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El Pollo Loco Holdings Inc  (NASDAQ:LOCO)
Q4 2018 Earnings Conference Call
March 07, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to El Pollo Loco Fourth Quarter 2018 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. Please note that this conference is being recorded today, March 7, 2018 (ph). On the call today, we have Bernard Acoca, President and Chief Executive Officer of El Pollo Loco; and Larry Roberts, Chief Financial Officer.

And now, I'd like to turn the conference over to Larry Roberts.

Laurance Roberts -- Chief Financial Officer and Treasurer

Thank you, operator and good afternoon. By now everyone should have access to our fourth quarter 2019 (ph) 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. 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 expect.

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10-K for the 2018 fiscal year tomorrow and we 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.

I'd now like to turn the call over to President and Chief Executive Officer, Bernard Acoca.

Bernard Acoca -- President and Chief Executive Officer

Thanks, Larry. Good afternoon, everyone, and thank you all for joining us today. Our transformation agenda continued to drive momentum in the quarter, and I'm incredibly proud of our fourth quarter results. During the quarter, we achieved 4.4% systemwide comparable restaurant sales growth, which was our best systemwide result since the first quarter of 2015 and a two-year sales comp of 5.8%. We are proud that we drove these results by bringing more people into our restaurants, achieving systemwide comparable restaurant transaction growth of 2.3%. This quarter, we delivered restaurant operating profit margin of 18.7%, and pro forma EPS of $0.16 on an ongoing operating basis, up 45% over the comparable quarter last year.

This was all accomplished despite significant headwinds in the quarter in the form of California wildfires and avocado shortage, a spike in tomato prices and a nationwide recall by the CDC on romaine lettuce. In the hyper-competitive category, we achieved these results without engaging in the steep discounting of our competitors. In fact, we reduced the amount of discounting year-over-year, which is testament to the growing strength of our brand. We believe these results are evidence that the initiatives we launched as part of our transformation agenda in March of last year are producing the desired results and we are just getting started.

I would like to personally thank all of our employees and franchisee partners without whom these results would not be possible. The passion, commitment and resilience that our employees and franchisees demonstrate to take care of our customers and one another give me great confidence that our Company mission to feed the love that makes us all feel like family is being brought to life by them each and every day.

During the quarter, we further strengthened our leadership team, adding industry veteran Hector Munoz as Chief Marketing Officer on December 3rd. Hector was most recently Executive Vice President and Global Chief Marketing Officer at Church's Chicken and previously served for nearly seven years as US Chief Marketing Officer for Popeyes. He's an inspirational servant leader, who built an impressive track record for driving same-store sales growth in both companies and we're thrilled to have him on board as we transition our Company to being a more brand-centric organization.

Also, we recently reached agreements in principle to settle our securities class action lawsuit and multiple wage and hour class action lawsuits. It was important for us to get these long-standing legal issues taken care of, so that we can focus all our attention going forward on building upon the momentum generated in 2018. As we look ahead to 2019, we remain focused on executing our transformation agenda, which entails four key strategies, one, developing the people-first culture by investing in and growing our talent; two, differentiating the brand by accentuating our strengths and building upon them; three, simplifying operations, thereby making it easier to be an employee and franchisee; and four, growing the business responsibly and profitably for the long term.

I'd now like to touch on the four strategies and highlight some of the key initiatives supporting each. As I've discussed previously, we believe that culture is the foundation for all great companies and the enabler for everything we do. Therefore, it is critical that we continue to invest in and develop our talent. In creating a people-first culture, we have set out to drive a performance-based culture with heart. Along these lines, we recently implemented a new bonus program for both field and support center employees that rewards them based on sales, profitability and customer satisfaction improvement. This customer satisfaction piece has been enabled by a new measurement we developed in October called our Overall Blended Index or OBI, which aggregates our mystery shops, customer surveys and customer complaints in each one of our restaurants and automates an action plan for our restaurant general managers to respond to that data.

The OBI has proven to have a strong correlation with sales performance and we believe this bonus structure is a much more robust way to reward what we value and drive better sales, profits and positive customer experiences. Another example of our people-first culture and values being put in practice is the program that launches in a few days, our very first employee appreciation month.

As a company, our primary goal each and every day is to determine new and meaningful ways we can make our employees' jobs easier and more rewarding. Employee appreciation month has been designed with this objective in mind. We have developed four weeks of planned activity designed to celebrate, invest in, and thank our greatest asset, our employees.

