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Edited Transcript of TACO earnings conference call or presentation 4-May-20 8:30pm GMT

Q1 2020 Del Taco Restaurants Inc Earnings Call

LAKE FOREST May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Del Taco Restaurants Inc earnings conference call or presentation Monday, May 4, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John D. Cappasola

Del Taco Restaurants, Inc. - CEO, President & Director

* Steven L. Brake

Del Taco Restaurants, Inc. - Executive VP & CFO

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Conference Call Participants

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* Alexander Russell Slagle

Jefferies LLC, Research Division - Equity Analyst

* Nerses Setyan

Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst

* Nicole Miller Regan

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Raphael Gross

ICR, LLC - MD

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Fiscal First Quarter 2020 Conference Call and Webcast for Del Taco Restaurants, Inc. I would now like to turn the call over to Mr. Raphael Gross, Managing Director at ICR to begin.

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Raphael Gross, ICR, LLC - MD [2]

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Thank you, operator, and thank you all for joining us today. On the call with me is John Cappasola, President and Chief Executive Officer; and Steve Brake, Chief Financial Officer. After we deliver our prepared remarks, we will open the lines for your questions. Before we begin, I'd like to remind everyone that part of our discussion today will include some forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We do not undertake to update these forward-looking statements at a later date and refer you to today's earnings press release and our SEC filings for more detailed discussion of the risks that could impact the company's future operating results and financial condition.

Today's earnings press release also includes non-GAAP financial measures, such as adjusted net income or loss, adjusted EBITDA and restaurant contribution, along with reconciliations of these non-GAAP measures to the nearest GAAP measures. However, non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance.

I would now like to turn the call over to John Cappasola, Chief Executive Officer.

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [3]

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Thank you, Raphael, and we appreciate everyone joining us today. I want to start by expressing how proud I am of our restaurant teams, our franchise partners and support staff for truly rising to the occasion throughout the COVID-19 crisis. They have met every challenge with a sense of urgency and a commitment to do the right thing for our people, our guests and our brand. The Del Taco culture is full of pride and very special. This situation reinforced 2 important brand strengths that give me confidence that we will not only survive through this unfortunate pandemic but we will thrive and even be stronger as a brand.

First is the strength of our people-driven approach. Our teams truly embrace the importance of serving others as an essential business in this time of need. The time we take to teach our core values is paying dividends as our team members serve our guests and recently achieved record-high guest service ratings. Second is our ability to innovate through a process that promotes an entrepreneurial spirit and allows our teams to rapidly execute change with a high degree of consistency. We've taken a strategic and systematic approach organized into 3 interrelated phases. First is crisis management; second, business recovery and the third phase, brand acceleration.

Let me share some of the elements within our crisis management and business recovery strategies, which include 7 key work streams, each led by an executive to enable timely decisions and actions focused on crisis management and business recovery. The first and biggest area of focus is employee relations to help our teams manage the frontline challenges of an essential business during this crisis.

First, we're fortunate to have maintained operations through our drive-through, takeout and rapidly expanding delivery channels, and we have not had to lay off or furlough any restaurant employees. Next, following CDC recommendations, we established standard protocols to address employees exposed to or infected with COVID-19. This includes shutting down and sanitizing any impacted restaurants and providing employees paid time off to quarantine. We've also implemented enhanced restaurant communications, including a COVID-19 hot line and group communication platforms to share best practices and changes. Finally, we are recognizing our general managers and restaurant teams for their efforts to serve our communities through several key programs, including guaranteed first and second quarter bonuses for all company general managers, maintaining our planned annual merit increases and launching a free meal program for company team members.

These programs have been funded by a series of cost-cutting moves, including voluntary salary reductions for all Vice Presidents and above, and reductions to Board of Directors' compensation. We'll remain attentive to our employees and recognize the special people that are serving our guests. The next work stream is business continuity with a focus on technology. Our advanced planning and foresight enabled the successful transition of our support center to a virtual office on March 16. Since then, the combination of existing and new technologies has maintained our business continuity through an effective flow of information, and in some cases, has provided new best practices to drive future efficiencies in our business, which will aid our business recovery.

