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Del Taco finds fewer seats equals greater profits

The Mexican fast-food chain has largely recovered, even as its dining rooms remain closed, and its profits are up.
Photograph: Shutterstock

Del Taco appears to be in little hurry to reopen its dining rooms.

The Lake Forest, Calif.-based Mexican fast-food chain on Thursday reported that its same-store sales have largely recovered from the pandemic, increasing 4.1% systemwide, including 6.5% at franchisees that operate half of the chain’s nearly 600 units.

Consumers have clearly shifted business to drive-thrus and delivery. Most of those 600 units, including all of Del Taco’s company-operated locations, remain drive-thru only. Delivery, meanwhile, grew eight-fold and is about 6% of the company’s business.

But the biggest reason Del Taco is taking it easy reopening dining rooms is this number: 18%. That was the company’s restaurant contribution margin last quarter. It was 120 basis points higher than a year ago. In other words, the chain’s restaurants are more profitable now than they were a year ago.

“We have not yet reopened any company-operated dining rooms, which has helped us stand out as a trusted brand for safety and sanitation while driving significant operational efficiencies,” CEO John Cappasola said on Del Taco’s fiscal third quarter earnings call. He noted that guest satisfaction scores have improved and the company has been using labor more efficiently.

To be sure, Del Taco’s results did not quite impress investors who sent the company’s shares down some 16% on Friday—in large part because company-operated restaurants are “trending slightly negative.”

Del Taco blamed the trends on pricing. Executives also defended corporate stores’ underperformance on the company’s concentration in California and Las Vegas, where restrictions have been tighter than in other parts of the country.

Still, Del Taco executives said that takeout has been a big benefit during the pandemic. They also suggested that demand right now simply isn’t there to justify reopening dining rooms.

“We feel comfortable right now, given the circumstances we’re seeing from the drive-thru, takeout and delivery channels,” Cappasola said. “Consumer demand is there. We’ve been able to make up for the lost dine-in sales for the most part due to these consumer behavior changes.”

The key in reopening dining rooms, he said, “is going to be making sure guests and employees are safe and secondly, making sure there’s adequate consumer demand.”

Cappasola said it made little sense to reopen dining rooms without that demand, given the profitability concerns. “You may be able to pick up some sales,” he said, “but the drag down on profitability may not be worth it.”

He said the company is seeing “tepid demand for dining rooms” in markets where franchisees have opened indoor dining. Cappasola added that the company plans to test its dining room reopening plan this quarter with a “couple of handfuls of company restaurants.”

Del Taco said that the pandemic led the company and franchisees to slow growth. But the company, and some of its franchisees, have changed that. Del Taco plans to open in Orlando next year, and franchisees plan to open locations in Ohio later this year.

“Strong recent results have instilled confidence in growth-minded franchisees to revisit, and in many cases resume their growth plans,” Cappasola said.

He added that the company expects “favorable dynamics” could spur growth, potentially from franchisees interested in drive-thru concepts, as well as real estate flexibility.

Del Taco also plans to double down on technology. The company plans to develop a new customer relationship management platform next year. It also plans to focus more on takeout. The company is developing a new drive-thru-only prototype, for instance. But it is also considering outside order takers at high-volume locations.

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