Q1 2024 El Pollo Loco Holdings Inc Earnings Call

Participants

Ira Fils; Chief Financial Officer; El Pollo Loco Holdings Inc

Elizabeth Williams; Chief Executive Officer, Director; El Pollo Loco Holdings Inc

Todd Brooks; Analyst; The Benchmark Company LLC

Andy Barish; Analyst; Jefferies

Vin Sengelmann; Analyst; Truist Securities

Presentation

Operator

Welcome to the El Pollo Loco First Quarter 2024 earnings conference call. At this time, all participants have been placed in listen-only mode and the lines will be open for your questions following the presentation, please note that this conference is being recorded today, May second, 2024. And now I would like to turn the conference over to Ira Fils the Company's Chief Financial Officer. Please go ahead.

Ira Fils

Thank you, operator, and good afternoon. By now. Everyone should have access to our first quarter 2024 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 growth opportunities, strategic operating initiatives, expectations regarding sales and margins, potential changes to our product platforms, capital expenditure plans, expectations regarding kiosk rollouts, the ability of our franchisees to drive growth, expectations regarding commodity and wage inflation, remodel plans and our 2024 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 the year ended 2023 previously filed, as well as our Form 10-Q for the first quarter to be filed for a more detailed discussion of the risks that could impact that could impact our future operating results and financial condition. We expect to file our 10-Q for the first quarter of '24 tomorrow. 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, 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 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 CEO, Liz Williams.

