Del Taco Restaurants Inc (NASDAQ: TACO) Q1 2021 earnings call dated Apr. 29, 2021.
Corporate Participants:
Raphael Gross — Investor Relations
John D. Cappasola — President and Chief Executive Officer
Steven L. Brake — Executive Vice President and Chief Financial Officer
Analysts:
Alex Slagle — Jefferies — Analyst
Nick Setyan — Wedbush Securities — Analyst
Joshua Long — Piper Sandler — Analyst
Todd Brooks — C.L. King & Associates — Analyst
Presentation:
Operator
Thank you for standing by and welcome to the Fiscal First Quarter 2021 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.
Raphael Gross — Investor Relations
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 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 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 or loss, operating income or loss, net cash flows provided by operating activities, or any other GAAP measure of liquidity or financial performance.
Let me now turn the call over to John Cappasola, President and Chief Executive Officer.
John D. Cappasola — President and Chief Executive Officer
Thank you, Raphael and we appreciate everyone joining us today. We’re pleased to have delivered a very strong first quarter that sets us up for a great year at Del Taco. Although the operating environment remains very difficult due to continued COVID related impacts and very challenging labor availability, our team is doing an outstanding job growing sales by serving guests through our drive-thru, takeout and delivery channels, while managing cost effectively. This resulted in significant first quarter restaurant contribution and adjusted EBITDA growth, margin expansion.
First, let’s review our first quarter performance and highlights. Following positive Company and franchise same-store sales trends through the first 10 weeks of the quarter which sequentially improved compared to the fourth quarter, we experienced accelerated sales growth in the final two weeks of the quarter as we cycled over the onset of COVID-19 last year. This resulted in first quarter system-wide comparable restaurant sales growth of 9.1%, consisting of a 14% increase at franchise restaurants and a 4.9% increase at Company-operated restaurants.
Our sales trends continue to be a geographic story as our non-California restaurants, which are primarily franchise-operated drove impressive comparable restaurant sales growth of 12% during the first 10 weeks prior to lapping the pandemic, which accelerated to growth of over 16% during the full 12-week fiscal first quarter. Restaurant contribution margin increased by 330 basis points to 16%, due primarily to strong comparable restaurant sales including 4% menu price coupled with food deflation and labor efficiencies. In terms of profit, adjusted EBITDA increased $2.9 million or over 33% to $11.6 million from $8.7 million, while adjusted net income per diluted share increased to $0.07 from adjusted net loss per diluted share of $0.01 last year.
Finally, while our net debt remained relatively consistent with Q4 last year, our adjusted EBITDA growth, reduced our net debt to adjusted EBITDA leverage ratio to approximately 1.87 times from 1.96 times. Our operations team is driving results through our focus for better initiatives that prioritizes four critical dimensions of our business, trusted and safe, making our teams and guests smile, productivity and ultimate convenience. In Q1, this focus delivered continued improvement in key performance indicators, including a 3.6% increase in overall guest satisfaction versus the prior year and a 3% improvement in drive-thru speed during our busiest lunch daypart.
Focus for better has done a great job narrowing our focus in the restaurants and driving performance. It also provides for an ongoing framework for our restaurant general managers to pivot their leadership based on the various opportunities they face in their specific restaurant. And many are pivoting once again based on the industry-wide staffing challenge. We are executing a two-pronged approach to attack this challenge with a combination of bottoms-up best practices that we have mined from successful stores and brand-wide enhancements designed to increase candidates in our hiring funnel and reduce friction in the application process.
Our focus for better execution is serving as the backbone to deliver on our five drivers of sales acceleration. And those are value leadership, menu innovation, brand engagement, digital transformation and ultimate convenience. Since we discussed these five drivers at length on our last conference call, I’ll be brief with my updates today. Our value leadership strategy focuses on great everyday value across our barbell menu and is supported by ongoing menu innovation to keep our menu platforms fresh and interesting.
For example, we started the year with a delicious new honey mango flavor that spans our barbell menu strategy from a $1 Crispy Chicken Taco on our Del’s Dollar Deals Menu up to a $5 Crispy Chicken Epic Burrito. We then launched our seasonal promotion lend by our Crispy Jumbo Shrimp LTO, including our new Honey Mango flavor. In Q2, this was followed by our newest Crispy Chicken flavor honey chipotle barbeque. And today we relaunched our Crunchtada platform with new items leveraging signature Del Taco ingredients on top a large 6.5 inch freshly fried tortilla. Our Crunchtada’s are akin to a Tostada or a Mexican pizza.
