This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Thank you for standing by, and welcome to the fiscal first quarter 2021 conference call and webcast for Del Taco Restaurants, Inc. I would now like to turn the call over to Mr. Rafael Gross, Managing Director at ICR, to begin.
spk08: Thank you, Operator, and thank you all for joining us today. On the call with me is John Capasola, President and Chief Executive Officer, and Steve Brake, Chief Financial Officer. After we deliver our prepared remarks, We'll 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 more detailed discussion of the risks that could impact Del Taco's future operating results and financial conditions. 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 or loss, operating income or loss, net cash flows provided by operating activities, or any other GAAP measure of liquidity or financial performance. Let me now turn the call over to John Capasola, President and Chief Executive Officer.
spk06: Thank you, Rafael, and we appreciate everyone joining us today. We're pleased to have delivered a very strong first quarter that sets us up for a great year at Del Taco. Although the operating environment remains very difficult due to continued COVID-related impacts and very challenging labor availability, Our team is doing an outstanding job growing sales by serving guests through our drive-through, takeout, and delivery channels while managing costs effectively. This resulted in significant first quarter restaurant contribution and adjusted EBITDA growth, margin expansion. First, let's review our first quarter performance and highlights. Following positive company and franchise same-store sales trends through the first 10 weeks of the quarter, which sequentially improved compared to the fourth quarter, we experienced accelerated sales growth in the final two weeks of the quarter as we cycled over the onset of COVID-19 last year. This resulted in first-quarter system-wide comparable restaurant sales growth of 9.1%, consisting of a 14% increase at franchise restaurants and a 4.9% increase at company-operated restaurants. Our sales trends continue to be a geographic story as our non-California restaurants, which are primarily franchise-operated, drove impressive comparable restaurant sales growth of 12% during the first 10 weeks prior to lapping the pandemic, which accelerated to growth of over 16% during the full 12-week fiscal first quarter. Restaurant contribution margin increased by 330 basis points to 16%, due primarily to strong comparable restaurant sales, including 4% menu price coupled with food deflation and labor efficiencies. In terms of profit, adjusted EBITDA increased $2.9 million, or over 33%, to $11.6 million from $8.7 million, while adjusted net income per diluted share increased to $0.07%. from adjusted net loss per diluted share of one cent last year. Finally, while our net debt remained relatively consistent with Q4 last year, our adjusted EBITDA growth reduced our net debt to adjusted EBITDA leverage ratio to approximately 1.87 times from 1.96 times. Our operations team is driving results through our Focus for Better initiatives that prioritizes four critical dimensions of our business, trusted and safe, making our teams and guests smile, productivity, and ultimate convenience. In Q1, this focus delivered continued improvement in key performance indicators, including a 3.6% increase in overall guest satisfaction versus the prior year and a 3% improvement in drive-through speed during our busiest lunch day part. Focus for Better has done a great job narrowing our focus in the restaurants and driving performance. It also provides for an ongoing framework for our restaurant general managers to pivot their leadership based on the various opportunities they face in their specific restaurant. And many are pivoting once again based on the industry-wide staffing challenge. We are executing a two-pronged approach to attack this challenge with a combination of bottoms-up best practices that we have mined from successful stores and brand-wide enhancements designed to increase candidates in our hiring funnel, and reduce friction in the application process. Our focus for better execution is serving as the backbone to deliver on our five drivers of sales acceleration. And those are value leadership, menu innovation, brand engagement, digital transformation, and ultimate convenience. Since we discussed these five drivers at length on our last conference call, I'll be brief with my updates today. Our value leadership strategy focuses on great everyday value across our barbell menu and is supported by ongoing menu innovation to keep our menu platforms fresh and interesting. For example, we started the year with a delicious new honey mango flavor that spans our barbell menu strategy from a dollar crispy chicken taco on our Dell's dollar deals menu up to a $5 crispy chicken epic burrito. We then launched our seasonal Lent promotion led by our crispy jumbo shrimp LTO, including our new honey mango flavor. In Q2, this was followed by our newest crispy chicken flavor, Honey Chipotle Barbecue, and today we relaunched our Crunch Tata platform with new items leveraging signature Del Taco ingredients atop a large 6 1⁄2-inch freshly fried tortilla. Our Crunch Tatas are akin to a tostada or a Mexican pizza. Our lineup will feature our