Elizabeth Williams

Thank you, Ira, and good afternoon, everyone. I am thrilled to be speaking with you today on my first call as El Pollo Loco new CE. Since I joined El Pollo Loco at the beginning of March this year, I have been busy immersing myself in the business from working the opening and closing chefs in our restaurants to marinated chicken and working the drive-through line. I've enjoyed spending time with team members and also our franchise partners as I've gained a comprehensive understanding of our operations and more I become ingrained in our culture deeper.
My belief is that we have a truly unique brand with significant opportunities ahead of us. What attracted me to joining El Pollo Loco and what I believe to be the strength of our brand. These are delicious, freshly prepared high-quality food and dedicated team members. My first few months at El Pollo Loco have only confirmed my excitement. Our food is cherished by our guests for taste, freshness and quality. Our signature product, our fire grilled citrus, marinated chicken is prepared fresh daily in our restaurants for our customers. We are one of the few in the quick service restaurant category that can offer portable craveable burritos and tacos alongside a healthier option like to data solids and payables.
Next to our original chicken meal. In fact, consumer research shows that El Pollo Loco leads the quick service segment in our fresh, high-quality, healthy options offerings. This is an incredible equity in our world today and was clearly demonstrated by the success of our double two Sobha LTO during the first quarter. Overall, I believe we have a tremendous opportunity to take this beloved brand to another level in order to achieve that potential.
I have focused the organization around five strategic pillars. First, a brand that wins to be the flavorful affordable, better-for-you chicken leader Second, a hospitality mindset showing up consistently and with a hospitality mindset. Third, digital first become a digital first business in service of improving the customer experience. Fourth, deliver winning unit economics and fifth drive unit growth, again with national expansion.
So let's start with our first pillar brand that wins to broaden our reach with new customers. We need to sharpen our brand positioning by leaning heavily into key differentiators, our citrus marinated fire-grilled chicken with our craveable flavors from Mexico and a menu of Better For You offerings.
El Pollo Loco sits at the intersection of chicken and Mexican two of the fastest growing categories over the next few months, we will focus on how we drive awareness that El Pollo Loco is the flavorful affordable better-for-you chicken brand. We are beloved for our high quality of ingredients where our freshness and ability to customize offer a good value. And with the convenience of fast service oftentimes through a drive-through. We need to spend more time communicating these messages to an expanded consumer base across traditional and digital channel. We are also focused on simultaneously bringing thoughtful innovation and affordable options back to the brands. Bottom line, we have an incredible opportunity to position the brand for consistent long term traffic gains.
Next, our second pillar, hospitality mindset with any great brand people are our greatest assets, and I am so impressed with the quality and commitment of our team members in our restaurants and the positive inclusive culture we have built as we revisit some of our standards. We are working closely with our operators and franchise partners to raise the bar and further our culture of accountability. Ultimately, our goal is to deliver speed and consistency in our operation. This starts with clear systems process tools and best-in-class training programs. We know we have an opportunity for simplification and to continue to focus on priority labor initiatives to drive speed and to make the team member job easier, which will also enhance customer service.
One example is the rollout of new equipment that will simplify the preparation of our freshly made salsa in the restaurants. Another example is the rollout of kiosks that enable customers to order more efficiently. I am excited with the focus and investment we are making in these two and other productivity areas and look forward to sharing more in the future.
Quick, efficient and consistent operations are critical to driving increased frequency and traffic gains. I am confident these initiatives will help us balance the rising labor costs while also keeping a focus on preparing quality food and enhancing our overall guest experience.
Digital First is our next strategic pillar, unlocking a frictionless experience in our restaurants to further differentiate our brand and reach customers for whom convenience and value are key decision factors. We have made several investments in consumer-facing technology, including our loyalty program, loco rewards, digital ordering through our website and mobile app and our integrated delivery through third party. We are also investing heavily in our digital experience from digital menu boards to order confirmation boards and now with the seamless adoption of our kiosks by our guests. When combined with a cash machine, our test restaurants have consistently been able to serve our guests more efficiently with less labor, especially at peak traffic periods. I'm pleased to say that we remain on track to complete the rollout of kiosks to all our company owned restaurants later this summer, and our franchise partners are actively deploying these units as well. We are also exploring new digital technologies in the drive-thru that enhance the customer experience and further automate ordering. We look forward to sharing more in upcoming calls as our test gets underway.
Next, our fourth strategic pillar is deliver winning unit economics to further improve our restaurant profitability. Nothing replaces a strong business model and the flywheel that generates with growing the business and driving development. Our player logo has historically had higher store level margins and we are focused on getting back in that range. In addition to the focus we have with labor productivity, we are closely reviewing everything from cars, two, R&M, utilities and other controllable expenses while still early in the process, we have identified several areas of improvement. But more importantly, we are doing that methodically to ensure it does not impact our high quality food or the guest experience because we are still very early in the process. We have refrained from fully incorporating the potential savings into the margin outlook that Ira will provide. But as we have greater insight into the timing and size of the potential savings you can expect we will update future outlooks accordingly.
Finally, we are pleased that the modernization of our store base through thoughtful remodeling is also showing improved sales and positive returns. In addition to welcoming our customers with an updated brand image, we are in the process of incorporating feedback from the recent remodel and further value engineering before full rollout, we remain optimistic about the continued remodeling plan for both company-owned and franchised restaurants. This leads to our last strategic pillar driving unit growth. Partnering with world-class franchisees is key to our accelerated growth plan. I have been so impressed by the quality of our franchise system, the passion they have for the El Pollo Loco brand and the collaborative partnership that has been built over many years.
Building on the work that has been done over the last few months, I would like to share our focus going forward. Our first focus is to complete the work on updating our restaurant design and lowering filter cost. Our current prototype cost about $2.2 million to build simply put that is too expensive to drive consistent long-term franchise growth to remedy this. We are currently in the process of working with multiple partners to value engineer and reduce the cost of our prototype while also making sure the image of the restaurant conveys our future brand image.
We also recently launched a new development incentive for all of our franchise partners we are excited about the combination of reducing the build cost, improving the unit level margins with our winning economic focus, together with a meaningful development incentive, coupled with strong sales growth we believe this formula will reinvigorate the pipeline over time.
Finally, we are also thoughtfully evaluating our market entry strategy and existing market growth plans. In addition to elevating our franchise recruitment process and support for new and existing franchise partners. We have recently reorganized to provide a higher level of support and continue to resource franchise operations. These initiatives, combined with more marketing and operational focus on new markets will help ensure as new markets open, we have more success. There is still significant work ahead of us, but I firmly believe that El Pollo Loco should be and will be a national brand over time. That said, we need to get the right building blocks in place to ensure our long-term success.
Let me conclude by saying I am optimistic about the future of El Pollo Loco and what we can accomplish as a team. I want to thank our over 4,300 team members and our franchise partners for their hard work and dedication every day. I'm thrilled to work alongside you, and I look forward to nurturing our special culture and unlocking a sale of both long-term potential.
With that, let me turn the call over to Ira for a more detailed discussion of our first quarter financial results.

