Cold, wet weather in California did Del Taco no favors.
The Lake Forest, Calif.-based Mexican QSR chain said this week that its same-store sales have turned “slightly negative” so far this year, thanks largely to an unusually cold winter in typically mild California.
The weak sales sent the company’s stock down more than 6% on Tuesday.
“Very wet, very cold,” CFO Steve Brake said on the company’s fourth-quarter earnings call on Monday. “Had we experienced normalized weather, it would probably lead to slightly positive” same-store sales for the system.
The company also blamed a shift in Lent, which started three weeks later this year and delayed a popular seafood promotion.
The slight decline in same-store sales early in the first quarter of 2019 threatens Del Taco’s streak of 26 straight quarters of same-store sales growth at company-operated restaurants.
The decline represents a deceleration in the chain’s declining traffic. Transactions at company-operated restaurants in the fourth quarter ended Jan. 1 declined by 3.9%. The deceleration so far this year implies a 5% decline, executives said.
Company executives said that aggressive pricing is not hurting traffic at its restaurants. Del Taco raised prices by 3.9% in the fourth quarter and also generated another 1% growth from consumers ordering more expensive items.
“We’re OK with our pricing strategy,” CEO John Cappasola said. “We don’t think it’s having an adverse impact, a massive adverse impact on traffic at this point.”
Brake noted that the company regularly monitors its affordability perception ratings, but also notes that there are many other chains that are aggressively raising prices, especially in California, where wages are rising quickly.
Executives said that they have strategies in place to generate more sales this year. That includes a planned national launch of tacos made with the plant-based Beyond Meat product.
The company has been testing the Beyond Taco and the Beyond Avocado Taco in Los Angeles, San Diego and Oklahoma, and Cappasola said that the tacos have performed well in those markets.
“The response on social media and the results have been impressive,” Cappasola said, noting that the products have increased both average check and traffic “as many new or lapsed users and regular Del Taco fans visit our restaurants to sample something innovative.”
Del Taco is also expanding delivery. The company launched the service with Grubhub in the first quarter but plans to use multiple providers, including both DoorDash and Postmates later this year. “We believe a multiple [delivery service provider] approach will optimize driver coverage to maximize customer demand,” Cappasola said.
Del Taco is working to refranchise many of its company-owned stores to franchisees, with plans to sell stores in “non-core, Western markets” to existing or new operators with proven operational experience.
Del currently operates 55% of its 580 restaurants, suggesting the sale of as many as 60 restaurants. That included the sale of 13 locations to three local franchisees in Los Angeles earlier this year.
“We feel really good about giving them the opportunity to turn these restaurants into a big win,” Cappasola said.
“We’re going to be very opportunistic in regards to portfolio optimization where it makes sense,” Cappasola said.
The company is also looking to “seed” new markets with company stores, with plans to refranchise them to franchisees in the future. “We’ve been evaluating several markets,” Cappasola said.
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