The Habit Restaurants' (HABT) CEO Russ Bendel on Q1 2018 Results - Earnings Call Transcript
The Habit Restaurants, Inc. (NASDAQ:HABT) Q1 2018 Earnings Conference Call May 2, 2018 4:30 PM ET
Executives
Russ Bendel - President and CEO
Ira Fils - CFO
Analysts
Will Slabaugh - Stephens Inc
David Tarantino - Robert W. Baird
Joshua Long - Piper Jaffray
Jeff Farmer - Wells Fargo Securities
Andrew Charles - Cowen & Company
Nick Setyan - Wedbush Securities
Matthew Difrisco - Guggenheim Partners
Stephen Anderson - Maxim Group
Brian Vaccaro - Raymond James
Operator
Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Habit Restaurants, Inc. First Quarter 2018 Earnings Conference Call. Please note that this conference is being recorded today, May 2, 2018. On the call today, we have Russ Bendel, President and Chief Executive Officer; and Ira Fils, Chief Financial Officer.
By now, everyone should have access to the company's first quarter 2018 earnings release. If not, it can be found at www.habitburger.com in the Investor Relations section. Before the company begins their formal remarks, I need to remind everyone that the discussion today will include forward-looking statements. 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 the company expects. The company refers you to their recent SEC filings for a more detailed discussion on the risks that could impact their future operating results and financial conditions.
Lastly, during today's call, the company will discuss non-GAAP measures which they believe can be useful in evaluating the company's 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 the company's earnings release.
With that, I will now hand the conference over to Russ Bendel. Please go ahead.
Russ Bendel
Thank you, and good afternoon, everyone. I'll start the call with a brief overview of the first quarter, and share our thoughts for the remainder of the year. I will then review our first quarter financial results in more detail, as well as review our updated guidance before we open the call for your questions.
For the first quarter of 2018, total revenue increased 17% year-over-year, to $91.9 million. Adjusted EBITDA for the quarter was $7.9 million. Company-operated comparable restaurant sales decreased 1.4% during the quarter. This was below our expectations especially given that we had a good start to Q1, with our quarter-to-date results being positive as of our last earnings call. However, we had a particularly difficult March, resulting in the negative comparison for the full quarter. So far, early in the second quarter, we have bounded back from March softness with Q2 comps down 7/10ths of a percent quarter-to-date. While we believe part of the softness in March was a result of the cold and rainy weather in California, we are also taking a hard look at the effectiveness of our free Charburger promotional effort.
This promotion we ran, in March, was our annual free Charburger for all existing and new CharClub members. In fact, we hit a new milestone of a million CharClub members, which is almost double the amount we had at this time last year. We will continue to use this database, not just for value offerings, but for communicating our regular LTOs as well. In fact, our open rates are still among the highest in the industry. And our unsubscribed rates are very low. So we think it's a valuable channel to communicate both ends of the barbell. However, while the free Charburger promotion has historically done a good job at driving both incremental visits as well as CharClub memberships. Given this was the third consecutive year of the promotion; it appears it may not have been as effective as in the past years of driving incremental traffic.
On our fourth quarter call, we outlined a number of initiatives we have been working on. And today, I'll review our current progress and thoughts going forward for them. As you may remember, we have focused our offers on three initiatives; quality, convenience, and innovation. Let's start with quality, specifically food quality. Over time, we have demonstrated a strong commitment to using the freshest ingredients, made to order, in combination with our distinctive char-grilled preparation technique. This commitment has allowed us to offer a barbell menu, which includes our core everyday value offering, as well as premium-priced high-quality limited time offerings. These offerings have not only enhanced The Habit's reputation for quality, but they have also provided additional variety for our guests.
In the first quarter, our premium LTO was an Asian sesame ginger salad with edamame topped with either a fresh grilled chicken breast or sushi-grilled ahi tuna steak. That item sold for $7.99, which was a premium priced, but at a discount compared to any of our direct or casual dining competitors for the quality and size of this offering. This LTO preformed in line with our expectations during the quarter, and we have another great LTO product in the second quarter, our guacamole crunch char-burger, which is also getting great feedback from guests. Recently, we began to test items on the other end of the barbell focused on value. We launched the first of what we called "Digital Deal," which is a lower priced off-menu item that is promoted exclusively through our digital channels.
The items we tested in an Arizona market included two sliders with a small side of fries for $4.50, and a BLT with a small side of fries for $3.95; these offerings area great value without discounting any of our existing items, which was very important to us. While we were pleased with the value and the quality of the digital deal offering, we were disappointed in the initial response. We believe this may be due to the fact that we ran this offering simultaneously with the free char-burger campaign. Both offers were communicated through the CharClub database, and a majority of the members came for a free char-burger versus trying a digital deal.
