Q2 2022 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 Polio Locos Second Quarter 2022 earnings conference call. At this time, all participants have been placed in a listen only mode, and the lines will be open for your questions following the presentation.
Please note that this conference is being recorded today August 4th, 2022.
And now I would like to turn the conference over to Ira Filz, Chief Financial Officer. Thank you, you may begin.
Thank you, operator, and good afternoon. By now everyone has access to our second quarter 2022 earnings release. If not, it can be found at www.elpoyoloco.com in the investor relations section.
Before we get our firm over marks, I need to remind everyone that our discussions today will include forward-looking statements, including statements related to the impacts of the COVID pandemic and macroeconomic environment on 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. These forward-looking statements are not guarantees the future performance and therefore...
We expect to file our 10Q for the second quarter of 2022 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 presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliation's two comparable GAAP measures are available in our earnings release.
Now, I would like to turn it over to Larry Roberts, our Chief Executive Officer.
Thank you, Ira, and good for new and everyone.
Let me start by welcoming Ira to the Apollo local family.
As many of you know, he's a well-rounded and accomplished executive with a strong 20 plus year track record of leadership and experience in the restaurant industry.
I look forward to as many contributions as we execute on our strategic priorities in 2022 and beyond. In 2022 and beyond.
Turning to our second-quarter results, system-wide comparable restaurant sales increased seven and a half percent, including a 2.9% increase at company-owned stores, and a 10.6% increase at franchise locations. Turning to our second-quarter results, the system-wide comparable restaurant sales increased at company-owned stores, and a 10.6% increase at company-owned stores. Turning to our second-quarter results, Okay.
helped in part by the success of our shredded beef birria living at a time offer.
Labor and commodity inflation continue to persist during a second quarter, pressuring our store-level margins.
Nevertheless, our team continues to do a nice job managing our business, resulting in pro forma diluted earnings per share of 21 cents.
We believe efforts toward improving our brand differentiation and awareness were a key driver of our sales growth during the second quarter.
As I noted, and our last call, our shredded beef beery promotion, which ran from mid-March to early June , performed exceptionally well, created by our new social media-centric marketing approach. made???? was inspired by our new social media-centric marketing approach.
With this success, we will be evaluating whether beef can be a permanent item on our menu.
At the very least, we know that we have an exceptional, limited-time promotion that will be on the calendar for years to come.
To build upon this statement, we launched our first startup promotion in early June by utilizing a similar marketing approach as with Beak Bearia.
This includes creating a new and unique content across the major social media channels with a special emphasis on TikTok, all of which is allowing us to send targeted messages to various user groups, particularly our younger consumer base. To date, the response to our to-style promotion has been outstanding.
We have achieved record levels of tostada sales during promotion with our tostada mix averaging almost 18% since the start of the module. This is 400 basis points higher than our peak tostada mix last year.
Despite the success of our recent promotions, we did see some softening in customer traffic starting in mid-June mostly during our dinner day part. The next day, we did see some softening in mid-June in mid-June in mid-June in mid-June in mid-June in mid-June in mid-June in mid-June in mid-June
Quarters date system same-source sales through July 27th increase 2.4%.
We believe the softness at dinner is a combination of consumers pulling back due to economic uncertainties and a lack of value advertising for our dinner day part. We have not advertised family meals since December of 2021.
With this in mind, we will utilizing both TV and social media channels in the near term to promote more value-oriented messaging, starting with our family's piece promotion, which includes eight pieces of chicken, a family-sized salad, two large sides and shurros for $24. Additionally, starting in August , we will advertise our fire-grilled value menu with a price point starting at $5. These meals include an entree with a choice of either a chicken and cheese-cated deer.
consumers without compromising our margins.
While dealing with this challenging operating environment, we remain focused on executing our strategic priorities that are designed to strengthen our average unit volumes, improve our profitability, and in time, accelerate our store growth.
Our marketing will continue to focus on those attributes that differentiate Alpoholoqo, including our flame grilled chicken and freshly prepared food.
As we've noted, social media would be a key medium for our messaging. And along those lines, we recently hired a vice president, a digital marketing to coordinate our digital and social media efforts.
