Del Taco Restaurants, Inc. (TACO) CEO John Cappasola on Q3 2019 Results - Earnings Call Transcript

Oct. 21, 2019 9:16 PM ETDel Taco Restaurants, Inc. (TACO)
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Del Taco Restaurants, Inc. (NASDAQ:TACO) Q3 2019 Earnings Conference Call October 21, 2019 4:30 PM ET

Company Participants

John Cappasola - President and CEO

Steven Brake - EVP and CFO

Raphael Gross - Managing Director ICR

Conference Call Participants

Spencer Hanus - Citi

Alex Slagle - Jefferies

Nick Setyan - Wedbush Securities

Peter Saleh - BTIG

Joshua Long - Piper Jaffray

Stephen Anderson - Maxim Group


Thank you for standing by. And welcome to the Fiscal Third Quarter 2019 Conference Call and Webcast for Del Taco Restaurants, Inc.

I would now like to turn the call over to Mr. Raphael Gross, Managing Director at ICR to begin.

Raphael Gross

Thank you, operator, and thank you all for joining us today. On the call with me is John Cappasola, President and Chief Executive Officer; and Steve Brake, Chief Financial Officer. After we deliver our prepared remarks, we will open the lines for your questions.

Before we begin, I’d like to remind everyone that part of our discussion today will include some forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We do not undertake to update these forward-looking statements at a later date and refer you to today's earnings press release and our filings with the SEC for a more detailed discussion of the risks that could impact the company’s future operating results and financial condition.

Today's earnings press release also includes non-GAAP financial measures such as adjusted net income, adjusted EBITDA and restaurant contribution along with reconciliations of these non-GAAP measures to the nearest GAAP measures. However, non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance.

I would now like to turn the call over to John Cappasola, Chief Executive Officer.

John Cappasola

Thank you, Raphael, and thank you for joining us on the call today. Let me first summarize Q3 before focusing on Q4 where we have since experienced an improvement in company operated sales and transaction trends due to furthering our transaction driving initiatives as well as made progress on our portfolio optimization strategy and refranchising efforts to help stimulate long-term growth.

During Q3, slightly positive comparable restaurant sales at company operated restaurants coupled with inflationary pressures resulted in a loss of leverage across the P&L. Specifically, comparable restaurant sales at company operated restaurants grew 0.4% consisting of average check growth of 4.1%, including approximately 3.5% of menu price and a transaction decline of 3.7%.

You may recall in our Q2 conference call, we foreshadowed transaction softness that began in July and then sustained through August until the launch of key transaction driving initiatives helped restore transaction trends that were similar to our second quarter trends. Franchise comparable restaurant sales outpaced company operated restaurants during Q3 increasing 1.8% while system-wide comparable restaurant sales grew 1.0%.

Turning to restaurant contribution, excluding an approximate 70 basis point impact from the new lease accounting rules and approximately 40 basis points of pressure from the timing of advertising expense, restaurant contribution margins declined approximately 200 basis points from last year. This reflects cost inflation across food, labor and operating expenses coupled with slightly positive comparable restaurant sales which yielded lower restaurant contribution margins and dollars.

Adjusted EBITDA of 14.5 million declined 3.2 million from last year including an approximate 0.7 million impact from lease accounting. Given our results to date as well as a more cautious stance on our current 16-week Q4, we have revised our annual guidance. As we’ve discussed on recent calls, our brand focus this year is to activate and embed our transaction driving initiatives including our digital transformation, value evolution and product innovation.

Beginning with digital, I would still characterize our digital initiatives as an early innings relative to the opportunity that we have to establish new channels of transactions, but we are certainly beginning to see encouraging results. Our Del App now exceeds 800,000 registered users and all company restaurants are accepting mobile orders through the Del App for pickup or delivery plus over 100 franchise restaurants are currently live or in the process of adding this capability.

As we’ve mentioned before, we are focused on growing our database of consumers in 2019 into a sizable base to leverage. As we move into 2020, we will enhance our CRM targeting capabilities to drive further guest engagement and ultimately returns on investment through improved segmentation techniques enabled with scale. In addition, in late fiscal Q3, we launched Postmates across all company restaurants and immediately realized favorable adoption.

