El Pollo Loco Holdings Inc (LOCO) Q1 2021 Earnings Call Transcript

Image source: The Motley Fool.

El Pollo Loco Holdings Inc (LOCO -0.36%)
Q1 2021 Earnings Call
May 6, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the El Pollo Loco First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, May 6, 2012.

On the call today we have, Bernard Acoca, President and Chief Executive Officer of El Pollo Loco; and Larry Roberts, Chief Financial Officer. I would now like to turn the conference over to Larry Roberts.

Laurance Roberts -- Chief Financial Officer

Thank you operator, good afternoon. By now, everyone should that access to our first quarter 2021 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 the impact of the COVID-19 pandemic on our business and strategic actions we are taking in response, as well as our marketing initiatives, cash flow expectations, capital expenditure plan and plan for new store openings 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 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 2021 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.

Before I turn the call over to President and Chief Executive Officer, Bernard Acoca, I'd like to note that Bernard and I are in different locations today. Please bear with us if you experience any slight delays or minor audio quality issues. Bernard, please go ahead.

Bernard Acoca -- Chief Executive Officer and President

Thank you, Larry. Good afternoon, everyone, and thank you for joining us today. I hope that you and your families are staying safe and healthy. We are very pleased with our solid start to 2021, and the sales trends we are currently experiencing, which we believe indicates that we are at the start of a strong recovery. After a sluggish start to the first quarter which was largely a result of an increase in COVID case rates in Southern California and heightened restrictions, we saw steady sales improvement throughout the quarter, culminating in a 26.1% increase and systemwide comparable restaurant sales in March.

This acceleration enabled us to deliver systemwide comparable sales of 7.4% for the first quarter. Sales trends that we saw in March have continued to accelerate into the second quarter. I'm pleased to report that through April 28, our second quarter to date, system comparable sales are up 39.1% and on a two-year basis system comparable sales have increased 13.5%.

In addition to the strong comparable restaurant sales performance in late March and early April, we achieved record systemwide weekly average unit volumes for three straight weeks. And on April 1, we posted our highest single day of sales ever on National Burrito Day. Achieving these results at a time when most of our restaurants are operating at limited capacity, it's particularly impressive. And would not have been possible without the hard work and dedication of our team members and franchise partners.

As I noted, the ongoing improvement in our Greater Los Angeles area restaurants has been a key part of our recent sales improvement. As restrictions have been lifted, we are seeing overall economic activity in the region accelerate and COVID appears to be having a declining impact on our restaurant and employees. Most of our LA area restaurants are currently able to operate at 50% capacity and while dining traffic remains understandably muted, we are optimistic that it will gradually increase as our customers continue to get vaccinated, and are more comfortable eating indoors.

Outside Los Angeles, we continue to be pleased with the sales trajectory of our outer market restaurants have consistently achieved positive same-store sales growth since June of last year. While a smaller subset of our overall restaurant base, we have seen outer market comparable sales improve more dramatically than at our LA units, which not only bodes well for the health of our overall system, but gives us even greater confidence about the future of our core LA market as economic activity continues to rebound in Southern California.

Our restaurant contribution margin for the quarter was 16.1% which primarily reflects the challenges we experienced in January and February. As the sales and labor impacts of COVID abated during the quarter, company-operated restaurant margins quickly improved with March coming in at over 20%. With sales trends recovering, our team is also making great progress on the four key strategies that make up our acceleration agenda, which are, one, expand the brand, growing new geographies with franchisees; two, support the brand, build the right organization for asset light growth; three, evolve the brand, digitize the business to compete; and four, focus the brand, exaggerate what makes us so special and different.

While I won't focus on each of these strategies in great detail, I would like to give you a brief update. Evolving our brand is all about utilizing technology to better serve our customers. During the quarter, our digital business continued to grow and is now approaching 11% of total system sales, primarily driven by third-party delivery. In addition, our enhanced efforts to grow our loyalty customer base are paying dividends as we have added approximately 2,000 new members since the beginning of the year.

