Del Taco’s first fiscal quarter of 2018 marked 18 consecutive quarters of sales growth for the Mexican-American quick-service chain, with systemwide comparable sales growth of 3.7 percent, year-over-year. Sales from company-owned stores also reported 2.6 percent growth, making it 23 consecutive quarters of sales increases. Franchise stores reported 5.2 percent growth. Total revenue was also up by 6.8 percent at $112.6 million over the $105.3 million reported for the same quarter last year.
John D. Cappasola, Jr., president and CEO of Del Taco, said in the call that the results were largely in line with the company’s expectations and that guidance for the year was reaffirmed. “Systemwide comparable restaurant sales growth of 3.7 percent, or 7.9 percent on a two-year basis, was a strong outcome, and we view the franchise restaurants 5.2 percent comparable restaurant sales increase as a reflection of Del Taco’s strength in varied geographies. We are very pleased with the continued AUV growth within our franchise base which is driving increased traction on franchise development across the country,” he said.
Cappasola also attributed sales growth to more engaged franchisees and their dedication to speed of service and guest experience. “As you know, the company has been leading the way with best practices in these areas and we're pleased our franchise supports strategy over the last couple of years is yielding great results across markets,” he said.
Net income fell to $3.2 million compared to $4.2 million in 2017, which was attributed to inflation, low menu prices, and labor expenses, but Cappasola said that a shift in pricing will offset these costs in future quarters. “We view our first quarter restaurant contribution margin as a good outcome considering we had our lowest expected level of menu pricing coupled with the highest level of expected food inflation for the year,” he said.
A seafood promotion launched for Lent played well with consumers in the first quarter, but it was the brand’s “Buck & Under” campaign that drove the strongest results, particularly due to the launch of a new Salsa Chicken Taco priced at only $1. “Buck & Under is a unique platform with up to 15 items for a dollar or less and continues to be a key component of our everyday value strategy,” Cappasola said. “Buck & Under allows us to promote value without sacrificing margins and is integral to driving our value and affordability perceptions.”
Strong value pricing has been an integral part of Del Taco’s strategy, and the brand has continued plans to build off its momentum. Del Taco will expand the “Buck & Change” section of its Buck & Under menu to nearly all restaurants and will feature slightly higher prices than a dollar to help migrate consumers to higher-cost items over time, though Buck & Under will not go away.
“We believe this approach and the compelling value offered across our barbell menu will help achieve elevated pricing with a limited adverse impact on transactions,” Cappasola said, and he noted that other expense reduction initiatives are under way. “On the cost management front, we continue to make progress on supply chain strategies including portion optimization on select items that do not adversely impact guest experience. Within the restaurants we plan to roll out new prep equipment in Q3 to enhance quality and reduce labor hours and also leverage enhanced labor scheduling techniques to optimize labor.”
Del Taco is also rolling out its Elevated Combined Solutions in its fiscal third quarter, which will include operational improvements, a new advertising campaign highlighting “Fresh Prep,” menu refreshes, and continued additions to Buck & Under, mid-tier, and premium products.
Expansion of third-party delivery, which will tie into the Del Taco app and offer support for a future loyalty program, also offers strong earning potential.
Del Taco opened three new company stores in the first quarter, while it closed one franchise restaurant. After signing a seven-unit development agreement with a new Atlanta-based franchisee, Del Taco plans to open 25–28 stores in 2018 as planned.
“As the year progresses we expect to increase our menu pricing while food inflation trends moderate and various supply chain and labor optimization strategies generate additional savings,” Cappasola said. “We believe these factors, coupled with our upcoming launch of Elevated Combined Solutions with enhanced marketing and advertising, menu innovation, and operational initiatives, has us well positioned to drive improved restaurant contribution performance in the second half of the year and beyond.”