El Pollo Loco Holdings Inc (LOCO) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Please note that this conference is being recorded today March 9, 2017.

On this call today we have Steve Sather, President and Chief Executive Officer of El Pollo Loco, and Larry Roberts, Chief Financial Officer. I would now like to turn the conference over to Larry Roberts.

Thank you, operator, and good afternoon. By now everyone should have access to our fourth-quarter 2016 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 more a detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10-K for 2016 tomorrow and we encourage you to review that document at your earliest convenience.

During today's call we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation, or as a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release.

With that, I'd like to turn the call over to Steve Sather.

Thanks, Larry, and good afternoon, everyone. We appreciate your joining us on the call today.

Fourth-quarter results included revenue growth of 7.2% and pro forma net income of $0.12 per share. System-wide comparable-store sales decreased 1.3% during the quarter, including a 60 basis point decrease at Company-operated restaurants and a 1.9% decrease at franchise restaurants. In line with what we've heard from many of our peers, comparable-store sales growth slowed through the fourth quarter and the softness has persisted this year.

The softness is at least partially due to the heavy rains that we've had here in Southern California this winter, the impact of which we estimate to be 1% to 1.5% thus far in the first quarter. While we're not satisfied with these results, we remain committed to enhancing our value equation, which is comprised of great food, excellent service and a warm and inviting atmosphere, all at a good price.

A major focus in 2017 is to clearly communicate our differentiation from other QSR and fast casual concepts, as well as to enhance convenience and loyalty. At El Pollo Loco, our differentiation starts with the food and our heritage. More specifically, it starts with our authentic signature flame-grilled, citrus-marinated chicken, which is crafted by our talented grill masters in our open kitchen, or as I like to call it, the theater of chicken. Our grill masters, many of whom have been with the Company for 20-plus years, are the key to producing our differentiated, cravable, Mexican inspired menu, which is why we highlighted one of our best in our most recent ad campaign.

Pedro Lopez mastered the art of grilling our signature chicken at our original Alvarado Street location, where he dedicated himself to serving guests for the past 32 years. Stories like Pedro's are at the heart of our new ad campaign, the Road to Authenticity, created with our new partner Vitro. The creative campaign, which we launched in January, will evolve over time to highlight our differentiated brand story, the work that goes on in preparing our food, the relative healthiness of our offerings in the authentic influence of our hometown, Los Angeles.

Our focus on driving convenience and loyalty began in the fourth quarter as we rolled out our mobile ordering system, providing yet another convenient way for guests to enjoy their favorite El Pollo Loco meals. We partnered with Olo to develop the ordering system, which includes a mobile app. The app features a full array of capabilities such as customizable ordering, a full menu, multiple payment options and flexible pickup time selection.

As we previously highlighted, the app is the foundation for further technology innovation that we will drive convenience and loyalty. Working with Olo, we expect to begin testing third-party delivery during the first quarter with a rollout currently planned for the second quarter. In addition, we are working with Punch on a loyalty program, which is expected to launch in the second quarter. We believe that our technology innovations will continue to augment convenience and loyalty for our customers, thus driving sales and enhancing our value proposition.

On a more tactical level, we are very focused on addressing the decline in our family meal business that we experienced throughout 2016. Our analysis indicates that for many of our customers, a non-price-pointed three-course family meal is not a compelling value offering. In response, we are developing a number of promotions that will deliver great value to our customers while maintaining, or even improving, margins.

The first of these, the $20 family choice meal, was promoted in January and was very successful in increasing our family meal mix. This gives us added confidence that we can continue to design promotions that deliver compelling value at attractive food costs.

Turning now to development, during the fourth quarter we opened eight new Company-operated restaurants. Additionally, franchisees opened seven new restaurants. Subsequent to the end of the fourth quarter, we have opened an additional five Company restaurants and franchisees have opened three more restaurants.

We currently expect to open 15 to 20 new Company-operated restaurants this year and 8 to 12 new franchise restaurants. We are now using our new development model and are excited about the enhanced analytical capability it provides to identify great sites for new Company and franchise restaurants. On the franchise side, we continue to seek high-quality franchisees to develop both existing and new markets.

