Q3 2023 El Pollo Loco Holdings Inc Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to the El Pollo Loco third quarter 2023 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 2nd 2023, and now I would like to turn the conference over to ourselves the Companys Chief Financial Officer. Please go ahead. Thank you operator and good afternoon by now everyone should have access to our third quarter 2023 earnings release, if not it can be found at <unk>.
W. W. W. 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 growth opportunities strategic and operational initiatives expectations regarding sales and margins potential changes to our product platforms.
Capital expenditures chirp plans expectations regarding kiosk rollouts, the ability of our franchisees to drive growth expectations regarding commodity and wage inflation remodel and expansion plans and our 2023 guidance among others. This fall.
<unk> 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 third quarter of 2023 Tomorrow and we 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 result substitute for results prepared.
Coordinates with GAAP and reconciliations to comparable GAAP measures are available in our earnings release, which is available in the Investor Relations section of our website 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.
Filiation to the most directly comparable forward looking GAAP financial measure because without unreasonable efforts, we are unable to predict with reasonable certainty the amount or timing of 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 Bill Floyd, our chairman of the board.
Thank you IRA.
As we.
Positioning the company for growth going into the new year.
The board of directors has been assessing the best way to support the execution and acceleration.
Although POI logos long term strategy.
In doing so the board has named Maria Hollingsworth, our Chief operating officer to the additional role of interim Chief Executive Officer, replacing.
Replacing Larry Roberts.
This change will be effective at the end of the day Tomorrow.
In light of Maria's new incoming role she is joining us on today's call and I'm pleased you'll be able to hear from her directly.
On our strategic initiatives, Larry was an important part of.
Although POI logos history.
As a public company thus far.
From serving as our CFO during our initial public offering in 2014 to leading the company.
As our CEO for the past two years.
On behalf of the board I want to thank Larry.
For his valuable leadership and.
Contributions to the company over the past 10 years.
Now, let me be abundantly clear for everyone on this call.
It is the board's belief.
That El Pollo Loco has a tremendous opportunity to create value for all its stakeholders.
In order to capitalize on this opportunity we believe the company remains focused on what makes us unique our flame grilled chicken.
While continuing to improve our profitability through.
Through the implementation of technology, such as kiosks, and our ongoing process optimization efforts finally.
We will accelerate unit growth expanding into new markets.
To realize the immense potential of deal.
Boy a local brand.
The board firmly believes in our strategic direction and we are excited to accelerate the pace in which we will achieve it.
Board has engaged a nationally recognized executive search firm to.
To help identify our next CEO to lead the company for the board will consider both internal.
And the external candidates to ensure we find the right person with the necessary skills and experience to.
To ensure that we capitalize on our opportunity.
As I mentioned earlier to help ensure a smooth.
In addition.
Our current CLO Maria Hollinsworth will assume the additional role of interim president and CEO until a new CEO is identify.
Maria has been in the restaurant industry for approximately 30 years.
With extensive experience driving operations for multiple franchised quick service brands.
He understands our customers, our franchisees and our people, making her well suited to <unk>.
And to this role.
Maria will be supported by the rest of our World class leadership team at our engaged and experienced board of directors.
I look forward to working more closely with Maria to capture the immense opportunity ahead of us.
With that.
I turn it over to our incoming interim president.
And C E O Maria Hollingsworth Maria.
Thanks, Bill I'm pleased to be named interim President and CEO of El Pollo Loco and look forward to working closely with our board and our senior leadership team to continue to drive our strong brand forward.
Before I turn the call over to IRA to go over the financials. Let me first update you on our revenue growth initiatives, including our refocus on chicken and the rollout of catering our profitability improvement initiatives driven by the implementation of new technology and provide enough.
Based on our development strategy, including our recent Refranchising transactions.
The opportunity for this brand is simple.
To make El Pollo Loco, and operational powerhouse, where our customers fall in love with our one of a kind flame grilled chicken.
To get there, we will continue to implement processes and technologies to ensure.
Sure our product is consistent and they're available across our system in every restaurant every day.
Our chicken is known for being flame grill, but our Merry nation is truly special and delivers the flavor that our customers great.
<unk> implemented a semiannual Mary nation calibration to ensure our customers get the same great tasting chicken.
No matter what location day visit.
Day or night.
We're also currently in test with enhanced holding equipment, which we expect to complete by mid February and we'll provide an update on the next earnings call.
With this equipment, we are hoping to improve both availability, especially in shoulder periods.
Well as consistency of both temperature and taste.
Additionally, in late September we rolled out our revamped catering program.
We believe that catering has the opportunity to be up two 5% of our sales relative to approximately 1% today.
And this revamp is the first step in addressing the significant opportunity ahead of us.
Our revamped program includes a new catering menu. It provides more options for our customers with a broader offering beyond our chicken on the bone.