While we conceptually liked what we are trying to accomplish with digital deals, we need to rework how we execute on it. And we may revisit it once we have our mobile app completed and rolled out. But we do not plan to continue digital deals at this time. We will also continue expand our competitive advantage through the quality of our human capital. We have, for long, put a high value on the ongoing training and professional development for all of our team members, whether it be management or hourly team members. We are currently evolving the platform, and are close to rolling out new enhancements which give us the ability to interact with every employee digitally.
These enhancements will make our platform more employee-interactive and self-directed for both the hourly and management team members. We believe our historical focus on professional development has a very positive impact on employee retention, while also continuing to provide a superior guest experience. We continue to be very focused on making the habit more convenient for our loyal customers, offering delivery.
One of our most important initiatives on the convenience side is progressing. We are currently 50 days into our San Diego test with DoorDash, and expect to launch our Sacramento test with Postmates shortly. So far, the tests with DoorDash are going well, and we are very encouraged with the early results. So much so, that we have already begun to expand delivery with DoorDash, and expect to have it live in about 150 restaurants by the end of the second quarter.
Having an integrated solution with our POS system was very important to us when choosing a delivery partner. Most third-party providers are supplying a tablet to the dining establishment, which is not efficient for our team members. However, the two partners we are testing are working with our IT department to make the employee and customer experience seamless using our current POS system. By working with two different providers with similar economics, we hope to understand more quickly how delivery can impact our top line and bottom line, and assess how well it's being received by our guests. We are excited about the delivery opportunity, and we'll update you on progress throughout the year.
Our new digital agency, which is developing a proprietary mobile app for us, has hit the ground running. As a reminder, this app will allow our customers to skip the line and place their order from their mobile phones or a self-ordering kiosk in the stores. We hope this will increase our speed of service as well as help to offset increased labor costs the industry has been experiencing. We also believe the mobile app will give us yet another channel in which to engage with our guests.
And finally, with regards to convenience, we have been optimizing our drive-thrus with regard to throughput, speed of service and kitchen efficiency. We're also searching for optimal ways to communicate key habit branding elements to our customers in the drive-thru queue around the fact that our food is made fresh to order with high-quality ingredients. Also one of the drive-thru locations expected to open in the third quarter in Provo, Utah, will have a new kitchen layout that we believe is more labor-efficient, therefore providing better experience for guests as well as our team members. Our second location with this new kitchen layout will open in the fourth quarter.
Moving along to our innovation initiatives, we recently retained a National Advertising Agency to help solidify our brand positioning as well as enhance our digital media strategy and creative messaging. We expect the end result of this initiative will provide a new perspective on how we communicate our brand attributes to our core customers. We will also update you further on this initiative as it progresses. Earlier, we spoke about our culinary pipeline, which has new and innovative flavors that we believe will resonate with our core guests and attract new users to The Habit brand.
In addition, our breakfast day-part expansion test is expected to rollout in six drive-thru locations in early June. We believe that drive-thru locations are great place to start our breakfast test, which addresses the consumer side for both convenience and favorable flavors. We also will continue to work with our operations teams to find additional non-guest facing labor saving opportunities.
Turning to development; during the first quarter, we opened 11 new company-operated restaurants, four of them being drive-thrus. As far as our East Coast development goes, three of the 11 stores we opened during the quarter are on the East Coast with two stores opening in Maryland and one in New Jersey. While on average, new stores in East will open at lower volumes than new stores in the West. We continue to be very pleased with the same-store sales growth on the East Coast. We continue to expect to open approximately 30 new company-operated locations in 2018, while franchises expect to open six to eight locations during this year. Approximately 20% of our company-operated growth will be on the east coast and about 50% of our total development will be drive through locations.
With that, I'd like to turn the call over to Ira to discuss our financial results in more detail.
Ira Fils
Thanks, Russ. Now turning to the results of our 13-week first quarter ended March 27, 2018. Total revenue increased 17% to $91.9 million for the first quarter of 2018 compared to $78.6 million in the comparable year quarter last year. The 11 new company-operated restaurants open during the quarter were open for a combined 63 sales weeks. Our other 193 company operating locations were open for a combined 2509 weeks in the quarter.
In total, the 204 company-operated locations were open to combine 2572 sales weeks in the quarter. As Russ mentioned, comparable company-operated restaurant sales decreased 1.4% in the first quarter. In breaking down the 1.4% comp store sales decrease we saw a 2.1% decrease in traffic which was partially offset by a 0.7% increase in the average transaction amount.
In breaking down the 0.7% increase in the average transaction amount, we had a 2.4% net price increase partially offset by 1.6% decline in mix. Turning to expenses as a percentage of company revenue food and paper costs were 30.5% which was a 130 basis point increase compared to last year. The increase was largely driven by significant commodity pressure in beef, French fries, and chicken, when compared to last year. Sequentially from Q4 of 2017, food and paper costs increased only 10 basis points.
