El Pollo Loco - Earnings Call - Q4 2020
March 11, 2021
Transcript
Speaker 0
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Fourth Quarter twenty twenty Earnings Conference Call. At this time, all participants have been placed in a listen only mode, and the lines will be open for your questions following the presentation.
Speaker 1
Please note that this conference is being recorded today, 03/11/2021.
Speaker 2
On the
Speaker 1
call today, have Bernard Acoca, president and chief executive officer of El Pollo Loco and Larry Roberts, chief financial officer. And now I'd like to turn the conference over to Larry Roberts.
Speaker 3
Thank you, operator, and good afternoon. By now, everyone should have access to our fourth quarter twenty twenty earnings release. If not, it can be found at www.eltoyoloco.com in the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussion today will include forward looking statements, including statements related to the impact of the COVID-nineteen pandemic on our business and strategic actions we are taking in response as well as our marketing initiatives, cash flow expectations, capital expenditure plans and plans for new store openings, among others. These forward looking statements are not a guarantee of future performance, and therefore, you should not put undue reliance on them.
These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file a 10 k for 2020 tomorrow, and we encourage you to review that document at your earliest convenience. During today's call, we will discuss non GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release.
Before I turn the call over to President and Chief Executive Officer, Bernard Acoca, I'd like to note that Bernard and I are in different locations today. Please bear with us if you experience any point delays or minor audio quality issues. Bernard, please go ahead.
Speaker 2
Thank you, Larry. Good afternoon, everyone, and thank you for joining us today. I hope that you and your families are staying safe and healthy. As previously communicated in our January 12 press release, system comparable restaurant sales for the fourth quarter declined by point 2%. Our sales performance, combined with $2,900,000 of COVID nineteen related expenses, resulted in pro form a fourth quarter earnings per share of $0.16 Our fourth quarter performance continued to be a tale of two cities.
Our outer market sales performance, restaurants outside of Los Angeles, remained strong during the quarter, while Los Angeles and the surrounding areas were heavily impacted by the ongoing increased spread of COVID nineteen, particularly during November and December. This resulted in staffing shortages forcing us to temporarily close and reduce hours of operations in a number of our restaurants. In addition, we believe that high unemployment in the LA area, which has been well above the national average, exacerbated the negative impact during the quarter. All in all, we believe our LA sales trends are largely macro driven and as a result, temporary, as demonstrated by the system wide LA comparable sales decline of negative 2.1% compared to the comparable sales increase of 3.3% in our outer markets during the fourth quarter. As we have entered 2021, we have finally begun seeing COVID nineteen cases in California decelerate beginning at mid January, allowing the majority of our restaurants in the state to open with regular hours and all modes of service with the exception of dining rooms.
While we have reopened patios throughout California, dining rooms remain closed at this time in accordance with state regulations. However, a number of counties have begun to ease restrictions, and it is expected that Los Angeles and Orange County will allow dining rooms to reopen to 25% capacity next week. Given current COVID nineteen case levels, we are increasingly optimistic that restrictions will continue to be relaxed, and we will be able to reopen our dining rooms in California in the near future. In the meantime, sales trends in the first quarter to date continue to reflect trends experienced in the 2020. System comparable restaurant sales in Los Angeles continue to be negative, while restaurants in our outer markets, particularly in Phoenix, Salt Lake City, and Dallas are performing well.
With COVID 19 cases recently trending downward in California, we expect sales to improve in Los Angeles as businesses reopen and economic activity picks up. We are optimistic that the worst is behind us, and we can now focus more of our efforts on the future. Despite the challenges of 2020, our team was largely able to complete our three year transformation agenda that was guided by four key strategies, establish a people first culture, clearly differentiate the brand, simplify operations, which then creates the conditions for long term business expansion. Accomplishing these during a pandemic is truly a testament to the resilience and dedication of our support center employees, restaurant teams, and franchise partners, and I am proud to be able to work alongside each and every one of them. With that, I'm excited to speak with you today about our next phase of growth, which we are internally calling our three year acceleration agenda.
In a nutshell, our acceleration agenda is all about scaling for rapid and successful growth over the next three years by leveraging the operations and brand work we've completed over the past three years, implementing and expanding our beautiful new LA Mex restaurant design, which we believe will deliver improved unit economics versus what we have today. Our transformation agenda established the foundation and fundamentals required for successful growth and now the acceleration agenda establishing a three year strategic road map for El Pollo Loco to execute our growth plans and grow new units in DMAs where we currently do not have presence. There are four strategies that underpin our acceleration agenda. One, expand the brand, grow in new geographies with franchisees. Two, support the brand, build the right organization for asset light growth.
