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spk02: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Al Polo Loco First Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your questions following the presentation. Please note that this conference call is being recorded today, May 4, 2023. And now, I would like to turn the conference over to your host, Ira Foles, the company's chief financial officer. Please go ahead.
spk01: Thank you, operator, and good afternoon. By now, everyone should have access to our first quarter 2023 earnings release. If not, it can be found at www.elpoyoloco.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 strategic pillars and strategic initiatives, our operational plans, marketing and new product initiatives, cash flow expectations, capital expenditure plans, remodel plans, expected new store openings, and franchise partnerships, and our 2023 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 a more formal, detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10-Q for the first quarter of 2023 tomorrow and would 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 non-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 president and CEO, Larry Roberts.
spk00: Thanks, Ira, and good afternoon, everyone. We are encouraged by the start to 2023 as we achieved positive system comparable restaurant sales growth of 0.8% during the first quarter despite unprecedented California weather, which we believe impacted comparable restaurant sales by two to four percentage points, and the lapping of last year's highly successful beef dairy promotion. The increase included a 3.8% increase at company-owned and a 1% decrease at franchise restaurants. Our focus on restaurant-level operating controls was instrumental in driving a year-over-year 470 basis point improvement in restaurant-level margins to 15%, which enabled us to deliver adjusted earnings per share of 14 cents. This was achieved while customer service metrics continued to reach new highs. On the development front, we recently signed three franchise development agreements for an incremental 26 new restaurants in three new markets, which are Northern Colorado, New Mexico, and El Paso, Texas. In addition, the franchise restaurant opened last November in the Denver area, continues to perform very well with sales averaging over $70,000 per week, which highlights the success we can have as we expand into new markets. One further note is that in April, we implemented a reorganization of our support center to reduce G&A spend and reallocate resources to operations services and marketing. We believe that this reorganization will result in continued improvement of restaurant operations and better execution of our brand strategies, both of which will build sales over the long term. Let me now talk about the progress we've made against several of our key strategic pillars. As mentioned on our last earnings call, earlier this year we hired a new creative agency, Organic, to help us build awareness and drive our brand differentiation, which we call Own Our Lane. As part of the marketing strategy, we are bringing a new look and energy to our advertising across all media channels. We believe that this approach will resonate with both moms and families while also attracting younger consumers. Our new approach debuted with a double chicken tostada limited time offer that began in late February and featured both beef and chicken options. Despite being our third consecutive year promoting this product, tostada sales achieved a record high mix of over 19% during the promotion. Post-promotion, tostadas continued to mix at around 15% of sales, which is up from 13.5% pre-promotion and represents our highest selling non-chicken on the bone menu item. To add some additional context to the success of Tostadas, just two years ago, they represented 8.5% of our sales mix. By consistently promoting a very differentiated product, we've nearly doubled their sales mix in just two years. In late April, we brought back Chartered Beef Birria as a limited time offer for the second year running. Similar to last year, our guests can experience this menu item in a variety of entrees, including crunchy tacos, grilled burritos, and overstuffed quesadillas, which can be dipped into a Mexican-inspired consomme. While it will be difficult to match last year's record performance, we believe that Beef Birria will drive frequency and attract new customers to Apoyo Loco while also providing additional feedback as we assess beef as a permanent menu item. As part of our brand evolution, We continue to evaluate our menu approach with a menu board test that is currently in process. Through the menu board test, we are looking to achieve two things. First, make it easier for consumers to understand and navigate our menu. And second, identify new menu items and platforms that will resonate with consumers and build sales over the long term. Menu items we are testing include new add-on snacks, stuffed quesadillas, hard shell tacos, beef, and new beverages. Depending on the test results, we expect to roll out a revised menu and menu board in the fall. In addition to the menu board test, we've developed several catering concepts that we will be screening with consumers with the goal of launching a revamped catering program later this year. The program will offer more options for customers versus our current focus on chicken on the bone. We believe providing variety is more in line with the way consumers eat in groups today, especially in offices. Today, catering sales represent approximately 1% of our total system sales. With the right program and focus, we believe catering has the potential to be a significant sales layer for our restaurants. To further drive our strategy of attracting young consumers, in early May, we launched our revamped app and loyalty program. These upgrades make it easier for customers to order food, and the loyalty program provides additional options for engagement and tiers of food redemptions. To help promote the new loyalty program, we are creating Poyo Millionaires. Once a day for 30 days, we are rewarding an existing or new loyalty member with one million reward points. The new app has been well received with a four and a half star rating, while signups for our loyalty program have roughly doubled versus prior trends. We expect that both the app and loyalty program will only get better as we continue to update them and make them even more engaging for our customers. Shifting to operations. In the first quarter, we continued to make significant progress against our strategic pillar of delivering exceptional service profitably. 