Accordingly, we are getting ready to completely revamp our mobile app and website, which we expect to complete in early 2023.
This investment will enable us to significantly upgrade and unify the consumer experience on our website and app, as well as greatly enhance our loyalty program. And greatly enhance our loyalty program. And greatly enhance our loyalty program.
In addition, as part of our strategy to become more relevant to younger consumers, we launched our Avuela-approved TikTok campaign in July .
This campaign uses a series of short videos to tap into the growing popularity of abuelas, or grandmothers.
Napoielelocha recognizes that the generational gap is narrowing and there is a unique bond between grandparents and grandchild. In fact, the number of Americans living in a multi-generational household with three or more generations has nearly quadrupled over the past decade.
Our content featuring Abuela is about acknowledging these dynamics and spraying joy and wisdom to the heavy dose of relatability. The heavy dose of relatability.
To date, the videos have been viewed over 3.5 million times on TikTok. Over time, we expect campaigns like Abuela approved to attract younger consumers to a brand.
Shifting to restaurant operations, which is another of our strategic priorities, we believe we have made significant progress during the quarter with regard to staffing, retention, processes, and routines at all operational levels.
Beginning with staffing, applicant flow has increased significantly, and while a handful of our restaurants remain challenged, our overall staffing levels have improved tremendously. This combined with improved turnover has resulted in over 95% of company owned restaurants being able to operate all channels at all hours every day.
We've also made significant improvements in our four-wall execution, as demonstrated by the reduction of total drive-through times by approximately one minute and significant improvements across multiple consumer metrics.
For example, our last visit excellent scores have improved by over 10 percentage points in company operating restaurants since the first quarter of this year, and they're at the highest levels we've achieved since 2019. And they're at the highest levels we've achieved since 2019.
We believe these operational improvements enhance our consumer proposition and drive higher sales over time.
Lastly, we continue to work on projects to simplify our restaurant operations. We continue to work on projects to simplify our restaurant operations.
Since the launch of this initiative, we have implemented a number of changes that have reduced complexity, as well as the labor hours required to complete various tasks.
These include menu deletions, de-stems, serrano peppers, pre-chops, cilantro, and revived tortilla packing procedures.
In addition to these, we are testing a handful of initiatives, several of which we expect to implement in a near term that could significantly reduce labor hours required in our backup house.
These include new food processors for salsa, the use of soap tanks for cleaning grills, dishwashers, avocado slicers, and simplified onboarding procedures for new employees.
These and other projects are part of a longer term effort to streamline a daily work performed by employees, thereby improving their engagement and enhancing guest satisfaction through better execution in our restaurants.
While our efforts to promote brand awareness and improve restaurant operations are key strategic initiatives, we believe it's equally important for a poil local to ingrain the right company culture.
We have made significant progress in our restaurants creating a servant-led leadership culture predicated on recognition of still maintaining accountability.
This is clearly evident by the recognition boards we have in all of our restaurants, postings on Workplace by Facebook, and the engagement we were seeing amongst our teams.
While these efforts will continue at our restaurants, we're also working to create a restaurant mindset within the support center.
We want all Support Center employees to have a greater appreciation for the work our team members do to serve our customers.
With that in mind, all new support center employees are now required to work two days in our restaurants as part of our onboarding process. And as part of our onboarding process. And as part of our onboarding process.
In addition, all vice presidents and above are now required to spend one day per quarter visiting restaurants with either a senior company operator or a franchisee. And in August , we will be relaunching day of pollo where all support center employees will work in a restaurant to show support for our restaurant team members.
Finally, our Support Center employees will be given WOW pins to recognize team members who provide exceptional service when they visit one of our restaurants, either company-operated or franchised. We believe these and additional initiatives will improve overall employee satisfaction, which will translate into a better experience for our customers.
On the franchise in front, I am very pleased that we recently signed a development agreement with a new franchisee to the Seattle area and our finalizing agreement for Chico Redding, California and Southern Oregon.
These, along with the opening of our first restaurant in Denver, scheduled for September , demonstrate that we are making progress in our efforts to develop a new market with franchisees.
