Del Taco Restaurants, Inc.
Q2 2020 Earnings Call Transcript

Published: 24 Jul 2020

[Operator:]

Thank you for standing by, and welcome to the Fiscal Second Quarter 2020 Conference Call and webcast for Del Taco Restaurants. I would now like to turn the call over to Mr. Raphael Gross, Managing Director at ICR.

[Raphael Gross:]

Thank you, operator, and thank you all for joining us today. On the call with me is 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 some 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. Today's earnings press release also includes non-GAAP financial measures such as adjusted net income, adjusted EBITDA and restaurant contribution, along with reconciliations of these non-GAAP measures to the nearest GAAP measures. However, non-GAAP financial measures should not be considered as alternatives to GAAP measures, such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance. I would now like to turn the call over to John Cappasola, Chief Executive Officer.

[John Cappasola:]

Thank you, Raphael, and we appreciate everyone joining us today. Let me begin by reiterating what I said on our previous call. Our restaurant teams, our franchise partners and our support staff are doing an exceptional job supporting our people, serving our guests and strengthening our brand. I couldn't be more proud or thankful for their efforts and dedication and I am very pleased that this focus is driving business results. Specifically, system wide same store sales are slightly positive so far in Q3 led by our franchise based, who is a sustaining positive same store sales trends across a broad 14 state geographic footprint. This trend, coupled with funding for all franchisees who sought PPP loans strengthened our franchise financial health. To-date 70% of franchise restaurants have voluntarily repaid all of the royalty and sublease rents that we deferred earlier this year and all remaining restaurants are on repayment programs to enable full repayment before the end of 2020. Despite 100% of company operated dining rooms remaining close since the start of COVID and challenged trends in the breakfast day part, company same store sales trends continue to improve sequentially and are negative approximately 2% during the first five weeks of Q3, despite over 90% of our company restaurants residing in California and Las Vegas where COVID-19 exposure is currently substantial. Although we're very pleased with the company same store sales recovery during and since the second quarter, we are even more proud of the restaurant level cost controls and flow through achieved during fiscal Q2. Specifically, the food cost reduction, very modest labor and related deleverage despite absorbing $1 California minimum wage increase, and operating expense adjustments allowed us to limit our overall restaurant contribution margin contraction to 260 basis points despite the COVID-19 reduction in company restaurant sales. We are very pleased with this outcome and we expect further sequential improvement in our year-over-year restaurant contribution margin performance in both Q3 and Q4. Importantly, our recent sales and profit trends coupled with the deferral of certain nonessential capital expenditures, put us in a position to reduce our outstanding debt, net of cash. At the end of the second quarter by over $9 million compared to the end of fiscal 2019. This resulted in a relatively stable net debt to adjusted-EBITDA leverage ratio at Q2 compared to year-end and we currently have over $12 million in cash-on-hand. Due to our financial stability, continued operations, sales and profitability improvements, we've been fortunate to not have to furlough any restaurant employees. Instead we reinforce our people centric culture by paying company general managers’ healthy Q2 bonuses for their leadership and introduced and enhanced employee free meal program to reward our dedicated teams for serving their communities. We are proud that our resilient business model has kept our teams employed and productive. These results have not only stabilized our business, but also put us in a position to further our brand acceleration through operational improvements, digital transformation, brand initiatives and a continued focus on development led by franchising. Starting with operations. I'm not surprised by our ability to rise to the occasion and overcome recent challenges. The Del Taco culture is very special, built upon our people driven approach of serving others as a core value. Our culture is truly a strength of this organization and enables us to be innovative, execute rapid change and employ new best practices that enable the recovery and future acceleration of our business. As we contemplated the new normal, we set goals to stand out as a trusted brand for safety and sanitation, as well as simplifying operations to drive efficiencies and we are accomplishing both. Since the COVID-19 impact, we maintained operations in our drive-through, takeout and rapidly expanding delivery channels. These service modes provide guest the convenience they want in a limited contact or contactless manner. Due to this advantage, we chose not to reopen company operated dining rooms in order to streamline our focus on the service modes that are currently more relevant to our guests. The majority of our franchisees also adopted a similar approach. Our narrowed focus on drive-through, takeout and delivery channels has led to improved service stores and greater labor efficiency in our restaurants, which has been aided by increased visibility provided by our new workforce management system. Next, 2020 progresses. We have planned a number of innovation initiatives expected to enhance existing restaurant operations and provide consumers reasons to visit Del Taco. Let me start with our digital transformation, which will continue to be an important part of our strategy. Our Del Taco mobile app and delivery have enabled enhanced engagement with guest and expanded our ability to provide them with greater convenience. The app database has now grown to more than 1.1 million registered users, up 28% from 880,000 at the end of 2019, which is in part due to regular disruptive offers only available to app users. To drive more trial and frequency with this technology, we just launched Del's Daily Smile Summer, whereby every day this summer guest can receive Del Taco offers and surprise deals from other partners that are only available in the app. As an example of that, last Friday all Del Taco app users received an offer for a free Samsung smartphone on what