Del Taco Restaurants Inc (TACO) Q2 2020 Earnings Call Transcript

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Del Taco Restaurants Inc (NASDAQ: TACO)
Q2 2020 Earnings Call
Jul 23, 2020, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Thank you for standing by, and welcome to the Fiscal Second Quarter 2020 Conference Call and Webcast for Del Taco Restaurants.

I would now like to turn the call over to Mr. Raphael Gross, Managing Director at ICR.

Raphael Gross -- Managing Director

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.

But first, let me 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 a more detailed discussion of the risks that could impact Del Taco's future operating results and financial condition.

Today's earnings press release also includes non-GAAP financial measures such as adjusted net income, 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.

John D. Cappasola -- President and Chief Executive Officer

Thank you, Raphael, and we appreciate everyone joining us today. Let me begin by reiterating what I said on our previous call. Our restaurant teams, our franchise partners and our support staff are doing an exceptional job supporting our people, serving our guests and strengthening our brand. I couldn't be more proud or thankful for their efforts and dedication and I am very pleased that this focus is driving business results.

Specifically, systemwide same-store sales are slightly positive so far in Q3, led by our franchise base, who is sustaining positive same-store sales trends across a broad 14-state geographic footprint. This trend, coupled with funding for all franchisees who sought PPP loans, strengthened our franchise financial health. To date, 70% of franchised restaurants have voluntarily repaid all of the royalty and sublease rents that we deferred earlier this year and all remaining restaurants are on repayment programs to enable full repayment before the end of 2020.

Despite 100% of company-operated dining rooms remaining close since the start of COVID and challenged trends in the breakfast day part, company same-store sales trends continued to improve sequentially and are negative approximately 2% during the first five weeks of Q3, despite over 90% of our company restaurants residing in California and Las Vegas, where COVID-19 exposure is currently substantial.

Although we're very pleased with the company's same-store sales recovery during and since the second quarter, we are even more proud of the restaurant level cost controls and flow through achieved during fiscal Q2. Specifically, the food cost reduction, very modest labor and related deleverage despite absorbing $1 California minimum wage increase, and operating expense adjustments allowed us to limit our overall restaurant contribution margin contraction to 260 basis points despite the COVID-19 reduction in company restaurant sales.

We are very pleased with this outcome and we expect further sequential improvement in our year-over-year restaurant contribution margin performance in both Q3 and Q4. Importantly, our recent sales and profit trends, coupled with the deferral of certain non-essential capital expenditures, put us in a position to reduce our outstanding debt, net of cash at the end of the second quarter by over $9 million compared to the end of fiscal 2019. This resulted in a relatively stable net debt-to-adjusted EBITDA leverage ratio at Q2 compared to year-end and we currently have over $12 million in cash on hand.

Due to our financial stability, continued operations, sales and profitability improvements, we've been fortunate to not have to furlough any restaurant employees. Instead, we reinforced our people-centric culture by paying company general managers healthy Q2 bonuses for their leadership and introduced and enhanced employee free meal program to reward our dedicated teams for serving their communities.

We are proud that our resilient business model has kept our teams employed and productive. These results have not only stabilized our business, but also put us in a position to further our brand acceleration through operational improvements, digital transformation, brand initiatives and a continued focus on development led by franchising.

Starting with operations. I'm not surprised by our ability to rise to the occasion and overcome recent challenges. The Del Taco culture is very special, built upon our people-driven approach of serving others as a core value. Our culture is truly a strength of this organization and enables us to be innovative, execute rapid change and employ new best practices that enable the recovery and future acceleration of our business.

As we contemplated the new normal, we set goals to stand out as a trusted brand for safety and sanitation, as well as simplifying operations to drive efficiencies and we are accomplishing both. Since the COVID-19 impact, we maintained operations in our drive-thru, takeout and rapidly expanding delivery channels. These service modes provide guests the convenience they want in a limited contact or contactless manner. Due to this advantage, we chose not to reopen company-operated dining rooms in order to streamline our focus on the service modes that are currently more relevant to our guests.

