El Pollo Loco Holdings, Inc. — Q1 2024 Form 10-Q
Business context and reporting period
The filing covers the 13 weeks ended March 27, 2024, compared with the 13 weeks ended March 29, 2023. El Pollo Loco operates and franchises quick-service restaurants under one operating segment. At quarter-end it had 172 company-operated and 323 franchised restaurants across seven states.
Financial and operating performance
| Metric | Q1 2024 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $116.2 million | $114.5 million | +1.4% |
| Operating income | $9.7 million | $7.8 million | +24.9% |
| Net income | $5.9 million | $4.9 million | +20.2% |
| Diluted EPS | $0.19 | $0.13 | Up $0.06 |
| Operating cash flow | $11.2 million | $3.8 million | Up $7.3 million |
| Capital expenditures | $4.2 million | $6.0 million | Down $1.8 million |
| Cash and cash equivalents | $9.1 million | $7.3 million at fiscal year-end | Up $1.8 million |
| Revolver borrowings | $80.0 million | $84.0 million at fiscal year-end | Down $4.0 million |
Operating margin was 8.3% of revenue versus 6.8% a year earlier; net margin was 5.1% versus 4.3%. Company-operated restaurant contribution was $17.1 million, or 17.6% of company-operated restaurant revenue, compared with $14.7 million, or 15.0%.
System-wide sales, including franchised restaurant sales, were $267.9 million, up 5.7%. Comparable sales increased 5.1% system-wide, 3.8% at company-operated restaurants and 5.9% at franchised restaurants. Company-operated comparable sales reflected a 2.5% higher average check and 1.2% more transactions.
Adjusted EBITDA, a non-GAAP measure, was $15.7 million versus $12.2 million. The company reported $256.3 million of stockholders’ equity and $341.7 million of total liabilities. Current assets were $26.8 million compared with current liabilities of $75.2 million. Operating lease obligations totaled $189.3 million, including current maturities.
Material changes versus the prior comparable period
- Revenue growth came from franchise revenue, up 17.3%, and franchise advertising fee revenue, up 9.6%; company-operated restaurant revenue declined 0.7%. The company attributed the company-operated decline mainly to the prior-period refranchising of 18 restaurants, partly offset by comparable-sales growth and sales from newer restaurants.
- Company restaurant expenses fell 3.7%. Food and paper costs, labor costs, and occupancy and other operating expenses each declined as a share of company-operated revenue. Management cited pricing and the smaller company-operated restaurant base, while noting commodity and wage cost pressure.
- General and administrative expenses rose 6.5%, including $0.5 million in restructuring costs and $0.6 million in executive transition costs. Interest expense increased 55.8% to $1.6 million, reflecting higher borrowing balances and interest rates.
- Operating cash flow improved, which management attributed to favorable working-capital movements and higher profitability. Cash used for financing declined, in part because share repurchases and revolver paydowns were lower than in the prior-year quarter.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue, earnings, or comparable-sales guidance. Management expects operating cash flow, cash on hand, and revolver availability to meet liquidity needs for at least 12 months. It plans to pursue sales growth, digital business, remodels, and new-unit growth; success is not assured.
- Labor and inflation: California’s fast-food minimum wage rose to $20 per hour on April 1, 2024. Management expects higher labor and regulatory-compliance costs in the remainder of fiscal 2024, potentially pressuring profitability. It also expects food, labor, construction, and other cost pressures to continue and may not fully offset them through pricing or productivity.
- Debt and interest rates: The $150 million secured revolver matures July 27, 2027. At March 27, $80.0 million was drawn, with a $9.8 million letter of credit and $60.2 million of borrowing availability; the company was in compliance with financial covenants. A 1 percentage-point increase in the effective borrowing rate would add an estimated $0.8 million of annualized pretax interest expense. On May 2, borrowings were reduced to $75.0 million after a subsequent $5.0 million paydown.
- Concentration and operating risks: Greater Los Angeles generated approximately 71.5% of total revenue. Risks include consumer spending, competition, food safety, staffing, commodity prices, franchisee performance, leases, and potential disruptions or adverse events in the company’s concentrated markets. The largest supplier accounted for purchases equal to 24.7% of total expenses in the quarter; estimated chicken purchase commitments were $24.8 million.
- Contingencies and unusual items: The company reported ordinary-course wage-and-hour and other claims, but no material legal proceedings. It is contingently liable on three assigned leases for up to $3.6 million of undiscounted payments if franchisees default. No impairment charges were recorded in Q1, though management monitors certain restaurants and warns future charges could be material. Q1 Adjusted EBITDA included $0.6 million of executive transition costs and $0.6 million of restructuring charges; these are excluded in that non-GAAP measure.
- Capital allocation and governance: The company repurchased 136,400 shares for approximately $1.2 million, leaving approximately $6.2 million available under its repurchase authorization. A shareholder rights agreement generally becomes exercisable if a person or group reaches 12.5% beneficial ownership and is set to expire August 7, 2024.
Important facts for investors to verify
- Whether comparable-sales growth and higher restaurant contribution persist as wage increases and other cost pressures take effect.
- Whether the higher operating cash flow reflects sustainable earnings or mainly favorable working-capital timing.
- Revolver debt, borrowing availability, interest-rate exposure, and the effect of the subsequent $5.0 million paydown.
- Progress and returns on remodels and new-unit growth, and performance at newer-market restaurants subject to impairment monitoring.
- The use and remaining capacity of the share repurchase program, alongside liquidity and capital investment needs.
- Potential exposure from legal claims, contingent lease obligations, chicken commitments, and the expiration or operation of the shareholder rights agreement.