What happened
Shares of Del Taco Restaurants (TACO) got crushed on Friday after the company reported results for the third quarter of 2020. Sales growth and results actually exceeded analyst expectations. Nevertheless, Del Taco stock was down 16% as of 10:45 a.m. EDT today.
So what
Before today, there was plenty of reason to expect Del Taco to report a bad quarter. For one, its restaurant locations are highly concentrated in California, a state with strict ongoing coronavirus guidelines. This means most of the company's dining rooms are still closed.
But Del Taco reported surprising sales growth in Q3. Sales at existing restaurants (known as comparable sales) were up 4.1% year over year. Total revenue was up less than this due to some company-owned locations converting to franchised locations during the past year. But it was still up nonetheless.
Image source: Getty Images.
Another reason to have expected a bad quarter were labor expenses. California increased its minimum wage, and that could have affected Del Taco. But because its dining rooms are closed, the company has actually needed fewer workers (a to-go operating model can be more efficient). Therefore, its expenses were down, allowing it to report $5.8 million in net income versus a $7.7 million loss in the same quarter last year.
Now what
If Q3 was so good, why is Del Taco stock down so much today? It's hard to say for sure, but here are a few concerns that could be contributing to the sharp sell-off. First, the company left a question mark in investors' minds by not reinstating guidance. While it was common to withdraw guidance earlier this year, many companies have returned to it as things normalized. By not providing this, it's reasonable to doubt the sustainability of Del Taco's performance.
Additionally, Del Taco could face some headwinds. For example, it spent less on advertising in Q3 than anticipated, but plans to ramp up spending in the fourth quarter. Furthermore, if dining rooms reopen, the company could see labor expenses go higher.
Finally, Del Taco stock was already trading at 52-week highs, so today may simply be a case of short-term traders taking some profits off the table. For the record, I question whether Del Taco could be a winning investment today. But selling a stock simply to lock in gains is a bad strategy for long-term investors.
