El Pollo Loco Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 7, 2024

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco 4th Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in listen only mode and lines will be open for your questions following the presentation. Please note that this conference is being recorded today, March 7, 2024. And now, I would like to turn the conference over to Ira Fowles, the company's Chief Financial Officer.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator, and good afternoon. By now, everyone should have access to our Q4 2023 earnings release. If not, it can be found at www.elpoyoloco.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 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. These forward looking statements are not guarantees of future performance and therefore you should not put undue reliance on them.

Speaker 1

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 detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10 ks for 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.

Speaker 1

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, we are unable to predict with a 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 Interim CEO, President and COO, Maria Hollingsworth.

Speaker 2

Thank you, Ira, and good afternoon, everyone. During the Q4, we continued to make great progress in reemphasizing what makes our brand unique, our one of a kind better for you grilled chicken offering. As we go forward, we aim to lean into this differentiating strength through our marketing and product development, both to drive our top line growth and help us achieve the immense potential we have ahead of us. To that end, our organization is aligned around 5 key operational pillars. The first operational pillar attract, hire and retain top talent demonstrates our belief that success in the restaurant industry is highly correlated with employee engagement.

Speaker 2

This includes building a compelling employer brand with strategies aligned with our values as well as creating a culture of accountability and recognition while fostering a positive and inclusive environment. Our second operational pillar, being known for our famous fire grilled chicken, prioritizes our focus on our key differentiators, including our fire grilled chicken, flavors from Mexico and better for you positioning consistently and frequently. In late December, we reintroduced Double Pollo Fit Bowls to help make New Year resolution planning easier and more convenient. Packed with double the protein, the Double Pollo Fit Balls are a filling and nutritious choice for those craving a delicious flavorful meal. Since launch, we've seen great reception with guests typically skewing female and a little higher income.

Speaker 2

Starting in February, we began the promotion of our current tostada platform alongside the introduction of a seasonal shrimp tostada and shrimp taco available for lent. Additionally, guests can substitute shrimp for chicken or add shrimp to any entree for a small upcharge. We're excited to be able to emphasize our better for you chicken offerings, while providing a relevant seafood option during this time of year. Additionally, in late December, we launched a new menu board designed to make it easier for our guests to not only navigate our menu, but also help them find new items and platforms. In addition to new items like the chicken avocado stuffed quesadilla, we also introduced chips and queso blanco, new agua fresca flavors and the crunchy shredded chicken taco as new add on items.

Speaker 2

The new menu board has received positive customer feedback for appearing more modern and premium. Over time, we will continue to evolve our menu to drive more add on items and provide everyday value for our customers. We are also making progress with our relaunched catering program that we rolled out in late September. During the Q4, we expanded our marketing support on digital and social to include messaging for key catering moments to keep El Pollo Loco top of mind as a great option for group occasions. We were encouraged to see sequential improvement in catering sales from the 3rd quarter.

Speaker 2

With a new catering menu that provides broader offering beyond our chicken on the bone, we still believe our catering channel mix has the opportunity to grow to approximately 5% of sales over time. To further accelerate the growth of catering, we are aligning marketing resources to focus on menu innovation, driving awareness and overall customer experience. Our 3rd pillar, digital centric in service of improving the customer experience includes investing in consumer facing technology to further differentiate our brand and reach customers for whom convenience and value are key decision factors. This includes our loyalty program, digital ordering through our website and mobile app and our integrated delivery through a third party service. This also includes the ability for our consumer to order on kiosks.

Speaker 2

We've been thrilled by the seamless adoptions by our guests. Additionally, when coupled with a cash machine, our test restaurants have been able to allow for a more efficient servicing of our guests with less labor, especially at peak traffic periods. To that end, we remain on track to complete the rollout to all of our company owned restaurants by mid-twenty 24. Our 4th operational pillar is driving consistency in operations execution with a hospitality mindset through a focus on brand standards. Delivering a consistent experience across the brand starts with having the right playbook.