Our lineup will feature our traditional dollar bean and cheese Crunchtada as well as new mid-tier offerings at $2 with Queso Beef, and at $3 with grilled chicken and fresh guacamole. These trade up products highlight our QSR plus positioning with quality ingredients like our fresh guacamole and Queso while offering guests best in class value for the money.
In terms of dayparts, although breakfast in graveyard have been challenged in recent quarters, I am happy to report that thus far in the second quarter our graveyard business has accelerated to become one of our top dayparts on a same store basis compared to 2019 with double-digit growth. Although breakfast remains negative on a same store basis compared to 2019. We are currently finalizing our plans to launch a new breakfast platform late summer anticipating morning routines are likely to further normalize as vaccination rates improve. We expect this to put us in a position to capitalize on strong breakfast seasonality in the fall.
Turning to our digital transformation. During the first quarter, delivery mix for Company and franchise restaurants was approximately 7% of sales representing sequential improvement from the second half of 2020 despite an increased menu price premium enacted during Q3 last year. To expand our ability to offer low friction opportunities for guests to order Del Taco, we are happy to announce another digital ordering channel. Beginning in May, we will rollout Google ordering across the system. As guests use Google to find a Del Taco, they can instantly order directly from those search results including dine-in, takeout, drive-through and delivery options.
Our Del app currently has more than 1.4 million users, which provides a solid foundation as we plan for the launch of our new holistic CRM platform by this fall, which will enable us to further digitize Del Taco and incentivize and reward our fans for their loyalty. The launch will include a host of features and improvements to the Del App. The launch of our loyalty program as well as a data and attribution capability to drive personalized and valued experiences for our guests to increase sales and frequency over time.
Turning to development. Our system growth will be led by franchisees who will open eight new restaurants this year, of which four have opened to-date. Four Company-operated restaurants will also open this year, of which two have opened to-date across infill locations in core markets and our first restaurant in our new Company seed market in Orlando by this fall. We are excited to announce we have recently signed two new development agreements totaling at 18 restaurants in the Southeast, with two experienced multi-concept QSR franchise groups. One agreement includes commitments for eight restaurants in the Greenville-Spartanburg, South Carolina region and three restaurants in the Macon-Albany, Georgia region.
The other agreement includes a seven restaurant commitment in the Sarasota-Bradenton region on Florida’s West Coast. We believe these signings and other active discussions are enabled by several factors including our unique QSR plus brand position and ubiquitous menu that drives broad appeal, a strong track record of eight consecutive years of franchise comparable restaurant sales growth across a broad franchise geography that spans 15 states coast to coast and the relevance of our new Fresh Flex prototype, which has been very well received.
Fresh Flex is designed to propel growth with new and existing franchisees by expanding real estate opportunities to help lower net investment through multiple buildout options as well as modernizing the guest experience. We are very excited about its distinct design and look forward to our first Fresh Flex building in our new Company seed market in Orlando by this fall. We are continuing to test our remodel program with this year expected to complete up to 10 extensive remodels of older facilities and up to 10 remodels of more modern facilities with primarily cosmetic upgrades at a lower investment level. We are optimistic about the potential returns of these projects, particularly given the encouraging results on our initial 2019 and 2020 remodels, and the integration of our new Fresh Flex prototype into our remodel design. We expect this final phase of testing will lead to a formal system-wide remodel program as we move into 2022.
Finally, we announced our second quarterly cash dividend as part of our strategy to deliver shareholder returns through three key levers, driving our core business, deploying a disciplined investment strategy and returning excess capital. Our core business drove strong restaurant contribution and adjusted EBITDA growth during the first quarter and our disciplined investment strategy features continued growth led by franchising alongside a remodeling program which each leverage our new Fresh Flex design.
This approach is expected to enable the return of excess capital, inclusive of the quarterly cash dividend program along with opportunistic debt repayment and share repurchases. In closing, while COVID is certainly not yet fully behind us, our core business acceleration and development strategy led by Fresh Flex has set us up to drive continued growth this year and beyond.
Now I’ll turn the call over to Steve to review our first quarter financial results and reiterate our annual guidelines for 2021.