As we have discussed, our restaurants in the Houston market are underperforming relative to our expectations. Last December we began a test which we implemented a number of marketing and operational initiatives at three restaurants. These initiatives were designed to communicate our concept, create a connection with consumers, and build awareness by driving trial and repeat visits.

While it's still very early and sales at these restaurants remain below targeted levels, we have seen recent sales improvement and have started to implement that more successful tactics at our other restaurants in Houston. In addition, we have partnered with Ipsos to perform additional customer research in the Houston market. Recommendations from this research will help us better focus our efforts and attract customers and drive sales.

Just as important as our marketing efforts is our focus on continuing to improve our operations. To this end, we have recently relocated several of our best operators to Texas. This will ensure that customers receive great food and service when they visit our restaurants, which is critical to driving frequency and word-of-mouth advertising.

Our newest market, Dallas, now has 10 restaurants in operation, including 3 franchise restaurants. While it's still early, the results are essentially in line with expectations. Together with our franchise partner, we expect to open an additional four to six restaurants in the Dallas-Fort Worth area this year.

Lastly, I'd like to touch on our vision prototype, which we feel better showcases our authentic brand identity and QSR-plus positioning and enhances the environment part of our value equation. All 10 of our Dallas-Fort Worth locations have opened with a new design, and we have completed for remodels in California.

Feedback has been very favorable and we will continue to closely monitor the reception of the design along with the associated sales lift. We currently have plans for four more remodels in California during the first half of the year and an additional seven by the end of the year, including several in Las Vegas.

Additionally, and while not required to do so, we have several franchisees committed to completing vision remodels during 2017. Our team is working hard to value engineer the vision prototype for both remodels as well as for new builds. Going forward, all new Company-operated restaurants which have not yet begun the permitting process will open with a vision design, including substantially all of our openings this year.

With that, I'd like to turn the call over to Larry, who will go over our fourth-quarter results and 2017 guidance in detail. Larry?

Thanks, Steve. For the fourth quarter ended December 28, 2016, total revenue increased 7.2% to $92.5 million from $86.3 million in the fourth quarter of 2016. The growth was largely the result of increase in Company-operated restaurant sales, which rose 7.1% in the quarter to $86.5 million.

This increase in Company-operated restaurant sales was driven by the contribution from the 29 new restaurants opened during, and subsequent to, the fourth quarter of 2015, partially offset by a 0.6% decrease in comparable restaurant sales. The decrease in Company-operated Company restaurant sales was comprised of a 60-basis point decrease in transaction and a flat average check. Franchise revenue increased 7.8% in the quarter to $6 million, $5.6 million in the fourth quarter of 2015. This increase was driven by the contribution from 16 new restaurants opened during, and subsequent to, the fourth quarter of 2015, partially offset by comparable restaurant sales decline of 1.9%.

Turning to expenses, food and paper cost as a percentage of Company restaurant sales decreased 80 basis points year over year to 30.6%. The improvement was predominantly due to lower commodity cost, particularly lower contracted chicken prices and freight costs. Looking ahead, we have locked in our chicken needs for the year and expect commodity deflation of about 2% for 2017.

Labor and related expenses as a percentage of Company restaurant sales increased 220 basis points year over year to 27.9%. The increase in labor expenses was driven by higher wage rates, reflecting the impact of California minimum wage increases and increased labor cost resulting from new restaurants opened in 2015 and 2016. For 2017, we expect labor inflation of about 4% as a result of minimum wage laws and tighter labor markets.

Occupancy and other operating expenses as a percentage of Company restaurant sales increased 160 basis points year over year to 23%. The increase was primarily due to rent expense and property taxes on new and renewed restaurant leases and the incremental cost related to opening new restaurants in the fourth quarter 2015 and 2016.

General and administrative expenses increased by approximately $94,000 year over year in the fourth quarter to $8.9 million. As a percentage of total revenue, G&A expenses decreased 60 basis points to 9.6%. G&A expense in the fourth quarter of 2016 included $369,000 in legal costs related to the securities class action litigation as compared to $993,000 of securities litigation costs in the fourth quarter of 2015.

