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El Pollo Loco Holdings (LOCO) Q2 2019 Earnings Call Transcript

Motley Fool Transcribing, The Motley Fool
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El Pollo Loco Holdings (NASDAQ: LOCO)
Q2 2019 Earnings Call
Aug 01, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to El Pollo Loco second-quarter 2019 earnings conference call. [Operator instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Larry Roberts, chief financial officer. Thank you.

Please go ahead.

Larry Roberts -- Chief Financial Officer

Thank you, operator, and good afternoon. By now, everyone should have access to our second-quarter 2019 earnings release. If not, it can be found at www.elpolloloco.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.

These forward-looking statements are not guarantees 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 expect. We refer all of 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 our 10-Q for the second quarter of 2019 tomorrow, and we would encourage you to review that document at your earliest convenience.

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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 reconciliation to comparable GAAP measures are available in our earnings release. I'd now like to turn the call over to President and Chief Executive Officer Bernard Acoca.

Bernard Acoca -- President and Chief Executive Officer

Thanks, Larry. Good afternoon, everyone, and thank you all for joining us today. For the second quarter of 2019, we reported adjusted earnings per share of $0.23 per share as compared to adjusted EPS of $0.22 last year. While our systemwide comparable store sales increase of 0.7% was below our expectations, it does represent our fourth straight quarter of positive systemwide same-store sales growth since the launch of our transformation agenda.

In addition, our teams did a nice job of managing store-level expenses during the quarter as evidenced by our restaurant contribution margin of 19.9%. Heading into the second half of the year, our main focus is delivering affordable value without sacrificing the quality our customers have come to expect from El Pollo Loco. By affordable, I mean products that have value-engineered to deliver good margins at very attractive price points. An example of this is our current Overstuffed Quesadillas promotion, featuring our new Nacho Overstuffed Quesadillas at $5.

We will follow up this promotion with our $5 fire-grilled combos promotion, which includes your choice of five of our most popular entree items, along with our famous chips and a drink. Both of these promotions offer tremendous value to consumers at food cost designed to help maintain attractive margins. While we are taking actions to drive near-term sales and transactions, we remain focused on our longer-term strategies. During the second quarter, we continued executing against our transformation agenda, and I'd like to provide a brief update on a few of the key initiatives that we've been working on during the past three months to drive and sustain future growth.

As part of our ongoing focus to build a culture centered on leadership with heart, we completed testing a food-donation program, which will be rolled out in September. Partnering with food donation connection, all company restaurants and those franchisees choosing to participate will donate food left over at the end of the day to local shelters and food banks. We believe this is particularly important as homelessness has reached epidemic proportions in Southern California, and we are committed to doing everything we can as a brand through initiatives, both big and small, to assist with the mounting crisis in the communities in which we do business. As a system, we expect to donate over 500,000 pounds food over the course of the year to help feed people in need.

We also continue to make progress with regard to our brand relaunch that we initiated in March, which, as you'll recall, included the systemwide roll-out of our new logo, advertising campaign, Feed the Flame tag line, menu boards and point-of-purchase materials. On July 8th, we launched our new e-commerce website and mobile app, significantly improving our customers' ability to engage and interface with our brand. Both the website and app highlight the quality and craft associated with our food, our brand heritage and dramatically simplify ordering food from us, whether it be for delivery or takeout. Equally as important, we have increased our digital and socially media mix in Q3 to 15% with plans to get to 20% next year in order to drive customers to these e-commerce platform.

For context, we spent less than 3% on digital media, prior to making this change. While we still have work to do, we believe that this new website, app and greater commitment to digital media are the first steps toward creating a first-class digital experience, which is key to unlocking the full potential of our loyalty, delivery and catering platforms. With regards to delivery, in addition to our DoorDash relationship, we are in the process of testing the expansion of our delivery partners to include Postmates and Uber Eats as options for our customers. The test also includes a new, more curated menu with a heavy emphasis on family meals and combos, which are designed to drive more profitable sales through third-party marketplaces.

