Second quarter earnings thus far have been a mixed bag, and an increasingly pressured consumer environment has not been all that kind to the public restaurant sector. Of course, there are exceptions to nearly every rule and one such example in Q2 was El Pollo Loco.
The company reported a 4.5% increase in comparable restaurant sales and a 170-basis-point improvement in restaurant-level margins, to 18.6%. During the earnings call Thursday, chief executive officer Liz Williams said these positive results were driven by a focus on value and operations.
“It has been a challenging macroeconomic environment for the restaurant industry and consumers as a whole in the recent months. While some may see this as an obstacle, we see this as an opportunity to showcase to our guests that El Pollo Loco is one of the unique restaurants that can offer portable, craveable, fresh food, all for good value and with the convenience of fast service,” she said, adding that the company is seeing trade down activity from casual dining and fast casual while also giving up some consumers to quick-service concepts running aggressive deals.
Williams, who came on board in February, provided updates on El Pollo Loco’s five strategic pillars, including winning with flavorful, affordable, and better-for-you chicken; having a hospitality mindset; becoming a digital-first business; delivering winning unit economics; and driving unit growth with national expansion. On the “affordable” side, the chain recently relaunched burritos with guacamole included in all three for $9.99, or $8.99 for Loco Rewards members. Williams said the burritos were designed to maintain favorable margins. El Pollo Loco is also testing other value offerings, including à la carte and combo offerings in the $3 to $7 range.
For the digital pillar, the chain has slowed down its kiosk rollout to “ensure guest experience remained a priority.” The kiosk rollout began last year and was accelerated to help offset the minimum wage increase in California, where a majority of the chain’s restaurants are located, but Williams said the company needed more “high-touch training … to drive sustainable customer adoption.” The systemwide kiosk rollout is now expected to be completed by the end of this year.
In addition to allowing for more training time, the slowdown has also enabled the company to enhance other technology solutions, such as accepting gift cards and discounts, Williams said. Speaking of California, chief financial officer Ira Fils said the company didn’t experience much of a performance difference in the market following the implementation of AB 1228 April 1, which raised the minimum wage to $20 an hour.
“Marginally, there were some markets outside of California that [were] a little stronger, but I think in general, the comp that you see for us is pretty representative of the system,” he said.
That said, El Pollo Loco has experienced “a little more” traffic decline in the state because of having to take some pricing in the market.
The company recently brought on supply chain, operational, and culinary leaders to help identify efficiency opportunities across the P&L (profit and loss statement). Williams said these benefits should start to appear in the fourth quarter and should offset investments toward the initiative.
“We have a very concerted effort on our cost of goods and some of our semi variable costs," Williams said, adding that the company has hired a third party company to help with this process. "We have some new talent … and we're just doing a very thorough look in the middle of the P&L and other line items. Honestly, it hasn't been done in a couple of years, and it's overdue.
Williams said this initiative should enable the company to return to “consistent 18% to 20% margins over time.”
Finally, El Pollo Loco continues to value engineer its restaurant prototype with a goal of reducing new unit build costs to about $1.8 million. Construction on the first unit in the new prototype – a company-owned restaurant – is expected to begin “in the next few months.”
“As it relates to build costs, the saving is coming from all over. The first place I would point to is reducing the size of the unit. We were over-specing on the equipment package. And … we were probably overdesigning the unit and some of the features weren’t modern,” Williams said. “It’s a list of many things that are going to get us to $1.8 million.”
Williams added that the company recently hired Tim Welsh as its new chief development officer to lead the development pillar. That said, the company is “modestly reducing” its development and remodel guidance for the year to incorporate design elements and cost savings from its new prototype into a bigger chunk of the system more quickly, according to Fils. For the full year, the company expects to complete 10 to 12 company remodels and 35 to 45 franchise remodels. The company is targeting two company-owned openings and four to five franchise openings.
El Pollo Loco’s Q2 by the numbers
- Total revenue was $122.2 million versus $121.5 million the year prior
- Systemwide comparable restaurant sales increased year-over-year by 4.5%
- Restaurant contribution was $18.6% of company-operated revenue, compared to 16.9% last year
- Net income was $7.6 million, versus $7.1 million
- Adjusted EBITDA was $17.2 million, compared to $16.6 million
Contact Alicia Kelso at [email protected]
