Del Taco stock plunges after traffic falls

The company sold too many $1 Chicken Quesadilla Snackers without luring new customers.
Photograph courtesy of Del Taco

Del Taco Restaurants’ new Chicken Quesadilla Snacker was a hit last quarter. But not in the way the company wanted.

Executives with the Lake Forest, Calif.-based Mexican fast-food chain said on a conference call this week that product, launched earlier this year to drive customers in the door, broke company records for products sold—reinforcing the chain’s value image at a time when chains are pushing discounts.

But it didn’t quite generate the traffic the company hoped. “Although the $1 Chicken Quesadilla Snacker was a record-breaking product,” CEO John Cappasola said during the company’s third quarter earnings call Tuesday, “its high mix caused negative check mix trends without any improvement in transactions.”

“Although we used innovation to launch a high-demand value product, it did not have the desired effect on transactions,” he added.

The result: Same-store sales in the third quarter ended Sept. 11 rose 1.4%. While that continued the chain’s long string of improvement—systemwide same-store sales have now risen 20 straight quarters—it nevertheless missed Wall Street expectations.

And transactions fell 2.6%.

The quarter’s weaker sales trends, and diminished expectations for the current period, led Del Taco to lower earnings guidance for the full year. Del Taco now expects same-store sales to rise 3% for the year, a change from the 2% to 4% it had previously expected.

The company also lowered guidance for revenues and profit margins.

All of that did not sit well with investors. Del Taco stock fell 8% on Wednesday. Its stock has fallen by a third since June.

BTIG analyst Peter Saleh downgraded Del Taco to Neutral from Buy.

“The combination of negative traffic and rising food and labor inflation dampens prospects for the coming year and we struggle to see how the concept can outperform,” he wrote.

Del Taco quickly changed its message in the quarter to focus on its Epic Burritos and then a two-for-$5 mix and match promotion, which “immediately restored healthy check trends,” Cappasola said.

But traffic remained a problem—despite a popular product priced at $1.

Cappasola suggested that the heavy discounting environment is proving to be more challenging than expected. “We believe this outcome may be a reflection of the current environment,” he said. “We are well into the third year of heavy competitive value promotions. The value-driven consumer has many options, which perhaps diluted our ability to use the new $1 Snacker.”

Del Taco plans to drive sales with a Shredded Beef LTO—shredded beef hasn’t been on the menu since 2012. The company is also planning to launch a new Triple Meat Epic Burrito with grilled steak, chicken and bacon.

The company plans to launch a mobile app in November, and it plans to expand third-party delivery through Grubhub next month, with a planned systemwide launch next year. The company also has partnerships with Postmates and DoorDash.

Cappasola said the multiple partner approach to delivery “will position us to optimize driver coverage and maximize consumer demand across trade areas.”

He added that these technology efforts could make the company more competitive with its rivals that have been using discounts through mobile apps or delivery offers—especially in technology-forward markets such as Los Angeles.

“We’re getting into the game,” he said. “We’re through our testing development phases and moving into rollout. So if there is a headwind in some markets because of our careful adoption of these programs, it’s going to be removed here over the next few quarters.”

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