El Pollo Loco Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: 13 weeks ended June 29, 2016; year-to-date figures cover 26 weeks. Comparisons are with the periods ended July 1, 2015. The company operates and franchises quick-service restaurants; at quarter-end it had 188 company-operated and 251 franchised locations.
Financial performance
| Metric | Q2 2016 | Q2 2015 | 26 weeks 2016 | 26 weeks 2015 |
|---|---|---|---|---|
| Total revenue | $97.5m | $89.5m | $191.8m | $179.9m |
| Operating income | $13.4m | $13.6m | $23.7m | $26.5m |
| Net income | $7.3m | $7.2m | $12.7m | $14.0m |
| Diluted EPS | $0.19 | $0.18 | $0.33 | $0.36 |
| Operating cash flow | — | — | $21.0m | $29.8m |
| Capital expenditures | $8.4m | Not stated | $14.3m | $8.9m |
- Q2 revenue rose 9.0%; company-operated restaurant revenue increased 8.7% and franchise revenue 12.2%. Year-to-date revenue rose 6.6%.
- Q2 comparable sales increased 2.4% system-wide, 2.0% at company-operated restaurants and 2.7% at franchised restaurants. Company-operated comparable sales reflected 2.7% traffic growth offset by a 0.7% lower average check.
- Restaurant contribution margin was 22.0% in Q2 versus 21.6%; year-to-date it was 21.3% versus 21.9%. Q2 operating margin was approximately 13.7% versus 15.2%; net margin was 7.5% versus 8.1%.
- Q2 Adjusted EBITDA was $17.9m versus $17.0m; year-to-date it was $33.9m versus $33.6m. This non-GAAP measure includes management-selected adjustments.
- Cash and cash equivalents were $9.5m at June 29, up from $6.1m at year-end 2015. Net cash used in investing was $11.9m and in financing was $5.8m for the first half.
Balance sheet and liquidity
- Revolver borrowings were $116.5m; total debt including capital leases was reported as $117.1m. The company paid down $6.5m of revolver debt in the first half and made a further $3.0m payment after quarter-end.
- The $200m revolving facility had $76.3m available at quarter-end, with $7.2m of letters of credit outstanding. The facility matures in December 2019; the company reported covenant compliance.
- Management said cash, operating cash flow and available revolver borrowings would cover liquidity needs for at least 12 months. A 1 percentage-point increase in borrowing rates would add an estimated $1.2m to annualized pretax interest expense.
Changes, outlook and risks
- Despite higher sales, first-half operating income fell 10.7% and net income fell 9.4%. Labor and related costs rose 14.5% year to date, driven in part by new restaurants and California’s minimum-wage increase; G&A rose 26.2%, including securities-litigation legal expenses. Food-cost ratios improved, helped by lower chicken commodity costs and promotional mix.
- Management planned to open 17–20 company-operated and 10–15 franchised restaurants in 2016; its longer-term target was 8%–10% annual unit growth. Expected 2016 capital expenditures were $35m–$39m. These are plans, not guarantees.
- One fire-damaged restaurant reopened in March. First-half results included an $889,000 insurance recovery gain; Q2 included $600,000 of that gain. A Tucson restaurant sale generated $1.5m cash proceeds and a $33,000 gain.
- Key risks include rising labor costs—particularly scheduled California and local minimum-wage increases—commodity-price volatility, and geographic concentration: the greater Los Angeles area generated about 75% of revenue. Commitments included an estimated $21.6m of chicken purchases and $11.5m under beverage agreements. Potential undiscounted lease-guarantee payments were $3.4m; no liability was recorded.
- A California wage-and-hour class action had a settlement stipulation pending court approval. The securities class-action complaint was dismissed without prejudice on July 25, 2016, with leave to amend; the SEC separately closed its inquiry on July 15, 2016. Related shareholder derivative litigation was stayed pending the securities case.
Most important facts to verify
- Whether comparable-sales and traffic momentum persisted, and whether average check recovered.
- Whether wage increases and new-store costs continue to pressure restaurant margins.
- Actual opening pace and capital spending versus the 2016 targets.
- Revolver balance, liquidity availability, interest-rate exposure and covenant headroom.
- Outcomes and financial exposure from the employment and securities litigation, and court approval of the wage-and-hour settlement.