97% of our restaurants are now fully staffed, and crew member turnover during the first quarter was under 100%, which we believe is significantly below our competitors. The low turnover reflects our continued efforts to build a recognition culture and create a great work environment for our employees. Along these lines, last week we completed a rollout of our revamped onboarding program, which greatly simplifies and improves the experience of new employees joining our restaurant teams. As a result of these efforts, during the first quarter, we continue to see improvements in our company and franchise restaurant service metrics, including drive-through times, social media ratings, and customer complaints. As we continue to improve customer service across the system, We are also making significant progress, better managing labor and food costs at company operated restaurants, which is showing up in our operating margins. Labor efficiencies and food waste are well controlled, and we have significantly reduced overtime pay and meal break penalties. In addition to restaurant level cost management, project teams are working against additional margin enhancing opportunities, which we expect to deliver results as we head into 2024. With regards to our efforts to simplify operations, The rollout of soak tanks will be completed in May for company restaurants and later this summer for franchisees. We also continue to make good progress in simplifying salsa preparation and will be installing dishwashers in restaurants that have space available. One especially promising initiative is self-ordering kiosks, which are now installed in 10 company-owned restaurants. Based on results so far, in which we are seeing good average check growth, We're expanding the test to 10 more company-owned restaurants, and a number of franchisees will be installing them over the next several months. Provided we continue to see positive results, we expect to accelerate the program later this year. With that, let's discuss our last driver, accelerating development. As highlighted earlier, we recently signed three additional franchise development agreements with two new franchisees to open a total of 26 new restaurants over the next several years in three new markets. Combined with previously signed agreements, We now have franchise development activities underway in 12 states. While we made exciting progress in our franchise development efforts, our team continues to work on securing new agreements, and we look forward to announcing additional partnerships as the year progresses. In closing, we remain excited by the opportunities ahead for Apoyo Loco. With improved operations aided by a familiar culture, initiatives in place that will further differentiate our brand, drive awareness for younger consumers, and build sales layers, and renewed efforts to attract high-quality franchisees to the Apoyo Loco system, we believe that we are positioning ourselves for sales and profit growth. I'd like to close by thanking each member of our familia, including all of our team members and franchisees, for the work they do each and every day to make Apoyo Loco a truly special brand. With that, let me turn the call over to Ira for a more detailed discussion of our first quarter financial results.
spk01: Thank you, Larry, and good afternoon, everyone. For the first quarter ended March 29th, 2023, total revenue increased 4.1% to 114.5 million compared to 110 million in the first quarter of 2022. Company operated restaurant revenue increased 4.2% to 97.9 million from 94 million in the same period last year. The increase in company operated restaurant sales was primarily driven by a 3.8% increase in company-operated comparable restaurant sales. The increase in company-operated comparable restaurant sales was comprised of a 6.3% increase in average check size, partially offset by a 2.4% decrease in transactions. During the first quarter, our effective menu price increase versus 2022 was approximately 11%. As we look ahead, we believe system-wide comparable sales will be flat to down 2% for the second quarter as we lap our extremely successful Beefberia promotion last year. Franchise revenue was $9.7 million during the first quarter, compared to $9.3 million in the prior year period. The increase was driven by the opening of nine new franchise restaurants open during or subsequent to the first quarter of 2022 and revenue generated from three company-owned restaurants sold to an existing franchisee during the fourth quarter of 2022 and one in the first quarter of 2023. This was partially offset by a franchise comparable restaurant sales decline of 1%. Turning to expenses. Food and paper costs as a percentage of company restaurant sales decreased 200 basis points year over year to 27.5% due to higher menu prices partially offset by increased commodity costs. Commodity inflation during the first quarter was approximately 4% and did moderate substantially from 16% during the fourth quarter of 2022. We now expect commodity inflation to decelerate to between 2% and 3% for 2023. Labor and related expenses as a percentage of company restaurant sales decreased 260 basis points year over year to 32.2% due to lower COVID-19 related sick pay, lower overtime expense, lower workers' compensation expense, and the impact of higher menu prices, partially offset by higher wage rates. Labor inflation during the first quarter was a little over 4%. We expect wage inflation of 4% to 5% for 2023. Occupancy and other operating expenses as a percentage of company restaurant sales was flat year over year at 25.4%, primarily due to higher repairs and maintenance expenses, as well as higher occupancy-related expenses being offset by higher menu prices. Our restaurant contribution margin for the first