Three, evolve the brand, digitize the business to compete. And four, focus the brand, exaggerate what makes us so special and different. We will expand the brand by growing our footprint in new geographies. This all starts with our partnership with existing franchisees and our renewed efforts to attract and recruit new franchisees. Through the work we've done in the past several years, we believe we have strengthened our foundation, streamlined our operations, and evolved our brand to the point that we can jump start our new unit development.
We will initially focus our expansion on continuously penetrating Western And Southwestern DMAs before eventually moving east. Our efforts to recruit new franchisees, which we began in January, will go hand in hand with the rollout of our Mello A Max design, which will modernize and reset our brand through remodels and new builds. For 2021, we are planning to complete 55 remodels with a longer term goal to complete over 300 remodels over the next four to five years. In terms of new builds, we are targeting six new restaurants with the LA mix design in 2021. Our sentiment strategy supports the brand, translates into building the right organization for asset light growth.
As we transition to a bigger focus on franchise growth, we will reallocate resources to provide more support to our franchisees. We
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will
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focus not just on compliance, but more on building the operational capabilities of our franchise partners, including the development of franchise specific leadership training programs. Our third strategy is to evolve the brand through the use of technology. This includes growing our digital channels, which encompasses our loyalty program, Local Rewards. As I've said in the past, our loyalty program is the centerpiece of our go to market strategy for the long term. We're very pleased with the progress we made in 2020, growing digital sales from 5% to 10% of total sales and growing the number of loyalty members nearly 40% to their current total of 2,300,000.
We're also very pleased that news release magazine meets the latest local launch among the top 10 of 241 loyalty programs in The United States across 43 categories. Our focus on digital will continue in 2021 as we recently engaged a new digital agency named Organic, which is a subsidiary of Omnicom. It is important to note that digital now comprises 40% of our total media spend, which is indicative of the progress we have made on the front. We will work with organic and our other partners to continue to enhance and accelerate our digital programs with the goal being to increase digital sales to 30% of our total sales over the next three years. Another aspect of evolving the brand is leveraging our technology and processes to offer more frictionless convenience and further improve our speed of service.
Last September, we implemented a GPS enabled curbside pickup, which is now available at over 97% of our system wide restaurants. This service enables our guests to immediately place their order through our app, park in one of our dedicated curbside parking spaces, and have their orders delivered to their car with the restaurant being notified at their arrival through the GPS functionality. We're very pleased with the execution of our restaurants with customer wait times averaging about ninety seconds at company owned restaurants, which is significantly faster than competitors offering the service. While still representing a small mix of our total sales, it is steadily growing, and we do expect curbside to continue to gain popularity as more customers download our app and take advantage of the convenience it offers. With regards to speed of service, we continue to focus on our drive through channel.
Drive through has become an essential sales channel because of COVID nineteen, and we believe we have a massive opportunity to enhance the customer experience with improvements in both speed and accuracy. During the 2020, we successfully implemented a number of measures to improve speed of service at our drive through windows. These included more efficient labor deployment, readiness guidelines, prepacking side items and salsa, and better positioning of equipment. We are now testing order taking tablets that enable team members to take orders and payments from customers while they are in the drive through queue.
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We're very excited about this test that our goal is to
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significantly increase drive through capacity by cutting in half as it takes for customers to place orders and pick them up at the drive through window. This brings us to our last strategy, focus the brand, which is designed to exaggerate what makes El Toiloboco special and different. This will be accomplished through our LAMEX positioning, which combines the traditions of Mexico with the healthier lifestyle and edgy culinary innovation of LA. While we will continue to sell the food customers have come to Lovell's Puerto Rico, we will also look to broaden our reach by expanding our portfolio of better for you products. We believe expanding our product product portfolio in this way, combined with our commitment to digitize our business, enables us to cast the widest net and attract new customers to the El Pollo Loco franchise.
