Del Taco Restaurants, Inc.
Q2 2021 Earnings Call Transcript

Published: 22 Jul 2021

[Operator:]

Hello and thank you for standing by. Welcome to the Fiscal Second Quarter 2021 Conference Call and Webcast for Del Taco Restaurants, Inc. I would now like to turn the call over to Mr. Raphael Gross, Managing Director at ICR to begin.

[Raphael Gross:]

Thank you, good afternoon and welcome. On today's call are John Cappasola, President and Chief Executive Officer; and Steve Brake, Chief Financial Officer. After we deliver our prepared remarks, we will open the lines for your questions. But first, let me remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We do not undertake to update these forward-looking statements at a later date and refer you to today's earnings press release and our SEC filings for a more detailed discussion of the risks that could impact Del Taco's future operating results and financial condition.

[John Cappasola:]

Thank you, Raphael, and thank you all for joining us today. Once again, I am delighted to report that we had another great quarter at Del Taco and are on track to achieve what we set out to accomplish earlier this year. Although inflationary headwinds impacting our industry and business have emerged, we are well positioned through our initiatives to maintain operational excellence, drive sales through new product launches and our new loyalty program and to accelerate our new restaurant pipeline to deliver 5% system wide new unit growth led by franchising by 2023. We're also pleased with our team's exceptional execution in providing our guests ultimate convenience through our drive-thru, takeout and delivery channels as we navigate through the remainder of the pandemic, while maintaining strong guest satisfaction scores. During Q2, we also leveraged our strong comparable restaurant sales trends against our very effectively managed input costs, resulting in significant restaurant contribution and adjusted EBITDA growth and margin expansion. Let me briefly review performance highlights from the quarter before moving on to a discussion of our short and long term initiatives. System wide comparable restaurant sales grew 17.8% over the prior year, consisting of a 17.2% increase at franchise restaurants and an 18.3% increase at company operated restaurants. To neutralize the impact of lapping the pandemic during Q2 on a same-store basis compared to 2019, company sales grew approximately 3.6% while franchised restaurants grew at a high single digit rate. Geographically during Q2 on a same-store basis compared to 2019, our non-California restaurants which are primarily franchise operated grew at a double digit rate while our California restaurants grew at approximately 4% compared to 2019. Again, this contrast reflects the broad brand appeal that Del Taco has earned across 15 states outside of California that also generally mandated fewer operating restrictions.

[Steven Brake:]

Thanks, John. Total revenue increased 19.5% to 125 million from 104.6 million in the year ago period. Company restaurant sales increased 18.6% to 113.0 million from 95.3 million in the year ago period. The growth was primarily driven by positive comparable restaurant sales. Franchise revenue increased 24.0% year-over-year, to 5.6 million from 4.5 million last year. The growth was primarily driven by the increase in franchise comparable restaurant sales, coupled with additional franchise operated rest4aurants compared to last year. System wide comparable restaurant sales increased 17.8% consisting of an 18.3% increase at company operated restaurants and a 17.2% increase at franchised restaurants. Turning to our expenses, food and paper costs as a percentage of company restaurant sales decreased approximately 140 basis points year-over-year to 25.5% from 26.9%. This was primarily driven by a menu price increase of approximately 4% and approximately flat food inflation. Looking forward, I want to point out that recent inflationary pressure has materialized beyond our original second half food inflation expectations, particularly in the areas of beef, soybean oil, freight and other input costs. Therefore, we now expect food inflation compared to last year of approximately 5% during Q3, and 4% during Q4, resulting in full year inflation of up to 2%. Although this increased inflation is expected to result in a sequential increase in our food percentage of over 100 basis points during Q3 compared to Q2, time will tell to what extent much of this inflation may prove to be transitory. For instance, we would point to the recent pullback in carnia thought appraising is one example of a meaningful yet temporary inflationary pressure that we are well positioned to manage through.

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Joshua Long with Piper Sandler. Please proceed with your question. Joshua Long your line is live.

[Joshua Long:]

Great. Thank you for taking my question and for the update today. I wanted to see if you might be able to first dig into some of the people first initiatives that you started with and understand better there. Obviously, you got a lot of initiatives in place. But if you could contextualize that a little bit with just how the human capital pipeline, whether that's at the store level, or the manager level, is trending and building so we can support some of those growth initiatives that you talked about into next year and even into 2023.