Because this limited test has shown a lot of promise in terms of significantly increasing our delivery mix, we are expanding it to one entire DMA, and plan to launch it systemwide in September. As you know, we've made a priority of simplifying operations for our employees and franchisees. A key focus of this goal has been the reduction of back-of-house complexity to free up capacity in order to deliver a better customer experience. Along these lines, our new back-of-house inventory management system has now been rolled out to approximately 120 restaurants, and we continue to expect full implementation by the end of this year.

This system will help streamline our operations and is expected to free up an additional one to two hours per day for our restaurant general managers. We've also made huge progress simplifying, eliminating and rewriting many of our standard operating procedures. This work includes simplifying the production process for each of our menu items to six steps or less. We are also very close to completing what has proven to be a successful market test of simplifying how chicken is cooked in our restaurants to deliver a more consistent, higher-quality product that is much easier to teach to our aspiring grill masters.

This detail work is foundational for simplifying our operations and the enabler for our team members and franchisees to serve great food and provide exceptional customer service. Ultimately, we believe it will have the added benefit of lowering turnover and increasing retention, which is particularly important in today's tight labor environment. Lastly, we continue to strengthen the foundation for new market expansion and continue to target 2020 for entry into one or two new markets. Included in this is the development of a new restaurant of the future prototype, which is going as planned.

Included in its design features will be of our new brand visual expression, and it will incorporate our parallel work to simplify our back-of-house operating platform. By continuing to focus and make progress against our transformation agenda, I'm convinced that all our current initiatives should lead to a stronger foundation for our business, allowing us to grow our business profitably and responsibly over the long term. We remain excited about the progress we've made to date, and I look forward to updating you on our progress on future calls as we continue to elevate the El Pollo Loco brand. Before I turn the call over to Larry, as always, I would like to thank all of our employees and franchisee partners for making these results possible.

Your passion, commitment and dedication are what make this brand and this family truly special. I'll now hand the call over to Larry to review our second-quarter results in detail.

Larry Roberts -- Chief Financial Officer

Thanks, Bernard. Before we get into our second-quarter results, I'd like to quickly update you on our store base. No new El Pollo Loco restaurants opened during the second quarter. For the full-year 2019, we now expect to open two to three company-operated restaurants, along with two to three franchised restaurants.

The lower guidance is primarily due to restaurant openings slipping from late 2019 into 2020. We did continue our remodel efforts, completing two company-owned restaurants to coincide with an additional nine remodels completed by franchisees. As our new asset design work continues, we are reducing a number of company remodels we expect to complete this year from 10 to 15 to seven. Rather than continuing to invest in remodels using the Vision Design, we'd rather wait until early 2020 and use a new design.

We still expect our franchise partners to complete 10 to 15 remodels in 2019. Finally, we closed on the sale of four company-operated restaurants in the east bay area and seven company operated-restaurants in Phoenix to two franchisees. We're pleased to have put these restaurants into the hands of strong-performing franchisees and both transactions include development agreements to promote continued growth in these markets. We expect that the sales will be accretive to both margins and earnings.

Now onto our financial results. For the second quarter ended June 26th, 2019, total revenue increased to $113.7 million from $111.6 million in the second quarter of 2018. Company-operated restaurant revenue increased to $101.1 million compared to $99.6 million in the same period last year. Company-operated restaurant sales growth was driven by a 0.4% increase in company-operated comparable restaurant sales, as well as, by the contribution from six new restaurants opened during and subsequent to the second quarter of 2018, partially offset by seven restaurant closures and the sale of 11 company-operated locations to franchisees during the same period.

The increase in company-operated comparable restaurant sales was comprised of a 3.1% increase in average check, inclusive of 3.6% effective pricing, partially offset by a 2.7% decrease in transactions. Franchise revenue increased 20.8% in the second quarter to $7.9 million compared to $6.6 million in the prior year period. The increase was driven by fees associated with the use of our point of sale system, a 0.9% increase in comparable restaurant sales, the contribution from eight new franchise restaurants opened during and subsequent to the second quarter of 2018 and the addition of the 11 former company-operated restaurants transferred to franchisees during the quarter as noted previously. This was partially offset by three restaurant closures during the same period.