Over time, the ultimate goal is to establish and popularize LA Mex cuisine and make it as well known as Tex Mex cuisine. In addition to firmly establishing LA Mex cuisine, we will also seek to differentiate ourselves by forging an emotional connection with our customers or what we call moments of connection via the service we provide in our restaurants and online, primarily via our loyalty program. Moments of connection are about creating memorable experiences that delight our customers by acknowledging who they are as individuals and what they need from us as a brand. To that end, we will continue to train our general managers to be powerful coaches whose main responsibility is to build restaurant teams that feel not just empowered to take care of our customers, but to build relationships with them over time. Similarly, we will look to humanize our digital experiences by surprising and delighting our customers with events and offers that demonstrate that we know them better than any other brand.
In closing, I'd like to thank each and every one of our team members and franchise partners for their tremendous job operating in this highly uncertain environment. We successfully completed our transformation agenda despite the pandemic, and we are well positioned to accomplish our acceleration agenda through the strategies I've just laid out. Most importantly, as we continue to navigate COVID nineteen pandemic, as a people first company, we will continue to take all necessary measures to ensure the health, safety, and well-being of our employees, We're very optimistic about the future of our business and are confident that our go forward strategy, combined with everything we've done to date, will drive sales and profit growth when we return to a more normalized operating environment. With that, I'd like to turn the call over to Larry to review our fourth quarter results in more detail.
Speaker 3
Thanks, Bernard. Before we get into our fourth quarter results, I just wanted to highlight that during the quarter, one new franchise restaurant was opened in California. And second, we are model using our new LA mix design in Los Angeles. Now on to our financial results. For the fourth quarter ended December 2020, total revenue was $110,300,000 compared to $107,500,000 in the 2019.
Company operated restaurant revenue was $96,400,000 compared to $94,800,000 in the same period last year. The increase in company operated restaurant sales was primarily due to $4,600,000 from an additional week of operation during the quarter compared to last year's fourth quarter, an increase of $900,000 in non comparable restaurant sales, and a $200,000 increase in revenue recognized from our loyalty program. This was partially offset by a 3% decrease in company operated comparable restaurant sales, primarily, we believe, due to the impact of the COVID nineteen pandemic, a decrease of $600,000 and a $800,000 decrease due to temporary record closures also due to the COVID nineteen pandemic. Franchise revenue was $7,900,000 during the fourth quarter compared to $7,200,000 in the prior year period. This increase was primarily due to a franchise comparable restaurant sales increase of 1.8% as well as the opening of one new franchise restaurant and additional revenue generated from five company operated restaurants sold to franchisees by the company during the 2019.
This increase was partially offset by the closure of eight franchise locations during the same period. Turning to expenses. Food and paper costs as a percentage of company restaurant sales decreased 180 basis points year over year to 22.4%. The improvement was predominantly due to higher menu prices, lower food and beverage usage resulting from dining room closures, effective waste management, and favorable sales times. These are partially offset by commodity inflation of 1.5%.
In 2021, we expect commodity inflation to be flat to 1%. Labor and related expenses as a percentage of company restaurant sales increased 230 basis points year over year to 32.1%. The increase was primarily due to higher hourly wages in California and $2,800,000 of labor cost related to leave of absence pay and overtime in the first phase with the COVID nineteen pandemic. These were partially offset by increased menu prices and operating efficiencies. In 2021, we expect wage inflation of four to 5%.
Occupancy and other operating expenses as a percentage of company restaurant sales increased 240 basis points to 25.5%, primarily due to sales deleverage and increase in stock price cost and marketplace delivery fees. General and administrative expenses decreased by $1,300,000 year over year to $8,900,000 primarily due to decreased labor costs related to a decreased management bonus expense and lower preopening costs. This was partially offset by increases in stock compensation expenses and other miscellaneous expenses. As a percent of total revenue, the
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cost and
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administrative expenses decreased approximately 130 basis points to 8.1%. We recorded a provision for income taxes of $2,000,000 in the 2020 for an effective tax rate of 26.3%. That compares to a provision for income taxes of $700,000 and an effective tax rate of 17.2 in the prior year fourth quarter. We reported GAAP net income of $5,500,000 or 15¢ per diluted share in the fourth quarter compared to net income of $3,500,000 or 10¢ per diluted share in the prior year period. Pro form a net income for the quarter was $5,700,000 or 16¢ per diluted share compared to pro form a net income of $6,200,000 or 18¢ per diluted share in the fourth quarter of last year.
For a reconciliation of pro form a net income and earnings per share to comparable GAAP figures, please refer to our earnings release. Let me quickly touch on our liquidity. As discussed previously, in March, we fully drew down the balance of our $1,300,000 revolving credit facility, adding 34,500,000 of cash to our balance sheet. During the fourth quarter, we paid down $21,000,000 of debt. And as of 12/30/2020, had $62,800,000 of debt outstanding and $13,200,000 in cash and equivalents.