Ira Fils

Thank you, Liz, and good afternoon, everyone. for the first quarter ended March 27, 2024, for total revenue increased 1.4% to $116.2 million compared to $114.5 million in the first quarter of 2023, Company operated restaurant revenue decreased 0.7% to $97.2 million from $97.9 million in the same period last year. The decrease in company-operated restaurant sales was primarily driven by a $5 million decrease in revenue from the refranchising of 18 Company operated restaurants to existing franchisees in prior quarters, offset by a 3.8% increase in Company operated comparable restaurant sales and additional sales from restaurants opened during or subsequent to the first quarter of 2023.
The increase in comparable restaurant sales included a 2.6% increase in average check size and an approximately 1.2% increase in transactions during the first quarter. Our effective price increase versus 2023 was 6.7%. Franchise revenue increased 17.3% to $11.3 million during the first quarter, driven by a 5.9% increase in franchise comparable restaurant sales as well as three new franchise restaurant openings during or subsequent to the first quarter of 2023 and the 18 refranchised restaurants I've just mentioned earlier.
Looking ahead, second quarter to date, through April 24, 2024, system-wide comparable store sales increased 5.3%, consisting of a 3.7% increase in company-operated restaurants and a 6.3% increase in franchise restaurants. As Liz mentioned, we're pleased with the reception by consumers of our double test data promotion to start the second quarter and the benefit to our quarter to date results.
Turning to expenses, food and paper costs as a percentage of company restaurant sales decreased 110 basis points year over year to 26.4% due to higher menu prices. During the quarter, we experienced slight commodity inflation of approximately 2.5%. We continue to expect commodity inflation to be approximately 3% for the full year 2024 labor and related expenses as a percentage of company restaurant sales decreased 70 basis points year over year to 31.5%. Higher menu prices and better operating efficiencies were partially offset by wage rate increases during the quarter.
Labor inflation during the first quarter was a little over 4%, and we expect wage inflation between 12% to 14% for the full year 2024, driven by the California minimum wage increase to $20 an hour for QSR restaurants on April first of 2024. Occupancy and other operating expenses as a percentage of company restaurant sales decreased 80 basis points year over year to 24.6%, primarily due to the leverage gained on the same store sales increase combined with the sale of lower-volume restaurants to existing franchisees in the prior year.
Our restaurant contribution margin for the first quarter was 17.6% compared to 15% in the year ago period. For the full year 2024 we expect our restaurant contribution margin to be in the 15.5% to 16.5% range, including the second quarter in the 16.5% to 17.5% range. As we move into 2024 we are pleased with the progress we are making in our labor improvement initiatives and as Liz mentioned earlier, are continuing to focus on identifying additional savings and efficiencies across the P&L as we look to continue to improve restaurant level margin.
General and administrative expenses increased 50 basis points year over year to 10.3% of total revenue. The increase for the quarter was primarily due to restructuring costs related to certain positions in the organization and executive transition costs during the first quarter we recorded a provision for income taxes of $2.2 million for an effective tax rate of 27.1%. This compares to a provision for income taxes of $2 million and an effective tax rate of 28.4% in the prior year period. We reported GAAP net income of $5.9 million or $0.19 per diluted share in the first quarter compared to GAAP net income of $4.9 million or $0.13 per diluted share in the prior year period. Adjusted net income for the quarter was $6.8 million, or $0.22 per diluted share, compared to adjusted net income of $4.9 million or $0.14 per diluted share in the first quarter of last year. Please refer to our earnings release for a reconciliation of non-GAAP measures.
In regards to meat remodels, during the first quarter, we completed three company operated restaurant remodels and 11 franchised restaurant remodels.
Turning to liquidity, during the first quarter, we paid down $4 million on our revolver. And as of March 27, 2024, we had $80 million of debt outstanding and $9.1 million in cash and cash equivalents. Subsequent to the end of the quarter, we paid down an additional $5 million on our revolver, resulting in $75 million of debt outstanding as of May 2, 2024. Additionally, during the first quarter, we repurchased 136,400 shares of stock for approximately $1.2 million, leaving about $6.2 million remaining under our current share repurchase authorization. As of March 27, 2024.
And finally, based on our results to date, we would like to provide the following guidance for 2024 the opening of two Company-owned restaurants and 5 to 7 franchise restaurants, capital spending of $25 million to $28 million, G&A expenses of $45 million to $47 million, excluding one-time costs and an adjusted income tax rate of 27% to 28%.
This concludes our prepared remarks. We'd like to thank you again for joining us on the call today, and we are happy to answer any questions that you may have. Operator, please open the line for questions.