In addition to these signings, we are in discussions with a number of other franchise candidates, which we hope to conclude with new development agreements over the balance of the year.
As part of our franchising strategy, we are striving to put our restaurants in the hands of strong operators. And one way to accomplish that is to focus on expanded development opportunities with current franchise partners.
To that end, one of our current franchisees, which 12 restaurants in Phoenix, in California, has recently teamed up with a former company operator to purchase five restaurants in San Antonio and two restaurants in Louisiana from other franchisees. Both transactions include new development agreements, six new restaurants in San Antonio, four in Louisiana.
Our current franchisees, which 12 restaurants in Phoenix, California, has recently teamed up with a former company operator to purchase five restaurants in San Antonio and two restaurants in Louisiana from other franchisees. Both transactions include new development agreements, six new restaurants in San Antonio, and four in Louisiana. And closing.
While we are not immune to the softening trends the industry is seeing in a third quarter of the day, we continue to make meaningful and tangible progress in our strategic initiatives, which ultimately positioned the Apollo local brand to better capture the opportunities ahead of us. The better capture the opportunities ahead of us.
I'd also like to thank our team members and franchise partners for their passion, commitment, dedication to make this brand and this family truly special. Thank you for your hard work and your dedication to make this brand and this family truly special.
With that, let me turn the call over to Ira for a more detailed discussion of our second quarter financial results.
Thank you, Larry, and good afternoon, everyone. Let me start by saying I am very excited to join the El Poco team. And thank you for welcoming me into the familia.
Turning to the financials. For the second quarter and at June 29th, 2022, total revenue increased 1.7% to 124.1 million compared to 122 million in the second quarter of 2021.
company operated restaurant revenue decreased 0.5% to $106.5 million from $107 million in the same period last year.
The decrease in company operated restaurant sales was primarily due to a $2.7 million decrease due to the sale of 8 company owned restaurants to a franchisee during 2021. And 1 million from restaurants closed during the past year.
This decrease was partially offset by a 2.9% increase in company operated comparable restaurant sales and 0.3 million in non-comparable restaurant sales.
The increase in company-operated comparable restaurant sales was comprised of an 8% increase in average check and a 4.7%. The increase in company-operated comparable restaurant sales was comprised of an 8% increase in average check and a 4.7%. The increase in company-operated comparable restaurant sales was comprised of an 8% increase in average check
The questions.
During the second quarter, our effective price increase versus 2021 was 9%.
Based on current economic conditions and consumer sentiment, we continue to expect approximately 9% pricing for the full year. Inclusive of a two to three percent price increase, we will be taking in mid-August.
Looking ahead, third quarter to date through July 27th, system-wide comparable restaurant sales increased 2.4%.
consisting of a 0.4% increase at company-owned restaurants and a 5.5% increase at franchise restaurants.
all of which reflects the traffic softness that Larry alluded to earlier.
Franchise revenue was $10.1 million during the second quarter compared to $8.4 million in the prior year period. This increase was driven by a franchise comparable restaurant sales increase.
of 10.6% as well as the opening of five new franchise restaurants open during or subsequent to the second quarter of 2021 and revenue generated from eight company owned restaurants sold to an existing franchisee during 2021.
This was partially offset by the closure of three franchise restaurants during the same period. Turning two expenses, food and paper costs as a percentage of company, restaurant sales, increased 370 basis points year over year to 29.8% due to increased commodity costs and investments in new packaging, partially offset by higher-menu prices. This was partially offset by higher-menu prices.
Commodity inflation during the second quarter was approximately 21%.
We continue to see significant commodity inflation and currently expect it to be approximately 24% in the third quarter.
Although still elevated, we expect commodity inflation to peak in the third quarter before easing in the fourth quarter. We anticipate full year 2022 food cost inflation to be approximately 20%.
Labor and related expenses as a percentage of company restaurants sales increased 150 basis points year over year to 31%
due to higher wage inflation, overtime costs, and other labor-related costs.
partially offset by lower workers' compensation expense.
based on the continuing labor pressure that we're experiencing. We are expecting wage inflation of eight to nine percent for the full year. We are expecting wage inflation of eight percent for the full year.