traditional dollar bean and cheese Crunch Tata as well as new mid-tier offerings at $2 with queso beef, and at $3 with grilled chicken and fresh guacamole. These trade-up products highlight our QSR Plus positioning with quality ingredients like our fresh guacamole and queso while offering guests best-in-class value for the money. In terms of day parts, although breakfast and graveyard have been challenged in recent quarters, I am happy to report that thus far in the second quarter, our graveyard business has accelerated to become one of our top day parts on a same store basis compared to 2019 with double digit growth. Although breakfast remains negative on a same store basis compared to 2019, we are currently finalizing our plans to launch a new breakfast platform late summer, anticipating morning routines are likely to further normalize as vaccination rates improve. We expect this to put us in a position to capitalize on strong breakfast seasonality in the fall. Turning to our digital transformation. During the first quarter, delivery mix for company and franchise restaurants was approximately 7% of sales, representing sequential improvement from the second half of 2020, despite an increased menu price premium enacted during Q3 last year. To expand our ability to offer low friction opportunities for guests to order Del Taco, we are happy to announce another digital ordering channel. Beginning in May, we will roll out Google ordering across the system. As guests use Google to find a Del Taco, they can instantly order directly from those search results, including dine-in, take-out, drive-through, and delivery options. Our Dell app currently has more than 1.4 million users, which provides a solid foundation as we plan for the launch of our new holistic CRM platform by this fall, which will enable us to further digitize Del Taco and incentivize and reward our fans for their loyalty. The launch will include a host of features and improvements to the Dell app, the launch of our loyalty program, as well as a data and attribution capability to drive personalized and valued experiences for our guests to increase sales and frequency over time. Turning to development, our system growth will be led by franchisees who will open eight new restaurants this year, of which four have opened to date. Four company-operated restaurants will also open this year, of which two have opened to date, across infill locations in core markets and our first restaurant in our new company seed market in Orlando by this fall. We are excited to announce we have recently signed two new development agreements totaling 18 restaurants in the southeast with two experienced multi-concept QSR franchise groups. One agreement includes commitments for eight restaurants in the Greenville Spartanburg South Carolina region, and three restaurants in the Macon, Albany, Georgia region. The other agreement includes a seven-restaurant commitment in the Sarasota, Bradenton region on Florida's west coast. We believe these signings and other active discussions are enabled by several factors, including our unique QSR Plus brand position and ubiquitous menu that drives broad appeal, a strong track record of eight consecutive years of franchise-comparable restaurant sales growth across a broad franchise geography that spans 15 states coast to coast, and the relevance of our new FreshFlex prototype, which has been very well received. FreshFlex is designed to propel growth with new and existing franchisees by expanding real estate opportunities to help lower net investment through multiple build-out options, as well as modernizing the guest experience. We are very excited about its distinct design and look forward to our first fresh flex building in our new company seed market in Orlando by this fall. We are continuing to test our remodel program with this year expected to complete up to 10 extensive remodels of older facilities and up to 10 remodels of more modern facilities with primarily cosmetic upgrades at a lower investment level. We are optimistic about the potential returns of these projects particularly given the encouraging results on our initial 2019 and 2020 remodels and the integration of our new Fresh Flex prototype into our remodel design. We expect this final phase of testing will lead to a formal system-wide remodel program as we move into 2022. Finally, we announced our second quarterly cash dividend as part of our strategy to deliver shareholder returns through three key levers. driving our core business, deploying a disciplined investment strategy, and returning excess capital. Our core business drove strong restaurant contribution and adjusted EBITDA growth during the first quarter, and our disciplined investment strategy features continued growth led by franchising alongside a remodeling program, which each leverage our new Fresh Flex design. This approach is expected to enable the return of excess capital, inclusive of the quarterly cash dividend program, along with opportunistic debt repayment and share repurchases. In closing, while COVID is certainly not yet fully behind us, our core business acceleration and development strategy led by FreshFlex has set us up to drive continued growth this year and beyond. Now I'll turn the call over to Steve to review our first quarter financial results and reiterate our annual guidelines for 2021.
