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.
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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 novel coronavirus (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
the adverse impact of economic conditions on our (i) operating results and
? financial condition, (ii) ability to comply with the terms and covenants of our
debt agreements, and (iii) ability to pay or refinance our existing debt or to
obtain additional financing;
? 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
? vulnerability to changes in consumer preferences and economic conditions;
? vulnerability to conditions in the greater Los Angeles area;
? vulnerability to natural disasters given the geographic concentration and real
estate intensive nature of our business;
? our ability to effectively identify and secure appropriate new sites for
? changes to food and supply costs, especially for chicken;
? 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
? 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;
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;
? the impact of any security breaches of confidential customer information in
connection with our electronic process of credit and debit card transactions;
? the impact of any failure of our information technology system or any breach of
our network security;
? ability to protect our name and logo and other proprietary intellectual
other risks set forth in our filings with the SEC from time to time, including
under Item 1A, Risk Factors in this quarterly report on Form 10-Q, under Item
1A, Risk Factors in our annual report on Form 10-K for the year ended
? December 25, 2019 and under Item 1A, Risk Factors in our quarterly report on
Form 10-Q for the quarter ended March 25, 2020, which such filings are
available online at www.sec.gov, at www.elpolloloco.com or upon request from El
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.
El Pollo Loco is a differentiated and growing restaurant concept that
specializes in fire-grilling citrus-marinated chicken and operates in the
limited service restaurant ("LSR") segment. We strive to offer food that
integrates the culinary traditions of Mexico with the healthier lifestyle of Los
Angeles, a combination that we call "LA-Mex". Our distinctive menu features our
signature product--citrus-marinated fire-grilled chicken--and a variety of
Mexican and LA-inspired entrees that we create from our chicken. We serve
individual and family-sized chicken meals, a variety of Mexican and
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LA-inspired entrees, and sides, and, throughout the year, on a limited-time
basis, additional proteins like shrimp. Our entrees include favorites such as
our Chicken Avocado Burrito, Under 500 Calorie entrees, chicken tostada salads,
and Pollo Bowls. Our famous Creamy Cilantro dressings and salsas are prepared
fresh daily, allowing our customers to create their favorite flavor profiles to
enhance their culinary experience. Our distinctive menu with healthier
alternatives appeals to consumers across a wide variety of socio-economic
backgrounds and drives our balanced composition of sales throughout the day (our
"day-part mix"), including at lunch and dinner.
On January 30, 2020, the World Health Organization ("WHO") announced a global
health emergency because of a new strain of coronavirus ("COVID-19") originating
in Wuhan, China and the risks to the international community as the virus
spreads globally beyond its point of origin. On March 11, 2020, the WHO
classified the COVID-19 outbreak as a pandemic, based on the rapid increase in
The COVID-19 pandemic has significantly disrupted our restaurant operations.
Following the pandemic declaration in March 2020, federal, state and local
governments began to respond to the public health crisis by requiring social
distancing, "stay at home" directives, and restaurant restrictions - including
government-mandated dining room closures - that limited business to off-premise
services only (take-out, drive-thru and delivery). Historically, approximately
20% of the Company's sales are associated with dine-in service. In May 2020, the
"stay at home" directive was modified in most areas in which the Company
operates, allowing for the opening of lower-risk workplaces, including
restaurants, but with restrictions such as limited capacity. However, in recent
months a surge in the COVID-19 pandemic has caused many state and local
governments to re-implement certain restrictions to try and contain the spread
of the virus. Except for nine restaurants in Houston and one in Utah, all of our
restaurants are operating on a take-away, mobile pick-up and delivery basis, as
well as maintaining drive-thru operations where available, in order to protect
our employees and customers from the spread of the COVID-19 pandemic and to
comply with the government mandates. Due to the impact of the COVID-19 pandemic,
during the thirteen and twenty-six weeks ended June 24, 2020, we temporarily
closed 31 restaurants, 30 of which have reopened and one remained closed as of
June 24, 2020. Similarly, franchisees have temporarily closed 21 restaurants, of
which 17 have reopened and four remain closed as of June 24, 2020. As of June
24, 2020, we have not permanently closed any restaurants due to the COVID-19
Below is a summary of other actions we have taken, or plan to take to enhance
financial and operating flexibility for the Company and for our franchisees, and
to protect our employees and customers:
As a precautionary measure, we bolstered our existing cash position by fully
? drawing down our $150 million 2018 Revolver, adding $34.5 million of cash to
our balance sheet.
We have temporarily suspended all share repurchase activity, significantly
reduced capital spending, reevaluated essential support center general and
? administrative expenses, and fine-tuned our restaurant labor model based on
indoor dining room restrictions, limited dining room capacity in restaurants
located in geographies where indoor dining is permitted, dining room closures
and fluctuating sales volume.