[John Cappasola:]

Yeah, hi, Josh, listen, we feel good about where we're at right now overall, as a general statement, considering these challenges that everyone I think, in the industry across categories have faced here with staffing over the last several months. And the first thing I just like to say is our operators and our franchisees are just doing an outstanding job, really staying focused on our people in managing the situation. We wouldn't be here where we are today without - with having strong sales and guest satisfaction if it wasn't for their focus and their belief in driving our people first culture at Del Taco. Second, we've been very active in trying to stay ahead of the curve by providing these tools I referenced. These resources and these best practices are really important to the operators, to everyone in our restaurants, to make sure that we are leveraging those and although we are seeing turnover up slightly versus prior year, like I said, we're still below industry average. And part of that is we attribute really steady and stable performance at the team member level to that strength of our core crew and we track those folks. These are really important team members that have five plus years' experience with the brand. And this provides an unbelievable amount of stability. They did during COVID. They continue during the staffing environment. So we feel great about that piece. And that they're - we're not seeing increased turnover with that core crew. And then the last piece I'll mention that I think is really important, as part of staying ahead of the game is we're executing a holistic strategy here. So we've got some macro solutions, like new digital recruiting efforts, and increased referral bonuses and ways to reduce friction in the hiring process at the restaurant could be more immediate in our hiring practices. And then there's micro solutions for where we have hotspots stores or stores that need a little bit more help. And those solutions are going to include things like increasing starting wages, and perhaps even limiting in some cases, restaurant dining room hours, which is certainly not the norm or the exception, but those are some of those micro situations and some of those hotspot source. So a lot be said there, but it's a very important piece right now in our business, and we're very focused on it.

[Joshua Long:]

Great, thank you for that. And curious if you might be able to dig a little bit further in or maybe give more context around some of the quarter to date trends, or what you've been seeing here most recently? I believe you talked about seeing - in the second half of 2021 seeing trends be similar to what you saw in 2Q on a two year basis, which is encouraging. And obviously, there's a lot of concern and increased conversation around just what new variants of COVID or just what potential disruptions there might be to the consumer patterns that are getting rebuilt right now. And so just curious if you've seen anything here lately in terms of changes in daypart, consumer patterns, anything that might be embedded in some of that guidance that you'd call to our attention?

[John Cappasola:]

Yeah, that's all been considered in the commentary here today, I'd say that we certainly acknowledge that the environment continues to be challenging relative to the pandemic. The delta variant and the different aspects of surges that we're seeing around the country, it's not yet impacting our business from what we can tell at this point, but we're certainly watching it very closely, just like we did during COVID. Our main concern is always going to be keeping our guests and our employees safe and we've got some great protocols to be able to monitor and adapt to that as needed. In regards to just back half as we think about same-store sales and that commentary - you heard Steve say that yeah, we're going over the strength of 2020 from a same-store sales perspective in the back half, especially due to that launch of the crispy chicken menu last year, but we believe we'll continue to see good momentum on a two year basis compared to 2019. We're definitely excited about the upcoming product launches, as well as our new app and loyalty program. And we think that combination of these sales catalysts with our teams, driving really great guest experiences make for a great recipe for continued sales growth.

[Joshua Long:]

Great, thank you for that. And it might be a little bit early. But when you think about rebuilding some of those dayparts, namely breakfast in particular, which is exciting. Does that lead you to maybe either accelerate or revisit some of the dining room closures or some of the operating hours? I know that you mentioned that in some of the micro solutions, but just thinking about the chain overall, if we're at a point yet where you can see line of sight on some of these patterns being rebuilt that you're revisiting some of the store level operations for the system.

[John Cappasola:]

Yeah, it's early to make that call right now based on what we know. We have opened substantial amount of our dining rooms here over the last couple of months, so we're going to keep a real close eye on it. And the good news is we've got multiple service modes to serve our guests through. So when you think about dining, that's one aspect of it. The results, by the way, on that front have been rather tepid thus far, although it's building a little bit of momentum, nowhere near where we were pre-pandemic. But when you think about drive-thru and delivery and takeout in giving guests access, however they want access, we're in a good spot.

[Joshua Long:]

Great, thank you and then last one for me. I understood on the some of the inflation commentary, I think there's a second layer there that we're seeing across the system, which is just the availability of product or maybe the levels of service being pulled back a little bit, just as product is hard to get from the manufacturer to in restaurant, and if you could provide some commentary on what you're seeing in your system, and maybe how you were addressing that either through slimmed down menus, or maybe operational adjustments to keep those service levels and customer satisfaction scores high would be very helpful.

[Steven Brake:]

Sure. This is Steve. Overall, we've been very fortunate not to experience any material supply chain issues impacting availability of products. That said, recently, we have been managing various packaging shortages, which the operation team working with supply chain is doing a great job being a little bit nimble in solving for those packages, sheet packaging issues as they arise, but again, fortunate that from a food standpoint, we've been in really good shape. So proud of the supply chain team and the operator for being nimble and very focused there. And so far, so good, but it does remain a challenging environment as everyone knows.

[Joshua Long:]

Got it, thank you for that. On the packaging specifically, are those items that are imported or is that just maybe something that is seeing a lot more competition as everybody moves into off premise, and there's just a lower supply of that packaging product, just curious there.

