El Pollo Loco Holdings, Inc. — Q3 2015 Form 10-Q
Reporting period: 13 weeks ended September 30, 2015, compared with the 13 weeks ended September 24, 2014; year-to-date figures cover 39 weeks. The company operates and franchises quick-service restaurants under the El Pollo Loco name. At quarter-end it had 175 company-operated and 245 franchised restaurants across five states.
Financial results
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Total revenue | $88.9 million | $86.6 million | $268.8 million | $254.9 million |
| Income from operations | $12.5 million | $13.6 million | $39.1 million | $38.0 million |
| Net income | $4.7 million | $25.8 million | $18.7 million | $37.9 million |
| Diluted EPS | $0.12 | $0.70 | $0.48 | $1.17 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $43.4 million | $29.8 million |
Q3 revenue grew 2.7%; company-operated revenue rose 2.6% and franchise revenue rose 3.3%. Q3 company-operated comparable sales were flat: traffic declined 1.9%, offset by a 1.9% increase in average check. System-wide comparable sales increased 0.6%. Restaurant contribution margin improved to 21.2% from 20.7%; this is a company-defined non-GAAP measure. Operating margin was approximately 14.1% of revenue, versus 15.7%.
For the 39 weeks, revenue increased 5.4% and operating income increased 2.9%. Company-operated comparable sales rose 1.0% year to date, with a 3.0% higher average check partly offset by a 2.0% traffic decline. Year-to-date restaurant contribution margin was 21.7%, versus 21.8%.
The sharp year-over-year decline in net income primarily reflects unusually favorable prior-year tax items, not a comparable deterioration in restaurant sales: 2014 included a $61.4 million income tax benefit following the release of a valuation allowance and recognition of tax credits, as well as a $2.7 million restaurant-sale gain. Prior-year results also included $5.1 million of debt-extinguishment expense and $40.1 million of TRA expense. In 2015, tax provisions were $6.5 million for the quarter and $16.3 million year to date; these included a $1.9 million valuation allowance for credits that may expire unused.
Cash, debt and liquidity
At September 30, cash was $8.2 million, down from $11.5 million at December 31, 2014. Current assets were $39.1 million and current liabilities $39.9 million. Total debt, including capital leases, was $125.7 million. The $200 million revolving facility had $125.0 million drawn, $7.0 million of letters of credit outstanding, and approximately $68.0 million available; the company reported compliance with its covenants. It repaid $40.0 million of revolver borrowings during the 39 weeks.
Year-to-date operating cash flow of $43.4 million funded, among other uses, $16.5 million of cash capital expenditures and the $40.0 million revolver repayment. The filing reports total capital expenditures of $21.1 million for the 39 weeks, including unpaid purchases. Management expected approximately $31 million of capital expenditures for fiscal 2015 and believed cash, operating cash flow, and revolver availability would cover liquidity needs for at least 12 months.
Outlook, risks and notable items
- Management planned 11–13 additional company-operated openings and three franchised openings during the remainder of 2015, and described a long-term goal of 8%–10% annual restaurant-count growth. These are plans, not guaranteed results; the filing provides no earnings guidance.
- Four restaurants opened after quarter-end. Letters of credit increased to $7.2 million subsequent to quarter-end following vendor-agreement changes.
- Labor and commodity costs are key risks. California’s minimum wage was scheduled to rise to $10 per hour on January 1, 2016; Los Angeles city and county wage increases were also scheduled over subsequent years. Management noted that price increases may not fully offset cost inflation.
- Greater Los Angeles generated approximately 78% of revenue in the quarter. Two suppliers accounted for 19% and 9% of accounts payable at quarter-end; supplier concentration and regional exposure merit attention.
- The company faced a California hourly-worker class action with an indeterminable outcome and unspecified damages. Two putative securities class actions alleged misleading statements concerning comparable sales and labor costs; the company intended to defend them. The SEC had made an informal, non-public request for voluntary documents and information, and the company said it was cooperating. A shareholder derivative action was filed after quarter-end. No likely loss range was provided for these matters.
- Trimaran Pollo Partners owned approximately 43.7% of common stock, creating significant shareholder influence. The company also disclosed risks from potential sales of substantial shareholder holdings.
Most important facts for investors to verify
- Whether traffic and comparable-sales trends improved after the quarter, given flat Q3 company-operated comparable sales and lower traffic.
- Actual restaurant openings and capital spending compared with management’s 2015 plans.
- Progress on debt repayment, revolver availability, covenant compliance, and the company’s liquidity outlook.
- Effects of wage increases, food-cost volatility, and pricing on restaurant-level margins.
- Developments in the labor and securities litigation, the derivative action, and the SEC inquiry, including any change in potential financial exposure.