El Pollo Loco Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: 13 weeks ended September 28, 2016; year-to-date figures cover 39 weeks. Fiscal 2016 is a 52-week year. The company operated 193 restaurants and franchised 253, across five states.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Total revenue | $95.8 | $88.9 | $287.6 | $268.8 |
| Income from operations | $9.0 | $12.5 | $32.7 | $39.1 |
| Net income | $5.2 | $4.7 | $17.9 | $18.7 |
| Diluted EPS | $0.13 | $0.12 | $0.46 | $0.48 |
| Restaurant contribution margin | 20.9% | 21.2% | 21.2% | 21.7% |
| Operating margin | 9.4% | 14.1% | 11.4% | 14.5% |
- Q3 revenue grew 7.8%; company-operated revenue rose 8.1% and franchise revenue 3.3%. System-wide comparable sales increased 1.6% (company-operated 1.4%; franchise 1.8%). Company-operated comparable-sales growth reflected higher average check, with traffic flat.
- Q3 operating income declined 28.1%, despite higher revenue. Company-operated labor costs rose to 27.3% of company-operated sales from 25.1%; general and administrative expense increased 30.7%, including securities-litigation legal costs and higher pre-opening and payroll expenses. A $2.4 million impairment charge also weighed on results. Lower taxes helped Q3 net income increase 11.7%.
- For the 39 weeks, revenue rose 7.0%, while operating income fell 16.3% and net income fell 4.1%. Restaurant contribution margin declined to 21.2% from 21.7%; higher labor and occupancy/operating costs more than offset improved food-cost percentages.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $39.7 million, versus $43.4 million; capital expenditures were $26.5 million, versus $16.5 million. Investing cash outflow was $24.3 million. Financing cash outflow was $15.0 million, including $16.0 million of revolver repayments.
- Cash was $6.5 million at September 28, 2016. Revolver borrowings were $107.0 million, with $7.2 million of letters of credit and $85.8 million of borrowing availability. Total debt including capital leases was $107.5 million. The company reported compliance with credit covenants.
- Management said cash, operating cash flow and available revolver capacity were expected to fund liquidity needs for at least the next 12 months. A 1 percentage-point increase in the effective borrowing rate would add an estimated $1.1 million of annualized pretax interest expense.
Outlook, material developments and risks
- Management planned 17–18 company-operated and 11–12 franchised openings in 2016; stated a long-term system growth target of 8%–10% annually. Expected 2016 capital expenditures were $37–$38 million, including $26–$27 million for new restaurants. These are plans, not guarantees; no earnings guidance was provided.
- After quarter-end, the company opened four restaurants and prepaid $3.0 million on the revolver. It announced a two-unit franchise development agreement in Lafayette, Louisiana. A further $354,000 of fire-insurance proceeds was received October 5; the restaurant damaged in a 2015 fire had reopened in March 2016.
- Minimum-wage increases, particularly in California and Los Angeles, are a significant cost risk; management cited them as a contributor to higher labor expense. Food commodity volatility, restaurant-opening execution, and potential market saturation are also risks. The largest supplier represented 33% of purchases, and the greater Los Angeles area generated approximately 75% of revenue in the periods presented.
- Two restaurants in Arizona and Texas generated a $2.4 million noncash impairment charge; the company continued monitoring several other restaurants, including Texas locations opened in 2015.
- A securities class action alleging misleading statements about sales and labor-cost effects was amended after the court dismissed the initial complaint without prejudice; defendants said they would vigorously defend. A related derivative case was stayed pending the class action. A California wage-and-hour class settlement had been submitted for court approval. The SEC closed its inquiry in July 2016. The filing does not quantify potential exposure from the pending claims.
- Other commitments included estimated chicken purchases of $13.4 million and beverage obligations of $9.7 million. The company was contingently liable on five assigned restaurant leases, with potential undiscounted payments of $3.3 million; no liability was recorded.
Investor verification points
- Track whether comparable-sales and traffic trends improve, and whether new-unit growth translates into sustainable restaurant-level margins.
- Monitor labor, occupancy and corporate expense growth, impairment indicators at other restaurants, and execution against the stated openings and capital-spending plans.
- Verify cash generation, revolver repayments and availability, interest-rate exposure, and covenant headroom as expansion spending continues.
- Follow developments and potential financial exposure in the securities, derivative and wage-and-hour cases; assess the effects of minimum-wage changes and supplier concentration.