For our franchisees, we deferred 50% of their April royalties until July 1,
2020, when such royalties began to be repaid in even monthly installments over
? the remainder of fiscal 2020. In addition, we deferred 100% of our franchisees'
2020 remodel and new restaurant build requirements until 2021. We also
established a support team to assist franchisees in accessing funds and
benefits provided by the CARES Act legislation.
For our employees, we continue to implement actions to help protect them from
the coronavirus while working in our restaurants. These include implementing
enhanced cleaning procedures in our restaurants, providing gloves and masks to
? all system restaurant employees, installing plexiglass shields at company
restaurant cashier stations and initiating other social distancing measures. We
are providing extended sick leave benefits to employees impacted by COVID-19,
and we have granted two weeks paid leave for employees who are 65 or older.
We have shifted our marketing to highlight our free delivery program; our
? Family Meals as a healthier and affordable option; and our meaningful value
We delayed making April, May and June rent payments on the majority of our
? leased properties, and we have reached rent abatement and/or deferment
agreements with our landlords for those properties.
We have taken advantage of provisions available under the CARES Act.
? Specifically, we have deferred payment of employer Social Security taxes that
are otherwise owed for wage payments.
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The full impact of the COVID-19 outbreak continues to evolve as of the date of
this report. Management is continually evaluating the impact of the global
crisis on its financial condition, liquidity, operations, suppliers, industry,
and workforce and will take additional actions as necessary. The disruption in
operations has led to us considering the impact of the COVID-19 pandemic on our
liquidity, debt covenant compliance, and recoverability of long-lived and ROU
assets, goodwill and intangible assets, among others. If these disruptions to
our operations from COVID-19 pandemic continue, they may have a material
negative impact on our financial results, future operations and liquidity. The
extent of such negative impact will depend, in part, on the COVID-19 pandemics
longevity and severity.
Due to the rapid development and fluidity of this situation, we cannot determine
the ultimate impact that the COVID-19 pandemic will have on our consolidated
financial condition, liquidity, and future results of operations, and therefore
any prediction as to the ultimate material adverse impact on tour consolidated
financial condition, liquidity, and future results of operations is uncertain.
Growth Strategies and Outlook
As of June 24, 2020, we had 479 locations in six states. In fiscal 2019, we
opened two new company-operated and two new franchised restaurants all in
California. For the twenty-six weeks ended June 24, 2020, one new
company-operated restaurant was opened in Nevada, which was in process prior to
the COVID-19 pandemic, and two franchised restaurants, one in California and one
in Arizona, were opened. As a result of the COVID-19 crisis, we have suspended
company-operated new unit development until the timing of the economic recovery
and our business improvement becomes more clear. In addition, we are allowing
franchisees to defer their 2020 new unit development obligations until 2021. As
a result, we do not expect to open any additional company-operated or franchised
restaurant during the remainder of 2020.
It is our intention to return to the following long-term growth strategy after
the impact of the COVID-19 pandemic subsides. We plan to continue to expand our
business, drive restaurant sales growth, and enhance our competitive
positioning, by executing the following strategies:
? expand our restaurant base;
? increase our comparable restaurant sales; and
? enhance operations and leverage our infrastructure.
To increase comparable restaurant sales, we plan to increase customer frequency,
attract new customers, and improve per-person spend. Success of these growth
plans is not guaranteed.
Highlights and Trends
Comparable Restaurant Sales
System-wide, for the thirteen and twenty-six weeks ended June 24, 2020,
comparable restaurant sales decreased by 9.7% and 5.7%, respectively, from the
comparable period in the prior year. For company-operated restaurants,
comparable restaurant sales for the thirteen and twenty-six weeks ended
June 24, 2020 decreased by 8.5% and 4.7%, respectively. For company-operated
restaurants, the quarter's change in comparable restaurant sales consisted of a
decline in transactions of 25.4%, partially offset by an approximately 22.5%
increase in average check size, and the year-to-date change in comparable
restaurant sales consisted of a 15.2% decline in transactions, partially offset
by a 12.4% increase in average check size. For franchised restaurants,
comparable restaurant sales decreased 10.6% and 6.4% for the thirteen and
twenty-six weeks ended June 24, 2020, respectively. Refer to Comparable
Restaurant Sales definition in "Key Performance Indicators" section below.
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Our restaurant counts at the beginning and end of each of the last three fiscal
years and the twenty-six weeks ended June 24, 2020, were as follows.
