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El Pollo Loco(LOCO) - 2023 Q4 - Annual Report

PART I Business Overview El Pollo Loco Holdings, Inc. operates 495 fire-grilling citrus-marinated chicken restaurants across seven states, focusing on a differentiated limited-service concept - As of December 27, 2023, the company operates 495 restaurants, comprising 172 company-operated and 323 franchised locations, primarily in California, Arizona, Nevada, Texas, Utah, Colorado, and Louisiana10208 - The company specializes in fire-grilling citrus-marinated chicken and Mexican/LA-inspired entrees, positioning itself in the limited service restaurant (LSR) segment with a focus on healthier, affordable options111819 - AB 1228, effective January 1, 2024, will increase the minimum wage at fast food restaurants to $20 an hour on April 1, 2024, in California, leading to expected increases in labor and regulatory compliance costs13229 - The company's growth strategy includes attracting top talent, enhancing hospitality, emphasizing its signature fire-grilled chicken, investing in digital customer experience, and expanding as an asset-light company primarily through franchising2529303437231232233 Company-Operated Restaurant Sales Mix (2021-2023) | Category | 2023 | 2022 | 2021 | | :------------------------ | :---- | :---- | :---- | | Bone-in chicken meals | 43% | 44% | 46% | | Mexican-inspired entrees | 50% | 50% | 48% | | Family-sized meals (of total sales) | 26% | 28% | 31% | - Digital and delivery orders constituted 12.0% of total sales mix in fiscal 2023, with partnerships including DoorDash, Postmates, Uber Eats, and Grub Hub35 - Poultry is the largest product cost item, representing approximately 36% of total food and paper costs for 2023, with more than half of poultry purchases having a fixed price through the end of 202461 Risk Factors The company faces a broad range of risks, including challenges in new restaurant development, intense competition, and vulnerability to economic downturns and shifts in consumer preferences - The ability to open new restaurants is dependent on identifying suitable sites, securing financing, hiring and training staff, and obtaining timely regulatory approvals, with failures potentially leading to increased costs and lower sales9091 - The restaurant industry is intensely competitive, with competition based on price, convenience, service quality, brand recognition, and food quality, particularly in the QSR and fast-casual segments6694 - Changes in food, supply, labor, construction, and utility costs, especially for chicken (36% of food and paper costs in 2023), could adversely affect profitability, and the company may not be able to offset these increases through menu price adjustments110111114 - The company's operations are highly concentrated in the greater Los Angeles area, generating approximately 71.3% of revenue in fiscal 2023, making it vulnerable to adverse regional conditions100407 - Compliance with AB 1228, which raises the minimum wage for fast food workers in California to $20/hour, is expected to increase labor and regulatory compliance costs starting in fiscal 2024, potentially impacting profitability164166 - The company's level of indebtedness and restrictions under its credit facility could limit its ability to fund operations, capital expenditures, and growth strategies, and expose it to interest rate fluctuations130131 Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments200 Cybersecurity The company has a multi-layer cybersecurity risk management framework integrated into its enterprise risk management, overseen by the Audit Committee - The company employs a multi-layer cybersecurity risk management process, including 24/7 threat monitoring, firewall and antivirus protections, vulnerability scans, and regular employee training200202 - External third parties are engaged for advice on emerging threats and to conduct bi-annual audits of cybersecurity systems and processes, with results shared with senior leadership and the Audit Committee202203 - The Audit Committee of the Board of Directors is responsible for overseeing cyber threats and reviewing the company's mitigation protocols, receiving quarterly updates from the Chief Privacy Officer206 - To date, the company has not experienced any cybersecurity threats