Question and Answer Session

Operator

Thank you. So at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two, if you would like to move your question from the queue For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys again, if you'd like to ask a question, please press star and then one. Now the first question we have comes from Todd Brooks of The Benchmark Company. Please go ahead.

Todd Brooks

Thank you and welcome, Lew, and this release is a really nice way to kick things off. So congrats.

Elizabeth Williams

Thank you. I agree.
If you and look at the restaurant level operating margins. You parse a couple of things out. There were drivers. You talked about higher menu prices, but you also talked about operating efficiencies. If we can look at the year over year increase of 260 basis points. How much are attributable to each bucket? And can you walk through the timing of pricing that you took relative to the minimum wage increase that kicked in at the beginning of April?

Ira Fils

Yes. So Todd, a couple of things there. We if you roll back a little bit, we had taken price a little in preparation for minimum wage happening in April. We had to we had taken some price on back in December and then we took on additional price. And at the end of February to really help that. That was a big part of what helped drive the operating margin improvement.
The the other thing is we had we really had good sales. I mean when you're when you're comping up sales, we got some great leverage. And on the P & L And then third, we did start some of the initiatives, the biggest one really being as we started looking at the better way to process our salsa started a little earlier in the quarter as well. So it was a combination of all those things as well as just kind of overall general ban and better management of the labor schedules as we're really let's face it. We're really focused as we're looking forward into April one really focused on making sure we're running efficient labor.

Elizabeth Williams

And just to look at that, I'd say it's really been an all hands on deck focus across the operating team. But then all of the supporting functions. And so as we look forward, not just stopping with the improvements that we found, but also starting to look at every single line item within the P&L as well.

Todd Brooks

Fantastic. And then one more and I'll jump back in queue on if you if you listen to others calls, there's a lot of talk about varying performance across different income cohorts. I know you've got a geographic concentration and a really good handle on your different income cohorts. Just how variable is the performance across household incomes and what are you seeing in maybe your lowest couple of cohorts as far as trends during the quarter? Thank you.

Elizabeth Williams

Yes, you know, because we serve really well across cohorts. We weren't we didn't have an outsized effect by any of them. And we really do in our menu has so much on it for different different folks. So we have the value add at the lower end, although we do see that we need to have even more value. So that's something we're working on. But then we have also you can get something better for you healthy the salad bowls, such those ticket items are more expensive. Those are the $10 plus items, although the family meals are a great example of a really good value, although it is a high price ticket. You're feeding lots of people with that. So again, that really spans against all of the different demographics, demographics as well. So it was one of those things where I don't unlike maybe some other brands, I don't think we were is negatively affected by some of the trends that you're seeing. That said, we really have to stay on top of value. And like I keep saying we're focused on it.

Todd Brooks

Great. Thanks.

Elizabeth Williams

Yes.

Operator

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

Andy Barish

Hey, let's welcome. I guess, Sam, just would love to hear your impressions. I know it's not the first 100 days yet, but some appreciate you laying out the strategic pillars, just what kind of surprised you positively, maybe an area where, you know, you kind of discovered there there needs to be a little bit more work as well.

Elizabeth Williams

I would say positively, I have been before away by and just the quality and then how that quality is translating into consumers' perceptions of El Pollo Loco. When you look at the consumer research. We get so much credit for having such delicious, healthy, high quality and really great ingredients and consumers play that back to us, which is in QSR that is unique. So I'm really excited by that. I think there's a huge opportunity to talk more with our consumers about customization. We really are a brand where you can customize. So I think there's huge offer opportunity there, but we truly have food that that and people feel good eating. And so I think that's just been a place that we've tried to lean into more also pleasantly surprised by our at just how strong our operations are. When I look at the quality of the team members and when I dug into our turnover, we have some of the lowest turnover rates that I've seen in years. And it really just attribute is attributed, I think, to our culture and also our strong franchise partners and as well as our corporate operations teams, just a great culture. So I'm excited about all that. And I still see a ton of opportunity across the business overall.

