Q2 2024 El Pollo Loco Holdings Inc Earnings Call
Speaker Change: Good day ladies and gentlemen and thank you for standing by. Welcome to the El Pollo Loco 2nd Quarter 2024 Holdings Conference Call.
Speaker Change: 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.
Operator: Please note that this conference is being recorded today, August 1st, 2024. If not, it can be found at www.elpolloloco.com in the investor relations section.
Speaker Change: Please note that this conference is being recorded today, August 1st, 2024. And now, I would like to turn the conference over to Ira Fils, the company's Chief Financial Officer. Please go ahead, sir.
Ira Fils: Thank you, operator, and good afternoon, everyone.
Speaker Change: By now, everyone should have access to our second quarter 2024 earnings release. If not, it can be found at www.elpolloloco.com in the Investor Relations section.
Speaker Change: 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 operating initiatives, expectations regarding sales and margins, potential changes to our product platforms,
Speaker Change: Capital Expenditure Plans, Expectations regarding Kiosk Rollouts, the Ability of our Franchisees to Drive Growth, Expectations regarding Commodity and Wage Inflation, Remodel Plans, and our 2024 Guidance, among others.
Speaker Change: These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them.
Elizabeth Williams: These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect. During today's call, we will discuss non-gap measures that we believe can be useful in evaluating our performance, beating out several well-known larger brands. It is recognition like this that reinforces our differentiated consumer value proposition that makes us primed for growth. As a reminder, these are the Brand That Wins, to be the flavorful, affordable, better for you chicken leader.
Speaker Change: These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect.
Speaker Change: including our Form 10-K for the year ended 2023 previously filed as well as our Form 10-Q for the second quarter to be filed for a more detailed discussion of the risks that could impact our future operating results and financial condition.
Speaker Change: We expect to file our 10-Q for the second quarter of 2024 tomorrow. We encourage you to review that document at your earliest convenience.
Speaker Change: During today's call, we will discuss non- GAAP measures that we believe can be useful in evaluating our performance.
Speaker Change: 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, which is available in the Investor Relations section of our website.
Speaker Change: 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 GAAP financial measure because, without unreasonable efforts,
Speaker Change: We are unable to predict, with reasonable certainty, the amount of or timing of non-gap adjustments that are used to calculate income from operations and company-operated restaurant revenue on a forward-looking basis.
Speaker Change: Now, I would like to turn it over to our CEO , Liz Williams.
Liz Williams: Thank you, Ira, and good afternoon, everyone. I am proud of what we have accomplished during the second quarter as we delivered 4.5% increase in system-wide comparable restaurant sales driven by our iconic Fire Grilled Chicken.
Liz Williams: Our renewed focus on everyday value and our consistent operation.
Speaker Change: Our restaurant level margins were 18.6%, 170 basis point improvement versus the second quarter of 2023, which can be attributed to our ongoing operational focus.
Speaker Change: While we are proud of these achievements, we are just getting started in growing our beloved brand.
Speaker Change: As you know, it has been a challenging macroeconomic environment for the restaurant industry and consumers as a whole in the recent months.
Speaker Change: While some may see this as an obstacle, we see this as an opportunity to showcase to our guests
Speaker Change: that El Pollo Loco is one of the unique restaurants that can offer portable, craveable, fresh food all for a good value and with the convenience of fast service.
Speaker Change: And don't just take our word for it, last month we were named the nation's number one best restaurant for quick, healthy food by USA Today, as voted on by consumers across the country.
Speaker Change: beating out several well-known, larger brands. It is recognition like this that reinforces our differentiated consumer value proposition that makes us primed for growth.
Speaker Change: As we navigate the second half of 2024, let me update you on our five strategic pillars.
Speaker Change: As a reminder, these are Brand That Wins, to be the flavorful, affordable, better-for-you chicken leader, Hospitality Mindset, to show up consistently and with a hospitality mindset.
Elizabeth Williams: Hospitality mindset to show up consistently and with a hospitality mindset. Number three, digital first, to become a digital first business in the service of improving the customer experience. And number five, to drive unit growth again with national expansion. El Pollo Loco sits at the intersection of chicken and Mexican.
Speaker Change: Number three, digital first. To become a digital first business in service of improving the customer experience.
Speaker Change: Number four, to deliver winning unit economics, and number five, to drive unit growth again with national expansion.