Turning to expenses. Food and paper costs as a percentage of company restaurant sales decreased 100 basis points year-over-year to 27.8%. The improvement was predominantly due to higher menu prices and favorable sales mix. Looking ahead, we expect commodity inflation for approximately 1% in 2019.

Labor and related expenses as a percentage of company restaurant sales increased 120 basis points year over year to 29.2%. The increase in labor expenses was due primarily to higher hourly wages in California, especially Los Angeles and higher workers compensation expense, partially offset by increased menu prices. We expect labor inflation of about 6.5% in 2019, which is slightly higher than previously communicated, reflecting a tight labor market. Occupancy and other operating expenses as a percentage of company restaurant sales was unchanged at 23% as increases in occupancy cost and delivery fees were offset by lower advertising costs, and other operating expenses.

General and administrative expenses decreased by $3.1 million year over year to $9.3 million. Included in G&A are approximately $550,000 of expenses related to legal expenses associated with securities litigation and executive transition cost compared to approximately $3.5 million in the second quarter of 2018. Excluding the costs associated with the securities litigation and executive transition cost, G&A expenses in the second quarter of 2019 decreased approximately $140,000 year over year to 7.7% of total revenue, a decrease of approximately 30 basis points versus the prior year. The dollar decrease in G&A expenses was primarily due to decreases and preopening, dead site and travel expenses, which were partially offset by higher bonus accrual.

Depreciation and amortization expense increased to $4.5 million from $4.3 million in the second quarter of last year and was flat year over year as a percentage of the company revenue. Additionally, we received insurance proceeds of $10 million in the second quarter related to the settlement of the securities class action lawsuit as compared to insurance reimbursement of $2.4 million in the prior period related to the reimbursement of legal costs associated with the securities class action lawsuits. We recorded a provision for income taxes of $5.7 million in the second quarter of 2019 for an effective tax rate of 28.7%. This compares to a provision for income taxes of $855,000, and an effective tax rate of 14.6% in the prior year second quarter.

We reported GAAP net income of $14.1 million or $0.37 per diluted share in the second quarter, compared to net income of $5.1 million or $0.13 per diluted share in the prior-year period. Pro forma net income for the quarter was $8.7 million as compared to pro forma net income of $8.6 million in the second quarter of last year. Pro forma diluted earnings per share were $0.23 for the second quarter of 2019, compared to $0.22 in the prior year period. For a reconciliation of pro forma net income and earnings per share to the comparable GAAP figures, please refer to our earnings release.

In terms of liquidity and balance sheet, we had $11.3 million in cash and equivalents as of June 26th, 2019, and $85 million in debt outstanding. For the foreseeable future, we expect to finance our operations, including new restaurant development and maintenance capital, through cash from operations and borrowings under our credit facility. For 2019, we expect our capital expenditures to total $12 million to $15 million. During the quarter, we repurchased 1,303,282 shares for approximately $14.9 million or an average price of $11.46.

Effective June 26th, 2019, our $20 million 2018 stock repurchase program expired. Effective June 27th, 2019, our $30 million 2019 stock repurchase program commenced, which will run until March 25th, 2020. Turning to our outlook for 2019. We're updating guidance for the full year as follows.

Excluding the impact of potential share repurchases, we expect pro forma diluted net income per share of $0.69 to $0.72. This compares to pro forma diluted net income per share of $0.74 in 2018. Pro forma net income per share guidance for 2019 is based in part on the following annual assumptions. We expect systemwide comparable restaurant sales growth to be approximately 1% to 2%, as I noted, we expect to open two to three new company-owned restaurants and expect our franchisees to open two to three new restaurants.

We expect restaurant contribution margin of between 18.2% and 18.7%, we expect G&A expenses of between 8.2% and 8.4% of total revenue, excluding fees related to securities class action litigation and reflecting our change in accounting for franchise advertising fees. We expect adjusted EBITDA of between $61 million and $63 million, and we're using a pro forma income tax rate of 26.5%. This concludes our prepared remarks. I'd like to thank you again for joining us on the call today, and we are now happy to answer any questions that you may have.