While it is still early we're happy with the traction we've seen thus far and remain excited about our opportunity to do even more.
We also have a significant opportunity to improve our profitability through process and technology enhancements.
The restaurant industry faces, new challenges daily and given our geographic mix, especially for our company owned restaurants.
We need to grow sales.
Leverage technologies, better they become more efficient and to help offset some expected incremental costs, we anticipate from upcoming legislation changes.
More importantly, these initiatives will help ensure the I'll call. Your local experience is consistent across our entire system.
In recent weeks, we have expanded our kiosk that approximately 20 company owned restaurants.
In addition to several franchise restaurant.
To date, our test results have been very encouraging resulting in reduced restaurant level labor hours per day <unk>.
Additionally, the adoption by consumers has been terrific and more seamless than we originally envisioned.
We are excited to announce that we will be rolling out kiosks storage system as quickly as possible.
That said our current gating factor is the procurement of the associated cash machine.
We will update you on our progress next quarter.
We are also rolling out new salsa processing equipment, which will drive consistency of our product while also driving labor efficiency as the new equipment is both easier to use and easier to clean.
We expect to complete the rollout of this new equipment the company restaurants by mid 2024 with franchisees complete by end of 2024.
In addition, we are simplifying our salsa lineup by introducing our salsa fresca offering and reducing our salsa count from two to one.
We also continue to test additional initiatives such as automated dishwasher among others.
Summarize you.
New and innovative technologies and equipment provide us with substantial opportunity to become more efficient in the coming quarters and year.
Finally, let me touch on our development strategy.
Subsequent to the end of the quarter, we opened our second restaurant in Denver.
Franchisee in the market.
We're pleased to report that both of our Denver restaurants are performing very well.
Highlighting the strength of the brand and the success that it is possible as we expand in new markets.
We also re franchised 17 company operated restaurants, so quiet franchise partners, including nine restaurants in Houston, Texas seven.
Seven restaurants in California, and one restaurant in Utah.
Well this does not represent a change in our strategy.
We're pleased to be able to opportunistically transfer this units into the hands of our strong franchise partners, who will leverage their local market knowledge to further drive the growth of El Pollo loco in each market.
Our franchisees excitement acquired this restaurant showcases our franchise partners belief in the significant opportunity ahead for the El Pollo Loco brand.
In closing I want to thank Bill and the board of directors for Entrusting me to lead this unique brand the El Pollo Loco team members for showing up every day and being what makes this company truly special.
I also would like to thank the investment community for your continued interest and support of El Pollo Loco.
With that let me turn the call over to IRA for a more detailed discussion of our third quarter financial results.
Thank you Maria and good afternoon, everyone.
For the third quarter ended September 27th 2023, total revenue increased <unk>, 4% to $124 million compared to $119 9 million in the third quarter of 2022.
Company operated restaurant revenue decreased <unk>, 5% to $102 7 million from $103 2 million in the same period last year.
The decrease in company operated restaurant sales was primarily driven by a 1.6 million decrease in revenue from the Refranchising of four company operated restaurants to existing franchisees in prior quarters as well as a $200000 decrease in rare.
Canoe recognized for our loyalty points program.
This was partially offset by additional sales from restaurants opened during or subsequent to the third quarter of 2022 as well as 23% increase in company operated comparable restaurant sales the.
The increase in company operated comparable restaurant sales included a one 3% increase in average check size offset by a <unk>, 9% decrease in transactions.
During the third quarter, our effective price increase versus 2022 was a little over 7% looking.
Looking ahead.
Fourth quarter to date through October 25th system wide comparable store sales increased three 2%.
Consisting of a two 1% increase in company operated restaurants, and a 3.9% increase in franchise restaurants.
Franchise revenue increased seven 5% to $10.3 million during the third quarter driven by a one 1% increase in franchise comparable restaurant sales as well as seven new franchise restaurant openings in prior quarters and before re franchise.
Restaurants, I've just mentioned earlier.
Turning to expenses food and paper cost as a percentage of company restaurant sales decreased 240 basis points year over year to 26, 8%.
Due to higher menu prices and lower commodity costs during the quarter, we experienced commodity deflation of approximately 2% we.
We expect commodity inflation to be approximately 1% for the full year 2023.
Labor and related expenses as a percentage of company restaurant sales held steady year over year at 32, 2%.
Higher menu pricing and improved labor management was offset by wage rate increases and higher workers' compensation expense wage.
Wage inflation during the third quarter was a little over 3% and we continue to expect wage inflation of about 4% for the full year 2023.
Occupancy and other operating expenses as a percentage of company restaurant sales increased 50 basis points year over year to 26, 6%, primarily due to higher rent insurance costs and utilities expense.
Our restaurant contribution margin for the third quarter was 14, 4% compared to 12, 4% in the year ago period.