The majority of our franchisees also adopted a similar approach. Our narrowed focus on drive-thru, takeout and delivery channels has led to improved service scores and greater labor efficiency in our restaurants, which has been aided by increased visibility provided by our new workforce management system.

Next, 2020 progresses. We have planned a number of innovation initiatives expected to enhance existing restaurant operations and provide consumers new reasons to visit Del Taco. Let me start with our digital transformation, which will continue to be an important part of our strategy. Our Del Taco mobile app and delivery have enabled enhanced engagement with guests and expanded our ability to provide them with greater convenience.

The app database has now grown to more than 1.1 million registered users, up 28% from 880,000 at the end of 2019, which is in part due to regular disruptive offers only available to app users. To drive more trial and frequency with this technology, we just launched Del's Daily Smile Summer, whereby every day this summer, guests can receive Del Taco offers and surprise deals from other partners that are only available in the app. As an example of that, last Friday, all Del Taco app users received an offer for a free Samsung smartphone on what we called Free Phone Friday.

We are also aggressively promoting Del Delivery as a contactless ordering option with Postmates, DoorDash and Grubhub and recently with our new partnership with Uber Eats. Delivery is available across all company restaurants and more than 90% of franchised restaurants through one or more DSPs and represented approximately 7% of systemwide sales during the second quarter.

We believe being one of the few brands to partner with all four leading delivery platforms to maximize consumer convenience channels and leverage the trend toward at-home delivery provides a clear advantage. In June, we reinstated a traditional advertising media to highlight our everyday value barbell strategy with a focus on our Del's Dollar Deals Menu. More recently, we pivoted our messaging to innovation with the launch of Fresh Guacamole as our newest premium ingredient. Fresh Guac builds on our strategy of delivering fast casual, fresh quality ingredients with fast food speed, convenience and price. We plan to use Fresh Guac as a QSR+ point of difference by making it available across our barbell menu strategy as a side or product modification as well as within new products designed to highlight this signature ingredient.

We featured it as part of the recent launch of the new Epic Burrito lineup, which allows the guests to choose chicken, carne asada or Beyond Meat for any of our Epic Burritos, along with simplified product builds to ease operations execution. Early returns from this new ingredient feature extremely high guest satisfaction scores, along with increased Epic Burrito product mix, which underscores our ability to deliver value and convenience even at the premium end of our barbell menu.

Next week, we'll introduce New Crispy Chicken as part of an overarching combined solutions event. As a reminder, our combined solutions approach pairs catalytic marketing activity with operational enhancements and it has been a key part of our same-store sales growth playbook for over the past decade. This combined solutions event is centered around the core idea of Del's Daily Smile. In this current COVID world, we could all use another reason to smile, and we are bringing that to our guests through new products, a series of giveaways and an improved guest experience.

We'll be the first national Mexican QSR with a crispy chicken offering, and we are launching it in new products across our menu barbell, including $1 Crispy Chicken Taco, which will be our first new addition to the Del's Dollar Deals Menu and a $5 Epic Burrito with Fresh Guac. The product launch will be supported by a new marketing approach and brand voice developed by our new advertising agency, Skiver and CMO, Tim Hackbardt. We are already seeing significant improvements in our consumer engagement across social and digital channels as a result of their early work over the past month.

Our new approach that delivers must watch brand creative has increased social engagement and buzz by up to 4 times. For example, we recently launched a new Sprite Poppers beverage, which is driving impressive social media sharing of our creative content and inspiring a significant amount of user-generated video reviews and experiences across TikTok, YouTube and other social platforms, trending it as a must try beverage this summer.

Finally, we are using the COVID-19 period to invest in our future and are not simply waiting for when the pandemic is behind us to consider next steps. Rather, we intend to reach the other side better positioned to capitalize on new opportunities that will emerge from this crisis. A key area of continued investment and focus will be technology. We've made great strides through our digital transformation over the past year and a half and plan to build upon that momentum as we recognize the importance of technology to drive the guest experience and meet future guest expectations.