Next and importantly, operations, led by our COO, Chad Gretzema. We have made dozens of changes to our operating system based on government requirements and our effort to be ahead of the curve to enhance employee and guest safety. These changes include social distancing procedures in the kitchens and for guest carryout, closure of dining rooms, gloves and facemasks for all employees, increased cleaning frequency, improved contactless service and preparing for employee health and wellness procedures. In addition, detailed daily scorecards are used to manage key metrics, including sales by restaurant, by hour, by day and by geography, including a focus on labor and productivity metrics. This focus has leveraged our new labor management system and led to reduced operating hours in some restaurants to further enhance profitability. We are proud to announce that these changes and the guest service we are providing recently has resulted in all-time high order accuracy and guest satisfaction scores. Building off operations as our franchise partnership work stream. Franchising is a key part of our strategy, and we have actively partnered with our franchise owners to help ensure their success. To enhance franchise liquidity, we are deferring half of their royalty payments for the first 7 weeks of the crisis, waiving 1.5% of the typical 4% system-wide marketing fee payment for 8 weeks and deferring franchise sublease rent payments for 6 weeks. The partnership with our franchise owners remains strong and includes sharing best practices, regular owner conference calls with the executive team, ongoing discussions with our franchise support teams and providing assistance with respect to various programs available to our franchisees under the CARES Act.

The next important area is finance. As previously communicated, to enhance our financial flexibility, we elected to draw down $50 million on our revolving credit facility as a precautionary measure as we also deferred planned nonessential capital expenditures and adjusted our operating expenses due to the economic uncertainties. These adjustments include eliminating all nonessential G&A; salary reductions for all Vice Presidents and above; reductions to Board member compensation; deferring or eliminating all open support center positions; and a small reduction in force at the support center to achieve a tightened focus of resources on our crisis management, business recovery and brand acceleration efforts. Supply chain is also a critical focus, whereby daily calls with our distributor and proactive communications with suppliers have helped to avoid any meaningful disruptions to our supply chain. This effort includes real-time sales forecasting to support the continuity of supply and appropriate labor staffing as sales volumes continue to improve during our business recovery phase.

Next is marketing, led by our new CMO, Tim Hackbardt. Although the 8 weeks of reduced marketing funding required a recent reduction in traditional media, under Tim's leadership, our marketing strategy has been nimble and entrepreneurial. Our Del Taco mobile app and delivery have been key assets during this crisis. The app database has grown to more than 1 million registered users, in part due to regular disruptive offers only available to app users such as a free Chicken Crunch Burrito on National Burrito Day and turning our Tuesday Taco Night into an all-day offer while harnessing the power of one of our delivery partners to engage their large, hungry user base. In fact, our recent 10 tacos for $4.20 promotion on April 20 was our most successful ever, yielding the highest redemptions of any app promotion to date. We have been aggressively promoting delivery as a limited contact ordering option with free delivery across Postmates, DoorDash and Grubhub. This helped to accelerate our delivery volume from over 3% of company sales in Q1 to approximately 8% of company sales thus far during Q2. We have now expanded third-party delivery through one or more DSPs to more than 90% of franchise restaurants and expect to launch Uber Eats by the end of Q2.

Lastly, our strong value position and barbell menu strategy anchored in the new Del's Dollar Deals Menu has provided guests great value and variety throughout this crisis. We have seen high satisfaction associated with this menu and continued high usage with the Del's Dollar Deals Menu serving to enhance value perceptions and as an add-on strategy. Also, given its ease of execution, our operators also love it. Our digital transformation strategy, coupled with the great value and variety provided by the Del's Dollar Deals Menu will serve as foundational elements of our marketing strategy to deliver on guest expectations moving forward.