During the second quarter, we incurred approximately 300,000 of COVID related expenses, including leave of absence and overtime pay.
Occupancy and other operating expenses as a percentage of company restaurant sales increased 60 basis points to 24.3% due to higher utility costs and marketplace delivery fees.
Our restaurant contribution margin for the quarter was 15% compared to 20.8% in the prior year.
We expect margins to be under further pressure in the third quarter as a result of softer sales and elevated inflation.
General and administrative expenses decreased to $9.7 million from $10.5 million.
In the year ago period, primarily due to a decrease in management bonus expense.
As a percentage of total revenues, G&A decreased approximately 80 basis points to 7.8%.
We recorded a provision for income taxes of 3.1 million in the second quarter of 2022 for an effective tax rate of 30%.
This compares to a provision for income taxes of $3.4 million and an effective tax rate of 27.8% in the prior year's second quarter.
We reported gap net income of $7.1 million or $0.20 per diluted share in the second quarter, compared to gap net income of $8.8 million or $0.24 per diluted share in the prior year period. Proforma net income for the second quarter was $7.6 million or $0.21 per diluted share, compared to proforma net income of $10.7 million or $0.29 per diluted share.
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 our earnings release.
Turning to liquidity.
During the second quarter, as of June 27, 2022, we had $40 million of debt outstanding and $34.3 million in cash and cash equivalents.
In late July , we refinanced our $150 million credit facility, extending the term out five years to July of 2027.
On July 29th, we made a $20 million repayment to the credit facility and our outstanding balance as of August 4th was reduced to $20 million.
Lastly, due to the uncertainty surrounding the COVID-19 pandemic and current economic conditions, we won't be providing a full financial outlook for the year ending December 28, 2022.
However, we are providing the following limited guidance for fiscal 2022.
The opening of 3-6 company-owned restaurants and 6-10 franchise restaurants.
The remodeling of 10 to 15 company operated restaurants and 20 to 30 franchise restaurants.
capital spending of 20 to 25 million in a pro forma income tax rate of 26.5%
This concludes our prepared remarks. We'd like to thank you and we are now happy to answer any questions that you may have, operator. Please open the line for questions.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session.
If you'd like to ask your question, you may press star one on your telephone keypad. A confirmation tunnel indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Jake Barlett with truest. Please proceed with your question.
Great, thanks for taking the question. My first question was really on the trajectory of sales. And we mentioned a deceleration in mid-June. We've been hearing from others kind of a mid-May. comments lined up from ???. you will win.
gas prices were high COVID cases were spiking. So I'm just wanna just dig into the kind of the mid-June commentary, it's a little bit different. And I'm wondering whether that has to do with kind of the benefit of the beef barrier ending, I think in early, the promotion ending in early June . So to help us understand kind of the trajectory of the same sort of sales. And then I had a Paul question to that.
Yeah, thanks, Jack. I think you can't hit on one of the things. I think that delayed.
The softest we were seeing, again, as we look through Q2, got up to a very strong start with beef, birria, contingency, good momentum with that product. And so, for us.
We really didn't see a nullable, I'll say soft thing, especially relative to our internal forecast.
until that mid-June time frame. And that's when we really started to see a softening in the dinner business as being what we thought was the primary driver of that softness.
So I do think the beef barrier promotion may have been something that delayed the onset of the softness in our business because the barrier was selling both at lunch and dinner. It, you know, it skewed more lunch, but it was still a pretty big dinner product. So it wasn't until that was winding down and then, you know, we saw the softness of dinner that led to the softening that we highlighted around mid-June. That led to the softening that we highlighted around mid-June.
Got it. And then my next question is just on the consumer and how you're positioned. Maybe if you could remind us what your kind of average income consumer is, it may be confirmed that the weakness that you saw was really specifically from that lower income consumer that seems to be feeling the most pressure right now. And I guess all related to that question, just bigger picture how you feel, for your local is positioned if this.
current situation worsens. How do you feel about your value positioning now versus the Great Recession? I don't have the data going back that far, but maybe you could help me understand how you did then and how it might be different now. That would be helpful.