Subsequent to the end of the fourth quarter, we paid down an additional $7,000,000 of debt, bringing our current debt outstanding to $55,800,000. I'd now like to provide a brief update on our business during the 2021. As Bernard highlighted earlier, the COVID nineteen pandemic has continued to significantly impact our business during the first quarter. All company owned and vast majority of franchise restaurants located in California, which makes up 80% of our restaurants, continue to operate the closed dining room. Second, wide comparable restaurant sales in January and February decreased 3.61.8%, respectively.
As of 02/24/2021, year to date comparable restaurant sales decreased 2.7%, consisting of a 6.9% decline at company operated restaurants and a 0.4 increase at franchise restaurants. System wide comparable restaurant sales declined by 5.6% in Los Angeles and surrounding areas, increasing 2.7% in other markets. Bear in mind that even comparable restaurant sales during the first ten weeks of 2020 were approximately 4.2%. In addition, as of 02/24/2021, the company incurred $2,300,000 of COVID nineteen related expenses, which were primarily related to Visa's absence pay and overtime pay. These costs have been trending downward as the number of COVID nineteen cases continue to decline in California.
Due to the uncertainty surrounding the COVID nineteen pandemic, the company is not yet providing financial outlook for the 2021 future. However, we are providing the following limited guidance. The opening of three to five company owned restaurants and four to six franchise restaurants and a pro form a 87 tax rate of 26.5%. This concludes our prepared remarks. I'd to thank you again for joining us on the call today, and we are now happy to answer any questions that you may have.
Speaker 1
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question,
Speaker 2
please press
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star one on your telephone keypad,
Speaker 1
and the confirmation tone indicates your line is in the question queue. You may press 2 if you would like to remove your question from the queue. Thank you. Our first
Speaker 2
question comes
Speaker 1
from the line of Jake Bartlett with Truist Securities. Please proceed with your question. Hey. Thanks for taking the question. My first one is about, the experience, in the outer markets outside of California, where, restrictions have eased, your quicker, obviously, within California.
What is the mix of sales in terms of in store dining, presuming you reopened the dining rooms, also the mix of drive thru and whether that sustained at elevated levels?
Speaker 3
Well, Jake, what I can provide you is I mean, it it varied across the market in terms of the dine in business. I would say, you know, on average, just think I'll be running low teens in terms of percent mix on dine in. Vegas is a little lower than that. Again, they've been open at 50% capacity now for a while. So that's where they're mixing.
The drive through, I don't have a cost at the top of my head. But I would expect that, you know, they're probably running similar to what we're seeing in LA, you know, less maybe that incremental dine in traffic. That's something I can get for you later if that's helpful. But I do know the dine in traffic is roughly kinda low to
Speaker 2
mid teens in the market. Okay. And and has that been
Speaker 1
I mean, in place like Texas has had restrictions for a while, but has has the has the dining, you know, mix been increasing, you know, more recently or over over time? Or, you know, how how is the business kind of shifting as as the as cases are going down and and restrictions on your economic activities in COVID?
Speaker 3
Well, it's really not I'm really looking since call it, the December. I don't go
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further back than that.
Speaker 3
It's I mean, again, it's up and down, but I would say it's been, you know, probably roughly flattish in terms of that dine in mix, you know, overall. So we haven't really seen an acceleration. I mean, in some of these markets now, I I'd I'd hope that, you know, Dallas and Houston and the Texas market, you start seeing it now as they're further opening those dining rooms. That's where it just started. So we'll keep an eye on that to see if that trend starts to move up from dine in.
But certainly since, you know, early December, you know, those kind of mid teens low to mid teens, dine in percentages have been, you know, fairly constant across my group.
Speaker 1
Got it. And then, you know, shifting to to LA County, mentioned, you know, the the impact of of having the dining rooms being closed, but but also the impact of high unemployment. How do you expect what's your expectation for the the recovery in in in, if I take LA and, you know, next week as they reopen at 25%?
Speaker 3
Is is that better for
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you to reopen your stores?
Speaker 1
And I think earlier when they reopened at 25%, you hadn't reopened stores. I'm just trying to gauge what your expectation is going to be as the restrictions ease a little bit. But also just in the in the context of of having, you know, a still very high unemployment rate, how how quickly do you expect to kind of search a rebound in in places like LA?
