LOCO

El Pollo Loco Holdings, Inc. - 2025 Annual Report (10-K) Summary

Business Context and Reporting Period

This filing is the Annual Report on Form 10-K for El Pollo Loco Holdings, Inc. (LOCO) for the fiscal year ended December 31, 2025. The company operates in the limited-service restaurant (LSR) segment, specializing in fire-grilled citrus-marinated chicken. As of December 31, 2025, the system comprised 503 domestic restaurants (175 company-operated and 328 franchised), primarily located in California, with expansion into Arizona, Nevada, Texas, Utah, Colorado, Washington, Louisiana, and New Mexico. The fiscal year 2025 was a 53-week period.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 3.6% to $490.0 million, driven by a 2.4% increase in company-operated restaurant revenue and a 15.0% increase in franchise revenue. The franchise revenue spike included $4.1 million in one-time IT pass-through revenue related to a new POS system rollout.
• Comparable Sales: System-wide comparable restaurant sales grew 0.1%. Company-operated same-store sales increased 0.3% (driven by a 2.1% check size increase offset by a 1.8% transaction decline), while franchise same-store sales were flat.
• Cost Management: Food and paper costs decreased as a percentage of company revenue to 24.7% (from 25.4%) due to menu pricing and cost initiatives. Labor expenses as a percentage of revenue improved to 31.4% (from 32.1%) despite a $3.4 million increase in wage rates due to California's AB 1228 legislation, offset by labor efficiency gains.
• Debt Reduction: The company reduced revolver borrowings by $20.0 million during the year, bringing the outstanding balance to $51.0 million.
• Unit Activity: The company opened one new company-operated restaurant and acquired one franchise unit. Franchisees opened eight new units and closed four.

Guidance, Outlook, and Risks

Outlook and Strategy: Management plans to open 3-4 new company-operated restaurants and 15-16 franchised restaurants in fiscal 2026. Capital expenditures are expected to range between $37 million and $40 million in 2026, focusing on new construction, remodels, and technology investments. The company continues to focus on its "Digital First" strategy, with digital and delivery orders comprising 13.8% of total sales mix in 2025.

Key Risks and Contingencies:

• Labor Costs: Continued pressure from California's AB 1228 (fast food minimum wage of $20/hour) and potential similar legislation in other states.
• Geographic Concentration: Approximately 71.9% of revenue is generated in the Greater Los Angeles area, exposing the company to regional economic and regulatory risks.
• Supply Chain and Tariffs: Vulnerability to food cost inflation, particularly chicken (37% of food/paper costs), and potential impacts from U.S. trade policies and tariffs on imported goods.
• Shareholder Activism: The company incurred $1.7 million in legal and professional fees in 2025 related to shareholder activism and related matters.
• Cybersecurity: Ongoing risks related to data security and IT system failures, though no material incidents were reported in the last three years.

Investor Verification Checklist

• Franchise Revenue Quality: Verify the sustainability of the 15% franchise revenue growth, noting the $4.1 million one-time IT pass-through component.
• Transaction Trends: Monitor the 1.8% decline in company-operated transactions to assess if price increases are suppressing volume.
• Debt Covenants: Confirm continued compliance with the lease-adjusted consolidated leverage ratio (max 4.25x) and fixed-charge coverage ratio under the 2022 Credit Agreement.
• Capital Allocation: Review the execution of the $37-40 million capital expenditure plan for 2026 against cash flow generation.
• Legal Exposure: Track the status of wage and hour class action lawsuits and the financial impact of ongoing shareholder activism.