El Pollo Loco Holdings Inc. Q1 2023 Earnings Call
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Good day, ladies and gentlemen, and thank you for standing by welcome.
Welcome to the I'll call. It uncle first quarter 'twenty 'twenty earnings Conference call.
At this time, all participants have been placed in a listen only mode and the mines will be opened for your questions. Following the presentation.
Please note that this conference call is being recorded today may four 2023.
And now I would like to turn the conference over to your host IRA fold the company's Chief Financial Officer. Please go ahead.
Thank you operator, and good afternoon bye.
By now everyone should have access to our first quarter 2023 earnings release if.
If not it can be found at www dot El Pollo Loco Dot com in the Investor Relations section.
Before we begin our formal remarks I need to remind everyone that our discussions today will include forward looking statements, including statements related to our strategic pillars and strategic initiatives, our operational plans marketing and new product initiatives cash flow expectations capital.
Sure plans remodel plans expected new store openings and franchise partnerships and our 2023 guidance among others.
These forward looking statements are not guarantees of future performance and therefore, you should not put undue reliance on them.
These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect.
We refer you to our recent SEC filings, including our Form 10-K for a more formal detailed discussion of the risks that could impact our future operating results and financial condition.
We expect to file our 10-Q for the first quarter of 2000, and twenty-three 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 reconciliations.
The comparable GAAP measures are available in our earnings release, which is available in the Investor Relations section of our website with.
With respect to the restaurant contribution margin outlook, we will be providing on today's call. Please note that we have not provided a reconciliation to the most directly comparable forward looking non-GAAP financial measure because without unreasonable efforts, we are unable to predict with reasonable certainty the amount of ore.
<unk> non-GAAP adjustments that are used to calculate income from operations in company operated restaurant revenue on a forward looking basis.
Now I would like to turn it over to our President and CEO Larry Roberts.
Thanks, Sarah and good afternoon, everyone.
We are encouraged by the start to 2023 as we achieved positive system comparable restaurant sales growth of 0.8% during the first quarter, Despite unprecedented, California weather, which we believe impacted comparable restaurant sales by 2% to four percentage points and lapping last year's highly successful.
Beef theory promotion.
The increase included a three 8% increase at company owned and a 1% decrease at franchise restaurants.
Our focus on restaurant level operating controls was instrumental in driving a year over year 470 basis point improvement in restaurant level margins to 15%, which enabled us to deliver adjusted earnings per share of 14 cents.
This was achieved while customer service metrics continued to reach new highs.
On the development front, we recently signed three franchise development agreements for an incremental 26, new restaurants in three new markets, which are northern Colorado, New Mexico, and El Paso, Texas and.
In addition, the franchise restaurant opened last November in the Denver area continues to perform very well with sales averaging over $70000 per week, which highlights. The success. We can have as we expanded in new markets.
One further note is that in April we implemented a reorganization of our support center to reduce G&A span and reallocate resources, the operation services and marketing.
We believe that this reorganization will result in continued improvement of restaurant operations and better execution of our brand strategies, both of which will build sales over the long term.
Let me now talk about the progress we've made against several of our key strategic pillars.
As mentioned on our last earnings call earlier. This year, we hired a new creative agency organic to help us build awareness and drive our brand differentiation, which we call one early.
As part of the marketing strategy, we are bringing a new look and energy to our advertising across all media channels. We believe that this approach will resonate with both moms and families. While also attracting younger consumers.
Our new approach it debuted with a double chicken to start a limited time offer that began in late February and featured both beef and chicken options.
Despite being our third consecutive year promoting this product just started sales achieved a record high mix of over 19% during the promotion post.
Post promotion to stars continued to mix at around 15% of sales, which is up from 13, 5% pre promotion and represents our highest selling non chicken on the bone menu item.
To add some additional context to assess at this status just two years ago. They represented eight 5% of our sales mix by consistently promoting a very differentiated product we've nearly doubled their sales mix and just two years.