quarter was 15% compared to 10.3% in the year-ago period. For the second quarter, we expect our restaurant contribution margin to be between 16.5% and 17.5%. For the full year 2023, we now expect our restaurant contribution margin to be in the 15 to 17% range. General and administrative expenses increased 80 basis points year over year to 9.8% of total revenue. The increase for the quarter is due to higher labor-related expenses, primarily higher incentive compensation. In addition, we incurred one-time expenses related to the recent share distribution. As we go through 2023, we are actively working on identifying ways to improve efficiency in our business. To that end, we are now in the process of reallocating resources to further support restaurant operations and future sales growth, as Larry mentioned previously. As a result, we will incur approximately $1.1 million in one-time restructuring-related costs during the second quarter. Such will result in an approximately $1 million reduction in our overall G&A spend for the balance of the year as resources are reallocated. During the first quarter, we recorded a provision for income taxes of $2 million for an effective tax rate of 28.4%. This compares to a provision for income taxes of $0.9 million and effective tax rate of 30% in the prior year first quarter. We reported GAAP net income of $4.9 million or $0.13 per diluted share in the first quarter compared to GAAP net income of $2.1 million or $0.06 per diluted share in the prior year period. Adjusted net income for the quarter was $4.9 million or $0.14 per diluted share compared to adjusted net income of $2.6 million or $0.07 per diluted share in the first quarter of last year. Please refer to our earnings release for a reconciliation of non-GAAP measures. During the first quarter, we remodeled seven company-operated restaurants and seven franchise restaurants. We continue to expect to remodel 10 to 15 company operated locations and 20 to 30 franchise locations in 2023. In regards to new restaurant development, we now expect three to five company openings and six to nine franchise openings as permitting and other development delays have pushed store openings originally planned for the back half of 2023 into 2024. Turning to liquidity, as of March 29, 2023, we had $58 million of debt outstanding and $4.8 million in cash and cash equivalents. We also paid down $8 million on our 2022 revolver during the first quarter. Subsequent to the end of the quarter, we borrowed an additional $2 million, and as of May 4, 2023, our outstanding borrowings were $60 million. During the quarter, we repurchased 552,000 shares for approximately 6.2 million. As of March 29, 2023, we had approximately 13.8 million remaining on our current share repurchase program. Subsequent to the end of the quarter, through April 28, we repurchased an additional 453,000 shares for approximately 4.1 million. Finally, based on our results to date, we would like to provide the following update to our 2023 guidance. The opening of three to five company-owned restaurants and six to nine franchise restaurants. Remodeling of 10 to 15 company-owned and 20 to 30 franchise restaurants. Capital spending of $25 to $29 million. G&A expenses are now expected to be from $42 million and $45 million, inclusive of approximately $1.4 million in one-time costs related to the reorganization and the reshift share distribution, and an adjusted income tax rate of $26.5 to $27.5. This concludes our prepared remarks. We'd like to thank you again for joining us on the call today. And we are now happy to answer any questions that you may have.
spk04: Operator, please open a line for questions.
spk03: Thank you, sir.
spk02: 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. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove 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 would like to ask a question, please press star and then one now. Our first question, Michal, is from Jake Bartlett from Trace Securities. Please go ahead.
spk06: Great. Thank you so much for taking the question. Larry or Ira, my first is on the guidance for the second quarter and kind of also what you reported in the first, and you mentioned a weather impact of two to 4%. First question is, how do you know what's weather and what's not? Meaning, how confident are you that that's what's driven the lower same source sales in the first quarter than otherwise? When we hear from other companies that they're not highlighting California as being particularly weak, and so I'm just trying to reconcile that with your commentary on the weather.
spk00: Yeah, Jake, so the way we measure that is we actually take a look at those days in which we had rain versus those that we did not. And then we look at the comp sales gap between the two. And so what we see is on a rainy day, we'll see somewhere around six to eight percentage points drop in sales relative to a non-rainy day. And so that's the way we come up with it. We don't look at whether, you know, cold days versus warm days. It's really strictly rain days versus non-rain days. And one thing I'd highlight is I think one reason why perhaps we see weather more heavily impact us is that if you go into an El Pollo Loco restaurant for lunchtime, you see a lot of workers in our restaurants getting their chicken on the bone meals and things. And so clearly on a rainy day, many of them are not working. You know, they're generally working on lawns, on roofs, painting houses and those things. So maybe that's the reason why we see a heavier impact in some other concepts. But, you know, that's the way we measure it. You know, rain days or non-rain days and see what that gap is. And that's how we estimate what the weather impact is.
spk06: Got it. I appreciate that. And, you know, another question kind of building on just the question of underlying trends for you, you know, are you seeing – you know, any, any shifts in how your different consumer cohorts are behaving, meaning, or any, any, you know, incremental pressure on the lower end consumer, your family, your family consumer. I'm trying to really just figure out how, you know, just understand better how you're positioned for the current macro environment.