This effort will leverage a restaurant and technology assessment to help ensure all systemwide restaurants are well positioned to adopt future enhancements, such as developing and testing a loyalty platform to better leverage our 1.1 million plus app users as well as testing incremental new service modes for the brand, such as curbside pickup, and other strategies that allow the guests to order ahead and conveniently access Del Taco food in a contactless manner.

Turning to development. Thus far in the third quarter, we have opened two franchise and one company restaurant and have up to three additional franchise openings planned later this year. Looking ahead, we anticipate favorable dynamics may occur across our development efforts as a result of the pandemic, such as additional new franchise interest and drive-thrus, increasing real estate availability and potential development cost deflation. To help capitalize on these opportunities, we are aggressively working a menu of venues strategy designed to expand our prototype capabilities to provide more flexibility, both in terms of real estate access and enhancing our targeted new unit return profile. This planned restaurant prototype expansion will include a modernized design, improved functionality and other operational enhancements. In addition, we are continuing our test remodel program in the back half of 2020, which is driving encouraging sales lifts and returns.

We believe the combination of expanded real estate and prototype opportunities alongside a comprehensive future remodel program will benefit future company and franchise development, including attracting new franchisees.

To conclude, we've stabilized our business and believe our franchisees are healthy. Our brand positioning of fresh, flavorful food, great value and convenience is exactly what the consumer is looking for these days, and we can provide these relevant attributes through limited and no contact channels without the reliance of our dining rooms. Although sales volatility may persist, our underlying trend is undeniably strengthening. And absent a major setback from the pandemic, we believe that the worst of it may be behind us in terms of same-store sales and restaurant contribution margin performance. At the same time, we are investing in our business to strengthen our guest engagement through technology to improve our ability to provide even greater convenience, while also evaluating how we can realize the emerging real estate opportunities to grow our brand through expanded prototype capabilities.

We look forward to sharing more information on these topics. Now, I'll turn the call over to Steve to review our second quarter financials.

Steven L. Brake -- Executive Vice President and Chief Financial Officer

Thank you, John. Total revenue decreased 13.9% to $104.6 million from $121.5 million in the year ago second quarter. Systemwide comparable restaurant sales decreased 10.1%, including a 12.6% decrease at company-operated restaurants and a 7.2% decrease at franchise restaurants.

Second quarter company restaurant sales decreased 15.1% to $95.3 million from $112.2 million in the year ago period. This decrease was driven by the decrease in company-operated comparable restaurant sales as well as fewer company-operated restaurants compared to last year, primarily due to our refranchising activity.

Franchise revenue decreased 2.5% year-over-year to $4.5 million from $4.6 million last year. The decrease was driven by the negative franchise comparable restaurant sales, partially offset by additional franchise-operated restaurants compared to last year, primarily from our refranchising activity.

Now turning to expenses. Food and paper costs, as a percentage of company restaurant sales, decreased approximately 60 basis points year-over-year to 26.9% from 27.5%. This was driven by our menu price increase of nearly 4%, which exceeded food inflation of approximately 3%.

Looking ahead, we continue to expect food inflation to step down sequentially, particularly during the fiscal fourth quarter. And to date, we have not experienced any material supply chain issues impacting product availability. During the second fiscal quarter, despite the $1 increase in California minimum wage to $13 an hour and the loss of leverage on fixed elements of labor, such as general manager salary and benefits due to the COVID-19-related reduction in company restaurant sales, our labor and related expenses, as a percentage of company restaurant sales, increased by a relatively modest 80 basis points to 33.2% from 32.4%.

Our operations team very efficiently managed our variable hourly costs to align with the reduced consumer demand with a very streamlined focus on drive-thru operations, while the dining rooms remained closed. In addition, the quarter included reduced workers' compensation expense based on favorable underlying trends.

We view the modest deleveraging on this key line item as a strong outcome, all things considered. Occupancy and other operating expenses as a percentage of company restaurant sales increased by approximately 240 basis points to 23.5% from 21.1% last year. This increase was primarily due to increased third-party delivery fees and deleverage across our fixed occupancy costs from the COVID-19-related reduction in company restaurant sales, partially offset by reduced advertising expense as traditional media spending was slowed during the second quarter due to COVID-19.