Week one will be about recognizing our employees for all they do, and launching our new dedicated service awards, a program designed to recognize long-term employees in our restaurants and support center. Week two will be an investment in our employees' professional development and personal well being. Week three will showcase our employees' unique talents and have them help us come up with our next great new product. Week four will focus on volunteerism and giving back to the communities we serve, culminating in a huge community service event in East Los Angeles on April 1st, Cesar Chavez Day, a day intended to commemorate his legacy by giving back to those in need.

Our second strategy is to accentuate our brand strengths and build upon them, thereby differentiating the brand and making the Company's values a source of competitive advantage. These strengths and values were identified through an extensive brand segmentation completed last fall. That work helped us identify our core customers and reaffirm our key brand differentiators and is captured in our brand book, which serves as a strategic filter for all our decision making, particularly how we communicate everything we do going forward.

Based on this work, we have just initiated a comprehensive brand relaunch incorporating our new look this month across our system, a new logo, advertising, tag line, menu boards and point of purchase materials will be rolled out in the month of March with the new e-commerce site, mobile app, packaging and uniforms being phased into the system later this year. I'm especially excited by our new tag line, Feed the Flame, which not only highlights that we are the only major restaurant brand that is a true fire burning grill, a source of competitive advantage for us, but also points the aspirational passions for life our employees and customers share. As we relaunch the brand, we are also focused on building a tested product pipeline centered on a food type we are now calling L.A. Mex.

L.A. Mex is the juxtaposition of better-for-you food that is the hallmark of quintessentially LA lifestyle and Mexican inspired cuisine. We have coined this phrase to indicate not only where our brand originated and how Los Angeles has shaped and influenced us but also to encapsulate what we've been doing in our kitchens for years. We will reinforce L.A. Mex in our communications moving forward to emphasize that you don't have to feel guilty eating at El Pollo Loco because so much of our food is grilled, made from scratch, made with only the freshest ingredients and can be personalized to meet any diet, whether you are following a Paleo regime or strictly vegetarian one.

In order to cast the widest net, we are also seeking to develop products that equally appeal to both our Hispanic and general market consumers. Our last three promotions are great examples of these type of products. In the fourth quarter, we launched handmade chicken tamales, a classic Mexican holiday dish to kick-off the holiday season. We then started 2019 with fire-grilled chicken nachos and are now promoting hand-rolled stone ground enchiladas. All of these product offerings were designed to have broad base acceptance and have been well-received by our guests across multiple demographic lines.

On the technology front, we continue to make loyalty, digital and delivery bigger parts of how we connect with our customers. Our loyalty program now has over 1.2 million members and accounts for approximately 7.5% of our sales. Our goal in the next two years is to get the 5 million members and make our loyalty program a bigger part of how we go to market. This includes transitioning our discounts away from mass market vehicles and focusing them instead in a much more pinpointed fashion in our loyalty program, where we can drive higher levels of incrementality based on knowledge of our customers' purchase history.

All of our restaurants currently have access to delivery through DoorDash. In order to expand our delivery presence, we've recently signed agreements with Postmates and Uber Eats to sell on their marketplaces, which we expect to test and implement during the year. In the second half of this year, we will further increase our number of digital access points by allowing our customers to order from us on Facebook Messenger via chatbot technology and enable voice activated orders on devices like Amazon's Alexa.

Our third strategy is focused on simplifying operations for our employees and franchisees. This strategy was recently added to the original transformation agenda to highlight the importance of operations and the work we know we need to do to reduce back of house complexity in order to free up capacity to deliver a better experience front of house. As part of our brand relaunch, we have implemented the first phase of menu simplification in our restaurants, which we tested last year. This involves eliminating approximately 20% of lower mixing lower margin menu items.

In addition, we continue to invest in technology that will streamline our operations. This year we are implementing a new pack of health management system, which is expected to free up one hour per day for our restaurant general managers. We are revisiting and revising some of our standard operating procedures to minimize non-value added non-customer facing work. We believe simplified operations can significantly improve our employee's ability to execute our brand providing better food and service with the added benefit of lower turnover and increased retention.

The final strategy underpinning our transformation agenda is profitably and responsibly growing our business for the long term. We are currently setting the foundation for new market expansion with a target date of 2020 for entry into one or two new markets. This includes developing a new store of the future, in partnership with an outside firm which will incorporate our new brand visual expression, and create a market entry marketing strategy based among other things on our learnings from Texas. Furthermore, we believe the work we are doing to streamline our menu and enhance our operations platform will facilitate success in new markets.

