EL POLLO LOCO HOLDINGS, INC. Cautionary Statement Concerning Forward-Looking Statements
This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements because they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those that we expected.
While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations. These factors include, but are not limited to:
the impacts of the COVID-19 pandemic on our company, our employees, our
? customers, our partners, our industry and the economy as a whole, as well as
our franchisees' ability to maintain operations in their individual
restaurants;
? our ability to open new restaurants in new and existing markets, including
difficulty in finding sites and in negotiating acceptable leases;
? our ability to compete successfully with other quick-service and fast casual
restaurants;
? vulnerability to changes in consumer preferences and political and economic
conditions;
? our ability to attract, develop and retain employees;
vulnerability to conditions in the greater
? disasters given the geographic concentration and real estate intensive nature
of our business;
? the possibility that we may continue to incur significant impairment of certain
of our assets, in particular in our new markets;
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? changes in food and supply costs, especially for chicken;
? social media and negative publicity, whether or not valid, and our ability to
respond to and effectively manage the accelerated impact of social media;
? our ability to continue to expand our digital business, delivery orders and
catering;
? concerns about food safety and quality and about food-borne illness,
particularly avian flu;
dependence on frequent and timely deliveries of food and supplies and our
? dependence on a single supplier to distribute substantially all of our products
to our restaurants;
? our ability to service our level of indebtedness;
? uncertainty related to the success of our marketing programs, new menu items,
advertising campaigns and restaurant designs and remodels;
our reliance on our franchisees, who may incur financial hardships, lose access
? to credit, close restaurants, or declare bankruptcy, and our limited control
over our franchisees and potential liability for their acts;
? potential exposure to unexpected costs and losses from our self-insurance
programs;
? potential obligations under long-term and non-cancelable leases, and our
ability to renew leases at the end of their terms;
? the impact of any failure of our information technology system or any breach of
our network security;
the impact of any security breaches of confidential customer data or personal
? information in connection with our electronic process of credit and debit card
transactions;
? our ability to enforce and maintain our trademarks and protect our other
proprietary intellectual property;
? risks related to government regulation and litigation, including employment and
labor laws; and
other risks set forth in our filings with the
? under Item 1A, Risk Factors in our annual report on Form 10-K for the year
ended
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the ways that we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Market Trends and Uncertainties
We may face future business disruption and related risks resulting from the
ongoing outbreak of COVID-19 or from another pandemic, epidemic or infectious
disease outbreak, or from broader macroeconomic trends, any of which could have
a significant impact on our business. During the thirteen and twenty-six weeks
ended
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higher wage inflation, overtime costs and other labor related costs, which
resulted in reduced operating hours and service channels at some of our
restaurants during the thirteen and twenty-six weeks ended
Due to the fluidity of the COVID-19 pandemic and current macroeconomic environment, we cannot determine the ultimate impact on our condensed consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on our condensed consolidated financial condition, liquidity, and future results of operations is uncertain.
Recent Developments
On
See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies - Subsequent Events" for additional information.
In connection with our entry into the 2022 Credit Agreement, we terminated the
interest rate swap previously used to hedge interest rate risk. In settlement of
this swap, we received approximately
Growth Strategies and Outlook
As of
? develop a people-first culture;
? differentiate the brand; ? simplify operations; and
? accelerate new restaurant development.
To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend. The success of these growth plans is not guaranteed.