Speaker 2

In the quarter, we launched an updated operations manual, inclusive of a hospitality module specific to digital ordering and kiosks and subsequent training to ensure that we have a consistent customer experience. We also believe that we can drive additional consistency through simplification and labor efficiencies, And we have several initiatives in place to drive that consistent experience and reduce or optimize labor in our restaurants. In addition to the kiosks, which I previously discussed, another labor saving initiative comes from our salsa offering, which we divided in 2 phases. Late last year, we completed the simplification of our salsa lineup by introducing our salsa fresca offering and reducing our salsa count from 2 to 1. With that behind us, our next phase is to roll out our new salsa processing equipment, which will further drive consistency of our product, while also improve labor efficiency as the new equipment is both easier to use and easier to clean.

Speaker 2

We are on track to roll out the salsa equipment to all our company restaurants by mid-twenty 24 and to franchisees by the end of the year. Lastly, we continue to test other labor savings initiatives and look for operational efficiencies as we thoughtfully enhance our operating model. We are also aggressively exploring all areas of the P and L from COGS to R and M, utilities and other controllable expenses. We are leveraging 3rd party data and really scrutinizing all costs to help offset expected incremental labor costs from upcoming legislative changes. We are doing this carefully to ensure the El Pollo Loco experience is best in class for our customers and consistent across our entire system.

Speaker 2

Our 5th operational pillar is to build back the fundamentals of winning economics and partner with world class franchisees to prepare for accelerated growth. I am excited about the work we have done with our franchisees in the past few months in this area. We have put support back into franchise recruitment and new restaurant and market openings with better training materials and best practice sharing. This will ensure operational excellence as new markets open and as we grow in markets where El Pollo Loco is relatively newer and less well known to consumers. We are also very focused on improving our development capabilities from helping franchisees with better site selection to significantly cost engineering our new builds for company and franchise units.

Speaker 2

We know that if we get the economic model right with lower build costs combined with higher sales volumes and store level margins, the development flywheel will get going. We have initiatives in place in all of these areas and look forward to sharing more details in the quarters to come. In addition, we are excited to announce an acceleration in our remodeling efforts for both the company owned and franchise system to continue to enhance our restaurants and provide our customers with a more modern dining experience. We currently expect to remodel 15 to 20 company restaurants and 40 to 50 franchise restaurants in 2024. In closing, I would like to thank our El Pollo Loco team members and our franchisees for the hard work they put in every day to make this brand great.

Speaker 2

It is an exciting time to be at El Pollo Loco and I'm thrilled to be working alongside Liz Williams, our new CEO, who starts on March 11 and the rest of the management team as we unlock our brand's long term potential. With that, let me turn the call over to Ira for a more detailed discussion of our Q4 financial results.

Speaker 1

Thank you, Maria, and good afternoon, everyone. For the Q4 ended December 27, 2023, total revenue decreased 3.2 percent to $112,200,000 compared to $115,900,000 in the Q4 of 2022. Company operated restaurant revenue decreased 5.7 percent to $94,000,000 from $99,600,000 in the same period last year. The decrease in company operated restaurant sales was primarily driven by a $5,800,000 decrease in revenue from the refranchising of 18 company operated restaurants to existing franchisees in prior quarters as well as a 0.2% decrease in company operated restaurant sales. This was partially offset by additional sales from restaurants opened during or subsequent to Q4 of 2022.

Speaker 1

The decrease in comparable restaurant sales included a 0.4% decrease in average check size offset by 0.2% increase in transactions. During the Q4, our effective price increase versus 2022 was approximately 6%. For 2024, we expect our pricing to be in the mid to high single digits to help offset the impact of the April 1 California minimum wage increase. Franchise revenue increased 17% to $11,000,000 during the Q4 driven by a 1.6% increase in franchise comparable restaurant sales as well as 5 new franchise restaurant openings during or subsequent to the Q4 of 2022 and 18 refranchised restaurants I've mentioned earlier. Looking ahead, 2024 Q1 to date through February 28th system wide comparable store sales increased 3.8% consisting of a 2.2% increase in company operated restaurants and a 4.7% increase in franchise restaurants.

