El Pollo Loco Holdings, Inc. — Q3 2020 Form 10-Q
Business context and period. The filing covers the 13 and 39 weeks ended September 23, 2020, compared with the periods ended September 25, 2019. El Pollo Loco operates and franchises quick-service restaurants; at quarter-end it had 196 company-operated and 282 franchised locations. Results were significantly affected by COVID-19 restrictions and shifts away from dine-in service.
Key financial results
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Total revenue | $111.0 million | $112.1 million | $315.7 million | $334.8 million |
| Operating income | $12.2 million | $10.1 million | $25.3 million | $33.0 million |
| Net income | $9.9 million | $6.4 million | $19.0 million | $21.4 million |
| Diluted EPS | $0.28 | $0.18 | $0.53 | $0.56 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $33.5 million | $31.9 million |
| Capital expenditures | Not presented by quarter | Not presented by quarter | $4.3 million | $10.8 million |
- Q3 revenue declined 1.0%, while operating income rose 20.5% and net income rose 55.0%. Net margin was 8.9%, compared with 5.7%.
- For the 39 weeks, revenue fell 5.7%, operating income fell 23.2%, and net income fell 11.1%. Operating margin was 8.0%, versus 9.9%; net margin was 6.0%, versus 6.4%.
- Restaurant contribution margin, a non-GAAP operating measure, was 22.4% in Q3 versus 18.6%; year to date it was 19.9% versus 18.7%. The Q3 calculation includes a $2.0 million business-interruption insurance recovery.
- Adjusted EBITDA was $19.3 million for Q3 versus $15.9 million, and $48.0 million year to date versus $48.0 million. These are non-GAAP measures and include management-selected adjustments.
Liquidity, debt and balance sheet
- At September 23, cash and cash equivalents were $29.5 million, compared with $8.1 million at fiscal 2019 year-end. Current assets were $44.9 million and current liabilities $69.7 million.
- Revolver borrowings were $83.8 million, down from $97.0 million at December 25, 2019; $57.8 million remained available at quarter-end, with $8.4 million of letters of credit outstanding. The company reported compliance with its debt covenants at September 23.
- After quarter-end, the company prepaid $28.0 million on the revolver. As of October 30, borrowings were $55.8 million and availability was $85.8 million.
- Operating lease liabilities totaled $202.6 million, including $19.8 million current. Management said cash, available liquidity and operating cash flow were expected to meet needs for the next 12 months, but warned that a prolonged or worsening pandemic could pressure liquidity and covenant compliance.
Changes, outlook and risks
- Q3 system-wide comparable sales increased 1.8%; company-operated comparable sales increased 0.2% and franchised comparable sales increased 3.0%. Company-operated comparable sales reflected an 18.1% increase in average check, offset by a 15.2% transaction decline. For the 39 weeks, system-wide comparable sales fell 3.2%.
- Most California restaurants continued to rely on takeout, mobile pickup, delivery and drive-thru, while many locations elsewhere operated dining rooms at limited capacity. Historically, about 20% of company sales came from dine-in. Temporary pandemic closures affected both company and franchised restaurants; as of September 23, three in each group had not reopened, and none had been permanently closed due to COVID-19.
- The company suspended company-operated new restaurant development, significantly reduced capital spending and suspended share repurchases. It did not expect additional company or franchised openings for the remainder of 2020; franchisees’ 2020 build and remodel requirements were deferred to 2021. The company planned to limit Q4 remodels to two locations.
- Management attributed Q3 improvement partly to lower food costs, operating adjustments and the $2.0 million insurance recovery. Year-to-date comparisons also reflect unusual prior-year items, including a $10.0 million insurance recovery related to a securities lawsuit and a $5.1 million loss on restaurant dispositions in 2019.
- Year-to-date impairment and closed-store charges were $4.6 million, versus $1.2 million a year earlier. The company found no impairment of goodwill or trademarks in its assessment, but said future impairment charges could be material if performance weakens.
- The company recorded a $2.5 million settlement expense in 2020 to resolve a franchise territory dispute; payment was made and the case was dismissed with prejudice. Other disclosed matters include a shareholder derivative action with a dismissal motion still under consideration and ordinary-course claims. The filing says other claims are not expected to have a material adverse effect, while acknowledging that a significant increase in claims could be harmful.
- Key risks include the duration and severity of COVID-19 and related restrictions, debt-covenant headroom, consumer demand, labor and commodity costs (especially chicken), reliance on a major supplier, franchisee financial health, and concentration in the greater Los Angeles area, which generated about 71% of revenue.
Investor verification points
- Assess whether the Q3 comparable-sales gains and higher average checks can persist, given the substantial transaction decline and management’s uncertainty about post-pandemic spending patterns.
- Separate recurring operating performance from the $2.0 million Q3 insurance recovery and the prior-year $10.0 million insurance recovery and restaurant-disposition loss.
- Track post-quarter revolver repayment, cash needs, lease obligations and compliance with the lease-adjusted coverage and fixed-charge coverage covenants.
- Monitor dining-room restrictions, restaurant reopenings, paused development, impairment indicators and any material developments in legal contingencies.