Business context and reporting period
El Pollo Loco Holdings, Inc. operates and franchises quick-service restaurants under the El Pollo Loco brand. This unaudited Form 10-Q covers the 13 weeks ended June 29, 2022 (second quarter) and the 26 weeks ended that date, compared with the corresponding 2021 periods. At quarter-end, the company operated 188 restaurants and franchised 293, across six states.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $124.1 million | $122.0 million | $234.2 million | $229.7 million |
| Income from operations | $10.4 million | $12.7 million | $13.7 million | $18.7 million |
| Net income | $7.1 million | $8.8 million | $9.3 million | $12.8 million |
| Diluted EPS | $0.20 | $0.24 | $0.25 | $0.35 |
| Restaurant contribution margin (non-GAAP) | 15.0% | 20.8% | 12.8% | 18.6% |
Q2 revenue increased 1.7%, while operating income fell 17.7% and net income fell 19.0%. First-half revenue increased 1.9%, but operating income declined 26.4% and net income declined 27.6%. Company-operated restaurant revenue was nearly flat; franchise and franchise advertising revenue grew 20.0% and 14.6% in Q2, respectively. System-wide comparable sales rose 7.5% in Q2: company-operated comparable sales increased 2.9% as average check grew about 8.0% but transactions fell 4.7%; franchised comparable sales increased 10.6%.
Pressure on restaurant-level profitability was driven principally by food and paper costs, which rose to 29.8% of company-operated revenue from 26.1%, and labor costs, which rose to 31.0% from 29.5%. The filing attributes these increases primarily to commodity inflation, elevated wages, and related labor costs. Q2 total revenue includes franchise advertising fees; the company’s restaurant contribution measure excludes certain corporate and other costs and is non-GAAP.
For the first half, operating cash flow was $11.8 million, down from $26.6 million in 2021. Investing cash outflow was $8.8 million versus $4.3 million; financing provided $1.3 million versus $22.9 million used in the prior period. Cash increased $4.3 million to $34.3 million. Management cited lower profitability and unfavorable working-capital movements as reasons for reduced operating cash flow.
At June 29, 2022, the company had $40.0 million drawn on its revolving facility, $10.0 million of letters of credit, and $100.0 million of borrowing availability. Current assets were $55.5 million and current liabilities $70.1 million. Operating lease liabilities totaled $190.5 million, including $20.2 million current; finance lease liabilities totaled $1.8 million. The company reported compliance with its credit covenants and believed available cash and operating cash flow would meet liquidity needs for the following 12 months.
Material changes, outlook, and risks
- Food and paper costs increased 13.7% in both Q2 and the first half, reflecting commodity inflation and higher packaging costs. Labor expense also increased amid minimum-wage increases, wage competition, overtime, and staffing challenges. Some restaurants experienced reduced operating hours or service channels.
- Management expected inflationary and supply-chain pressures to continue through the remainder of fiscal 2022. The filing provides no specific full-year revenue, earnings, or comparable-sales guidance.
- After quarter-end, on July 27, the company refinanced its 2018 revolver with a $150 million, five-year senior secured revolving facility maturing in July 2027. It paid $20 million on July 29; the outstanding balance was $20 million as of August 4. The new facility has financial and other covenants. The company also terminated its interest-rate swap and received approximately $0.6 million.
- Growth plans include accelerating restaurant development. During the first half, one company-operated and three franchised restaurants opened; three restaurants closed. For fiscal 2022, the company planned 10–15 company and 20–30 franchise remodels under its newer design, averaging $0.3–$0.4 million per remodel.
- COVID-related expenses were $0.3 million in Q2 and $2.6 million for the first half. Management said the ultimate effects of COVID-19 and macroeconomic conditions remained uncertain. Other cited risks include food and labor inflation, supply disruptions, dependence on a major supplier, restaurant concentration in greater Los Angeles, staffing, leases, and potential impairment in newer markets.
- The largest supplier accounted for 24.1% of accounts payable at quarter-end and purchases equal to 27.4% of Q2 total expenses. Greater Los Angeles generated about 70.9% of revenue. A shareholder derivative appeal involving Trimaran was affirmed on June 28, 2022; the company also disclosed ordinary-course claims, including wage-and-hour matters, whose outcomes are uncertain.
Important facts for investors to verify
- Whether menu pricing and continued comparable-sales growth can offset commodity, wage, utility, and other operating-cost inflation without further reducing transaction volumes or margins.
- Cash generation and working-capital trends, alongside capital expenditure, remodel, lease, and other contractual commitments.
- Borrowings, available capacity, interest-rate exposure, and compliance with the new credit agreement’s leverage and fixed-charge covenants.
- Restaurant openings, closures, and performance in newer markets, including whether any locations require additional impairment charges.
- The extent and duration of staffing, supply-chain, and COVID-related disruptions, and the company’s exposure to its major supplier and Los Angeles-area concentration.