Labor-related expenses, as a percentage of company revenue were 34.9%, which is a 170-basis point increase from the first quarter of 2017. Of the 170-basis point increase, 160 basis points were due to an increase in direct labor wages along with a 10-basis point increase in labor-related expenses. Increase in direct labor was largely due to government-mandated wage rate increases for hourly employees, particularly in California.
For the quarter, the average hourly rate increased approximately 6%. Partially offsetting the wage rate increase were productivity gains centered around enhancements to our opening and closing procedures. Moving forward, we plan on getting more responsive with pricing on a regional basis, to help combat the current wage headwinds. We have a 3.9% price increase planned for the end of May, which will result in cumulative pricing of 6% during Q3, and 5.5% during Q4.
Occupancy and other related expenses as a percentage of company revenue increased approximately 70 basis points to 17.4%. The increase was largely due to higher rent, primarily associated with unit development, as well as high utility expense and higher common area maintenance expense. Our general administrative expenses increased approximately $1.1 million to $8.9 million during the first quarter, primarily due to causes associated with supporting an increasing number of restaurants in a larger geographic area. As a percentage of total revenue, general and administrative expenses decreased 20 basis points to 9.7%.
Depreciation and amortization expense increased to $5.6 million from $4.2 million last year. As a percentage of company revenue, depreciation and amortization expense increased 6.1% for the first quarter of 2018, compared to 5.4% in the first quarter of 2017. Pre-opening costs were approximately $1.1 million for the first quarter of 2018, compared to 395,000 in the prior year quarter. The $685,000 increase was primarily driven by our 11 openings in the first quarter of 2018, compared to three openings in the first quarter of 2017. We continue to expect pre-opening costs will range between $90,000 to a $100,000 to a new restaurant for 2018.
GAAP-net income for the first quarter of 2018 was $654,000 over $0.03 per diluted share, compared to net income of $1.8 million on $0.09 per diluted share in the prior year. On an adjusted fully distributed pro forma basis, net income for the first quarter was $210,000 or $0.01 for fully distributed weighted average share compared to net income of $2.4 million or $0.09 cents per fully distributed weighted average share in the first quarter of 2017.
In terms of our liquidity and balance sheet, as of March 27, 2018, we had cash and cash equivalents of approximately $24.3 million and outstanding debt of $17.2 million, which consists solely of deemed landlord financing. We expect capital expenditure to be between $43 million and $46 million, before landlord contributions, for the fiscal year 2018.
Based on our growth plans, we believe cash flows from operations and current cash on hand will be sufficient to fund our capital needs for the next couple of years. With regards to fiscal year 2018, we are slightly updating our full-year guidance to be as follows. We expect total revenue to be between $389 million and $393 million. Comparable restaurant sales are now expected to be flat in 2018. We expect our restaurant contribution margin to be between 16% and 17% of sales for the full-year. It is also our expectation that commodities will be up approximately 2%. In regards to labor, we expect our average wage to increase between 6% to 7% in 2018.
General and administrative expenses are expected to be between $37.5 million and $38 million. As Russ stated earlier, we still expect to open approximately 30 company-operated locations for the full-year, with six to eight company-operated openings in the second quarter. We also continue to expect our franchises to open between six and eight locations for the full-year. We expect our depreciation and amortization expense to be approximately $24 million for the year. And finally, we now expect our pro forma effective tax rate to be approximately 32.5%.
With that, I'd like to turn the call back over to Russ for some final remarks.
Russ Bendel
Thanks, Ira. We remain excited for what is to come in 2018 and beyond. We believe that continuing to focus our efforts on convenience, quality, and value, and innovation positions us for long-term growth as we strive to return to positive comparable restaurant sales in the future. And as always, I want to extend a huge thank you to our amazing team members in all of our restaurants. They are the face of our brand, and the reason our customers tend to come away with such great experiences each day.
With that, operator, I'd like to turn the call over for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Will Slabaugh of Stephens.
Will Slabaugh
Thanks, guys. I want to make sure I understood your comments about March. Just mathematically it looks like you may have been down kind of four-plus percent or so, just given the positive start in the first couple of months, which is -- it's just hard to compute a little bit given your relative consistency in the past. So can you go into any more detail in terms of maybe how correlated the sales were to bad weather days, or if there's anything else you can point to in terms of the softness you saw there?
Russ Bendel
Yes, first of all, your commentary around being a little over 4% is correct, which obviously caught us a little bit by surprise. Now, I think a lot of it -- well, not a lot of it, part of it was due to weather, probably about a percent or percent-and-a-half of that was due to weather-related, cold and rain. The rest of it I think as we're looking on it we feel that the CharClub promotion, the free burger promotion was in its third full year, and while we had a lot of redemptions it just didn't feel like it drove the incremental traffic it had driven in years past.
