El Pollo Loco Holdings, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
The filing covers the 13 weeks ended March 30, 2022; comparisons are with the 13 weeks ended March 31, 2021. El Pollo Loco operates and franchises quick-service restaurants. At quarter-end, it had 188 company-operated and 293 franchised restaurants, 481 total, across six states.
Financial and operating performance
| Metric | Q1 2022 | Prior period |
|---|---|---|
| Total revenue | $110.0 million | $107.7 million |
| Operating income / margin | $3.3 million / 3.0% | $6.0 million / 5.6% |
| Net income / diluted EPS | $2.1 million / $0.06 | $4.0 million / $0.11 |
| Restaurant contribution / margin | $9.7 million / 10.3% | $15.2 million / 16.1% |
| EBITDA | $7.0 million | $10.0 million |
| Adjusted EBITDA | $8.5 million | $11.9 million |
| Operating cash flow | $(2.3) million | $7.4 million |
Revenue rose 2.2%, while net income fell 46.6%. Company-operated restaurant revenue was nearly flat at $94.0 million; franchise revenue increased 21.6% to $9.3 million and franchise advertising revenue rose 14.9% to $6.8 million. System-wide sales increased 8.5% to $246.5 million. System-wide comparable sales rose 7.8%; company-operated comparable sales increased 2.3% (average check +6.0%, transactions -3.5%), and franchised comparable sales increased 11.5%.
Margin pressure reflected higher food, paper and labor costs. Food and paper costs increased to 29.5% of company-operated revenue from 25.9%; labor increased to 34.8% from 32.6%. Company restaurant expenses rose to 89.7% of company-operated revenue from 83.9%. The filing attributes these changes chiefly to commodity inflation, packaging investment, wage increases, overtime and other labor costs.
Liquidity, debt and cash flow
At March 30, 2022, cash was $25.5 million, total current assets were $46.5 million and total current liabilities were $71.0 million. Revolver borrowings were $40.0 million, with $100.0 million of borrowing availability after $10.0 million of letters of credit. The $150.0 million revolving facility matures July 13, 2023; the company was in compliance with its financial covenants at quarter-end. A $40.0 million interest-rate swap hedged the borrowings, with a fixed LIBOR component of 1.31% plus the applicable margin.
Cash decreased $4.6 million during the quarter. Operating cash outflow was $2.3 million, investing outflow was $3.8 million, and financing inflow was $1.5 million. Management said working-capital movements and lower profitability drove the year-over-year decline in operating cash flow. In addition to debt, the company reported $189.5 million of operating lease liabilities and $1.8 million of finance lease liabilities.
Changes, outlook and risks
Management said staffing constraints reduced operating hours or service channels at some restaurants and contributed to wage inflation, overtime and labor costs. Supply-chain disruption and commodity inflation also affected results; management expects these pressures to continue through the rest of fiscal 2022. COVID-19-related expenses were $2.3 million, compared with $2.8 million a year earlier. All restaurant dining rooms were open at quarter-end.
No specific full-year revenue or earnings guidance was provided. The company plans to pursue restaurant development, sales growth and operational improvements. For fiscal 2022, it planned 10–15 company and 20–30 franchise remodels using its new design; average investment was estimated at $0.3–$0.4 million per restaurant. During the quarter, it opened one company-operated and two franchised restaurants, and closed two company-operated restaurants.
Key risks include ongoing food and labor inflation, staffing and supply-chain challenges, COVID-19 uncertainty, geographic concentration (the greater Los Angeles area generated 70.8% of revenue), and reliance on a major supplier. The largest supplier accounted for 29.7% of total expenses in the quarter. The company had an estimated $30.4 million chicken-purchasing commitment. It also reported potential contingent lease payments of up to $2.6 million if franchisees fail to pay assigned leases.
Legal matters include an appeal in a shareholder derivative action; the parties were awaiting a ruling after a March 30, 2022 hearing. The company stated other ordinary-course claims were not expected to have a material adverse effect, while noting that a significant increase in claims or successful claim amounts could be material. The filing reported no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether commodity, packaging and labor inflation continues, and whether menu pricing can offset those costs without further transaction declines.
- Whether cash generation recovers after the quarter’s operating cash outflow and working-capital pressures.
- Refinancing or replacement plans for the revolver before its July 2023 maturity, including LIBOR-transition terms and covenant headroom.
- Restaurant-level sales and margins, including whether company-operated comparable sales can improve from transaction weakness.
- Progress on planned restaurant openings and remodels, and any material developments in the derivative appeal or other legal contingencies.