Speaker 2
Well, you know, I think if if we look at the LA store, you know, you you know that our business has been very dependent on the Hispanic consumer. It's 50% of our customer base that we see every single day. Naturally, that that has been disproportionately impacted by COVID. I mean, at the height of the pandemic, during the winter, I mean, seventy two percent of hospitalizations in LA County were were were those of, and folks who are Hispanic. And, naturally, as we've mentioned, they have also been disproportionately impacted economically.
So our strongest consumer segment has been affected by what's going on in LA. Now the good news is both from a COVID case count, which is on the the the decline, and also from an economic standpoint, certainly with the arrival of more stimulus, we expect to idea you know, hopefully be the beneficiaries of both those things. I I think we will, although probably we've not inclined in the past to open up dining rooms at 25% because that business is coming back a little bit more slowly than we expected. I think we will capitalize on the opportunity when certain counties do reopen up to open up at 25% to rebuild that business once again. We think we can do that without adding any incremental labor to 25%, so there's no harm in doing it.
So it's really gonna
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be a little bit of a wait
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and see as things start to open up. We're encouraged by the fact that, you know, schools look like they'll open up shortly as well. And, again, you know, I I I can't stress enough. I think what we're seeing with dining rooms more than anything else is the disruption of consumer patterns. Right?
So we see it now in the work day where lunch has been softer than it historically has been, and that's a really that's that has always been
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a strong big part for us
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to pre COVID. But also, you know, with with kids being at home and parents being at home more often as a result, Once those disruptions to those patterns start to return back to more normalized behaviors, we think that there's upside for us there as well. Great. That all makes sense.
Speaker 1
It was my question, and that's just really on the interest you've you've received so far from the existing franchisees. It sounds like you're you're just starting to to look for newer franchisees. But I'm wondering about the if you could share any kind of number of commitments that you've already secured for this re celebration of show just to if
Speaker 3
you can get to I'm just
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gonna say how much visibility do you think you have on the one that you've seen here.
Speaker 3
Yes, Jake. So, obviously, we we stopped the process in January, so it's still early days. Yeah. I think that's just we're we're we're on track where we were hoping to see. We've got a few existing franchisees who are interested in expanding outside of, you know, their normal core market and and the new market.
And then we also have a number of new people who have reached out to become franchisees, you know, again, the these they've been targeting. So I would say we're we're pretty on much on track in terms of our plans, And we're in the vetting process now, obviously, with our existing franchisees. That's pretty easy since we know them, we know their financials and things. With the newer ones, they're going through the vetting process now. And assuming that we get to that, then we'll really start talking to them in a lot more detail about exactly what parts of the markets we'll look for them to help and reach agreements with them.
Speaker 2
Great. Thank you very much. Appreciate it.
Speaker 1
The next question is coming from the line
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of Ed Barish with Jefferies.
Speaker 1
Please proceed with your question.
Speaker 5
Hey, guys. Good afternoon. Just as you shift to Asset Light, wondering, and I think maybe to purposely phrase it this way, Bernard, on a reallocation of resources. Just wondering if you expect a ramp or an impact on the run rate G and A, although I know that's tough to figure out these days, but just kind of your thoughts on giving us a little bit more color as it pertains to G and A and a reallocation moving to to to new franchisees and the support system you mentioned?
Speaker 3
Hey, Eddie. Why why don't I take that one? Yep. I think our people first of all, what I'd say is I think we have a little time before we're making investment of resources because, really, that investment will depend on the timing of when, you know, new people will start developing a new market. So I think we have a while before we'll even make those investments.
And then my thinking is, you know, there might be some incremental, but I really would challenge the organization around, can we figure out a way to reallocate resources? So there's not a lot of incremental g and a. It's more again just, know, keep pulling some resource for one area and devoting more into this franchise development and franchise expansion. So that's that's that's my current thinking. But, I think the timing is is not immediate.
We've got a little time before we'll start making those investments on the franchise side.
Speaker 5
Gotcha. And then on the on the unit growth and and remodels, the franchise unit growth, I think, is more towards the low end of what you originally thinking. Does that have to do with some of the remodel ramp up if you got the first few behind you? And although I know it's early, what what kind of, you know, same store sales impact do you, sort of pencil out to, you know, generate an appropriate return for, you know, both the company and the franchisees as you endeavor on on remodeling, you know, two thirds or so of the system over the next several years?
