Business context and reporting period
El Pollo Loco Holdings, Inc. operates and franchises limited-service restaurants specializing in fire-grilled chicken. This Form 10-K reports fiscal 2020, ended December 30, 2020, a 53-week year; fiscal 2019 was 52 weeks. At year-end, the system had 479 restaurants: 196 company-operated and 283 franchised.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise noted.
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $426.1 | $442.3 |
| Operating income | $33.6 | $38.3 |
| Net income | $24.5 | $24.9 |
| Diluted EPS | $0.68 | $0.67 |
| Operating cash flow | $40.5 | $36.1 |
| Capital expenditures | $6.7 | $15.4 |
| Adjusted EBITDA | $61.6 | $62.5 |
- Total revenue declined 3.7%; company-operated restaurant revenue fell 4.4% to $374.1 million, while franchise revenue rose 2.1% to $29.4 million.
- Net income margin was 5.7% of revenue, versus 5.6% in FY2019. Company restaurant contribution margin was 18.8%, compared with 18.7%.
- System-wide comparable sales decreased 2.4%: company-operated comparable sales fell 3.0% and franchised comparable sales fell 2.0%. Company-operated transactions declined 15.8%, partly offset by a 15.3% increase in average check.
- Cash and cash equivalents were $13.2 million at year-end. Revolver borrowings were $62.8 million, with $78.8 million available; the company was in compliance with credit-facility covenants. The $150 million facility matures in July 2023.
- Operating cash flow was $40.5 million; investing cash outflow was $6.7 million and financing cash outflow was $28.7 million. Year-end current assets were $31.7 million and current liabilities $66.4 million.
- Operating lease liabilities totaled approximately $198.6 million, including $19.9 million current. Contractual operating lease payments were $245.9 million before imputed interest.
Material changes versus the prior comparable period
- Revenue and operating income declined, while net income was nearly flat. FY2020 included an additional operating week, which added approximately $4.6 million to company-operated revenue and $0.7 million to franchise revenue.
- Food and paper costs fell to 26.4% of company-operated revenue from 27.9%, helped by pricing, lower waste and operating efficiencies. Labor costs rose to 30.6% from 29.8%, and occupancy and other operating expenses rose to 24.7% from 23.5%, reflecting wage and delivery costs, pandemic-related expenses and sales deleverage.
- Operating cash flow increased by $4.4 million, primarily due to favorable working-capital movements. Capital spending decreased substantially amid pandemic-related reductions. The company paid down $34.2 million net on its revolver during FY2020; year-end borrowings were down from $97.0 million in FY2019.
Outlook, risks and unusual items
- Management planned for FY2021 to open three to five company-operated restaurants and four to six franchised restaurants, and to resume remodels at 15 company-operated and 40 franchised locations. These plans were subject to pandemic and economic uncertainty.
- COVID-19 restrictions disrupted dining-room operations; historically, about 20% of sales came from dine-in service. The company temporarily closed 154 restaurants during FY2020, with seven still closed at year-end; franchisees temporarily closed 69, with three still closed. No restaurants had been permanently closed due to the pandemic as of year-end.
- The company incurred $4.9 million of COVID-related expenses and received $2.0 million of business-interruption insurance proceeds. It deferred some rent payments and payroll taxes, reduced capital spending, and suspended share repurchases. All deferred franchise royalties had been repaid by year-end.
- Management warned that prolonged or worsening pandemic conditions could pressure sales, liquidity, asset values and future covenant compliance. No goodwill or trademark impairment was recorded, but $3.5 million of restaurant asset impairments were recorded and additional impairments could be material.
- FY2020 included $2.6 million of legal settlements, including resolution of a franchise territory dispute and final payments on wage-and-hour class actions. A new California PAGA action and a subsequent wage-and-hour class action were disclosed; management said losses were not probable or estimable for those matters at year-end.
- Chicken costs are a key exposure: poultry represented about 40% of food and paper costs, and the company had fixed prices for 100% of poultry supply through 2021. The company also cited labor-cost, supplier-concentration, geographic-concentration, lease, cybersecurity and competition risks. Greater Los Angeles generated 71.3% of FY2020 revenue.
Important facts for investors to verify
- Track comparable sales, particularly transaction recovery versus elevated average check, and the durability of pricing and pandemic-era demand shifts.
- Check actual FY2021 restaurant openings, remodel investment and returns against management’s plans.
- Monitor cash generation, revolver utilization, covenant headroom and lease obligations, especially if restaurant restrictions or sales weakness recur.
- Review subsequent updates on the disclosed employee and franchisee litigation, impairments and pandemic-related contingencies.
- Distinguish GAAP net income and cash flow from non-GAAP Adjusted EBITDA; assess the impact of the extra fiscal week and unusual insurance, legal and impairment items.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 30, 2020.