Speaker Change: Let's start with Brand That Wings. El Pollo Loco sits at the intersection of chicken and Mexican, two of the fastest-growing categories.
Speaker Change: We are squarely focused on being known for the best chicken in the limited service restaurant sector by bringing thoughtful innovation and affordable options back into the brand.
Speaker Change: To that end, we recently relaunched our Fire Grilled Burritos with handmade guacamole included in all three, at a very attractive price point of $9.99 and $8.99 for our Loco Rewards members.
Speaker Change: As value perceptions across our entire industry are at a crucial point right now.
Speaker Change: Our burritos with delicious ingredients, like our new creamy chipotle sauce or our signature queso blanco, reinforce the promise that you can fill up on really good food for a good price at El Pollo Loco.
Speaker Change: The best part is that these burritos were designed to maintain our favorable margins.
Speaker Change: Early feedback has been positive, and we look forward to providing you with additional updates later this year.
Speaker Change: As we launched our new burritos, we also brought back, for a limited time, our double-chopped salads with chicken. And we reintroduced shrimp, following the success we saw with shrimp in the first quarter.
Speaker Change: While premium-priced, these fan favorites are affordable versus the fast-casual alternatives in the market, and they provide healthy options for consumers on the go.
Speaker Change: We also continued to test other value with our Fire Grilled deal, including our a la carte and combo offering in the $3 to $7 price range.
Speaker Change: with classics like our original Play-O-Bowl and Tacos al Carbón.
Speaker Change: I look forward to sharing more with you in the upcoming months as we learn more from our tough markets.
Speaker Change: Finally, as we sharpen our brand positioning,
Speaker Change: We look forward to reinforcing El Pollo Loco as genuinely delicious food that not only tastes good, but also makes you feel good. We have a unique opportunity to own this space in QSR.
Elizabeth Williams: And we reintroduced shrimp following the success we saw with shrimp in the first quarter. Turning now to our first digital pillar. In this environment where value is key to the consumer, we will continue to ensure our digital assets offer value that drives trial and repeat business. When we stepped back and realized the high-touch training and customer service that was needed to drive sustainable customer adoption, we decided to better pace and sequence this timeline to ensure our guest experience remained a priority.
Speaker Change: Turning now to our digital first pillar. While we believe $9.99 is already a very competitive price point on our menu, our Loco Rewards loyalty members have access to even better deals like $8.99 burritos already mentioned.
Speaker Change: Our program, powered through our LocoRewards app, is the best place for these deals at EPL.
Speaker Change: In this environment where value is key to the consumer, we will continue to ensure our digital assets offer value that drive trial and repeat visits.
Speaker Change: Turning to kiosks, when we first began the rollout of kiosks late last year, our timeline was accelerated to help offset the minimum wage increases that were forecasted in our California markets.
Speaker Change: When we stepped back and realized the high-touch training and customer service that was needed to drive sustainable customer adoption, we decided to better pace and sequence this timeline to ensure our guest experience remained a priority.
Elizabeth Williams: In parallel, our team has been exploring additional labor productivity initiatives throughout our P&L to offset any gap from kiosk savings. We believe this has been the right decision for the success of kiosks within El Pollo Loco for the long term.
Speaker Change: In parallel, our team has been exploring additional labor productivity initiatives throughout our P&L to offset any gap from kiosk savings.
Speaker Change: As such, we now expect to complete our company kiosk rollout by the end of the year. This extra time has also enabled some technology enhancements that help our operational and customer experience, like accepting gift cards and discounts.
Speaker Change: We believe this has been the right decision for the success of kiosks within El Pollo Loco for the long term. We remain excited by the future potential of kiosks and look forward to keeping you updated as the year goes on.
Elizabeth Williams: The next pillar I want to touch on is delivering winning unit economics. We are looking across the P&L from labor productivity, to cost of goods sold, to repair and maintenance, and utilities, and all other controllable expenses. We have a dedicated working team focused on these initiatives, led by recently hired new leaders guiding our supply chain, our operational services, and our culinary function and offsetting the investments we are making in this initiative.
Speaker Change: The next pillar I want to touch on is delivering winning unit economics.
Speaker Change: While we are pleased with our margin performance during the quarter, we are excited about the roadmap that we are building for our future.
