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DEL TACO Q2 SALES RISE 6%

Del Taco Restaurants Inc. said that its sales and profits both grew in the second quarter in its first report as a public company this week.

Same-store sales for the Lake Forest, Calif.-based chain rose 6 percent in the quarter ended June 16. On a two-year basis, which factors out one-time impacts such as weather, same-store sales are up 10.8 percent.

Net income for the quarter was $4.6 million — a considerable improvement over the $100,000 loss the company reported in the same period a year ago.

"Our strong fiscal second quarter results further position us for an exciting year," CEO Paul Murphy said on the company's earnings call, its first since investors approved Del Taco's Reverse merger with Levy Acquisition Corp. June 30. That approval took the 550-unit Mexican chain public.

The deal strengthened the chain's balance sheet at a time when sales have started showing some momentum. Same-store sales have been up for seven straight quarters despite heavy competition.

The acquisition enabled the company to pay off $68.6 million in debt in the quarter, executives said.

With lower debt costs, the company expects to ramp up growth. But the chain does plan to close 13 underperforming locations by the end of the year, likely in the fourth quarter. Del Taco expects to sublease those locations, reducing its total rent expense.

The 13 closures should offset the 13 to 17 locations the company expects to open by the end of the year, executives said.

Nevertheless, the company expects to improve on unit growth in coming years and believes that its newfound status as a public company should help. "The debt reduction helped free up more capital to enable the acceleration of store growth in the coming years," Murphy said. "The added exposure of being a publicly traded company should shed a spotlight on our performance and help us attract quality operators."

In addition, he said, the company's association with Larry Levy, whose Levy Acquisition Corp. acquired Del Taco and who is now company chairman, should give the company some additional credibility.

"Our improved financial position bodes well for our next phase of expansion as we take Del Taco as far as it can go," Levy said. He added that, in his years in the restaurant business, "I have learned the key metrics that show the health of a restaurant company. I'm delighted to report that we have improving key operating metrics across the board."

Murphy said that the company's expansion plans will focus in the coming two years on "lower-risk infill markets" where the company already has consumer awareness, scale and existing relationships.

Over the longer term, he said, the company is targeting Georgia, New Jersey and Tennessee, where it just inked a 10-unit development deal.

The chain's sales have been improving following a strategy implemented in 2013 to highlight the chain's quality. The company is targeting a position between quick service and fast casual, emphasizing freshness with new products like Epic Grill Chicken Avocado Burrito. It also has low-cost items for the value customer.

Total revenues in the quarter rose 7 percent — to $97.6 million from $91.2 million in the same period a year ago.

Operating income, meanwhile, rose 30.2 percent to $11.3 million from $8.6 million. Operating profits improved thanks largely to more profitable restaurants. Restaurant contribution margin increased 1.5 percentage points to 19.8 percent, the company said. The increase was due to improved food and labor costs.

Food costs are expected to increase 1 to 2 percent for the full year. One reason for the decline is eggs, which represent 1 percent of the company's total food basket but could lead to a half-percent increase in food costs in the third quarter. The reason: The Avian Flu has decimated the egg-laying population and has led to a dramatic increase in the price of eggs.

Del Taco's higher sales have come despite competition from Taco Bell at breakfast, something Taco Bell has served for more than a year now. Company executives said on the call that breakfast is one of the chain's top performing dayparts.

"We don't view Taco Bell's entry into the daypart as a negative," said John Cappasola, Del Taco's chief brand officer. "We appreciate the spotlight it provides our category."

Contact Jonathan Maze at jonathan.maze@penton.com.
Follow him on Twitter at @jonathanmaze
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