Excluding the costs associated with the securities litigation in both periods, G&A expenses in the fourth quarter of 2016 increased approximately $718,000 year over year and 20 basis points higher as a percentage of total revenue. This increase resulted primarily from higher stock option and legal expenses, partially offset by a reduction in our bonus accrual.

Depreciation and amortization expense increased to $4.3 million from $3.5 million in the fourth quarter of last year. As a percentage of total revenue, depreciation and amortization increased 60 basis points year over year. The increase was primarily driven by our new store development.

During the quarter we recorded a $5.9 million expense related to the full impairment of the asset of three restaurants, two in Texas and one in California, as well as a partial impairment of another four restaurants. As is our policy, we continued to monitor the recoverability of the carrying value of our assets on a quarterly basis. Subsequent to the end of our FY16, we have close two restaurants during the first quarter of 2017, one in Arizona and the other in Texas.

Prior to our IPO, we entered into a tax receivable agreement that calls for us to pay our pre-IPO shareholders 85% of the tax savings realized as a result of utilizing our pre-IPO net operating losses and other tax attributes. We recorded a provision for income taxes of $853,000 in the fourth quarter of 2016, reflecting an estimated effective tax rate of 67.1%. This compares to a provision for income taxes of $4.6 million in the prior-year fourth quarter. We reported GAAP net income of $418,000, or $0.01 per diluted share, in the fourth quarter, compared to a net income of $5.4 million, or $0.14 per diluted share, in the year-ago period.

In addition to our GAAP net income, we have calculated pro forma results adjusting for one time or unusual items. To arrive at pro forma income, we have made adjustments for expenses associated with the tax receivable agreement, gains or losses on disposable assets, asset impairment, and store closure costs and legal expenses associated with a securities class action lawsuit. We have added back provision for income taxes and have applied a 40% income tax rate.

Included in our earnings release is a reconciliation of our GAAP results to our pro forma results. We believe that the pro forma results provide a useful view of our business and cost structure. Accordingly, pro forma net income for the quarter was $4.6 million, as compared to $6 million in the fourth quarter of last year. Pro forma diluted earnings per share were $0.12 for the fourth quarter of 2016 compared to $0.15 in the prior-year period.

In terms of liquidity and balance sheet, we had $2.2 million in cash and equivalents as of December 28, 2016, and $104.5 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. Looking ahead to 2017, we expect capital expenditures to total $40 million to $45 million for the full year.

Turning to our 2017 guidance, we expect diluted net income per share of $0.65 to $0.69. This compares to pro forma diluted net income per share of $0.66 in 2016. Our pro forma net income guide for 2017 is based in part on the following annual assumptions.

We expect system-wide comparable restaurant sales growth to be approximately flat to 2%, which includes first-quarter comparable restaurant sales of negative 1% to negative 2%, reflecting the weather impact highlighted by Steve earlier. We expect to open 15 to 20 new Company-owned restaurants and expect our franchisees to open 8 to 12 new restaurants.

We expect restaurant contribution margin of between 20.4 % and 20.8%. We expect G&A expenses of between 8.5 % and 8.7% of total revenue, which assumes that legal expenses related to securities class action litigation will be minimal. We expect adjusted EBITDA of between $67 million and $70 million and we are using a pro forma income tax rate of 39.5%, which reflects our successful program to obtain Wasi credits.

Now I will turn the call back over to Steve for closing remarks.

Thanks, Larry. We continue to steer through this challenging environment by focusing on what matters most to our guest, the value equation. By value I don't mean just price, but rather the food, service and environment that you get for the price. Initiatives such as our recent mobile and online ordering app, our new learning management system, our up-to-date vision design, and are authentic advertising campaign, highlighting our high-quality food, are all aimed at increasing the value equation, thereby strengthening our brand and driving financial results.

We remain committed to the Texas market and are working hard to drive improved brand awareness, sales and profitability in Houston. We're on track with our 2017 development plans, and we will continue to partner with high-quality franchisees to build our pipeline for the future.

