El Pollo Loco’s sales continue to track upward, but increased labor and commodity costs remain looming obstacles.

The chain reported Q2 systemwide same-store sales gains of 21 percent against 2020. Versus 2019, comps lifted 14.8 percent. The quarter also saw the two highest sales volume days in company history with El Polo Loco’s National Burrito Day and Cinco de Mayo promotions.

The sales reflect a key change in El Pollo Loco’s coronavirus recovery. While it was once a “tale of two cities” in terms of California and non-California store performance, the Golden State has more than rebounded, CEO and president Bernard Acoca said during Thursday’s earnings call.

In Q2, El Pollo Loco’s Los Angeles stores started to outpace the outer-market restaurants, exceeding the markets in June by 150 basis points. Los Angeles restaurants initially were capped at 50 percent at the beginning of Q2. On June 15, local authorities allowed 100 percent capacity.

“To see LA come back as strongly as it has, is very, very encouraging,” Acoca said. ”That’s our bread-and-butter business, and if that’s not strong, vibrant and healthy, the business is just off in general.”       

The chicken brand has not returned to pre-pandemic dine-in business levels, but Acoca said four-wall business is starting to look more incremental than previously anticipated. It’s coming back, albeit slowly, running between 8–9 percent of transactions.           

“Will it return back to pre-COVID levels? [It’s] tough to say because I think some consumer behaviors have irrevocably changed given how much they’ve gotten accustomed to the convenience of the off-premises side of the business,” Acoca said.

El Pollo Loco continued its positive trajectory into Q3. Quarter-to-date, system comparable sales jumped 10.6 percent (14.6 percent on a two-year basis).

To offset the increased costs of labor and commodities predicted in the period ahead, CFO Laurance Roberts said El Pollo Loco plans to increase prices in the 2–3 percent range. However, they are still working on a final number.

This uptick is meant to absorb some of the pressure El Pollo Loco faces. And not just from yearly inflationary costs around increased pay. The brand expects higher inflation as it sources chicken outside of contracts and packaging costs remain elevated.

In addition, El Pollo Loco will likely see higher costs from its training program. The decision to give key employees, like shift supervisors, raises in order to be competitive in the hiring marketplace will also bump up costs.

On the labor front, the chicken chain increased recruiting resources to surface more candidates and process applications faster. El Pollo Loco also offers a general manager stipend for managers in high-volume restaurants in hopes it will incentivize continued growing sales.

These efforts significantly boosted the number of new hires and improved retention rates, Acoca said.

But based on all of this, El Pollo Loco’s Q3 restaurant-level margin could be 250–300 basis points lower than Q2, Roberts said. This follows typical business trends where Q3 margins are lower than Q2, often because of higher utility costs in the summer months and wage changes. This year, though, more costs surrounding labor abound.

On a sustainability focus, El Pollo Loco made a commitment to entirely eliminate Styrofoam from its packaging. Acoca said the removal from restaurants gets rid of 21 Olympic sized swimming pools worth of Styrofoam from the waste stream annually. To reach this goal, the brand introduced its Thermo-To-Go packaging during Q2.

The company also offers a free delivery promotion for dispatch orders placed through its website. This offer sparked an increase of double the dispatch sales and overall delivery sales by 7.7 percent.

And El Pollo Loco’s delivery is a game-changer in and of itself. The brand claims to be the first national restaurant chain to deliver food to customers’ homes through the air, by drone. It’s called “Air Loco.”

“While a lot of work remains to be done to make drone delivery a viable everyday option, we are excited about its potential,” Acoca said.

Sales grew in part from El Pollo Loco’s campaigns over the past quarter.

The “How Do You Tostado” advertising focused on the many ways one can eat a Tostada. And clearly enough, the campaign worked as El Pollo Loco reached record Tostada sales. The $5 Fire-Grilled Combo promotion came next in the brand’s advertising wheelhouse.

The advertising concepts were unique in that they didn’t highlight new products but instead found ways to spotlight the value already present in current menu offerings.

Acoca said El Pollo Loco was deliberate in doing this. Consumer research identified ways to present food items in more relevant ways to customers. Both campaigns target the older Gen Z, younger millennial demographic that is seeking higher quality value-meal options, Acoca said. But the company also wanted to give franchisees a break as they dealt with the blows of the labor shortage.

“I think it was a smart move in that regard,” Acoca said. “Now with that being said, looking to the fall, being a little bit more bullish and optimistic that the macro environment is going to improve a bit, we’re turning back to new product news for the balance of the year.”

El Pollo Loco primarily grew its business through transactions. The brand saw a significant check lift last year, and the check growth continues, just not at the same pace. Still, transactions are at around 10 percent below where they were two years ago, Roberts said.      

The loyalty program is an area of potentiall, though. El Pollo Loco’s loyalty sales drove incremental average checks compared to those not enrolled in the loyalty program. The frequency of visitation and transactions is also up. Loco Rewards added 330,000 members since the beginning of the year for a total of $2.6 million. Overall, loyalty transactions grew 14 percent from Q1 to Q2.

“We think the noise naturally of what was going on with COVID made that hard to achieve,” Acoca said. “But now that the momentum in our business has returned, that higher average check lift and now starting to see this kind of increase in frequency of visitation with the loyalty program gives us a lot of optimism. So I think we can continue to deliver very strong sales growth for the balance of the year.”

El Pollo Loco is growing in more avenues than just its sales. too. The chain concluded a four-unit development agreement in the Denver market with an existing franchisee, and it expects more new markets to follow.

The brand sold eight company-owned restaurants in Sacramento to an existing franchisee under an agreement that also promised to open three more restaurants in the market. It also completed two company remodels using the LA Mex design in Los Angeles and plans to remodel 15 company-owned and 40 franchise restaurants this year.

El Pollo Loco intends to open two to three company-owned and four to six franchise restaurants during the second half of the year.

“I couldn’t be more proud of what our team has accomplished,” Acoca said. “Despite labor and supply challenges, the hard work and dedication of our restaurant and support center teams have enabled us to ramp up our restaurant operations to 100 percent as efficiently and safely as possible while also delivering exceptional financial results.”

Total revenue increased 22.5 percent to $122 million compared to $99.6 million in the second quarter of 2020. Company-operated restaurant revenue soared 22 percent to $107 million compared to $87.7 million last year.