In fact, we more than tripled our third party marketplace delivery incidents during the recent four weeks compared to the prior run rate which had only one provider. We are also encouraged by the over-indexing of delivery during our late snack and graveyard dayparts as they typically have significant capacity and also extend past the operating hours of most casual and fast casual brands as well as many QSRs who are not open late-night.

As you know, our goal is to maximize consumer demand through a multiple DSP approach and by the end of the year we expect to launch our third DSP DoorDash who continues to expand market share in many of our markets and represents a viable opportunity to further expand our reach in the delivery channel.

Now let’s shift to our value evolution. The first part of our evolution was the addition of Fresh Faves boxes at key $4, $5 and $6 price points to fill the mid-tier value opportunity on our menu and reinforce everyday value. We plan to continue to embed the platform with new news like we did in early Q3, which helped drive Fresh Faves mix of over 6% during the quarter.

The next key part of our evolution is making sure we remain highly relevant on the lower tier of the value spectrum in order to complement Fresh Faves and our premium innovation. During Q4, we recently launched a two for $3 Del Taco promotion to enhance our value and affordability perceptions and we plan to maintain a focus on enhancing the lower end of the value spectrum, given the highly competitive value landscape in QSR.

Finally, product innovation was led by the late fiscal Q3 debut of the $2 Breakfast Toasted Wrap which is a highly portable and craveable new product featuring bacon or chorizo at a great price point. This highly relevant new product not only quickly became our best-selling breakfast product ever in terms of units sold but has also reenergized the breakfast daypart to become our number one sales comping daypart since this product launched.

Product innovation across the barbell will continue to be an important part of our marketing strategy and we’ve developed a robust pipeline for 2020. As noted earlier, Q4 trends to date for company operated restaurants have sequentially improved compared to fiscal Q3, led by transaction improvement resulting from our transaction driving initiatives that specifically address the transaction softness in Q3.

They included the successful new $2 Breakfast Toasted Wrap that reinvigorated our breakfast daypart, the launch of Postmates to expand our presence in this important new sales channel and the recent two for $3 Del Taco promotion that uses a hero product to reinforce our value and affordability.

In addition, Q4 is benefiting from the return of our popular Carnitas program and our Beyond platform. Beyond continues to resonate with new and existing guests mixing at over 6% during fiscal Q3 and at approximately 4% during Q4, despite limited menu merchandizing.

Looking ahead, we expect added momentum from the mid-November launch of the new authentic Pork Tamales LTO for the first time to capitalize on the seasonal relevance of this traditional Mexican holiday indulgence, as well as the expected late Q4 launch of DoorDash as we fully activate our multiple DSP approach to set ourselves up for success in the new year.

On the development front, during Q3 we opened two company operated restaurants and our franchisees opened two restaurants. Including two openings this week, there will be 15 Del Taco system restaurant openings so far this year and we currently have 12 restaurants under construction, of which 10 are expected to open during fiscal 2019.

This would achieve our 2019 development guidance of at least 25 new restaurants, skewing slightly toward franchised openings. During Q3, we also opportunistically purchased a high-volume Southern California franchise restaurant and closed one company operated restaurant.

Turning to our portfolio optimization strategy, we have now executed an asset purchase agreement for one market and have signed letters of intent covering two other markets to be refranchised. Each non-core Western market is now expected to be refranchised to a different franchise group.

Two groups are existing multiunit, multistate franchisees and the other group is a new multiunit, multistate and multi-concept franchisee. All three franchised groups are very high quality operators with demonstrated track records in operations and new unit development. Any transaction will include a meaningful future store growth commitment in these and adjacent markets.

We currently expect to complete the refranchising of the first three markets through a series of transactions in late Q4 and into Q1 2020. Since we are still finalizing definitive purchase, franchise and development agreement terms, we are not going to share any transaction specifics, although we will share relevant financial highlights related to the restaurants themselves.

The 23 restaurants in these three markets currently have an AUV of approximately $1.2 million and a company operated restaurant contribution margin of approximately 12%. Net of future franchise revenues from the existing restaurants and immediate G&A reductions, we expect an approximate $1.5 million annual pro forma reduction in adjusted EBITDA.

Looking forward, we believe the expected completion of these highly scrutinized transactions and their related future growth commitments will not only enhance long-term value creation, but also provides increased confidence that franchise growth will continue to lead our growth story into the future.