And finally, we have legal and governmental policies. This is our final work stream. We remain close to all state, local and federal regulations related to COVID-19, and our legal team has helped inform many other work streams to ensure appropriate direction. The discipline we've established as we navigate elements of crisis management and move into business recovery will help ensure our ability to further accelerate performance as we move toward brand acceleration. In fact, over the past 5 weeks, we have seen a stabilization and improvement in comparable restaurant sales trends across the system, with company and franchise comparable restaurant sales trends improving from approximately negative 30% to start the second quarter to approximately negative mid-teens and negative 10% for company and franchise restaurants, respectively, during the 2 most recently completed fiscal weeks. These trends include impact from comparable restaurant sales that are more negative in our late snack, graveyard and breakfast dayparts compared to our lunch, snack and dinner dayparts. We believe our improved trends benefited from the reinforcement of our contactless and limited contact ordering options such as drive-through, takeout and delivery. We also contend that as consumers begin to experience stay-at-home fatigue and grow tired of pantry stocking, they become more willing to order at the drive-through window, carryout and increase utilization of delivery options. We also believe stimulus checks may have contributed to the improvement. Looking forward, we are confident that our QSR+ brand position, category-leading value and affordability perceptions and recent operational adjustments will continue to serve as catalysts to support the following planned actions as we move forward as a brand.

On the operations front, we have an initiative focused on the guest experience related to safety and sanitation, with a goal of standing out as a trusted brand. And we expect many of our safety and sanitation changes will become a permanent part of our operation. These changes, along with an operation simplification initiative are expected to improve our ability to enhance guest satisfaction. On the marketing front, we have developed a nimble and exciting calendar for the remainder of the year, which includes a focus on furthering our digital transformation, reinstating traditional media in June to highlight our everyday value barbell strategy, paired with new product innovation. This includes planned high-impact launches of several new products on the Del's Dollar Deals Menu, including the introduction of a new protein that will be unique within our category as well as other exciting new forms and flavors. We will also leverage the mid-tier and upper end of the barbell with strong relative value, highlighting complementary $2 to $5 price points, including the launch of fresh guacamole and a new simplified Epic Burrito lineup.

Overall, we are well positioned to leverage our QSR+ strengths, which includes a lack of reliance upon our dining rooms due to our ability to offer no contact or limited contact channels as well as our strong value heritage. These attributes will be increasingly important in the months ahead and set up unique opportunity for Del Taco to over-index on restaurant occasions as the consumer seeks limited contact food options from lower cost alternatives without having to sacrifice high-quality, fresh ingredients and flavor.

Finally, in all, our entire team has managed this crisis better than I could have hoped at the outset, and it's a reinforcement of the pride culture we have created across the brand. Our teams are helping their communities and are proud of the work they are doing at Del Taco, whether that is in the restaurant serving our guests or in a support role, setting our teams up for success.

Now let me hand off to Steve, and he'll provide a financial update.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [4]

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Thanks, John. Before I cover first quarter results, I want to summarize our first quarter cadence and certain COVID-19 dynamics, starting with development. There were 3 system-wide openings in the first quarter, including 2 company-operated and 1 franchise restaurant as well as 1 company-operated and 2 franchise closures. As a reminder, during the first quarter, we refranchised all 5 company-operated restaurants in the Yuma, Arizona and El Centro, California region, to an existing franchisee in a transaction that included a development agreement for 4 additional new restaurants.

Looking ahead, 1 additional new company-operated restaurant and 3 new franchise-operated restaurants are expected to open by summer, and we are currently evaluating the appropriate timing for the remainder of our originally planned fiscal 2020 system-wide openings. In addition, due to COVID-19, we have terminated the refranchising of the final noncore western market in California, and our ongoing portfolio optimization efforts are suspended, pending further evaluation. From a marketing standpoint, 2020 began with the return of our Premium Turkey Protein, along with a 2 for $3, $4 and $5 promotion, including 2 for $3 Del tacos. In late January, we launched the new Del's Dollar Deal Menu, consisting of 15 freshly prepared items priced from $0.69 to $1. This menu replaced Buck & Under and was designed to stimulate trial and frequency with a modest check average and margin impact. The second half of Q1 included the return of our annual seafood promotion in advance of Lent, featuring our Crispy Jumbo Shrimp.