Late April we brought back shredded beef be area as a limited time offer for the second year running.
Similar to last year, our guests can experience this menu item in a variety of entrees, including crunchy tacos, grilled burritos and overstuffed case, it is which can be dipped into a Mexican inspired consummate.
Well it'd be difficult to match last years record performance, we believe that beef Berea will drive frequency and attract new customers to El Pollo Loco, while also providing additional feedback as we assess beef as a permanent menu item.
As part of our brand evolution, we continue to evaluate our menu approach with a menu board task is currently in process through.
Through the menu Board test, we are looking to achieve two things first make it easier for consumers to understand and navigate our menu and second identify new menu items and platforms that will resonate with consumers and build sales over the long term.
Items. We are testing include new add on snacks stuff case, it is hard-shell tacos beef and new beverages, depending on the test results, we expect to roll out a revised menu and menu board in the fall.
In addition to the menu board test we've developed several catering concepts that will be screening with consumers with the goal of launching a revamped catering program later this year.
The program will offer more options for customers versus our current focus on chicken on the bone.
We believe providing variety is more in line with the way consumers eat groups today, especially in offices today catering sales represent approximately 1% of our total system sales.
The right program and focused we believe catering has the potential to be a significant sales layer for our restaurants.
To further drive our strategy of attracting young consumers in early May we launched our revamped app and loyalty program.
[noise] upgrades make it easier for customers to order food and our loyalty program provides additional options for engagement and tiers of food redemptions to.
To help promote the new loyalty program, we are creating ponyo millionaires once a day for 30 days, we are rewarding in existing or new loyalty member with $1 million reward points.
The new App has been well received with a four five star rating, while sign ups for our loyalty program have roughly doubled versus prior trends.
We expect that both the App and loyalty program will only get better as we continue to update them and make them even more engaging for our customers.
Shifting to operations in the first quarter, we continued to make significant progress against our strategic pillar of delivering exceptional service profitably.
97% of our restaurants are now fully staffed and crew member turnover during the first quarter was under 100%, which we believe is significantly below our competitors. The low turnover reflects our continued efforts to build a recognition culture and create a great work environment for our employees.
Along these lines last week, we completed the rollout of our revamped Onboarding program, which greatly simplifies and improves the experience of new employees, joining our restaurant teams.
As a result of these efforts during the first quarter, we continued to see improvements in our company and franchise restaurants service metrics, including drive through times, social media ratings and customer complaints.
As we continue to improve customer service across our system. We are also making significant progress better managing labor and food cost at company operated restaurants, which is showing up in our operating margins labor efficiencies at food waste are well controlled and we have significantly reduced overtime pay and Neil brake pads and.
In addition to restaurant level cost management project teams are working against additional margin enhancing opportunities, which we expect to deliver results as we head into 2024.
With regards to our efforts to simplify operations. The rollout of so tanks will be completed in May for company restaurants and later this summer for franchisees. We also continue to make good progress in simplifying its also preparation and we'll be installing dishwashers and restaurants that have space available.
When especially promising initiative is self ordering kiosks, which are now installed in 10 company owned restaurants based on results, so far and which we are seeing good average check growth. We're expanding the test to 10 more company owned restaurants, and a number of franchisees will be installing them over the next several months.
Provided we continue to see positive results, we expect to accelerate the program later this year.
With that let's discuss our last driver accelerating development as highlighted earlier, we recently signed three additional franchise development agreements with two new franchisees to open a total of 26, new restaurants over the next several years at three new markets.
Combined with previously signed agreement, we now have franchise development activities underway in 12 states.
While we've made exciting progress in our franchise development efforts. Our team continues to work on securing new agreements and we look forward to announcing additional partnerships as the year progresses.
In closing we remain excited by the opportunities ahead for our play a logo with improved operations aided by a familiar culture initiatives in place that will further differentiate our brand drive awareness for younger consumers and build sales layers and renewed efforts to attract high quality franchisees to the Apollo ecosystem. We believe that we are positioning.