Equally as important, we are seeing an uptick in Loyalty transactions, which are the centerpiece of our go-to-market strategy for the long term. We also continue to make progress improving our speed of service as a result of several measures implemented late last year, including efficient labor deployment, readiness guidelines, repacking side items and salsa, and better positioning of equipment in our restaurant. Moreover, during the first quarter we expanded our tests of order taking tablets to 10 restaurants. This technology enables our team members to take orders and payments from customers while they're on the drive-thru queue with the goal of cutting our drive-thru times in hand by achieving a 45 second order and window time.

It's early days, but we are very encouraged by the results we're seeing in our test restaurants. We currently plan to further expand the test in May and are targeting pending achievement of our KPIs to begin rolling out the platform at the company restaurants this fall. Turning to our strategy to focus the brand. Our team has been working tirelessly to exaggerate what makes us so special and different. To that end, in addition to our regular marketing activities, we will be executing several brand sparks in 2021. We believe that these will give us the opportunity to more deeply connect with our target audience to build brand love and affinity.

The first part will be to celebrate this upcoming Mother's Day. Our Strong Like A Madre Mother's Day grant initiatives was designed to recognize, celebrate and support Greater Los Angeles area moms who had to put their career and personal pursuits on pause because of the COVID-19 pandemic. Nominations for moms via Instagram are open now through May 14 and each of the 12 selected winners will receive a $5,000 Madreship grants that gives them the opportunities and resources to get back to pursuing their dreams. The role of a mother is never simple and the past year pandemic and economic strike has made the world's toughest job even tougher. For mothers of color and single moms, this crisis has been amplified as these communities have been disproportionately impacted by job losses and workforce exits.

This is what inspired El Pollo Loco to give back to moms and help them regain their footing after a year of constant setbacks. Most of you have heard me discuss, our focus to build a culture at El Pollo Loco centered on leadership with heart, and this is another example of building our culture, while also strengthening the bonds with and making a difference in the communities we serve.

Finally, we continue to focus our efforts on expanding the brand as we work with existing franchisees and recruit new franchise partners to develop new market. We feel good about the progress we're making and expect to be announcing new development agreements over the next several months. In summary, our confidence is steadily growing that the worst of the pandemic is behind us, with positive sales trends, continued progress in implementing our acceleration agenda and vaccines becoming more widely available, our team members and franchise partners are ready to capitalize on a more normalized operating environment.

As always, I'd like to thank our dedicated employees and franchise partners who courageously steered us through an incredibly trying period and are now leading us to capitalize on accelerating our growth.

Now I'd like to turn the call over to Larry to review our first quarter results in more detail.

Laurance Roberts -- Chief Financial Officer

Thanks, Bernard. Before we get into our first quarter results, I just wanted to highlight that two new company restaurants were opened during the quarter, one each in Las Vegas and California. In addition, we completed three remodels using our new LA Mex design in Los Angeles. We expect capital spending for 2021 to be in the range of $20 million to $25 million.

Now onto our financial results. For the first quarter ended March 31, 2021, total revenue was $107.7 million compared to $105.2 million in the first quarter of 2020. Company-operated restaurant revenue was $94.2 million compared to $92.6 million in the same period last year. The increase in company-operated restaurant sales was primarily due to a 3.3% increase in company-operated comparable restaurant sales and an increase of $0.5 million in non-comparable restaurant sales, partially offset by a $1 million decrease due to temporary closures as a result of the COVID-19 pandemic.

The increase in company-operated comparable restaurant sales was comprised of a 15.7% increase in average check, partially offset by a 10.7% decline in transactions. During the quarter, our gross pricing increased versus 2020 was 3%. Franchise revenue was $7.6 million during the first quarter compared to $7.1 million in the prior year period. This increase was driven by franchise comparable restaurant sales increase of 10.5% as well as the opening of three new franchise restaurants during or subsequent to the first quarter of 2020. This was partially offset by the closure of seven franchise restaurants during the same period.