spk03: Thank you, John. During our 12-week fiscal first quarter, total revenue increased 5.2% to $115.5 million from $109.8 million in the year-ago first quarter. Company restaurant sales increased 3.2% to $103.6 million from $100.3 million in the year-ago period. This growth was primarily driven by the positive, comparable restaurant sales. Franchise revenue increased 18.5% year-over-year to $5.2 million from $4.4 million last year. The growth was driven by the increased franchise comparable restaurant sales, coupled with additional franchise-operated restaurants compared to last year. System-wide comparable restaurant sales increased 9.1%, consisting of a 4.9% increase at company-operated restaurants and a 14.0% increase at franchise restaurants. I want to also add perspective to our recent sales trends. As John noted, the final two weeks of our first quarter experienced outside sales growth as we lapped the initial COVID-19 impact. To help neutralize the impact of lapping the pandemic, I am happy to share that on a same-store basis compared to 2019, our first quarter grew at a low single-digit rate for company restaurants and at a high single-digit growth rate for franchise restaurants. In addition, thus far in the second quarter, on a same store basis compared to 2019, our growth has accelerated to a mid single digit rate for company restaurants and a low double digit rate for franchise restaurants. It is also important to note that this same store growth compared to 2019 is being achieved despite certain day parts and geographies that were particularly challenged by the pandemic. Specifically, For company restaurants on a same store basis compared to 2019, during the first quarter, our breakfast day part was negative high single digits, but has improved to negative mid single digits thus far during the second quarter. However, on a same store basis compared to 2019, the graveyard day part began 2021 in the negative mid single digit range and turned positive as the first quarter progressed, achieving negative low single digit performance compared to 2019 during the full first quarter. Since then, Graveyard has improved significantly to become one of our top day parts on a same-store basis compared to 2019, with double-digit growth thus far during the second quarter. In terms of geographic performance for company restaurants, on a same-store basis compared to 2019, during the first quarter, although both LA and Orange counties remain negative, Clark County, covering Greater Las Vegas, improved to flat. Also, thus far during the second quarter, on a same-store basis compared to 2019, LA County has turned positive, and Clark County is up high single digits, with Orange County improving sequentially to slightly negative. All other California counties and our Atlanta restaurants were significantly positive on a same-store basis compared to 2019. During the first quarter, and the second quarter to date. Turning now to the rest of our P&L. Food and paper costs as a percentage of company restaurant sales decreased approximately 250 basis points year-over-year to 25.7% from 28.2%. This was primarily driven by a menu price increase of approximately 4% coupled with food deflation of approximately 2%. That was driven by reductions in produce, beef, and cheddar cheese. Looking ahead, we expect slight food inflation in Q2, followed by modest inflation during the second half, resulting in full-year inflation of approximately 1%. Also, please note that during 2020, the first quarter was our highest food percentage at 28.2%, followed by the remaining three quarters, which each ran in the mid to high 26% area, representing more challenging comparisons for the balance of this year. Despite the $1 increase in California minimum wage to $14 an hour in January 2021, our labor and related expenses as a percentage of company restaurant sales decreased 50 basis points to 34.3% from 34.8%. This was driven by effective management of variable labor and the favorable impact of comparable restaurant sales growth, including 4% menu pricing, along with reduced workers' compensation expense based on favorable underlying trends, partially offset by the impact of the California minimum wage increase. Occupancy and other operating expenses as a percentage of company restaurant sales decreased by approximately 30 basis points to 24.0% from 24.3% last year. The decrease was due to lower advertising expense, repairs, maintenance, and supplies, coupled with leverage from the comparable restaurant sales growth, mostly offset by an increase in delivery fees as delivery grew to 7% of sales compared to 3.3% last year and incremental net direct COVID-19 costs. Looking ahead, we expect our delivery fees to level compared to the prior year and a potential reduction in incremental direct COVID-19 costs as vaccination rates improve. However, During the second and third quarter, we will lap a muted 2020 advertising expense of approximately 3% compared to our typical advertising spend of approximately 4% of restaurant sales. Restaurant contribution grew 30.6% to $16.6 million compared to $12.7 million in the prior year, while restaurant contribution margin increased approximately 330 basis points to 16.0%, from 12.7%. General and administrative expenses were $11.3 million, up from $9.9 million last year, and as a percentage of total revenue, increased 70 basis points to 9.7%. The increase was primarily driven by increased performance-based management incentive compensation, as we lapped a minimal incentive compensation accrual in 2020 due to performance, compared to strong performance this year. as well as increased legal fees and non-cash stock-based compensation, partially offset by reduced executive transition costs and travel expenses. Adjusted EBITDA grew 33.4% to $11.6 million compared to $8.7 million last year and increased as a