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Del Taco storefront Courtesy of Del Taco

Strong Del Taco sales yield profit growth

Company overcomes bad weather to generate 14th straight positive quarter

Not even heavy rains in California could keep Del Taco Restaurants Inc. from another quarter of positive sales.

The Lake Forest, Calif.-based quick-service Mexican chain said its same-store sales increased 4.2 percent in the quarter ended March 28.

That was the 14th consecutive quarter of same-store sales improvement for the 554-unit chain. And it came even though heavy rains hurt sales in February in particular.

“In what has been characterized as a challenging environment for the industry,” CEO Paul Murphy said on the company’s earnings call Thursday, “we delivered strong financial performance during the first quarter.”

Traffic in the period increased just 0.3 percent, likely contributing to the 1 percent decline in Del Taco’s stock price on Friday. In addition, Murphy noted that same-store sales are likely to “moderate” in the second half of this year, as sales comparisons grow more difficult

Yet executives on the earnings call said that transactions have increased four straight years. And Murphy said that, “Both sales momentum and traffic growth have continued into the second quarter.”

Executives also stressed the chain’s shift in strategic positioning, started in 2012, have contributed to improved unit economics. Del Taco has long been known for its lower priced items. Yet under Murphy, the company has added more premium items, a “barbell” strategy that has kept traffic but also yielded better sales as its consumers buy more expensive menu items.

Average unit volumes have increased nearly 20 percent, Murphy said, to $1.4 million, an increase of $230,000 per locations. The company plans to get to $1.5 million average unit volumes by 2018.

Restaurant contribution margin, meanwhile, has increased by 340 basis points over that time, Murphy said.

Consumers in the first quarter bought fewer lower-cost items, and more of the premium items.

The company has continued to push more premium products, such as its shrimp limited-time offer and the Del Turkey Taco. Executives also said that its Platos continued to generate sales, even though it was not a primary focus for the chain in the period.

“Our aggressive focus is on keeping the brand fresh and constantly giving our guests new reasons to visit,” John Cappasola, Del Taco’s president and chief brand officer, said on the earnings call. “This will continue to be a key driver for brand progress in 2017.”

Executives said the company’s positioning, and its focus on operations have helped improve the chain’s guest satisfaction scores, an important consideration as the company looks to drive more sales in the future.

Del Taco is also getting more interest from franchisees. The chain refranchised five company owned locations in the quarter, in part to spur development. For instance, it sold two locations in San Diego to new franchisees, and it sold three locations to a local franchisee there.

The refranchised locations “provide new, growing franchisees with an operating base of restaurants that will enhance their operational expertise with Del Taco,” Murphy said. That could help spur future openings.

Still, Murphy said the company is likely to open more new locations in the coming two or three years than franchisees, in part because it takes new franchisees longer to get off the ground. Ultimately, however, those operators will drive unit growth in other parts of the country.

“The next leg forward is going to come out of the newer franchise,” Murphy said. “Especially in the Southeast.”

Executives said they expanded tests of the chain’s online and mobile ordering strategies to their Las Vegas market last month. They also expect to test a third-party delivery strategy this quarter.

Cappasola said the company is “pleased with our progress” and is now focusing on driving more awareness of the programs.

He also said the company is working on improving speed and accuracy. The company is training workers get those results. And Del Taco plans to invest more in its kitchens, particularly at higher volume locations, to improve speed. The company is also using more outside order takers in the drive thru during peak hours.

“A lot of targeted investment will … improve our ability to get more efficient and more capable in driving transactions, especially during peak times,” Cappasola said.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

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