Now turning to the first quarter results. Total revenue decreased 3.8% to $109.8 million from $114.2 million in the year ago first quarter. System-wide comparable restaurant sales decreased 3.1%, including negative 2.5% at company-operated restaurants and negative 3.7% at franchise restaurants. The decrease at company-operated restaurants was comprised of a 3.7% increase in average check and a transaction decline of 6.2%. COVID-19 began to adversely impact our sales and transaction trends in the middle of March, resulting in a stark contrast between company-operated and franchise comparable restaurant performance during the first 10 weeks of the quarter at positive 1.5% and 0.3%, respectively, compared to company-operated and franchise comparable restaurant performance during the last 2 weeks of the quarter at negative 21.1% and negative 21.6%, respectively.

First quarter company restaurant sales decreased 5.3% to $100.3 million from $105.9 million in the year ago period. This decrease was driven by fewer company-operated restaurants compared to last year, due to our refranchising activity coupled with a 2.5% decrease in company-operated comparable restaurant sales. Franchise revenue increased 8% year-over-year to $4.4 million from $4.1 million last year. The increase was driven by additional franchise-operated stores as compared to last year, from our refranchising activity and new restaurant growth, partially offset by a franchise comparable restaurant sales decline of 3.7%.

Turning to our expenses. Food and paper costs as a percentage of company restaurant sales increased approximately 100 basis points year-over-year to 28.2% from 27.2%. This was driven by food inflation of approximately 6%, which exceeded our menu price increases of nearly 4%, plus impact from Beyond Tacos, 2 for $3 Del Taco and the new Del's Dollar Deal Menu that was designed to drive margin dollar contributions at a slightly lower-than-typical margin percentage. We expect food inflation to step down sequentially as the year progresses, particularly in the second half of the year. Labor and related expenses as a percentage of company restaurant sales increased approximately 90 basis points to 34.8% from 33.9%. This was driven by wage inflation from the $1 California minimum wage increase to $13 an hour and impact from the COVID-19 related drop in sales that amplified our labor deleverage, partially offset by reduced workers' compensation based on underlying trends.

Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 120 basis points to 24.3% from 23.1% last year, primarily due to an approximate 70 basis point increase related to third-party delivery fees as well as the COVID-19 related drop in sales that amplified our operating expense deleverage, partially offset by reduced general insurance expense compared to the prior year. Based on this performance, restaurant contribution was $12.7 million compared to $16.8 million in the prior year, and restaurant contribution margin decreased approximately 310 basis points to 12.7% from 15.8%.

General and administrative expenses were $9.9 million, down from $10.5 million last year, and as a percentage of total revenue, declined 20 basis points to 9.0%. The decrease was primarily driven by reduced performance-based management incentive compensation and lower stock-based compensation. Adjusted EBITDA was $8.7 million, down from $12.1 million last year and decreased as a percentage of total revenues to 7.9% from 10.6% last year. Depreciation and amortization was $6.1 million, up from $5.9 million last year, and the increase primarily reflects the addition of new assets, partially offset by the impact of refranchising. As a percentage of total revenue, depreciation and amortization increased 40 basis points to 5.6%. During the first quarter, based on the impact of the COVID-19 pandemic, coupled with a sustained decrease in the company's market capitalization, the company performed quantitative goodwill and trademark impairment tests that resulted in a noncash impairment of goodwill charge, totaling $87.3 million and a noncash impairment of trademark charge totaling $11.9 million.

Interest expense was $1.5 million compared to $1.8 million last year. The decrease was due to a slightly lower average outstanding revolver balance and a decreased 1-month LIBOR rate compared to last year. At the end of Q1, $175 million was outstanding under our revolver. And as previously disclosed, we recently drew down $50 million under our revolving credit facility as a precautionary measure to increase our cash position and to enhance our financial flexibility as a result of COVID-19. $25 million of that was drawn before the end of the fiscal first quarter and an additional $25 million was drawn during the second fiscal quarter. As of today, we have over $53 million of cash on hand, $200 million remains outstanding under our revolver and the remaining availability under the revolving credit facility is $32.7 million. Net loss was $102.5 million or $2.76 per diluted share compared to net income of $1.4 million or $0.04 per diluted share last year. The net loss compared to net income in the prior year was primarily due to noncash impairment of goodwill, trademarks and long-lived assets. We also reported adjusted net loss, which excludes impairment of goodwill, trademark and long-lived assets, restaurant closure charges, other income, loss on disposal of assets and adjustments to assets held for sale, executive transition costs and sublease income for closed restaurants. Adjusted net loss was $0.3 million or $0.01 per diluted share compared to adjusted net income of $1.9 million or $0.05 per diluted share last year.