Based on this performance, restaurant contribution was $15.6 million compared to $21.3 million in the prior year and restaurant contribution margin decreased approximately 260 basis points to 16.4% from 19% last year.

Overall, we are pleased with our restaurant margin performance in light of the operating environment in the COVID-19-related reduction in company restaurant sales. Looking forward, we believe we are well positioned to further minimize restaurant contribution margin contraction based on improved comparable restaurant sales, coupled with sequentially less commodity inflation and a continued focus on managing other restaurant expenses.

General and administrative expenses were $9.4 million, down from $10.8 million last year, but as a percentage of total revenue, increased 10 basis points to 9%. The decrease in dollars was primarily driven by reduced performance-based management incentive compensation, lower stock-based compensation expense and other G&A reductions.

Adjusted EBITDA was $12.1 million, down from $16.7 million last year and decreased as a percentage of total revenues to 11.6% from 13.8% last year. Depreciation and amortization was $6.3 million, up from $5.8 million last year. 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 120 basis points to 6%.

Interest expense was $1.3 million compared to $1.7 million last year. The decrease was primarily due to a decreased one-month LIBOR rate compared to last year, partially offset by a higher average outstanding revolver balance. During the second fiscal quarter, the company reduced its outstanding revolving credit facility borrowing, down to $145 million, consistent with the balance at the end of fiscal year 2019 and the company currently has over $12 million in cash on hand.

The remaining availability under the revolving credit facility is currently $87.7 million. In addition, at the end of the second fiscal quarter, our balance sheet debt, net of cash, totaled $133.8 million compared to $143.4 million at the end of fiscal year 2019, representing a reduction of approximately $9.6 million and a relatively stable net debt-to-adjusted EBITDA leverage ratio.

This performance has allowed us to maintain meaningful financial cushion with respect to our lease-adjusted leverage and fixed charge coverage covenants, which we currently expect to maintain. Net loss was $0.6 million or $0.02 per diluted share compared to net income of $2.1 million or $0.06 per diluted share last year. We also reported adjusted net loss, which excludes sublease income for closed restaurants, restaurant closure charges and loss on disposal of assets and adjustments to assets held for sale.

Adjusted net loss was $0.1 million or approximately 0 per diluted share compared to adjusted net income of $5.4 million or $0.15 per diluted share last year. As a reminder, we have already withdrawn our guidance for the 52-week fiscal year ending December 29, 2020. However, as I said earlier, we expect to demonstrate sequential improvement and year-over-year restaurant contribution margin trends during the third and fourth fiscal quarters due to our comparable restaurant sales recovery, coupled with sequentially less commodity inflation and a continued focus on managing our other restaurant expenses.

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

Questions and Answers:


Thank you. [Operator Instructions] Our first question comes from Nick Setyan with Wedbush Securities. Please go ahead.

Nick Setyan -- Wedbush Securities -- Analyst

Hi. Thanks and congrats on a very solid unit level margin, well above, I think, even the most bullish expectations. Can you maybe just parse out to what extent we can expect to see some permanence in some of the improvements and to what extent maybe some of that trend line is transient in nature?

And then separately, specifically, on the other opex, how should we think about the fee impact, the third-party fee impact going forward?

Steven L. Brake -- Executive Vice President and Chief Financial Officer

Sure, Nick. This is Steve. As we mentioned, the real good news is looking forward, we absolutely expect sequentially less restaurant contribution margin contraction in both Q3 and Q4. So compared to the 260 basis points of contraction we saw in Q2, although we do expect some continued contraction, it's going to definitely moderate over each of the next two quarters.

Now that certainly assumes that same-store sales performance remains in line with recent performance. Overall, certainly, the strength of our company same-store sales, along with commodity trends on certain items that we have not yet contracted, that's going to influence our ultimate restaurant contribution performance over the next two quarters.

So overall, we'd like to see that food reduction on a percent basis. We think that'll maintain labor, 80 bps of deleverage despite a significant negative comp influenced by COVID, it just speaks to the very good discipline within that labor-related bucket. So we're real pleased with that. We expect to see that continue. And then even occupancy and other, you mentioned delivery, that certainly is the most notable point of pressure on a percent basis. Advertising was also a good guy that somewhat offset that. But then naturally, your loss of leverage on all your fixed occupancy costs, that was the other notable pressure point.

