El Pollo Loco Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Alpolo Loco First 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 call is being recorded today, May 4, 2023. And now, I would like to turn the conference over to your host, to Ira Fowles, the company's Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good afternoon. 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 expenditure 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 ks for a more formal detailed discussion of the risks that could impact our future operating results and financial condition.

Speaker 1

We expect to file our 10 Q for the Q1 of 2023 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 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 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 or timing of non GAAP adjustments that are used to calculate income from operations and company operated restaurant revenue on a forward looking basis. Now I would like to turn it over to our President and CEO, Larry Roberts.

Speaker 2

Thanks, Ira, 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 Q1 despite unprecedented California weather, which we believe impacted comparable restaurant sales by 2 to 4 percentage points and lapping last year's highly successful beef beauty promotion. The increase included a 3.8% 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 4 70 basis point improvement and restaurant level margins to 15%, which enabled us to deliver adjusted earnings per share of $0.14 This was achieved while customer service metrics continued to reach new highs. On the development front, We recently signed 3 franchise development agreements for an incremental 26 new restaurants in 3 new markets, which are Northern Colorado, New Mexico and El Paso, Texas.

Speaker 2

In addition, the franchise restaurant opened last November in the Denver area Continues to perform very well with sales averaging over $70,000 per week, which highlights the success we can have as we expand into new markets. One further note is that in April, we implemented a reorganization of our support center to reduce G and A spend and reallocate resources to 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 Own Our Lane.

Speaker 2

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 debuted with a double chicken tostada limited time offer that began in late February and featured both beef and chicken options. Despite being our 3rd consecutive year promoting this product, Testata sales achieved a record high mix of over 19% during the promotion. Post promotion, distillates continue 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.

Speaker 2

To add some additional context to the success of Testata's, Just 2 years ago, they represented 8.5% of our sales mix. By consistently promoting a very differentiated product, We've nearly doubled their sales mix in just 2 years. In late April, we brought back charted beef birria has a limited time offer for the 2nd 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 quesadillas, which can be dipped into a Mexican inspired consomme. While it will be difficult to match last year's record performance, We believe that beef birria will drive frequency and attract new customers to Opelio Loco, while also providing additional feedback as we assess beef as a permanent menu item.

Speaker 2

As part of our brand evolution, we continue to evaluate our menu approach with a menu board test that is currently in process. Through the menu board test, we are looking to achieve 2 things. 1st, 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. Menu items we are testing include new add on snacks, stuffed quesadillas, hard shell tacos, beef and new beverages.

Speaker 2

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 we 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 in groups Today, especially in offices. Today, catering sales represent approximately 1% of our total system sales.

Speaker 2

The right program and focus, we believe catering has 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. These upgrades make it easier for customers to order food and the loyalty program provides additional options for engagement and tiers of food redemptions. To help promote the new loyalty program, we are creating Pollo Millionaires. Once a day for 30 days, we are rewarding an existing or new loyalty member with 1,000,000 reward points.

Speaker 2

The new app has been well received with a 4.5 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 Q1, we continue 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 Q1 was under 100%, which we believe is significantly below our competitors.

Speaker 2

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 a 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 Q1, we continue to see improvements in our company and franchise restaurant service metrics, including drive through times, social media ratings and customer complaints. As we continue to improve customer service across the system, We are also making significant progress better managing labor and food costs at company operated restaurants, which is showing up in our operating margins. Labor efficiencies and food waste are well controlled and we have significantly reduced overtime pay and meal break penalties.

Speaker 2

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 Soak Tanks will be completed in May for company restaurants and later this summer for franchisees. We also continue to make good progress in simplifying salsa preparation and we'll be installing dishwashers in restaurants that have space available. One especially promising initiative is self ordering kiosks, which are now installed in 10 company owned restaurants. Based on results so far, which we are seeing good average check growth, we are expanding the test to 10 more company owned restaurants and a number of franchisees will be installing them over the next several months.

Speaker 2

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 3 additional franchise development agreements 2 new franchisees to open a total of 26 new restaurants over the next several years in 3 new markets. Combined with previously signed agreements, We now have franchise development activities underway in 12 states. While we 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.

Speaker 2

In closing, We remain excited by the opportunities ahead for El Pollo Loco. 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 local system, We believe that we are positioning ourselves for sales and profit growth. I'd like to close by thanking each member of our familia, including all of our team members and franchisees for the work they do each and every day to make Opio Loco a truly special brand. With that, let me turn the call over to Ira for a more detailed discussion of our Q1 financial results.

Speaker 1

Thank you, Larry, and good afternoon, everyone. For the Q1 ended March 29, 2023, total revenue increased 4.1% to $114,500,000 compared to $110,000,000 in the Q1 of 2022. Company operated restaurant revenue increased 4.2% to $97,900,000 from $94,000,000 in the same period last year. The increase in company operated restaurant sales was primarily driven by a 3.8% increase in company operated comparable restaurant sales. The increase in company operated comparable restaurant sales was comprised of a 6.3% increase in average check size, partially offset by a 2.4% decrease in transactions.