Speaker Change: We are looking across the P&L from labor productivity, to cost of goods sold, to repair and maintenance and utilities, and all other controllable expenses.
Speaker Change: We have a dedicated working team focused on these initiatives, led by recently hired new leaders guiding our supply chain, our operational services, and our culinary functions.
Speaker Change: With their fresh perspective and our talented teams that have been with El Pollo Loco for many years, we are approaching our cost savings initiatives methodically to ensure our high quality food and the guest experience only improve.
Speaker Change: As we unlock this potential, we expect to start seeing the benefits in the fourth quarter of 2024 and offsetting the investments we are making in this initiative.
Speaker Change: through the work we've done thus far.
Speaker Change: And with the roadmap for the next year, we believe there is an opportunity to approach 18% restaurant contribution margins in 2025.
Speaker Change: giving us increased confidence in our ability to return to consistent 18-20% margins over time.
Speaker Change: Lastly, let's talk about driving unit growth. As I mentioned on our last call, our current prototype build costs are simply too high to drive consistent long-term franchise growth.
Elizabeth Williams: To that end, we have made good progress on value engineering and reducing the cost of our prototype. I have increased confidence in our ability to reduce our new unit bill cost to around $1.8 million. Wrapping up development, I am pleased to introduce Tim Welsh as our Chief Development Officer.
Speaker Change: To that end, we have made good progress on value engineering and reducing the cost of our prototypes, while at the same time modernizing our brand image.
Speaker Change: I have increased confidence in our ability to reduce our new unit bill cost to around $1.8 million.
Speaker Change: We are just finishing up the design of the prototype, which will have a more relevant image that bridges our current design to our future.
Speaker Change: In the next few months, we will begin construction on a company unit with the new prototype and reduced cost model. We look forward to sharing further updates as we move through the year.
Speaker Change: Combined with the development incentive that we launched a few months ago for our franchise partners, we are quickly laying the foundation to ignite development growth in 2025.
Speaker Change: Wrapping up development, I am pleased to introduce Tim Welsh as our Chief Development Officer.
Tim Welsh: Tim joined the team in early June and has brought with him over 20 years of development and franchising experience in growth strategies, franchise sales, prototype development, remodel programs, and facilities maintenance.
Tim Welsh: From design to facilities maintenance to restaurant equipment, Tim has already had an impact on many areas of our cost engineering and design initiatives.
Speaker Change: His experience is the perfect fit for El Pollo Loco as we work together with our franchise partners to drive unit growth and become a national brand.
Speaker Change: I want to close by talking about our hospitality mindset pillar and the underpinning priority of culture.
Speaker Change: We are committed to attracting, hiring, and retaining top talent and driving a culture of accountability. As I have gotten to know the El Pollo Loco team better in my last six months, I have been so impressed with our restaurant culture.
Elizabeth Williams: As I have gotten to know the El Pollo Loco team better in my last six months, I have been so impressed with our restaurant culture. We look forward to sharing more in the future with an incredible franchise. Together, all of this is ready to capture the growth ahead. During the second quarter, our effective price increase versus 2023 was 7.8%. System-wide, comparable store sales increased 1.9%, consisting of a 0.3% increase in company-operated restaurants and a 2.8% increase in franchise restaurants.
Speaker Change: Because of the strength of our leaders and the passion of our team members and franchise partners, we have some of the lowest turnover in the restaurant industry.
Speaker Change: in both company and franchise restaurants. As our team is focused on updating our tools and standards to drive speed, accuracy, and hospitality, we are confident that our culture will enable some quick operational wins.
Speaker Change: We look forward to sharing more in the future.
Speaker Change: In summary, we believe we have the right building blocks for long-term success. We are reinventing value by focusing on our key differentiator, citrus-marinated fire-grilled chicken.
Speaker Change: We have the right leadership in place to reignite our growth plan and return El Pollo Loco to historically strong margin performance.
Speaker Change: And, we are fortunate to have such a strong support center team and over 4,300 amazing team members in our restaurants and an incredible franchise system.
Speaker Change: Together, all of this is ready to capture the growth ahead.
Speaker Change: With that, let me turn the call over to Ira for a more detailed discussion of our second quarter financial results.
Ira Fils: Thank you, Liz, and good afternoon, everyone.
Ira Fils: For the second quarter ended June 26, 2024, total revenue increased 0.6% to $122.2 million compared to $121.5 million in the second quarter of 2023.
