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    Del Taco Looks to Reignite Traffic Trends

  • Rising costs challenged the brand in the third quarter.

    Del Taco
    Del Taco says breakfast could help ignite transactions.

    Del Taco saw increases in third-quarter revenue and franchise stores outpaced company-operated restaurants on the top line, the company announced earlier this week. Even so, the California-based chain witnessed a decrease in net income and a slight slowdown of its Beyond menu items, which Del Taco championed in Q2.

    Total Q3 revenue rose 2 percent, year-over-year, from $117.8 million to $120.2 million. Systemwide comparable restaurant sales also bumped 1 percent, resulting in a two-year stack of 2.4 percent.

    Broken down, company-operated comps increased 1 percent in Q3, while franchise stores hiked 1.8 percent. As of September 10, 312 of Del Taco’s 586 restaurants were corporate.

    Del Taco's company comp was comprised of average check growth of 4.1 percent, including modest menu mix growth, mostly offset by a transaction decline of 3.7 percent.

    The brand opened four total units and closed one in Q3. Including recent or upcoming expansion, there will be 15 Del Taco system restaurant openings during 2019 and the company currently has 12 restaurants under construction, of which 10 are expected to debut during this fiscal calendar.

    Del Taco’s labor and operations-related expenses as a percentage of company restaurant sales also increased from 32.2 to 32.7 percent. Steve Brake, the company’s chief financial officer, said the increase was driven by wage inflation from the $1 increase in California’s minimum wage.

    Brake added it was partially offset by reduced workers’ compensation expenses based on underlying trends, reduced group insurance, and a favorable change in the company’s California payroll tax rate compared to 2018.

    Share prices dropped just over 8 percent Tuesday morning on the stock market after Del Taco posted results below Wall Street expectations.

    The company posted a net loss of $7.7 million, or 21 cents per share, compared to $5.9 million or 15 cents per share last year. The company’s net income for the quarter decreased from $6 million to $3.7 million.

    The company did see a turning point with the launch of its products on Postmates, which CEO John Cappasola said tripled delivery incidents. Cappasola said he expects business to increase even further later in the year when Del Taco connects with DoorDash.

    Cappasola added traffic softness in Q3 is being shored up by putting a focus on making breakfast a higher-performing daypart and by innovating at the lower price end of the value menu spectrum, which he said was not as strong in the summer.

    Why a drop in Beyond mix?

    The decrease in Beyond’s share of Del Taco’s sales mix likely came from moving the products from the main marquee of merchandising, taking the product line from primary merchandising to secondary merchandising, Cappasola said.

    “We still think the 4 percent is actually a really healthy sales mix relative to other programs there we’ve done in the past when that similar type of merchandising dynamic has happened and ultimately we continue to be excited about the Beyond program,” Cappasola said. It was 6 percent last quarter. Del Taco said in June that it had sold nearly two million Beyond Tacos and Beyond Avocado Tacos since launch, with close to 100,000 hand-sliced avocados used for the Beyond Avocado Taco alone.

    “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,” he added. “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.”

    Cappasola also said the company didn’t see a significant increase in visits from customers who bought the Beyond products, but just an increase in check gains. He said guests essentially took a trade-up opportunity with the products. The company struggled to get other demographics to increase their visits.

    “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 and vegetarians, are not heavy category users,” he said. “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.”

    He said the launch of Beyond products in April and the four-month primary messaging had somewhat run its course, and the company wanted to put a focus on other products to keep the menu fresh, especially in the competitive nature of the quick-service industry.

    “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 quick service plus the strategy that we’ve deployed,” he said. “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.”