Earnings Labs

El Pollo Loco Holdings, Inc. (LOCO)

Q1 2023 Earnings Call· Sun, May 7, 2023

$13.61

-1.34%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.
Transcript

Operator

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco First Quarter 2023 Earnings Conference Call. [Operator Instructions] 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, Ira Fils, the company’s Chief Financial Officer. Please go ahead.

Ira Fils

Analyst

Thank you, operator, and good afternoon. By now, everyone should have access to our first quarter 2023 earnings release. If not, it can be found at www.elpolloloco.com in the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements, including statements related to our strategic pillars and strategic initiatives, our operational plans, marketing and new product initiatives, cash flow expectations, capital 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-K for a more formal detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10-Q for the first quarter of 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.

Larry Roberts

Analyst

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 first quarter 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 Birria 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 470 basis point improvement in 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. 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&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 [indiscernible]. As part of the marketing strategy, we are bringing a new look…

Ira Fils

Analyst

Thank you, Larry, and good afternoon, everyone. For the first quarter ended March 29, 2023, total revenue increased 4.1% to $114.5 million compared to $110 million in the first quarter of 2022. Company-operated restaurant revenue increased 4.2% to $97.9 million from $94 million 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. During the first quarter, our effective menu price increase versus 2022 was approximately 11%. As we look ahead, we believe system-wide comparable sales will be flat to down 2% for the second quarter as we lap our extremely successful beef Birria promotion last year. Franchise revenue was $9.7 million during the first quarter compared to $9.3 million in the prior year period. The increase was driven by the opening of 9 new franchise restaurants opened during or subsequent to the first quarter of 2022 and revenue generated from 3 company-owned restaurants sold to an existing franchisee during the fourth quarter of 2022 and 1 in the first quarter of 2023. This was partially offset by a franchise comparable restaurant sales decline of 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% due to higher menu prices, partially offset by increased commodity costs. Commodity inflation during the first quarter was approximately 4% and did moderate substantially from 16% during the fourth quarter of 2022. We now expect commodity inflation to decelerate to between 2% and 3% for 2023. Labor and related expenses as a percentage of company restaurant sales decreased 260 basis points year-over-year to 32.2%…

Operator

Operator

[Operator Instructions] First question is from Jake Bartlett from Truist Securities. Please go ahead.

Jake Bartlett

Analyst

Well, thank you so much for taking the question. Larry or Ira, my first is on the guidance for the second quarter 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 not, meaning, how confident are you that that’s what’s driven the lower same-store sales in the first quarter than otherwise. When we hear from other companies that they are not highlighting California as being particularly weak, and so I am just trying to reconcile that with your commentary on the weather.

Larry Roberts

Analyst

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 two. And so what we see is on a rainy day, we will see somewhere around 6 to 8 percentage points drop in sales relative to a non-rainy day. And so that’s where we come in with it. We don’t look at weather cold days versus warm days, it’s really strictly rain days versus non-rain days. And the one thing I would highlight is, I think one reason why perhaps we see weather more heavily impact us is that if you go into a El Pollo Loco restaurant for lunch time, you see a lot of workers in our restaurants getting their chicken on a bone meals and things. And so clearly, on a rainy day, many of them are not working. They are generally working on lawns, on roofs, painting houses and those things. 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 with non-rand days and see what that gap is, and that’s how we estimate what the weather impact is.

Jake Bartlett

Analyst

Got it. Appreciate that. And another question kind of building on just a 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 am trying to really just figure out how – just understand better how you are positioned for the current macro environment.

Ira Fils

Analyst

Yes, Jake. So, I think it’s pretty similar to what we have talked about really, I think in the last couple of quarters where we talked about that we do think we are seeing maybe some pullback from a lower call it, income consumer in two ways. One is around just not spending as much because we have seen a number of items for check drop a bit. And I think you may also be seeing it a little bit in terms of vacant seat. And I think we tend to see it more – a little bit more dinner than we do, say, during the rest of the day. So, we are working on some things to bring more value to the menu. For example, we do now have three different bowls for $5 that are in our restaurants to bring that value. We marked 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 of the conscious consumer. We have seen a nice pickup in mix on our $5 bowls. So, we do have that, and we are looking at other things in which we look to perhaps bring a little more value to the menu at good profit, at good profit points on those. I mean that’s a great thing about bowls is the food costs are fairly low, so you can actually go pretty aggressive on price points and still deliver good margins on those. So, we are looking at more of those types of things. But again, I don’t think the trends have changed that much from what we have seen really since – I mean really fourth quarter last year. I think we have first started seeing perhaps a little bit pullback from some consumers.

Jake Bartlett

Analyst

Great. I appreciate it. Thank you so much.

Operator

Operator

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

Andy Barish

Analyst

Hey. Good afternoon guys. Within the system, sales got a flat to negative 2%, are you still expecting company-owned to be positive? And if you could give us maybe a sense of challenges and lapping Birria as your best promotion, just kind of what – maybe what it’s making now versus the peak of what it makes last year, that may give us a little bit more perspective on things as well?

Larry Roberts

Analyst

Sure. I will start with the second part of that question. If you looked at Birria last year, I mean it got up to as much as a little over 12% mix and really stayed double-digit mix-wise for about six weeks or seven weeks. So, as we highlighted last year, I mean it was a very unique distinctive product that we came out with and had a huge response from consumers. And so you saw a huge increase. And like we highlighted last year also, we saw record sales weeks last year as a result of the Birria promotion. This year, yes, I am not going to give actual numbers. We are seeing probably a little bit normal to slightly above normal mix in terms of Birria. So and I think it reflects that. 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 Birria, anything like it. And this year, just not as exciting news as last year. So, not surprising, that’s 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. 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 and we include that beef in our menu test that we are currently doing and looking to expand. So, that’s the second part. And in terms of the trends company franchise, I mean the trends you are seeing currently in terms of the company being a higher same-store sales versus franchise. We expect that to continue certainly through the second quarter. And again, that just reflects – I think part of that is just a lap year-over-year of the company sales versus franchisees, because franchisees during this timeframe last year were really, really high sales growth. And so there is a lap benefit for company restaurants versus franchisees.

Andy Barish

Analyst

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?

Larry Roberts

Analyst

Yes. So, as part of the tests that we are doing these kiosks, we are also testing the ability to move labor. And a key part of the test that we are finding is – well, a couple of key things. One is the kiosks need to be at the front counter. You don’t want to have them elsewhere in the restaurant because we are seeing a much bigger response when you are at the front counter. And we are also finding for our customers at least that you want to have cash machines available so they can use cash. Because again, we are finding where we have cash machines, the usage is much higher. But the bottom line is we are seeing good average check growth really across the board. And certainly, in those restaurants with the high kiosk usage, we are going to be testing, reallocating labor and possibly removing labor.

Andy Barish

Analyst

Got it. Thanks Larry.

Operator

Operator

[Operator Instructions] Ladies and gentlemen, I think 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.

Larry Roberts

Analyst

Well, thanks everybody for joining us today. Again, I can’t tell you how much – we are very excited about the prospects. We have got a lot of great things going on in the business and really looking forward to the balance of the year as we implement these and continue to drive growth in the business. Thanks for joining us.

Operator

Operator

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