Ira Fils: Company-operated restaurant revenue decreased 1.5% to $102.3 million from $103.9 million in the same period last year.
Speaker Change: The $1.6 million decrease in company-operated restaurant sales was primarily driven by a $5.5 million decrease in revenue from the re-franchising of 19 company-operated restaurants to existing franchisees in prior quarters.
Speaker Change: offset by a 3.2% increase in company-operated comparable restaurant sales and additional sales from restaurants opened during or subsequent to the second quarter of 2023.
Speaker Change: The increase in comparable restaurant sales included an 8.8% increase in average check size and an approximately 5.2% decrease in transactions.
Speaker Change: During the second quarter, our effective price increase versus 2023 was 7.8 percent.
Speaker Change: Franchise revenue increased 15.1 percent.
Speaker Change: to $11.7 million during the second quarter, driven by a 5.3% increase in franchise comparable restaurant sales.
Speaker Change: as well as four new franchise restaurant openings during, or subsequent to, the second quarter of 2023.
Speaker Change: and the 19 re-franchised restaurants I've just mentioned earlier.
Speaker Change: Looking ahead, third quarter to date sales through July 30th, 2024.
Speaker Change: System-wide, comparable store sales increased 1.9 percent, consisting of a 0.3 percent increase in company-operated restaurants and a 2.8 percent increase in franchise restaurants.
Speaker Change: Our quarter-to-date trends reflect two major factors.
Speaker Change: First, the impact of the July 4th shift, and second, the impact of a mismatch in LTO timing relative to last year.
Speaker Change: As we've moved past these transitory timing issues,
Speaker Change: We've already seen trends start to normalize and expect to see comparable trends.
Speaker Change: Similar to what we achieved in the second quarter for the majority of the remainder of the third quarter.
Elizabeth Williams: Food and labor costs as a percentage of company restaurant sales decreased 220 basis points year over year to 25.2% due to higher menu prices and lower discounting, partially offset by slight commodity inflation of approximately 2.7%. We expect commodity inflation to be a manageable 2-3% for the full year 2024.
Speaker Change: Turning to expenses.
Speaker Change: Food and labor costs as a percentage of company restaurant sales decreased 220 basis points year-over-year to 25.2% due to higher menu prices and lower discounting.
Speaker Change: partially offset by slight commodity inflation of approximately 2.7 percent.
Speaker Change: We expect commodity inflation to be a manageable 2-3% for the full year 2024.
Elizabeth Williams: Labor and related expenses as a percentage of company restaurant sales increased 100 basis points year over year to 32.1%. Occupancy and other operating expenses as a percentage of company restaurant sales decreased 50 basis points year over year to 24.1%, primarily due to the leverage gained on the same store sales increase combined with the sale of lower volume locations to existing franchisees in the prior year. For the full year 2024, we are now expecting our restaurant contribution margin to be in the 16 to 17% range, an increase from our prior expectation of 15 and a half to 16 and a half percent. This compares to a provision for our income taxes of $2.7 million and an effective tax rate of 27.9% in the prior year period.
Speaker Change: Labor and related expenses as a percentage of company restaurant sales increased 100 basis points year-over-year to 32.1 percent.
Speaker Change: An increase in wages was partially offset by higher menu prices and better operating efficiencies primarily driven through improvements in labor deployment and labor scheduling, especially during open and closing periods.
Speaker Change: Labor wage inflation during the second quarter was approximately 15% for all our company-owned locations.
Speaker Change: driven by wage inflation in our California restaurants of approximately 17% as a result of the April 1st California $20 minimum wage increase for QSR restaurants.
Speaker Change: For the full year 2024, we expect wage inflation between 12 and 13 percent for all our company-owned locations.
Speaker Change: Occupancy and other operating expenses.
Speaker Change: as a percentage of company restaurant sales decreased 50 basis points year over year.
Speaker Change: to 24.1%, primarily due to the leverage gained on the same store sales increase combined with the sale of lower volume locations to existing franchisees in the prior year.
Speaker Change: Our restaurant contribution margin for the second quarter was 18.6% compared to 16.9% in the year-ago period.
Speaker Change: For the full year 2024, we are now expecting our restaurant contribution margin to be in the 16 to 17 percent range.
Speaker Change: an increase from our prior expectation of 15.5% to 16.5%.
