El Pollo Loco Holdings, Inc. — Q2 2015 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 1, 2015, compared with the periods ended June 25, 2014. The company operated 174 restaurants and franchised 244 at quarter-end.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $89.5 million | $86.9 million | $179.9 million | $168.3 million |
| Operating income | $13.6 million | $12.8 million | $26.5 million | $24.4 million |
| Net income | $7.2 million | $6.6 million | $14.0 million | $12.0 million |
| Diluted EPS | $0.18 | $0.22 | $0.36 | $0.39 |
| Operating cash flow | — | — | $29.8 million | $21.6 million |
- Q2 revenue increased 2.9%; first-half revenue increased 6.9%. Company-operated restaurant revenue rose 2.7% in Q2 and 6.8% year to date; franchise revenue rose 6.0% and 7.5%, respectively.
- Operating margin was 15.2% in Q2 versus 14.8% a year earlier; first-half margin was 14.8% versus 14.5%. Restaurant contribution margin declined to 21.6% from 22.6% in Q2 and to 21.9% from 22.3% year to date.
- Q2 company-operated comparable sales fell 0.5%, as traffic declined 3.9% and average check rose 3.4%. First-half company-operated comparable sales increased 1.5%. System-wide comparable sales increased 1.3% in Q2 and 3.1% year to date.
- Q2 food and paper costs were 32.4% of company-operated revenue, up from 31.9%; labor costs were 25.2%, up from 24.7%. Management cited commodity costs, promotional mix, and higher workers’ compensation and medical claims.
- Net income increased despite lower diluted EPS, with weighted-average diluted shares rising to 39.1 million from 30.4 million in Q2. The prior-year comparison also reflects a much lower tax provision; the company released its deferred-tax valuation allowance in 2014.
Cash, debt and liquidity
- Cash was $6.4 million at July 1, 2015, down from $11.5 million at year-end 2014. First-half operating cash flow of $29.8 million funded $8.9 million of capital expenditures and, along with available cash, a $30.0 million revolver repayment. Cash decreased by $5.1 million overall.
- Revolver borrowings were $135.0 million; total debt including capital leases was $135.7 million. The $200 million revolving facility matures in December 2019. Availability was approximately $58.0 million, with $7.0 million of letters of credit outstanding. The company reported compliance with covenants.
- Management believes cash, operating cash flow, and revolver availability will cover liquidity needs for at least the next 12 months. A 1 percentage-point rise in borrowing rates would increase annualized pretax interest expense by approximately $1.4 million; interest-rate caps provide partial protection.
- Planned 2015 capital expenditures are approximately $36 million: $23 million for new restaurants, $6 million for remodeling, and $7 million for maintenance and corporate needs.
Outlook, changes and risks
- For the remainder of 2015, management planned 14 company-operated and seven franchised openings; its long-term restaurant growth objective is 8%–10% annually. These are plans, not guaranteed results. The filing gives no specific full-year revenue or earnings guidance.
- Interest expense fell substantially following the 2014 refinancing, repayment of the second-lien loan with IPO proceeds, and the first-half revolver paydown. The company said refinancing reduced annualized interest expense by approximately $6 million.
- The company expects labor-cost pressure from California minimum-wage increases, including scheduled statewide and Los Angeles increases. It cautioned that menu-price increases may not fully offset rising costs without affecting sales.
- Food commodity volatility, particularly for chicken and other proteins, is a risk; the company does not hedge commodity prices. Two suppliers represented 37% and 3% of purchases in the first half, and one supplier accounted for 32% of accounts payable at quarter-end.
- Restaurants in the greater Los Angeles area generated approximately 68% of revenue in the reported periods, creating geographic concentration exposure.
- A former employee’s California wage-and-hour class action remains at a preliminary stage. Outcome and potential damages cannot be determined; an adverse result could materially affect the company. Beverage purchasing commitments were estimated at $16.9 million, chicken commitments at $21.4 million, and potential undiscounted contingent lease payments at $1.5 million.
- The largest shareholder held approximately 43.8% after selling 5.4 million shares in a block trade during Q2. The company is no longer a controlled company under Nasdaq rules and was in a phase-in period for board and committee independence requirements.
Important facts for investors to verify
- Whether comparable-sales traffic and company-operated restaurant margins recover as food, labor, and insurance costs evolve.
- Progress against planned openings and the $36 million capital-spending plan, alongside cash generation and revolver capacity.
- Debt covenant headroom, interest-rate exposure, and the impact of future borrowing rates.
- Developments in the employee class action, minimum-wage requirements, supplier concentration, and Los Angeles market exposure.
- Future shareholder sales, governance changes, and the effect of higher share count on per-share results.