El Pollo Loco Holdings, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
The 13-week quarter ended September 27, 2023; year-to-date figures cover 39 weeks. El Pollo Loco operates and franchises quick-service restaurants. At quarter-end it operated 171 restaurants and franchised 321, across seven states. All amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Total revenue | $120.4 | $119.9 | $356.4 | $354.0 |
| Operating income | $13.7 | $6.9 | $32.3 | $20.6 |
| Net income | $9.2 | $5.0 | $21.2 | $14.3 |
| Diluted EPS | $0.28 | $0.14 | $0.60 | $0.39 |
| Operating cash flow | — | $32.5 | $21.9 |
- Q3 operating margin was 11.4% versus 5.7%; net margin was 7.7% versus 4.2%. For the 39 weeks, operating margin was 9.1% versus 5.8%, and net margin was 6.1% versus 4.0%.
- Company restaurant contribution margin, a non-GAAP operating measure, was 14.4% versus 12.4% in Q3 and 15.4% versus 12.7% year to date. Adjusted EBITDA was $15.0 million versus $11.6 million in Q3 and $43.8 million versus $35.4 million year to date.
- At September 27, cash was $13.8 million, down from $20.5 million at December 28, 2022. Revolver borrowings were $80.0 million, with $60.2 million available after letters of credit. Total debt was $80.0 million; recognized operating lease liabilities were $186.3 million. The company reported compliance with debt covenants.
- Year-to-date investing cash use was $7.4 million, including $15.3 million of property and equipment purchases and $7.7 million of restaurant-sale proceeds. Financing cash use was $31.8 million, including $46.6 million in share repurchases. Management said cash, operating cash flow and revolver availability should cover liquidity needs for at least 12 months.
Material changes versus prior comparable period
- Q3 revenue increased 0.4%; year-to-date revenue increased 0.7%. Company-operated restaurant revenue was nearly flat, while franchise revenue rose 7.5% in Q3 and 4.1% year to date.
- System-wide comparable sales rose 0.8% in Q3 but fell 0.7% year to date. Company-operated comparable sales rose 0.3% and 0.5%, respectively; check growth was partly offset by lower transactions. Franchise comparable sales rose 1.1% in Q3 and declined 1.4% year to date.
- Food and paper costs declined as a share of company-operated revenue, helped by menu pricing, while occupancy and other operating costs increased as a share. Interest expense rose substantially, reflecting higher borrowings and rates.
- Reported earnings benefited from $4.9 million in Q3 and $5.0 million year-to-date gains on restaurant dispositions. The company sold 18 restaurants to existing franchisees year to date, shifting them from company-operated to franchised.
- Shares outstanding fell from 37.0 million at December 2022 to 33.0 million at quarter-end, following $46.6 million of repurchases, including a $26.6 million purchase of 2.5 million shares from funds associated with the company’s largest prior shareholder.
Outlook, commentary, risks and unusual items
- Management expects inflationary pressures to continue through the remainder of fiscal 2023; menu pricing, mix management and productivity had substantially offset cost pressure to date, but future offsets are uncertain. No specific earnings or revenue guidance was provided.
- California AB 1228 is expected, if effective January 1, 2024, to raise the minimum wage at qualifying fast-food brands to $20 per hour beginning April 1, 2024, with a council able to approve further increases through 2029. Management expects higher labor and compliance costs and potential pressure on profitability. The filing notes effectiveness depends on withdrawal of a referendum.
- Risk factors include inflation and commodity costs, labor availability and regulation, variable-rate debt, lease obligations, restaurant performance and impairments, legal claims, and the company’s geographic concentration. Greater Los Angeles generated about 71% of revenue. The company recorded $1.0 million of non-cash impairment charges in Q3 and year to date and said further charges could be material if restaurant performance disappoints.
- Subsequent events: the CEO and president departed effective November 3, 2023; the COO was appointed interim CEO and president effective November 4. The board authorized a new repurchase program of up to $20 million through March 31, 2025. The company also paid down $9 million on its revolver; borrowings were $71 million on November 2.
- The August 2023 shareholder rights plan generally triggers at 12.5% beneficial ownership and expires August 7, 2024. The filing identifies takeover deterrence and shareholder activism as risks. Ordinary-course wage and hour claims are disclosed, but no material legal proceedings were reported.
Important facts for investors to verify
- Whether California AB 1228 takes effect as described, and the resulting wage, compliance and margin impact.
- How much of earnings growth reflects core restaurant operations versus the one-time restaurant-sale gains; review GAAP results alongside adjusted EBITDA.
- Future comparable-sales and transaction trends, including whether price increases continue to offset weaker traffic.
- Revolver balances, variable interest rates, remaining borrowing capacity, covenant compliance and the effect of subsequent debt paydown.
- Capital allocation after the substantial 2023 repurchases, including use of the newly authorized $20 million program and implications for liquidity.
- Restaurant performance and impairment exposure, particularly in newer markets, alongside the company’s substantial lease commitments and Los Angeles revenue concentration.