spk00: Yeah, Jake. So I think it's pretty similar to what we've talked about really, I think the last couple of quarters where we talked about that we do think a, You know, we're seeing maybe some pullback from a lower, you know, call it income consumer, you know, in two ways. One is around just not spending as much because we have seen the number of items for check drop a bit. And I think you may also be seeing it a little bit in terms of frequency. And I think we tend to see it more, a little bit more at dinner than we do, say, during the rest of the day. So, you know, we are working on some things to bring more value to the menu. For example, we do now have – three different bowls for $5 that are in our restaurants to bring that value. You know, we market them a little bit, you know, for a couple of weeks and it's something we may look to bring back and do a little bit more marketing on really to address, you know, that value conscious consumer. You know, we've seen, you know, a nice pickup mix on our $5 bowls. So we do have that and we're looking at other things in which we, you know, look to perhaps bring a little more value to the menu. You know, at Good Profit, you know, at good profit points on those. I mean, that's a great thing about bowls is the food costs are fairly low, so you can actually go pretty aggressive on price points and still deliver good margins on those. So we're looking at more of those types of things. But again, I don't think the trends have changed that much from what we've seen really since, I mean, really fourth quarter last year. I think we first started seeing perhaps a little bit pullback from some consumers.
spk04: Great. I appreciate it. Thank you so much.
spk03: Thank you. The next question we have is from Andy Barsh from Jefferies. Please go ahead.
spk05: Hey, good afternoon, guys. Within the system sales guide of flat to negative two, are you still expecting company-owned to be positive? And if you could give us maybe a sense of challenges in lapping, you know, Birria as your best promotion, just kind of what, maybe what it's mixing now versus the peak of what it mixed last year that may, you know, give us a little bit more perspective on things as well.
spk00: Sure. I'll start with the second part of that question. If you looked at Birria last year, I mean, it got up to as much as a 12%, well, over 12% mix. And really stayed double-digit mix-wise for, you know, about six or seven weeks. So, you know, as we highlighted last year, I mean, it was a very unique, distinctive product that we came out with. It had a huge response from consumers. And so you just saw, you know, a huge increase. And like we highlighted last year also, we saw, you know, record sales weeks last year as a result of the beer promotion. Yeah, this year, I'm not going to give actual numbers. We're seeing probably a little bit normal to slightly above normal mix in terms of beeria. So I think it reflects that. And that's not surprising. We knew that was going to be the case or that certainly would not or probably would not be as strong as last year, given that last year, brand new product. Nobody else was doing beeria, anything like it. And this year, you know, just not as exciting news. as last year. So not surprising that it's mixing lower. It's more, like I said, normal. It's slightly better than normal in terms of the mix. But, you know, we do think it's bringing in some consumers that normally wouldn't come to us. And like I said, it's going to give us a good read on the beef as we continue to look at that as being a possible permanent menu item. And we're going to include that beef in our menu test that we're currently doing and looking to expand. So that's the second part. In terms of the trends, company, franchise, I mean, The trend you're seeing currently in terms of the company, you know, being a higher same-store sales versus franchise, you know, we expect that to continue certainly through the second quarter. And, again, that just reflects, I think, part of that's just the lap year over year of the company sales versus franchisees because franchisees during this timeframe last year were, you know, really, really high sales growth. And so there's a lap benefit for company restaurants versus franchisees.
spk05: Got it. And then secondly, I mean, I know it's early on with kiosks and understanding, you know, what many see with the higher check. But is there a labor opportunity there and potentially either, you know, less folks at the POS or do you expect, you know, some flexibility in terms of maybe, you know, being able to reallocate some labor to other, you know, other parts of the restaurant?
spk00: Yeah, so as part of the test, as we're doing these kiosks, we are also testing the ability to move labor. Yes. And a key part of the test that we're finding is, well, a couple of key things. One is the kiosks need to be at the front counter. You don't want to have them elsewhere in a restaurant because we're seeing a much bigger response when you're at the front counter. And we're also finding, for our customers at least, that you want to have cash machines available. so they can use cash. Because, again, we're finding where we have cash machines, the usage is much higher. But, you know, the bottom line is we're seeing, you know, good average check growth really across the board. And certainly in those restaurants with a high kiosk usage, we are going to be testing, you know, reallocating labor.
spk04: And possibly removing labor. Gotcha. Thanks, Larry.
spk03: Thank you.
spk02: Ladies and gentlemen, just a final reminder, if you would like to ask a question, please press star and then one now. We'll pause a moment to see if we have any further questions. 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 Mr. Larry Roberts for closing remarks.
spk00: Well, thanks, everybody, for joining us today. Again, I can't tell you how much we're very excited about the process. We've got a lot of great things going on in the business and really looking forward to the balance of year as we implement these and continue to drive growth in the business. Thanks for joining us.
spk03: Thank you, sir. Ladies and gentlemen, that then concludes today's conference.
spk02: Thank you for joining us. You may now disconnect your lines.
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