On a more personal note, as you may have seen earlier today, I have informed the Board of my intention to retire by the end of this year, subject to the Board finding a suitable replacement. Over the last 40-plus years, I have been beyond fortunate to earn a living in this great industry, including the last 11 spent leading this special brand and team in multiple capacities. I'm very proud of what we have accomplished in my time here.

However, while I have my health, I have decided I would like to spend more time with my wife and family while also pursuing personal interests. As I've said repeatedly, El Pollo Loco continues to have tremendous opportunity of growth ahead of it, and I intend to do everything I can to help ensure that the brand reaches its full potential.

Again, I'd like to thank you for joining us on the call today. Now we would be happy to answer any questions that you might have. Operator?

(Operator Instructions)

Jake Bartlett, SunTrust.

Great. Thanks for taking the question. My first question is about this earning season, especially some of the late reporters have talked about a real deceleration in February, partly weather for California, but also related to tax refund delays. You haven't mentioned that, so I'm wondering whether you think it's impacting you and also whether you can help us understand just the cadence of same-store sales as you've experienced in the first quarter so far, January versus February and then more recent trends.

This is Steve. We certainly are aware of some of the issues that everyone has pointed out. We did have weather impact in Q1. We actually think that's going to be about a 1% to 1.5% in Q1 this year and that's why, as we mentioned on the call, we think we will be 1% to 2% negative in Q1.

So we think that. We also -- other things like the tax refund impact, we've heard that. We've heard that it rebounded towards the end of February when the actual refunds came out a little bit. It's very hard to pinpoint that. But the weather certainly here in Southern California, where we have a predominance of stores, has affected us in Q1. Larry?

I'll just add, you asked the question around the cadence during the quarter. It's very difficult to judge for us the cadence during the quarter just because of the weather impact and what we have seen is a lot of volatility based on that weather. It's been very up and down. Recently we've had a string of good weather days so we have seen a pop back up.

That could also relate to the tax refunds. It's very difficult to measure a cadence just given the variability in the weather and whenever it hits we see a drop off and it rebounds when we get good weather. So I really can't talk too much about whether we really see a trend line or a real cadence during the quarter yet.

The weather, my impression was it was more of a February event, but you are saying it's been pretty continual in February -- or in January and February.

It's been more probably late January and February, but certainly there was weather impact in January also.

Okay. On the unit targets, it looks like the franchise target for 2017 is a little lower than where you came out in 2016. Any reason for that or are there any markets that are slowing down or any commentary around the development targets?

This is Steve. No particular market. Most of our -- we have our Texas development, which about half of the Company will be -- development will be in Texas. The franchisee continues to develop in Dallas and in Houston there, as well as down in the Rio Grande Valley. But there is no -- if you look on the franchise side, Utah is still developing, Southern California some development here. Not really.

The only thing I'd add to that is, what you're seeing is relatively flat development. That reflects, as we have consistently said, that in order to really ramp up development we need to get new franchisees in the system, especially in newer markets. We have brought some new people, but it's going to take them a little while to get geared up and start developing and so right now, when we look at 2017, that's why we're calling for relatively flat development.

Okay. It looks like there was a closure in the fourth quarter. If I am right about that, where is that closure in the franchise side?

We are checking on that.

It could've been the WKS in Dunlap. Watsonville, California. (Multiple speakers)

Okay. Thank you very much.

Thanks.

Matthew Difrisco, Guggenheim Securities.

Thank you. You mentioned in the prepared remarks a little bit about the family value. I wondered if you could talk specifically about maybe give us some numbers that you thought as far as the bundle, the $20 family bundle, how that worked as a percentage of sales potentially or did that index to where you thought it would or was it a little bit under indexed?

We were very pleased with the -- in module one, as we mentioned, we ran the family choice meal, which included eight pieces of chicken, two sides, and the consumers choice of a family-sized soup or salad and that ran about 8% of the chicken -- or 8% of our mix, which was very strong. We think that $20 price point is very key on these family meals and you will see that emphasized throughout this year. We are currently offering another family program that's two additional sides with any family meal for $3 and we are seeing a good performance on that, but we like the $20, the price point on that as well. You will see those testing in and out this year.