In summary, we believe our transformation agenda has put us on the right track as evidenced by our fourth quarter results. We believe this momentum will only accelerate as our transformation agenda continues to gain traction and we further elevate the El Pollo Loco brand. I look forward to updating you on our progress on future calls.

I'd now like to hand the call over to Larry to review our fourth quarter results in more detail.

Laurance Roberts -- Chief Financial Officer and Treasurer

Thanks, Bernard. Before we get into our fourth quarter results, I'd first like to touch on our store base. During the fourth quarter, we opened two new Company-operated restaurants in Southern California. Franchisees also opened two new restaurants during the quarter, one in Utah and one in Texas. Looking ahead, we expect to open three to four Company-operated restaurants, along with three to five franchise restaurants in 2019. At remodels, the Company completed eight vision remodels in the fourth quarter, and franchisees completed an additional 14. This year, we plan to complete 10 to 15 Company remodels and expect our franchise partners to complete another 10 to 15.

Now, onto our financial results. For the fourth quarter ended December 26, 2018, total revenue increased 11.6% to $106.3 million from $95.2 million in the fourth quarter 2017. Total revenue in the quarter included a $5.2 million of advertising revenue related to franchise advertising fund contributions required as part of new accounting guidance implementation. Excluding the advertising fund revenue, total revenue would have increased 6.2%, driven by an increase in Company-operated restaurant sales. Company-operated restaurant sales grew 6% in the quarter to $94.6 million from $89.3 million in the fourth quarter of last year.

This increase in Company-operated restaurant sales was driven by the contribution from the 12 new restaurants opened during and subsequent to the fourth quarter of 2017 as well as by 3.7% increase in Company-operated comparable restaurant sales, partially offset by seven restaurant closures during the same period. The increase in Company-operated comparable restaurant sales was composed of a 1% increase in transaction and a 2.7% increase in average check.

Franchise revenue increased 9.2% in the fourth quarter to $6.4 million compared to $5.9 million in the prior year period. The increase was largely driven by a 5.1% increase in franchise comparable restaurant sales, which included transaction growth of 3.3% as well as by the contribution from the 10 new franchise restaurants opened during and subsequent to the fourth quarter of 2017, partially offset by four restaurant closures during the same period.

Expenses. Food and paper costs, as a percentage of Company restaurant sales, decreased 50 basis point year-over-year to 28.4%. The improvement was predominantly due to higher menu prices. Looking ahead, we have locked in our chicken need for the year and expect total inflation of 1% to 2% in 2019. As a reminder, chicken makes up approximately 40% of our commodity basket. Labor and related expenses as a percentage of Company restaurant sales increased 60 basis points year-over-year to 29.3%. The increase in labor expenses was primarily due to higher hourly wages in California, especially Los Angeles and higher group insurance, partially offset by increased menu prices and a reversal of an accrual as a result of California no longer being a credit reduction state. We expect labor inflation of about 6% in 2019.

Occupancy and other operating expenses, as a percentage of Company restaurant sales, decreased 20 basis points year-over-year to 23.6%. The decrease was primarily due to sales leverage and restaurant closures, partially offset by higher delivery charges as well as increased costs for trash pickup services and operating supplies.

General and administrative expenses increased by $1.5 million year-over-year to $12.4 million. Included in G&A, our $3 million of legal expenses associated with the securities litigation as compared to $1.9 million in securities litigation costs in the fourth quarter of 2017. Excluding the costs associated with the securities litigation and adjusting for the impact of franchise advertising revenues on our 2018 revenues, G&A expenses in the fourth quarter of 2018 increased approximately $350,000 year-over-year to 9.3% of total revenue, a 20 basis point decrease versus the prior year.

The dollar increase in G&A expenses resulted primarily from an increase in our bonus accrual and higher group insurance costs. Depreciation and amortization expense increased to $4.8 million from $4.5 million in the fourth quarter of last year. The increase was primarily due to new restaurant openings and remodels completed during and after the fourth quarter of 2017, partially offset by the impairment of 12 restaurants during the same time period.

As a percentage of Company revenue, depreciation and amortization decreased 20 basis points year-over-year. The decrease was primarily driven by increased sales revenue, which leveraged the higher expense noted above. During the fourth quarter, we incurred a total of $36.3 million of pre-tax expense related to two agreements in principle to settle several class action lawsuits. The securities loss suit settlement agreement and associated legal expenses and the wage and hour settlement agreement have been adjusted out of our pro forma net income calculations.

