El Pollo Loco Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Thirteen weeks ended March 30, 2016; comparison is the thirteen weeks ended April 1, 2015. Amounts are in U.S. dollars. The company operates and franchises quick-service restaurants; at quarter-end it had 188 company-operated and 248 franchised locations.
Financial performance
| Metric | Q1 2016 | Prior period | Change |
|---|---|---|---|
| Total revenue | $94.4 million | $90.4 million | Up 4.3% |
| Operating income | $10.3 million | $13.0 million | Down 20.6% |
| Net income | $5.4 million | $6.8 million | Down 19.8% |
| Diluted EPS | $0.14 | $0.17 | Down $0.03 |
| Operating margin | 10.9% | 14.3% | Down 3.4 percentage points |
| Net margin | 5.8% | 7.5% | Down 1.7 percentage points |
| Adjusted EBITDA | $16.0 million | $16.6 million | Down 3.3% |
Company-operated revenue rose 4.3%, principally from sales at newer restaurants; comparable sales fell 0.6% at company-operated restaurants, with traffic down 0.8% and average check up 0.2%. System-wide comparable sales increased 0.7%; franchise comparable sales increased 1.8%. Restaurant contribution was $18.3 million, with a 20.7% margin versus $18.9 million and 22.3% a year earlier.
Food and paper costs improved to 30.3% of company-operated revenue from 32.0%, mainly due to lower chicken commodity costs. Labor costs increased to 27.7% from 25.5%, reflecting new restaurants, additional staffing, and California’s January 2016 minimum-wage increase. Occupancy and other operating costs rose to 21.3% from 20.2%. General and administrative expense increased 23.4%, including $1.5 million of securities-litigation expense.
Cash flow, balance sheet, and debt
Operating cash flow was $11.0 million, down from $14.3 million. Investing cash outflow was $5.7 million, including $5.9 million of property and equipment purchases; financing cash outflow was $2.6 million, including a $2.5 million revolver repayment. Cash increased $2.8 million to $8.9 million. The filing reports $8.5 million of capital expenditures for the quarter, including $5.5 million for new restaurants and $1.5 million for remodeling; these figures reflect the filing’s distinct expenditure presentations.
At March 30, cash was $8.9 million, current assets $39.3 million, and current liabilities $41.5 million. Revolver borrowings were $120.5 million; total debt including capital leases was $121.1 million. The $200 million revolver had $72.3 million available, with $7.2 million of letters of credit outstanding. Revolver interest rates ranged from 2.02% to 2.19% during the quarter; the company was in compliance with its covenants. Management said cash, operating cash flow, and available revolver borrowings should meet liquidity needs for at least 12 months.
Outlook, risks, and notable items
- For 2016, management planned 17–20 new company-operated restaurants and 10–15 franchised restaurants, and expected capital expenditures of $34–38 million. Long-term restaurant growth target was 8%–10% annually; these plans are not guaranteed.
- Management cited continued expansion, comparable-sales growth, and operating leverage as priorities. It also highlighted substantial labor-cost exposure: California’s minimum wage had risen to $10 per hour, with further state and local increases scheduled. Future cost increases may not be offset by pricing or productivity.
- A $1.5 million securities-class-action legal expense contributed to higher G&A. The company also reported a $289,000 gain on insurance recovery and $48,000 of fire-related costs. It received an additional $600,000 of insurance proceeds after quarter-end.
- Legal matters include a securities class action seeking unspecified damages, a related shareholder derivative action, and an informal, non-public SEC document request with which the company said it was cooperating. A separate California wage-and-hour class action had an agreement in principle to settle, subject to documentation and court approval.
- Estimated commitments included $31.7 million for chicken purchases and $13.2 million under beverage agreements. The company also had contingent exposure on four assigned leases: up to $1.3 million of undiscounted payments if franchisees fail to pay; no liability was recorded.
- Revenue is concentrated in the greater Los Angeles area, which generated approximately 76% of total revenue in the quarter. Purchases from the largest supplier were 33% of purchases. A 1 percentage-point increase in borrowing rates was estimated to raise annual pre-tax interest expense by $1.2 million.
Investor verification points
- Assess whether comparable-sales and traffic trends improve, particularly at company-operated restaurants.
- Monitor labor, occupancy, and other restaurant-cost inflation against the benefit from lower food costs and any menu pricing.
- Track new-restaurant openings, capital spending, cash generation, revolver availability, and covenant compliance.
- Verify the status and potential financial impact of the securities litigation, SEC inquiry, and wage-and-hour settlement.
- Review management’s non-GAAP Adjusted EBITDA adjustments, including litigation and pre-opening costs, alongside GAAP operating income and cash flow.