Speaker 1

We are excited about the sales momentum in the business as we move past some of the underlying weather impact experienced in Q1 and feel we have created a strong marketing plan and calendar for the remainder of the year. Turning to expenses, food and paper costs as a percentage of company restaurant sales decreased 140 basis points year over year to 26.9% due to higher menu prices. During the quarter we experienced slight commodity inflation of approximately 0.7%. We expect commodity inflation to be approximately 3% for the full year 2024. Labor and related expenses as a percentage of company restaurant sales increased 40 basis points year over year to 32.3%.

Speaker 1

Higher menu pricing and improved labor management was more than offset by wage increases and higher workers' compensation expense during the quarter. Labor inflation during the Q4 was 3.6% and we expect wage inflation between 12% 14% for the full year 2024 driven by the California minimum wage increase to $20 an hour for QSR restaurants on April 1, 2024. Occupancy and other operating expenses as a percentage of company restaurant sales increased 20 basis points year over year to 25.2%, primarily due to higher repairs and maintenance and insurance costs partially offset by lower utilities expense. Our restaurant contribution margin for the Q4 was 15.8% compared to 14.7% in the year ago period. For both the full year 'twenty four and the Q1 of 2024, we expect our restaurant contribution margin to be in the 15% to 16% range.

Speaker 1

As we move into 2024, we are pleased with the progress we are making our labor improvement initiatives and we are focusing on identifying additional savings and efficiencies across the P and L as we continue to improve restaurant level margins. General and administrative expenses increased 110 basis points year over year to 9.4% of total revenue. The increase for the quarter was primarily due to executive transition costs and increased other G and A expenses. During the Q4, we recorded a provision for income taxes of $1,700,000 for an effective tax rate of 27.7%. This compares to a provision for income taxes of $2,300,000 and an effective tax rate of 26.4% in the prior year period.

Speaker 1

We reported GAAP net income of $4,400,000 or 0 point $6,500,000 or $0.18 per diluted share in the prior year period. Adjusted net income for the 4th quarter was $5,200,000 or $0.16 per diluted share compared to adjusted net income of $6,000,000 or $0.16 per diluted share in the Q4 of last year. Please refer to our earnings release for a reconciliation of non GAAP measures. Turning to unit development. During the Q4, we opened 1 company operated restaurant in Las Vegas and 2 franchised restaurants, 1 in Denver and 1 in Utah bringing the total to 2 company and 3 franchise openings for 2023.

Speaker 1

As Maria mentioned earlier, we are actively working toward value engineering our new restaurant investment with a target build cost of $1,800,000 to drive new unit growth. In addition, we completed the remodeling of 15 company owned restaurants and 33 franchise restaurants during 2023. As we look to 2024, we are currently planning to remodel 15 to 20 company owned restaurants and between 40 50 franchise restaurants. Turning to liquidity. As of December 27, 2023, we had $84,000,000 of debt outstanding and $7,300,000 in cash and cash equivalents.

Speaker 1

After the end of the quarter, the company paid down $3,000,000 on the revolver and as of March 7, 2024, there was $81,000,000 of debt outstanding. As we mentioned on our last call, on October 31, 2023, our Board of Directors approved a new share repurchase program with an authorization to purchase up to $20,000,000 of common stock through March 31, 2025. Following our repurchase Finally, based on our results to date we would like to provide the following guidance for 2024. The opening of 2 company owned restaurants and 5 to 7 franchise restaurants, capital spending of between $25,000,000 $28,000,000 and G and A expenses of between $45,000,000 $47,000,000 which includes management incentive compensation expense at 100% of target and approximately $4,500,000 in stock compensation expense and an adjusted income tax of 27% to 28%. This concludes our prepared remarks.