Sales of our sales and profit growth I'd like to close by thanking each member of our familiar including all of our team members and franchisees for the work they do each and every day to make El Pollo Loco, a truly special brand.
With that let me turn the call over to IRA for a more detailed discussion of our first quarter financial results.
Thank you Larry and good afternoon, everyone for the first quarter ended March 29, 2023, total revenue increased four 1% to $114 5 million compared to $110 million in the first quarter of 2022.
Company operated restaurant revenue increased four 2% to $97 9 million from $94 million in the same period last year the.
The increase in company operated restaurant sales was primarily driven by a three 8% increase in company operated comparable restaurant sales.
The increase in company operated comparable restaurant sales was comprised of a six 3% increase in average check size, partially offset by a two 4% decrease in transactions during.
During the first quarter, our effective menu price increase versus 2022 was approximately 11%.
As we look ahead, we believe systemwide comparable sales will be flat to down 2% for the second quarter as we lap our extremely successful beef Berry promotion last year.
Franchise revenue was $9 7 million during the first quarter compared to $9 3 million in the prior year period. The increase was driven by the opening of nine new franchise restaurants opened during or subsequent to the first quarter of 2022.
And revenue generated from three company owned restaurants sold to an existing franchisee during the fourth quarter of 2022 and one in the first quarter of 2023.
This was partially offset by a franchise comparable restaurant sales decline of 1%.
Turning to expenses food.
Food and paper costs as a percentage of company restaurant sales decreased 200 basis points year over year to 27, 5% due to higher menu prices, partially offset by increased commodity costs.
Commodity inflation during the first quarter was approximately 4% and did moderate substantially from 16% during the fourth quarter of 2022.
We now expect commodity inflation to decelerate to between 2% and 3% for 2023.
Labor and related expenses as a percentage of company restaurant sales decreased 260 basis points year over year to 32, 2% due to lower COVID-19 related sick pay lower overtime expense lower workers' compensation expense and the.
The impact of higher menu prices, partially offset by higher wage rates labor inflation. During the first quarter was a little over 4%, we expect wage inflation of 4% to 5% for 2023.
Occupancy and other operating expenses as a percentage of company restaurant sales was flat year over year at 25, 4%, primarily due to higher repairs and maintenance expenses as well as higher occupancy related expenses being offset by higher menu prices.
Yes.
Our restaurant contribution margin for the first quarter was 15% compared to 10, 3% in the year ago period.
For the second quarter, we expect our restaurant contribution margin to be between 16, and a half and 17, 5%.
For the full year 2023, we now expect our restaurant contribution margin to be in the 15% to 17% range.
General and administrative expenses increased 80 basis points year over year to nine 8% of total revenue.
The increase for the quarter is due to higher labor related expenses, primarily higher incentive compensation in.
In addition, we incurred onetime expenses related to the recent share distribution.
As we go through 2023, we are actively working on identifying ways to improve the efficiency in our business.
To that end, we are now in the process of reallocating resources to further support restaurant operations and future sales growth as Larry mentioned previously.
As a result, we will incur approximately $1 1 million in one time restructuring related costs during the second quarter.
Such will result in an approximately $1 million reduction in our overall G&A spend for the balance of the year as resources are reallocated.
During the first quarter, we recorded a provision for income taxes of $2 million for an effective tax rate of 28, 4%.
This compares to a provision for income taxes of <unk> 9 million and effective tax rate of 30% in the prior year first quarter.
We reported GAAP net income of $4 9 million or <unk> 13 per diluted share in the first quarter compared to GAAP net income of $2 1 million or <unk> <unk> per diluted share in the prior year period.
Adjusted net income for the quarter was $4 9 million or 14.
Per diluted share compared to adjusted net income of $2 6 million or <unk> <unk> per diluted share in the first quarter of last year. Please.
Please refer to our earnings release for a reconciliation of non-GAAP measures.
During the first quarter, we remodeled seven company operated restaurants, and seven franchise restaurants.
