El Pollo Loco Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Thirteen weeks ended June 30, 2021; year-to-date figures cover 26 weeks. Comparisons are with the corresponding 2020 periods. The company operates and franchises El Pollo Loco quick-service restaurants; at quarter-end it operated 198 and franchised 282 locations.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $122.0M | $99.6M | $229.7M | $204.8M |
| Operating income | $12.7M | $7.4M | $18.7M | $13.1M |
| Net income | $8.8M | $5.5M | $12.8M | $9.1M |
| Diluted EPS | $0.24 | $0.16 | $0.35 | $0.26 |
| Operating margin | 10.4% | 7.5% | 8.1% | 6.4% |
- Q2 revenue rose 22.5%; company-operated restaurant revenue increased 22.0%, franchise revenue 24.9%, and franchise advertising fee revenue 28.0%. First-half revenue grew 12.2%.
- System-wide comparable restaurant sales increased 21.0% in Q2 and 14.2% year to date. Company-operated comparables rose 16.4% and 9.8%, respectively; franchise comparables rose 24.5% and 17.5%.
- Q2 company restaurant expenses were 79.3% of company-operated revenue, versus 80.5% a year earlier; restaurant contribution margin was 20.8% versus 19.6%. First-half restaurant contribution margin was 18.6% versus 18.5%.
- Food and paper costs were 26.1% of company-operated revenue in Q2, unchanged year over year. Labor was 29.5%, also approximately flat; first-half labor costs rose to 31.0% from 30.2%, reflecting overtime, wage increases and pandemic-related labor costs.
- Adjusted EBITDA, a non-GAAP measure, was $19.9M in Q2 versus $15.3M, and $31.8M for the first half versus $28.7M.
Cash flow, debt and liquidity
- First-half operating cash flow was $26.6M, up from $11.1M. Investing used $4.3M, including $8.8M of property and equipment purchases, partly offset by a $4.6M deposit on the Sacramento restaurant sale. Financing used $22.9M, including $22.8M of revolver repayments.
- Cash was $12.6M at June 30, 2021, compared with $13.2M at fiscal year-end. Revolver borrowings were $40.0M, down from $62.8M; $101.6M remained available after $8.4M of letters of credit. The company reported compliance with credit covenants.
- The company stated that cash and expected operating cash flows should meet liquidity needs for at least 12 months, while warning that a prolonged or renewed pandemic impact could affect financial performance and covenant compliance.
- Operating lease liabilities totaled $194.8M, including $19.6M current; finance lease liabilities totaled $1.9M. These are substantial obligations beyond the $40.0M revolver balance.
Material changes, outlook and risks
- Results improved against a prior-year quarter affected by COVID-19 restrictions. Nearly all restaurants had dining rooms open at full capacity by June 30, 2021; the company reported no permanent closures due to the pandemic. Pandemic-related expenses were $0.2M in Q2 and $3.0M year to date.
- Eight Sacramento-area company restaurants were classified as held for sale, with a $1.5M loss recognized and $4.6M received before quarter-end. The sale to an existing franchisee was completed after June 30, 2021.
- The company opened two company-operated restaurants in the first half and planned 15 company and 40 franchise remodels using its new design during fiscal 2021. No formal financial guidance was provided.
- Management highlighted exposure to COVID-19 and economic conditions, food and chicken cost inflation, minimum-wage and labor pressures, dependence on a major food distributor, geographic concentration in greater Los Angeles, franchisee financial health, lease commitments, and potential asset impairment. Greater Los Angeles generated about 70% of revenue.
- First-half effective tax rate was 28.1%, versus 18.4% a year earlier. A $625,000 proposed settlement in a shareholder derivative action was subject to court approval at quarter-end; the company recorded no gain. The court later dismissed claims against Trimaran Pollo Partners on July 30, 2021.
- The filing reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Assess how much of the comparable-sales growth reflects recovery from pandemic-affected 2020 comparisons, and whether traffic and average-check trends persist.
- Track labor, chicken and other commodity inflation, pricing actions, and restaurant-level margins.
- Confirm the accounting and cash proceeds from the post-quarter Sacramento restaurant sale and the effect of refranchising on revenue and earnings.
- Monitor cash generation, revolver repayments, lease obligations, covenant headroom and the July 2023 credit-facility maturity.
- Review pandemic-related operating effects, impairment exposure, and the status and financial implications of unresolved legal matters.