Turning to expenses. Food and paper costs as a percentage of company restaurant sales decreased 170 basis points year-over-year to 25.9%. The improvement was predominantly due to higher menu prices, lower food and paper usage, resulting from dining room closures and effective waste management. These were partially offset by slightly unfavorable menu mix. We currently expect commodity inflation to be around 1% for 2021. Labor and related expenses as a percentage of company restaurant sales increased 160 basis points year-over-year to 32.6%. The increase was primarily due to higher wages in California compared to last year and $2.7 million of labor costs related to leaves of absence pay and over time associated with the COVID-19 pandemic. These were partially offset by increased menu prices and operating efficiencies.

In 2021, we expect wage inflation of around 5%. Occupancy and other operating expenses as a percentage of company restaurant sales increased 140 basis points to 25.3% primarily due to higher maintenance spend, operating costs and marketplace delivery fees. General and administrative expenses increased by approximately $1.1 million year-over-year to $10.5 million, primarily due to increases in management bonus and stock compensation expense. As a percentage of total revenues, general and administrative expenses increased approximately 80 basis points to 9.7%.

We recorded a provision for income taxes of $1.6 million in the first quarter of 2021 for an effective tax rate of 28.7%. This compares to a provision for income taxes of $1.3 million and an effective tax rate of 26.6% in the prior year first quarter. We reported GAAP net income of $4 million or $0.11 per diluted share in the first quarter, compared to GAAP net income of $3.6 million or $0.10 per diluted share in the prior year period. Pro forma net income for the quarter was $4.7 million or $0.13 per diluted share compared to pro forma net income of $5.5 million or $0.16 per diluted share in the first quarter of last year. For a reconciliation of pro forma net income and earnings per share to the comparable GAAP figures, please refer to our earnings release.

Let me quickly touch on our liquidity. During the first quarter, we paid down $9 million of debt, as of March 31, 2021, we had $53.8 million of debt outstanding and $6.7 million in cash and cash equivalents. I'd now like to provide a brief update on our business during the second quarter of 2021. As Bernard mentioned earlier, all company owned and the vast majority of franchise restaurants located in California which make up 80% of our restaurants are now operating at 50% capacity. Through April 28, second quarter systemwide comparable restaurant sales increased 39.1% consisting of a 32.8% increase at company owned restaurants and a 43.9% increase at franchise restaurants.

Systemwide comparable restaurant sales increased by 36.8% in Los Angeles and surrounding areas, well, I think increasing 42.9% in other markets. As a reminder, our COVID-19 related expenses have been trending downward as the number of cases are declining in California. And for the month ending April 28, 2021, we estimate that the company incurred $100,000 to $150,000 of COVID-19 related expenses primarily related to leave absence and over time pay.

Lastly, due to the uncertainty surrounding the COVID-19 pandemic, the company is not yet providing a financial outlook for the year ending December 29, 2021. However, we are reiterating the following limited guidance. The opening of three to five company-owned restaurants and four to six franchise restaurants, pro forma income tax rate of 26.5%.

This concludes our prepared remarks. I would like to thank you again for joining us on the call today. And we're now happy to answer any questions you may have.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Sharon Zackfia with William Blair. Please proceed.

Alex Vasti -- William Blair -- Analyst

Hey guys, this is Alex on for Sharon. I was just wondering if you could clarify on in the LA and outer market comps through second quarter, is that -- is that difference there really just based on easing restrictions and increase in consumer sentiment, could you provide a little color on that?

Bernard Acoca -- Chief Executive Officer and President

Sure. Yeah, no, I think it's part of an ongoing trend that we've seen where naturally Southern California particularly LA was harder hit by COVID, greater impact with COVID related issues, that's one. Two, for more of a macroeconomic standpoint, our customer base in LA tends to skew very heavily Hispanic and throughout the pandemic and continuing up into the present what we've noticed is that while that customer is recovering -- they are not recovering at the same rate is perhaps the general market consumers at this point.