As a reminder, we have already withdrawn our guidance for the 52-week fiscal year, ending December 29, 2020. Given the ongoing uncertainty related to COVID-19, we are not in a position to provide updated guidance at this time regarding our expectations for the remainder of 2020.

That concludes our formal remarks. As always, thank you for your interest in Del Taco, and we are happy to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Alex Slagle with Jefferies.

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Alexander Russell Slagle, Jefferies LLC, Research Division - Equity Analyst [2]

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I wanted to start off on the cash flow, if you can kind of talk about some of the metrics around cash flow breakeven levels for the company restaurants and what you think for the franchisees as well, what sort of comp you need at that level.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [3]

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Sure. Alex. Good to hear from you. It's Steve here. In terms of overall breakeven level, starting with the company side, I would say on a, I'll call it, all in basis, including fixed costs at the restaurant level, on average, company restaurants can absorb up to a 40% drop in same-store sales volumes to maintain that breakeven level at the restaurant level. Now of course, that will vary depending on the restaurant, the AUV of a restaurant and their specific fixed occupancy costs in particular, but that's a good average to think about.

Now on the franchise side, similar thought process with estimated all in costs. For them, the average is probably closer to a 25% reduction that they could absorb on average, a bit lower of a negative comp compared to the company due to historically franchise has a bit of a lower AUV and also the impact of the 5% ongoing royalty. So that's how we think about the same-store sales to kind of hit that breakeven letter. And naturally, we're very pleased that, to date, throughout the crisis, we've been performing comfortably favorable to those breakeven levels and obviously very much moving in the right direction lately.

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Alexander Russell Slagle, Jefferies LLC, Research Division - Equity Analyst [4]

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Great. That's helpful. And then on dayparts, I think you mentioned some of the trends being impacted in late night and some other areas. If you could just expand on that with some perspective on maybe the year-over-year changes you've seen in certain dayparts and then any regional performance differences worth noting.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [5]

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Yes. In terms of dayparts, there's definitely 3 dayparts that have been underperforming, if you will. So that would be graveyard, late snack and breakfast. That's those later evening hours, into the early morning hours. So we've certainly seen the same-store sales for those 3 dayparts, notably more negative than our other 3 dayparts of lunch dinner and snacks. So it kind of makes sense, right, that those 3 dayparts where the late night, overnight, you had the complete loss of the bar business, people being out and about gathering socially. So the late night has taken a bigger hit, and then breakfast, very habitual. Daypart, as you know, which has also seen a bit of outsized disruption. So that's what we're seeing in terms of daypart performance.

You asked about geography. Very -- I'm very pleased to report that we are seeing some relative strength across many franchise-only states, particularly over the last 2 weeks. This includes certain states that are significantly overperforming the recent franchise same-store sales trends, including several states or markets who have turned positive over the past 2 weeks. So that's all very encouraging. That said, I want to point out that company and franchise performance in California has been similar since the start of COVID-19. And although California has also improved quite significantly over the last 2 weeks, the California same-store sales trends remain the most challenging on an absolute basis, likely due to stringent stay-at-home orders here in California.

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Operator [6]

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Our next question comes from Nicole Miller with Piper Sandler.

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Nicole Miller Regan, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [7]

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Congratulations on really ramping the delivery business up to a decent percentage of comp. It also seems like you're able to get into direct channels. So can you talk a little bit more about what you're doing as a tactic to drive the customers to you on your website or your app?

And how much of sales -- I'm sorry -- or of delivery, are you able to get directly to you without going through the marketplace?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [8]

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Yes. Nicole, it's still a higher percentage of our delivery orders are coming through marketplace, although it's exciting to see that we've really ramped up our capability with the mobile app. So as you saw, there are over 1 million registered users now. And I think that the combination of the mobile app and delivery in particular, that we came out of 2019 with this capability of really having -- have a robust option there, has really served us well over the last 6 or 7 weeks throughout this crisis. As you look at where we've put most of our time and effort relative to marketing communications, it's really in those 2 areas. And especially as we've had the marketing reduction occur over the last couple of months to just help us and the franchisees get through this period of time, we found that the mobile app is an absolute nimble and entrepreneurial way to go. We're able to move offers in and out very quickly, be very disruptive with our offers because you need to be an app user to be able to activate those offers. So we're seeing both same-store sales through redemptions when we're doing that sort of activity, but we're also seeing more registered users come on to the app through it.

