On October 16, Del Taco’s stock sank as much as 10 percent after reporting $117.8 million in revenue, slightly missing the projected $120 million. System-wide same-store sales grew 1.4 percent, but again fell below Wall Street's estimate for 2.2 percent growth. Transactions dropped 2.6 percent. The soft trends also led Del Taco to lower its guidance for the year. It now predicts same-store sales gains of 3 percent, down from the previously forecasted 2–4 percent.
Even though company-operated restaurant sales were up 0.3 percent, and franchised same-store sales grew 3 percent, the missed projections caused the second largest Mexican-American quick-service restaurant chain to shift direction for Q4.
President and chief executive officer John Cappasola outlined the brand’s upcoming changes during a Wednesday conference call.
“I would characterize our Q3 results as decidedly mixed with our strategic progress and effective cost management being tempered by soft comparable restaurant sales trends at company restaurants,” Cappasola said.
Value innovation misses the mark
During this past quarter, Del Taco found weakness in its bargain $1 Chicken Quesadilla Snacker, which drove customers into the store but failed to pay off in sales for the brand.
“Although the $1 Chicken Quesadilla Snacker was a record-breaking new product in terms of units sold and helped to reinforce our strong value and affordability perceptions, its high mix caused negative check mix trends without any improvement in transactions,” Cappasola said.
Toward the end of Q3, the brand’s messaging pivoted to focus on Del Taco’s Epic Burritos 2-for-$5 Classic Burrito Mix and Match promotion, which restored healthy check trends. The brand saw a continuation of soft transaction trends, it said, which further confirmed that innovation of a high-demand value product didn’t exactly translate into the desired effect on transactions.
While it has yet to see an effect on transactions, though, the brand did see consumer interest from new menu items, Cappasola said. This innovation will continue in Q4 with the reintroduction of a fan-favorite premium LTO protein, Shredded Beef, which hasn’t been on the menu since 2012.
“Later this month, we’ll pair our Shredded Beef LTO with additional new product news around Epic Burritos with a launch of the new Triple Meat Epic Burrito, featuring freshly grilled steak, chicken and bacon,” Cappasola said. “We expect these promotions to drive a healthy check average and improved transaction trends compared to Q3.”
Growth on the horizon
During Q3, Del Taco opened three new franchise restaurants and four new company-operated restaurants, bringing the total of new system-wide openings to 12 new restaurants in 2018 to-date. Cappasola noted that there are currently 17 restaurants under construction, including 11 franchise locations and six company-operated, with the hopes that 13–16 will open by the end of the year.
“We are very pleased with the momentum we are seeing with our franchisees, as the brand expects to open restaurants in a 11 total states this year, which positions us well for future growth,” he said. “We also opportunistically acquired three restaurants from franchisees during the third quarter.”
Drumming up customer loyalty
Cappasola announced Del Taco will be launching a mobile app in November, allowing customers a new way to order and experience promotional offers. The app will feature targeted promotional offers to drive guest frequency and the support a loyalty program in the future.
“Our guests have been eagerly awaiting the launch of our app, and we believe this will help us limit any impact from deep discounts many competitors are offering on their own apps as we build our consumer database over time,” he said.
To compete with other brands expanding into the delivery business, Del Taco is experimenting with third-party delivery in the Los Angeles market beginning next month. The brand has partnered with food delivery service GrubHub and expects to expand this program nationwide in 2019.
“We have also signed partnership agreements with Postmates and DoorDash and plan to expand with both during 2019,” added Cappasola.
Moving forward to Q4
Del Taco EVP and CFO Steven Brake noted the brand had a revenue increase of 6.2 percent, finishing the quarter with $117.8 million against the $111 million in the year-ago third quarter. As stated before, system-wide comparable restaurant sales increased 1.4 percent and lapped system-wide comparable restaurant sales of 4.1 percent during Q3 2017, resulting in a two-year trend of 5.5 percent.
The chain also reported a 3.1 percent year-over-year increase of third-quarter company restaurant sales to $109.6 million from $106.3 million in the year-ago period.
“In the quarter, we successfully rolled out elevated combined solutions, designed to further our mission to be the leader in the value-oriented [quick-service] plus segment, which has been a driver of our success today, and we believe we’ll continue to pay dividends over the long-term,” Cappasola said. “We again experienced strong franchise comparable restaurant sales trends, demonstrating our strengthening franchise systems and brand portability.”