Speaker 1

During the Q1, our effective menu price versus 2022 was approximately 11%. As we look ahead, we believe system wide comparable sales will be flat to down 2% for the Q2 as we lap our extremely successful beef birria promotion last year. Franchise revenue was $9,700,000 during the Q1 compared to $9,300,000 in the prior year period. The increase was driven by the opening of 9 new franchise restaurants opened during or subsequent To the Q1 of 2022 and revenue generated from 3 company owned restaurants sold to an existing franchisee during the Q4 of 2022 and won in the Q1 of 2023. This was partially offset by a franchise comparable restaurant sales decline of 1%.

Speaker 1

Turning to expenses. Food and paper costs as a percentage of company restaurant sales decreased 200 basis points year over year to 27.5 percent due to higher menu prices, partially offset by increased commodity costs. Commodity inflation during the Q1 was approximately 4% and did moderate substantially from 16% during the Q4 of 2022. We now expect commodity inflation to de Sales decreased 260 basis points year over year to 32.2% Due to lower COVID-nineteen related sick pay, lower overtime expense, lower workers' compensation expense and the impact of higher menu prices, partially offset by higher wage rates. Labor inflation during the Q1 was a little over 4%.

Speaker 1

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 percent, primarily due to higher repairs and maintenance expenses as well as higher occupancy related expenses being offset by higher menu prices. Our restaurant contribution margin For the Q1 was 15% compared to 10.3% in the year ago period. For the Q2, we expect our restaurant contribution margin to be between 16.5% 17.5%. For the full year 2023, we now expect our restaurant contribution margin to be in the 15% to 17% range.

Speaker 1

General and administrative expenses increased 80 basis points year over year to 9.8% of total revenue. The increase for the quarter is due to higher labor related expenses, primarily higher incentive compensation. In addition, we incurred one time expenses related to the recent share distribution. As we go through 2023, We are actively working on identifying ways to improve efficiency in our business. To that end, we are now in the process Reallocating resources to further support restaurant operations and future sales growth, as Larry mentioned previously.

Speaker 1

As a result, we will incur approximately $1,100,000 in one time restructuring related costs during the second quarter. Such will result in an approximately $1,000,000 reduction in our overall G and A spend for the balance of the year as resources are reallocated. During the Q1, we recorded a provision for income taxes of $2,000,000 for an effective tax rate of 28.4%. This compares to a provision for income taxes of $900,000 and effective tax rate of 30% in the prior year Q1. We reported GAAP net income of $4,900,000 or $0.13 per diluted share in the Q1 compared to GAAP net income of $2,100,000 or $0.06 per diluted share in the prior year period.

Speaker 1

Adjusted net income for the quarter was $4,900,000 or $0.14 per diluted share compared to adjusted net income of $2,600,000 or $0.07 per diluted share in the Q1 of last year. Please refer to our earnings release for a reconciliation of non GAAP measures. During the Q1, we remodeled 7 company operated restaurants and 7 franchise restaurants. We continue to expect to remodel 10 to 15 company operated locations and 20 to 30 franchise locations in 2023. In regards to new restaurant development, we now expect 3 to 5 Company openings and 6 to 9 franchise openings as permitting and other development delays have pushed store openings originally planned for the back half of twenty twenty three into 2024.

Speaker 1

Turning to liquidity. As of March 29, 2023, we have $58,000,000 of debt outstanding and $4,800,000 in cash and cash equivalents. We also paid down $8,000,000 on our 2022 revolver during the Q1. Subsequent to the end of the quarter, we borrowed an additional $2,000,000 And as of May 4, 2023, Our outstanding borrowings were $60,000,000 During the quarter, we repurchased 552,000 shares for approximately $6,200,000 As of March 29, 2023, we had approximately $13,800,000 remaining on our current share repurchase program. Subsequent to the end of the quarter through April 28, We repurchased an additional 453,000 shares for approximately 4,100,000 Finally, based on our results to date, we would like to provide the following update to our 2023 guidance.

Speaker 1

The opening of 3 to 5 company owned restaurants and 6 to 9 franchise restaurants remodeling of 10 to 15 company owned And 20 to 30 franchise restaurants, capital spending of $25,000,000 to 29,000,000 G and A expenses are now expected to be from $42,000,000 $45,000,000 inclusive of approximately 1 $400,000 in one time costs related to the reorganization and the recent share distribution and an adjusted income tax rate of 26.5% 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.

Operator

Thank you, sir. At this time, we will be conducting It may be necessary to pick up your handset before pressing the star key. The first question we have is from Jake Bartlett from Chase Securities. Please go ahead.

Speaker 3

Great. Thank you so much for taking the question. Larry or Ira, my first is on the guidance for the Q2 and kind of also what you 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 Meaning, how confident are you that that's what's driven the lower same store sales in the Q1 than otherwise? When we hear from other companies that they're not highlighting California as being particularly weak, and so I'm just trying to reconcile that Your commentary on the weather.