And then obviously, delivery has been a great story both franchise ramping up. Over the last couple of months, I think we were somewhere just north of 50% towards the end of Q1 on the franchise side. And now we're about 90% of franchisees that have at least 1 delivery service provider, and the company obviously has been fully scaled with the 3 delivery service providers since the end of December. So that's been a great story and seeing the entire system move in a good direction with that, which provides the consumer contactless ordering point, which is highly relevant right now. So will we continue to expand out of those 2 digital platforms? Yes, we will. Right now, we're leveraging them for what we have today. And I think we're doing a pretty good job just kind of harnessing both right now.

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Nicole Miller Regan, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [9]

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In terms of terminating the final market you would have refranchised, what's the next kind of interim stage and in the long-term plan? Does it fit as it is as just still a very good market, do you grow that with company-owned stores? And what -- how might you treat that market now?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [10]

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It's a good question. It is a market that over the last probably 6 months has begun to actually outperform. It is the California market. It's outperforming overall and within California, so some good things were happening up there. We did make some operational changes over the last 6 to 9 months. We see that kicking in. And naturally, it's a moment to take a step back and pause across a lot of things, but certainly, portfolio optimization, the potential sale of that market being a natural thing to take a step back and reassess. So that will be something we're working on among many other things here in the near term. And I wouldn't rule anything out. It may be something that we have new life on that we do choose to develop.

But at the same time, as you know, we've said for a long time now, having franchise growth lead our growth long term is definitely a priority and a focus for us. So consider us open-minded on that at this point. We're assessing a lot of things, that being one of them. And when appropriate, we'll formulate the right further course of action and communicate it to you all.

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Nicole Miller Regan, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [11]

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And just real quick, if I can sneak it in on numbers. Maybe it would be good to get an update on your average check and actually the daypart mix, maybe not as it stands today, clearly, but in the otherwise pre-COVID normal environment, so we can put some context around the pieces that are stronger versus other in terms of dayparts.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [12]

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Sure, Nicole. So in terms of average check last year, company, we ran around $8 check average. Since COVID, check average has been outsized. It's been north of 20%, so significant growth. We largely attribute that to party size. So naturally, that takes you into that mid, high $9 area in terms of recent check average. We've seen a similar uptick in our delivery check average. So delivery checks continue to be not quite but close to 2x your in-store check. That was true before and post-COVID.

In terms of overall daypart mix on our 24-hour clock in most restaurants, and most restaurants still are 24 hours, what we've seen is that the main daypart that has gone down notably would be graveyard. It historically is a daypart that's a little more than 9% of sales. Lately, it's been running about 6% of sales. The beneficiaries, if you will, from that reduction would be kind of our mid-day daypart. So lunch, snack and dinner have all picked up slightly with breakfast and late snack mix kind of overall being about neutral.

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Operator [13]

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(Operator Instructions) Our next question comes from Nick Setyan with Wedbush Securities.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [14]

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In terms of just drive-through throughput and then speed of service, obviously, now and probably going forward, we're going to have a lot more traffic going through drive-through. How are you thinking about that, just to make sure to capitalize on all the incremental drive-through business?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [15]

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Yes, Nick. It's a massive focus for us. Obviously, as you look at drive-through representing 85%, 86%, 87% of sales and then you layer on the peak dayparts like lunch, where actually in the last couple of weeks we've seen an outperformance year-on-year relative to comps at the drive-through during -- at that service mode for drive-through at lunch. So certainly throughput, our main priority as we think about those peak periods with drive-through as guests are really kind of coming through that service mode more than ever during some hours of the day.