In addition, upon completion of the planned refranchising, we expect to gain a sharpened operational focus with a company operated footprint of restaurants with predominantly strong AUVs and restaurant margins in our remaining core Western markets of greater Los Angeles and Las Vegas as well as a strategic presence in our emerging seed markets.

The emerging seed markets were originally designed to establish infrastructure to support long-term franchise growth and we are pleased that by the end of 2020, we expect to have at least 10 company restaurants in Oklahoma and nearly 30 system-wide restaurants in Georgia. This progress will allow us to limit future company growth in these markets as we focus on supporting franchise growth in these and surrounding areas as well as plan for future seed markets.

Our planned refranchising transactions and continued franchise growth focus also provides us with the opportunity to alter our pace of company growth to reflect a slower and more strategic approach in the near to mid-term, particularly while high real estate and construction cost persists.

Specifically, starting in 2020, we expect to annually open 5 to 10 company operated restaurants reflecting selective infill in our remaining core Western company markets, limited development and existing seed markets and development into new seed markets starting in late 2021.

For 2020, we currently anticipate opening up to 20 new system-wide restaurants, again slightly skewing toward franchise with a 1% system-wide closure rate. The refranchising transactions paired with a slower pace of company development will help generate near-term capital and preserve capital as we move forward, enabling us to enhance existing restaurant performance through continued investments in technology and equipment as well as test remodels to optimize the design cost and return profile.

The transactions are also expected to provide greater means to enhance total shareholder returns through debt repayment and opportunistic share repurchases and our current authorization has $22.3 million remaining as of the end of fiscal Q3.

Finally, I want to congratulate Chad Gretzema who was recently promoted to Chief Operating Officer. This is a new leadership role at Del Taco and one from which I believe Chad will lead our restaurant teams and brand to even greater success. Chad has been an invaluable asset and contributor to our company over the past seven years having successfully led strategic planning, innovation, operations support, training and facility support.

He is someone who knows how to help teams deliver superior results and has also been a passionate voice ensuring strong cross functional franchise support to help our franchise partners successfully grow their businesses, which will be even more critical as we expand our focus on franchise operations and development.

And now, Steve will review our Q3 financials.

Steven Brake

Thanks, John. Beginning with our top line, total third quarter revenue rose 2.0% to 120.2 million from 117.8 million in the year ago third quarter. System-wide comparable restaurant sales increased 1.0% and lapped system-wide comparable restaurant sales of 1.4% during the third quarter last year resulting in a two-year increase of 2.4%.

Third quarter company restaurant sales increased 1.4% to 111.1 million from 109.6 million in the year ago period, which was primarily driven by an improved mix of company operated restaurants in terms of average unit volume including impact from the first quarter refranchise of 13 low volume restaurants and acquisition of three high-volume franchise restaurants.

Third quarter company operated comparable restaurant sales increased 0.4% and were comprised of a 4.1% increase in check, including an approximate 0.6% increase in menu mix partially offset by a 3.7% decline in transactions. Franchise revenue increased 4.2% year-over-year to 4.5 million from 4.3 million last year. The increase was driven by additional franchised operated stores as compared to last year, including 13 restaurants that were refranchised in early 2019 as well as by franchised comparable restaurant sales growth of 1.8%.

Turning to our expenses. Food and paper costs as a percentage of company restaurant sales increased approximately 70 basis points year-over-year to 27.7% from 27.0%. This was driven by food inflation of over 4% which exceeded menu price increases of approximately 3.5%, plus impact from our Beyond offerings which have a slightly lower than typical margin percentage.

Looking ahead, during Q4, we expect net food inflation of over 3% as well as impact from new products or LTOs that feature a lower than typical margin percentage including our Beyond products, the Breakfast Toasted Wrap, the two for $3 Del Taco promotion and Carnitas.

Expected fiscal 2019 inflation is now approximately 3% and we currently anticipate slightly less food inflation in 2020, absent a more material impact from African swine fever which we continue to monitor.

Labor and related expenses as a percentage of company restaurant sales increased approximately 50 basis points to 32.7% from 32.2%. This was driven by wage inflation from the $1 California minimum wage increase to $12 an hour, partially offset by reduced workers’ compensation expense based on underlying trends, reduced group insurance and a favorable change in our California payroll tax rate compared to 2018.