we call Free Phone Friday. We are also aggressively promoting Del Delivery as a contactless ordering option with Postmates, Doordash and Grubhub and recently with our new partnership with Uber Eats. Delivery is available across all company restaurants in more than 90% of franchise restaurants through one or more DSPs, and represented approximately 7% of system wide sales during the second quarter. We believe being one of the few brands to partner with all four leading delivery platforms to maximize consumer convenience channel and leverage the trend toward at-home delivery provides a clear advantage. In June we reinstated a traditional advertising media to highlight our everyday value barbell strategy with a focus on Del's Dollar Deals Menu. More recently, we pivoted our messaging to innovation with the launch of fresh guacamole as our newest premium ingredients. Fresh guac builds on our strategy of delivering fast casual, fresh quality ingredients with fast food speed, convenience and price. We plan to use fresh guac as a QSR+ point of difference by making it available across our barbell menu strategy as a side or product modification, as well as within new products designed to highlight this signature ingredient. We featured it as part of the recent launch of the New Epic Burrito line-up which allows the guest to choose chicken, carne asada or beyond meat for any of our Epic Burritos, along with simplified product builds to ease operations execution. Early returns from this new ingredient feature extremely high guest satisfaction scores, along with increased Epic Burrito product mix, which underscores our ability to deliver value and convenience even at the premium end of our barbell menu. Next week, we’ll introduce New Crispy Chicken as part of an overarching combined solutions event. As a reminder, our combined solutions approach, there’s catalytic marking activity with operational enhancements that has been a key part of our same-store sales growth playbook for over the past decade. This combined solutions event is centered around the core idea of Del's Daily Smile. In this current COVID world we could all use another reason to smile and we're bringing that to our guests through new products, a series of giveaways and improved guest experience. We’ll be the first national Mexican QSR with a Crispy Chicken Offering and we are launching it in new products across our Menu Barbell, including a Dollar Crispy Chicken Taco, which will be our first new addition to the Del’s Dollar Deals Menu and a $5 Epic Burrito with fresh guac. The product launch will be supported by a new marketing approach and brand voice developed by our new advertising agency Skiver and CMO Tim Hackbardt. We're already seeing significant improvements in our consumer engagement across social and digital channels as a result of their early work over the past month. Our new approach that delivers must watch brand creative has increased social engagement and buzz by up to four times. For example, we recently launched a new Sprite Poppers beverage which is driving impressive social media sharing of our creative content and inspiring a significant amount of user generated video reviews and experiences across TikTok, YouTube and other social platforms, trending it as a must try beverage this summer. Finally, we are using the COVID-19 period to invest in our future and are not simply waiting for when the pandemic is behind us to consider next steps. Rather we intend to reach the other side better positioned to capitalize on new opportunities that will emerge from this crisis. A key area of continued investment and focus will be technology. We've made great strides through our digital transformation over the past year and a half and plan to build upon that momentum as we recognize the importance of technology to drive the guest experience and meet future guest expectations. This effort will leverage our restaurant and technology assessments to help ensure all system wide restaurants are well positioned to adopt future enhancements such as developing and testing a loyalty platform to better leverage our 1.1 million-plus app users, as well as testing incremental new service modes for the brands such as Curbside Pickup and other strategies that allow the guest to order ahead and conveniently access Del Taco Food in a contactless manner. Turning to development; thus far in the third quarter we have opened two franchise and one company restaurant and have up to three additional franchise openings planned later this year. Looking ahead, we anticipate favorable dynamics may occur across our development efforts as a result of the pandemic, such as additional new franchise interest in drive-throughs, increasing real-estate availability and potential development cost deflation. To help capitalize on these opportunities, we are aggressively working a menu of venue strategy, designed to expand our prototype capabilities to provide more flexibility both in terms of real estate access and enhancing our targeted new unit return profile. This planned restaurant prototype expansion will include a modernized design, improved functionality and other operational enhancements. In addition, we are continuing our test remodel program in the back half of 2020, which is driving encouraging sales lifts and returns. We believe the combination of expanded real-estate and prototype opportunities, alongside a comprehensive future remodel program will benefit future company and franchise development, including attracting new franchisees. To conclude, we’ve stabilized our business and believe our franchisees are healthy. Our brand positioning of fresh flavorful food, great value and convenience is exactly what the consumer is looking for these days, and we can provide these relevant attributes to a limited and no-contact channels without the reliance of our dining rooms. Although sales volatility may persist, our underlying trend is undeniably strengthening and absent a major setback from the pandemic, we believe that the worst of it may be behind us in terms of same store sales and restaurant contribution margin performance. At the same time, we are investing in our business to strengthen our guest engagement through technology to improve our ability to provide even greater convenience while also evaluating how we can realize the emerging real-estate opportunities to grow our brand through expanded prototype capabilities. We look forward to sharing more information on these topics. Now, I'll turn the call over to Steve to review our second quarter financials.