Questions & Answers:


Operator

[Operator instructions] Our first questions come from the line of Matthew DiFrisco with Guggenheim.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Thank you. Larry, just one bookkeeping question here for the question. With respect to the 11 that shifted from company to the franchise side, how much did that contribute in the quarter to the revenue -- of franchise revenues?

Larry Roberts -- Chief Financial Officer

Oh, the franchise revenues? Net of expenses, I think it was about $300,000. Let me double check that.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

OK. But just to the revenue line.

Larry Roberts -- Chief Financial Officer

Oh, I'm sorry. Revenue line was about $76,000. I think -- yeah.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

So it was only -- OK, it was a modest amount. OK.

Larry Roberts -- Chief Financial Officer

Yeah.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Got it. And then respect -- with respect to the stores that are moving over into 2020, is that something that is purely incremental to 2020? Or is this sort of -- I guess I'm trying to figure out without you giving development or being held to a number for '20, should we expect that '20 is going to be a meaningful up year in development?

Larry Roberts -- Chief Financial Officer

Well, I think, right now, you know, we're still working through 2020. It's a little early to make that call, Matt. I guess the one thing I would say which we can certainly, that is we certainly expect 2020 to be higher than this year, which, given the low bar, we should be able to achieve. But it's way too early to give the actual numbers on 2020.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

OK. And then Bernard, with respect to I guess the positioning now. A couple of quarters into repositioning of the brand, the comp you did mentioned was somewhat on the lower end of what you had been expecting. Is that more the context of California and some of the pressures we've heard out there? Or have you had -- I don't want to use weather or disruptions from regional issues, but are you -- is that still a strong number though on the context of what you've seen as far as in industry and the region in California what your peers are doing?

Bernard Acoca -- President and Chief Executive Officer

Yeah, Matt. If I could take a step back for a minute, I think the way -- what we attribute our results to, quite frankly, is where we are in our journey with the transformation agenda. And we really started this journey four quarters ago. It really took hold in the third quarter of 2018.

And while we're happy with the progress we've made certainly during that time, we're -- again, we communicated that we've experienced four quarters of consecutive same-store sales growth. They're going to be some bumps in the road in terms of where we are in that journey. And so what I would attribute the comps to in this quarter, while positive, was more to a product introduction, which we have been able to count on to do very, very well for us in the past, not delivering fully up to our expectations. So we know that we've got to do more work with our innovation pipeline to deliver more compelling and true new news to our customers, and we're well under way to doing that.

And I'd say the second thing that I think impacted us in the quarter was the delay of the launch of our e-commerce website, which we've now realized July 8th in this quarter and the accompanying digital plans that we originally intended to launch in Q2, which have now launched in Q3, which as I said in my opening remarks, have increased our digital mix -- or I should say, our overall media mix to 15% digital, with the intention of only growing that number over time. So I'm not looking at the macroeconomic climate as the rationale for why we are where we are. I think it has more to do with where we are in our journey, and we feel like we're pretty -- we're in control of what we can deliver on a go-forward basis.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

OK. So that helps me I guess better understand the guidance implies a meaningful step-up in the two-year trend. But it sounds like you had some headwinds given the delays, but you just outlined in 2Q that you're counting on more so for the third quarter? Or are already seeing the benefits of those?

Bernard Acoca -- President and Chief Executive Officer

Well, what I can say in terms of what we're seeing right now is that we saw a nice uptick in sales comp in June. But in July, we did experience a slowdown. And so it was a softer than expected month, but we're looking to bounce back from that for the balance of the quarter.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

OK. Thank you.

Bernard Acoca -- President and Chief Executive Officer

Matt, the only other thing that I want to mention that I failed to mention that I think is also upside on a go-forward basis, certainly, with the arrival of our new Chief Operating Officer Miguel Lozano, is we see a lot of the plans that he's starting to put into effect being -- enabling us to deliver a vastly superior customer experience than the one we've been able to deliver historically. And so I mentioned the pipeline, I mentioned digital and e-commerce. You heard me talk about delivery in my opening remarks. The thing that I probably underplayed was the benefit that we think improved operations can have for us on a go-forward basis as well.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Excellent. Can you -- while I still have you, can you give us the cadence of the comp from a year ago? Was the 2.6% pretty much even throughout all three months? Or was the July ahead of your compare?