So overall, that's kind of some of the puts and takes, and we're pleased to have good outlook in terms of much less contraction as we move forward throughout the year.

Nick Setyan -- Wedbush Securities -- Analyst

Are there any learnings on -- in terms of labor? Given some of the efficiencies you're seeing, I mean, is there potential to permanently have maybe less staffing, lower hours and still have the same productivity relative to pre-COVID?

Steven L. Brake -- Executive Vice President and Chief Financial Officer

Yeah. It's definitely a journey. We delivered a very efficient outcome the first day and week of COVID. No, we weren't that efficient, but we real quickly -- I mean, John talked about how nimble this organization is through a real strong culture. So we quickly adjusted. I think it showed in that performance. And the focus is really just trying to maintain that, if not improve it. But we're absolutely chronically, learnings along the way that probably are going to inform future strategies to say the least now. And to be fair, that lack of a dining room is playing a big role in that.

Long term, the dining room is an asset. That will be an asset in the future, not the immediate future. So that definitely played a role, but there's certainly a lot of smaller learnings along the way. Notably, we talked a couple of times about having rolled out a state-of-the-art workforce management system. That's absolutely giving great real-time visibility, allowing the finance and ops [Phonetic] team and really help achieve the efficiencies you saw play out on the P&L today.

Nick Setyan -- Wedbush Securities -- Analyst

Got it. And just last question. The difference between the com [Phonetic] comp and the franchise comp, I mean, they're just down to a higher percentage of no drive-thru locations in the company-owned base? Or is there something else going on there?

Steven L. Brake -- Executive Vice President and Chief Financial Officer

Are you referring to the same-store sales differential, Nick?

Nick Setyan -- Wedbush Securities -- Analyst


Steven L. Brake -- Executive Vice President and Chief Financial Officer

Yeah. Really, it's a geographic dynamic. Over the last eight weeks, in particular, we've seen really strong positive same-store sale trends in all three of our Pacific Northwest states, all of our four corner states as well as Michigan. In all eight of those states, they're exclusively owned and operated by franchisees, and that accounts for a good number of our system outlets.

So really, it's that outside of California, outside of Vegas, where the company is based more than 90%. That's what's really allowing the franchise overall same-store sales trend to outperform the company. Notably, if you look within California or within the LA, DMA area, both franchise and company does remain negative and there is slight outperformance in favor of the company within California and LA. So really, it's more of a geographic dynamic.

Nick Setyan -- Wedbush Securities -- Analyst

Understood. Thank you very much.

Steven L. Brake -- Executive Vice President and Chief Financial Officer

You bet.


Next question comes from Nicole Miller with Piper Sandler. Please go ahead.

Nicole Miller -- Piper Sandler -- Analyst

Thank you and good afternoon. Appreciate the update, excited about the comp return. I wanted to ask a big picture about the industry. We've had -- it seems almost enough companies report to think this could be a trend. It seems with less mobility, and clearly, you're in the state of California where that's the case, that full service casual dining is taking a step back in comp, but limited service is not. And if anything, comp recovery continues. So I would just wonder what do you think about that. And if that is the case, is this coming mostly through the drive-thru channels, through the delivery channels or somewhere else? Thanks.

John D. Cappasola -- President and Chief Executive Officer

Yeah. Nicole, I mean, with us, in particular, I mean, 90% of our sales are coming through drive-thru and delivery at this point, and the remaining being carryout. Obviously, we don't have the company restaurants. Dining rooms are not open. We have not reopened dining rooms. And just a very small minority of franchise restaurants where it's even -- where they're even able to open dining rooms have. So it's definitely a drive-thru and delivery dynamic. I think that speaks to where the consumer is today with the pandemic and the convenience that is provided with QSR, and our ability to kind of transact quickly when you're out and about through a drive-thru in a limited contact manner. I think that's an important factor that we offer, and the fact that even going in the COVID, the limited service restaurants were such a regular -- more regular everyday use for consumers. I think that dependability was created over time. So I definitely feel like we're well positioned on all those consumer factors, and then you add in value and what we bring to the table when people are a bit pinched or expecting to be a bit pinched in the -- with their wallets. I think we can absolutely continue to see momentum given these dynamics in our business.