Speaker 3
Yeah. So on the franchise development side, I I don't think that really has much to do with the remodel program. I think it has more to do with the fact that we, you know, pretty much shut things down last year. And so now you've got, you know, ramped back up again. I also say that the I think other companies might see the same thing is that the the permitting process in a lot of these jurisdictions have gotten very cumbersome and very timing something.
So those are really the two factors that have, you know, brought our our our franchise development numbers down to, like you said, probably the the lower part of the range that you had. In terms of remodels, you know, I've I've usually said that we need to be somewhere between 46%. I I think, obviously, it depends a lot on the unit volume of the restaurant that you're remodeling, what sales growth you need. But I would say for an average unit, you can get it somewhere in the five to six percentage point range in terms of pre, post comp growth. I think that gets you to a, call it, you know, call it, mid teen ish cash on cash return.
And certainly on the company side, that's what also gets you to a at least an income breakeven, if not a little bit positive on income line after taking account depreciation.
Speaker 5
Okay. Thanks. And then just one other quick one if you could on, the temporary closures the cost impact in the 1Q versus 4Q. 4Q looks like it's at a point of you know, same store sales or so. Is the 1Q actually running a little bit higher than that just given January, February?
And and and on the cost side as well, it seems like that's, guess, a little bit lower as things normalize.
Speaker 3
Well, on the on the cost side, we highlighted, I think, fourth quarter was 2.9 so far since February. I use February 24 at the end of our second period. It's around 2,300,000.0. And really, that 2.3 is driven heavily by January. It got a lot less costly in February and continue to drop down.
So for the quarter, I I still think, you know, 2.3 plus a little bit more for March. But, again, those costs are are coming way down. On the comp side, you know, it's hard it's probably roughly equivalent because in the fourth quarter, what you saw was a a ramp up, an impact in December and even late November. And then first quarter this year, what you saw was a heavy impact on the comp side in January, and it starts to tail off in in, call it, late January, February. So it's kind of a a curve that peaks right around the holidays and gradually comes down to January.
So, I mean, just to give you a sense right now, a little more detail on that is if you look at the performance of our restaurants that have never been closed versus those that have been closed at least some point during COVID, they're still running about a two to two and a half percent difference in same store sales.
Speaker 5
Okay. Very helpful. Thank you.
Speaker 3
Yep.
Speaker 4
The next
Speaker 1
question is coming from the line of David Tarantino with Baird. Please proceed with your question.
Speaker 6
Hi. Good afternoon. Hope you both are doing well. My my question kind of comes back to the LA market, and I fully appreciate and understand a lot of the macro issues you're dealing with. But as you look at your data internally, do you see anything underneath the surface that might be explaining some of the the weakness, you know, related to value proposition or customer satisfaction scores or anything that might be more brand specific in that market?
Speaker 2
So, you know, I not not as it pertains to to customer satisfaction regarding the brand. But but I can say that probably where we're losing a bit of frequency is, as I mentioned earlier, with our core Hispanic segment with our core Hispanic customer group. That that group with both COVID and the macroeconomic environment here and how it's affected them has perhaps forced them to not visit us as often as they once did. And I think we're seeing a little bit of a frequency issue with them, and that is a group that has, you know, sustained us in the test of times. But, you know, in in challenging times like this, I think we feel, more of the effect of what you're going through.
So there there is that impact that we are experiencing. Now as the situation improves here, we expect that business to slowly come back. How quickly it comes back has yet to be determined. Nevertheless, you know, we continue to figure out ways to speak to that demographic group in ways that are relevant to them, certainly as it pertains to value. But I think it's going to it really depends on how much the LA economy comes back.
I know we're not the only brand experiencing this. Even more value centric brands, brands that drive a lot more discounting than we do are experiencing similar declines. So net net, that's kind of what we're experiencing there. I don't think it's a fundamental brand issue because all our brand health measures continue to remain very, very strong. I do think it's a function of how many of our restaurants in the LA area are dependent on our spend consumer.
Speaker 6
Got it. On value side, going a
Speaker 0
to to a bit more
Speaker 6
of of a a value strategy in the next next, you know, I guess, several weeks as we come out of this.
