be a little bit higher as we enter into 2022.
Thank you.
Ladies and gentlemen, we've reached the end of the question and answer session I would like to turn the call back to Larry Roberts for any closing remarks.