[Steve Brake:]

Thank you, John. Total revenue decreased 13.9% to $104.6 million from $121.5 million in the year ago second quarter. System wide comparable restaurant sales decreased 10.1% including a 12.6% decrease at company operated restaurants, and a 7.2% decrease at franchise restaurants. Second quarter, company restaurant sales decreased 15.1% to $95.3 million from $112.2 million in the year ago period. This decrease was driven by the decrease in company operated comparable restaurant sales, as well as fewer company operated restaurants compared to last year, primarily due to our refranchising activity. Franchise revenue decreased 2.5% year-over-year to $4.5 million from $4.6 million last year. The decrease was driven by the negative franchise comparable restaurant sales, partially offset by additional franchise operated restaurants compared to last year, primarily from our refranchising activity. Now turning to expenses; food and paper costs as a percentage of company restaurant sales decreased approximately 60 basis points year-over-year to 26.9% from 27.5%. This was driven by our menu price increase of nearly 4%, which exceeded food inflation of approximately 3%. Looking ahead, we continue to expect food inflation to step down sequentially, particularly during the fiscal fourth quarter, and to-date we have not experienced any material supply chain issues impacting product availability. During the second fiscal quarter, despite the $1 increase in California minimum wage to $13 an hour and the loss of leverage on fixed elements of labor such as General Manager salary and benefits due to the COVID-19 related reduction company restaurant sales, our labor and related expenses as a percentage of company restaurant sales increased by a relatively modest 80 basis points to 33.2% from 32.4%. Our operations team very efficiently managed our variable hourly costs to align with the reduced consumer demand, with a very streamlined focus on drive through operations, while the dining rooms remain closed. In addition, the quarter included reduced workers compensation, expense based on favorable underlying trends. We view the modest deleveraging and this key line items a strong outcome All Things Considered. Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 240 basis points to 23.5% from 21.1% last year. This increase was primarily due to increased third party delivery fees and deleverage across our fixed occupancy costs from the COVID-19 related reduction in company restaurant sales, partially offset by reduced advertising expense, as traditional media spending was slowed during the second quarter due to COVID-19. Based on this performance, restaurant contribution was $15.6 million compared to $21.3 million in the prior year and restaurant contribution margin decreased approximately 260 basis points to 16.4% from 19.0% last year. Overall, we are pleased with our restaurant margin performance in light of the operating environment in the COVID-19 related reduction in company restaurant sales. Looking forward, we believe we are well positioned to further minimize restaurant contribution margin contraction based on improved comparable restaurant sales, coupled with sequentially less commodity inflation and a continued focus on managing other restaurant expenses. General and administrative expenses were $9.4 million, down from $10.8 million last year, but as a percentage of total revenue increased 10 basis points to 9.0%. The decrease in dollars was primarily driven by reduced performance based management incentive compensation, lower stock based compensation expense and other G&A reductions. Adjusted EBITDA was $12.1 million, down from $16.7 million last year and decreased as a percentage of total revenues to 11.6% from 13.8% last year. Depreciation and amortization was $6.3 million, up from $5.8 million last year. The increase primarily reflects the addition of new assets, partially offset by the impact of refranchising. As a percentage of total revenue, depreciation and amortization increased 120 basis points to 6.0%. Interest expense was $1.3 million compared to $1.7 million last year. The decrease was primarily due to a decreased one month LIBOR rate compared to last year, partially offset by a higher average outstanding revolver balance. During the second fiscal quarter, the company reduced its outstanding revolving credit facility borrowing, down to $145 million consistent with the balance at the end of fiscal year 2019 and the company currently has over $12 million in cash-on-hand. The remaining availability under the revolving credit facility is currently $87.7 million. In addition, at the end of the second fiscal quarter our balance sheet debt net of cash totaled $133.8 million compared to $143.4 million at the end of fiscal year 2019, representing a reduction of approximately $9.6 million and a relatively stable net-debt to adjusted EBITDA leverage ratio. This performance has allowed us to maintain meaningful financial cushion, with respect to our lease adjusted leverage and fixed charge coverage covenants, which we currently expect to maintain. Net loss was $0.6 million or $0.02 per diluted share compared to net income of $2.1 million or $0.06 per diluted share last year. We also reported adjusted net loss which excludes sublease income for closed restaurants, restaurant closure charges and loss on disposal of assets and adjustments to asset held for sale. Adjusted net loss was $0.1 million or approximately zero per diluted share, compared to adjusted net income of $5.4 million or $0.15 per diluted share last year. As a reminder, we have already withdrawn our guidance for the 52 weeks fiscal year ending December 29, 2020; however, as I said earlier we expect to demonstrate sequential improvement in year-over-year restaurant contribution margin trends during the third and fourth fiscal quarters due to our comparable restaurant sales recovery, coupled with sequentially less commodity inflation and the continued focus on managing our other restaurant expenses. That concludes our formal remarks. As always, thank you for your interest in Del Taco and we're happy to answer any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Nick Setyan with Wedbush Securities. Please go ahead.