So given that 74% of our company restaurants are concentrated in LA, we are seeing still some catch-up taking place in the LA market. Now the encouraging news is we're seeing trends move in the right direction at a pretty rapid clip. So we remain optimistic that LA has a lot of room to still recover.

Alex Vasti -- William Blair -- Analyst

Okay, great, thanks. I'll pass it on.

Operator

Our next question comes from the line of Jake Bartlett with Truist Securities, please go ahead.

Jack DeMasie -- Truist Securities -- Analyst

Hey guys, it's actually Jack on for Jake. Thanks for taking the questions. To kind of follow up on current sales trends, I guess, would you be able to break out how much of the current trend is driven by dine-in sales for drive-thru sales. Maybe another way to think about it is just have the level of drive-thru -- the absolute level of drive0thru sales maintained even as the dining rooms are open?

Bernard Acoca -- Chief Executive Officer and President

Yes. So the drive-thru business is the lion's share of what's driving the business right now. So we're still slightly below 70% of our business coming through the drive-thru. Our dining rooms naturally are opened only 50% capacity. And while we are seeing a slight uptick in the growth of that business, it certainly hasn't returned to where it was pre-pandemic naturally, well and that would be a challenge with the 50% cap to begin with. So, so yes, to answer your question, where we're seeing the strength in the business is largely off-premise primarily driven by drive-thru and then we're seeing some nice growth as well in delivery and our to-go business as well.

Jack DeMasie -- Truist Securities -- Analyst

Yeah. Great, that's helpful. And then I guess as the dine-in business continues to come back, do you expect that to have an impact on your average check and maybe you experienced a lot higher average check throughout the pandemic. So as the dine-in comes back, is that going to have an impact on the average check and is there any implications on your margins as that happens?

Bernard Acoca -- Chief Executive Officer and President

Well, I guess, I'll take that one is, all along we've communicated that we think average check, now the growth in average check will certainly slow down and probably flatten out a little bit as transactions grow. I think part of that is recognizing that we'll get transaction growth as a dine-in traffic comes back and so I think the positive there that I think we still feel like we'll get incremental sales from dine-in traffic coming back. I do think the check may drop down a bit just because I think you get more individual and two party transactions in dine-in versus some of the delivery in drive-thru transactions that we do.

From a margin perspective, I think a potential impact of the dining room, which we haven't really done too much yet is just on the dine-in traffic is significant enough, do we need to put some incremental labor in to comply with the regulations around keeping restaurants clean and those types of things. So that's to be determined, but I think to ask where more of the margin impact versus just drop in check, because again I think we'll get transaction growth as that takes place.

Jack DeMasie -- Truist Securities -- Analyst

Great, thanks, makes lot of sense. And then I guess just one last one. A lot of other companies have talked about difficulty staffing up in this time as everyone's kind of trying to step up at the same time, are you seeing any difficulties there? Is that holding back maybe some opening of dining rooms?

Bernard Acoca -- Chief Executive Officer and President

So naturally, everyone seeing a tightening of the labor market, and it's impacted in somewhere and other, I could tell you from a staffing perspective what we're seeing that is that it's not universal across the board that we see a little bit of aggravation and staffing some of our restaurants in some concentrated areas, but it's not universal, that's one.

So right now we are doing a pretty good job contending with it, but with that being said we are putting in place some additional actions to ensure that we are increasing our staffing levels that we are kind of increasing our hiring practices more broadly but right now, right now at present, it seems to be, it seems to be manageable, because as I mentioned, it's not widespread. It's more primarily concentrated in some particular areas.

Jack DeMasie -- Truist Securities -- Analyst

Great, thank you for the time.

Operator

[Operator Instructions] Our next question comes from the line of Andy Barish with Jefferies. Please go ahead.