Steven L. Brake — Executive Vice President and Chief Financial Officer
Thank you, John. During our 12-week fiscal first quarter, total revenue increased 5.2% to $115.5 million from $109.8 million in the year ago first quarter. Company-restaurant sales increased 3.2% to $103.6 million from $100.3 million in the year-ago period. This growth was primarily driven by the positive comparable restaurant sales. Franchise revenue increased 18.5% year-over-year to $5.2 million from $4.4 million last year. The growth was driven by the increased franchise comparable restaurant sales coupled with additional franchise-operated restaurants compared to last year.
System-wide comparable restaurant sales increased 9.1%, consisting of the 4.9% increase at Company-operated restaurants, and a 14.0% increase at franchise restaurants. I want to also add perspective to our recent sales trends. As John noted, the final two weeks of our first quarter experienced outside sales growth as we lapped the initial COVID-19 impact. To help neutralize the impact of lapping the pandemic, I’m happy to share that on a same-store basis compared to 2019, our first quarter grew at a low-single-digit rate for Company restaurants and at a high-single-digit growth rate for franchise restaurants.
In addition, thus far in the second quarter, on a same store basis compared to 2019, our growth has accelerated to a mid-single-digit rate for Company restaurants and a low-double-digit rate for franchise restaurants. It is also important to note that this same-store growth compared to 2019 has been achieved despite certain day-parts in geographies that were particularly challenged by the pandemic. Specifically, for Company restaurants on a same store basis compared to 2019, during the first quarter, our breakfast daypart was negative high-single-digits, but has improved to negative mid-single digits thus far during the second quarter.
However, on a same-store basis compared to 2019, the graveyard daypart began 2021 in the negative mid-single-digit range and turn positive as the first quarter progressed achieving negative low-single-digit performance compared to 2019 during the full first quarter. Since then graveyard has improved significantly to become one of our top dayparts on a same-store basis compared to 2019 with double-digit growth thus far during the second quarter.
In terms of geographic performance for Company restaurants. On a same-store basis compared to 2019, during the first quarter although both LA and Orange Counties remain negative Clark County covering greater Las Vegas improved to flat also thus far during the second quarter on a same store basis compared to 2019, LA County has turned positive and Clark County is up high-single digits with Orange County improving sequentially to slightly negative. All other California counties and our Atlanta restaurants was significantly positive on a same-store basis compared to 2019 during the first quarter and the second quarter to date.
Turning now to the rest of our P&L. Food and paper costs as a percentage to Company restaurant sales decreased approximately 250 basis points year-over-year to 25.7% from 28.2%. This was primarily driven by a menu price increase of approximately 4%, coupled with food deflation of approximately 2% that was driven by reductions in produce, beef and cheddar cheese.
Looking ahead, we expect slight food inflation in Q2, followed by modest inflation during the second half, resulting in full year inflation of approximately 1%. Also, please note that during 2020, the first quarter was our highest food percentage at 28.2% followed by the remaining three quarters which each ran in the mid to high 26% area, representing more challenging comparisons for the balance of this year. Despite the $1 increase in California minimum wage to $14 an hour in January 2021, our labor and related expenses as a percentage of Company restaurant sales decreased 50 basis points to 34.3% from 34.8%.
This was driven by effective management of variable labor and the favorable impact of comparable restaurant sales growth including 4% menu pricing along with reduced workers’ compensation expense based on favorable underlying trends, partially offset by the impact of the California minimum wage increase. Occupancy and other operating expenses as a percentage of Company restaurant sales decreased by approximately 30 basis points to 24.0% from 24.3% last year. The decrease was due to lower advertising expense, repairs, maintenance and supplies coupled with leverage from the comparable restaurant sales growth mostly offset by an increase in delivery fees as delivery grew to 7% of sales compared to 3.3% last year and the incremental net direct COVID-19 costs.
Looking ahead, we expect our delivery fees to level compared to the prior year and a potential reduction in the incremental direct COVID-19 costs as vaccination rates improve. However, during the second and third quarter, we will lap a muted 2020 advertising expense of approximately 3% compared to our typical advertising spend of approximately 4% of restaurant sales. Restaurant contribution grew 30.6% to $16.6 million compared to $12.7 million in the prior year, while restaurant contribution margin increased approximately 330 basis points to 16.0% from 12.7%. General and administrative expenses were $11.3 million, up from $9.9 million last year and as a percentage of total revenue increased 70 basis points to 9.7%. The increase was primarily driven by increased performance-based management incentive compensations as we lapped a minimal incentive compensation accrual in 2020 due to performance compared to strong performance this year, as well as increased legal fees and non-cash stock-based compensation, partially offset by reduced executive transition costs, and travel expenses.
