El Pollo Loco Holdings, Inc. — FY2021 Form 10-K
Business context and reporting period. The company operates and franchises fire-grilled chicken restaurants. This annual report covers the 52-week fiscal year ended December 29, 2021; the prior comparable fiscal year had 53 weeks. At year-end, the system had 480 restaurants: 189 company-operated and 291 franchised.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $454.4 million | $426.1 million |
| Operating income | $41.3 million; 9.1% margin | $33.6 million; 7.9% margin |
| Net income | $29.1 million; diluted EPS $0.80 | $24.5 million; diluted EPS $0.68 |
| Operating cash flow | $52.1 million | $40.5 million |
| Capital expenditures | $17.0 million | $6.7 million |
| Cash and cash equivalents, year-end | $30.0 million | $13.2 million |
| Revolver borrowings, year-end | $40.0 million | $62.8 million |
- System-wide sales, a non-GAAP operating measure, were $973.2 million, up from $879.6 million. System comparable sales rose 12.1%; company-operated comparable sales rose 7.6% and franchised comparable sales rose 15.3%.
- Company-operated restaurant revenue increased 5.5% to $394.7 million. Franchise revenue increased 14.7% to $33.7 million; franchise advertising fee revenue increased 14.6% to $25.9 million.
- Restaurant contribution was $72.5 million, with an 18.4% contribution margin, versus $70.4 million and 18.8% in FY2020. Adjusted EBITDA, a non-GAAP measure, was $63.4 million versus $61.6 million.
- Food and paper, labor, and occupancy/other operating costs were respectively 26.4%, 30.5%, and 24.7% of company-operated restaurant revenue. Each percentage was approximately unchanged year over year.
- Investing cash outflow was $12.5 million; financing cash outflow was $22.8 million, primarily reflecting revolver repayments. Cash increased $16.8 million during the year.
- The $150 million secured revolver matures July 2023. At year-end, $100 million remained available, with $10 million of letters of credit outstanding. The company reported compliance with its financial covenants. A $40 million interest-rate swap fixed the reference-rate component on that amount at 1.31%, plus the applicable margin.
- Reported balance-sheet operating lease liabilities totaled about $191.6 million; future minimum operating lease payments were $246.6 million before imputed interest and sublease income. These obligations are significant alongside revolver debt.
Material changes versus FY2020
- Revenue rose 6.6% and net income rose 19.0%, despite FY2021 having one fewer operating week. The company attributed revenue growth chiefly to comparable-sales gains; FY2020 also included a $2.0 million business-interruption insurance recovery and the extra week.
- Operating income increased 23.2%. Net interest expense fell 44.6%, primarily due to lower interest rates and reduced revolver balances. Lower impairment and closed-store reserves and the absence of FY2020 legal settlements also supported the comparison.
- Labor cost pressures persisted: minimum-wage increases, competitive wage increases and overtime raised costs, partly offset by a $3.4 million Employee Retention Credit. Food inflation and supply disruption also affected results.
- The company sold eight Sacramento-area company-operated restaurants to an existing franchisee for $4.6 million in proceeds, recording a $1.5 million loss. The transfer reduced company-operated revenue but increased franchised locations.
Outlook, risks and unusual items
- Management expects staffing constraints, wage inflation, supply-chain disruption and commodity-price pressures to continue in FY2022; it did not provide a specific revenue or earnings forecast.
- For FY2022, the company planned 3–6 new company-operated restaurants and 6–10 franchised openings, plus 10–15 company and 20–30 franchise remodels. Expected capital expenditures were $20–25 million.
- COVID-19 remained an uncertain risk to restaurant hours, staffing, supply, customer demand, asset recoverability and debt-covenant compliance. All dining rooms were open at year-end, but some locations had reduced hours or service channels. COVID-related expenses were $3.9 million in FY2021, compared with $4.9 million in FY2020.
- Operations and revenue are geographically concentrated: the greater Los Angeles area represented 70.9% of FY2021 revenue. Chicken is a major cost exposure; more than half of poultry purchases had fixed pricing through the end of 2022, but commodity and supplier concentration risks remain.
- Other material risks include labor availability and regulation, food safety, reliance on a primary distributor and a small number of poultry suppliers, franchisee performance, competition, digital-delivery costs, cyber/privacy incidents, long-term lease commitments, and potential impairment. The company recorded $0.7 million in non-cash impairment charges in FY2021 and reported no goodwill or trademark impairment.
- Contingencies include ongoing litigation and possible future wage-and-hour claims. A shareholder derivative action remained under appeal at year-end. The company reported $2.6 million of potential undiscounted payments under four contingent lease guarantees; franchisees are primarily liable.
- The company recognized a $6.2 million valuation allowance against deferred tax assets, largely related to state credits. It paid $1.7 million under its tax receivable agreement in FY2021 and reported $1.5 million accrued at year-end.
- After the reporting period, Laurance Roberts was appointed CEO and President effective March 9, 2022, while continuing as interim CFO.
Important facts for investors to verify
- Assess whether comparable-sales momentum can persist and separate pricing/check growth from transaction growth; company-operated FY2021 comparables reflected 6.3% average-check growth and 1.2% transaction growth.
- Track food, poultry, wage and overtime inflation, and determine whether menu pricing can offset those pressures without weakening traffic or margins.
- Review cash generation against planned capital spending, lease obligations, and the July 2023 revolver maturity; monitor covenant headroom and refinancing plans.
- Evaluate the sustainability of earnings after the $3.4 million retention credit and other period-specific items, and compare GAAP results with management’s non-GAAP measures.
- Monitor restaurant openings, remodel returns, franchisee health, supplier concentration, litigation developments and any further impairment charges.