Ira Fils
Well, again, good question. The sign-ups were strong. The redemptions were very strong, but we just don't feel that we were getting the incremental visits as much as maybe people just trading off a free burger for a regular Habit visit. And we're going to take a hard look at the use of free going forward.
Will Slabaugh
Understood. And then I wanted to ask you about drive-thrus, I know you haven't had a ton of them to get data on in the past, and now that you're building more, I wondered what you've been seeing in terms of throughput at those stores at peak. And I ask because I know you're pretty much a cook-to-order restaurant, and so curious what that looks like at lunch or dinner as you have the drive-thrus, and if the lines get too long or if there's been rising customer complaints or if they're sort of expecting a little bit of a longer wait time versus a QSR?
Russ Bendel
We're not getting a lot of complaints at all for drive-thrus, particularly on wait time. The most common compliant we ever get, and we don't get a whole lot of them, is on order accuracy, whether it'd be at the drive-thru or people taking out food. So we work real hard at validating and ensuring that people are getting what they ordered.
We are cook-to-order, and we can move a car through the drive-thru about one every minute. During peak times, when the stack is longer than six or seven cars, typically where you would place the order, we try to have an additional person with a tablet take orders further down the line, so that even though the people -- the line is longer, we are starting the cooking process before they typically would order.
Our experience with them, we're somewhat limited, but we're opening -- almost half of our current stores are drive-thrus, and we're coming up to speed on that business pretty quickly. And in fact, our percentage of sales through the drive-thru part of the restaurant continues to grow.
Ira Fils
And just to add to that a little bit, Will, now it's in a lot smaller component of the total sales, but for the comp restaurants the drive-thru sales were actually a nick positive. So we don't feel like that.
Russ Bendel
Yes. We continue to be very bullish on the drive-thrus and how it addresses the needs of today's consumer.
Will Slabaugh
Great. Thanks, guys.
Operator
Our next question comes from David Tarantino of Baird.
David Tarantino
Hi, good afternoon. My question is about the pricing actions that you're taking. I guess one part of the strategy is to maintain a strong value proposition. And we've heard a lot about competitor discounting, perhaps influencing your business negatively. But now we're hearing that you're taking a much more aggressive posture on the price actions. So could you maybe reconcile that, and maybe talk about what led you to the decision to take that much pricing heading into the second-half of the year.
Russ Bendel
Sure, I'd be happy to. And as you note, David, whether on these calls or with individual conversations with you and the other analysts, we've always said that pricing will have to play a part in restoring the margins to where we believe they should be, at 20% store level. If you look at -- and we look at this very closely, competitively, both QSR and other better burger, more fast casual burger-centric concepts, our pricing continues to be approximately 20% to 30% underneath those better burger competitors. In fact, just yesterday, looking at the price of the Double-char burger with cheese is generally less expensive today than a Big Mac at McDonalds. So we feel, and have always felt, that we had pricing power, and wouldn't be afraid to use it.
We have been hesitant in the past in light of all of the promotional activity around us. But with the regulatory environment, what it is primarily in California, and we are being, as Ira mentioned in our commentary, we are being more regional sensitive to pricing that it's not only us, it's other people will be taking price as well. And we feel that we're positioned well to do so.
David Tarantino
And Russ, just to clarify, do you think the gap versus whatever relevant comparable concepts or peers or competitors, however you want to define it, do you think that gap has changed over the last couple of years, or do you think it's -- how would you describe what the trends look like?
Russ Bendel
We have always used the burger category in our menu to be the more value kind of comparison to other fast casual brands. If you look at our non-burger, the other sandwiches, and entrée salads, they don't represent a 30% to our more direct competitors. We've always used the burger category to do that. We're not higher priced than the others, but we're probably more in line with other fast casual concepts.
David Tarantino
Got it. And then are you guys, on this subject as well, do you have a sense of consumer feedback related to value scores. I know it's been a very competitive industry. So just wondering if whatever you're measuring in your own consumer feedback has changed in light of what's happening outside the four walls of what you're seeing?
Russ Bendel
No. As you know, we don't do a lot of consumer research in that area. We've embarked on a project more recently. But no, I'm not hearing anything different relative to value at all.
Ira Fils
No. We haven't seen our scores materially move…
Russ Bendel
Anecdotally, we hear more from customers, investors that, my god, your prices are so reasonable. We hear the opposite.
David Tarantino
I agree. And then last question, and Ira, am I correct that the guidance for the full-year for comps now assumes maybe a little less or a little pullback in traffic in the second-half of the year given how much pricing you're running?
Ira Fils
Yes, there's a little bit of that listed in that guidance. Correct.
David Tarantino
Great. Okay, thank you very much.