In general has the family ordering on a proportion basis on a year over year, can you give us some context to that? Are these drivers to it and expanding it as a share of the menu or are you still in recoup mode and trying to get back to -- were you at higher levels historically in years past?

With this offering, we saw a nice jump up in our family meal mix. We were back up around 29% or so versus we were running around 27% last year. So that increase we saw in the family meal itself, which was a jump somewhere about 6% up to 8%, corresponded to an increase in the overall family meal mix.

The reason why we reengineered these, it's also improved our margins on those because they're a different offering than our prior three course family meal.

Great. If you look at the flat check, can you just give us the composites? I'm sorry if I missed that. Did you say what the menu price increase was in there?

Menu price increases about 1.5%, which leads you to a mix of negative 1.5%, really driven by the fall off in the family meal mix that we saw in the fourth quarter, but really saw all of last year and saw more of it in the fourth quarter.

Okay, but you were up year over year, 29% in family meals versus 27% in the fourth quarter?

No. (Multiple speakers) first quarter this year.

Okay. I'm sorry.

(Multiple speakers) we were down in family meals.

Got it. So you can say that then you have corrected -- you are addressing the issue and it seems to be responding.

So far, so good. Yes.

Excellent. My last question, if we were to look at the margins and the amount of deleverage you did just incur with only a slight miss on the comp number, is this is a scenario still though where maybe labor -- obviously, rain you cannot predict so well, so if the sales were more consistent in a trend basis you that would've been able to manage these margins? I'm just trying to get to was there some surprise in the volatility driven by weather causing the weakness in the comp that might of exasperated some deleverage on the labor line and just trying to get a better handle on how much labor opportunity there could be in a better comp environment longer term.

Looking at the fourth quarter, just to reflect, if I look year on year, Q4 last year about 21.7% restaurant offering profit. 2016 came in at 18.5%. The biggest driver of that was our 2015 and 2016 builds, which I've highlighted previously. That was about a 230 basis point drag on overall margins. If I look at labor, it was down about 1.5 percentage points. You certainly had the combination of the minimum wage and other wage inflation, exacerbated by the fact that you had negative comps.

The comps we haven't gone through and figure how much of the negative comp impacted that, but certainly those are the numbers that I have to go through and calculate how much negative comps drove that negative 1.5% labor shortfall, but again, you had the wage inflation with negative comps. That combination was about 1.5 percentage points of labor deleverage.

Right, but in your guidance for 1Q, though, also I'm assuming that there's some conservative guidance in there because of the weather, very hard to manage the labor margins in this current quarter so that is incorporated in your guidance as well?

Yes.

Okay, excellent. Thank you guys.

David Tarantino, Robert W Baird.

Good afternoon. I have a couple questions. First on the impairments, can you provide a little bit more detail on the locations that were impaired? You gave us two were in Texas, one in California. Can you just talk about where the other four were and the characteristics of the restaurants that you are impairing? Is there anything to be learned on what didn't meet your expectations on those?

David, the other four restaurants that had partial impairment, three were in Houston and one was Los Angeles. The one in Los Angeles was a very old unit so there wasn't much of a impact from that one. I'll let Steve talk more about the outlook on use overall. I will focus on the accounting side.

As we've highlighted, we do the quarterly impairment reviews every quarter. We actually start looking at restaurants and measuring whether we should impair them or not after about a year of being open. We ran these through the models, and just from an accounting standpoint and ignoring the use-to-market situation. Again, Steve will talk to that.

We just decided that these restaurants, from our accounting perspective and based on our accounting guidelines, that we should go ahead and impair a couple of them full impairment and then, like I said, three other restaurants that have partial impairment in the quarter.