We recorded an income tax benefit of $8.4 million in the fourth quarter of 2018 for an effective tax rate of 26.4%. This compares to an income tax benefit of $4.8 million and an effective tax rate of 99.2% in the prior year fourth quarter. We reported a GAAP net loss of $23.4 million or $0.60 per diluted share in the fourth quarter compared to a net loss of $38,000 or $0 per diluted share in the prior year period.

Pro forma net income for the quarter was $6.1 million as compared to net income of $4.4 million in the fourth quarter of last year. Pro forma diluted earnings per share were $0.16 for the fourth quarter of 2018, compared to $0.11 in the prior year period. For a reconciliation of pro forma net income and earnings per share to the comparable GAAP figures, please refer to our earnings release.

In terms of our liquidity and balance sheet, we had $7 million in cash and equivalents as of December 26, 2018 and $74.2 million in debt outstanding. For the foreseeable future, we expect to finance our operations, including new restaurant development and maintenance capital through cash from operations and borrowings under our credit facility. For 2019, we expect our capital expenditures to total $14 million to $19 million. During the quarter, we repurchased 66,409 shares for approximately $980,000 or an average price of $14.78. As of December 26, 2018, we had approximately $19 million remaining on our share repurchase authorization.

Turning to our outlook for 2019, we are providing guidance for the full year as follows. Excluding the impact of potential share repurchases, we expect pro forma diluted net income per share of $0.70 to $0.75. This compares to pro forma diluted net income per share of $0.74 in 2018. Our pro forma net income per share guidance for 2019 is based in part on the following annual assumptions. We expect systemwide comparable restaurant sales growth to be approximately 2% to 4%. As I noted, we expect to open three to four new Company-owned restaurants and expect our franchisees to open three to five new restaurants.

We expect restaurant contribution margin of between 18.2% and 18.9%. We expect G&A expenses of between 8.4% and 8.6% of total revenue, excluding CEO transition costs and legal fees related to securities class action litigation and reflecting our change in accounting for franchise advertising fees. We expect adjusted EBITDA of between $62 million and $65 million and we are using a pro forma income tax rate of 26.5%.

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 you may have.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question is from Jake Bartlett with SunTrust. Please proceed with your question.

Jake Bartlett -- SunTrust -- Analyst

Great, thanks for taking the question. First, I had a question about the guidance in same-store sales and just how confident you are that you can -- you keep it this kind of current level, this strong level and maybe in that answer, kind of give us an indication as to what -- how you're trending right now?

Bernard Acoca -- President and Chief Executive Officer

So I'll answer the first part of the question, I'll let -- for the same-store sales portion of the question, I'll let Larry answer the balance of it. What we can say right now is that in the current quarter that we're in, we are positive. However, I don't think what we could have envisioned at the start of this fiscal year is the -- what is now approaching record rainfall in Southern California or in California, in general, I should say, where we have 80% of our restaurants, and what has turned out to be record cold weather in the month of February -- the coldest February in 60 years.

So normally, I -- it's hard for me to talk about weather as being a factor in our business, but when you got that many restaurants located in the State of California, given what we have been experiencing thus far within the quarter, it is starting to have an impact. With that being said, we are positive and we are fighting through it. And we do believe that, that is an anomaly that is seasonally based versus something that we're going to live with for the duration of the year.

Jake Bartlett -- SunTrust -- Analyst

Got it.

Laurance Roberts -- Chief Financial Officer and Treasurer

Yeah, Jake, so --

Jake Bartlett -- SunTrust -- Analyst

Yeah, sorry.

Laurance Roberts -- Chief Financial Officer and Treasurer

Jake, so I think what you hear from Bernard saying is, we feel good about that range for the full year, despite what we're seeing as a soft start to the first quarter, really driven by weather. The only -- the other thing I'd highlight about the first quarter is in addition to the weather impact, causing results to be a little softer than we expected, we have a couple of other expense items in the first quarter really around severance and some high gas prices which really hit in December, which we saw in January, February.

So as we look at the quarterization of the year, I think Q1 will be a little softer relative year-over-year versus the other quarters of the year. So I think as you guys look at your models and things, I suggest you look at that, because again I think given the softer start to the year in terms of sales and some of the expenses we've seen, Q1 year-over-year will be a little softer than the other quarters ever again. We still believe the $0.70 to $0.75 range that we're projecting is a good range.

