El Pollo Loco Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 25, 2019 (52 weeks); the filing is an annual report, not a standalone Q4 filing. FY2020 is expected to be a 53-week year. The company operated 195 restaurants and franchised 287 across six states at year-end.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $442.3 million | $435.8 million |
| Operating income (loss) | $38.3 million | $(9.5) million |
| Net income (loss) | $24.9 million | $(9.0) million |
| Diluted EPS | $0.67 | $(0.23) |
| Cash from operations | $36.1 million | $45.4 million |
| Capital expenditures | $15.4 million | $27.8 million |
| Cash and equivalents at year-end | $8.1 million | $7.0 million |
| Revolver debt at year-end | $97.0 million | $74.0 million |
- Revenue rose 1.5%. Company-operated restaurant revenue increased 0.6%; franchise revenue grew 11.8%. System-wide comparable sales increased 2.0%, with company-operated sales up 1.9% and franchised sales up 2.0%.
- Company-operated comparable sales reflected a 2.9% increase in average check, including a 3.6% benefit from menu price increases, partly offset by a 1.0% decline in transactions.
- Restaurant contribution margin, a non-GAAP restaurant-level measure, was 18.7%, down from 19.0%. Adjusted EBITDA was $62.5 million versus $62.9 million; reported net income improved substantially from the prior-year loss.
- Company-operated restaurant expenses were 81.3% of related revenue, versus 81.0%. Food and paper costs improved to 27.9% from 28.6%, while labor costs increased to 29.8% from 28.9%, reflecting wage increases and higher workers’ compensation claims.
- Q4 FY2019 revenue was $107.5 million, operating income $5.3 million, and net income $3.5 million. Q4 FY2018 revenue was $106.3 million; operating and net losses included a $36.3 million legal-settlement charge.
Material changes and unusual items
- FY2019 earnings benefited from the absence of FY2018’s $36.3 million legal-settlement charge and from a $10.0 million insurance recovery of securities-litigation legal expenses. FY2019 also included $4.9 million of impairment and closed-store charges and a $5.1 million loss on restaurant dispositions.
- The company sold 16 company-operated restaurants to franchisees, received $4.8 million in proceeds, and recorded a $5.1 million net loss on sale. System restaurants ended the year at 482, down from 484.
- Cash from operations fell $9.3 million, primarily due to unfavorable working-capital movements. Financing included $48.4 million of share repurchases; the company repurchased roughly 4.4 million shares under its 2018 and 2019 programs.
- Adoption of lease accounting in FY2019 brought operating lease right-of-use assets and liabilities onto the balance sheet. At year-end, operating lease assets were $192.4 million and operating lease liabilities totaled about $213.9 million. Prior-year balance-sheet amounts were not recast.
- Reported revenue and expenses include franchise advertising contributions and corresponding expenses under the revenue standard adopted in FY2018; this gross presentation increased both without changing the underlying advertising-fund economics.
Liquidity, debt and outlook
- The company had $97.0 million outstanding on its $150 million secured revolver, $8.4 million of letters of credit, and $44.6 million of remaining availability at December 25, 2019. It was in compliance with its financial covenants. The revolver matures July 2023.
- A $40 million interest-rate swap fixed the LIBOR component on that portion of borrowings at 2.81% through June 2023. After the swap, $57 million of debt remained rate-sensitive; a one-percentage-point rate increase was estimated to raise annual interest expense by $0.6 million.
- Management said cash, operating cash flow and available revolver capacity were expected to fund operations and plans for at least 12 months from issuance of the statements. There is no specific sales or earnings guidance in the filing.
- For FY2020, management intended to open three to four company-operated and five to eight franchised restaurants. The company planned to test a new restaurant design, with broader rollout dependent on results. Development, remodels, rent, labor, and working-capital needs remain demands on liquidity.
Management commentary and key risks
- Management’s Transformation Agenda focuses on people and culture, brand differentiation, operational simplification, and disciplined growth. Delivery represented about 3% of sales mix in Q4; digital and delivery orders together were 3.7% of FY2019 revenue, up from 2.1% in FY2018.
- Geographic concentration is significant: the greater Los Angeles area generated 70.5% of FY2019 revenue. Risks include California wage increases, competition, food and poultry costs, labor availability, food safety, and dependence on a major distributor and limited chicken suppliers. The company fixed prices for all planned poultry supply through 2020, with two suppliers representing about 64% of planned purchases.
- A Lancaster franchisee judgment resulted in $8.8 million in damages and an injunction requiring changes to franchise documents and restricting certain nearby development. Costs and post-judgment interest were also awarded. The company appealed; management concluded a loss was not probable or estimable at year-end and recorded no accrual. The injunction was in effect pending appeal.
- A separate wage-and-hour class-action settlement was approved in January 2020. The company had accrued $16.3 million in FY2018 and paid the settlement on February 28, 2020, funding it in part with a subsequent $10.0 million net revolver borrowing. Other litigation and contingent lease obligations also remain relevant.
- The company’s 47.7% shareholder, Trimaran Pollo Partners, has significant voting influence. The company does not expect to pay common-stock dividends in the foreseeable future.
Important facts for investors to verify
- Whether comparable-sales growth can continue without relying mainly on menu pricing, given the FY2019 transaction decline.
- Progress on the new restaurant design, planned openings, and franchisee development commitments, especially in light of the Lancaster injunction and prior impairments in newer markets.
- Cash flow, debt balances, revolver availability and covenant headroom after the FY2020 settlement payment, share repurchases, capital spending, and lease obligations.
- Final outcomes and additional costs from the Lancaster appeal and remaining legal matters; confirm payment and accounting for the wage-and-hour settlement.
- Whether labor, poultry, delivery fees, and other operating costs pressure restaurant contribution margins, and whether digital and delivery growth is profitable after third-party fees.