El Pollo Loco Holdings, Inc. (LOCO) Earnings Call Transcript & Summary

Good morning, everyone. I'm Andy Barish with Jefferies. We're very pleased to have El Pollo Loco as our next presenter or fireside chat as we're going to go through things. Liz Williams is to my right, the CEO; Ira Fils, to her right, CFO. El Pollo Loco is a Southern California-based company, and it would be kind of calloused and remiss to not mention what's going on in Southern California, as we all know, and how we're thinking about everybody and sending our best thoughts and prayers. And with that, Liz, I think, wanted to make a comment on that, but also then kind of jump into almost your 1-year anniversary.

Yes.

So why don't we start out with that and kind of some feelings on where you are after a year at El Pollo Loco?

Yes. Thank you, and thank you for hosting us. And just echoing the comments, we're a California-based company, born and raised in L.A., and I'm -- we're all devastated. I'm pleased to report that all of our team members are safe, and we're not -- very minimal impact to our team members and our restaurants also. Believe it or not, we did not have any total destruction of any of our restaurants. We've had a couple here and there closed because of electricity over the last couple of days. And just proud of the way our teams come together. We've fed, I think, at last count last night, over 700 meals to emergency responders and growing every day, and we'll continue to support. So they're in our thoughts and prayers. So as turning to the business, yes, coming up on 1 year, time really does fly. And as I came in, I had always loved the brand from afar. And I knew coming in, I was coming into -- a bit of a turnaround. And what surprised me in a pleasant way was the elements of the turnaround were a little different than what I originally thought. And what kind of turnaround this is, is a brand turnaround, but I was really excited because it is not a food turnaround. So many times people come into restaurant businesses and say, I've got to go fix the food or make the food better, and that is not the case. El Pollo Loco has some of the most delicious, revered food by our fans. People love our grilled chicken, our fire-grilled chicken. And really, I came in and learned, don't mess it up. Don't mess it up. Our food is delicious. So that was great. And then from a business standpoint, I learned very quickly, we are a profitable business. We're throwing off a lot of cash. Now were there some enhancements we could make? Absolutely. And was there some areas where we needed some attention, and we'll talk about today in the middle of the P&L, those areas we really jumped into in year 1? Absolutely. And really, when I think about the margin improvement, that was the focus of year 1. It was, hey, let's go and find the quick wins that we can get back to a business model that really works and a business model that takes us back into those high teens in terms of margins and a business model that franchise partners want to invest in to grow again. So that was the focus of year 1 of this turnaround. And when I think about the turnaround, I say it's a 3-year turnaround. Year 1 was let's go get that profitability. Year 2 is all about the brand. And this is the heart of the turnaround. It is a brand turnaround. And so when I say brand, what I mean is, how do we make this brand more modern, relevant, useful and then how do we take innovation and value and really get sales and transactions humming again because that is the essence. Everyone wants to see the growth. And to get the new unit development, we need the business model and the profitability. We need the sales transactions and growth and the development of flywheel starts to go.

Perfect. And just one final overview kind of you oversaw your first franchisee convention a few months ago. If you're willing to share kind of some of the themes and thoughts that came out of that as it flows into now 2025.

Yes. One word, growth. That was the theme. And it's growth both from getting sales and transactions going again, but also this new unit development. And we have some of the best franchise partners in the industry. They are hard-working, great operators, really loyal. They love this brand. And so many of them, as I came in and said, I want to grow. I want to open new restaurants. But Liz, you got to help me. You got to get the unit economics back where they need to be and you have to reduce the build cost. It's crazy what we had been asking our franchise partners to pay for build cost. And so that's what we did when we announced a couple of months ago, a new prototype aiming for [$1.8 million], a new look and feel that, again, is more modern, more contemporary. We reduced the size of the footprint as we realized a lot of business going through the drive-thru, much more business going through delivery these days. You don't need to have as big of a dining room. And the franchise convention, everyone left with just this renewed spirit of we're back and we're ready to grow.

Yes. You mentioned transaction growth. It's been a challenge for you guys, it's been a challenge for a lot of the industry in 2024. The big, big players in this industry are back doing value and discounting kind of like we saw in the old days. And as a brand, obviously, you don't have the same marketing power, very dense in California. But how have you responded? And I know it's kind of come through a bit of a continuum. There's some attempts at discounting, some more focus on the premium products. And where are we kind of on that spectrum?

Yes, you're exactly right. You have to be careful that it's not a race to the bottom. And although we did get out there with our $5 Pollo Bowl, which in our advertising, we say it's food that you actually want to eat for $5, not just food we're throwing at you for $5. And it's a great spot. It showcases the beauty of our food. And that consumers have responded to that. We also did the Taco Tuesday 2 for $5. We realize, though, that value has to be throughout the menu. And our salads, we're running our Pollo Fit Bowl salads right now, and those are $10 to $12, which is a great value compared to fast-casual and casual dining, which are $15 plus. So it's putting those out there. It's also getting the innovation. I'm a big believer, value and innovation have to go together when you want to drive transactions. And we're working on a calendar that has new products that we can bring out in that $7 to $9 price point that are new news for the consumer, but also a good value. So I think you have to play value so many different ways. You can't just be, I guess, a one-trick pony.