Speaker Change: including the third quarter of 24 in the 15 to 16 percent range.
Speaker Change: We are pleased with the progress we are making in our labor improvement initiatives, and as Liz mentioned earlier, we are continuing to focus on identifying additional savings and efficiencies across the P&L as we continue to improve restaurant-level margins.
Speaker Change: General and administrative expenses increased 50 basis points year-over-year to 9.6% of total revenue. The increase for the quarter was primarily due to an increase in estimated management bonus expense and executive transition costs.
Speaker Change: During the second quarter, we recorded a provision for our income taxes of $3.2 million for an effective tax rate of 29.3%.
Speaker Change: This compares to a provision for our income taxes of $2.7 million and an effective tax rate of 27.9% in the prior year period.
Speaker Change: We reported gap net income of $7.6 million, or $0.25 per diluted share, in the second quarter compared to gap net income of $7.1 million, or $0.20 per diluted share, in the prior year period.
Speaker Change: Adjusted net income for the quarter was $7.8 million or $0.26 per diluted share compared to adjusted net income of $8 million or $0.23 per diluted share in the second quarter of last year.
Speaker Change: Please refer to our earnings release for a reconciliation of non-GAAP measures.
Elizabeth Williams: Turning to develop. For the full year, we expect to complete a total of 10 to 12 company remodels and 35 to 45 franchise remodels in 2024. Turning to liquidity, as of June 26, 2024, we had $87 million of debt outstanding and $10.5 million in cash and cash equivalents. Subsequent to the end of the quarter, we paid down an additional $4 million on our revolver, resulting in $83 million of debt outstanding as of July 31, 2024.
Speaker Change: Turning to development.
Speaker Change: We are modestly reducing our development and remodel guidance for the year.
Speaker Change: This enables us to incorporate design elements and cost savings from our new prototype in a greater portion of the system more quickly, and thus better setting us up for success over the long term.
Speaker Change: During the quarter, our franchisees opened one new restaurant in California, and we sold one company location to an existing franchisee.
Speaker Change: In regards to remodels, during the second quarter, we completed two company-operated restaurant remodels and 17 franchise restaurant remodels, bringing our total completed remodels for the year to five company restaurants and 28 franchise restaurants.
Speaker Change: For the full year, we expect to complete a total of 10-12 company remodels and 35-45 franchise remodels in 2024.
Speaker Change: Turning to liquidity, as of June 26, 2024, we had $87 million of debt outstanding and $10.5 million in cash and cash equivalents.
Speaker Change: Subsequent to the end of the quarter, we paid down an additional $4 million on our revolver, resulting in $83 million of debt outstanding as of July 31, 2024.
Speaker Change: On May 29, 2024, the company repurchased approximately 1.5 million shares for $15 million under a stock repurchase agreement with FS Equity Partners and FS Affiliates.
Speaker Change: Additionally, during the second quarter, we repurchased approximately 203,000 shares of stock for approximately $2 million.
Speaker Change: leaving about $4.2 million remaining under our current share repurchase authorization as of June 26, 2024.
Speaker Change: Finally, based on our results to date, we would like to update the following guidance for 2024.
Speaker Change: The opening of two company-owned restaurants and four to five franchise restaurants.
Speaker Change: Capital spending between $24 million and $26 million.
Speaker Change: G&A expenses between $45 million and $47 million excluding one-time costs and an adjusted income tax rate of 27.5 to 28 percent.
Speaker Change: 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.
Operator: On May 29, 2024, the company repurchased approximately 1.5 million shares for $15 million under a stock repurchase agreement with FS Equity Partners and FS Affiliates, capital spending between 24 and 26 million. Ladies and gentlemen, we will now be conducting a question and answer session. Great, thanks for taking the question. Um, you know, my first one was just on underlying consumer demand and underlying restaurant demand.
Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star and 2 if you'd like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Ladies and gentlemen, we will wait for a moment while we poll for questions.
Speaker Change: Our first question comes from the line of Jake Bartlett with Truist Securities. Please go ahead.
Operator: Um, you know, your Cintra sales, um, you know, obviously great in the quarter itself, a little volatile as the promotions have kind of rolled off and then rolled back on. You know, how do you interpret what the underlying demand is? Do you feel like it's stabilizing, you know, still maybe deteriorating a bit, maybe improving? What's your characterization of your consumer?