Operator
Our next question comes from Joshua Long of Piper Jaffray.
Joshua Long
Great. Thank you for taking the question. I had two pieces, one on the culinary innovation side and your discussion around some of the recent promotions. I was curious if you might be able to update us in terms of your thinking around bringing in new items on the promotional calendar versus kind of bringing back favorites that had worked in the past. I mean, I light of the CharClub promotion maybe not having enough newness to it, just curious if you're thinking about shifting that pipeline or that mix of new LTO products versus kind of returning favorites?
Russ Bendel
We talked a little bit last call, Josh, about pushing the envelope a little more on the innovation side. We feel we have the culinary credibility. Our kitchens are used to doing everything from scratch. So we see it as an opportunity to do a little more introduction of newer flavor profiles, but at the same time, not being afraid to bring back things that have historically done well as LTOs. What we're really looking at more critically, as you mentioned, is the use of free, and how that probably didn't move the needle like it had last year -- the last years that we've used it. Plus this year, if you remember, it had an extra week in there approximately. So not so sure that helped us at all.
Joshua Long
Understood. Thank you for that. And in terms of thinking about drive-thrus in general, and then also the new kitchen layout that you mentioned, wanted to see if there was anything you might be able to tell us in terms of how you're thinking about optimizing that. And then in relations to the breakfast test, is that something that this new format could eventually be adjusted to also include or kind of roll in line with that breakfast test or does that kind of necessitate some adjustments down the line as you get more understandings and kind of a better handle around what breakfast could potentially be for you.
Russ Bendel
Yes, great question. We have breakfast in two units, both of which are captive audience, university settings. And we're about to launch the next six as we said. We believe to jumpstart it; doing so in the drive-thrus gives us a better launching pad. But if breakfast is to be successful and we're excited about getting it to test we see it as more than just in drive-thru locations. We just think drive-thrus allow us to get off to a much better start.
And in regards to our learnings on drive-thru, maybe the first part of your question. We've, over the last year and currently, we spend a lot of time looking at how we execute the drive-thru, customer behaviors, how we can improve throughput with always being mindful that we are cook-to-order, and people are willing to wait a little longer for that. But the new kitchen design, we think, will actually enhance that. We are going to make some modifications to a number of the drive-thru menu boards. We're going to show probably some more -- not probably, we're definitely going to show some more pictures. And really try to make it easier and more convenient for customers to order once they get to the drive-thru menu board.
So we got a lot of things we're working on and while our results don't show it right now, we're pretty excited about all the things that we're doing that really are focused around -- well, quality has always been a hallmark in everything we do, but we are really, really looking at everything, how do we become more convenient to our customers to access The Habit and/or order and have it be much more readily available.
Q – Joshua Long
Understood, thank you for that. And last one from me, in terms of putting that down 70 basis points trend in the context, it's nice to see that improvement sequentially from 1Q, but curious how you are dimensionalizing that if it's a function of better year-over-year comparisons or maybe moving away from that weather moving into a more normalized promotion cycle, just curious on how you are thinking about that or is there anything you've done here quarter-to-date to kind of help support that trend?
Russ Bendel
I think it's a combination of comparisons a little bit. March was a pretty big comparison for us last year. It was our best because of the weather, but it was our best. Last year was our best month of the quarter. I think as we move as we start to move away from the weather issues that we saw in March and away from kind of the -- what we saw with the fruit Charburger promotion, we are moving into more of a traditional types of promotion where we are kind of back on the sponsorship radio as we move forth kind of into this year. And I think that's just an indication of where we believe we are kind of trending right now.
Q – Joshua Long
Got it, thank you.
Operator
Our next question comes from Jeff Farmer of Wells Fargo Securities.
Jeff Farmer
Thanks. You guys did touch on it, but that move away from the digital deal strategy, how do you plan to pursue value moving forward?
Russ Bendel
Good question. And we are currently not doing digital deals, but really with the rollout of the proprietary apps that were being developed we think having a mobile app will really allow us really a much better vehicle to do so. Also as a big part of that rollout of the app, we have not mentioned this yet, we do plan on introducing a loyalty component to the app. We believe working with our digital agency, the creative agency that you know, having a loyalty program can help move the needle, but also will really enhance the consumer's mindset to download the app. So we think loyalty will play a big part of that, Jeff, going forward.
Jeff Farmer
Okay, and then I know it's extremely early on the delivery test, but anything you guys can offer in terms of check incrementality, sales lift, anything like that?
Russ Bendel
No, we don't -- it's still early and all we'll say is we are very encouraged.
Ira Fils
As we said, we are we have 50 units in the quarter that went into it. We introduced another 23 units today. So that is out of the quarter.
Russ Bendel
We had 10 in Q1. We did the last 40 just early in Q2.
