El Pollo Loco Holdings, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 26, 2018 (52 weeks). The filing is an annual report, not a standalone Q4 filing; it also reports unaudited fourth-quarter results. The company operates and franchises Mexican-inspired fire-grilled chicken restaurants and ended the year with 484 locations: 213 company-operated and 271 franchised.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $435.8 million | $401.7 million |
| Operating income (loss) | $(9.5) million | $6.8 million |
| Net income (loss) | $(9.0) million | $8.6 million |
| Operating cash flow | $45.4 million | $53.7 million |
| Capital expenditures | $27.8 million | $36.2 million |
| Cash at year-end | $7.0 million | $8.6 million |
| Total debt, including capital leases | $74.2 million | $93.3 million |
Reported revenue grew 8.5%, including $21.2 million of franchise advertising fee revenue presented gross under newly adopted revenue-accounting rules. Excluding that presentation change, FY2018 revenue was $414.4 million, up about 3.2% from FY2017. Company-operated restaurant revenue rose 3.2%; system-wide comparable sales increased 1.2% (company-operated +0.4%, franchised +1.8%). Company-operated comparable sales reflected a 1.4% increase in average check, partly offset by a 1.0% transaction decline.
Company restaurant contribution was $73.9 million, with a 19.0% margin, down from $74.5 million and 19.8% in FY2017. Adjusted EBITDA, a non-GAAP measure, was $62.9 million versus $65.3 million. Food and paper costs improved to 28.6% of company-operated revenue from 29.2%, but labor costs rose to 28.9% from 28.3% and occupancy and other operating costs rose to 23.5% from 22.7%.
FY2018 results included $36.3 million of legal settlement expense and $9.7 million of asset impairment and closed-store reserves. General and administrative expense increased 30.5% to $50.3 million, partly due to legal costs. The company received $8.4 million of insurance reimbursements for previously incurred securities-litigation expenses, recorded as a reduction of expense. Q4 revenue was $106.3 million; operating loss was $31.0 million and net loss was $23.4 million, with the quarterly operating loss including the $36.3 million legal settlement expense.
Liquidity, debt, and capital
At year-end, cash was $7.0 million and $74.0 million was drawn on the $150 million secured revolving facility; $67.5 million remained available after $8.5 million of letters of credit. The facility matures in July 2023, and the company reported covenant compliance. Operating cash flow fell $8.2 million, primarily due to unfavorable working-capital movements. The company reported $266.5 million of future operating lease payments and a $13.9 million accrued income tax receivable agreement obligation. It paid $7.3 million under that agreement during FY2018.
Material changes, outlook, and risks
- FY2018 included eight new company restaurants and nine new franchised restaurants; the company closed seven and franchisees closed three. Management said outer-market restaurant performance was below expectations and planned to slow expansion. For FY2019, it expected to open three to four company restaurants and three to five franchised restaurants; overall unit development was expected to be lower than in FY2018.
- FY2017 included $32.6 million of impairment expense, compared with $5.1 million in FY2018. The company continues to monitor certain restaurants, including in Arizona and Northern California, for potential future impairment.
- The company adopted Topic 606 in FY2018. The change added gross presentation of franchise advertising revenue and expense and deferred recognition of certain franchise and development fees; prior-year figures were not restated. Adoption reduced opening equity by $3.5 million. Adoption of the lease-accounting standard in FY2019 was expected to materially increase reported assets and liabilities, without a material impact on operating results.
- Management cited increasing wage and benefit costs, moderate commodity inflation, competition, and performance in newer markets as operating pressures. Chicken represented about 40% of food and paper costs; poultry prices were fixed through the end of 2019, although two suppliers represented about 67% of planned 2019 purchases.
- Geographic concentration remains significant: restaurants in the greater Los Angeles area generated about 69% of FY2018 revenue. The company also relies on one primary distributor for substantially all restaurant supplies.
- Two settlement agreements in principle were reached in January 2019: wage-and-hour class actions and a securities class action. The filing accrued $16.3 million and $20.0 million, respectively. Separately, a Lancaster franchisee judgment totaled $8.8 million plus $1.4 million in attorneys’ fees; the company reported no accrual because management assessed the loss as not probable. The judgment includes an injunction restricting certain restaurant development; appeals were pending.
- No earnings or comparable-sales guidance was provided. Management stated that available cash, operating cash flow, and revolver availability were expected to meet liquidity needs for at least 12 months from issuance of the financial statements.
Important facts for investors to verify
- How much of reported revenue growth reflects underlying sales versus the new gross presentation of franchise advertising fees.
- Whether transaction trends, restaurant-level margins, and performance in newer markets improve, and whether further impairments or closures occur.
- Final settlement terms, payment timing, insurance recoveries, and the outcome and business impact of the Lancaster appeals and injunction.
- Liquidity and covenant headroom as the company funds capital spending, lease obligations, and tax receivable agreement payments.
- The effects of wage increases, chicken and other input costs, supplier or distributor disruption, and the FY2019 lease-accounting transition.