Recall that we experienced the most favorability in our California payroll tax rate in Q1 with much less in Q2 and Q3, and we will lap the full benefit in Q4 of approximately 80 basis points that was realized last year.

Looking ahead, we expect fiscal 2020 labor and related inflation of up to 6% primarily driven by a $1 increase in California minimum wage from $12 to $13 an hour and although our pricing strategy will be informed by consumer, competitive and macroeconomic trends, we currently expect elevated fiscal 2020 menu pricing of at least 4%.

Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 200 basis points to 22.9% from 20.9% last year. This outcome included approximately 40 basis points of higher advertising expenditures due to timing and approximately 70 basis points from adoption of the new lease accounting rules as well as approximately 90 basis points of deleverage from inflationary trends which outpaced the slightly positive comparable restaurant sales.

Based on this performance, restaurant contribution was 18.6 million compared to 21.8 million in the prior year and restaurant contribution margin decreased approximately 310 basis points to 16.8% from 19.9%. However, excluding impacts from the lease accounting rules and timing of advertising, restaurant contribution margins declined approximately 200 basis points from last year.

General and administrative expenses were 10.4 million, up from 9.6 million last year as a percentage of total revenue. G&A increased by approximately 50 basis points year-over-year to 8.7%. This increase was primarily driven by increased legal and related expenses including reserves recorded in connection with an ongoing complaint filed by the Equal Employment Opportunity Commission and executive transition costs, partially offset by reduced performance-based management incentive compensation and lower stock-based compensation expense.

Adjusted EBITDA was 14.5 million, down from 17.7 million last year and decreased as a percentage of total revenues to 12.0% from 15.0% last year. Note that adjusted EBITDA this quarter includes an unfavorable impact of approximately 0.7 million from the adoption of the new lease accounting standard.

Depreciation and amortization expense was consistent at approximately 5.9 million each year, reflecting the larger company operated restaurant base offset by the reclassification of our build-to-suit leases to occupancy and other operating expense under the new lease accounting rules. As a percentage of total revenue, depreciation and amortization declined 10 basis points to 4.9%.

Interest expense was 1.7 million compared to 2.1 million last year. The decrease was due to the reclassification of our build-to- suit leases to occupancy and other expense under the new lease accounting rules, partially offset by an increased one-month LIBOR rate compared to last year.

At the end of Q3, 150 million with outstanding under our revolver and our applicable margin for LIBOR loans remained at 1.75%. Early in fiscal Q4, we refinanced our revolver to extend its term and achieve improvements to the pricing grid and additional covenant and other flexibility.

Our refranchising progress required a third quarter balance sheet reclassification to a held-for-sale caption to reflect the carrying value related to these restaurants, including their property and equipment and an associated amount of goodwill totaling 14.8 million.

A non-cash adjustment of 7.9 million was also recorded within loss on disposal of assets and adjustments to assets held-for-sale to reduce the reclassified goodwill within assets held-for-sale to net realizable value net of direct selling costs and estimated sublease assets and liabilities.

This adjustment contributed to a third quarter pre-tax loss and also impacted on effective tax rate. Specifically, this 14.8 million reclassification of non-deductible goodwill created an unfavorable permanent difference in our resulting third quarter income tax expense was approximately 2.6 million, despite a pre-tax book loss as compared to 1.8 million during the third quarter of 2018 for an effective tax rate of 23.3%.

Net loss was 7.7 million or a loss of $0.21 per diluted share compared to net income of 5.9 million or $0.15 per diluted share last year. In addition, we are reporting adjusted net income which excludes restaurant closure charges, other income, sublease income for closed restaurants, impairment of long-lived assets, executive transition costs and loss on disposal of assets and adjustments to assets held for sale. Adjusted net income in the quarter was 3.7 million or $0.10 per diluted share compared to 6.0 million or $0.15 per diluted share last year.

Finally, as John referenced, we updated our fiscal 2019 annual guidance including our current expectation that two refranchising transactions are finalized during the second half of the fiscal fourth quarter. On our Q2 conference call, although we discussed an unexpected traffic driven slowdown which began in early July, we believe our transaction driving initiatives would provide momentum as the year progressed.