[Steven Brake:]

Yeah, the root cause is largely domestic, heavily tied to the labor availability, staffing challenges that all businesses are essentially facing today. So that's really the root cause of our issues.

[Joshua Long:]

Got it. Thank you. I'll pass it on.

[Operator:]

Our next question comes from the line of Alex Slagle with Jefferies. Please proceed with your question.

[Alex Slagle:]

Hey, guys, thanks for the question. I want to touch on the development outlook. And it sounds like pretty notable acceleration versus previous thoughts and peak growth levels from before 2020. Just kind of wondering if you could get some more color on how you're thinking about new versus existing markets, and how much of this is fueled by new franchisees versus existing and you can start with that.

[John Cappasola:]

Sure, yeah. Hey, Alex. Well first, we've really been talking much of this year about the excitement that we've got on the franchising front relative to the launch of the Fresh Flex prototype Menu of Venues initiative. Obviously, it gives us a lot of optionality in regards to building types and real estate, as well as just the excitement out there from the standpoint of eight consecutive years of positive franchise same-store sales growth and coming into 2021. So, there's been a lot of - a lot of that momentum has been fueled by those items I just talked through. But when you think about our growth strategy here and what we announced here today, it starts with franchising and our ability to build our franchise pipeline across multiple states and we're doing that by leveraging the Fresh Flex prototype with both new and existing franchisees, but we're certainly seeing momentum on the new franchisees front, as we see existing franchisees getting back on track in post-COVID environment. And what that really does for us, what we see happening is based on our pipeline of existing agreements, some of these new agreements, some that are yet to be signed, that we're looking out in the future on, we feel good that our franchise system is in a position to grow in that high single digit range, beginning in 2023. And then when you think about the company, we'll continue to build, and we've said that we've talked about that over the past several quarters, and we'll do - we'll look at opportunistic capabilities that we have with Fresh Flex now on an infill basis. And we'll also obviously be feeling that seed market strategy with company capital and expect company build outs to probably be in the LSD range. They have been, they'll probably continue to be there. And the real acceleration will be on the franchise side as I mentioned.

[Alex Slagle:]

Got it, is that - the 5% is that a gross number?

[Steven Brake:]

That's a system number of gross.

[Alex Slagle:]

Okay. And then I just wonder if you could talk around some of your initiatives around speed of service and some of the recent metrics. I think, kind of talked about some solid throughput improvements through 2020. And still seems like some improvements so far in 2021. Just kind of wondering how you see this going as he face more challenges hiring and perhaps more employees in training and all that and how you're able to sort of maintain staffing levels and kind of keep that momentum going.

[John Cappasola:]

Yeah, like I said earlier, staffing is critical, it's key. And we've been somewhat fortunate that really, other than dealing with some hotspots and some issues. Although turnover is a little bit higher year-on-year, staffing play a little bit lower year-on-year, it's not - we're not in an area where we are seeing widespread issues around operating hours and/or operating metrics. So that's the good news. And to your point, we absolutely are seeing improvements, which is amazing and speaks to our franchisees and our operations team over really solid improvements last year on both speed during key hours of the day where you really need that throughput capability, as well as on our overall satisfaction scores and we're maintaining really strong overall satisfaction both at the four wall level as well as with delivery, which is a really important part of the business and something that's been really strong for us this year. So all in all operations team, our franchisees are doing an outstanding job.

[Alex Slagle:]

Great, thanks. And I'll pass it on.

[Operator:]

Our next question comes from the line of Nick Setyan with Wedbush. Please proceed with your question.

[Nick Setyan:]

Thank you and it's great to hear you expect the momentum on the top line to continue in the second half. Just following up on the unit growth around 2021, I think you said modest acceleration in '21. I guess just given the gap between where we are now and 5% in '22 how should we interpret that modest rate in '21? Any kind of help there would be appreciated.

[Steven Brake:]

Yeah, just to clarify -

[Nick Setyan:]

I'm sorry, '22.

[Steven Brake:]

Yeah, 2022 will be a modest step up from the 13 this year followed by that 5% new unit growth rate on a gross basis in 2023, so your question about 2022?

[NickSetyan:]

Right, yeah, in 2022, just given the 5% in '23, any further clarification on what modest maybe would be very helpful?

[Steven Brake:]

Yeah, so in 2022 a modest step up from 13 is something still in the teens, but notably above the 13 this year, so the more pronounced step up would certainly be in 2023. And as John touched on a number of signings that have happened this year, the expansion of our current pipeline and number of deals that we expect to be soon announced, really those are frankly data points that we love, we feel good about them. And that's what puts us in a position to have conviction that 2023 well be that year where you'll have the more notable step up certainly versus current numbers in recent trends.

