El Pollo Loco Holdings, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. The quarter comprised 13 weeks ended June 28, 2023; year-to-date results cover 26 weeks. El Pollo Loco develops, operates and franchises quick-service restaurants. At quarter-end, it had 188 company-operated and 304 franchised locations across seven states.
Financial results and liquidity
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2022 periods.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Total revenue | $121.5 | $124.1 | $236.0 | $234.2 |
| Operating income | $10.9 | $10.4 | $18.6 | $13.7 |
| Net income | $7.1 | $7.1 | $12.0 | $9.3 |
| Diluted EPS | $0.20 | $0.20 | $0.33 | $0.25 |
| Restaurant contribution margin* | 16.9% | 15.0% | 16.0% | 12.8% |
*Company-defined non-GAAP restaurant-level measure; it excludes corporate and other costs and is not a GAAP operating margin.
- Q2 company-operated restaurant revenue was $103.9 million, down 2.4%; franchise revenue was $10.1 million, up 0.5%, and advertising-fee revenue was $7.5 million, down 1.6%.
- Q2 operating income improved 4.4%, but net income edged down 1.2%, as net interest expense rose $0.6 million to $1.0 million. First-half net income rose 29.4%.
- Company restaurant expenses were 83.1% of company-operated revenue in Q2 versus 85.1% a year earlier. Food and paper costs improved to 27.4% of company revenue from 29.8%; labor was 31.1% versus 31.0%, and occupancy and other operating costs were 24.6% versus 24.3%.
- First-half operating cash flow was $21.8 million, versus $11.8 million. Capital purchases were $9.2 million; investing cash outflow was $8.9 million. Financing used $23.2 million, including $17.8 million of share repurchases and $6.0 million of net revolver repayments.
- Cash was $10.2 million at June 28, down from $20.5 million at fiscal year-end. Revolver borrowings were $60.0 million; $80.2 million remained available after $9.8 million of letters of credit. The $150 million facility matures in July 2027; borrowing rates during the first half ranged from 5.69% to 8.50%. The company was in compliance with its financial covenants.
- Recognized operating lease obligations were $189.2 million and finance lease obligations were $1.7 million. These are distinct from the $60.0 million revolver debt.
Material changes versus prior period
- System-wide comparable sales fell 3.4% in Q2 and 1.4% year to date. Company-operated comps declined 2.3% in Q2, reflecting transactions down 4.5% partly offset by average check up 2.3%; first-half company comps rose 0.5%. Franchise comps fell 4.1% in Q2 and 2.6% year to date.
- First-half revenue increased 0.8%, while operating income increased 35.6%. Lower food costs and improved labor expense as a share of sales contributed to the improvement; Q2 general and administrative expense rose 14.8%, including $1.1 million of restructuring costs.
- Share repurchases totaled 1.82 million shares for $18.1 million in the first half. The company reported $1.9 million remaining under the program at quarter-end and said that amount was completed after quarter-end.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or comparable-sales guidance. Management said labor costs and inflationary pressure had become more moderate, but the future effects of macroeconomic conditions and any infectious-disease resurgence remained uncertain. It cited growth, sales improvement and restaurant development as priorities.
- Fiscal 2023 remodeling plans were 10–15 company restaurants and 20–30 franchised restaurants; through the first half, 9 company and 14 franchise remodels were completed. The company opened one company restaurant and franchisees opened one restaurant during the first half.
- California Assembly Bill 257 could raise labor costs if it takes effect following a November 2024 voter decision. Other risks highlighted include food and labor inflation, interest-rate exposure, consumer demand, competition, staffing, food safety, and the company’s geographic concentration: the greater Los Angeles area generated about 70.8% of first-half revenue.
- The largest supplier represented 27.3% of first-half total expenses and 30.9% of accounts payable at quarter-end. The company had a $24.4 million estimated chicken-purchase commitment.
- First-half results included $0.4 million net insurance recovery related to a prior restaurant fire, a $0.1 million gain on a restaurant sale, and $1.1 million of estimated one-time restructuring costs. Less than $0.1 million of impairment charges were recorded; management is monitoring certain restaurants and notes future impairment charges could be material.
- Ordinary-course wage-and-hour and other claims were disclosed, with no material legal proceeding reported. Contingent lease guarantees could require up to $4.0 million of undiscounted payments ($2.7 million present value) if primary lessees fail to pay. Management said liquidity, including operating cash flow and revolver availability, should meet needs for at least 12 months.
Important facts for investors to verify
- Whether transaction trends and comparable sales stabilize after Q2 declines, and whether pricing can continue to offset lower traffic.
- Whether food-cost improvements persist and whether wage, occupancy and other operating-cost pressures affect restaurant margins.
- Cash generation, capital spending and repurchases relative to available cash, revolver borrowings and variable-rate interest exposure.
- Progress on restaurant openings and remodels, including performance of newer-market locations and any resulting impairment risk.
- Potential California labor-cost effects, chicken supply and pricing, supplier concentration, and the status of ordinary-course legal claims and contingent lease exposures.