Adjusted EBITDA grew 33.4% to $11.6 million compared to $8.7 million last year an increased as a percentage of total revenues to 10.1% from 7.9% last year. Depreciation and amortization was $5.9 million down from $6.1 million last year due to the impact of fully depreciated assets and decreased 50 basis points to 5.1% as a percentage of total revenue. Interest expense was $0.7 million compared to $1.5 million last year. The decrease was due to a lower average outstanding revolver balance and lower one-month LIBOR rate compared to 2020.
During the first fiscal quarter, our outstanding revolving credit facility borrowing remained at $115 million, consistent with the end of fiscal year 2020 and the remaining availability under the revolving credit facility was $121.6 million. In addition, at the end of the fiscal first quarter, our balance sheet debt, net of cash to adjusted EBITDA leverage ratio declined to approximately 1.87 times compared to approximately 1.96 times at the end of fiscal 2020. We also repurchased approximately 106,000 shares of common stock and the average price of $8.92 per share during the first quarter for a total of $0.9 million.
At the end of the fiscal first quarter, approximately $17.1 million remained under our $75 million repurchase authorization. Net income was $2.6 million or $0.07 per diluted share compared to a net loss of $102.5 million or $2.76 per diluted share last year. We also reported adjusted net income, which excludes various items identified in our earnings release in the financial tables. Adjusted net income was $2.5 million or approximately $0.07 per diluted share compared to adjusted net loss of $0.3 million or $0.01 per diluted share last year. We also announced our second quarterly dividend of $0.04 per share of common stock that will be paid on May 27, 2021 to shareholders of record at the close of business on May 13, 2021.
Finally, please refer to today’s earnings press release for our fiscal 2021 guidelines that we furnished last quarter. Our second quarter is off to a great start with strong system-wide sales growth on a same-store basis compared to 2019, which is expected to enable robust second quarter same-store sales performance compared to 2020. As we plan for a second half, we believe increased vaccination rates coupled with our five drivers of acceleration will set us up to maintain our top line momentum as we lap more challenging comparisons due to normalized sales volumes that drove positive low-single-digit company and positive mid-single-digit franchised same-store sales results last year driven by the very successful third quarter 2020 launch of our Crispy Chicken menu.
In addition, following our significant first quarter restaurant contribution margin expansion that was aided by food deflation and lapping a high food percentage in 2020, we are poised a lot more normalized restaurant contribution margins during the second and fourth quarters this year. Recall, however, that last year’s restaurant contribution margin was particularly high. Any questions?
Questions and Answers:
Operator
Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Alex Slagle with Jefferies. Please proceed with your question.
Alex Slagle — Jefferies — Analyst
Thanks. Hey, guys. Thanks for the question. Good to see everything accelerating here. I had a question on development. I know you picked up the pace of conversations with new and existing franchisees about same development agreements. So just curious what these conversations have been like sort of the reaction to the new prototype and the performance of your existing franchise base and if you’ve had any evolution and the composition of those interested parties and maybe their preferences be used to be the buy an old with the strategy, but I just wonder how that’s evolved.
John D. Cappasola — President and Chief Executive Officer
Yeah. Hey, Alex. So first off, definitely continue the same from the last call, which is the combination of the launch of the Fresh Flex prototype, which really creates nice opportunity for any active developer as we think about growing Del Taco that’s definitely a piece of the puzzle as we think about the kind of flexibility need to access, real estate and then also that obviously having the tech integration to be able to meet consumer demand. So really getting a lots of positives on Fresh Flex and feel really great about moving prototype forward.
In addition, as we’ve been trumpeting here for a bit, the eighth consecutive year of positive same-store sales growth on the franchise business has been a big deal and it’s been nice to be able to really kind of actively talk about that, two prospects. And so those are — those are probably the two big things that are going in our favor right now and causing a real influx of conversations do occur, especially in the territories that we’re looking to grow and underserved or under penetrated territories and that obviously culminated to a couple of deals getting signed here recently and there’s many more conversations kind of happening. And how many of those come through to actual deals we’ll see.
But we certainly have momentum in this area. And I’d say in regards to the quality of the candidate. Yeah, we’re seeing a really nice quality candidate coming to the table that wants to grow from restaurant one and doesn’t necessarily want to build, but that or want to buy, but that buy dynamic is still out there and we hear that from time to time, but I’d say right now, we’re here a nice a bit of a mixture on that right now that’s allowing for probably more meaty conversations across the board. So we feel good about the progress we’ve made on that front.