percentage of total revenues to 10.1% from 7.9% last year. Depreciation and amortization was $5.9 million, down from $6.1 million last year due to the impact of fully depreciated assets, and decreased 50 basis points to 5.1% as a percentage of total revenue. Interest expense was $0.7 million compared to $1.5 million last year. The decrease was due to a lower average outstanding revolver balance and lower one-month LIBOR rate compared to 2020. During the first fiscal quarter, our outstanding revolving credit facility borrowing remained at $115 million, consistent with the end of fiscal year 2020, and the remaining availability under the revolving credit facility was $121.6 million. In addition, at the end of the fiscal first quarter, our balance sheet debt net of cash to adjusted EBITDA leverage ratio declined to approximately 1.87 times compared to approximately 1.96 times at the end of fiscal 2020. We also repurchased approximately 106,000 shares of common stock, an average price of $8.92 per share during the first quarter, for a total of $0.9 million. At the end of the fiscal first quarter, approximately $17.1 million remained under our $75 million repurchase authorization. Net income was $2.6 million, or $0.07 per diluted share, compared to a net loss of $102.5 million, or $2.76 per diluted share last year. We also reported adjusted net income, which excludes various items identified in our earnings release in the financial tables. Adjusted net income was $2.5 million, or approximately $0.07 per diluted share, compared to adjusted net loss of $0.03 million, or $0.01 per diluted share last year. We also announced our second quarterly dividend of $0.04 per share of common stock that will be paid on May 27, 2021 to shareholders of record at the close of business on May 13, 2021. Finally, please refer to today's earnings press release for our fiscal 2021 guidelines that we furnished last quarter. Our second quarter is off to a great start with strong system-wide sales growth on a same-store basis compared to 2019. which is expected to enable robust second quarter same store sales performance compared to 2020. As we plan for a second half, we believe increased vaccination rates coupled with our five drivers of acceleration will set us up to maintain our top line momentum as we lap more challenging comparisons due to normalized sales volumes that drove positive low single digit company and positive mid single digit franchised same store sale results last year driven by the very successful third quarter 2020 launch of our crispy chicken menu. In addition, following our significant first quarter restaurant contribution margin expansion that was aided by food deflation and lapping a high food percentage in 2020, we are poised to lap more normalized restaurant contribution margins during the second and fourth quarters this year. Recall, however, that last year's restaurant contribution margin was particularly high in the fiscal third quarter, primarily due to a lower than typical level of advertising spend due to the pandemic. We therefore continue to expect modest restaurant contribution margin expansion this year on an annual basis. That concludes our formal remarks. As always, thank you for your interest in Del Taco, and we are happy to answer any questions.
spk01: Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first question comes from the line of Alex Slagle with Jefferies. Please proceed with your question.
spk04: Thanks. Hey, guys. Thanks for the question. Good to see everything accelerating here. I had a question on development. I know you picked up the pace of conversations with new and existing franchisees about signed development agreements. So I'm just curious what these conversations have been like, sort of the reaction to the new prototype and the performance of your existing franchise base and if you've had any evolution in the composition of those interested parties and maybe their preferences. It used to be the buy and hold was the strategy, but I just wonder how that's evolved.
spk06: Yeah. Hey, Alex. So first off, definitely continue the theme from the last call, which is the combination of the launch of the Fresh Flex prototype, which really creates nice um you know opportunity for any active developer as they think about growing del taco that's that's definitely a piece of the puzzle as we think about the the kind of flexibility you need to to access real estate and then also the you know obviously having the tech integration to be able to meet consumer demand so really i'm getting lots of positives on fresh flex and and feel really great about you know moving that prototype forward You know, in addition, you know, as we've been trumpeting here for a bit, the eighth consecutive year of positive same-source sales growth on the franchise business has been a big deal, and it's been nice to be able to really kind of actively talk about that to prospects. And so, you know, those are probably, you know, the two big things that are going in our favor right now and causing a real influx of conversations to occur, or underpenetrated territories. And that obviously culminated to a couple of deals getting signed here recently. And there's many more conversations kind of happening. And how many of those come through to actual deals, we'll see. But we certainly have momentum in this area. And I'd say in regards to the quality of the candidate, Yeah, we're seeing a really nice quality candidate coming to the table that wants to grow from restaurant one and doesn't necessarily want to build or want to buy, but that buy dynamic is still out there, and we hear that from time to time, but I'd say right now, We're hearing a nice bit of a mixture on that right now that's allowing for probably more meaty conversations across the board. So we feel good about the progress we've made on that front.