Andy Barish -- Jefferies -- Analyst

Hey guys, hope you're well. Just one quick clarification, Larry, on that on the two years system growth, is that comparing AUVs in April through April of 2019. I just want to make sure I'm thinking about that correctly.

Laurance Roberts -- Chief Financial Officer

Yeah. The two-year comps are 2021 versus 2019. Yes.

Andy Barish -- Jefferies -- Analyst

Okay. Okay. And then what was -- was it purely geographical I guess the gap in a much wider gap in the franchise comps as you reported in the first quarter?

Bernard Acoca -- Chief Executive Officer and President

Well and if I heard the question correctly the gap between franchise and company I think is really again falling in a couple of areas. One, our strong company concentration of restaurants, 74% of them roughly in LA and the toll that COVID took -- the toll the COVID took for quite some time leading up into February on the company restaurants there, which I don't think was as widely felt outside of LA to the degree that we experienced it here and then I'd say the differential also has to do again with the recovery of that Hispanic consumer, which historically, our Hispanic consumer has led our growth.

What we have seen throughout this pandemic and what we're seeing up into the presence is that and I think this is also a testament to the fact that we've cast a wider net to appeal to a much broader customer base over the past couple of years but right now, if you look at our trade areas, it's really our general market trade areas and what we term our mix trade areas which consist of both naturally general market and lower concentration of Hispanic consumers that are leading the growth in our business versus our highly Hispanic trade area.

So given that we are more dependent than, let's say, a lot of our franchisees are in that very high Hispanic concentration of customers, I think those are the two primary factors that largely explain the differential.

Andy Barish -- Jefferies -- Analyst

Thanks, Bernard, and then Larry, if you can give us a little sense I know March you mentioned was a -- a 20% restaurant-level margin number. Is that a good way to think about things near term or maybe for the next couple of quarters in terms of the seasonality in the business and things like that.

Laurance Roberts -- Chief Financial Officer

Yes. So just give you a little more detail around our margins, given, yeah. Assuming current trends continue on the sales line, I expect Q2 to be similar to March in terms of margin. So a strong second quarter on the margin line. And Q2 is usually our strongest margin quarter absent any kind of one-off adjustments. Q2 is usually our strongest margin quarter. So then as you move through the year, you got little seasonality that will drag margins a little bit. The other headwinds that we have for balance of the year are just around some of the investments that we're making like packaging. We're rolling out new packaging, getting rid of all our styrofoam and putting in recycled packaging.

So that's going to add to our cost of the business. I'd like to highlight just earlier, one of the questions is we may need to make some investment in our dining rooms as dining room volumes increase. So that create a little bit of a headwind and then as we move through the year, expect to see probably a little pressure around utilities, electricity rates are high and obviously electricity usage in the third quarter is always high because of the heat that we get in LA and Las Vegas. And then the food cost back half of the year, I expect a little bit more cost inflation primarily around freight and oils like soybean oil.

So I expect to see a little more COGS inflation back half of the year. So again Q2 should be strong in the range of March. And then I think there is going to be a little bit more pressure back half of the year and of course it always depends on what the sales are in terms of where ultimately the margins come out back half of the year, but current trends are very positive around margins.

Andy Barish -- Jefferies -- Analyst

Great, very helpful. Thank you.

Laurance Roberts -- Chief Financial Officer

Yeah.

Operator

There are no further questions at this time. I'll turn the call back to you, Mr. Acoca.

Bernard Acoca -- Chief Executive Officer and President

I would like to thank you all for participating on today's call and we look forward to speaking to you all real soon. Have a great day. Stay safe.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Laurance Roberts -- Chief Financial Officer

Bernard Acoca -- Chief Executive Officer and President

Alex Vasti -- William Blair -- Analyst

Jack DeMasie -- Truist Securities -- Analyst

Andy Barish -- Jefferies -- Analyst

More LOCO analysis

All earnings call transcripts