Larry Roberts -- Chief Financial Officer

You talking about 3Q last year?

Matthew DiFrisco -- Guggenheim Securities -- Analyst

In 3Q '18. So I'm trying to figure out July, August and September year ago comparisons?

Larry Roberts -- Chief Financial Officer

We have that. Give me a second. Yeah, relatively, I'll call it, consistent during the quarter, Matt, maybe a little bit higher in September versus August and September, but you know fairly consistent.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

OK. Thank you.

Operator

Our next questions are from the line of Jake Bartlett of SunTrust.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for taking the question. Bernard, I'm wondering about -- it sounds like you're going to -- one of the strategies going forward to get the sales going and traffic going is to focus more on value. My perception just from the rest of the industry and where they've gone on kind of on the QSR side has been to move away from the kind of deep value orientation that we've had over the last few years.

And so more premium products seem to be doing better, but I'm curious to hear what you're seeing out there. Why you think that value is what you need to focus on to kind of reignite traffic here?

Bernard Acoca -- President and Chief Executive Officer

Well, I mean for us, I think it's always a balance. You know, we have a high-end business, which is our family business, so you always see us on air with a $20 price point. But then we have a lower-end business, which we like to counterbalance our high-end business with. As a matter of fact, you know, it's one of the biggest strength in our business is that we've got that evergreen barbell, if you will.

And in regards to the promotions that I've referenced, those quite honestly aren't additional discounts as they pertain to our business. The $5 fire-grill combos menu, for instance, comprises a lot of the items that already exist at that price point on our menu board today. So it's not what I would technically describe as incremental discounting. It's simply highlighting what is on our menu today and promoting it aggressively in a way that, perhaps, we don't throughout the course of the year.

But we like to look at the calendar. If you see the first of the year, we didn't really resort on television or on our media, I should say, with any kind of aggressive discounting. This time of year, certainly, in the third quarter, during that kind of back-to-school time period, usually you want to be a little bit more front-footed with your discounting. So I think it's just more of a balance overall.

I wouldn't qualify it as doing incrementally more than what we've historically done.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

OK. And then in regards to your labor cost and the tick-up in wage inflation, I think in the last quarter, you mentioned some pretty impressive improvements on turnover. Are you seeing the improvements in turnover increase? Or have you maintained those improvements? How much do you think that that can offset some of the increased wage inflation that you're seeing?

Bernard Acoca -- President and Chief Executive Officer

Well, I mean, I think as a brand, we've been historically blessed with lower than industry average turnover rates. And so we saw the second quarter, for instance, crew turnover about 115%, which is substantially lower than the 136%, 140% you see industrywide. So this focus on culture that we've been building down on, I think, it's manifesting itself in the employee retention numbers that we're seeing. That coupled with the fact that we're really maniacally focused on trying to figure out how to simplify the back of the house to make our employees' job easier because we do have a little bit more of a complicated operating platform that -- those two things take an intend that we believe has continued.

Our strong retention numbers are lower than industry average retention numbers.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

OK. And then lastly, any insight on the new markets that you mentioned entering one or three new markets as soon as 2020. Does that mean that you have new franchise partners already kind of lined up and signed up for that? Or is that still in process?

Bernard Acoca -- President and Chief Executive Officer

Those things are all still kind of in the throes of discussion here internally, and we haven't finalized our plans yet. So we're not in a position to share them, but -- so more to come on that.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

OK. Thank you very much.

Operator

Our next questions are from the line of Andrew Barish with Jefferies.

Andrew Barish -- Jefferies -- Analyst

Hey, guys. Wondering on sort of the next steps you referred to on operational improvements. I mean you did the menu simplification and kind of quickly pivoted to being a little bit more sales oriented with your teams. I guess, what are the next steps? And what are you seeing on guest satisfaction scores that are either good or need some areas of improvement that are the near-term focus?