Jake Bartlett -- SunTrust -- Analyst

Got it. And I had a couple of questions about margins. And just looking at the margin guidance for restaurant level margins, it looks like you're expecting about a similar decrease year-over-year on a basis points basis despite having what looks to be stronger comps. And so, just trying to understand that on the restaurant level, maybe that's an indication that maybe the Company might not be as strong as the system or maybe that's baked into your guidance, if you could address that. And also the question about G&A, and it looks like it's expected to accelerate pretty meaningfully in '19 as a percentage of sales, which is also year-over-year growth kind of aside from earning the one-time charges. What is driving that and should we -- when should we expect you to get leverage on G&A going forward?

Laurance Roberts -- Chief Financial Officer and Treasurer

Yeah, so let me talk G&A first, and I'll talk margins. G&A, the biggest driver of the increase is the bonus adjustment. So obviously, when we look year-over-year, we go back to a 100% bonus accrual projection will be hitting plan. And so when you see year-on-year, overall, after securities litigation costs and CEO transition costs, I think we're up about $3 million or so to get within that range. The bonus adjustment is by far the biggest driver of that. We have a little bit higher in terms of equity compensation in that number. And then the balance of salaries and other G&A expenses are roughly flat. So overall, we've done a real good job in terms of managing G&A overall, but again we'll have that bonus adjustment, and a little bit on the equity that will drive the costs up year-over-year.

If we have the year that we are targeting at this year then I expect to start leveraging G&A next year, quite honestly as we continue to build sales and not have this seems like annual bonus adjustments that we have to lap into the future. So in terms of margins, what you're seeing now is the wage inflation, which has -- if you look at the past several years, it has become higher and higher for us. One, just from the magnitude of the minimum wage increases here in California, the other one is the ability to manage the compression has gotten tougher, basically managing a difference between your higher paid labor in restaurants like shift layers and cooks relative to cashiers and chefs.

So we've had to move more than more in line with minimum wage increases. So we haven't had the ability to manage that compression. So you got the wage pressures and versus the last three years where we had food costs deflation, this year, as you have heard in our opening remarks, we expect to have a little bit inflation in food costs. I don't have that offset. So we've pretty consistently saying you really need to be probably 3.5% comp growth in order to hold margin flat, maybe even north of that. So that's why you're seeing -- the high end of the range were basically flat on margins but if you get lower, you could see some margin degradation if we don't get that kind of comp lift.

Jake Bartlett -- SunTrust -- Analyst

Got it. Thank you very much.

Operator

Our next question is from Matthew DiFrisco with Guggenheim Securities. Please proceed with your question.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Thank you so much. I have a couple of questions. Just first on the remodels that you've been doing, can you just talk about how much of those -- what's the type of lift you're seeing of those and I guess are you gaining some momentum on those or is that becoming a greater factor to some of the momentum we saw toward the end of the year on the comp?

Laurance Roberts -- Chief Financial Officer and Treasurer

Yes. Overall, when we look at the Vision remodels over the last couple of years, you're able to get varying performance anywhere from roughly flat up to north of high-double digits in terms of the growth. On average -- to average them out, you're probably running somewhere around 5% to 7% overall lift. Now we'll highlight that the remodels that we did in late '16 and '17 and earlier '18, you're getting higher lift in those numbers because what we're doing is we're getting toward the tail end of the restaurant that need to be remodeled. So these are pre-hacienda, but they are also the ones we waited the longest on just because they have site issues, they have other issues that we just wait until we get into the remodel.

So we expect less lift on those. So going forward, what we're doing is really going back through only doing restaurants that are pre-hacienda, for those who go back probably around 10 years or so that haven't been touched. And we're looking for, before going to do remodels, we're also going to be working on get those costs down and do some modifications to the Vision remodel because obviously with our new brand image and things, we want -- and we build some of those elements into those remodels as we're doing them. So that's why number of remodels is only 10 to 15 and again the lift we're seeing from the later ones was lower, which we expected just because again they have other issues, which put them at the very end of the list of restaurants remodeling.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Okay. And then just a bookkeeping question. I think you said also the debt balance was around $74 million at the end of the year? Is that correct?

Laurance Roberts -- Chief Financial Officer and Treasurer

Yes.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

That incorporates the $36 million of the legal settlement or are there some -- does the balance now in entering into '19 has that creeped up or is that $74 million representative of you fully paying out any liabilities you may have had to encash?

Bernard Acoca -- President and Chief Executive Officer

No. So the $74 million is where we ended the year. And then, it was just fairly recently that we entered into these agreements in principle on the legal settlements. So if those go through, we'll see those borrowing balances increase probably in three, four, five months or so. So as I project the year, I expect to be starting obviously at $74 million. We should see an increase kind of mid-year and then come back down again, given our free cash flow and I expect to get back down to probably $75 to $85 million level in debt.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Okay, so you might go back -- the $36 million added onto that might take you up to $110 million and then you come down basically throughout the year. Is that the way to think of it?