We continue to expect to remodel 10 to 15 company operated locations and 20% to 30 franchise locations in 2023 and.
In regards to new restaurant development, we now expect three to five company openings and six to nine franchise openings as permitting and other development delays have pushed store openings originally planned for the back half of 2023 into 2024.
Turning to liquidity.
As of March 29, 2023, we had $58 million of debt outstanding and $4 8 million in cash and cash equivalents. We also paid down $8 million on our 2022 revolver during the first quarter.
Subsequent to the end of the quarter, we borrowed an additional $2 million and as of May four 2023, our outstanding borrowings were $60 million.
During the quarter, we repurchased 552000 shares for approximately $6 2 million.
As of March 29, 2023, we had approximately $13 8 million remaining on our current share repurchase program.
Subsequent to the end of the quarter through April 28.
We purchased an additional 453000 shares for approximately $4 1 million.
Finally based on our results to date, we would like to provide the following update to our 2023 guidance the.
The opening of three to five company owned restaurants, and six to nine franchise restaurants.
Remodeling up 10% to 15 company owned and 20% to 30 franchise restaurants.
Capital spending of $25 million to $29 million.
G&A expenses are now expected to be from $42 million and $45 million inclusive of approximately $1 4 million in one time costs related to the reorganization and the recent share distribution.
And an adjusted income tax rate of $26 five to 27 and a half.
This concludes our prepared remarks, 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 operator, please open the line for questions.
Thank you Sir.
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My first question is from Jake Bartlett from <unk> Securities. Please go ahead.
Great. Thank you so much for taking the question.
Larry or IRA you My first is on <unk>.
The guidance for the second quarter and kind of and also what you.
We reported in the first and you mentioned a weather impact of 2% to 4% first question is how do you know what's weather and what's not meaning how confident are you that that's what what's driven the lower.
Same store sales.
In the first quarter than otherwise.
We hear from other companies, they're not highlighting in California, as being particularly weak.
And so I'm just trying to reconcile that with.
With your commentary on the weather.
Yes, Jake so the way we measure that is we actually take a look at.
Those days in which we had rain versus those that we did not.
And then we look at the the comp sales gap between the two and so what we see is on a.
On a rainy day, yes, we will see somewhere around <unk>.
6% to eight percentage points drop in sales relative to a non rainy day and.
So that's the way we come with it we don't look at weather Cold days, where it's warm days, it's really strictly rain days versus non rain days.
And one thing I'd highlight is I think one reason why perhaps we see whether more heavily impact us is that if you go into and I'll play a local restaurant for lunch time.
Do you see a lot of workers in our restaurants, getting there to kind of bone meals and things and so clearly on a rainy day many of them are not working there generally.
Working on lawns on roofs painting houses know, saying so maybe that's the reason why we see a heavier impact in some other concepts, but yes.
That's the way to measure rain days with non rain days and see what that gap is and that's how we estimate with the weather impacted.
Got it I appreciate that.
Another question kind of building on the just the question of underlying trends for U R.
Are you seeing any any.
Shifts in how youre different consumer cohorts are behaving, meaning any any.
Pressure on the lower end consumer.
Your family consumer I'm trying to really just figure out how to understand better how youre positioned for the current macro environment.
Yes, Jake so I think it's pretty similar to what we've talked about really I think the last couple of quarters, where we've talked about that we do think a.
We're seeing some maybe some pullback from our lower income consumer.
In two ways one is around just not spending as much because we have seen a number of items for check.
Drop a bit and I think you may also be seeing it a little bit in terms of if we can see and I think we tend to see it more a little bit more dinner than we do say.
During the rest of the day. So we are working on some things to bring more value to the menu. For example, we do now have.
A three different bowls for $5 that are in our restaurants to bring that value, yes, we mark them a little bit for a couple of weeks and it's something we may look to bring back and do a little bit more marketing on.
Really to address that.
That value conscious consumer yes, we've seen.
A nice pickup at nexon are $5 bowls so.