Alex Slagle — Jefferies — Analyst
Great. And then the delivery pricing that you took in the third quarter. I mean, it sounds like, not a whole lot of pushback. Now it’s gone up to 7% of sales, but kind of interested in what the reaction has been. And I mean, I guess, some of that is the price in that mix, but any thoughts on what the reaction has been?
Steven L. Brake — Executive Vice President and Chief Financial Officer
Sure, Alex, it’s Steve. We did take that price increase up to 20% early Q3 last year that followed a lengthy test of that during first half of 2020. And certainly, during that test, we did not sensor detect any notable elasticity, which enable us to make the move and clearly delivery kind of held and since accelerated sequentially as we moved into the New Year. So we feel really good about that pricing level that we’ve enacted, definitely goes a long way towards managing margins. So overall, we feel good about the model that we’ve created. We’re at the point where we’re limiting the impact on margins and we’re getting a similar penny profit dollar will flow-thru on delivery that we see at a restaurant transaction. That flow-thru might be a little smaller on a percent basis but could pressure margins, but really we also believe a good amount of this delivery is incremental, which as you know, creates leverage in other areas of the P&L.
So, overall the strategy, the 20%, we think it really neutralizes any overall restaurant margin pressure and puts us at the point where we’re generally agnostic between a delivery transaction with a much higher check that we continue to see versus something at stores. So we feel good about that.
Alex Slagle — Jefferies — Analyst
Got it. Well, thank you.
Steven L. Brake — Executive Vice President and Chief Financial Officer
You’re welcome.
Operator
Thank you. Our next question comes from the line of Nick Setyan with Wedbush Securities. Please proceed with your question.
Nick Setyan — Wedbush Securities — Analyst
Hey, thank you. And congratulations on some really great results. Great to hear the quarterly trends well. Steve, just given the top line trends, particularly the step up trends in April here on the Company-owned stores. Is there any chance maybe bracket, the low margin guidance a little bit more than modest improvements. It seems like the food cost, inflation guidance is pretty much the same, the marketing expense to the year was already known. Any chance you could help us maybe bracket that a little bit more than modest improvement year-over-year?
Steven L. Brake — Executive Vice President and Chief Financial Officer
Yeah. We certainly feel pretty good about Q2, we’ve seen a more of a normalized outcome. I’m also pointing out that Q4 was more of a normalized margin, the one-year little deviation a year ago, Q3 was very strong came in at 18%, that quarter, each of food, labor and opex ran the lowest all year on a percent basis among the four quarters. So Q3 will certainly be the challenging quarter in terms of margin performance, but feel otherwise particularly good about Q2 on the food line overall, incredible outcome and sub-26 in the first quarter, we mentioned that will move to some slight inflation from deflation as we get into Q2 with second half having more notable modest inflation on the line. So overall, there is a little more color on the food line than labor and opex, those two line items, as we move seasonally out of Q1 that historically has lower AUVs to higher seasonality quarters, certainly those two lines sequentially will lever as we move forward.
And really as we especially think about second half, notably we’re going over a great second half last year, company was up low-single digits. A nice strong 2% in Q3 and franchise also great performance from them as well. The new Crispy Chicken launch kind of what’s really the catalyst that drove some of those sales and notably sales as recovered last year a lot of strong labor and other operating efficiencies were kicking in. So, we had some pretty good performance, second half. So as we look at back half of this year where sales are in terms of magnitude of sales growth is going to heavily inform what that margin looks like in the second half. So it’s a little early to put a finite color on that. We are still ensuring our way out of a pandemic, but feel really good, everything John touched on, the brands, well positioned, we feel great about the sales line, which should lead the comfort on the margin line, but naturally things have to play out and hopefully, that’s a little added color for you.
Nick Setyan — Wedbush Securities — Analyst
And then obviously marketing spend this year should be a lot of ammunition just year-over-year in terms of a normalization, even as we kind of go over second half, any chance you could kind of, even if you don’t tell us the exact number of spending, but at least just directionally, Q2, Q3, Q4 if there is during quarters where marketing is, you may be more concentrated than others.