Speaker 1

We'd like to thank you again for joining us on the call today and we are 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 a question and answer The first question that we have comes from Jake Bartlett of Treus Securities. Please go ahead.

Speaker 3

Hey guys, thanks for taking the question. This is actually Vince Stengelmann on for Jake. Just firstly on the development guidance, I think slightly below our expectations for 8 system openings, can you kind of frame your expectations for sort of your shift to more remodels? What is kind of holding you back in really accelerating development here?

Speaker 1

So I think from a first of all, from a remodel standpoint, we completed, as we mentioned, 33 franchise and 15 company. And we're seeing a good sales momentum from the remodels. And so it's why the franchisees are accelerating their development. We're getting a mid single digit sales lift from the remodels when we're spending a little under $400,000 on average for these remodels. So we're getting a good return on those.

Speaker 1

So that's definitely why we're continuing to push forward with the remodels. From a development standpoint, hey, we are working to continue to bring in more franchisees into the system. And this is where we're sitting today is based on what we think we have relatively good visibility to the openings this year. And that's really driving what our guidance is for 2024. And we are still very actively in the process of recruiting and bringing on more franchisees.

Speaker 2

Yes. Maria, also on my prepared speech, I did talk about how we have initiatives in place in all these areas. And you're going to hear more about this. Liz is actually very passionate about development. So you're going to hear more about this in the next quarters to come.

Speaker 3

Okay, great. That's super helpful. And then just shifting gears a bit, just on your strategy to offset the wage increases in California. Can you kind of give us an update? I think at ICR you mentioned that you're looking to your operational initiatives to offset roughly a third to a half of the impact of the wage increases.

Speaker 3

Where are you on track to meet that goal? Are there any early learnings you're getting from, let's say, testing of the new salsa processing equipment or the kiosks that you're willing to share or any update on timing of the price increases?

Speaker 2

Yes. In terms of the kiosks, we have learned that if we have the cash machine and that works better for us, if the kiosk is on the counter, that is our customers will learn quickly and adopt very easily as well as if we have multiple kiosks in the restaurant. That's the one thing we've learned. It's really helped us with being efficient when it comes to our customers putting their orders as well as our team members preparing the orders for our customers.

Speaker 1

Yes. So I think that and where we are in the salsa that's we feel like we're still waiting for the processors. We've already simplified the process going to 2 sauces to 1 and we have not and we haven't had any negative guest feedback from that. So we feel good about where we're headed there. We have also and we've got the processors on order.

Speaker 1

Maria talked about the kiosks. And we're also we're working on kind of our whole labor we did a whole project on our whole labor tables as we're trying to really see if we can really streamline things like in times and out times to really be just more efficient from our labor standpoint from a labor standpoint. And we're so far we're seeing good results there and plan on rolling that out when we April 1 consist at the same time minimum wage goes up. So I think we're still comfortable with that range of a third to a half of that of the California minimum wage impact will be offset by labor savings. And honestly, the rest of it, we're working on taking some pricing.

Speaker 1

We've already taken a little bit. And for the year, we're going to be in the mid to high single digits on pricing. And we'll adjust that as we manage the impact of the minimum wage increase of our labor savings. And our whole goal is really to protect margins while balancing traffic as well because we are cognizant of the impact the pricing can have on traffic.

Speaker 2

We will continue to look for operational efficiencies with labor all throughout the year. We also know that labor alone is not enough to drive best in class margins. So we're also going to do a deep dive into the rest of the P and L and look forward to sharing more of that in the upcoming quarters.

Speaker 3

Okay, great. And then just last one for me, just an update on the consumer. Could you kind of help us understand your strategy and your messaging around balancing value versus your premium offering and whether you've seen any shift in the consumer environment?