Although momentum has materialized, its timing and magnitude lagged our expectations and our results to date and current outlook now warrant revised guidance. These revisions include expectations for fiscal 2019 system-wide comparable restaurant sales of approximately 1% with franchise outperformance consistent with our results to date as well as reduced total revenues and company restaurant sales reflecting comparable restaurant sales trends, new store opening delays and impact from the sale of two refranchised markets currently expected to occur during the second half of Q4.

These revenue revisions also necessitated reductions in restaurant contribution to margins, adjusted diluted earnings per share and adjusted EBITDA. Looking ahead to next year, we believe we are well positioned as we expect to enter 2020 with a stronger digital capability, including a full year benefit of three delivery service providers as well as an exciting pipeline to product innovation to provide transaction in menu mix opportunities.

As noted, we currently expect slightly lower food inflation and elevated menu pricing compared to 2019 and we also expect to benefit from a healthier company portfolio as a result of our portfolio optimization program in the pending refranchising transactions. As always, thank you for your interest in Del Taco.

And we are now happy to answer any questions you may have.

Question-and-Answer Session


Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Greg Badishkanian with Citi. Please proceed.

Spencer Hanus

Hi. This is actually Spencer Hanus on for Greg. I was just wondering if you could just provide a little additional color on the comp deceleration in the third quarter. And then can you quantify the Q4 to date trends that you’re seeing?

John Cappasola

Let me give you a little bit more color. Obviously, what we said was the initiatives that we’ve added in the last couple of months specifically address the key areas that drove the softer traffic in July and August and we’ve performed similar to Q2 traffic since. So let me walk you through that a bit. We really saw a tipping point in some key markets with third party delivery this summer and launching Postmates, as I said, nearly tripled our delivery incidents and we should further improve in that area with the launch of DoorDash late this year as well. We also saw breakfast lagging the other dayparts as we had more of the focus on lunch and dinner driven initiatives with Beyond and Fresh Faves and the launch of the Breakfast Toasted Wrap along with an intense operational focus really turning breakfast into the top performing daypart. So as we’ve seen historically, breakfast can be a strong performer for the brand when value and innovation are aligned. And then obviously we follow these initiatives with our Carnitas LTL in mid-September and then the two for $3 Del Taco promotion. And that one in particular was deployed to shore up the low price end of the value spectrum which we felt was not as strong as it could have been over the summer as we cycled over the launch of the $1 Chicken Snacker and we were more focused on premium with Beyond Burritos and mid-tier initiatives with Fresh Faves. So there’s a little more color on the Q3 traffic softness and kind of why we’re seeing traffic improvements in Q4 so far that’s really returning to the type of traffic that we saw in Q2.

Spencer Hanus

That makes sense. And then can you just talk a little bit more about the Beyond platform? I think you mentioned in the prepared remarks that you’re now mixing at 4% in Q4 to date versus 6% in 3Q. Can you just talk about why you’re seeing a little bit of a slowdown there?

John Cappasola

Yes. Mainly we’ve taken it off of the main marquee of merchandizing, so it’s gone from a primary message down to a secondary message and it’s got some diminished merchandizing. So we traditionally and typically see that happen with programs once we start to diminish the merchandizing. We still think the 4% is actually a really healthy sales mix relative to other programs there we’ve done in the past when that similar type of merchandizing dynamic has happened and ultimately we continue to be excited about the Beyond program. We think it definitely has the ability to continue to drive sales as the market and consumers continue to become more familiar with plant-based protein as well as of course those that are looking for alternatives to animal protein. And for us don’t forget it’s also priced at a premium, so delivers a higher check average. So moving forward you’re going to continue to see a role for Beyond on our menu. It is a nice differentiator for us in the Mexican LSR space and we do believe that again that consumer familiarity with plant-based protein will continue to grow.

Spencer Hanus

Perfect. Thank you.


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

Alex Slagle

Thanks. Just want to follow up on the Beyond commentary if you had any additional insight I guess now we’ve added out a few months and I’m sure you’ve been digging into the metrics and understanding a little better, but just anything else on guest satisfaction levels or differences you’ve seen sort of in different consumer groups using the product or geographic differences?