Steven L. Brake — Executive Vice President and Chief Financial Officer
Where we are right now, overall our model has been deployed 4% in a given fiscal year, notably last year due to some reduction in advertising during the height of the pandemic 2020, we spent 3.7%. So you’re right there will have a 30 basis point headwind on the margin line, just due to that. So notably, when we talk about modest restaurant margin expansion that includes absorbing that 30 bps. So as far as where we sit right now, we spent a little under 4% during the first quarter. In general, the next few quarters will be in that 4% area, likely Q3 will be a bit higher, that’s our toughest sales comparisons. We want to really have a strong advertising deploying in that quarter to help sustain our sales trends and what we’re lapping Q2 and Q3, those were the two quarters were a year ago, we deployed around 3%. So that right there suggests you’re looking at percentage plus of headwind in each of those quarters. And then the fourth quarter probably more level in that kind of 4% area. So that’s a little bit of color on the cadence of our advertising line that is inside operating expense as most of you know.
Nick Setyan — Wedbush Securities — Analyst
Got it. And then just lastly, any chance we could see further price increases on delivery going forward? Just given the trend across the industry seems to be that, there is very little pushback on further increases.
Steven L. Brake — Executive Vice President and Chief Financial Officer
Yeah. Good question. Very topical, top of mind here, we are currently testing 25%. So that test is underway and will lead to a decision down the road here.
Nick Setyan — Wedbush Securities — Analyst
Thank you.
Steven L. Brake — Executive Vice President and Chief Financial Officer
You’re welcome.
Operator
Thank you. Our next question comes from the line of Joshua Long with Piper Sandler. Please proceed with your question.
Joshua Long — Piper Sandler — Analyst
Great. Thank you for taking my question. I wanted to follow up on that last point on the testing of the 25% menu price and then some of your earlier comments, Steve, in terms of being able to mitigate some of that margin pressure with the 20% increase and maybe really just summarizing question, this 25% really get you to where you’re fully agnostic to that just narrow that gap a little bit more. Just trying to get a sense of where we are in that ultimate long run potential of being truly agnostic, between in-store and delivery.
Steven L. Brake — Executive Vice President and Chief Financial Officer
I would say, due to the 1.85 time area average elevated check, we’re seeing on delivery with today’s 20% premium, the dollar flow-thru delivery transaction truly is lined up with what we see at the restaurant on a more normalized check average. So we’re kind of already there. So I mentioned that on a margin percent basis, maybe a slight drag, but if we need to prove that and move to 25%, I would say we’re clearly agnostic, certainly on the dollar flow-thru line item and even on the margin point where we might even be agnostic skewing towards, very much final delivery. It’s definitely a proven meaningful channel, that’s not going to change.
So naturally, our view is to continue to nurture that. And goes back to ultimate convenience, the — making sure the guests can use this, how when and where they want to use this. So that will remain core to our strategy.
Joshua Long — Piper Sandler — Analyst
Understood. Very helpful color there. Thank you for that and then thinking back to maybe jump coming from the geographic story and how this is playing out. We’ve been talking about this for a while, so they definitely makes sense, but I was curious, we can dig deeper into understanding from the consumer behavior, but beneath that trend. When you think about or look at the transaction data and think about your consumers in those various markets, are they acting differently above and beyond just the restrictions and maybe the changes in kind of behavioral patterns in terms of going to the office or having area restrictions in terms of day times? Anything else you can glean in terms of how the consumer is using and engaging with your concept across those various geographies? That’s worth noting.
John D. Cappasola — President and Chief Executive Officer
Yeah, sure, I think, first off, I think the good news on this is that, those three counties that we’ve been highlighting for a few calls now, LA, Orange and Clark could have really lagged relative to the other company markets, which have all generally been positive. Good news is, we’re starting to see — we’re starting to see some positive trends in those markets from a perspective, they’re moving in the right direction, right, they’re progressing, so, although they’re not all, where we want them to be just yet. We definitely see that a combination of kind of factors are happening, when you look at a couple of the markets, I think it’s LA, LA County and Clark. In particular, they had significant unemployment headwinds as well relative to national trends and what we are seeing. So good news is some of those trends have started to improve with progress over the last few periods, Josh. So we think that will help those particular counties as unemployment kind of normalizes there a bit more. And then the other dynamic you kind of hit the nail on the head, which is, a few of these counties, Orange County is a great example, lots of inflow into Orange County from other counties for daytime employment.
And many more kind of white-collar jobs in Orange County more office buildings, things of that nature that have been very virtual as we all know. So as some of that starts to come back, we expect a county like Orange to start to normalize a bit more relative to the type of occasions that we serve during the day. So those are — those are some of the, some of the things relative to those three counties. I think Steve and I sit here today, we feel pretty good about the fact that they’re moving in the right directions, they’re not exactly where we want them, but over time, we do believe that we’ll get back to more normalized behavior in those counties which will certainly help the company trend, because as we’ve noted, it’s a high concentration of Company stores coming out of those counties.