Bernard Acoca -- President and Chief Executive Officer

Yeah. Something that -- yeah.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

And that's incorporated in your guidance or EPS guidance?

Bernard Acoca -- President and Chief Executive Officer

Yes.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Okay. And then the last question, I guess if you look at the comp guidance, I think clearly you guys said that it is positive in 1Q. However, I guess if we look at it, ex the weather and assuming you're going to have sunny dry California return, are you seeing the same type of -- is there any reason to think that there is two-year momentum that you saw in the fourth quarter didn't end when the calendar switched, but you're seeing that on the normalized days still?

Bernard Acoca -- President and Chief Executive Officer

But I think the answer on -- to that is reflected in the full-year guidance. So I mean, I think you're seeing us there, project comps for the full year that are closer to that range. So I think that is reflected in the quarterly and full-year guidance we provided.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Okay, thank you.

Operator

Our next question is from David Tarantino with Robert W. Baird. Please proceed with your question.

David Tarantino -- Robert W. Baird -- Analyst

Hi, good afternoon. My first question is on the Q4 sales trends and you saw a nice inflection in the traffic in the positive territory. Bernard, I guess, I'm curious to know your thoughts on what the key drivers of that inflection were. I know you have a lot of components of the transformation plan, but are there one or two things that you see in the business that really drove that inflection?

Bernard Acoca -- President and Chief Executive Officer

Yeah, I think it's pretty consistent with what we've been sharing out. It's never one thing. It's several things that I think in the aggregate have really helped get us more consistent traction with the business. I'd say one of the drivers certainly is the fact that we're clear on who our primary customer is in terms of who frequents us most often, which is a Hispanic customer. And while we certainly haven't neglected the general market customer, what we did in 2018 was we took our media spend which was less than 8% when I joined the organization and we took that up to over slightly 20% to put more of a focus on the Hispanic customer whom we see visit our restaurants, and 50% of our customers on a daily basis fallen that Hispanic category. Now still 80% of our media is spent in the general market, so it's not like we're not equally going after with the same intensity that consumer group, but we felt in 2018 until we made that correction that we were not doubling down on who our best and most loyal customer was -- is I should say. So that's one thing.

I think the second thing is, when you truly have clarity around your customer hierarchy, we've been able with the segmentation work that we've done and the brand work that we've done, we've been able to develop I believe a more compelling product pipeline, which you saw with our chicken tamale promotion in the fourth quarter as well as advertising that I think is more reflective of who our core customer is and really what our brand needs to stand for going forward. I think our differentiators, we're more readily apparent as the year progressed. So I think that was another big driver. The business was just simply more compelling, advertising and more relevant products that seem to resonate very, very strongly with our consumer base.

The third thing that I would say, and this is really just the magical unlock in our business is really operations, which is why you saw an adjustment in our transformation agenda occurred late last year. It wasn't one of the overarching strategies I talked about in Q2 or Q3 of last year, but it's one that I'm talking about with a lot of intensity now and that is simplifying our operations and making it easier to be an employee and franchisee and part of that also is building a sales driving mindset with our operators and having them own a portion of the sales result, which was something that they weren't really looked to do in the -- they weren't looked or responsible for doing in the past to the degree that they are today.

So we are setting very clear upsell targets with them that they are required to achieve on a daily basis that gets measured real-time in the restaurants. And so, there is a higher degree of accountability there around having operations own a portion of our sales. So I would say those are the big ones. Those are the big drivers and those initiatives are certainly carrying forward into 2019.

David Tarantino -- Robert W. Baird -- Analyst

Great. That's really helpful. And on the operations side, you mentioned simplification of the menu. So, can you elaborate on what you're seeing so far with that reduction in the number of SKUs?

Bernard Acoca -- President and Chief Executive Officer

So we talked about the fact that we've been testing this in Los Angeles. And we launched it in Texas as well last year. We mentioned at that time that in our test we saw no sales degradation, if anything we saw a mix shift a little -- some slight mix shift into what we wanted to achieve was into our chicken on the bone products and we eliminated low margin-low mixing items from the menu that we just didn't think earn their keep any longer with the intensive simplifying our operations back of house. So, that labor could be redeployed front of house. We launched that as of Saturday -- last Saturday, and we naturally too soon to tell what it's doing now that we have it at scale. But based on how long we tested it in our markets in 2018, we have a lot of confidence that what we saw in test will carry forward now that we've launched it throughout the system in 2019, so too soon to give you any further detail on that since it's relatively new, but we'll be -- we'll share out more detail as it becomes available.