Ira Fils
Early in Q2, and we introduced 23 today.
Russ Bendel
So we are making great progress on the rollout, and we'll definitely have some -- we believe some information to update you on the next call, but we are encouraged with the early results.
Ira Fils
Yes, again without giving sales numbers, we'll have two-thirds of the system implemented approximately by the end of Q2. So we are encouraged, we are enthusiastic about it.
Jeff Farmer
And last and unrelated question, so obviously '18 is another year with some pretty healthy labor inflation or wage rate inflation that you guys are facing. You manage to offset some of that in '17 with some of your labor costs efforts as you get deeper into '18 or even right now, do you have labor cost initiatives that you are pursuing that you hope it can offset some of this wage rate inflation for you as you get to the next few quarters?
Ira Fils
Yes. We want to be very careful about that, because we believe a big part of our long-term success has been in delivering a superior customer experience. That's really provided by service and hospitality as much as quality food at a fair price, but we have a number of operational initiatives. More focused around the opening and closing times when there is not guests in the building that we are continuing to work through and implement through the systems. We believe that the development of the mobile app and that self-order kiosk will help offset some of those wage headwinds. Just as a point of reference, approximately 5% of the labor we spend is on cashiers. Now we do not plan to eliminate cashiers, but anything we can utilize, technology and convenience for that certain consumers have an affinity to use automatically can help offset some of those regulatory or just labor challenges in general.
Jeff Farmer
Okay, thank you very much.
Operator
Our next question comes from Andrew Charles of Cowen.
Andrew Charles
Thank you. I want to ask about an update on the CMO search and based on where the brand is going with the new digital and loyalty based strategy, what qualifications you guys are looking for in the new CMO?
Russ Bendel
Yes, good. It's a great question, and mater of fact, we launched that search with Matt's departure about a month ago. We launched a national search soon thereafter. And we have not spoken to him face-to-face with many people yet, but I have to tell you we have a pipeline of interested candidates that's pretty exciting, kind of what the profile of that person what he or she may kind of background, we are really looking for someone that has demonstrated historical success of driving traffic through some of the more new wage channels of marketing, focused more on digital, social, those kind of arenas. And again, early in the search, and we're excited about what some of these men and women's backgrounds are, and are just starting to line-up meeting people in the very near future.
In the meantime, hey, Matt did a great job year here for the almost the four years that he was here, and he has a team of people that are certainly continuing to execute the strategy and the plans that we have had laid out. And I assure you that the train is still on the track that we were -- that left the station while Matt was still here.
Andrew Charles
Very good. And Ira, I want to ask about the lower same-store sales guidance, I mean it's only a tweak that doesn't imply a large change for what was implied for the second or the fourth quarter. So I'm curious if you can categorize the intact expectations for the remainder of the year, as a reflection that March was an anomaly with incremental competence based on what you are seeing in the breakfast or delivery tests or your ability to take price?
Ira Fils
I think a little bit of both. I think we think that you know, because we have recovered from the March sales that we've seen, although not positive yet, but we have recovered. And we feel good about the couple things that are on the table, I think delivery as number one, and I think our ability for the pricing action that we are going to be taking to be accepted by the consumers. Those two things we feel like are a big part of why we haven't -- we didn't really materially change the same-store sales guidance for the remainder of the year.
Andrew Charles
Thanks, guys.
Operator
Our next question comes from Nick Setyan of Wedbush Securities.
Nick Setyan
Thank you. How are you guys? In terms of the pipeline for 2019, I mean we're already kind of heading into May, what's that looking like and how are we thinking about the unit growth profile in 2019?
Russ Bendel
Yes, as we talked about, we definitely have pulled back on growth. It was harder to pull back this year, because quite honestly, our real estate team has done a really nice job of building a solid pipeline. Obviously, we have not been rewarded for being a growth company off late. So we are consciously trying to pull back, pulling back to approximately 30 this year. We said we'd like to do 10% next year. I just have to remind people that a lot of these deals were already in place, leases signed or fully negotiated LOIs. So we are consciously being very sensitive to how we are deploying capital in this environment.
Nick Setyan
Ira, in terms of CapEx guidance, what percent of that, or I guess in terms of dollar amounts or percent is that kind of, you know, permanent CapEx or CapEx on an ongoing basis versus CapEx that's related to new unit growth?
Ira Fils
Yes, a high percentage of it is related to new unit growth. I mean if you think about that rough range, we are looking in the mid-to-high 30s of that is related to new stores, so -- of that $43 million to $46 million. So a high percentage of that is related to new stores.
Nick Setyan
Got it. In terms of East Coast markets, I mean -- Florida, kind of the D.C., metro and New Jersey. Is there any differentiation among those markets? Are there any markets where you view a few more favorable maybe relative to others? Any learnings in terms of -- I don't know, maybe some markets need to do more drive-thrus versus in-line, anything that you can tell us there?