Jake Bartlett: Great, thanks for taking the question. You know, my first one was just on underlying consumer demand, underlying restaurant demand. You know, your Cintra sales, you know, obviously great in the quarter itself, a little volatile as the promotions have kind of rolled off and then rolled back on.
Speaker Change: How do you interpret what the underlying demand is? Do you feel like it's stabilizing, still maybe deteriorating a bit, maybe improving? What's your characterization of your consumer right now?
Speaker Change: Thanks for the question, Jake. And I'll start and then I can pass it over to Ira. Pretty much all of those characteristics you just mentioned, we're seeing a lot of that noise in the data.
Ira Fils: When you look at, as we entered into Q3, we had a lot of factors of our own that also clouded the data somewhat, so we had a lap that was mismatched with last year when we started our LTO this year versus where we started last year, which always creates some noise.
Speaker Change: And then we also made a strategic decision earlier this year to reduce the amount of discounting that we were doing with our rather, it's a bit of an older format of discounting with our FSIs or our coupon drops.
Speaker Change: And those decisions are made months in advance, you can imagine, because it's the old way of doing things, where things are printed, and so the discounting levels were less than they were last year, which now, where we see where we sit in value, you'd want them to be more. So we're, of course, changing that going forward.
Speaker Change: But that, that of course, you know.
Speaker Change: And then when you layer in the 4th of July holiday, which, you know, I think what others have been saying, we saw that too. People really adjusted their schedule more than just a day or two. And then, you know, just the overall consumer softness. So you put all that together and I definitely am seeing that. But then, you know, we launched the good news about this business is we got out there. We just launched two new products. We.
Speaker Change: relaunched our burritos with our guacamole, fresh guacamole included at $9.99 and $8.99.
Speaker Change: And then on barbell strategy, so we did that on the value, and then on the salads, we launched the double twist on a salad and have gotten a great response there, even though, you know, that's up it.
Speaker Change: you know, $11 to $12 price point, but it's still value versus, you know, where fast casual salads are. So, you know, we launched those and we saw the traffic pick back up. So I don't know that I gave you any more clarity, but it's definitely a mixed bag.
Speaker Change: Go ahead, Ira. Yeah, no, I...
Ira Fils: It was very much a mixed bag as you move through the month.
Ira Fils: The only thing I will add, and I mean it's not a lot of data points, but this most recent week
Ira Fils: that we experienced, we did see, you know, a little bit of a return to where we had been earlier on and, you know, in the year or specifically last quarter from a sales standpoint.
Speaker Change: So, you know, we are optimistic as we move from the quarter that we still have nice sales momentum, but there was a lot going on in our July comp.
Speaker Change: Got it. And maybe if you could also just address regionality and how your stores in California are doing versus stores outside. We've heard
Speaker Change: You know, a lot of different results in California, mostly kind of bad news with the consumer pulling back and traffic being really pressured in that market.
Speaker Change: Was that your experience? Maybe the experience outside of California is a little more representative of the underlying consumer itself. Any commentary there would be helpful.
Speaker Change: You know, we didn't see a whole lot of difference between the markets. I mean, I would say marginally, there were some markets outside of California that was a little stronger, but I think in general, the comp that you see for us is pretty representative of the system.
Speaker Change: Okay, and last question. On the expansion of the margins, you're really going from 24 to 25, kind of to come. What is the main driver? It's about, you know, I think at the midpoint...
Speaker Change: We've got 150 basis points, which, is it right to think about labor as really the kind of the vast majority of the benefit would be coming through the labor line, or was it more broad-based than that?
Speaker Change: It's going to be more broad-based than that.
Speaker Change: in those shoulder hours within some of the productivity we're doing. And then as we deploy kiosks.
Speaker Change: All of those will help, but then we also have a very concerted effort on our cost of goods and some of our semi-variable costs.
Speaker Change: where we have
Speaker Change: put a dedicated effort. We've engaged a third party. We have some new talent leading our supply chain function and some of our other functions.
Speaker Change: And we're just doing a very thorough look in the middle of the P&L on those other line items, and honestly, it just hasn't been done in a couple years, and it's overdue.
Operator: Thank you. Thank you. Our next question comes from the line of Todd Brooks with Benchmark Company. Please go ahead.
Speaker Change: Great, I appreciate it.