Twenty-Six Weeks Ended Fiscal Year Ended
June 24, 2020 2019 2018 2017
Company-operated restaurant activity:
Beginning of period 195 213 212 201
Openings 1 2 8 16
Restaurant sale to franchisee - (16) - -
Closures - (4) (7) (5)
Restaurants at end of period 196 195 213 212
Franchised restaurant activity:
Beginning of period 287 271 265 259
Openings 2 2 9 7
Restaurant sale to franchisee - 16 - -
Closures (6) (2) (3) (1)
Restaurants at end of period 283 287 271 265
System-wide restaurant activity:
Beginning of period 482 484 477 460
Openings 3 4 17 23
Closures (6) (6) (10) (6)
Restaurants at end of period 479 482 484 477
As of June 24, 2020, together with our franchisees, we had remodeled 34
company-operated and 45 franchised restaurants using our newest Vision
restaurant design. The Vision design elevates the brand image with exterior and
interior features that embrace the brand's authentic roots with warm textures,
rustic elements and a focus on the signature open kitchen layout established in
previous designs. As of June 24, 2020, including new builds and remodels, we had
120 restaurants open with the Vision design in our system. Remodeling is a use
of cash and has implications for our net property and equipment owned and
depreciation and amortization line items on our condensed consolidated balance
sheets and consolidated statements of income, among others. The cost of our
restaurant remodels varies depending on the scope of work required, but on
average, the investment is $0.3 million to $0.4 million per restaurant. We
believe that our remodeling program will result in higher restaurant revenue and
a strengthened brand. In addition, we are currently working on a new asset
design that we believe will clearly differentiate and communicate our brand,
both on the exterior and interior. We believe that this new design will deliver
good new unit volumes and cash on cash returns in both existing and new markets.
We also believe that our remodels using this new design will result in higher
restaurant revenue and a strengthened brand. If tests are successful, this new
design will replace our "Vision" design, which was implemented in 2016. However,
given the uncertainty surrounding the severity and longevity of the COVID-19
pandemic, as a precautionary measure we have significantly reduced capital
spending in 2020 and plan to limit our remodels to two restaurants using the new
design in the fourth quarter. We do not expect our franchisees to complete any
remodels in 2020 as we have deferred their remodel requirements until 2021.
During the second quarter of 2017, we introduced a new loyalty rewards points
program in an effort to increase sales and loyalty among our customers, by
offering rewards that incentivize customers to visit our restaurants more often
each month. Customers earn points for each dollars spent and 100 points can be
redeemed for a $10 reward to be used for a future purchase. If a customer does
not earn or use points within a one-year period, their account is deactivated
and all points expire. Additionally, if a $10 reward is not used within
six months, it expires. When a customer is part of the rewards program, the
obligation to provide future discounts related to points earned is considered a
separate performance obligation, to which a portion of the transaction price is
allocated. The performance obligation related to loyalty points is deemed to
have been satisfied, and the amount deferred in the balance sheet is recognized
as revenue, when the points are transferred to a $10 reward and redeemed, the
reward or points have expired, or the likelihood of redemption is
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remote. A portion of the transaction price is allocated to loyalty points, if
necessary, on a pro-rata basis, based on stand-alone selling price, as
determined by menu pricing and loyalty point's terms.
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 both June 24, 2020, and
December 25, 2019, the revenue allocated to loyalty points that have not been
redeemed are $1.1 million, which is reflected in the Company's accompanying
condensed consolidated balance sheets within other accrued expenses and current
liabilities. The Company had over 1.8 million loyalty program members as of
June 24, 2020.
Critical Accounting Policies and Use of Estimates
The preparation of our condensed consolidated financial statements in accordance
with GAAP requires us to make estimates and judgments that affect our reported
amounts of assets, liabilities, revenue, and expenses, and related disclosures
of contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under current circumstances in making judgments about the carrying value of
assets and liabilities that are not readily available from other sources. We
evaluate our estimates on an on-going basis. Actual results may differ from
these estimates under different assumptions or conditions.
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 the critical accounting policies and estimates
discussed below 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 December 25, 2019.
There have been no material changes to our critical accounting policies or uses
of estimates since our annual report on Form 10-K.
Recent Accounting Pronouncements
Recent accounting pronouncements are described in Note 1 to our condensed
consolidated financial statements included elsewhere in this report.
Key Financial Definitions
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 to Item I 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.
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, the frequency and severity of workers'
compensation claims, health care costs, and the performance of our restaurants.
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Occupancy Costs and Other Operating Expenses
Occupancy costs include rent, common area maintenance, 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.
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.
Legal settlements include expenses such as judgments or settlements related to
legal matters, legal claims and class action lawsuits.
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 a
carrying value of the assets that 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 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 the Company closes a restaurant, it will evaluate the 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 common area
maintenance ("CAM") charges for closed restaurants.
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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 Income
Our operating results for the thirteen weeks ended June 24, 2020 and
June 26, 2019 and expressed as percentages of total revenue, with the exception
of cost of operations and company restaurant expenses, which are expressed as
a percentage of company-operated restaurant revenue, are compared below.
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