David, on Houston, and as we talked on the call and mentioned last call, we are not happy with our current sales there. They are underperforming our expectations. But during December, January and February of this year actually we initiated tests there to improve sales, and with a number of different elements and tactics to drive the sales. Some of these we think are very -- have seen they're successful and we've expanded those now to the other stores in Houston and used them in Dallas as well and some of these where we use street teams to go around the stores, focus on businesses, talk about our catering, educate people with menus about El Pollo Loco.

Ed and his team tested different coupon drops and FSI drops. We also added radio advertising now that we're utilizing there, and greater community involvement, too. We are doing fundraisers there. We have seen those, while not bringing them to where we want initially, we have seen tangible improvement in those store sales. We've also focused on our operations in Houston and just made sure because that's ever so important that they have a great experience there, and we've relocated several of our Top Management people there as well.

Finally, we are just starting to conduct research with Ipsos consumer research. What we will do there is we'll do a deep dive into the consumer experience at the restaurants and really continue to understand to the market. Again, we use some of these elements in Dallas. Dallas is -- it's still early in Dallas, but they are performing in line with our expectations, so a little bit different market in the Dallas market.

That's very helpful, Steve, thank you. Just following up on this, is there any way you could dimension where the locations are in Houston in terms of volumes versus where you need them to be to earn the cost of capital or to meet your hurdle rates? Anything you could offer there. Are they at 70% of what you wanted, or 80%, 90%, anything in that thinking that you could share with us?

We normally haven't given details like that. David, all I would say is obviously for a restaurant to fail the impairment test, the volumes are -- we originally set a target of [28] was the target in Houston. They are fairly far below that at this time. Again, we still feel like we will be able to drive sales in those restaurants, but at this time, using our accounting guidelines, we just said they are far enough below that we feel like we should impair them.

Last question on this front is, some of the efforts sound like they're getting some traction early. Is there a lot of investment that you've baked into your guidance in Houston or is it measurable as you think about the impact on the earnings for this year?

No. Really, David, the only incremental investment in Houston/Dallas, similar to last year, is about $300,000 of incremental marketing spend over and above the 5% marketing contribution. Most of the things we're doing there are not super high cost. A lot of it is more FSI drops and those type of things which are part of our normal advertising budget. The street teams are little bit incremental but even that going forward will be covered in our advertising budget. So not a lot of this is actually incremental over and above the 5% plus the $300,000.

Great. Thank you very much.

(Operator Instructions)

John Glass, Morgan Stanley.

Hi, guys. This is Chris on for John. Wanted to get your sense of how you're thinking about the comp gap between the Company and franchise stores in 2017. I know the gap had been narrowing over the course of 2016, but given that Company comps flipped to better than franchise comps this quarter, wanted to get your sense about that gap in 2017 and whether you think that it's going to start pointing towards historical norms. It's been a couple hundred Bps difference. Any sense there would be great.

Chris, this is Steve. The franchisees have been a little bit more aggressive on taking price this year and that's impacted their transaction growth, so that's where you've seen that Company start to perform stronger. The balance of this year I would say it'll probably pretty close.

What you are highlighting is, last year as we saw that gap between our pricing and franchisees pricing, you start seeing a change in transactions that have built during the year. That's one reason why you see in Q4 Company-comp sales outperform franchise comp-sales. Going into 2017 right now, what we are assuming is they'll roughly be on par with each other.

Again, we don't yet see entirely what franchisees are doing around pricing. They will be a little more reserved and they were, say, last year. I could be wrong. But right now we think it will be basically comp sales for Company and franchise sales will roughly be in line with each other.

We focus very much on what we call that value equation and working with our franchisees to clearly understand that. There's not just price, it's the food, service, environment over the price and all of that is really that value equation. Especially with our focus on the $20 family meal, that the franchisees have recognized the importance of that.

Okay, thanks. That's helpful. With regard to pricing, or your pricing in 2017, I apologize if you gave that already. What are you baking into the guidance?

About 1.5% price for the year.

Okay. Thank you.

We're currently at the 1.5% and in the spring we have a potential to go up there. Normally, we do something in the late fall, but we will analyze those very closely because we want to maintain that value equation.