spk04: Great. And then the delivery pricing that you took in the third quarter, it sounds like not a whole lot of pushback now that it's gone up to 7% of sales, but Just kind of interested in what the reaction's been, and I guess some of that is the price in that mix, but any thoughts on what the reaction's been?
spk03: Sure, Alex and Steve, you know, we did take that price increase up to 20% early Q3 last year. You know, that followed a lengthy test of that, you know, during first half of 2020. And certainly during that test, you know, we did not sense or detect, you know, any notable elasticity, which enabled us to make the move. And, you know, clearly delivery was you know kind of held in his since accelerated sequentially as we moved into new years so we you know feel really good about that you know pricing level that we've enacted um definitely goes a long way towards you know managing margins um so overall we feel good about the model that we've created we're at the point where um you know we're limiting the impact on margins and we're getting a similar you know penny profit dollar if you will flow through on delivery that we see you know at a restaurant transaction You know, that flow-through might be a little smaller on a percent basis that could pressure margins, but really we also believe, you know, a good amount of this delivery is incremental, which, as you know, creates leverage in other areas of the P&L. So overall, the strategy, the 20%, we think it really neutralizes any overall restaurant margin pressure and, you know, really puts us at the point where we're generally agnostic between a delivery margin transaction with a much higher check that we continue to see versus something at store. So we feel good about that. Got it. All right.
spk04: So thank you. You're welcome. All right.
spk01: Thank you. Our next question comes from the line of Nick Setchin with Wedbush Securities. Please proceed with your question.
spk02: Hey, thank you. And congratulations on some really great results. Great to hear the quarterly trends as well. Steve, you know, just given the top-line trends, particularly the stepped-up trends in April here on the company-owned stores, is there any chance you can maybe bracket the four-world margin guidance a little bit more than modest improvements? I mean, it seems like, you know, the food cost inflation guidance is pretty much the same, you know, the marketing expense. through the year was already known. Any chance you could help us maybe bracket that a little bit more than modest improvement year over year?
spk03: Yeah, we certainly feel pretty good about Q2. It's more of a normalized outcome. I'm also pointing out that Q4 was more of a normalized margin. The one little deviation a year ago, Q3 was very strong, came in at 18%. That quarter, each of food, labor, and OPEX ran the lowest all year on a percent basis among the four quarters. So Q3 will certainly be the challenging quarter in terms of margin performance. But you know feel otherwise you know critically good about q2 um on the food line you know overall you know incredible outcome and sub 26 in the first quarter um you know we mentioned that that'll move to some slight inflation from deflation as we get into q2 you know with second half having you know more notable you know modest inflation on the line so you know overall there's a little more color on on the food line then you know labor and optics those two line items As we move seasonally out of Q1, that historically has lower AUVs into higher seasonality quarters. Certainly those two lines sequentially will lever as we move forward. And really, especially thinking about second half, notably, we're going over a great second half last year. Company was up low single digits, a nice strong 2% in Q3. And franchise also, great performance for them as well. The new crispy chicken launch, you know, kind of was really the catalyst that drove some of those sales. And, you know, notably as sales recovered last year, a lot of strong labor and other operating efficiencies were kicking in. So, you know, we had some pretty good performance second half. So as we look at back half this year, you know, where sales are, you know, in terms of magnitude of sales growth is going to heavily inform what that margin looks like. you know, in the second half. So, you know, a little early to put a finite collar on that. You know, we are still, you know, inching our way out of a pandemic, but feel really good. You know, everything John touched on, I mean, the brand's well-positioned. You know, we feel great about the sales line, which will lead to comfort on the margin line, but naturally things have to play out, and hopefully that's a little added color for you.
