El Pollo Loco Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Thirteen weeks ended March 25, 2020; comparison is the thirteen weeks ended March 27, 2019. The company operates and franchises El Pollo Loco restaurants; at quarter-end it had 195 company-operated and 284 franchised locations. COVID-19 restrictions began disrupting operations during March.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $105.2 million | $109.0 million |
| Operating income / margin | $5.7 million / 5.4% | $2.3 million / 2.1% |
| Net income | $3.6 million | $0.9 million |
| Diluted EPS | $0.10 | $0.02 |
| Restaurant contribution / margin (non-GAAP) | $16.3 million / 17.6% | $17.2 million / 17.7% |
| Adjusted EBITDA (non-GAAP) | $13.4 million | $14.2 million |
| Operating cash flow | $(7.5) million | $10.0 million |
| Capital expenditures | $1.6 million | $4.2 million |
At March 25, cash was $43.4 million, total assets $653.5 million, and total liabilities $404.9 million. Revolver borrowings were $141.5 million; $8.4 million of letters of credit were outstanding and only about $0.1 million of revolver availability remained. The $150 million facility matures in July 2023. Operating lease liabilities totaled $210.0 million. The company was in compliance with debt covenants at quarter-end.
Changes versus prior year
- Revenue declined 3.5%; company-operated restaurant revenue fell 4.6%, while franchise revenue rose 9.6%.
- System-wide comparable sales decreased 1.5%; company-operated comps fell 0.7% (transactions down 4.5%, average check up 3.8%) and franchise comps fell 2.2%.
- Operating income and net income increased, partly reflecting the prior-year $4.1 million loss on assets held for sale and lower general and administrative expense. Adjusted EBITDA decreased despite higher GAAP operating income.
- Food and paper costs improved to 27.6% of company-operated revenue from 27.9%; labor costs increased to 31.0% from 30.4%. Restaurant contribution margin was nearly unchanged.
- Operating cash flow turned negative, primarily reflecting payment of the $16.3 million wage-and-hour settlement and unfavorable working-capital changes. Net revolver borrowing provided $44.5 million of financing cash flow.
Outlook, risks and unusual items
- All dining rooms were closed under COVID-19 restrictions; restaurants relied on take-away, mobile pickup and delivery, with drive-thru where available. Historically, about 20% of company sales came from dine-in service. After quarter-end, 18 company restaurants and 12 franchise restaurants temporarily closed; at filing, 3 company locations and 4 franchise locations remained closed.
- Management suspended all but essential capital spending and share repurchases, delayed most April rent payments while negotiating relief, and deferred half of franchisees’ April royalties and their 2020 remodel/new-build obligations. Company development was suspended; management expected one company-operated and one franchised opening during the remainder of 2020, both already in progress.
- Management believed cash and operating cash flow would meet liquidity needs for twelve months from filing, but warned that the pandemic could materially harm results and liquidity and threaten lease-adjusted coverage and fixed-charge covenants. No specific earnings or sales guidance was provided.
- The company recorded $2.4 million of impairment and closed-store reserves, including a $1.9 million non-cash impairment charge. It found no goodwill or trademark impairment in Q1 but warned future impairment could be material.
- A Lancaster franchisee judgment remains under appeal. The company recorded no accrual because management assessed a loss as not probable or estimable. The judgment, costs and attorney fees totaled approximately $10.5 million before continuing interest. After quarter-end, the company provided a $2.7 million letter of credit to the surety and made a corresponding revolver prepayment.
- The company paid the $16.3 million wage-and-hour class-action settlement in February. It also disclosed concentration risks: the greater Los Angeles area generated 72.4% of Q1 revenue, and its largest supplier accounted for 27.4% of total expenses.
- Trimaran Pollo Partners held approximately 47.7% of shares; the filing said its LLC was expected to begin winding up on July 27, 2020, potentially creating share-sale pressure.
Important facts for investors to verify
- Subsequent quarterly filings for COVID-19 sales trends, restaurant reopening status, and the extent of rent concessions and franchisee royalty deferrals.
- Revolver usage, cash levels, covenant headroom, and the effect of operating performance on covenant compliance.
- Progress and outcome of the Lancaster appeal, related interest and collateral requirements, and any changes to the company’s loss assessment.
- Whether asset impairments, store closures, or franchisee financial distress increase as the pandemic and its effects continue.
- Actual 2020 restaurant openings and capital spending compared with management’s revised expectations.