Speaker Change: Thank you. Thank you. Our next question comes from the line of Todd Brooks with Benchmark Company. Please go ahead.
Todd Brooks: Hey, thanks for taking my questions and congrats on strong results Ana.
Operator: First question, just to follow up on Jake's question. Okay, fair enough. And then a final one for me, and it was, So, are you expecting a durability of this kind of positive mix for the next few quarters then, Ira? Yes. Yeah, hey, guys.
Todd Brooks: in a very choppy environment, so well done.
Todd Brooks: First question, just to follow up on Jake's question.
Ira Fils: Ira, you were talking about the regional performance and not seeing big discrepancies, but if we don't look at it at the total same store sales level, but we looked at it as more at the traffic level, kind of what's the spread between what you've seen in California versus the non-Californian markets?
Speaker Change: Yeah, we definitely have seen a little more decline in California from a traffic standpoint than the outer markets because those are the markets that we've taken a little more price.
Speaker Change: And I know that there's been talk about that consumer kind of throwing up their hands and
Speaker Change: walking away in April and May, but if you look at your California traffic trends, are you seeing any evidence that this whole concept of
Speaker Change: relative to what you were seeing in April-May with all the hype around the fast act of the price increases that were taken.
Speaker Change: Or the other thing that happens is gas prices come back down and they have a little bit of extra money. Now we're about to go into back-to-school, where people are spending money on that.
Speaker Change: What we are seeing is, and I think everyone's seeing, the tray down effect.
Speaker Change: for an $11 to $12 salad. And the salad we're promoting right now has super green lettuce. It has pepitas, queso fresco, you know, of course our...
Speaker Change: Plains grilled chicken and we're offering shrimp as well. So when you you compare it side-by-side with those salads on the upper end
Speaker Change: you know, the crazy.
Speaker Change: Okay, fair enough. And then a final one for me, and it was encouraging to hear, but I think Nick's has been running negative for a few quarters now.
Speaker Change: Yeah, you're right on. It starts a little bit with what you talked about, a little easier compares from a mixed standpoint, because last year is when we started to see the headwinds from a mixed standpoint.
Speaker Change: So that's a component of it. Another component of it for the quarter is, as we talked a little bit earlier, is we had less discounting during the quarter as well, which also helped from a mix standpoint. And then we just continue to see some positive benefits.
Speaker Change: and our core Tostadas as we promoted that kind of at the end of last quarter and into this quarter, and we'll continue to seeing that and
Speaker Change: you know the the quesadilla that we added to the menu and the crunchy taco drive a little mix as well. The new crunchy taco which we we added earlier in the year but that also helped drive a little mix as well.
Speaker Change: So are you expecting durability of kind of positive mix for the next few quarters then, Ira?
Speaker Change: Yes.
Speaker Change: Okay, perfect. Thank you both. Appreciate it.
Speaker Change: Our next question comes from the line of Andy Barish with Jeffries. Please go ahead.
Operator: I'm just trying to tease out. I mean, the step down in food costs, you know, to the low 25s is not something I think the brand has ever seen. So I mean, did that have a direct effect, I guess, on the traffic numbers? And then also, as you answered the last question, helping boost the mix? I'm just trying to kind of put all those pieces of the puzzle together. Yeah, I wanted to dovetail on that, if you don't mind, Liz. I think you said... That's correct. That's correct. Okay, I got it.
Speaker Change: Pricing ramped up a little bit from 1Q. I'm just even thinking sequentially from 1Q to 2Q, but ...
Andy Barish: Did that have a direct effect, I guess, on the traffic numbers? And then also, as you answered the last question, helping boost the mix. I'm just trying to kind of put together all those pieces of the puzzle.
Speaker Change: Yeah, so it's what you talked about. It was a little bit of the discounting, obviously the pricing, but a little in the mix as we've shifted our mix a little bit.
Speaker Change: Okay, and then...
Speaker Change: I guess just sort of an update in terms of where family meals stand in terms of your, you know, kind of everyday value proposition, how you kind of think about that business, how it's been acting, you know, over the last few months.
Speaker Change: It has still remained a little bit under pressure. I mean part of that is because we've been promoting the entree items.
Speaker Change: I would also say it remains one of our biggest value drivers. So when you look at the discounting and the couponing, the family chicken is one of the highest redeemed. So the person, you know, looking for the deal is usually that family chicken buyer. So they are a bit more of the price sensitive.