Nicole Miller -- Piper Sandler -- Analyst

Thank you. The second and final question, you talked about $1 increase in California minimum wage. On some of the other conference calls, did come up in the Q&A that your peers are taking price. And I'm wondering, if you're thinking this is an opportunity for your brand. If you did say price in the comp in the quarter, if you could repeat that, I might have missed it. And then if you think there's a pricing opportunity, where in the menu or which platform might you take that in?

Steven L. Brake -- Executive Vice President and Chief Financial Officer

Yeah. In terms of menu price during the quarter, we were menu priced at close to 4%. I'd say for the full-year, our outlook remains at least 3.5% to 4% area based on actions we've taken to date and then one pending potential action in the fall. So 3.5% to 4%. Certainly, that was set up a while back to, in part, help manage the labor inflation that you referenced. And as far as future price...

Nicole Miller -- Piper Sandler -- Analyst

And I guess, that technically the answer is not -- I guess it's kind of the same answer, like not anymore just because minimum wage went up? Or is that something you're considering?

John D. Cappasola -- President and Chief Executive Officer

No, I think we're always looking at it and trying to determine what the right amount to take is. But obviously, we want to keep an eye on transactions. We want to keep an eye on the health of the consumer and the competitive set before we make those decisions. And there are some levers that we do see as opportunities to pull; one in particular is on the delivery front. And recently, we moved up our premium pricing and delivery at the start of Q3. So we had been running about 10% premium on our delivery transactions. It certainly helps that model quite a bit. And through testing and franchise testing, we were able to see that there was some availability of taking additional premium in that area.

So we're able to target that a bit and get that up to closer to the 20% range on the premium side, which is similar to what we're seeing across the competition as well as when we look at the consumer dynamic, pre, post those types of moves, it seems like convenience really trumps or carries the day, if you will, with delivery.

So, that's an overriding factor that allows us to maybe absorb a little bit more of that pricing through that channel.

Nicole Miller -- Piper Sandler -- Analyst

Very helpful. I appreciate it. Thank you.


Next question comes from Alex Slagle with Jefferies. Please go ahead.

Alex Slagle -- Jefferies -- Analyst

Thank you. Hey guys. I hope everyone is well. So [Phonetic] wondering, what you see as the biggest opportunities right now to improve the service levels and capitalize on the higher demand you're seeing with the current drive-thru and carryout model. And I'm just wondering if there's ways you think you can improve sort of the speed and efficiency, whether it's opportunities for -- to improving equipment or processes or anything else you see out there.

John D. Cappasola -- President and Chief Executive Officer

Yeah, of course. It is a -- I'll tell you, with the narrowed focus here on -- on [Phonetic] really so much of the business coming through the drive-thru, we have really been able to put a massive push on throughput and actually, with the launch of Crispy Chicken that happens next week that we're really excited about, we have this combined solutions event, that you heard me mention in our prepared remarks, and with over 90% of our business coming through the drive-thru and delivery, we want to make sure we're improving that experience in both these channels with this launch. And so we are launching something that we're calling our throughput playbook. And that provides really specific tactics on a store-by-store basis to enable the growth of car counts during peak periods. So things like -- the playbook includes things like options for the use of cones to extend our drive-thru queue line as an example or deployment of technology, where we use an outside order taker, where we might have some more challenged drive-thru stacks to get that person out there, getting that order into the kitchen sooner. And we're doing some training on kitchen efficiency, best practices as well that we've mined from our top-performing stores. So it's a massive focus. And on the delivery front, we are setting up defined delivery stations in our kitchens to have all the key elements needed in one place and adding additional information to the stickers we use to seal all of our orders to enhance order accuracy. And then a piece that obviously is over the top of all this, that will additionally help, that is continuing to be worked through, and some of these elements will roll with combined solutions and Crispy Chicken next week is that we've been working hard to simplify the operation.