For the full year 2023 based on what we've experienced thus far we now expect our restaurant contribution margin to be in the 15% to 16% range.
General and administrative expenses decreased 60 basis points year over year to seven 6% of total revenue.
The decrease for the quarter was primarily due to a decrease in estimated management bonus expense, partially offset by higher legal related costs.
As Maria mentioned earlier towards the end of the third quarter. We completed the sale of 17 company operated restaurants within California, Utah, and Texas to existing franchisees that resulted in cash proceeds of seven 5 million and a net gain on sale of $4 9 million.
During the third quarter, we recorded a provision for income taxes of $3 million for an effective tax rate of 24, 4%.
This compares to a provision for income taxes of $1 8 million and an effective tax rate of 26, 2% in the prior year period.
We reported GAAP net income of $9 2 million or <unk> 28 per diluted share in the third quarter compared to GAAP net income of $5 million or <unk> 14 per diluted share in the prior year period.
Adjusted net income for the quarter was $6 4 million or <unk> 19 per diluted share compared to adjusted net income of 5 million or <unk> 14 per diluted share in the third quarter of last year.
Please refer to our earnings release for a reconciliation of non-GAAP measures.
Turning to unit development subsequent to the end of the third quarter. We opened one company operated restaurant in Las Vegas, and the one franchise restaurant in Denver with our second franchisee that Maria mentioned earlier.
In addition, we now expect to complete Remodels for 14 to 15 company owned restaurants, and 28 to 32 franchise restaurants.
Turning to liquidity as of September 27th 2023.
Had $80 million of debt outstanding and $13 8 million in cash and cash equivalents.
Or the end of the quarter the company paid down $9 million on the revolver and as of November <unk> 2023, there was $71 million of debt outstanding on August 7th we entered into a stock repurchase agreement with S. S equity partners and F S affiliates to <unk>.
Repurchase an aggregate of two 5 million shares of company stock at a price equal to the market closing price on August seven of $10 63 per share for a total purchase price of $26 6 million.
Separately, we also repurchased 206000 shares during the third quarter for a total approximate $1 $9 million, which completed our 2022 stock repurchase plan.
During the first three quarters of 2023, the company has repurchased a total of $46 6 million.
In shares.
On October 31, 2023, our board of directors approved a new share repo purchase program with authorization to.
Purchase up to $20 million of common stock through March 28, 2025.
Finally.
Based on our results today, we would like to provide the following update to our 2023 guidance.
The opening of two company owned restaurants, and three to four franchise restaurants.
Capital spending of 22 million to $24 million.
<unk> between 41 million and $43 million and adjusted income tax rate of 26, and a half to 27, 5%.
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 we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question 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 comes from Jake Bartlett with Trust Securities. Please proceed with your question.
Great. Thank you for taking the question.
I appreciate it you know my first one is big picture and Bill Im not sure. If you can answer part of this and Maria obviously.
The question is what's what do you think needs to change you talked about kind of really your strategic focus going forward.
What we've seen over the last year or two what do you think it's going to be the most different over the next coming year or two.
So let me.
Respond to that and Maria can certainly.
Jump in on it.
One of the things in my prepared remarks.
What's the word acceleration.
And we.
We have been a company for quite a while that has been essentially a regionally based.
Primarily in southern California.
And that is a strong area for us and we will continue to be but the board strategically is looking.
At really growth.
And becoming a national brand.
We think there is a huge.
Unlock potential with <unk>.
El Pollo Loco.
And.
We intend to grow.
Celebrate our growth as I as I said.
<unk>.
That is really I guess, if you want to call the change.
We are we're just looking at how do we take this brand whether it's in where we currently reside or in other new markets, how do we accelerate our growth.
Thanks to assist a great untapped opportunity that we intend to take advantage of.
Hi, Jason Thanks for the question.
We have great food and people love It we appeal to everyone from families and adults and kids and we have a business model that makes sense well, we do need to do is continue to develop our relationships with our newer franchisees. In addition to the existing ones and also cultivate.
Relationships, we want to make sure we have.
Long infrastructure behind our franchise growth story, but what I'm really excited about growth as I have experienced in my past life on this so I'm really looking forward to that opportunity of really driving our growth to become a national brand.
Got it no that all makes sense.
I think the last quarterly update was I think you had 51 development commitments.
Stores in newer markets had been had been doing well or doing fairly well and you are getting interest from from new franchise from new franchisees, but what do you think the kind of the one or two factors that has held back that growth that you think you can fix and I've been around a lot of us have been around the story since 2014 when.
When you know.
You were trying to kind of expand nationally and that was the goal then certainly a lot has changed and you've made a lot of improvements, but what do you think at this point is holding you back what are the kind of the one or two things that you think you need to to change or improve to really start to ignite the growth that you are hoping for.
Well I think.