So operations is focused. We've talked a lot about our transaction efficiency program. We are looking at speed with service. We're making sure that order accuracy is top of mind. That's been one of the big winners as we've kind of narrowed our service mode focus here. As you think about being narrow to drive-through, carryout and delivery that's kind of enabled with so much business going through the drive-through as to really tighten our focus. And that has yielded better order accuracy scores and actually higher OSAT scores. So our teams have done a great job really becoming even more efficient at the drive-through, getting those cars through. We're leveraging in some stores, the ability in some of the company restaurants and a few franchise restaurants. We've got an outside order taker technology that we're leveraging in some locations, and we're testing further. That could be an incremental add down the road to help throughput and efficiency. But right now, the teams are just doing a really good job kind of managing the process and getting great results to the drive-through right now.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [16]

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In terms of just labor variability, Steve, near term, given all the puts and takes, obviously, you've got some incremental wages and so on and incremental costs. But at the same time, you may be kind of flexing hours' worth, et cetera. So in a down sort of 10% or 15% type of comp environment, how should we think about the near-term variability of labor?

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [17]

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Yes. Right now, our approach is to broadly manage the P&L, but very specifically, a huge focus on labor. And really, that started with daily scorecards that are focused on sales by restaurant, by hour and by day, and there's a huge focus there on optimizing labor. And that includes -- we definitely did reduce operating hours in just over 1/3 of our locations. The intent there was to really help optimize labor and protect profit and margins. That said, as we now enter our business recovery and brand acceleration phases, I can say some of those hours are already being expanded back into the business as volume grows, especially over the last couple of weeks.

In terms of labor, we do utilize regression to help set appropriate staffing. It's all based on having appropriate sales forecast. So there's a huge focus there. Our recent new state-of-the-art Ceridian workforce management system has been hugely helpful in that effort as well. And ops has really done a tremendous job achieving the labor targets really during and throughout the whole COVID pandemic. So we feel like we've done a really nice job aligning the labor hours with the reduced levels of demand that are starting to improve.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [18]

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And then just last question. You mentioned a couple of the franchise markets have turned positive. Is that a function of those markets opening up? And can you just kind of remind us what percentage of your system is now open dine-in, just given some of the exposure to some of those states?

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [19]

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Yes. Nick, we don't have -- we're not -- our dining rooms are not open across the brand right now, and even these markets that have announced reopening, either this last week or so or even in the coming weeks. Obviously, we're going to take -- our general approach is make sure that we open on a time line that's going to make sense for the brand, our employees and our guests. And there's just a lot of factors that go into reopening our dining rooms. We want to make sure that we're watching that consumer dine-in demand, if you will, and opening safely for our guests and our employees and being profitable as well based on that demand.

So that's not factoring in at all. I'd say some of the markets did not react as poorly to the pandemic as others. Some rebounded much more quickly. So it's hard to put your exact finger on why some of these markets are outperforming. I think there's a number of factors regarding that. But I'll say just generally speaking, the business right now, there is a tightened focus, franchisees are highly engaged, our company operators are highly engaged. These are daily conversations that we're managing, and I'd like to say that that goes a long way in regards to the performance that we're starting to see here over the last couple of weeks.

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Steven L. Brake, Del Taco Restaurants, Inc. - Executive VP & CFO [20]

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Yes. And that communication, it's really been -- we've been lockstep with our franchise owners, which is important really across the business, not just operational adjustments, when and how to reopen dining rooms, but cash preservation techniques, landlord relations, staffing suggestions is what will help them optimize their performance. And also, don't forget the CARES Act. We've been very close to the franchisees, helping them really understand that program, the application process, required information for those loans that help put them in the best possible position to predict their business.

We're pleased to report that to date, all but one of our franchise groups have applied for funding. And as of today, we believe approximately 80% of our franchise groups have been either funded or approved for funding. So that's another important aspect that we've been very on top of with our franchisees.

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Operator [21]

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We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to the management team for closing comments.

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John D. Cappasola, Del Taco Restaurants, Inc. - CEO, President & Director [22]

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Yes. Thanks, operator. Well, we wish you all the best out there. Thank you for your interest in our brand. We appreciate it, and we look forward to sharing our progress on future calls. Have a great day.

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Operator [23]

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This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.