Andy Barish

Fantastic. Irene, if I could ask and I don't mean to sort of nitpick on monthly numbers, but it looked like March was very strong and April still solid, but but softer than the implied March numbers just from what you had given out in the fourth quarter with quarter to date through February, I believe. Can you give us a sense of sort of the first month in California you guys are obviously, and one of the biggest exposure is just what's going on with the consumer on, you know, how they're trading with these price increases and and where do we expect kind of pricing to be for the rest of the year when all. But, you know, all the California increases have now been put in place yet.
So So we took? Yes, March was very obviously, March was very strong. We had a little bit, you know, Gil, if you break down Q1 back and forth, there was puts and takes from a weather standpoint across the quarter. And yes, we did get some benefit on of that in March, but I think we're pretty happy with what we saw from a same-store sale sale standpoint in April, we had we did take a little more price.
We in addition to what we were already carrying, we took a little over a little over a percent more at the start of April and our sales have held up pretty well. We're definitely seeing a little more check and transactors have been a little bit pressured since we've done that. But I think in an area that we're very comfortable with and we do, we are first of all, we're holding to that. We believe we're going to carry for pricing for the year, mid mid to high single digits. And if you look across other players in our in our segment, that's what you're hearing from the other players as well but we are monitoring that very closely as we move forth around the year.
Thank you very much.

Operator

Thank you. The next question we have comes from Jake Bartlett of Truist Securities.
Please go ahead.

Vin Sengelmann

Hey, guys. This is Vin Sengelmann on for Jake. Let us welcome And congrats on a solid first quarter. I guess one question I have is you've laid out that's to kind of put together the building blocks of accelerated development. So curious how long do you expect that to take?

Elizabeth Williams

Thanks. Thanks for the question. As you know, we're just getting into this transformation as it regards to cost and taking cost out of the unit. I know the team was really working on it, but I think we didn't get as far as we needed to get and just quite frankly. And then when you couple that with the fact that our economic model wasn't as strong over the last 12 to 18 months.
Those are the two things you've got to have. If franchise franchise partners are going to invest. I feel comfortable that we have a plan on our economic model as we've laid out today, and I think we're headed in the right direction. So now we really have to do to work on the cost engineering of our on our buildings and do that very quickly because we don't want to wait around. We can put out an incentive recently that we think is really exciting and that our franchise partners and we heard a lot of positive feedback there, just knowing that the franchise partners can get started and moving forward with development. So a long way of saying we've got a lot of work to do in the next couple of months. And then I think we can give a more clear direction on time line, but really focused on getting development and the development flywheel going again.

Vin Sengelmann

Great. That's helpful. And then just shifting gears a bit. We've heard some large QSRs talk about a weakening consumer environment, promotional activity becoming more competitive. So I'm just kind of curious, you mentioned your strategy around providing value to the consumer. How do you balance that strategy of value versus premium offering in this context? And how do you think about that in terms of your marketing strategy going forward?

Elizabeth Williams

Right? So we really believe that you've got to have everyday value across the menu, first and foremost. So even some of those more expensive items. I mentioned like a test data, solid. The consumer has to really feel like they're getting a wonderful it's delicious, craveable and filling meal. And even though it might be on the upper end of their their price band. So that's number one. But then in the sub $10 price range, we've got figure out and how to continue to innovate there. And that's exactly what we're doing with our burrito platform as an example. So we have in test right now at some updated and recipes with our we're known for great ingredients. We're known for our delicious burritos, but putting a twist on some of those, we have those intact at a couple of different price points. So it's constantly looking at testing and learning so that we can launch that later this year.

Vin Sengelmann

Well, thank you.

Operator

Thank you. Ladies and gentlemen, we have reached the end of today's question and answer session. I would now like to turn the call back over to Liz Williams for closing remarks. Please go ahead.

Elizabeth Williams

Thank you. And I just want to thank everyone again for joining today and your interest in El Pollo Loco, and we look forward to talking to you again next quarter. Have a wonderful evening.

Operator

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