[Nick Setyan:]

Hi, thanks and congrats on a very solid margin, well above, I think even the most bullish expectations. Can you may be just pass out to what extent we can expect to see some permanent and some of the improvements and to what extent, maybe some of that front line is transient in nature. And then separately, specifically on the other OpEx, how should we think about the fee impact, the third party fee impact going forward?

[Steve Brake:]

Sure Nick, this is Steve. You know as we mentioned, you know the real good news is looking forward, we absolutely expect sequentially less restaurant contribution margin contraction in both Q3 and Q4. So you know compared to the 260 basis points of contraction we saw in Q2, although we do expect some continued contraction it's going to definitely moderate over each of the next two quarters. Now that certainly assumes that same store sales performance remains in line with recent performance, you know overall certainly the strength of our company same store sales, along with commodity trends on certain items that we have not yet contracted, that’s going to influence our ultimate restaurant contribution performance over the next two quarters. So overall we like to see that food reduction on a percent basis. We think that will maintain labor, you know 80 bips of deleverages despite a significant negative comp influenced by COVID. It just speaks to the very good discipline within that labor and related bucket. So we're real pleased with that, we expect to see that continue. But then even occupancy and other, you mentioned delivery that certainly is the most notable point of pressure on a percent basis. Advertising was also a good guide that somewhat offset that, but then naturally your loss of leverage on all your fixed occupancy costs, that was the other notable pressure point. So overall that's kind of some of the puts and takes and we're pleased to have a good outlook in terms of you know much less contraction as we move forward throughout the year.

[Nick Setyan:]

Are there any learning in terms of labor, you know given some of the proficiencies you're seeing? I mean is there potential to permanently happen to be less staffing, lower hours and still have the same productivity relative to pre-COVID?

[John Cappasola:]

Yeah, it's definitely a journey. You know we delivered a very efficient outcome the first day and week of COVID. No, we weren't that efficient, but we real quickly – I mean John talked about how you know nimble this organization is through a real strong culture, so we quickly adjusted. I think it showed in that performance and you know the focus is really just trying to maintain that if not improve it, but where absolutely you know chronicle learnings [ph] along the way that you know probably are going to inform the future strategy to say at the least now, and to be fair that lack of a dining room you know just playing a big role in that. You know long term the dining room is an asset, that will be an asset in the future, not the immediate future, so that we played a role, but there's certainly a lot of smaller learnings along the way. You know notably we talked a couple of times about having rolled out a state-of-the-art workforce management system. That's absolutely giving great real time visibility allowing your finance and ops, the team, and really help achieve the efficiencies you saw play out on the P&L today.

[Nick Setyan:]

And just last question, the difference between the con comp and the franchise comp, I mean this is down to a higher percentage of no drive-through locations in the company on base or is there something else going on there?

[John Cappasola:]

Are you referring to the same store sales differential Nick?

[Nick Setyan:]

Correct.