So we've completed our first phase of menu simplification, creating more efficiency in the kitchen. We've deleted five SKUs as of next week and over a dozen menu items over the last couple of promotions. So we're trying to put our operators, our franchisees in a great position to be able to maximize that efficiency through the drive-thru.

Alex Slagle -- Jefferies -- Analyst

That's great. And then a follow-up on previous questions just to get a sense for the restaurant-level margin run rate at current volumes and slightly negative company same-store sales. It just seems like the second quarter, pretty impressive restaurant-level margin with the comp down, I guess, considerably. And now you're getting back toward flattish. So we just expect -- I would expect that margin to sequentially increase, not just year-over-year or see the sequential increases, if you could kind of give some more clarity to that.

Steven L. Brake -- Executive Vice President and Chief Financial Officer

Yeah. We're certainly looking at much less contraction as we move forward. That said, if you look at the 16.8% that we're lapping in Q3, a year ago, some contraction can take you certainly at or below what we just put up for Q2, couple of dynamics there. Remember, Q3, we will have reinstated a full suite of advertising and media. Q2, that was largely subdued due to some cuts that we made. So the marketing on a percent basis will kind of spike back up, going the other way, fortunately, we'll have, obviously, a lot less deleverage on your fixed occupancy costs. So with sales returning toward that more flattish area, we're going to have a good guy there, certainly. But then the other dynamic is utilities do run high on a percent basis in the summer months due to higher energy consumption. So really that year-over-year contraction is going to shrink up quite a bit the next couple of quarters.

Longer term, obviously looking to keep driving that forward. So that's some of the puts and takes there, again, on margin. Q3 is just a bit unique coming off of Q2 with advertising coming back, higher energy costs. But then, of course, the leverage shores up on your fixed costs. So that's where we are. Obviously, same-store sales, as I mentioned, is going to be the big driver of where that margin goes and how quickly it goes in the direction we're pushing it toward; obviously, the comp recovery so far. It is being done really despite that footprint on the company's side being over 90% in California and Vegas with a meaningful historical breakfast daypart, where trends are just still tough there due to altered consumer behavior. And of course, the sequential improvement is without dining room. So we feel good about the progression, but definitely more to come.

Alex Slagle -- Jefferies -- Analyst

Got it. What kind of comp would you need to be able to hold the occupancy and operating expense line flat, just given all the fees and pressure there?

Steven L. Brake -- Executive Vice President and Chief Financial Officer

That one would be tougher to flatten than labor, I would say, particularly when we're in this more efficient [Phonetic] dining room only mode. So we would need more comp to get that to flatten out than the labor line. And that's even despite the dollar of wage pressure. So it really speaks to the great job our operators are doing managing the labor line.

Alex Slagle -- Jefferies -- Analyst

That's impressive. Thank you.

Steven L. Brake -- Executive Vice President and Chief Financial Officer

You bet.


There are no further questions. I would like to turn the floor over to John Cappasola for closing comments.

John D. Cappasola -- President and Chief Executive Officer

Okay. Well, we appreciate you taking the time today with us. I think we've been working through the pandemic and the team has been doing a great job. We've been demonstrating our ability to really focus on our employees, our guests and our brand. And what we've been doing is resulting in ascending performance. And you couple that with the consumer really adapting and being much more savvy in regards to how to navigate the shutdown safely and how to use technology to their advantage, I think Del Taco as a brand is fitting right in right now. So we appreciate all of you joining us today. We wish you all the best. And thank you for your interest in Del Taco.


[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Raphael Gross -- Managing Director

John D. Cappasola -- President and Chief Executive Officer

Steven L. Brake -- Executive Vice President and Chief Financial Officer

Nick Setyan -- Wedbush Securities -- Analyst

Nicole Miller -- Piper Sandler -- Analyst

Alex Slagle -- Jefferies -- Analyst

More TACO analysis

All earnings call transcripts

AlphaStreet Logo


10 stocks we like better than Del Taco Restaurants
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* 

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Del Taco Restaurants wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of June 2, 2020

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.