Russ Bendel
Yes. I'm glad you asked the question. We do not have a drive-thru yet open on the East Coast. We are pushing very hard to be able to open our first drive-thru in North Jersey in the fourth quarter of this year. If it doesn't open in the fourth quarter, it will open in the first quarter of '19, and that will be our first drive-thru on the East Coast.
The East Coast continues to comp very strongly. We don't see that big of a difference in the performance of the comps necessarily from New Jersey to D.C. to Florida. All of them are on a trajectory that we are very happy with. The one area that has not performed as well as we would expect it to to-date, is Orlando. We had one store opened -- we have three current stores opened currently in Orlando. Two of them opened last year, and one of them opened at the very end of 2016. So, Orlando, while they are not in the comp base, Orlando isn't on the same trajectory that the other 25-26 stores on the East Coast are. Again, we are not exactly sure why. I can assure you it's not execution. We have a great operator in Orlando. We have seasoned GMs there. We just don't have the traction yet. Now again, it's still very early. So we don't have the traction that we have had in all of the other markets on the East Coast.
Nick Setyan
Got it, that's very helpful. And just last on the tax rate, Ira, I know it's kind of ticked up a little bit in terms of the guidance, can you just maybe talk about what's going on there?
Ira Fils
Yes. It's as much as of two things. It's a function of a little bit of -- you know, the laws were changed around what you can deduct in regards to meals…
Russ Bendel
Employee meals, we feed all our employees a meal each shift.
Ira Fils
So we had -- that was a little bit of a surprise to us as we kind of got through some of the details on the new Jobs Act or Tax Act. What we are doing to kind of help work on that is we are having all our employees take surveys, and we believe by doing that we will be able to use that after-tax reduction, because quite frankly a big reason why we have our employees eat for free is we want them eating our food. We want them to understand what a good burger is supposed to look like and taste like, and what service is supposed to feel like. So that's why we do it.
The other thing is just as we are getting to a lower amount of income; kind of the pre-IPO options are not deductible, that's just a little bit of a mechanical thing that puts a little pressure on the rate, which should start to go away next year.
Nick Setyan
Got it, thanks very much.
Operator
Our next question comes from Matthew Difrisco of Guggenheim.
Matthew Difrisco
Thank you. Guys, I guess since there has been such consistency in the past with your comp, can you give us a little bit more granularity? I appreciate that you said that March was the strongest month a year ago, but how does that look then also for the April compared to the next two months, April, May, and June for -- is there anything that we should consider in the difference of a year-over-year basis?
Ira Fils
Yes, if you think about where we were last year, we were up a 10th for the quarter. So, we had a pretty tight quarter last year, with really June probably being the strongest -- May, you talked about -- no, last year, okay, June being the strongest of the three months, just to kind of give you a little bit of an idea of how the quarter kind of played out -- the June quarter played out last year.
Matthew Difrisco
Okay. And then, I guess is there -- are these clean numbers, or is there something to consider for Easter, the timing of Easter shifting two weeks earlier this year than last year?
Ira Fils
No, for us, all the Easter issues really all were out of the quarter, so that did not play into any factors for -- any sales performance factors for us.
Matthew Difrisco
Or benefit in the quarter-to-day trend?
Ira Fils
Correct.
Matthew Difrisco
Okay. And then I guess also with the departure of the CMO, did you guys change anything with marketing? Did you put a halt on spending in the month of March that perhaps might have caused some of this slowdown?
Russ Bendel
Absolutely not
Ira Fils
No.
Matthew Difrisco
So, comparable year-over-year spending in marketing and behavior as far as programs?
Ira Fils
Yes. I mean, and we believe the biggest difference again was the potential effectiveness of the free Charburger this year versus the previous two years.
Russ Bendel
And it's the same thing we ran for two years in a row, probably some fatigue.
Matthew Difrisco
And then I guess you also went out of your way to say the weather impacted the cold weather in California. So I guess would it be correct to assume the specific California stores -- not just West Coast -- but California stores performed weaker than, say, Phoenix and some other neighboring markets?
Ira Fils
California really is a proxy for West, because I think they are -- really they all get a lot of the same weather in fact. We are just so heavily focused in California, but you could say it was the West.
Matthew Difrisco
Okay. So then, basically your -- is there any concern that that could be from some cannibalization or -- now that I mean you are still doing sort of 80% of your growth or so is coming in your backyard there.
Ira Fils
No, there is cannibalization in the numbers, but there was cannibalization in the numbers last year and the year before. So I wouldn't say that we had materially incremental more cannibalization that covered that change within the month of March.
Russ Bendel
I agree.
Matthew Difrisco
Okay. Thank you so much, gentlemen.
Russ Bendel
Thanks.