Speaker 3
Yeah, David. So in the fourth quarter, we ran a little bit over 4% pricing. For the first quarter, we'll run more like a 3% gross pricing. You know, for the next price increase is scheduled, I think, for late April, early May. The other thing we are doing, you know, I feel like I mean, and this is my view, and we'll talk more about it as a as a senior team as we go forward is because of the the the cost pressures, especially on wages, you you almost have to take price during the year.
I think if we look at a value strategy, we may relook at the calendar and look at maybe going back to the $5 meals or something like that to drive value versus, you know, not taking the pricing. So, of course, we'll work with our outside consulting firm that we use on pricing to figure out what's the best way to take price, which will have the least impact on our our value scores and our metrics with consumers.
Speaker 2
I mean, you know, I'll add a few things. I I think one, yes, naturally, you wanna be really sensitive about pricing right now. You know, we've been a brand that's been very, very fortunate to be able to take perhaps more in price increases than over the past two years than we perhaps taken, you know, three to four years before that. I primarily because I believe that the brand has strengthened. The total value equation that we provide the consumer in terms of both food and service has improved based on all our measures that we track in regards to brand health.
And, you know, providing that very balanced total value equation is what enables you to command pricing power. Now with that being said, you know, we're always running a value layer in our business, to be clear. I mean, that's that's the beauty of having transitioned our our media mix model to a largely digital business is it allows us to run more simultaneous messages and target those messages more effectively than we otherwise could, say, two two, three years ago when we were far more dependent on television and print. So to be clear, we are running value. We will perhaps need to look depending on how the year shapes up a bit more to see if whether we got to turn that value message up in terms of volume, but it's something that we're always looking at.
Speaker 6
Great. And then on the acceleration agenda, I had a question around your comments of asset light makes sense from a kind of a growth or where you're heading more franchise oriented growth. But I guess it also has a a connotation that maybe the system could evolve to be, you know, more heavily franchised through asset sales. So are are you considering refranchising as part of the strategy and and maybe as a way to seed some some development agreements?
Speaker 3
Well, David, I mean, yeah, we're always looking at the the asset base and determining what we could do. I don't think we don't have any grand scheme to refranchise a lot of restaurants. But, you I think we'll always take a look at whether it makes sense on a on a case by case basis given some of the restaurant performance whether we wanna refranchise some assets. And to your point, I think if we do that if we do that, you know, we might look to use that to get some, you know, new franchisees into the system. But, you know, as of now, we don't have any big scheme to go refranchise, like, you know, fifty, sixty, 20% of our coming on restaurants, nothing like that.
You know, I mean and the reason being is, again, I mean, the performance as we highlighted before, you know, LA and Vegas are two biggest core markets continue to perform, you know, very, very well from both a sales and margin standpoint. So, you know, they they drive a lot of profitability for us.
Speaker 6
Yep. Makes sense. Thank you very much.
Speaker 1
Thank you. The next question is from the line of Todd Brooks with CL King. Please proceed with your question.
Speaker 4
Hey, good afternoon to you both. One follow-up and then one question about the acceleration agenda. On the 55 remodels planned for this year, what's the mix of kind of corporate stores to franchise locations getting remodeled?
Speaker 3
It's probably 15 company and 40 franchise. Okay. Great. And
Speaker 4
then around the fourth pillar of the acceleration agenda, just really something that LA MaxFocus, what it stands for as a brand and also as a menu offering. Is there any either broad strokes or specifics you could point to on the menu or product development side that that you're you're looking to further pivot into or or build out new platforms over fiscal twenty twenty to help accomplish that that fourth pillar of the agenda?
Speaker 2
Yeah. So, you know, I think the first example of of LA Mex cuisine was represented by which just recently introduced as our first promotion of the year, which are Hoyo Fitballs, which had organic super greens, which is not something you would expect from, you know, a traditional QSR. It was driven by, you know, more Mexican inspired ingredients like, you know, cotija cheese and pico de gallo. The other ingredient there that was a little bit, again, an unexpected ingredient for QSR is the caul cilantro lime cauliflower rice. So I I think we started out the year kind of really with our with the product that really exemplifies LA Mex cuisine.
We'll we'll continue to do that really throughout the course of the year. I mean, what we've got right now in terms of our promotion is, in a way, another way to reflect LA Mex cuisine because we're we're doing it in a really kind of fun, lighthearted way, and that's our local lunch boxes. You know, we really believe that design and packaging could be a big differentiator for the brand. And here we are trying to address what has been a softness for a lot of brands right now, that lunch tea part, by getting people excited for lunch again through a complete lunch offering packaged in a beautifully designed block. So there'll be more of those kind of LA Max influenced offerings throughout the course of the year.