[John Cappasola:]

Yeah, you know really it's a geographic dynamic. You know over the last eight weeks in particular we've seen really strong positive same store sale trends in all three of our Pacific Northwest states, all of our four corner states, as well as Michigan. All eight of those states, they are exclusively owned and operated by franchisees and that accounts for a good number of our system outlet. So really it's that outside of California, outside of Vegas where the company is based more than 90%, you know that's what's really allowing the franchise overall same store sales trend to outperform the company. Notably if you look within California or within the LA DMA area, both franchise and company you know does remain negative and there is you know slight outperformance in favor of the company within California and LA, though really it's more of a geographic dynamic.

[Nick Setyan:]

Understood, thank you very much.

[John Cappasola:]

You bet.

[Operator:]

The next question comes from Nicole Miller with Piper Sandler. Please go ahead.

[Nicole Miller:]

Thank you and good afternoon, I appreciate the update, excited about the comp return. I wanted to ask a big picture about the industry. We had 16, almost enough companies report to think this could be a trend. It seems with less mobility and clearly you're in the state of California where that's the case, that full service casual dining seating setback in comp, but limited service is not and if anything, comp recovery continues. So I would just wonder you know what do you think about that, and if that is the case, is this coming mostly through the drive-through channels, through the delivery channels or somewhere else. Thanks.

[John Cappasola:]

Yeah Nicole, I mean with us in particular, 90% of our sales are coming through drive-through and delivery at this point and you know the remaining being carried out obviously. We don't have the company restaurants, dining rooms are not open, we have not reopened dining rooms and just a very small minority of franchise restaurants where it’s even – where they are able to open dining rooms have. So it's definitely a drive-through and delivery dynamic. I think that speaks to where the consumer is today with the pandemic and the convenience that is provided with QSR and our ability to kind of transact quickly when you're out and about through a drive-through in a limited contact manner. I think that's an important factor that we offer and you know the fact that even going into COVID, the limited service restaurants were such a you know regular, more regular everyday use for consumers. I think that and dependability was created over time. So I definitely feel like we're well positioned on all of those consumer factors and then you add in value and what we bring to the table when people are a bit pinched or expecting to be a bit pinched you know with their wallets. I think we can absolutely continue to see momentum given these dynamics in our business.

[Nicole Miller:]

Thank you. The second and final question, you talked about the dollar increase in California minimum wage. On some of the other conference calls it did come up in the Q&A that your peers are taking price, and I'm wondering if you're thinking this is an opportunity for your brand. If you did say price in the comp in the quarter, if you could repeat that, I might have missed it. And then if you think that there's a pricing opportunity, where in the menu or which platform might you take that in?

[John Cappasola:]

Yeah, in terms of menu price during the quarter, we were menu priced at close to 4%. I'd say for the full year outlook remains at least 3.5% to 4% area based on actions we've taken to-date and then one pending potential action in the fall. So greenhouse the four, you know certainly that was set up you know a while back to in part help manage the labor inflation that you referenced.

[Nicole Miller:]

And I guess then technically there's not and I guess it's kind of the same answer, like not anymore just because minimum wage went up or is it something you're considering?

[John Cappasola:]

I think we're always looking at it and trying to determine what the right amount to take is, but obviously we want to keep an eye on transactions, we want to keep an eye on the health of the consumer and the competitive set before we make those decisions and there's some levers that we do see as opportunities. To pull one in particular, it is on the delivery front and recently we moved up our premium pricing and delivery at the start of Q3, so we had been running about 10% premium on our delivery transactions. It certainly helps with that model quite a bit, and through testing and franchise testing, we were able to see that there was some availability of taking additional premium in that area. So we're able to target that a bit and get that up to closer to the 20% range on the premium side, which is similar to what we're seeing you know across the competition, as well as you know when we look at the consumer dynamic pre-post those types of news. It seems like convenience really trumps, you know or carries the day if you will with delivery. So that's an overriding factor that allows us to maybe absorb a little bit more of that pricing through that channel.

[Nicole Miller:]

Very helpful. I appreciate it. Thank you.

[Operator:]

Next question comes from Alex Slagle with Jefferies. Please go ahead.

[Alex Slagle:]

Thank you. Hey guys, everyone's well. I just wondered what you see as the biggest opportunities right now to improve the service levels and capitalize on the higher demand you're seeing with the current drive-through and carry out model and just wondering if there's ways you think you can prove through the speed and efficiency, whether it's opportunities to improve equipment or processes or anything else you see out there.