Highlights and Trends Comparable Restaurant Sales
For the thirteen and twenty-six weeks ended
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restaurants, comparable restaurant sales increased 10.6% and 11.0% for the
thirteen and twenty-six weeks ended
Our restaurant counts at the beginning and end of each of the last three fiscal
years and the twenty-six weeks ended
Twenty-Six Weeks Ended Fiscal Year Ended
June 29, 2022 2021 2020 2019
Company-operated restaurant activity:
Beginning of period 189 196 195 213
Openings 1 2 1 2
Restaurant sale to franchisee - (8) - (16)
Closures (2) (1) - (4)
Restaurants at end of period 188 189 196 195
Franchised restaurant activity:
Beginning of period 291 283 287 271
Openings 3 2 3 2
Restaurant sale to franchisee - 8 - 16
Closures (1) (2) (7) (2)
Restaurants at end of period 293 291 283 287
System-wide restaurant activity:
Beginning of period 480 479 482 484
Openings 4 4 4 4
Closures (3) (3) (7) (6)
Restaurants at end of period 481 480 479 482
Restaurant Remodeling
In 2020, we finalized a new restaurant design that we believe will clearly
differentiate and communicate our brand, both on the exterior and interior. We
believe that our remodels using this new design will result in higher restaurant
revenue and a strengthened brand. As of
Loco Rewards
Our Loco Rewards loyalty program offers rewards that incentivize customers to
visit our restaurants more often each month. Customers earn points for each
dollar spent and 50 points can be redeemed for a
In addition, customers can earn additional points and free entrées for a variety
of engagement activities. As points are available for redemption past the
quarter earned, a portion of the revenue associated with the earned points will
be deferred until redemption or expiration. As of
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accompanying condensed consolidated balance sheets within other accrued expenses
and current liabilities. We had over 3.0 million loyalty program members as of
Critical Accounting Policies and Use of Estimates
The preparation of our condensed consolidated financial statements in accordance
with
Accounting policies are an integral part of our condensed consolidated financial
statements. A thorough understanding of these accounting policies is essential
when reviewing our reported results of operations and our financial position.
Management believes that our critical accounting policies and estimates involve
the most difficult management judgments, due to the sensitivity of the methods
and assumptions used. For a summary of our critical accounting policies and a
discussion of our use of estimates, see "Critical Accounting Policies and Use of
Estimates" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our annual report on Form 10-K for
the year ended
There have been no material changes to our critical accounting policies or uses
of estimates since our annual report on Form 10-K for the year ended
Recent Accounting Pronouncements
Recent accounting pronouncements are described in Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" in the Notes to Condensed Consolidated Financial Statements above.
Key Financial Definitions
Revenue
Our revenue is derived from three primary sources: company-operated restaurant revenue, franchise revenue, which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income, and franchise advertising fee revenue. See Note 10, "Revenue from Contracts with Customers" in the Notes to Condensed Consolidated Financial Statements above for further details regarding our revenue recognition policy.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs. We expect food and paper costs, particularly those items not subject to purchasing commitments, to increase in the short-term due to current inflationary pressures.
Labor and Related Expenses
Labor and related expenses include wages, payroll taxes, workers' compensation expense, benefits, and bonuses paid to our restaurant management teams. Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows. Factors that influence labor costs include minimum wage and payroll tax legislation, overtime, the frequency and severity of workers' compensation claims, health care costs, and the performance of our restaurants.
Occupancy Costs and Other Operating Expenses
Occupancy costs include rent, common area maintenance ("CAM"), and real estate taxes. Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.
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General and Administrative Expenses
General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support the development and operations of our restaurants, including compensation and benefits, travel expenses, stock compensation costs, legal and professional fees, and other related corporate costs. Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise field operational support.
Franchise Expenses
Franchise expenses are primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, expenses incurred in support of franchisee information technology systems, and the franchisee's portion of advertising expenses.
Depreciation and Amortization
Depreciation and amortization primarily consists of the depreciation of property and equipment, including leasehold improvements and equipment.
Loss on Disposal of Assets
Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
Impairment and Closed-Store Reserves
We review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values and record an impairment charge when appropriate. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset's carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.
When we close a restaurant, we will evaluate the right of use ("ROU") asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense, in addition to property tax and CAM charges for closed restaurants.
Interest Expense, Net
Interest expense, net, consists primarily of interest on our outstanding debt. Debt issuance costs are amortized at cost over the life of the related debt.
Provision for Income Taxes
Provision for income taxes consists of federal and state taxes on our income.
Comparison of Results of Operations
Our operating results for the thirteen weeks ended
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