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Why Shares of Del Taco Are Falling Today

By Lou Whiteman - Updated Oct 22, 2019 at 11:53AM

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Inflationary cost pressures are causing the company to take a conservative stance.

What happened

Shares of Del Taco Restaurants (TACO) traded down more than 14% on Tuesday after the fast-casual restaurant chain delivered weaker-than-expected quarterly results and cut guidance. The company blamed "inflationary pressure" on food, labor, and operating expenses for eating into profits, causing it to take a more conservative view on future results.

So what

After markets closed on Monday, Del Taco reported third-quarter adjusted earnings of $0.10 per share, short of the $0.14-per-share consensus despite meeting analyst revenue expectations for $120.2 million. Systemwide same-store sales were up 1% year over year. Del Taco also cut its full-year fiscal 2019 earnings view to $0.44 to $0.47 per share, from $0.47 to $0.52 per share, and dropped full-year revenue targets as well.

Tacos on a serving board on a gray counter.

Image source: Getty Images.

According to CEO John D. Cappasola Jr., though Del Taco's new products sold well and its $2 Breakfast Toasted Wrap "reinvigorated our breakfast" offering, the company is battling a difficult macroeconomic environment.

"Flattish comparable restaurant sales at company-operated restaurants coupled with inflationary pressures on food, labor, and operating expenses resulted in lower restaurant contribution and adjusted Ebitda compared to the year-ago period," Cappasola said. "Given our results to date, as well as a more cautious stance on our current 16-week fourth quarter, we have revised our annual guidance."

Now what

Cappasola said Del Taco has experienced "an improvement in company-operated sales and transaction trends during the fourth quarter," fueled by digital initiatives including a launch on Postmates. The company also hopes to benefit from a taco promotion and a new seasonal pork tamale.

Del Taco is also adjusting growth plans, pushing for a "slower and more strategic approach" to fill in its existing markets and seed its push into Atlanta and Oklahoma.

Restaurant stocks can be difficult investments in the best of time, impacted by complex supply chains and changing consumer preferences. Given the uncertain economic climate and Del Taco's current cost issues, investors are understandably running for the exits following the latest results.

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