Release Date: May 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- El Pollo Loco Holdings Inc reported a total revenue increase of 1.4% to $116.2 million in Q1 2024 compared to the previous year.
- Company-operated comparable restaurant sales increased by 3.8%, with a 2.6% increase in average check size and approximately 1.2% increase in transactions.
- Franchise revenue increased by 17.3% due to a 5.9% increase in franchise comparable restaurant sales and the addition of new franchise restaurant openings.
- Restaurant contribution margin improved significantly, reaching 17.6% compared to 15% in the previous year, driven by higher menu prices and better operating efficiencies.
- El Pollo Loco Holdings Inc is on track to complete the rollout of kiosks to all company-owned restaurants, enhancing customer service efficiency.
Negative Points
- Company-operated restaurant revenue decreased by 0.7% to $97.2 million, primarily due to a decrease in revenue from the refranchising of 18 company-operated restaurants.
- Despite overall revenue growth, there was a noted labor inflation of over 4% in the first quarter, with an expected increase to between 12% to 14% for the full year due to minimum wage increases.
- General and administrative expenses increased by 50 basis points year over year to 10.3% of total revenue, attributed to restructuring and executive transition costs.
- The cost of the current restaurant prototype was deemed too expensive at approximately $2.2 million, potentially hindering long-term franchise growth.
- El Pollo Loco Holdings Inc is still in the early stages of implementing cost-saving measures and has not yet fully incorporated potential savings into the margin outlook.
Q & A Highlights
Q: Can you discuss the drivers behind the year-over-year increase in restaurant level operating margins and the timing of pricing relative to the minimum wage increase?
A: Ira Fils, CFO, explained that the increase in operating margins was driven by proactive pricing adjustments made in December and February in anticipation of the minimum wage increase in April. These adjustments, along with strong sales and improved labor management, significantly contributed to the margin improvement. Elizabeth Williams, CEO, added that there has been a company-wide focus on enhancing operating efficiencies across all functions.
Q: How is performance varying across different income cohorts, and what trends are you seeing in the lower income cohorts?
A: Elizabeth Williams noted that El Pollo Loco serves well across all income cohorts without significant negative impacts. The menu offers items that cater to various price points, from value offerings to premium options, helping to address the needs of different demographics effectively.
Q: Could you share your initial impressions of the company and any areas that were surprisingly positive or need more work?
A: Elizabeth Williams expressed positive surprise at the high quality of food and strong consumer perceptions, which are unique in the QSR sector. She also praised the strong operations and low turnover rates, attributing these to a robust company culture and effective franchise partnerships.
Q: What are your observations on consumer behavior in response to price increases, especially with the new minimum wage laws in California?
A: Ira Fils mentioned that while March showed very strong sales, April experienced a slight moderation but remained solid. The company took additional price increases in April, and although there was some pressure on transaction numbers, the overall consumer response has been manageable. The company plans to maintain mid to high single-digit pricing throughout the year.
Q: What is the expected timeline for accelerating development and reducing unit costs as part of your growth strategy?
A: Elizabeth Williams acknowledged the need for rapid progress in cost engineering for new units and enhancing the economic model to attract franchise partners. She emphasized the importance of moving quickly to implement these changes and indicated that more detailed timelines would be shared in the coming months.
Q: How do you balance the strategy of offering value while also promoting premium products in a potentially weakening consumer environment?
A: Elizabeth Williams stressed the importance of providing everyday value across the menu and continuing to innovate, especially in the sub $10 price range. The company is testing new recipes and updates to its burrito platform to ensure they meet consumer expectations for value and quality.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
