El Pollo Loco Holdings, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 28, 2022 (52 weeks), compared with fiscal 2021 (52 weeks). The filing is an annual report; it does not provide a clear standalone fourth-quarter income statement or cash-flow figures.
Business context
El Pollo Loco operates and franchises limited-service restaurants specializing in citrus-marinated, fire-grilled chicken. At year-end, it had 490 restaurants: 188 company-operated and 302 franchised. The company operates in one segment. Greater Los Angeles generated 71.2% of revenue.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total revenue | $470.0 million | $454.4 million | +3.4% |
| Operating income | $30.1 million | $41.3 million | −27.1% |
| Net income | $20.8 million | $29.1 million | −28.6% |
| Diluted EPS | $0.57 | $0.80 | Lower |
| Operating cash flow | $38.5 million | $52.1 million | Lower by $13.6 million |
| Capital expenditures | $19.9 million | $17.0 million | Higher |
| Cash and cash equivalents, year-end | $20.5 million | $30.0 million | Lower |
- Operating margin declined to 6.4% from 9.1%. Company-operated restaurant contribution margin, a non-GAAP operating measure that excludes corporate-level costs, fell to 13.2% from 18.4%.
- System-wide comparable sales rose 5.9%; company-operated comparable sales rose 3.7%, reflecting a 7.3% increase in average check partly offset by a 3.3% decline in transactions. Franchise comparable sales increased 7.4%.
- Adjusted EBITDA, a non-GAAP measure, was $48.7 million, down from $63.4 million. Company-operated average unit volume was approximately $2.1 million.
- Year-end revolver borrowings were $66.0 million under a $150.0 million secured facility; $9.8 million of letters of credit were outstanding and $74.2 million was available. The interest rate was 5.7%. The company reported compliance with its financial covenants.
- The company paid a $1.50-per-share special dividend in November 2022, totaling $55.6 million in the cash-flow statement. Financing cash outflow was $29.2 million, including the dividend and net revolver borrowings.
Material changes and management commentary
- Revenue increased, but cost inflation and labor expense growth outweighed sales gains. Food and paper costs rose to 29.2% of company-operated revenue from 26.4%; labor and related expenses rose to 32.4% from 30.5%.
- Management cited commodity inflation, higher wages (including California minimum-wage increases), utilities, delivery fees and freight costs. FY2022 included $3.3 million of COVID-19-related expenses; comparable amounts were $3.9 million in FY2021 and $4.9 million in FY2020.
- The company refinanced its revolver in July 2022. Borrowings are variable-rate, and management estimated that a 1 percentage-point rate increase would raise annual pretax interest expense by about $0.7 million at year-end debt levels. It terminated its interest-rate swap in connection with the refinancing.
- Cash from operations declined because of lower profitability and unfavorable working-capital movements. The company states that cash, operating cash flow and revolver availability are expected to fund operations and planned capital expenditures for at least 12 months from issuance of the financial statements, while noting that adverse economic conditions could affect covenant compliance and liquidity.
Outlook, risks and contingencies
- For FY2023, management planned four to six new company-operated restaurants and eight to twelve franchised openings, plus 10–15 company and 20–30 franchise remodels. Expected capital expenditures were $27–31 million. No specific comparable-sales or earnings guidance is provided in the filing.
- Management expects inflationary pressures to continue in FY2023. Risks include labor shortages and wage increases, commodity and chicken costs, supply-chain disruption, interest-rate increases, competition, and uncertainty around the economic and post-pandemic environment.
- The California FAST Act could increase labor costs if approved by voters in November 2024; management also noted the possibility of similar legislation elsewhere. Poultry represented approximately 38% of food and paper costs; two suppliers accounted for approximately 79% of FY2022 poultry purchases. More than half of poultry purchases had fixed pricing through year-end 2023.
- Long-term operating lease payments totaled $236.5 million, before discounting; total contractual obligations shown in the filing were $357.1 million. The company also disclosed $40.9 million of chicken purchase commitments and potential undiscounted payments of $2.3 million under contingent lease guarantees.
- Ongoing ordinary-course claims include wage-and-hour and other legal actions. Management did not expect resolution of the other disclosed claims to materially affect financial position, results, liquidity or capital resources, but outcomes are uncertain. The auditor identified restaurant asset impairment estimates as a critical audit matter; no material weakness was reported, and the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether menu pricing and sales growth can offset further food, labor and utility inflation, particularly given the FY2022 transaction decline and margin contraction.
- Current revolver borrowings, interest rate, covenant headroom and liquidity after year-end; the filing reports $58.0 million outstanding as of March 9, 2023 after an $8.0 million paydown.
- Execution and returns from planned FY2023 openings, remodels and $27–31 million capital spending.
- Developments in California labor regulation, poultry pricing and supplier concentration, and the company’s exposure to its Los Angeles-heavy revenue base.
- Lease commitments, impairment assumptions for weaker restaurants, and the status and potential costs of legal claims.