Operator
Our next question comes from Stephen Anderson of Maxim Group.
Stephen Anderson
Good afternoon. Just couple of questions, first, I know -- not the deliver the point about March comps, but do you think there was anything incrementally from what you are seeing in the QSR or within the bar and grill casual dining that made things more competitive in the better burger space of you? And I have a follow-up.
Russ Bendel
Anecdotally to me, Stephen, it feels similar that it's felt for the last 18 months. That is still heavy promotional environment out there, both in casual dining, and in traditional QSR.
Stephen Anderson
Okay. And with regard to your [technical difficulty] forecast outlook, you are still in for about 2% year-over-year. I just don't want to break that down. What was your food cost inflation rate in the first quarter? And do you see any change in the remaining quarters?
Ira Fils
Yes, it's about 5% in the first quarter. We had -- if you look just historical, you can see that Q1 of last year was our low point in regards to cost of sales, and so lapping over that, and we started to really head up in Q2 of last year, and kind of carry for us through the last three quarters of last year. And so, this is our real tough comparative quarter from a food cost standpoint.
Russ Bendel
Q1.
Ira Fils
Q1, and the comparisons get much easier, and that's why you see the balance of the year coming in at 2% as with the one month coming; sorry, the one quarter coming in at 5%.
Q – Stephen Anderson
All right, thank you.
Operator
Our next question comes from Brian Vaccaro of Raymond James.
Brian Vaccaro
Thanks. Good evening. Just a couple from me, I wanted to circle back on the 3.9% price increase that you say you planned for the summer. I know you're taking more of a regional approach. So just curious how much you are taking in some of your largest California markets, and also, how that compares to what you are seeing sort of in the competitive year-on-year pricing environment at the local level in those markets?
Ira Fils
Yes, good question, Brian. Where we have the most regulatory challenge is in California, and not only regulatory, but on a supply and demand basis. You will see us take the largest increases in the West. And the Bay area will probably be the strongest at over 5% along with the L.A., the part of L.A., L.A. Proper, which has again a higher minimum wage than this State of California. It's about a dollar ahead of the march to $15-an-hour. So those are the areas where you will see that the highest. The smallest increases will more be in Arizona, Utah, probably the markets that labor is less of a regulatory challenge than in other places.
Brian Vaccaro
Okay, that's helpful. And are you also raising prices on the East Coast in the summer?
Ira Fils
Yes, we are taking price everywhere, I was just indicating where it would be higher, the highest or not as high.
Brian Vaccaro
Understood. Okay, that's helpful. And so, going back also on the mobile -- sorry, go ahead.
Ira Fils
We believe on the East Coast, our price value relationship to our competitors is even stronger. I mean, we have -- the difference is more drastic on the East than it is in the West.
Brian Vaccaro
Okay, that's helpful. And the mobile app and loyalty program, I'm sorry if I missed it, but what's the timing -- the expected timing for each of those as it relates to -- you mentioned that the opportunity on value, as it relates to the mobile app, but what's the timing again on those initiatives?
Ira Fils
We are looking towards the end of the early Q4.
Russ Bendel
End of Q3, Q4 to be in a beta test.
Brian Vaccaro
Okay, okay. And then, Ira, mix in the quarter widening out a little bit again down 17, can you just unpack that a little bit for us?
Ira Fils
Yes. So, a lot of that again has to do with being on promo with the free Charburger versus not being on promo. So when -- you if you would breakdown kind of the non-promo time, the mix goes down to about 1%, which is a little more consistent with what we had seen maybe in Q4, but when you -- the amount of -- the free Charburger promotion itself puts a little more pressure on the mix, and that took us down to the 16 that we saw for the quarter.
Brian Vaccaro
Okay. So your expectation as you think about the rest of the year, that mix will be more in that normal range, not impacting Charburger period?
Russ Bendel
Yes.
Brian Vaccaro
Okay. And then last one from me, just on the cadence of unit openings through 2018, any help with that in terms of Q2, Q3, Q4?
Russ Bendel
Yes, I think we said on the call here that we were going to open -- I think that eight in the Q2 -- approximately. In Q2, and we will have a little bit more in Q3, and actually very fewer openings in Q4 as for a change, the pipeline is pretty well, in progress and stacked, and it will be completed -- will be a couple in the fourth quarter. So we will get the balance of that opening in the first three quarters of the year.
Brian Vaccaro
Okay. And when you say eight in the second quarter, maybe eight in the second quarter, that's company-owned units?
Russ Bendel
Correct.
Brian Vaccaro
Okay.
Russ Bendel
And six to eight total license franchise for full-year 2018.
Brian Vaccaro
Okay, perfect. Thank you.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Russ Bendel
Hey, thank you all, and look forward to follow-up calls and your continued support. Thank you.
Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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