David Tarantino -- Robert W. Baird -- Analyst

Right. And Larry, couple of quick ones for you. So I may have missed it, but did you talk about how much pricing is in your same-store sales assumption for 2019?

Laurance Roberts -- Chief Financial Officer and Treasurer

No. You're the first to ask that, David. So we are -- our target for this year is in the, I call it the, mid 3% range. The mid-3s, having said that, what we're trying to do is do incremental pricing during the year. So each time we do that, like we just took some pricing this past weekend. And so, each time we take that, we'll monitor to see what the impact is because despite the cost pressures, we do want to be careful about getting too far out in front -- on the pricing front. But right now, the target is in the mid-3% range and -- but again, we'll assess it as we move along to determine that we keep moving up on that path.

David Tarantino -- Robert W. Baird -- Analyst

Got it. And then last one on, I think on the labor line, you mentioned there was an accrual reversal in that line in Q4 and I think we heard that from a couple of companies that have a lot of restaurants in California. So how big was the impact of that accrual? And I guess can you confirm that that's going to continue to be a benefit in 2019, so '19 versus '18 will it be neutral when you add it all up?

Laurance Roberts -- Chief Financial Officer and Treasurer

Yeah, I think the impact of reverse in the accrual was somewhere around $600,000 to $700,000 in that range. And really, the reason we had such big change in the fourth quarter is because we have been incurring (ph) all year. And then, it finally came out I guess was October, November, that California has finally repaid all the money it owed to the federal government and therefore is no longer going to be penalized through employment taxes. And so, we're able to reverse that accrual. Then going forward, there should be no year-over-year impact, but the quarters will look -- it will be more evenly spread across the quarter, so that accrual benefit in Q4 of 2018 will be spread across the first three quarters next year.

David Tarantino -- Robert W. Baird -- Analyst

Understood. Okay, thank you very much.

Operator

Our next question is from Sharon Zackfia with William Blair. Please proceed.

Sharon Zackfia -- William Blair -- Analyst

Hi, good afternoon. Actually, following up on the labor question, it looks like the per unit labor spend accelerated a lot in the fourth quarter if you kind of break into it. And I guess I was curious whether the group insurance dynamic that you talked about was meaningful in the quarter, because it seems like the 60 basis point increase on the 3.7% (ph) comp is out of keeping with what we saw the rest of the year.

Laurance Roberts -- Chief Financial Officer and Treasurer

Yeah, I mean, so the group insurance was not insignificant. It was probably just $400,000 to $500,000.

Sharon Zackfia -- William Blair -- Analyst

Okay. And what was that Larry? Is that like, are you self-insured or can you talk about what that is?

Laurance Roberts -- Chief Financial Officer and Treasurer

Yeah, we're self-insured, so we will see wide fluctuations in that number just based on the claims that come through.

Sharon Zackfia -- William Blair -- Analyst

Okay, perfect. And then a question on the plans for 2019. I think at one point you had mentioned the potential for some new chicken flavor profiles and I don't know if that was still something that you're thinking of in terms of menu innovation for 2019 and maybe give us some color on how impactful that might be or when we might see that in the restaurants ?

Bernard Acoca -- President and Chief Executive Officer

Yeah, so that's something that we still have in test right now in terms of just ideas that we are concept screening and also just playing within our test kitchens to figure out how to best operationalize. But what I will say is, so that's something that we're still investigating and figuring out the best way to bring to market. But what I will say, certainly with Hector's arrival here as Chief Marketing Officer, what we are going to be doing at a far more accelerated rate is putting a lot more ideas at the top of our product development funnel, so that we've got a pantry full of really compelling ideas to the degree to which we haven't had them before. So really ramping up product innovation is a huge growth driver for us moving forward in developing compelling innovation that really hits the mark in terms of what our customers want from us is going to be something that you will see going forward and we've got some exciting things planned for 2019.

Sharon Zackfia -- William Blair -- Analyst

Are you planning to keep the marketing budget the same as a percentage of sales, or is there any thought on moving that?

Bernard Acoca -- President and Chief Executive Officer

Currently, it's staying where it is, so there is no short-term desire to change at the moment.

Sharon Zackfia -- William Blair -- Analyst

Yeah, thank you.

