El Pollo Loco Holdings, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
The filing covers the 13 weeks ended March 31, 2021; the comparable period ended March 25, 2020. El Pollo Loco operates and franchises quick-service restaurants. At quarter-end, it operated 198 restaurants and franchised 283, across six states. Fiscal 2021 is a 52-week year ending December 29, 2021.
Key financial results
Amounts below are in millions of dollars except per-share data. Comparisons are year over year.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $107.7 | $105.2 |
| Operating income / margin | $6.0 / 5.6% | $5.7 / 5.4% |
| Net income | $4.0 | $3.6 |
| Diluted EPS | $0.11 | $0.10 |
| Operating cash flow | $7.4 | $(7.5) |
| Capital expenditures | $5.3 | $1.6 |
| Adjusted EBITDA (non-GAAP) | $11.9 | $13.4 |
- Company-operated restaurant revenue rose 1.6% to $94.2 million; franchise revenue rose 7.8% to $7.6 million, while franchise advertising-fee revenue rose 8.8% to $5.9 million.
- System-wide comparable restaurant sales increased 7.4%; company-operated comparable sales rose 3.3% and franchised comparable sales rose 10.5%. Company-operated average check increased 15.7%, partly offset by transactions declining 10.7%.
- Restaurant contribution was $15.2 million, with a 16.1% margin, versus $16.3 million and 17.6%. Food and paper costs improved to 25.9% of company-operated sales from 27.6%, but labor was 32.6% versus 31.0%, and occupancy and other operating expenses were 25.3% versus 23.9%.
- Cash and cash equivalents were $6.7 million at March 31, down from $13.2 million at fiscal year-end. Revolver borrowings were $53.8 million, down $9.0 million during the quarter; $87.8 million remained available, with $8.4 million of letters of credit outstanding. Management said available cash and expected operating cash flow should meet liquidity needs for at least 12 months.
- Operating lease liabilities were $198.6 million and finance lease obligations were $2.0 million. These are separate from the $53.8 million revolver debt.
Material changes and management commentary
- Net income increased 10.1% and operating income increased 5.5%, while Adjusted EBITDA declined 11.2%. Higher labor, occupancy, delivery fees and corporate costs weighed on restaurant-level contribution and adjusted earnings; lower impairment and closed-store charges and lower interest expense helped reported results.
- Operating cash flow improved by about $15.0 million, primarily because the prior-year quarter included a $16.3 million wage-and-hour settlement payment. Investing cash use increased with two new company restaurant openings and remodeling activity. The company paid down $9.0 million of revolver borrowings.
- The company incurred $2.8 million of COVID-19-related costs, mainly employee leaves and overtime. COVID-19 temporarily closed 45 company-operated restaurants and 15 franchise restaurants during the quarter; all had reopened by March 31, and no restaurants had been permanently closed due to the pandemic.
- Management reported covenant compliance at quarter-end, but warned that prolonged or worsening pandemic effects could pressure liquidity and compliance with lease-adjusted coverage and fixed-charge coverage covenants.
Outlook, risks, contingencies and unusual items
- The filing gives no quantified financial guidance. The company plans to continue expanding, growing comparable sales and improving operations. It opened two company-operated restaurants in Q1; for fiscal 2021 it planned 15 company and 40 franchise remodels using its new design. Five remodels had been completed by quarter-end.
- Management identifies COVID-19, consumer demand, competition, minimum wages, food and commodity inflation, restaurant development, franchisee financial health, leases, litigation and supply-chain dependence as risks. The greater Los Angeles area generated 70.1% of quarterly revenue. One supplier represented 25.5% of total expenses.
- Chicken purchase commitments totaled $25.7 million. The company was contingently liable on four assigned leases for up to $2.9 million of undiscounted payments and recorded a $0.1 million liability.
- Several employment-related matters remained pending, including a derivative action and PAGA/class claims; the company stated losses were not probable or estimable and recorded no accrual for those cases. A prior $2.5 million Lancaster franchisee settlement was resolved in 2020. The company also reported receiving a $0.5 million tax refund after quarter-end.
Important facts for investors to verify
- Whether the favorable comparable-sales trend, particularly higher average checks, persists as dining restrictions ease, and whether transaction declines recover.
- Whether wage, commodity, delivery and occupancy cost increases continue to pressure restaurant contribution margins.
- Cash generation, capital spending and revolver balances, including compliance with credit covenants if pandemic-related disruption returns.
- Progress against restaurant opening and remodel plans, and the performance and impairment risk of newer-market locations.
- Developments in pending employment litigation, the company’s Los Angeles concentration and reliance on a major supplier.