Bernard Acoca -- President and Chief Executive Officer

Yeah. So again, I think the trend -- what we mentioned to you with the transformation agenda is over the last several quarters, we've seen a slow but steady uptick in our overall blended index, which is our measure of customer satisfaction. It is not where we still wanted to be, but we do expect in the back half of the year to accelerate our improvement there, certainly, with the arrival of our new chief operating officer and our focus on customer satisfaction as a metric. So we've seen slow but steady improvement.

We want to see far greater improvement to hit our aspirational internal target. We've seen improvement in speed of service in the drive-through. I would say, again, steady improvement, but we are really focused as food ready at the window right now to drive down that window time even further. So we can -- we believe that we can do far better than what we've managed to achieve over the last several quarters.

So that in addition to some other initiatives that are really driving back-of-house simplicity. One, we talked about the inventory management system. It's in 120 restaurants now, will be fully implemented by the end of the year. We are rewriting the vast majority of our standard operating procedures to make them simpler.

I can't overemphasize enough what a coo it is to have all our recipes -- all our product recipes, we're now able to make in six steps or less. And then something that we are testing and very close to launching, which is a major paradigm shift in our business, is chicken-cooking simplification. And we have managed to come up with a methodology and a process to cook our chicken, which makes it so much easier for our employees, while simultaneously improving the quality of our product. And that will be in full implementation in company restaurants in Q4, and then we'll look to roll it out to the rest of the system from there.

So all these things taken in conjunction with one another we think are going to lead to greater front-of-house experience, given how much capacity we're starting to free up back of house.

Unknown speaker

Yeah. Andy, the only thing I'd add is Miguel has also come in and realigned his team. And the other thing is he's starting to get really, really focused, work with HR around the area leader level. And when you're talking about operations, that's the level you have to go after first because they are the ones who impact all the restaurants, but really getting into the everyday routine, where they're doing restaurant have a plan of day.

A lot of blocking, tackling work that Miguel is really getting after. And the other thing is we're also going to pay dividends over the near and longer term.

Andrew Barish -- Jefferies -- Analyst

Thanks. And then, Larry, on pricing and mix, does the back half look similar as far as you can tell in terms of about 3.5% menu price but somewhat offset by negative menu mix with more of the $5 items seemingly becoming part of your product strategy?

Larry Roberts -- Chief Financial Officer

Yeah. So we expect back half of the year pricing is probably going to actually a little north of where it's been. It'll probably run at about 3.8% or so back half of the year on pricing. And then mix, in total, you're right.

I think mix will be roughly flat. I think it will be a little negative in Q3 as we're driving the $5 promotion but then come back, hoping to be slightly positive in the fourth quarter as we turn in stores, the holidays and really emphasize family meals centered around tamale. So, yeah.

Andrew Barish -- Jefferies -- Analyst

Thank you.

Operator

Our next questions are from the line of Sharon Zackfia with William Blair.

Sharon Zackfia -- William Blair -- Analyst

Hi, good afternoon.

Bernard Acoca -- President and Chief Executive Officer

Hi, Sharon.

Sharon Zackfia -- William Blair -- Analyst

I just wanted to make sure I understood that delivery conversation from your prepared text. So did I understand correctly that you're testing Uber and Postmates in addition to DoorDash? And that's what's really not in September? Or was it the curated menu or the both sides? I kind of got lost a little bit there.

Bernard Acoca -- President and Chief Executive Officer

Yes. It's both, Sharon. So we launched right now with DoorDash our bifurcated menu. So if you order from our loyalty program or order online from us, from delivery and we generate the order, you know, you get our full menu at our regular menu price.

If you order from a third-party marketplace, whether it be DoorDash and eventually, Postmates and Uber Eats, which will launch with us in September systemwide, you will get a menu that's more curated, focused on -- primarily on family meals and combos at elevated pricing -- slightly elevated pricing and also actually some unique family meals and combos you can't get elsewhere that take into account the -- or the need to kind of preserve our margins to the best of our ability. So that is what is launching systemwide come early September.