I think what you'll see with the menu, just generally speaking, is a focus on a few things. Better view products, portability given how important the drive through has become, and three, an attempt to expand day parts by really getting at the snacking occasion a little bit more than what we get today. So those are the three things that I I think you can come to expect from the menu this year.
Speaker 4
Okay. Great. And just a final follow-up on the menu, and then I'll hop back in the queue. If if you look at year over year menu right now, are you running any sort of streamlined item count that's that's helping to drive efficiency? Are you running basically the same number of SKUs just with maybe more of a mix towards some of these new, items like the Pollo FitBull, but other items have have come off to keep the item count relatively flattish?
Or are we down year over year? And can you talk about efficiencies that you have seen if you are down?
Speaker 2
I mean, generally speaking, year over year, I I I don't think we've added anything, you know, significant. It's probably, I'd say,
Speaker 3
year over year the same.
Speaker 2
By and large, I think, you know, you gotta take a step back a few years ago where we actually reduced the menu SKUs by 20%. We added some since that time, took some off since that time. I think we're always evaluating the menu itself to determine, for instance, what we need to do to achieve that speed of service with the ultimate goal of being cutting our drive through times in half and really balancing that consideration with what we are leaving on our menu or what we are introducing on our menu. And I'll give you a small example of something we just recently took off for that reason, you know, our our Topic PO price.
Speaker 5
It did well. You know, it
Speaker 2
was just we were selling a decent amount, but we had to ask ourselves a question, you what with the amount that you're selling, does that justify the the longer operational time it took to fry and prepare that product given what we are trying to do with our drive through times? And we made the ultimate decision that it wasn't. So we're constantly having these ongoing conversations to determine what earns its keep based on not just sales, but also the goal of reducing speed of service primarily via the drive through.
Speaker 4
Okay. Thanks, Bernard. I appreciate the info.
Speaker 1
Thank you. Our next question is coming from the line of Jake Bartlett with Truist Securities. Please proceed with your question. Great. Larry, I just had a quick question about G and A.
It came in, in 2020, lower than certainly initial expectations, but it's lower than we were expecting. How should we think about the run rate for G and A going into 'twenty one? Is the fourth quarter a good base to grow from or anything abnormally low? How should we any kind of way to level set us or or or just in the right spot for for g and a for 2,021?
Speaker 3
Yeah, Jake. So in 2020, I mean, we had a number of things that, you know, save money on g and a, some of which were COVID related. The biggest one was on the bonus payout, which, you again, would be an adjustment you're gonna have to make in 2021. The fact that, you know, we didn't pay out full bonus in 2020, and we always assume that we're gonna have full bonus payout in 2021, and that's a a fairly good size number on g and a line. I think the other big line item on g and a is that we have one more year of equity compensation increase.
About four years ago, you know, we kind of expanded our equity program in the business. And so over the four year and it's a four year vesting. So as you each of the next four years, as you give equity to employees, it builds up, and then it'll start it'll flatten out because what will happen is as you add equity, you'll be dropping off because a chunk will last. So we've got one more year in which you're gonna see the equity compensation increase pretty much in line with what you've seen over the last several years. And then in addition to that, you've got, you know, some merit.
You've got some of the, I'll call it, savings that you had in 2020 around, you know, our our insurance call our our group insurance.
Speaker 0
You know, people didn't go to
Speaker 3
the doctor as much as they had been previously. So there's a number of items that will add to the g and a line in 2021 relative to 2020. Is there a way
Speaker 1
you can go just maybe for one of those those items that the incentive comp just to to help us understand how much lower it was than than normal and, you know, what what that could be for for g and a as it as it comes back next year.
Speaker 3
Yeah. I mean, so on the bonus, it was somewhere 2 and a half to 3,000,000 lower than, say, the full payout.
Speaker 1
Okay. Thanks a lot. Helpful. Thank
Speaker 2
you. At this time,
Speaker 1
we've reached the end of our question and answer session. I'll hand the floor back to Bernard O'Court for closing remarks.
Speaker 2
Well, I want to thank everyone, for spending time with us today, and always expressing an interest in our in our company and brand. I wanna wish everyone, a safe and healthy transition to hopefully what would be a more normalized world soon. So best of luck to everyone. Thank you for calling in today.
Speaker 1
Thank you, everyone. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.