Speaker 1

I don't necessarily know if we've seen a shift. I think we've seen the consumer under pressure a little bit for a couple of quarters as we've seen them. We've seen our check not raised to the amount of our pricing because what we do see is consumers are managing their check. They're doing it through a couple of ways. From a mix standpoint, they're trading down a little bit and they're also buying less checks per item less items per check, sorry.

Speaker 1

And we're seeing a little fall off on family meals as well. So the combination of that and the fact that we're actually seeing a little more lunch business, which has a lower check, it has weighed on our check a little bit. Bit. But I do think the lower end consumer is under a little bit of pressure, and I do think we're seeing that in regards to our check. But it's not I don't know if it's like a relatively new thing.

Speaker 1

I think we've seen it for a couple of quarters now.

Speaker 2

And for us, when we rolled out our menu boards last December, we know that our customers are looking for craveable food and also consistent value. And so we are testing ways to offer more value across our menu to meet this consumer demand. So look more for more information on this in the next quarters as well.

Operator

The next question we have comes from Zack Riddle of William Blair. Please go ahead.

Speaker 4

Hi, good afternoon. Just a couple of questions for you guys. I guess, first off, so just looking at the P and L, the food and packaging costs seems to have come in a little bit higher than we expected in the Q4. Just wondering kind of what drove that? I mean, was it bone in chicken, bone with chicken, some other ingredient or something like that?

Speaker 4

Or just kind of what caused that cost to be a bit higher? And then secondarily, I know you just was wondering if you guys could give us an update on how the Colorado market in general is doing today and maybe how that second restaurant is performing? Thanks.

Speaker 1

Yes. So the first question in regards to the commodities, I don't know if there was any one item that drove that unfavorability. I think we did get a little bit of from it maybe from the Carnitas promo. But we the basket came in pretty much as we expected for Q4 on that side. From a good news standpoint, I will tell you, yes, we did open our 2nd store in Denver and we are very excited how both of them are performing.

Speaker 1

The first one which opened over a year ago is still performing very well. And the second store is above our expectations as well. So we are very excited about how the 2 stores in Denver are performing.

Speaker 4

Great. And I guess just as a follow-up, how should we think about the cadence and maybe number of LTOs in 2024 versus 2023?

Speaker 1

I think in 2024, the cadence will be similar. We are reducing it from 6 LTOs to 5 LTOs this year. So small change for us just because we've seen things, for example, when we've seen the positive reception we've gotten from items like the Pollo fit bowls and the Tostadas, the consumers are coming back and they want we put these on LTO and then when we take them off, they're like, hey, where are these items that we've built some frequency on with them. And so that's why we've decided to extend the LTOs a little bit and go from 6

Speaker 4

to 5 this year. Great. Thanks. That does it for me for questions.

Operator

Thank you, sir. 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 the management team for closing remarks. Please go ahead.

Speaker 2

Thanks again, everyone, for your interest in El Pollo Loco, and we look forward to talking to you again next quarter. Have a great evening.

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Key Takeaways

  • In Q4 2023, total revenue fell 3.2% to $112.2 million due primarily to refranchising and a 0.2% decline in same-store sales, while franchise revenue rose 17% and Q1 comps are up 3.8%.
  • The company is leaning into its core fire-grilled chicken differentiation with initiatives like the reintroduction of Double Pollo Fit Bowls, seasonal shrimp tostadas and an updated menu board to drive premium add-ons.
  • Investments in digital and labor efficiency—including rollout of ordering kiosks with cash machines by mid-2024, salsa lineup simplification and new processing equipment—aim to improve consistency and offset wage inflation.
  • El Pollo Loco plans to open 2 company and 5–7 franchise restaurants in 2024 and remodel 15–20 company and 40–50 franchise locations, targeting $1.8 million per new build to enhance unit economics.
  • For 2024 guidance, management expects mid-to-high single digit pricing increases, ~3% commodity inflation, 12–14% wage inflation, 15–16% restaurant contribution margins, $25–28 million in capex and $45–47 million in G&A.
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Earnings Conference Call
El Pollo Loco Q4 2023
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