El Pollo Loco Holdings, Inc. — Q3 2021 Form 10-Q
Business context and period: The company operates and franchises El Pollo Loco quick-service restaurants. The filing covers the 13 weeks and 39 weeks ended September 29, 2021; comparisons are to periods ended September 23, 2020. At quarter-end, it operated 190 restaurants and franchised 290. All amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
- Q3 revenue: $115.7 million, up 4.3%. Company-operated restaurant revenue was $100.0 million (+2.8%), franchise revenue $8.9 million (+14.6%), and franchise advertising revenue $6.8 million (+14.8%). System-wide sales, a non-GAAP measure, were $251.6 million, up from $229.6 million.
- Q3 profit and margins: Operating income was $14.2 million, up 16.8%, and operating margin was 12.3%, versus 11.0%. Net income was $10.2 million, up 2.4%; diluted EPS was $0.28, unchanged. Restaurant contribution was $20.4 million and restaurant contribution margin was 20.4%, versus $21.8 million and 22.4%.
- Year-to-date: Revenue was $345.4 million (+9.4%); operating income $32.9 million (+30.0%); net income $22.9 million (+20.6%); and diluted EPS $0.63, versus $0.53. Operating margin improved to 9.5% from 8.0%, while restaurant contribution margin eased to 19.2% from 19.9%.
- Cash flow and investment: For the 39 weeks, operating cash flow was $42.3 million, compared with $33.5 million; capital spending was $12.7 million, partly offset by $4.6 million of restaurant-sale proceeds. Ending cash was $24.7 million. Cash increased $11.5 million during the period.
- Debt and liquidity: Revolver borrowings were $40.0 million, down from $62.8 million at December 30, 2020; the company repaid $22.8 million during the 39 weeks. It had $101.6 million of revolver availability after $8.4 million of letters of credit. The facility matures July 2023; the company reported covenant compliance. Management said cash and operating cash flow should cover liquidity needs for at least 12 months, while warning that prolonged or renewed COVID-19 effects could pressure liquidity and covenant compliance.
- Other balance-sheet items: Total assets were $604.3 million and total liabilities $300.4 million. Operating lease liabilities totaled $192.5 million, including current maturities.
Material changes and operating drivers
- System-wide comparable sales increased 9.3% in Q3 and 12.5% year-to-date. Company-operated comparable sales rose 4.8% and 8.1%, respectively; franchised comparable sales rose 12.6% and 15.7%.
- Company-operated Q3 comparable growth reflected higher average check (+3.5%) and transactions (+1.2%). Year-to-date, average check rose 6.6% and transactions 1.4%.
- Food and paper costs rose 7.1% in Q3, and increased to 26.7% of company-operated revenue from 25.6%, reflecting commodity inflation and packaging investment, partly offset by pricing. Labor costs as a percentage of company-operated revenue declined to 27.8% from 29.6%, helped by a payroll tax credit; occupancy and other operating expenses rose to 25.1% from 24.5%.
- Q3 results benefited from a $3.2 million Employee Retention Credit (ERC), recorded as a reduction of labor expense. The prior-year quarter included a $2.0 million insurance recovery for lost profits, which did not recur. Year-to-date, results also included a $1.5 million loss on the sale of eight Sacramento-area restaurants to a franchisee; the locations shifted from company-operated to franchised.
- Adjusted EBITDA, a non-GAAP measure, was $18.9 million in Q3 versus $19.3 million; year-to-date it was $50.7 million versus $48.0 million.
Outlook, commentary, and risks
- The company described plans to expand its restaurant base, grow comparable sales, and improve operations, but provided no specific financial guidance. It reported two company-operated openings year-to-date and said its fiscal 2021 remodeling plan was 10–12 company and 5–7 franchise restaurants; 12 remodels using the new design had been completed by quarter-end, including 10 during the year.
- Management reported that dining rooms were open at full capacity as of September 29, but staffing shortages had reduced operating hours and service channels. Supply-chain disruption and inflation were also affecting results. COVID-related expenses were $0.5 million in Q3 and $3.5 million year-to-date.
- CEO and President Bernard Acoca resigned effective October 15, 2021. CFO Laurance Roberts was appointed interim CEO while retaining the CFO role.
- Key risks include COVID-19 and staffing disruption; inflation in food, packaging, utilities, and wages; dependence on a major food distributor and exposure to chicken costs; concentration in the greater Los Angeles market; restaurant impairment risk; franchisee financial health; long-term lease obligations; and litigation, labor regulation, food safety, and cybersecurity. The company said risk factors were not materially changed from its 2020 Form 10-K.
- The company had $11.0 million of estimated chicken purchase commitments. It was contingently liable for up to $2.6 million of undiscounted payments on four leases assigned to franchisees and recorded a $0.1 million liability. A shareholder derivative action against Trimaran remained subject to appeal after dismissal; the company reported receiving $0.5 million of insurance proceeds, net of legal expenses, related to the matter.
Important facts for investors to verify
- Whether comparable-sales momentum can continue and whether pricing can offset food, packaging, labor, and other inflation without weakening traffic.
- How much of reported labor-cost improvement and earnings reflects the one-time $3.2 million ERC, and how the credit affects comparability in subsequent periods.
- Restaurant-level margin trends, given Q3 contribution-margin contraction despite revenue growth.
- Liquidity and covenant headroom under the revolver if operating conditions worsen; also monitor the July 2023 maturity and transition from LIBOR-based rates.
- Progress on the company’s remodeling and expansion plans, restaurant impairment exposures, and the outstanding derivative-litigation appeal.