Sharon Zackfia -- William Blair -- Analyst

And I guess I don't recall you having said previously how much delivery is as a percent of your sales mix at this point. So it might be helpful to update us on that. And then is the delivery launch in September, the revamped delivery paradigm? Is that why you're optimistic that comps will improve in the September quarter? Because I feel like you took the math is that you need a 0.5 comp in the back half to hit the low end of your guidance. And if comps have weakened a little bit in July, it doesn't like you're sitting there right now.

Bernard Acoca -- President and Chief Executive Officer

So there's a few things that gives us confidence. One, I think we have a lot of confidence around our $5 fire-grill combos promotion, which we think will do quite well for us. Two, you are right. Our expanded delivery platform, we're expecting to do more for us.

We haven't aggressively promoted delivery to date for one primary reason. And I can't state this point enough because it is a huge part of how we are transforming our business. To be clear, we have not historically been a digital player. I mean our go-to-market model has been very heavily dependent on television and print media.

I know that's hard to believe, but we jumped in a single quarter, this quarter, that we're in right now, from doing less than 3% in digital media to 15% and that number is only going to grow northward as we move forward. We redesigned our website which launched in the beginning of July. That website, quite frankly, hadn't been touched since 2012. Now we have a beautiful, dynamic website, a beautiful, new, dynamic mobile app.

It's been the UX on that, the user experience of that has been improved. It's been reskinned to reflect our new brand aesthetic. And the only reason why I bring that up is that was what was first required for us to then really want to drive people to our e-commerce platforms, which then get us to growth in delivery. So now that we've put that behind us, we are ready to turn on the delivery spigot, and we're going to do that with two new national partners, we're going to do that by promoting free delivery and our marketing communications far more aggressively and take delivery, which to answer your early question, represents less than 2% of our business now and really turn up the dial on that.

So yes, all those things combined we believe will help us throughout the quarter and on a go-forward basis.

Sharon Zackfia -- William Blair -- Analyst

Thank you. That's very helpful.

Operator

Our next questions are from the line of David Tarantino with Baird.

David Tarantino -- Robert W. Baird and Company -- Analyst

Hi, good afternoon. First, could you please clarify what you meant by the softness in July, just so that everyone on the call is level set on what you're running so far this quarter?

Bernard Acoca -- President and Chief Executive Officer

Well, I mean, I'm not going to get into the specific number, but what I will say is that, you know, we were encouraged by the way we exited the last quarter in Q2. And that momentum seemed to have slowed a little bit in July in terms of the sales comp that we experienced.

Larry Roberts -- Chief Financial Officer

Dave, we're, basically, slightly negative in July.

David Tarantino -- Robert W. Baird and Company -- Analyst

Got it. OK. Thank you. And I guess, Bernard, as you step back and look at the last I guess five or six quarters since you've been at the company and you saw a fairly nice acceleration in the back half of last year.

And then now we're seeing a little bit of a slowdown sequentially for the last couple of quarters and end of July. So I guess, what do you think you did well on the back half of last year that may not have continued in the first half of this year? And -- or is there some new issue in the first half of this year that is underneath the surface? I know you mentioned promotions not going well in Q2. But I guess just as a high level, why the strength last year and then the slowdown this year in your mind as you diagnose the business?

Bernard Acoca -- President and Chief Executive Officer

Well, I mean, I -- honestly, I think it has to do with the fact that, as you're well aware, the industry is just getting -- everyone is getting better faster, and we need to accelerate our development on certain fronts. I talked about the innovation pipeline certainly as a place that we're looking to get better and digital, and delivery being another. But I would attribute it to just simply a tougher marketplace and the fact that this marketplace is demanding every brand to get better faster. And so we never promised this was going to be 1-year transformation agenda.

We're making progress. We're very proud and confident of the progress that we're making. But as I mentioned, there's going to be some speed bumps along the way. We think we're going to successfully get past those, and that our best days lie ahead.

But that's the best way I could characterize it.

David Tarantino -- Robert W. Baird and Company -- Analyst

Got it. And then I think you referenced on the past plans to start to enter new markets next year with new unit growth. And I'm wondering, is that still on the books in the sense that it sounds like you got a lot of heavy lifting on the operations side to get to where you want. Does it make sense to maybe push that out a year so you get your operations right before you start growing? Or do you not think you need to do that?