John Cappasola

Yes, let me just try to hit it at the top level for you, Alex. The majority of the sales increases related to Beyond that really drove the mix came from existing users essentially trading up and trying the product. And although these existing guests we found are really pleased with the product based on our guests OSAT scores and experience ratings, most of their incrementality clearly came from average check gains and not necessarily visits. So it was a trade up opportunity for those folks. They mixed it into their menu options as they came into Del Taco versus necessarily making incremental visits to Del Taco because of the platform. The group that represents the most upside of course in regards to incremental visits are those much lighter users of the category that we talked a little bit about on the last call and in general those folks, those vegans as vegetarians are not heavy category users. They’re very light users and they’re just a smaller population. So although we did receive high brand marks and incremental visits from that group of folks, there just wasn’t enough volume to register against overall transactions with that group.

Alex Slagle

Okay. And then on the low price end of the value offerings, the two for $3, sounds like a good start. What else do you have that you think you can do here on that end of the barbell?

John Cappasola

Yes, so we think that low end of the barbell is really complementary to what we’re doing with the Fresh Faves program right now. We think Fresh Faves clearly filled the void on our menu strategy in regards to mid-tier value. And in addition to programs like two for $3 Del Taco that really hit that lower end more value, price value sensitive user, we have other programs similar to that that are in test and/or getting ready to be used in 2020. We also believe Buck & Under can continue to play a role, so there’s an amount of innovation that’s happening against the Buck & Under platform right now. We think Buck & Under can be really nice as far as a one-two punch as you think about the barbell within the barbell and that is the low end à la carte price within the barbell of Buck & Under and that ability to trade into a box at a $4, $5, or $6 price point, we think that can be a nice value one-two punch. So that’s how we’re thinking about it right now moving into 2020.

Alex Slagle

Got it. Thank you.


Thank you. Our next question comes from the line of Nick Setyan with Wedbush Securities. Please proceed.

Nick Setyan

Thanks. John, this is a question for you. I guess kind of if we take a step back and we just think about the category, the QSR category, we’ve seen quite a bit of strength from some of the competition in terms of their sales trends. I guess what do you think it is that’s driving their strength and why do you think you’re lagging and what can you do that’s a little different to kind of catch up I guess with the rest of the category relative to what your expectations have been for example year-to-date?

John Cappasola

Sure. I think Nick you’re right. We’re competing for share of stomach with some fierce limited service restaurant competition and we’re all in a transformational cycle driven by technology right now. And I think that we continue to believe that we are doing the right things to continue to position the brand for same-store sales growth and traffic. We’re focused on leveraging technology throughout our innovation and the digital and delivery development will continue to build and close the gap with the larger competitors while we continue to leverage our barbell, which gives us many levers to pull, can it be even more powerful as we think about bringing in a key part of our strategy which is new product development and of course all that buttressed [ph] by our QSR plus positioning. So, listen, we feel good about our ability to compete. Admittedly, we’re playing a little bit of catch up on the digital front. As I said, we’re in early innings but we feel good about the progress that we’re making. And as we move into 2020, we’re going to be that much stronger in that area.

Nick Setyan

Yes. I look forward to kind of what we’d see once you launch DoorDash, but in terms of Postmates specifically what’s the incrementality you see and can you maybe talk about average check, whether it’s driving more mix versus transactions, if it’s driving both mix and transactions, how we kind of breaking the result out there?

Steven Brake

Hi, Nick. It’s Steve. Yes, in terms of Postmates, real happy with their addition as we mentioned in the most recent four weeks versus back when we had only one provider. We more than tripled our per store per day delivery incident, so a really nice uptick there. The LA area is a very strong lead market for Postmates, so excited with what we’re seeing. We continue to have check average in that 1.5x to 2x area on the delivery transactions. As we mentioned before, we are taking a modest 10% area of price premium for third party delivery which goes good ways towards managing the impact of that commission. So we’re two steps into our three-legged journey here and with DoorDash on deck to launch by the end of this year, really as we get into next year with a fully built out program, at that point we’ll be in a better position to talk about more broad metrics in terms of the absolute per store per day metrics, et cetera, but so far very encouraged with the progression.

Nick Setyan

And then just last question on the 4% pricing in 2020, are we taking that at some point in Q4 so could Q4 pricing be above 3.5%?

Steven Brake

We’re going to end this year – right now we’re carrying a little over 3.5%. That’s about where we’ll end the year. As we get into the first quarter, mid quarter or so, we’ll begin to lap last year’s first quarter price increase and that’s the point where we’ll have a chance to begin to step up the level of price we’re carrying that at least 4% is a goal for all of 2020. We won’t be there day one in January, but over the course of the year that actually is the intention.