Joshua Long — Piper Sandler — Analyst
Understood. Thank you for that. My last question was circling back to your comments around the labor approach and how you are both working bottoms up and then kind of widening your funnel and curious to understand more about that and what you’ve learned to date or what maybe some of the early wins have been in terms of really being able to try to maybe outmaneuver some of that, I would call labor shortage, but some of the pressure just on really refilling that or building that human capital pipeline, which is a crucial piece to both the brand and your historical successes.
John D. Cappasola — President and Chief Executive Officer
Yeah, let me give you more color on that. So on a system-wide basis, on a national basis for us, for Del Taco, we’ve definitely seen applicant flow slowed down. Right. So that’s — that’s an early indicator. That’s an important one to recognize, but turnover has been very stable in Q1, and so far in Q2. And then, when you look at the operations, further, but you’re seeing the fact that there hasn’t been a major impact on our business just yet. As I noted on the call, our operating guest metrics have been stable and improving. You heard that guest OSAT increased by 3.6% in Q1 and then lunch drive-thru speed was better by 3%. So, it’s safe to say that our system-wide same-store sales are not being material — materially impacted at this point.
However, there are pockets of stores being effective and the big key here is, we need to stay ahead of the applicant flow and stay focused on maintaining strong staffing levels system-wide, so this doesn’t become a problem for Del Taco. And that’s what — what we’re doing, I mean that’s — my comments on best practice sharing, we’re dealing that with franchise owners. We’re dealing that with our operators. And then we’ve got addition — the addition of new recruiting tactics including an enhanced employee referral program that we’re rolling out and then in our franchisees decided to do that as well. So it’s both company and some franchise momentum in that. We’ve also got new and improved restaurant signage that has gone up, that includes starting wage in the stores that really need to kind of talk about that and make that top of mind for consumers coming in, because sometimes those best consumers can turn into your best employees and then we’ve got some new instant interview, a new instant interview process to quickly connect with potential applicants. So that’s about speed, just getting them through the application very quickly and hired very quickly. So we don’t miss the opportunity. So, again not a issue that we’re seeing in regards to business performance right now, but definitely some early indicators in regards to applicant flow that we are trying to stay ahead of.
Joshua Long — Piper Sandler — Analyst
Understood. And then just one point of clarification on that. Are these relatively new initiatives here, say 2021, our first quarter have we been — have you been layering in some of these over time, just trying to get a sense of the timing of these pieces.
John D. Cappasola — President and Chief Executive Officer
Combination, there are some that we’re layering in and there are some that we’re just reinforcing, refreshing, if you will.
Joshua Long — Piper Sandler — Analyst
Got it. Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Todd Brooks with C.L. King & Associates. Please proceed with your question.
Todd Brooks — C.L. King & Associates — Analyst
Hey, thanks and congratulations on the great momentum we’re seeing in the business really great to see.
John D. Cappasola — President and Chief Executive Officer
Thanks, Todd.
Steven L. Brake — Executive Vice President and Chief Financial Officer
Thanks, Todd.
Todd Brooks — C.L. King & Associates — Analyst
You’re welcome. If we can talk first about kind of that pipeline of active discussions on the potential franchisee partner side, two announced deals nice size in the Southeast, obviously, you said multi-branded other QSR operators. So it seems like the type of franchisees that you want to be bringing into the — the fall. If you look at the pipeline of discussions are they skewing to the Southeast just from the development opportunity where I think you think that could be a couple of 100 store market. Or what’s the breadth of where you’re seeing kind of that best most intense level of franchisee interest?
John D. Cappasola — President and Chief Executive Officer
Yeah, it’s really over the breadth of our operating geographies and some new territories that folks are interested in. I mean the reality is, you’ve got a lot of underpenetrated markets in the western third where we currently operate in and we’re seeing interest there and also seeing existing franchisees really excited about Fresh Flex. And then obviously the Southeast has been a priority market for us and we’ve been doing a lot of work down there to grow our presence. So good news there is both of these deals obviously are in the Southeast and there is more conversations happening in the Southeast, because of the presence and how the brand is building down there. I think that gives, it gives folks more confidence in regards to the brand’s ability to perform and that causes more material conversations to happen. So that’s certainly happened in the Southeast. And then we’re getting approached from a new market perspective, folks that want to go in, in greenfield, the new market that they feel like they can be first mover in. And so there’s a few of those conversations happening, Todd. So definitely the Southeast is a priority and we’re all over the Southeast, but there — there is more conversations going on right now than just the Southeast.
