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Del Taco to sell restaurants to franchisees

"Strategic" refranchising to reduce company portfolio to 45% by 2020.
Photograph: Shutterstock

Del Taco Restaurants on Monday said it plans to sell some stores to franchisees, “surgically” refranchising in a bid to reduce its company-owned store count to 45% of the system by 2020.

The company said it is acquiring three high volume franchise restaurants in the Los Angeles area and will sell 13 lower volume company stores to franchisees in the first three months of 2019.

The company also plans to sell franchise stores in “non-core Western markets” to existing or new operators with proven operational experience.

Del Taco operates 55% of its 580 restaurants, suggesting that it plans to sell as many as 60 restaurants to franchisees.

“Our portfolio optimization strategy positions the brand for accelerated franchise growth and focuses company operations on our core Western markets and strategic seed markets to support emerging market growth,” CEO John Cappasola said in a statement.

Steve Brake, the company’s CFO, told investors at the ICR Conference on Monday that the company is not planning “a wholesale change to an asset-lite model” but rather is planning “strategic and thoughtful moves” to help with the brand’s growth.

The company said that its same-store sales rose 1.9% in the quarter ended Jan. 1. It was the 21st straight quarter of same-store sales growth.

But franchisees have been outperforming company restaurants. Franchise operated restaurants’ same-store sales rose 3.2% in the quarter while company restaurants same-store sales increased 1%.

The chain’s increase in company same-store sales came from customers paying more for their food. Average check rose 4.9% and transactions fell 3.9%.

Cappasola said during the ICR Conference that the company is working to drive “incremental occasions” at the chain’s restaurants. The company launched a new app in November and it has 250,000 users.

It also plans more delivery. It started working with Grubhub in Los Angeles and plans to work with both Door Dash and Postmates later this year.

And it is working on more value. It has long had a “Buck and Under” value menu and has started offering higher-end products—such as a 2-for-$4 or 2-for-$5 mix-and-match menu and box meals at $4, $5 and $6.

The company is already testing tacos made with the plant-based Beyond Meat, with plans to expand that nationally “no later than summer,” Cappasola said.

Del Taco believes that more franchising could spur unit growth in the coming years. Cappasola said that the company has potential to expand nationally, with as many as 2,000 locations. He points to the chain’s chief rival, Taco Bell, which has 6,500 locations throughout the U.S.

He said that the company plans to invest in stores in core markets, while also using company capital to “seed” new markets and build infrastructure for franchise expansion. Del Taco did this in Atlanta, for instance, with 11 locations there while operators build in and around the market.

“We have great momentum in our franchise business,” Cappasola said during the conference. “We view franchising as an accelerator of our growth model.”

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