spk02: And then, you know, obviously marketing spend this year should be, you know, a lot of ammunition just year over year in terms of the normalization, you know, even as we kind of go over second half. Any chance you could kind of, you know, even if you don't tell us the exact number of spending, but, you know, at least just directionally, you know, Q2, Q3, Q4, you know, if there's certain quarters where, you know, marketing is, you know, maybe more concentrated than others?
spk03: Where we are right now, overall, our model is to deploy 4% in a given fiscal year. Notably, last year, due to some reduction in advertising during the height of the pandemic, 2020, we spent 3.7%. So right there, we'll have a 30 basis point headwind on the margin line just due to that. So notably, when we talk about modest restaurant margin expansion, that includes absorbing that 30 BIP. So As far as where we sit right now, we spent a little under 4% during the first quarter. In general, the next few quarters we'll be in that 4% area. Likely Q3 will be a bit higher. That's our toughest sales comparison. We want to really have a strong advertising deployment that quarter to help sustain our sales trends. And what we're lapping, Q2 and Q3, those were the two quarters where a year ago we deployed around 3%. So that right there suggests you're looking at a full percentage plus of headwind in each of those quarters. And then the fourth quarter, probably more level in that kind of 4% area. So that's a little bit of color on the cadence of our advertising line that is inside operating expenses, most of you know.
spk02: Got it. And then just lastly, any chance we could see further price increases on delivery going forward, just given the trend across the industry seems to be that there's very little pushback on further increases?
spk03: Yeah, good question. Very topical, top of mind here. We are currently testing 25%, so that test is underway and will lead to a decision down the road here. Thank you. You're welcome.
spk01: Thank you. Our next question comes from the line of Joshua Long with Piper Sandler. Please proceed with your question.
spk07: Great. Thank you for taking the question. I wanted to follow up on that last point on the testing of the 25% menu price and then some of your earlier comments, Steve, in terms of being able to mitigate some of that margin pressure with the 20% increase. And maybe really just summarizing the question, does 25% really get you to where you're fully agnostic? Does that just narrow that gap a little bit more? Just trying to get a sense of where we are in that ultimate long-run potential of being truly agnostic between in-store and delivery.
spk03: I would say due to the 1.85 time area average elevated check we're seeing on delivery, with today's 20% premium, the dollar flow through on a delivery transaction truly is lined up with what we see at the restaurant on a more normalized check average. We're kind of already there, so I mentioned that on a margin percent basis, maybe a slight drag, but if we indeed prove out and move to 25%, I would say we're clearly agnostic, certainly on the dollar flow-through line item and even on the margin point where we might even be agnostic. skewing towards you know very much fine with delivery i mean it's definitely a proven meaningful channel um that's not going to change so naturally you know our view is to continue to nurture that and you know it goes back to ultimate convenience you know the making sure the guests can use this how when and where they want to use us so that'll remain you know core to our strategy understood very helpful color there thank you for that and then thinking back to uh maybe john's comments on the geographic story and how this is playing out
spk07: we've been talking about this for a while and said that definitely makes sense. And I was curious if we could dig deeper into understanding some of the consumer behavior beneath that trend. When you think about or look at the transaction data and think about your consumers in those various markets, are they acting differently above and beyond just the restrictions and maybe the changes in behavioral patterns in terms of going to the office or having area – restrictions in terms of daytimes? Anything else you can glean in terms of how the consumer is using and engaging with your concept across those various geographies that's worth noting?
spk06: Yeah, sure. You know, I think, first off, I think the good news on this is that, you know, Those three counties that we've been highlighting for a few calls now, L.A., Orange, and Clark, could have really lagged relative to the other company markets, which have all generally been positive. I guess the good news is we're starting to see some positive trends in those markets from a perspective that they're moving in the right direction, right? They're progressing. although they're not all where we want them to be just yet, we definitely see that a combination of kind of factors are happening. When you look at a couple of the markets, I think it's L.A., L.A. County and Clark in particular, they had significant unemployment headwinds as well relative to national trends and what we were seeing. So good news is some of those trends have started to improve with progress over the last few periods, Josh. So we think that'll help those particular counties as unemployment kind of normalizes there a bit more. And then the other dynamic, you kind of hit the nail on the head, which is A few of these counties, Orange County is a great example. Lots of inflow into Orange County from other counties for daytime employment. And many more kind of white-collar jobs in Orange County, more office buildings, things of that nature that have been – very virtual, as we all know. So as some of that starts to come back, we expect a county like Orange to start to normalize a bit more relative to the type of occasions that we serve during the day. So those are some of the things relative to those three counties. But I think Steve and I sitting here today, we feel pretty good about the fact that they're moving in the right direction. They're not exactly where we want them, but over time we do believe that we'll get back to more normalized behavior in those counties, which will certainly help the company trend because, as we've noted, it's a high concentration of company stores coming out of those counties.