We do have that and we're looking at other things in which we live.
Look to perhaps bring a little more value.
To the menu.
Alright, good profit.
At good profit points.
I mean, that's a great thing about bowls is the food costs are fairly low. So you can actually go pretty aggressive on price points and still deliver good margins on those so we're looking at more of those types of things.
The trends have changed that much from what we've seen really since <unk>.
The fourth quarter last year, I think we'll start seeing.
Perhaps a little bit pullback from some consumers.
Great I appreciate it thank you so much.
Thank you.
The next question, we have is from Andy Barish from Jefferies. Please go ahead.
Hey, good afternoon guys.
We think within the system.
While the <unk> key.
Negative key are you scale it sparkle.
Company owned could be possible if you could.
Just maybe a sense.
The challenges in lapping brewery is your best promotion, just kind of what maybe what its making now versus the peak of what it mix last year that may give us a little bit more perspective on those as well.
Sure I'll start with the second.
Second part of that question, if you looked at theory.
Last year.
I mean, it got up to as much as a 12% little over 12% mix.
And really stayed double digit mix wise for about six or seven weeks.
So as we highlighted last year I mean, it was a very unique distinctive product that we came out with.
I had a huge response from consumers.
So you saw you.
<unk>, increasing like we highlight last year also we saw record sales weeks last year as a result of the barrier promotion this year.
To give actual numbers that we're seeing probably a little bit of normal to slightly above normal mix in terms of area. So I think it reflects that and thats not surprising we knew that was going to be the case or.
Certainly would not probably would not be.
To be as strong as last year, given that last year, a brand new product nobody else was doing barilla anything like it in this year just not as exciting news as as last year, so not surprising as mixing lowest more like I said normal to slightly better than normal in terms of the mix.
But we do think it's bringing in some some consumers that normally wouldn't come to us and I can say is that gives us a good read on that.
On the beef as we continue to look at that as being a possible permanent menu item and we include that beef in our menu test.
That we're currently doing and looking to expand so.
That's the second part of it in terms of the trends company franchise I mean, the trend Youre seeing currently in terms of the company.
Our higher same store sales versus franchise.
We expect that to continue.
Certainly through the second quarter and again that just reflects I think.
Part of that is just the lap year over year, the company sales versus franchisees because franchisees.
During this timeframe last year were really really high sales growth and so theres a lag benefit for company restaurants versus the franchisees.
Got it and then.
Secondly, I mean, I know, it's early on with kiosks.
Understanding.
What money here with the highest level.
Zero.
Labour opportunity, there and potentially either.
Less.
So at the Pos or do you expect some flexibility in terms of maybe being able to reallocate some labor to other other parts of the restaurant.
Yes, so as part of the tests that Theyre doing these kiosks, we're also testing.
The ability to move labor.
Yes.
And a key part of the test that we're finding is well a couple a couple key things one is.
<unk> need to be at the front counter.
You don't want to have them elsewhere.
In a restaurant because we're seeing a much bigger response when you're at the front counter.
And we're also finding for our customers at least that you want to have cash machines available. So they can use cash because again, we're finding where we have cash machines. The usage is much higher but the bottom line is we're seeing good average check growth.
Really across the board and certainly in those restaurants to the high kiosk usage, we are going to be testing.
Allocating labor.
Okay.
And possibly removing labor.
Got you thanks Mark.
Thank you ladies.
Ladies and gentlemen, just a final reminder, if you would.
Like to ask a question. Please press star and then one now.
We'll pause a moment to see if we have any further questions.
Ladies and gentlemen.
At the end of today's question and answer session.
I would now like to turn the call back over for closing remarks.
Well, thanks, everybody for joining us today.
Again, I can't tell you how much.
We're very excited about the prospects, we've got a lot of great things going on in the business and really looking forward to the balance of year as we implement these and continue to drive growth in the business. Thanks for joining us.
Thank you, Sir ladies and gentlemen that does conclude today's conference. Thank you for joining US you may now disconnect your lines.
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