Nick Setyan

Thank you.


Thank you. Our next question comes from the line of Peter Saleh with BTIG. Please proceed.

Peter Saleh

Great. Thanks. John, it sounds like 2020 will be a similar year to 2019 at least on the inflationary side from the food cost and labor and the amount of pricing that you’re taking. So I guess strategically how you guys attacking next year to be maybe different, any you doing anything different on the market side, any sort of change in your plans on LTOs to maybe just come at this a different way given it looks like the environment’s going to look very much the same in 2020 as it did in 2019?

John Cappasola

Yes. Peter, we’re going to continue to focused on our transaction momentum strategy and like I said earlier the digital transformation will be an ongoing focus for us both through Del App and improving our capabilities on the CRM side of the data sciences side of that. I think we’ve got some opportunity there to continue to grow into as we get scale in that database. Obviously, Steve mentioned delivery on the value transformation piece. You’ll see some more aggressive lower end value news coming from the brand as we move through 2020. I talked a little bit about additional programs like the two for $3 Del Taco as well as sorting out some new innovation in the Buck & Under platform to help really complement what we’re doing with Fresh Faves. That will be part of our marketing mix with new news there and then obviously product development. And we continue to innovate and develop a deep pipeline of new product news to really help our tiers of the barbell strategy. In Q1 we are planning on launching a new exciting ingredient which will come with some new products that will leverage as we move throughout the year as well. So new news, product innovation, overall innovation through technology and then you couple that with the move we made recently with Chad coming into the COO role, more disciplined on the operating side of the fence to really reinsert our combined solutions model in a more meaningful way. And I think we feel good about our ability to continue to compete for AUV.

Peter Saleh

Great. And then can you just give us an update on where you are in terms of service times in the drive through? Has that deteriorated this year? Has it kind of flat lined? And where do you see it going over the course of 2020?

John Cappasola

Yes. Overall, Peter, it’s plateaued from what we have seen over the last couple of years. So I’d say 2019 and 2018 looks similar in regards to speed.

We’re fast. We’re not getting much faster. We’re doing some things now in regards to technology testing at the drive through with a new platform that is an outside order taker platform that we’ve been testing and that we may expand into the right high volume situations. In 2020, there could be some investment that we’re making to help improve speed and throughput through the drive through. We think that’s still a key component. And then as we think about getting better, order accuracy has plateaued a bit as well this year. So that’s one of Chad’s lead charges is really working with our franchisees and our company operations to make sure that we are delivering that experience through the accuracy at the window as well as in the dining room and through delivery by the way. So those are the areas that we’ll focus as we move into the back end of this year and in 2020 to our four walls.

Peter Saleh

Great. And then just the last question, I think you said that the Beyond platform was now a secondary message versus I guess the primary message in 3Q. Why is that? Is it just – you guys want to shift dollars to a different platform or did you feel like you weren’t getting what you had expected out of the Beyond platform?

John Cappasola

We launched Beyond essentially in April, right, and so it’s been kind of think about in May, June, July, August we really kept it as a pretty primary focus, so call it four months or so. So new news is a big driver of this category and we’ve got to keep the barbell fresh across our consumer base in order to make sure that we’re maintaining a healthy level of transactions across that kind of broadly appealing QSR plus strategy that we’ve deployed. So being able to launch breakfast in a meaningful way as a primary message was a great way to get that daypart reinvigorated, being able to highlight Carnitas as an LTO another great way to bring consumers into Del Taco. So it’s choices that we have to make. And even though it’s a secondary message and it’s been diminished a bit on the merchandizing, it’s still present and it absolutely – if you’re driving up to the drive through or walking into the dining room, you’re going to see Beyond on the menu. And you’ve likely been able to experience it over the last several months, so top of mind it should be there. And then if you’re one that wants to choose it, it’s absolutely going to be merchandized. So that’s just how we think about it. There’s multiple priorities and we’ve got to make sure that we’re focused on the ones that are going to do the best for the business in the short term.

Peter Saleh

Great. Thank you very much.

John Cappasola

You got it.


Thank you. Our next question comes from the line of Joshua Long with Piper Jaffray. Please proceed.