spk07: Understood. Thank you for that. And my last question was circling back to your comments around the labor approach and how you were both working bottoms up and then kind of widening your funnel. And I'm curious to understand more about that and what you've learned to date or what maybe some of the early wins have been in terms of really being able to try to maybe outmaneuver some of that, I wouldn't call it a labor shortage, but some of the pressure just on really refilling that or building that human capital pipeline, which is a crucial piece to both the brand and your historical successes.
spk06: Yeah, let me give you more color on that. So on a system-wide basis, so on a national basis for us, for Del Taco, we've definitely seen applicant flow slow down, right? So that's an early indicator. That's an important one to recognize. But turnover has been very stable in Q1 and so far in Q2. And then when you look at the operations, further buts are saying the fact that there hasn't been a major impact on our business just yet. As I noted on the call, our operating guest metrics have been stable and improving. You heard that guest OSAT increased by 3.6% in Q1, and then lunch drive-through speed was better by 3%. So it's safe to say that our system-wide claims for sales are not being materially impacted at this point. However, there are pockets of stores being affected, and the big key here is we need to stay ahead of the applicant flow and stay focused on maintaining strong staffing levels system-wide so this doesn't become a problem for Del Taco. And that's what we're doing. I mean, that's my comments on best practice sharing. We're doing that with franchise owners. We're doing that with our operators. And then we've got the addition of new recruiting tactics, including – an enhanced employee referral program that we're rolling out, and then our franchisees have decided to do that as well. So it's both company and some franchise momentum in that. We've also got new and improved restaurant signage that has gone up that includes starting wage in the stores that really need to kind of You know, talk about that and make that top of mind for consumers coming in because sometimes those best consumers can turn into your best employees. And then we've got a new instant interview process to quickly connect with potential applicants. So that's about speed, just getting them through the application very quickly and hired very quickly so we don't miss the opportunity. So, again, not an issue that we're seeing in regards to business performance right now, but definitely some early indicators in regards to applicant flow. that we are trying to stay ahead of.
spk07: Understood. And then just one point of clarification on that. Are these relatively new initiatives here in, say, 2021 or first quarter, or have you been layering in some of these over time, just trying to get a sense of the timing of these pieces?
spk06: Combination. There's some that we're layering in, and there are some that we're just reinforcing or, you know, refreshing, if you will.
spk07: Got it. Thank you.
spk01: Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. For participants using a speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from the line of Todd Brooks with CL King and Associates. Please proceed with your question.
spk05: Hey, thanks, and congratulations on the great momentum we're seeing in the business. Really great to see. Thanks, Todd. You're welcome. If we can talk first about kind of that pipeline of active discussions on the potential franchisee partner side. Two announced deals, nice size in the southeast. Obviously, you said multi-branded other QSR operators, so it seems like the type of franchisees that you want to be bringing into the market. If you look at the pipeline of discussions, are they skewing to the southeast just from the development opportunity where I think you think that could be a couple hundred store market? Or what's the breadth of where you're seeing kind of that best, most intense level of franchisee interest?
spk06: Yeah, it's really over the breadth of our operating geographies and some new territories that folks are interested in. I mean, the reality is, is you've got a lot of underpenetrated markets in the Western Third, where we currently operate in, and we're seeing, you know, interest there, and also seeing existing franchisees really excited about Fresh Flex, and then you know obviously the southeast has been a priority market for us and we've been doing a lot of work down there to to grow our presence so um good news there is you know both of these deals obviously are in the southeast and and there's more conversations happening in the southeast because of the presence and and how the brand is building down there i think that you know, gives folks more confidence in regards to the brand's ability to perform, and that causes more, you know, material conversations to happen. So that's certainly happening in the southeast. And then we're getting approached, you know, from a new market perspective, you know, folks that want to go in and green fill the new market that they feel like they can be first mover in. And so there's a few of those conversations happening, Todd. So definitely the southeast is a priority, and we're all over the southeast. But there's more conversations going on right now than just the southeast.