Did you -- that $7 to $9 price point, is that kind of a gap in the menu that you've sort of focused on? Or is there existing products as well as the innovation that kind of fills that area of the price range?

I would say as we've taken pricing over the last year, 1.5 years, I think it's become an opportunity for us. And it's one of those where we have a burritos at $9.99. But if we can -- a quesadilla as an example, just a delicious quesadilla using some of our salsas that we're known for. And with our homemade fresh guacamole, imagine if we can get that for a consumer in that price point, in a combo, I think that would be a winner.

Ira, just weaving you in on pricing. Obviously, California was in a unique situation last year, quickly raising the minimum wage to $20. Just how did El Pollo Loco respond on the pricing side? And then as that laps in April of '25 coming up, how do you envision the '25 menu pricing looking?

Yes. So as we entered 2024, we realized everybody was going to have to take some price to compensate for the $20 minimum wage. So our thought process was, we will do the same so we keep our profitability neutral from minimum wage, and we did a great job of that. We -- our pricing for the year was about 7.75. And so as we think about that, though, as Liz has mentioned here, it has impacted transactions a little bit. And as we think about next year, as we're carrying forth a lot of price that we've taken this year into next year, we are looking at keeping our pricing -- our price increase is very moderate next year.

Got it. And anything you wanted, just circling back on the marketing and innovation calendar, again, the brand has been through some changes over a number of years now. Where are we sort of coming out in terms of number of windows? How are you supporting that from an advertising perspective, just kind of on a high-level basis?

Right. I think it's the number of windows, but also the quality. And so as we came into this '24, our marketing windows were pretty much rehits of products that consumers had seen before. We had walked away from some of our innovation. This last year, we brought in a new culinary leader. And as I look at our calendar for '25, we have 5 marketing windows and every single one of those is a new product that hasn't been seen or loved by consumers. So we'll start the year with Mango Habanero chicken. So our bone-in chicken, we have not brought new news to our delicious fire-grilled bone-in chicken in years. So we all know how popular different flavor profiles are, that will be fun. We have Fresca wrap with a citrus-marinated dressing later this year. We're testing a chicken sandwich, which will be interesting. So there's a lot of -- you'll see a lot of innovation from us. And then your point of how do you get that communicated to the consumer? We're placing a lot of emphasis this year on that brand positioning. And at the end of last year, we went out and did an agency review and pleased to announce that we'll be working with a new agency. By midyear, we'll start to see some of their work, which I think will really help in repositioning the brand.

Good to hear. You got through or getting through kiosk rollout, which certainly been quite popular in the industry over the last number of years for obvious reasons. What are you seeing in terms of that rollout? What's expected in '25, whether it's on the sales side or the labor side? Or how should we kind of think about that?

Yes. As we rolled kiosk out through this year, we'll complete the rollout to our company restaurants in Q1. We have some of our franchise partners also rolling out through '25, and we'll get about to about half of our system will have kiosks at some point this year. And so the benefits we've been seeing have been -- we wanted to make sure that the guests had time to absorb and understand how to use the kiosk. So we haven't pushed hard on the labor savings at this point in time. As we move forward into next year, we think we have a big opportunity to capitalize that from a productivity standpoint in the restaurants as well as, as we move into next year, we believe we have an opportunity to really work them from a sales standpoint and really upsell and sell the items that we'd like the guests to be purchasing.

Got it. So not really much of a labor save, just a kind of a reallocation of...

Yes, no. Yes and no, it's savings because we can then focus some of those to more sales-focused ideas and throughput.

And as the year goes on, you'll start to see more of that labor savings and then the consumer benefit of order accuracy and as we dial in the check increase, we're optimistic we'll see all 3 of those.

Got it. Got it. And as we were talking just on the way up, operations were something that you quickly saw some wins in. Do you want to give us one or two examples of kind of how retraining, restandardizing, all those kind of things have flown through the business?

Yes. We have great operations. We have some of the lowest turnover in the industry. I learned when I came in that one of the things that we had walked away from over the years was some of our just standardization and our -- just our attitude around standards as a franchise business. So we've reinvigorated that. We relaunched that with our company and our franchise restaurants. We've put in a new auditing system for standards that we're just rolling out. And then we've done a lot of work around labor deployment. And I have a -- I think we all share a strong belief in the industry. If you have aces in their places at the right time, speed magically happens and you get a better customer experience. And we're starting to see that as well. So I'm excited to see what that brings throughout the year.

Yes. And I think you introduced a terminology that I didn't hear or haven't heard much of in the restaurant business, but total cost to serve, which I imagine includes a lot on the back end with procurement and things like that. So how has that holistically started to show up or will it -- will show up in 2025?

Absolutely.

I think that's -- we'll see that's what our upside is for us in 2025. We started a project midyear. We brought in a third party to give us a little help to do exactly what you said. Just look through our supply chain and really get a good understanding of what we're buying, who we're buying it from and how we're using it in the restaurant, to really make sure that we are optimizing the things we're buying versus the amount of work we're doing in the restaurants from a prep standpoint with the overarching concept of we're not deteriorating our quality or our standards or what the guests are actually going to see. And we have many projects that are in focus this year that we should see some gains next year that will help us get to those margin goals that we've put out there of in that 18% to 20% over time, but approaching 18% next year.