or incidents that have materially affected its business strategy, results of operations, or financial condition207 Properties As of December 27, 2023, El Pollo Loco operates 495 restaurants across seven states, primarily leasing free-standing properties with drive-thru service - As of December 27, 2023, the company's system includes 495 restaurants (172 company-operated, 323 franchised) across California, Nevada, Arizona, Texas, Utah, Louisiana, and Colorado208209 - The majority of restaurants are free-standing with drive-thru service, typically 2,200 to 3,000 square feet, seating 50-70 people10208 - The company leases the land for most of its company-operated restaurants, with lease terms generally 20 years and renewal options. It owns 15 properties, operating 12 and licensing three to franchisees, and subleases 57 leased sites to franchisees210212 Restaurant Locations by State (December 27, 2023) | State | Company-Operated | Franchised | Total | | :---------- | :--------------- | :--------- | :---- | | California | 144 | 246 | 390 | | Nevada | 28 | 5 | 33 | | Arizona | — | 27 | 27 | | Texas | — | 31 | 31 | | Utah | — | 10 | 10 | | Louisiana | — | 2 | 2 | | Colorado | — | 2 | 2 | | Total | 172 | 323 | 495 | Legal Proceedings The company refers to Note 13, 'Commitments and Contingencies—Legal Matters,' in the accompanying financial statements for information regarding its material legal proceedings - Information on material legal proceedings is incorporated by reference from Note 13 'Commitments and Contingencies—Legal Matters' in the consolidated financial statements214 Mine Safety Disclosures The company has no disclosures regarding mine safety - There are no mine safety disclosures214 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is listed on Nasdaq under 'LOCO', with 31.3 million shares outstanding as of March 1, 2024, and a $20.0 million share repurchase program approved in October 2023 - The company's common stock (LOCO) is listed on The Nasdaq Stock Market LLC since July 25, 20143215 - As of March 1, 2024, there were 31,282,820 shares of common stock outstanding3 - A special cash dividend of $1.50 per share was paid on November 9, 2022, but the company does not anticipate paying any such dividends for the foreseeable future216 Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased | Average Price Per Share | Shares Purchased Under Publicly Announced Plans | Approximate Dollar Value Remaining Under Plans | | :----------------------------------- | :--------------------- | :---------------------- | :---------------------------------------------- | :--------------------------------------------- | | Oct 26, 2023 - Nov 22, 2023 | 3,215 | $8.37 | — | $20,000,000 | | Nov 23, 2023 - Dec 27, 2023 | 1,500,000 | $8.40 | 1,500,000 | $7,400,000 | | Total | 1,503,215 | | 1,500,000 | | - On October 31, 2023, the Board approved a share repurchase program authorizing up to $20.0 million in repurchases, terminating March 31, 2025. As of December 27, 2023, $7.4 million remained available219333334 Stock Performance (December 26, 2018 - December 27, 2023) | Date | LOCO ($) | Nasdaq Composite Index ($) | S&P Composite 1500 Restaurants ($) | | :--------------- | :------- | :------------------------- | :--------------------------------- | | December 26, 2018| 100.00 | 100.00 | 100.00 | | December 24, 2019| 99.67 | 136.69 | 122.86 | | December 30, 2020| 120.60 | 198.10 | 146.90 | | December 29, 2021| 92.78 | 242.03 | 179.28 | | December 28, 2022| 65.96 | 163.28 | 163.44 | | December 27, 2023| 59.93 | 236.17 | 189.14 | RESERVED This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an in-depth analysis of the company's financial performance, condition, and operational results for fiscal years 2023, 2022, and 2021, highlighting key trends, growth strategies, and market impacts Basis of Presentation The company operates on a 52- or 53-week fiscal year, ending on the last Wednesday of each calendar year, with fiscal years 2023, 2022, and 2021 all being 52-week periods - The company uses a 52- or 53-week fiscal year, ending on the last Wednesday of each calendar year. Fiscal years 2023, 2022, and 2021 were 52-week fiscal years227 Overview El Pollo Loco is a differentiated and growing limited-service restaurant concept specializing in fire-grilled citrus-marinated chicken and