Todd Brooks — C.L. King & Associates — Analyst
That’s helpful. Thanks, John. Second kind of following up on some of Josh’s questions about labor. If you look at the way that you characterized that it’s not a constraint yet, but the front end of the pipeline is slow, so you want to bolster the applicant pipeline. If you look at areas of the business, they’re coming back and I’m thinking specifically graveyard. Is the labor pinch being felt with staffing that daypart or maybe reopening that daypart, and some of the units, because you’re having challenges staffing up for that. Is that an opportunity, once we get over this staffing challenge for even better same-store sales results. So, what you’re reporting now?
John D. Cappasola — President and Chief Executive Officer
Yeah. So we’re not seeing that just yet outside of just a few obviously a few restaurants that are those pockets of opportunities that we’re seeing and I’m sure many other brands are seeing. So just — just not yet in regards to the trends now hours of operations have been a piece of the shoulder dayparts for us over the last year or so. As you recall we’ve — we’ve pulled some hours here and there, to optimize profitability. And we’re not fully back to pre-COVID level hours of operations across the system just yet. Although we’re building our way back there. So, and that’s part of the tailwind that we’re seeing at late night and certainly part of some of what we may see at breakfast over time here over the coming quarters. It’s not material enough to have affected our Q1 same-store sales, but it obviously the daypart in a vacuum from a percentage standpoint is going to help the daypart as you have more hours of operation.
So I think the balance that we’re striking right now is where we have those issues are probably not adding those hours back just quite as quickly, which is in a lot of restaurants and in a lot of markets just yet. And in the other markets where restaurants — where we’re not having the issue quite as bad on the staffing front, we’re probably still not quite where we were pretty COVID in regards hours of operation. So it’s a balancing act that we’re playing right now, in regards to the staffing and dayparts. But like I said, the key for us right now across the system is staying very focused on this applicant funnel and staying ahead of the game here, I mean we expect to have a few issues here and there, but we do not expect for this to be a system-wide brand issue because we are actively and vigorously managing it.
Todd Brooks — C.L. King & Associates — Analyst
That’s very helpful. Thank you. And then final one from me, you talked, I believe is on the last conference call about the possibility of a couple of new platforms product platforms, this year, you just talked about breakfast with the late summer launch timing it for kind of an early fall hopefully return to office type of scenario with the rebound that you’re seeing in graveyard currently, would that support pivoting that way from a platform of product news standpoint or does it recovering on its own actually gets you to pivot towards more of the core dayparts as far as a potential new platform.
John D. Cappasola — President and Chief Executive Officer
Yeah, let me platforms are going to continue to be only just hit that first product platforms in particular are going to continue to be something that we — will actively be developing against and innovating against in every year you’ll likely see us deploy some level of product platform to keep our news fresh and interesting. And then obviously developing products against those platforms are really key as well. So excited about what’s happening with Brexit. I think we’ve got a great platform to deploy that represents value in mid-tier, really well and consumers going to love it. And we’ll see what it does for the daypart. Some of that is definitely macro, but we do expect to start to see more normalized behavior, especially as we move into the fall. So we’re anticipating that we want to try to get ahead of that with some new products and some new exciting news from Del Taco at that daypart.
In regards to late-night, our late-night and graveyard business have really been heavily influenced by the delivery channel both over index from percent of sales perspective compared to other dayparts. So as you heard, we’re running higher so far this year, this year from a delivery perspective, both quarter to quarter. Q4 to Q1, as well as year-on-year. So that extra momentum we’re feeling and delivery with that over indexing that’s happening with graveyard and really late-night behavior is definitely translating into those into those later daypart. So it feels like Todd to me that the good play right now are the right play right now for us given that we’re seeing that kind of momentum is to continue to harness delivery continue to leverage the fact that maybe more folks are out and about again with more normalized evening activity that will continue to build. We believe through the summer and we probably don’t need to go the route of a product platform just yet at late night just really operate well, do delivery well and make sure we take advantage of the added traffic that may be in the marketplace in the evening over the summer. So that’s how we’re thinking about it right now.
Todd Brooks — C.L. King & Associates — Analyst
That’s very helpful. Thanks, John.
Operator
[Operator Closing Remarks]