[John Cappasola:]

And remember Nick, we launched Fresh Flex in January of this year, so if you get into 2023, you'll really start to see those Fresh Flex prototypes popping up, which - there will be a few probably in 2022. But I think the power of that Menu of Venues and Fresh Flex piece will be really starting really in 2023.

[Nick Setyan:]

And hopefully, we'll be able to 1.7 million that you need, so that'll help too. In terms of G&A, obviously, we have momentum in the second half of the year in terms of the top line, any chance that that 9% guidance could prove a little bit conservative?

[Steven Brake:]

The ultimate sales and revenues are going to obviously inform that any goal overall Q2 is probably a fair quarter to look at in terms of run rate. So that would probably lead you to the conclusion that the 9% area is probably more fair with lower likelihood of flexing down this year. As we've said before on a longer term basis now that sales have normalized post-COVID, certainly our view is to control G&A and while it tends to have some inflation, making sure that inflation stays inside our overall pace and growth in revenues, which will allow on a longer term basis us to start to move into achieving modest step downs in subsequent years after 2021.

[Nick Setyan:]

Perfect, thank you.

[Steven Brake:]

You're welcome.

[Operator:]

Our next question comes from the line of Todd Brooks with CL King & Associates. Please proceed with your question.

[Todd Brooks:]

Hey, good afternoon, guys. Congrats on the momentum in the quarter. Well done. So a couple questions here. One, we were talking about setup for the back half and lapping the crispy chicken launch and we talked about the product platforms. But can you give us more color about the planned launch of the new loyalty program? What tactics are you employing around that? How much of a driver and kind of a help in lapping those same-store sales from crispy chicken last year you're looking at the launch of the loyalty program? And how are you going to promote the customers?

[John Cappasola:]

Sure, yeah. I think the launch is really important. And getting folks using the program is really important. And I would characterize it as our expectation is that it's going to build momentum, right. So I don't think it's something that you turn on and overnight, there's a massive catalyst right there. But I think that when you think about what this could do for this brand in really leveling the playing field with some of these bigger brands., It is going to be a great solution for Del Taco and our guests moving forward. I'll tell you, we're excited about it, though the loyalty program is actually - I'll tell you what the name is going to be. It's called Del Yeah rewards. So we're excited about that. It's fun and it's exactly where we want to be as a brand. It's a points based loyalty program with a tiered structure designed to really motivate and reward behavior. So essentially, the more use, the higher your tier, and the higher your tier, the more benefits you unlock, and we'll have the ability to do things like challenges and enhance frequency and guest engagement and then ultimately what's really important here and the great team that we've been building internally, along with new partners that we have, will be collecting guest data to provide a more customized one to one experience with the brand. So as you can imagine, we're absolutely going to want to get as many guests into this program as we can, early and often. And so there'll be the marketing push around this when it launches in September, and an ongoing effort at the restaurant level to make sure that we're building this program over time.

[Todd Brooks:]

That's great and sounds excellent. I love them to have them soon. Just a follow up question, on the labor side from two fronts, one, I think you hinted at this, but where you had hot spot markets where you had to curtail operating hours. Was there an aggregate drag to same-store sales that you'd have us think about from staffing challenges in the quarter or was not a material problem?

[Steven Brake:]

No, just to clarify, John tried to make clear its stores definitely not markets. I mean, fortunately, we've been very fortunate, the hotspots are literally the store here or store there, quite isolated actually, which means to your question, no, there is not really a discernible overall impact on any metric of performance.

[Todd Brooks:]

Thanks, Steve. And then looking at the labor performance being down the 30 basis points, is there any chance that you're over levering because of staffing levels in the restaurant, do you feel like that you're actually running a little too efficiently on the labor line? And we need to think about that, within the context of how we're thinking about the back half of the year.

[Steven Brake:]

Generally no, I mean, there can be that risk, but we really - there's a very kind of rigid prescribed formula the restaurants follow. It's a fair and balanced formula that makes sure the right feet are on the right floor at the right time. So in general very comfortable and then, as far as the overall leverage, just if we recall a year ago Q2 was kind of for us to be at the heart of COVID. So really, that outcome is heavily informed by with this concept of high teens. It's really leveraged on the fixed elements of waiver, which would include your managers, your health insurance premiums and even some of the elements of variable staffing or I guess hourly staffing, that there is a fixed element to hire lease as well. So that's what really enabled the nice levering that we saw Q2.

[Todd Brooks:]

Okay, great. Thanks and congrats again.

[Steven Brake:]

Thank you.

[Todd Brooks:]

Thanks.

[Operator:]

There are no further questions in the queue. I'd like to hand the call to management for closing remarks.

[John Cappasola:]

Okay, thank you for taking the time with us today everyone and we certainly appreciate your interest in Del Taco and we look forward to sharing our progress on future calls. Have a great day.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.