El Pollo Loco Holdings, Inc.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the El Pollo Loco First Quarter 2021 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 6, 2021. 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.

[Larry Roberts:]

Thank you, operator, and good afternoon. By now, everyone should have access to our first quarter 2021 earnings release. If not, it can be found at www.elpolloloco.com in the Investor Relations section.

[Bernard Acoca:]

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 indicate 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 in system-wide comparable restaurant sales in March. This acceleration enabled us to deliver system-wide 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 had increased 13.5%.

[Larry Roberts:]

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 L.A. 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.

[Operator:]

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

[Unidentified Analyst:]

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

[Bernard Acoca:]

Sure. Yes. No, I think it's part of an ongoing trend that we've seen where naturally Southern California particularly L.A. was harder hit by COVID greater impact with COVID related issues. That's one. Two from more of a macroeconomic standpoint our customer base in L.A. 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're not recovering at the same rate as perhaps the general market consumer is at this point. So, given that 74% of our company restaurants are concentrated in L.A. 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 L.A. has a lot of room to still recover.

[Unidentified 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.

[Unidentified Analyst:]

Hey guys. This is 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 a current trend is driven by dine-in sales versus drive-thru sales? And maybe another way to think about it is just have the level of drive-thru -- the absolute level of drive the sales maintained even as the dining rooms are open?

[Bernard Acoca:]

Yes. So, the drive-thru through 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 to 50% capacity. And while we're 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, 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.

[Unidentified Analyst:]

Okay. 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 you've experienced a lot higher average check throughout the pandemic. So as that dining comes back is that going to have an impact on average check? And is there any implications on your margins as that happens?

[Larry Roberts:]

Well, I guess, I'll take that one is all along we've communicated that we think average check obviously 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 the dine-in traffic comes back. And so I think the positive is 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 and drive through transactions that we do. From a margin perspective, I think of the potential impact of the dining room which we haven't really done too much yet is just when 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 that's where more of the margin impact would be versus just the drop in check because again I think we'll get transaction growth as that takes place.

[Unidentified Analyst:]

Great. Thanks. That makes a 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 is kind of trying to staff up at the same time. Are you seeing any difficulties there? And is that holding back maybe some opening of dining rooms?

[Bernard Acoca:]

So, naturally everyone is seeing a tightening of the labor market and is impacted in somewhere or another. I can 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're doing a pretty good job contending with it. But with that being said, we are putting place some additional actions to ensure that we're increasing our staffing levels that we're kind of, increasing our hiring practices more broadly. But right now at present, it seems to be manageable, because as I mentioned it's not widespread. It's more primarily concentrated in some particular areas.

[Unidentified Analyst:]

Great. Thank you for the time.

[Operator:]

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

[Andy Barish:]

Hey guys. Hope you well. Just one quick clarification Larry, on the two-year system growth, is that comparing AUV's in April to April of 2019? I just want to make sure, I'm thinking about that correctly.

[Larry Roberts:]

Yeah, the two-year comps are 2021 versus 2019? Yes.

[Andy Barish:]

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

[Bernard Acoca:]

Well, Andy, 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 L.A. and the toll that COVID took -- the toll that COVID took for quite sometime leading up into February on the company restaurants there which, I don't think was as widely felt outside of L.A. 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 are, 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 areas. So given that, we're 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:]

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

[Larry Roberts:]

Yeah. So I'll just give you a little more detail on margins. Given -- assuming current trends continue on the sales line, I expect Q2 to be similar to March, in terms of margins 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 a little bit of 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 in packaging. We're rolling out new packaging, getting rid of all our Styrofoam and putting in recycled packaging. So that's going to add a little cost to the business. Like I highlighted just earlier on one of the questions is, we may need to make some investment in our dining rooms, as dining room volumes increase. So that created a little bit of a headwind. And then, as I 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 L.A. 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 COG's inflation back half of the year. So again. Q2 should be strong in the range of March. And then, I think there's 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:]

Great. Very helpful. Thank you.

[Larry Roberts:]

Yeah.

[Operator:]

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

[Bernard Acoca:]

We 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:]

That does conclude the conference call for today. We thank you once again for your participation. And ask that you please disconnect your line.