Bernard Acoca -- President and Chief Executive Officer

Yeah. No, I don't want to misrepresent where our operations are. I mean, you've got me wrong. We have a solid operating platform.

We just see a lot of upside opportunity for it going forward. So we're making tremendous headway and progress, and we have certainly over the past year. We just see it as being a real bigger -- a bigger differentiator for our business relative to what it's been historically. And so we're tracking with our timeline on everything and incorporating all the great initiatives we have under way and building them into that prototype store of the future.

And that store of the future, as a matter of fact, is driving some new thinking as to things that we might want to incorporate into our existing restaurants. So it's parallel work, and we're tracking right along with other timeline.

David Tarantino -- Robert W. Baird and Company -- Analyst

Got it. Thanks for that clarification. That makes sense. And then the last question I had is on delivery, Larry, can you explain what the margin structure of that looks like relative to an in-restaurant or takeout transaction -- normal takeout transaction? And then, if you have any insight on what you've seen so far in terms of the sales, whether you think those are incremental or replacing in-restaurant transactions, that'd be helpful.

Larry Roberts -- Chief Financial Officer

Well, the economics are -- obviously, there's two avenues. One is the dispatch, which basically is economic or similar to something going in a restaurant through the drive-through. There might be a small fee that you're paying for the process and transaction. But the margins are similar to somebody buying at the price directly from the restaurant.

It's the marketplace where, as you know, you're paying a fee to the marketplace provider. Bernard highlighted with the bifurcated menu. The incrementality task has been reduced significantly, meaning the margins are better. They're not all the way to bright where the consumer is paying the full delivery price.

But it is a lot better and that will continue to evolve if we work on the margin on delivery. So again, dispatches lead to the same margins. Marketplace, we are paying a fee but at the same time is we're probably covering -- I'm trying to think, what -- a pretty feeble a percentage of that fee is being covered by higher prices on the marketplace menu. In terms of incrementality, I think at this stage, David, it's hard to measure incrementality.

We -- as Bernard highlighted, we really haven't pushed delivery aggressively the way we're going to get ready to. So we believe in something incremental. We structure in a way that incrementality lift is less needed. It's probably more around the 20% incrementality or so that you need to breakeven on those delivery transactions.

So I think we're doing the right work there. But in terms of incrementality, today, we just haven't pushed it aggressively enough and so it's very hard to determine whether these are incrementality -- or incremental today. But going forward, we certainly expect to do it and really push it.

Operator

Thank you. Our next questions are from line of Jake Bartlett with SunTrust.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Thanks. I just had a clarification and then just a bookkeeping question. And the clarification was what drove the negative mix in this quarter? Was there some sort of promotion that drove that? Or was it just kind of maybe pushback from the kind of the increase in pricing?

Larry Roberts -- Chief Financial Officer

No. I think overall, we -- when we review that -- our discounting did go up a little bit in the second quarter. It wasn't significant, but if I look year over year on that discount line, it's a little bit higher. So I believe that drove some of the mix shortfall year over year.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

OK. And then, Larry, if you could provide us with the systemwide sales number, that'd be helpful.

Larry Roberts -- Chief Financial Officer

Yeah. $227.8 million.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

OK. Thank you very much. Appreciate it.

Larry Roberts -- Chief Financial Officer

All right.

Operator

Thank you. We've reached the end of our question-and-answer session. I would now like to turn the floor back to Bernard Acoca for closing comments.

Bernard Acoca -- President and Chief Executive Officer

Yes. I just want to thank everyone for joining the call today. We look very much forward to sharing our future results with you, and we look forward to talking to you soon. Be well.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Larry Roberts -- Chief Financial Officer

Bernard Acoca -- President and Chief Executive Officer

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Andrew Barish -- Jefferies -- Analyst

Unknown speaker

Sharon Zackfia -- William Blair -- Analyst

David Tarantino -- Robert W. Baird and Company -- Analyst


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