Sure. Yeah, so when we look at our consumer base, we have roughly some around 45% of consumers, say consumers actually households. So 45% of consumers live in households with income of $50,000 or less. So some of the QSRs which certainly highlights that we have, good poor share of our consumer base, that would be called a lower income consumer base. And so again, that's one of the reasons why we think we saw the drop off of dinner and we're not.
And so because there are pricing at dinner, it's just dinner eating out is a big tick item. And so we are consumers, especially lower income consumers, have pulled back on that. You know, the other thing I highlight again, and I mentioned it on the remark is, you know, we haven't advertised family meals and certainly have price point family meals for the beginning of the year. It really ended last year was the last time we did. So I think being out there with a message about family meals and a price point about family meals.
was also a contributor to the value piece. Now, looking forward, like a highlighted call, we're going to do the $24 family fees. We'll work on the, you know, you know.
combo starting at $5.00. So we see those great avenues that highlight the value that we provide. The other thing on the value equation that we've made huge progress on and we see it in some of the consumer data that we're pulling is.
as we really improved company operations, we've seen a value metric improve. So it's not just the experience metrics that consumers come back with, it's when we look at the value scores, we're seeing they're actually improving fairly significantly on the company side, which have been driving the entire.
system. So part of the value equation they continue in that progress and operation we made keep getting better and better in the end that is a key component of value to consumers.
Now, the differences between now and the great session, you know, for you, Jim, if you go back to where a poil local was back in 2009, 2010.
You know the entree side of the business was a bigger part was a smaller part of the business You know a lot of value things didn't even exist so since that time You know we've really Upgraded and enhanced and a part of our business come the entree side of the business You know the burritos to status salads and those things and those are Value offerings that we have that we didn't have back then so I do think you know it's going to be a situation At least over the next several quarters
where we're going after continued development ways to reach out to those really value conscious.
Value countries are really price conscious consumers with really strong price points that Not only will direct transactions, but you know maintain the margins And I think we have a lot of levers to chat with and we're going to dig through you know other things Got research going on right now. That's we've done over the next couple weeks That hopefully will also get us even more targeted and things we can do to really drive that value equation consumers If student
Great, that's really helpful. And then my other question was on your food costs and the inflation that you're seeing. And you know, pretty, I heard correctly, it went from 1% in second quarter to expect 24% in the third. In my notes, I believe, you know, back in January , you talked about having 8% of your chicken prices locked in, for instance. So what are the big moving pieces driven being placed so much higher and continue to drive it higher when...
I think when I look at the spot markets for a lot of these commodities, I'm seeing items coming off their peaks. So that's a question. And then as you look into 23, it looks like you could have a pretty material deflation as you laugh at this incredible inflation that you're seeing now. Is there any reason to think that wouldn't be the case? And maybe as you think about that 80% of the chicken that was locked in at the beginning of the year, was that a price that's lower than this price now?
you have visibility in that chicken piece to make us feel like maybe you could see some material deflate next year.
yet jake for me just to uh... and i'm sorry for confused you on a previous call when we're talking about what was locked in is eighty percent of our chicken was locked in
Right, so probably somewhere around 30% or so of our chicken business is a nonchicken on a bone, you know, it's only breast bone of the side. And those were always slow. So with a portion chicken on a bone that was floating and then we had all of our nonchicken bone that was floating. So that's what we hire inflation on the chicken as we move through because, you know, those pieces were not locked in. You know, having said that, you know, we are.
You're now starting to see some movement on some of these things. And it's really week to week. I mean, it's a really week to week around, seeing some improvement around, is still on chicken, the boneless chicken especially. But just, just starting to see some around, you have those.
some of the produce, some of the other things that we're starting to see. I just haven't banked on it yet, but our starting to see a little bit there. And again, we really do expect to start seeing some more of that in the fourth quarter and going into next year. I think it's very difficult to predict in this current economic situation, for sure what's gonna happen next year. But we certainly would expect a commodity inflation to be quite a bit left the near.