Speaker 2

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 comp sales gap between the 2. And so what we see is on a rainy day, we'll see somewhere around 6 to 8 percentage points Drop in sales relative to a non rainy day. And so that's where we come up with it.

Speaker 2

We don't look at whether cold days versus warm days. It's really strictly Rain days versus non rain days. And the one thing I'd highlight is, I think one reason why perhaps We see weather more heavily impact us is that if you go into an El Pollo Loco restaurant for lunchtime, You see a lot of workers in our restaurants getting their chicken on the bone meals and things. And so clearly, on a rainy day, many of them are not working. They're generally working on lawns, on roofs, painting houses and those things.

Speaker 2

So maybe that's the reason why we see a heavier impact in some other concepts. But That's the way we measure it, rain days or non rain days and see what that gap is and that's how we estimate what the weather impact is.

Speaker 3

Got it. I appreciate that. And another question kind of building on just the question of underlying trends for you. Are you seeing any Shifts in how your different consumer cohorts are behaving, meaning any incremental pressure on the lower end consumer, Your family consumer, I'm trying to really just figure out how just understand better how you're positioned for the current macro environment?

Speaker 2

Yes, Jake. So I think it's pretty similar to what we've talked about really, I think, in the last couple of quarters where we talked about that we do think a Yes, we're seeing maybe some pullback from a lower, call it, income consumer in 2 ways. 1 is around just not spending as much because we have seen The number of items per check drop a bit. And I think you may also be seeing it a little bit in terms of frequency. And I think we tend to see it more a little bit more dinner than we do say during the rest of the day.

Speaker 2

So we are working Some things to bring more value to the menu. For example, we do now have 3 different bowls for $5 That are in our restaurants to bring that value. Yes, we market 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 value conscious consumer. We've seen a nice pickup in mix on our $5 bowls. So we do have that and we're looking at other things in which we look to perhaps bring a little more value to the menu Yes, at good profit points on those.

Speaker 2

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 in those. So we're looking at more of those types of things. But again, I don't think the trends have changed that much from what Seeing really since I mean really Q4 last year, I think we'll first start seeing perhaps a little bit pullback from some consumers.

Speaker 3

Great. I appreciate it. Thank you so much.

Operator

Thank you. The next question we have is from Andy Barish from Jefferies. Please go ahead.

Speaker 4

Hey, good afternoon, guys. Within the system sales guide of flat to Negative 2. Are you still expecting company owned to be positive? And If you can give us maybe a sense of the challenges in lapping Birria as your best promotion, just kind of what Maybe what it's mixing now versus the peak of what it mixed last year that may give us a little bit more perspective on things as well.

Speaker 2

Sure. I'll start with the second part of that question. If you looked at Beria last year, I mean, it got up to as much as a 12% a little over 12% mix And really stayed double digit mix wise for about 6 or 7 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.

Speaker 2

And so you just saw a huge increase. And like we highlighted last year also, we saw record sales weeks Last year as a result of the beer promotion. This year, I'm not going to get back to the numbers. We're seeing probably A little bit normal to slightly above normal mix in terms of Beria. So, and I think it reflects that.

Speaker 2

And that's not surprising. We knew that was Going to be the case or that certainly would not or probably would not be as strong as last year given that last year brand new product, nobody else was doing Beria Anything like it. And this year, just not as exciting news as last year. So not Surprising, as mixing lower, it's more like I said normal to slightly better than normal in terms of the mix. But we do think it's bringing in some consumers that normally wouldn't come to us.

Speaker 2

And like I said, it's going to give us a good read on the beef as we continue to look at that as being a possible permanent menu item. We include that beef in our menu test that we're currently doing and looking to expand. So That's the second part. In terms of the trends, company, franchise, I mean, the trend you're seeing currently in terms of the company being higher same store sales Franchise, yes, we expect that to continue certainly through the Q2. And again, that just reflects, I think part of that's just the lap Year over year, the company sales versus franchisees because franchisees during this timeframe last year were really, really high sales growth.

Speaker 2

And so there's a lap benefit for company restaurants versus franchisees.

Speaker 4

Got it. And then Secondly, I mean, I know it's early on with kiosks and understanding what many see with the higher check. But is there a Labor opportunity there and potentially either less folks at the POS Or do you expect some flexibility in terms of maybe being able to reallocate some labor to other parts of the restaurant?

Speaker 2

Yes. So as part of the test as we're doing these kiosks, we are also testing the ability to move labor. Yes. And a key part of the test that we're finding is well, a couple of key things. One is the kiosks need to be at the front counter.

Speaker 2

You don't want to have them elsewhere in the restaurant because we're seeing a much bigger response when they'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 with a high kiosk usage, we are going to be testing reallocating labor.

Speaker 4

Appreciate it.

Speaker 2

Thank you. And possibly removing labor.

Speaker 4

Got you. Thanks,

Operator

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 Mr. Larry Roberts for closing remarks.

Speaker 2

Well, thanks everybody for joining us today. Again, I can't tell you how 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 the year

Operator

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.

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El Pollo Loco Q1 2023
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