[John Cappasola:]

Yeah, of course. It is a – I'll tell you – with a narrowed focus here on really so much of the business coming through the drive-through, we have really been able to put a massive push on throughput and actually with the launch of Crispy Chicken that happens next week that we’re really excited about, we have this combined solution to that, that you heard me mention in our prepared remarks. And with over 90% of our business coming through the drive-through and delivery, we want to make sure we're improving that experience in both these channels with this launch and so we are launching something that we're calling our throughput playbook and that provides you know really specific tactics on a store-by-store basis to enable the growth of car counts during peak periods. So things like – the playbook includes things like options for the use of cones to extend our drive-through queue line as an example or deployment of technology where we use an outside order taker where we might have some more challenged, drive-through stacks to get that person out there getting that order into the kitchen sooner, and then we're doing some training on kitchen efficiency best practices as well that we've mined from our top performing stores, so it's a massive focus. On the delivery front we are setting up to find delivery stations in our kitchens, to have all the key elements needed in one place and adding additional information to the stickers we used to see a lot of our orders, to enhance order accuracy. And then a piece that obviously is over the top of all this that would actually help, that is continuing to be worked through and some of these elements were well combined solutions and crispy chicken next week is that we've been working hard to simplify the operation. So we've completed our first phase of menu simplification, creating more efficiency in the kitchen. We deleted five skews as of next week and over a dozen menu items over the last couple of promotions. So we're trying to put our operators, our franchisees in a great position to be able to maximize that efficiency through the drive through.

[Alex Slagle:]

That's great. And then a follow-up on previous questions just to get a sense for restaurant level margin run rate at current volumes and slightly negative company same store sales. It just seems like you know the second quarter, pretty impressive restaurant level margin with the comp down you know I guess considerably and now you know you're getting back towards flattish. So we just expect – you know, I would expect that margin to sequentially increase, not just year-over-year to receive the sequential increases. You can – can you give some more clarity to that?

[Steve Brake:]

Yeah, we're certainly looking at much less contraction as we move forward. You know that said, if you look at the 16.8% that were left in Q3, a year ago, you know some contraction can you know take you certainly at or below what we just put out for Q2; a couple of dynamics are there. Remember Q3, we will have reinstated you know a full suite of advertising and media. Q2, that was largely subdued due to some cuts that we made. So the marketing on a percent basis will kind of spike back up. Going the other way, firstly we’ll have obviously a lot less deleverage on your fixed occupancy cost. So with sales returning you know towards that more flattish area, we're going to have you know a good guide there certainly, but then the other dynamic is your utilities do run high on a percent basis in the summer months due to higher energy consumption. So you know really that year-over-year contraction is going to shrink up quite a bit the next couple of quarters, you know longer term obviously looking to keep driving that forward. So that’s some of the, you know the puts and takes that are in our margin. You know Q3 is just a bit unique coming off of Q2 with advertising coming back, higher energy costs and then of course you know the leverage stores up on your fixed costs, so that's where we are. You know obviously same store sales as I mentioned is going to be the big driver of where that margin goes and how quickly it goes in the direction you know we're pushing it towards. You know obviously the comp recoveries so far, it is being done really despite that foot print on the company's side being over 90% at Californian and Vegas, you know with a meaningful historical reference state partner trends. The trends are just still tough there due to altered consumer behavior and of course you know the sequential improvement is without dining room. So we feel good about the progression, but you know definitely more to come.

[Alex Slagle:]

Got it. What kind of comp would you need to be able to hold the occupancy and operating expense line flat, just given all the season and pressure there?

[John Cappasola:]

That one would be tougher to flatten than labor I would say, particularly when we're in this more efficiently dining room only mode. So we would need more comp to get that to flatten out than the labor line. You know that's even despite the dollar of wage pressure, so it really speak to the great job our operators are doing managing with the labor line.

[Alex Slagle:]

That's impressive, thank you.

[John Cappasola:]

You bet.

[Operator:]

There are no further questions. I would like to turn the floor over to John Cappasola for closing comments.

[John Cappasola:]

Okay, well, we appreciate you taking the time today with us. You know I think we've been working through the pandemic in these two and the team's been doing a great job. You know we've been demonstrating our ability to really focus on our employees, our guests and our brand and what we've been doing is resulting in ascending performance and you couple that with the consumer really adapting and being much more savvy in regards to how to navigate the shut down safely and how to use technology to their advantage. I think Del Taco as a brand is fitting right in, right now. So we appreciate all of you joining us today. We wish you all the best and thank you for your interest in Del Taco.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.