Cool with relation. I'm not sure. I think chicken on the bone will be the terrible that we determine because, you know, we do have chicken on the bone, you know, the 80% that is locked in at pretty favorable cost relative to market cost right now. But again, these markets are moving very, very fast. So we will see as we enter into our chicken on the bone negotiations, which is starting, you know, about now or in a couple to see what come out of that. If we get or chicken on the bone pricing.
as we head into next year, then there certainly would be potential for deviation.
Great. I appreciate it. Thank you so much.
Our next question comes from the line of David Tarantino with Robert W. Baird. Let's proceed with your question.
Hi, good afternoon. A couple questions related to the margins and then I've got one on unit development as well. So first on the margin, I think Ira you mentioned the potential for increased pressure on the margins in the second half of the year and I was wondering if you could
Perhaps elaborate on what your comment was intended to mean. Do you mean that margin on an absolute basis could be less than what we saw in the second quarter? Or the year-over-year changes is going to be different? Anything that maybe helped how you're thinking about the margin?
I'll jump on that one. Yeah, that commentary was really round. We're seeing in the third quarter with the deceleration in sales and a higher cost inflation. We would anticipate more changes to come in under where we were in Q2.
Again, that was the outlook for Q3. As we look to Q4, then we're looking to see margins moving based on lower commodity inflation, the idea that we'll really get the overtime and other lip costs under control because, again, I don't want to digress too much, but when we looked at second quarter and even the third quarter, our number one priority has really been around getting a restaurant app, making the investment we need to do to get applicant flow, hire new people, train new people.
our expectations is as we get in the fourth quarter, some of those apps are coming back in line to which traditionally been even pre-COVID. So that will be another positive on the margin side as we get in the fourth quarter. And then we'll be looking at the pricing that HAKENS. And then we'll be looking at the pricing that HAKENS.
August here in a couple weeks and potentially look at another price thing as it moves through later in the year. The expectation would be the third court with the highest inflation will probably be you know below Q2 in terms of margins but look to start rebounding and and rebounding for on the margins.
And Larry is there a certain...
long-term margin that you think is a reason to bargain that you want to get to. I've had all this inflation, but you know, let's assume that some of it's, I guess, worth an ideally-free longer term.
Well, I think as I said in the last call, David, I'm looking to get back and I'm saying I have to set rather than a term goal, okay, what would you expect for the next year, year and a half or so, as we get into 2023.
Give me a current situation, who knows what's gonna happen. I'd be looking to get to the call to hire a team on the margin side.
and then go from there to try to get back up to 20% over the longer term.
Okay, thank you for that. And then, um, we'll start on the unit and, um...
You mentioned converting some of the pipeline into signed ignorance. And I was thinking if you elaborate on the scale of those agreements and what type of number of units are in proc and pros in some of those contracts. And pros in some of those contracts.
Oh, they don't want to get too far out and out ourselves. And the ones that were dressing through it and the people were too, they'll tell you tend to be multi-unit franchisees, fairly guys businesses looking to do, I'll call the development agreement. So be somewhere five, 10, maybe more than 10 restaurants over a period. I'll just highlight a few facts is, now because of the investments we've made.
on the franchising after our flow, or I would call them people who have initiated discussions with us or at least shown an interest.
We're high, we're above, we're a full year of 2011. We've had more inquiries here. So far this year, then we did all of last year. So far this year, then we did all of last year.
And of course, there's inquiries, then you have to work around the final. Okay, which one's available and you do a lot on that. So with that though, we have seen a lot of people in the pipeline talking to that we think the prospects, working through those again, these prospects tend to be larger, franchise organizations that can step and do a number of restaurants, with five, 10 or somewhere in that range. But again, yo.
probably one of the bigger focuses we've had here has been on that and feel good progress we're making.
Great, thank you very much.
As a reminder, it is R1 to ask question.
There are no further questions at this time. I'd like to hand it back to Robert for closing remarks.
Okay, well I just want to thank you for joining the call today and you know as we highlighted you know we have some headwinds we're dealing with in the near term.
You feel great about the program on our strategic initiatives. And we're very, very excited about the prospects for a political local. And we're very, very excited about the prospects for a political local.
you know, as we do the balances here and next year. So thank everybody for joining us.
Ladies and gentlemen, this does include today's teleconference. Thank you for your participation. You may disconnect your line today and have a one day.