spk05: That's helpful. Thanks, John. Second, kind of following up on some of Josh's questions about labor, if you look at the way that you characterized it, that it's not a constraint yet, but the front end of the pipeline is slowed, so you want to bolster the applicant pipeline. If you look at areas of the business that are coming back, and I'm thinking specifically graveyard areas, Is the labor pinch being felt with staffing that day part or maybe reopening that day part in some of the units because you're having challenges staffing up for that? And is that an opportunity once we get over this staffing challenge for even better same-store sales results on what you're reporting now?
spk06: Yeah, so we're not seeing that just yet outside of just a few, obviously a few restaurants that are those pockets of opportunities that we're seeing and I'm sure many other brands are seeing. So just not yet in regards to the trends. Hours of operations have been a piece of the shoulder day parts for us over the last year or so. As you recall, we've called some hours here and there to optimize profitability, and we're not fully back to pre-COVID level hours of operations across the system just yet, although we're building our way back there. And that's part of the tailwind that we're seeing at late night and certainly part of some of what we may see at breakfast over time here over the coming quarters. It's not material enough to have affected our Q1 same-store sales, but obviously the day part in a vacuum, from a percentage standpoint, it's going to help the day part as you have more hours of operation. So I think the balance that we're striking right now is, Where we have those issues, we're probably not adding those hours back just quite as quickly, which isn't in a lot of restaurants and in a lot of markets just yet. And, you know, in the other markets or restaurants where we're not having the issue quite as bad on the staffing front, you know, we're probably still, you know, not quite where we were pre-COVID in regards to hours of operation. So, you know, it's a balancing act that we're playing right now in regards to the staffing and day parts. But Like I said, the key for us right now across the system is staying very focused on this applicant funnel and staying ahead of the game here. I mean, we expect to have a few issues here and there, but we do not expect for this to be a system-wide brand issue because we are actively and vigorously managing it.
spk05: That's very helpful. Thank you. And then the final one for me, you talked, I believe it was on the last conference call, about the possibility of a couple of new platforms, product platforms this year. You just talked about breakfast with the late summer launch, timing it for kind of an early fall, hopefully return to office type of scenario. With the rebound that you're seeing in Graveyard currently, would that support pivoting that way from a platform or product newness standpoint? Or or does recovering on its own actually get you to pivot towards more of the core day parts as far as a potential new platform?
spk06: Yeah, platforms are going to continue to be – let me just hit that first. Product platforms in particular are going to continue to be something that we will actively be developing against and innovating against, and every year you'll likely – you know see us deploy some level of product platform um to keep keep our news fresh and interesting and and then you know obviously um you know developing products against those platforms are really key as well so excited about what's happening with breakfast i think we've got a great platform to deploy that represents value and mid-tier um really well and consumers going to love it and um We'll see what it does for the day part. Some of that is definitely macro, but we do expect to start to see more normalized behavior, especially as we move into the fall. So we're anticipating that, and we want to try to get ahead of that with some new products and some new exciting news from Del Taco at that day part. In regards to late night, you know... You know, our late night and graveyard business, you know, have really been heavily influenced by the delivery channel, both over index from a percent of sales perspective compared to other day parts. So, you know, as you heard, we're running higher so far this year from a delivery perspective, both quarter to quarter, Q4 to Q1, as well as year on year. So that extra momentum we're feeling on delivery, you know, with that over-indexing that's happening with graveyard and really late-night behavior is definitely translating into those later day parts. So it feels like, Todd, to me that the good play right now or the right play right now for us, given that we're seeing that kind of momentum, is to continue to harness delivery, continue to leverage the fact that maybe more folks are out and about again, with more normalized evening activity. That will continue to build, we believe, through the summer. And we probably don't need to go the route of a product platform just yet. At late night, just really operate well, do delivery well, and make sure we take advantage of, you know, the added traffic that may be in the marketplace in the evening over the summer. So that's how we're thinking about it right now.
spk05: That's very helpful. Thanks, John.
spk01: Thank you. We have reached the end of our question and answer session and the conclusion of today's call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
Disclaimer