Speaker Change: And, you know, that is also usually a dinner item. So, you know, in terms of people, you know.
Speaker Change: You're less likely to trade out and bring your lunch to work or, you know, go to the grocery store to substitute lunch, but you might do that. You might find that substitution for dinner.
Speaker Change: So that's also something which, again, it's just forcing us to go back as a system to figure out what's the right value equation, what's the right deal to be offering.
Speaker Change: Okay, got it. Thank you very much.
Operator: Thank you very much. You're welcome. Our next question comes from the line of Sharon Zaxia with William Blair. Please go ahead.
Speaker Change: You're welcome.
Speaker Change: Our next question comes from the line of Sharon Zaxia with William Blair. Please go ahead.
Sharon Zaxia: I guess two questions as we think about
Sharon Zaxia: kind of the new unit prototype going down to a 1.8 million build-out cost. I mean, what are you value engineering in that? Is it just a smaller box? Is there anything meaningful you're doing in the kitchen to take out costs?
Speaker Change: and then secondarily on the kiosks, the kind of slower roll. Are you going to have suggestive selling now when you do have the kiosks rolled out?
Speaker Change: Thanks for that question. I'll answer the last one first. So on the kiosk, definitely adding this, or have the suggestive selling and the additional, you know, can add to your burrito, you know, add or change things. So that is all enabled with the kiosk and, you know, something that that clearly drives check once you get the kiosk in and and fully full adoption. So we're excited about that. We really just wanted to slow down a bit to make sure that customer service was.
Speaker Change: You know, we're known for our customer service and we just, we didn't want to be that environment where you walk in and you're just greeted by screens. So we, we saw that we had some room to take a beat and get it right. And so we took that opportunity.
Elizabeth Williams: And then, as it relates to the build cost, the savings are coming from all over. So, the first place I would point to is just reducing the size of the unit. Somehow, we got into this world where we were building the units bigger than they needed to be, the dining rooms bigger than they needed to be. And in this world where drive-through and delivery, especially with the third-party aggregators, just continue to grow.
Elizabeth Williams: And then, as it relates to the build cost, the savings is coming from all over. So, the first place I would point to is just reducing the size of the unit.
Elizabeth Williams: bigger than they needed to be. The dining room's bigger than they needed to be. And in this world where drive-through and delivery, especially with the third-party aggregators, just continues to grow, we just didn't need that big of a dining room. And so we've reduced that to be about 2,200 square feet. So also that's a savings.
Elizabeth Williams: We just didn't need that big of a dining room, and so we've reduced it to about 2,200 square feet. So, also, that's a savings. On the equipment package, we were over-spec-ing the equipment package. We were building out some elements of the kitchen bigger than we needed to build as well. And this is an area where Tim, who just joined us leading development, he just came from an equipment provider. And just as he knows that world inside and out, and he's already brought some great ideas, try this and try that.
Elizabeth Williams: On the equipment package, we were over-spec-ing the equipment package. We were building out some elements of the kitchen bigger than we needed to build as well. And this is an area where Tim, who just joined us leading development, he just came from an equipment provider. And just as he knows that...
Elizabeth Williams: So, we're seeing savings there. And then the other place is just taking time to be more competitive and to improve on some of the design features. We were probably over-designing the unit, and some of the design features, quite frankly, weren't modern. And so, it was pretty easy to say, let's step back and rethink this and then redraw it and simplify it, and then go and re-bid it. And so, we've seen some nice savings on construction costs as well. So, it's not one thing; it's a list of many things that are going to get us to that 1.8.
Elizabeth Williams: We were probably over-designing the unit.
Elizabeth Williams: some of the design features, quite frankly, weren't modern, and so it was pretty easy to say, let's
Operator: You're welcome. Thank you. 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 Liz Williams for closing remarks. Thank you. The conference call with El Pollo Loco has now concluded. Thank you for your participation. You may now disconnect your lines. The Bulletproof Executive, 2013
Liz Williams: I just wanted to thank everyone again for joining us today. We're really pleased with the results for this quarter, and we look forward to speaking with you in the next couple of weeks and months ahead. So thank you.
Operator: The conference of El Polo Loco has now concluded. Thank you for your participation. You may now disconnect your lines.
Operator: [inaudible]