Operator

Our next question is from Andy Barish with Jefferies. Please proceed with your question.

Alexandra Chan -- Jefferies -- Analyst

Hey Bernard; Hey, Larry. This is Alex on for Andy. Just wanted to follow up on David's question around pricing and clarify. Are you looking for mid-3s for the full year or really of ramp-up to that 3% by year-end? And I guess thinking about the mix and how you've seen a slightly positive mix there with upsell work, I'm trying to understand the traffic dynamics in the guidance here.

Bernard Acoca -- President and Chief Executive Officer

Yeah. So, we expect for the full year to average about mid-3s.

Alexandra Chan -- Jefferies -- Analyst

Okay. And would you expect mix to remain positive?

Bernard Acoca -- President and Chief Executive Officer

I think we're targeting mix to be flat -- more or less flat -- maybe slightly positive. A lot of it depends on how successful we are in terms of driving family meals, which is obviously one of the big initiatives that we have. If we move that mix up, I would expect to be positive mix. I'm kind of thinking flat to slightly positive on mix.

Alexandra Chan -- Jefferies -- Analyst

Okay, that makes sense. And then historically, the franchisees had outperformed the Company on comps, but that was something that you were working on last quarter as well. And here in the fourth quarter, both the comp and traffic saw that gap widen a bit. With the work you are doing around increased staffing at dinner, drive-through and peak days of the week, do you think you can start to close that gap this year?

Bernard Acoca -- President and Chief Executive Officer

No, I think those were tests. So I want to make sure that there's no shame that, that wasn't necessarily spread throughout the entire Company system. And so, we were taking -- we're still looking at what adding incremental labor very judiciously and selectively in our business can do to drive results. What I would say is the real opportunity in our business is driving a level of operational consistency throughout the system unit by unit by unit. I'll just be very candid we've got some outstanding restaurant operations in certain geographies, and we've got opportunities in others and the key goal is to drive a level of consistency throughout. That I think will then be reflected in the results. So that's really where we are focusing the lion's share of our effort these days.

Alexandra Chan -- Jefferies -- Analyst

That makes sense. And then I guess given Larry's comment on the family meals, we've seen here in this quarter the approach of value looks like sort of an add-on offering with the four for $4 enchiladas, do you think about the strategy this year for value really on kind of add-ons and that of holistic value versus maybe what we've seen previously with that discounting around single entrees?

Bernard Acoca -- President and Chief Executive Officer

Yeah. So I think how our approach was in 2018 and continues to be to reduce our discounting year-over-year. That's kind of the opposite of what you hear a lot of our competitors doing or saying and I think again that is testament to the strength of our brand and our ability to command and have pricing power in the market. And I think the reason why we're able to do that is because we have become better storytellers and really explaining what the quality difference is in our products and explaining to the world the hard work that we do each and every day in terms that everything that is handcrafted made from scratch et cetera that our competitors simply don't do. With that being said, a lot of these value add-ons you're seeing us promote and advertise in conjunction with family meals are really designed to address the fact that again in 2018, we made in the second half of the year a concerted effort to go after families and we have a mantra internally within the Company that we want to own families. One of the ways that we are figuring out how to do that is to really ensure that mom have an opportunity to provide her family with everything that they want, whereas her and her husband or dad choose selecting for his family might decide that he wants chicken on the bone, but the younger children in the family wants something else.

Now we are providing that kind of a value offering where chicken on the bone could be had by -- perhaps by the older members of the family. And then if there's something for the younger members of the family to enjoy and indulge in if chicken on the bone isn't something that they want and moms and dads can add that on for value price, which serves not only a consumer need in this particular case but provides value to the family, while helping us increase our overall ticket (ph).

So that's one of the ways we're really trying to become more relevant at dinner, while not discounting our business unnecessarily.

Alexandra Chan -- Jefferies -- Analyst

Great, thanks. That's all from me.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Bernard Acoca -- President and Chief Executive Officer

Thank you everyone for attending this quarter's call. We look forward to regrouping with you next quarter as we continue to make progress against our transformation agenda. Have a great evening.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.

Duration: 52 minutes

Call participants:

Laurance Roberts -- Chief Financial Officer and Treasurer

Bernard Acoca -- President and Chief Executive Officer

Jake Bartlett -- SunTrust -- Analyst

Matthew DiFrisco -- Guggenheim Securities -- Analyst

David Tarantino -- Robert W. Baird -- Analyst

Sharon Zackfia -- William Blair -- Analyst

Alexandra Chan -- Jefferies -- Analyst

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