El Pollo Loco Holdings, Inc. — Q1 2023 Form 10-Q
Business context and period: The company operates and franchises El Pollo Loco quick-service restaurants. The quarter comprised 13 weeks ended March 29, 2023; comparisons are with the 13 weeks ended March 30, 2022. At quarter-end, it operated 187 restaurants and franchised 303, across seven states.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $114.5 million | $110.0 million | +4.1% |
| Income from operations | $7.8 million | $3.3 million | +133.5% |
| Net income | $4.9 million | $2.1 million | +132.5% |
| Diluted EPS | $0.13 | $0.06 | — |
| Operating margin | 6.8% | 3.0% | +3.8 percentage points |
| Restaurant contribution margin (non-GAAP) | 15.0% | 10.3% | +4.7 percentage points |
| Adjusted EBITDA (non-GAAP) | $12.2 million | $8.5 million | +43.4% |
Company-operated restaurant revenue rose 4.2% to $97.9 million; franchise revenue increased 4.5% to $9.7 million. System-wide comparable sales increased 0.8%: company-operated comps rose 3.8% while franchise comps fell 1.0%. Company-operated average check increased 6.3%, partly offset by a 2.4% decline in transactions.
Food and paper costs fell to 27.5% of company-operated revenue from 29.5%, and labor costs declined to 32.2% from 34.8%. Occupancy and other operating costs remained 25.4% of company-operated revenue. General and administrative expense increased 12.5% to $11.2 million, including higher labor and share-distribution-related costs. Net interest expense more than doubled to $1.0 million, reflecting higher rates and debt balances.
Cash flow, debt, and liquidity
- Operating cash flow was $3.8 million, compared with cash use of $2.3 million a year earlier. Capital spending was $6.0 million; investing cash outflow was $5.7 million.
- Cash declined by $15.7 million during the quarter to $4.8 million. Financing cash outflow of $13.8 million included an $8.0 million revolver paydown and $5.8 million of share repurchases.
- Revolver borrowings were $58.0 million at March 29, with $82.2 million available and $9.8 million of letters of credit outstanding. The facility is $150 million and matures in July 2027. Borrowing rates ranged from 5.69% to 6.30%; the company was in covenant compliance.
- Management said cash, operating cash flow, and borrowing availability should be adequate for liquidity needs for the next 12 months. The filing identifies operating lease obligations with a present value of $190.4 million and finance lease obligations of $1.7 million.
Changes, outlook, and material items
- Profitability improved substantially despite modest revenue growth, supported by higher pricing, lower food and labor expense ratios, and lower COVID-related and overtime costs. Cost pressures were described as beginning to moderate, though staffing challenges, wage increases, and commodity inflation remained.
- No company-operated or franchised restaurants opened in Q1. The company planned 10–15 company and 20–30 franchise remodels in fiscal 2023; it provided no specific financial guidance or quantified restaurant-opening outlook.
- Management cited risks from inflation, food and labor costs, competition, employee retention, lease obligations, interest rates, and the company’s concentration in greater Los Angeles, which generated 70.7% of Q1 revenue. California’s FAST Act could raise labor costs if approved by voters in November 2024.
- Unusual items included approximately $0.4 million of net insurance recovery related to a prior restaurant fire and a $0.1 million gain on a restaurant sale. Adjusted EBITDA also excludes items including $0.3 million of special legal costs related to a major shareholder distribution and $0.1 million of special-dividend-related costs.
- The company repurchased 552,349 shares for approximately $6.2 million under its $20 million authorization. On March 28, Trimaran Pollo Partners and affiliates distributed substantially all their company shares to investors, members, and limited partners.
- After quarter-end, the company borrowed an additional $2.0 million, bringing revolver borrowings to $60.0 million as of May 4. A workforce restructuring announced April 13 is expected to result in approximately $1.1 million of one-time costs in Q2.
- Potential contingencies include ordinary-course litigation, contingent lease payments of up to $4.1 million undiscounted (present value $2.8 million), and a $32.7 million estimated chicken purchasing commitment. The company said litigation outcomes are uncertain but did not expect current matters to materially affect its financial position or results.
Important facts for investors to verify
- Whether comparable-sales growth can persist as transaction counts remain below the prior-year level and franchise comps are negative.
- Whether pricing and moderating input costs can sustain restaurant margins, particularly given labor and commodity risks.
- Cash generation and revolver usage after the post-quarter borrowing, alongside share repurchases and planned capital spending.
- Exposure to variable interest rates: the filing estimates a 1 percentage-point rate increase would add about $0.6 million to annualized pretax interest expense.
- Potential future impairment charges at certain restaurants and the effect of the announced Q2 restructuring costs.