Joshua Long

Great. Thanks for taking the question. Wanted to start a little high level and just see if you could share some comments on what you’re seeing across the industry in terms of competition? You have a strong value offering and you’ve strengthened that with some of the different initiatives and products you mentioned during the call, but just curious on what you’re seeing – where you’re seeing the most pressure or where you think you have the most opportunity to compete going into the end of the year and beginning of next year?

John Cappasola

Yes, so just a little bit more color on the category. We’re still seeing the category kind of negative on transactions generally speaking, right. There’s a few folks that are not, but generally the category at large is displaying negative transactions. But those that are driving same-store sales are doing it through check essentially. So what that’s led to is on the value side we’ve seen some loss – leader type approaches on value where you’re seeing kind of low margin type offers in the marketplace, try to spur that, that highly frequent value user in the market looking at low price deals essentially. So we’ve seen some of that happen over the summer months and with some brands, not all brands but with some brands. We’ve also seen a big obviously move into the digital especially with the larger scaled brands. So you see that really leveraging that scale both through delivery and just digital in general transactions. So, Josh, that’s where we’ve seen the biggest moves this year relative to the competitive set, but I’ll reinforce that’s exactly why we’re doing the things that we’re doing. And I think we’re planned a pretty good offense in regards to our strategic development here and we just need to get all these initiatives into the market and make sure that we’re embedding them and continuing to create kind of familiarity with them with the consumer.

Joshua Long

Absolutely. And then thinking about the opportunity around the addition of a COO committed role there, how should we think about that? It sounds like order accuracy is on the list of things to be focused on, but also you talked about the opportunity to lean into some restaurant technology, maybe some new equipment or remodel testing. Should we think of that as an acceleration into those opportunities just maybe more of a dedicated focus by the new COO and his team?

John Cappasola

It definitely is partly what you just mentioned. I think it is a strategic role for us. And as we move forward and continue to focus on both company and franchise operations and needs associated with both, I think it’s critical that the structure be as efficient as possible to support those different needs and nuances to come with supporting company and franchised restaurants. There is different agendas sometimes between a franchisee and a company operator. We can bring those two together and collaborate and make sure that we’re putting the right programs to market to improve the four walls and to invest in the right areas, and that’s what I think Chad will bring to the table. It will be very strategic and it will be an opportunity for us to certainly do what you said and move some of these key programs forward.

Joshua Long

Great. Thank you. And one last one from me at a high level industry perspective, it seems like in California in your home state, we have some legislation going through targeting some of the gig economy players but also seems like it might wrap up some of the franchise or restaurant relationships there in terms of just how employees are being categorized between the franchisees and franchisors. I imagine a lot of things still to come there and still to evolve, but just curious if you could provide some high level commentary around what this could potentially mean for restaurants, your brand and/or kind of just how we should be thinking about this at this time?

Steven Brake

Josh, it’s Steve. I would say definitely something we’re watching carefully. At this juncture it’s still very much too early to tell, but absolutely that and other legislative threats that arise from time-to-time are things that we continue to watch.

Joshua Long

Got it. Thank you.

John Cappasola

Thanks, Josh.


Thank you. Our next question comes from the line of Stephen Anderson with Maxim Group. Please proceed.

Stephen Anderson

Good afternoon. Another high level question [indiscernible] vantage point than I am on the East Coast. I just want to ask about what’s going on in California certainly with these spike in gasoline prices whether this is hurting some of your – maybe some of the lower economic and our guests and whether they have maybe reduced their order frequency more, seems to be interesting.

John Cappasola

Hi, Stephen. What we have noticed in California is competition definitely being more aggressive on pricing across the board. And you think about that to offset regulatory driven wage increases that we’ve been facing. Gas prices in California have been high for some time and leading kind of the nation. So that’s not necessarily new news. I think the consumer here is used to that sort of thing happening in that cycle, certainly elevated right now but we’re not really seeing dramatic difference in traffic in California at this point compared to other markets. So yes, there’s definitely factors here in California that we’re keeping a close eye on that could be influential in call it the short to mid-term, but certainly nothing that is causing us heartburn or concern today.

Stephen Anderson

Thank you.


Thank you. With no further questions in queue at this time, allow me to hand the floor back over to management for closing remarks.

John Cappasola

Okay. Thank you everyone for your interest in Del Taco. We certainly appreciate it and we look forward to sharing our progress on future calls. Have a great day.


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

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