There are a couple of things Brexit thinking about holding us back is what are we going to do.
To grow and frankly.
One of the key.
Components of our strategy as Maria said, we have a great franchise base.
And we intend to.
On the acceleration if you will as a commitment of resources.
To grow in the franchise area.
We perhaps had not committed as much.
In that area in the past and that's changing.
And we are going to also be exploring.
Additional marketing resources to grow that business and again.
We are going to be first of all we have to have a good story for new franchisees.
Is the why and as I said to you we have a unique product that is very different than any other.
Chicken concept and we may.
Have not told that story is effectively in the past as.
We have as you may be aware, we just hired a new chief marketing officer.
And I happen to think we've got a team in place.
Today that is going to allow us to.
Fulfill what we're what we're looking at so those are the changes said I'm a <unk>.
Certainly thinking about from a board perspective Maria.
Totally agree with you Mike.
Like I said earlier, Jake we are building that infrastructure that will support our franchise growth.
Great Great and then I just had a near term question then I'll pass it on but the near term question is the acceleration that you saw in October certainly incur.
<unk> to see you.
You didn't explicitly state that the cadence of the third quarter it looks like it decelerated pretty materially from the initial from.
What youre doing in July so what do you attribute the improvement to in October.
And.
Was that where the monthly comps in the third quarter may be impacted by weather I know you had a hurricane amazingly well.
What are the factors that have driven the trajectory of the business over the last few months.
Yeah, I think youre, absolutely right, we did see a deceleration as we moved through the quarter and you know.
I don't want to lean too hard on the hurricane It did impact us, but you know who.
It was only I don't want to say, it's about 20 basis points for the quarter that that wasn't really what drove the results I think we got you know as we moved into September we got into the end of the promotion that we were on.
We were on we're finishing out.
The stuff case, it is which.
As we as we worked our way through we started out with a stuffed cases case it isn't in October that's what we were finishing out the.
Chop salads as we finished so we were at the end of a promotion in September versus last year. We had started a new promotion. So it's a little bit of a promotion timing mismatch as we saw September fall off and then as we moved into October we saw a little bit of the opposite we saw the stuffed quesadilla.
<unk> came on new and that really helped accelerate comps in October from what we had seen towards the end of Q3.
We're all excited about that obviously.
And as we move forward so into the balance of the year I, just kind of want to remind everybody. So we will have about two 5% price falling off in November.
So we will see that 3%, obviously moderate a little bit as we move through the balance of the quarter and we rolled up our rolling over in the back half of this quarter a very strong ended the year last year.
Great I appreciate I'll pass it on and maybe jump back in thanks.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Sharon Zackfia with William Blair. Please proceed with your question.
Hi, This is that credit line for Sharon Zackfia.
Yeah.
I guess.
First question that I have is on the kiosks I know you said rolling out as quickly as possibly and it sounds like the cash machines are kind of holding back kind.
Have a faster rollout I guess could you guys provide a little bit more details on.
I guess, what that looks like what as quickly as possible looks like and then also.
Are you able to quantify clinical labor savings that youre seeing with the chaos first is the restaurant without one.
Yeah.
So I think you know so a lot of it you said it exactly right, it's getting the equipment for the cash machine, we're going to start.
First of all we're very happy obviously with our progress and with the kiosk. So far the guests we've seen a lot of some very good acceptance from the guests.
And we have been able to reduce labor in the restaurants.
And we're getting a slight.
Increase in check as well so.
All cases, the kiosk has been very beneficial to us. So we will start as we have been ordering equipment will kind of start the rollout the accelerated pace of the rollout in January and we should finish it some time mid year ish.
Depending upon.
How soon we get the equipment and how when we actually can get this into.
Into the restaurants.
Great.
I guess, if I could just add one follow up on the catering program.
Is there anywhere that you specifically kind of thing traction any type of event or <unk>.
Gathering that youre seeing.
Good traction with the catering program.
So it's really more across the board, we see them whether in like businesses or.
Box like home depots or.
Auto parks.
However, we do have a great example, where we had one franchisee.
Get an order for 17500 people.
And she she realized that would be challenged to reach out to other franchise organizations and in the end.
Orders were fulfilled by 35 restaurants, and the power of getting the power of building relationships with our clients. That's what it is that's what it's all about and because they know we can deliver this clients come back and keep ordering from us that and that's our goal is to continue to build those relationships.
The traction we're seeing out there we're very encouraged.
Great. Thanks, I'll jump back in the queue.
Ladies and gentlemen, we have reached the end of today's question and answer session I would now like to turn the call back over to management for closing remarks.
Thank you everyone for joining us today, we appreciate you making time I also want to thank the entire El Pollo Loco family for their continued support and focus on our strategy have a great rest of the day.
Yes.
For your participation you may disconnect your lines at this time.
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