Just to make sure the pricing we're contemplating in the spring will basically be in line with what we took last year to maintain that 1.5% price increase. We feel like we want to be a little bit cautious and not get too aggressive on price just given the competitive environment.

Got it. Thank you.

Sharon Zackfia, William Blair.

Good afternoon. It's Matt Curtis on for Sharon. Just going back to your previous question on the restaurant level margin guidance, I still don't quite see how the guidance calls for restaurant level margins to stay roughly flat on a flat-to-2% comp this year when if you look at last year you were down over 100 basis points on margins when you had a similar comp.

Let me kind of walk you through our thinking on the margin piece. First of all, whereas last year we saw a pretty big drop as a result of 2015 and 2016 builds, I don't expect to see as much of a negative in 2017, just because I expect 2015 maybe to be slightly accretive to margins and 2016 maybe slightly negative as they come online this year but nothing like the magnitude we saw last year. Probably more importantly, when you look at the pricing we're taking and the overall calendar, we will look at maintaining our food costs based on promotional calendar in line with last year.

Then we're also going to get some food cost upside from our lower commodity cost. We're expecting deflation of somewhere around 2%, maybe even a little north of 2%. Those, when you combine all that, will offset the labor inflation we expect to see in our business. So that's why we feel like our margin [wise] will be somewhere around flat.

Okay. That helps. On the impairments and closures, on the closures, could you explain what the P&L impact is from those store closures, either in terms of revenue or APS?

I would say in terms of margins, I know it's about 0.02 improvement in margin. If I look at overall restaurant operating profit is as much as about $1 million.

Okay.

That's pretax.

Okay. Got it. Thank you.

Jake Bartlett, SunTrust.

Great, thanks. Just following up on the questions about the margins, I'm trying to understand COGS. I know your guidance had been about 4% deflation in 2016. What did you experience in 2016 for deflation? Why didn't you get more of a benefit in the fourth quarter? It looks like it would imply much lower deflation in the fourth quarter.

What it was is, we have overall deflation for the year. It was north of 4%, more in the range of 4.5%. This came up in a previous call actually, is our expectation in the fourth quarter was we'd see a little bit less of that just because some of the laps actually came through in the fourth quarter, so some of the upside that we had in the first three quarters we did not get in the fourth quarter because we were already had that -- we were lapping that (inaudible) Q4 of the previous year.

We always thought fourth-quarter deflation would be a little bit lower and then we also, from a calendar perspective, I believe the promotional calendar was a little bit more expensive in the fourth quarter. Combined, those resulted in a lower COGS improvement versus the previous quarters.

So you're saying that in 2017 you're not going to have any impact from the calendar, it's more of a pure math on menu price and deflation?

Primarily, although there's a little bit of a calendar impact for the year.

There should be, so it's not just that straight math?

A straight math will get you most of the way there. Like I said, there's a little bit of calendar benefit, but the straight math of just looking at the overall COGS deflation should get you most of the way there and of course, than, the price increase also on top of that.

And should it be pretty even 2% deflation throughout the year or does it end the year less and start more, or how should we think about that?

It should be even through the year.

Okay. Just a bookkeeping question. Can you give us the system-wide sales in the fourth quarter?

System-wide sales in the fourth quarter was $190.6 million.

Okay. That is great. Lastly one question on the apps. You have about three months under your belt. What have you learned? How has the mix been in terms of the number of orders? Has it posed any more challenges or less challenges operationally? What's the experience been so far?

We're very pleased with our apps that we rolled out really late in fourth quarter. We are seeing about 0.7 to 0.8 of a percent of sales going through that. I just had pulled some figures this morning, actually. We've had 55,000 orders in 94 days that we have used it. Our average check is higher on that.

We think as we roll mobile, which we are going to test the mobile in our Las Vegas market -- or delivery, I'm sorry, delivery at the end of this period. We think -- and then we will roll that in quarter two, and then also loyalty in quarter two. We think that will also drive that. We're very pleased with the system so far.

Great. Thank you very much.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Steve Sather for closing comments.

I'd like to thank everybody for joining us today and thank you for your continued interest in El Pollo Loco. Thank you, operator.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.