Mexican/LA-inspired entrees, offering healthier, affordable options - El Pollo Loco is a differentiated and growing restaurant concept specializing in fire-grilling citrus-marinated chicken and Mexican/LA-inspired entrees, operating in the limited service restaurant (LSR) segment228 - The menu offers 'better for you' and affordable alternatives, appealing to a wide variety of socio-economic backgrounds and ensuring balanced sales across lunch and dinner day-parts228 Market Trends and Uncertainties The company anticipates increased labor and regulatory compliance costs starting in fiscal 2024 due to California's AB 1228, alongside continued inflationary pressures on operating costs - California's AB 1228, effective January 1, 2024, will increase the minimum wage at fast food restaurants to $20 an hour on April 1, 2024, leading to higher labor and regulatory compliance costs for the company in fiscal 2024229 - The company expects inflationary pressures on food, labor, construction, and other operating costs to continue into fiscal year 2024, and may not be able to fully offset these increases230 Growth Strategies and Outlook The company's Strategic Plan focuses on five key strategies: talent, hospitality, brand reinforcement, digital-centricity, and asset-light expansion, with plans for new company-operated and franchised restaurants in 2024 - The company's five key growth strategies are: attract, hire, and retain top talent; EPL hospitality; be known for its famous fire-grilled chicken; digital-centric in service of improving the customer experience; and expand as an asset-light company231232233 - As of December 27, 2023, the company had 495 locations. In fiscal 2023, two company-operated and three franchised restaurants were opened. For 2024, plans include two new company-operated restaurants in California and five to seven new franchised restaurants234 Highlights and Trends In fiscal 2023, system-wide comparable restaurant sales decreased by 0.3%, while the company opened five new restaurants and completed 48 remodels, growing its loyalty program to 3.7 million members Comparable Restaurant Sales Growth (2021-2023) | Metric | 2023 | 2022 | 2021 | | :----------------------------------- | :---- | :---- | :---- | | System-wide comparable restaurant sales | -0.3% | 5.9% | 12.1% | | Company-operated comparable restaurant sales | 0.3% | 3.7% | 7.6% | | Franchised comparable restaurant sales | -0.7% | 7.4% | 15.3% | - In 2023, company-operated comparable restaurant sales increased by 0.3%, driven by a 2.3% increase in average check size (due to menu price increases) partially offset by a 2.0% decrease in transactions235 Restaurant Activity (2021-2023) | Category | 2023 | 2022 | 2021 | | :------------------------------ | :--- | :--- | :--- | | Company-operated restaurants: | | | | | Beginning of period | 188 | 189 | 196 | | Openings | 2 | 4 | 2 | | Restaurant sale to franchisee | (18) | (3) | (8) | | Closures | — | (2) | (1) | | Restaurants at end of period | 172 | 188 | 189 | | Franchised restaurants: | | | | | Beginning of period | 302 | 291 | 283 | | Openings | 3 | 9 | 2 | | Restaurant sale to franchisee | 18 | 3 | 8 | | Closures | — | (1) | (2) | | Restaurants at end of period | 323 | 302 | 291 | | System-wide restaurants: | | | | | Beginning of period | 490 | 480 | 479 | | Openings | 5 | 13 | 4 | | Closures | — | (3) | (3) | | Restaurants at end of period | 495 | 490 | 480 | - In 2023, 15 company-operated and 33 franchised restaurants underwent remodels, with plans for 15-20 company and 40-50 franchised remodels in 2024, costing $0.3 million to $0.4 million per restaurant239 - The Loco Rewards loyalty program had over 3.7 million members as of December 27, 2023, with $0.7 million in deferred revenue related to earned points241 Key Financial Definitions This section defines key financial terms used in the report, including revenue sources, cost categories, and other financial metrics, providing context for understanding the company's financial statements Results of Operations In fiscal 2023, total revenue slightly decreased by 0.3% to $468.7 million, while net income increased by 22.8% to $25.6 million, driven by lower food and paper costs and improved labor efficiency Statements of Income Data (2023 vs 2022) | Metric | 2023 ($,000) | 2023 (%) | 2022 ($,000) | 2022 (%) | Change ($,000) | Change (%) | | :----------------------------------------- | :----------- | :------- | :----------- | :------- | :------------- | :--------- | | Company-operated restaurant revenue | $398,437 | 85.0 | $403,218 | 85.8 | $(4,781) | (1.2) | | Franchise revenue | 41,002 | 8.7 | 38,225 | 8.1 | 2,777 | 7.3 | | Franchise advertising fee revenue | 29,225 | 6.3 | 28,516 | 6.1 | 709 | 2.5 | | Total revenue | 468,664 | 100.0| 469,959 | 100.0| (1,295) | (0.3) | | Food and paper costs (as % of co-op rev) | 108,250 | 27.2 | 117,774 | 29.2 | (9,524) | (8.1) | | Labor and related expenses (as % of co-op rev) | 127,244 | 31.9 | 130,773 | 32.4 | (3,529) | (2.7) | | Occupancy and other operating expenses (as % of co-op rev) | 101,398 | 25.4 | 101,543 | 25.2 | (145) | (0.1) | | General and administrative expenses | 42,025 | 9.0 | 39,093 | 8.3 | 2,932 | 7.5 | | Franchise expenses | 38,404 | 8.2 | 36,169 | 7.7 | 2,235 | 6.2 | | Income from operations | 39,792 | 8.5 | 30,120 | 6.4 | 9,672 | 32.1 | | Interest expense, net | 4,811 | 1.1 | 1,677 | 0.4 | 3,134 | 186.9 | | Provision for income taxes | 9,324 | 1.9 | 8,078 | 1.7 | 1,246 | 15.4 | | Net income | $25,554 | 5.5 | $20,801 | 4.4 | $4,753 | 22.8 | - Company-operated restaurant revenue decreased by $4.8 million (1.2%) in fiscal 2023, primarily due to the sale of 21 restaurants to franchisees, partially offset by a 0.3% increase in comparable restaurant revenue260 - Franchise revenue increased by $2.8 million (7.3%) in fiscal 2023, mainly from the conversion of 21 company-operated restaurants to franchised locations and new openings, despite a 0.7% decrease in comparable franchised restaurant sales262 - Food and paper costs decreased by $9.5 million (8.1%) in fiscal 2023, and as a percentage of company-operated revenue, decreased from 29.2% in 2022 to 27.2% in 2023, primarily due to pricing increases partially offset by commodity inflation263 - Labor and related expenses decreased by $3.5 million (2.7%) in fiscal 2023, and as a percentage of company-operated revenue, decreased from 32.4% in 2022 to 31.9% in 2023, driven by lower transactions, reduced overtime, and decreased COVID-19 sick pay, partially offset by higher wage rates264 - The company recorded a net gain of $5.0 million on the disposition of 18 restaurants to existing franchisees in fiscal 2023, generating $7.7 million in cash proceeds271 - Interest expense, net, increased by $3.1 million (186.9%) in fiscal 2023, primarily due to higher outstanding balances on the 2022 Revolver and increased interest rates273 - The provision for income taxes was $9.4 million in fiscal 2023, reflecting an effective tax rate of 26.7%, compared to 28.0% in fiscal 2022277 Key Performance Indicators In fiscal 2023, company-operated restaurant revenue was $398.4 million, system-wide sales were $1,050.2 million, and Adjusted EBITDA was $57.4 million, reflecting brand scale and restaurant-level profitability - In fiscal 2023, company-operated restaurant revenue was $398.4 million, system-wide sales were $1,050.2 million, and system comparable sales declined by 0.3%279 - Company-operated average unit volumes (AUVs) were $2.2 million in fiscal 2023, with a restaurant contribution margin of 15.5%279 System-Wide Sales Reconciliation (2021-2023) | (Dollar amounts in thousands) | 2023 (52-Weeks) | 2022 (52-Weeks) | 2021 (52-Weeks) | | :-------------------------------- | :-------------- | :-------------- | :-------------- | | Company-operated restaurant revenue | $398,437 | $403,218 | $394,733 | | Franchise revenue | 41,002 | 38,225 | 33,729 | | Franchise advertising fee revenue | 29,225 | 28,516 | 25,901 | | Total Revenue | 468,664 | 469,959 | 454,363 | | Less: Franchise revenue | (41,002) | (38,225) | (33,729) | | Less: Franchise advertising fee revenue | (29,225) | (28,516) | (25,901) | | Sales from franchised restaurants | 651,777 | 635,819 | 578,497 | | System-wide sales | $1,050,214 | $1,039,037 | $973,230 | Restaurant Contribution and Margin Reconciliation (2021-2023) | (Dollar amounts in thousands) | 2023 (52-Weeks) | 2022 (52-Weeks) | 2021 (52-Weeks) | | :-------------------------------- | :-------------- | :-------------- | :-------------- | | Income from operations | $39,792 | $30,120 | $41,335 | | Add (less) adjustments | | | | | General and administrative expenses | 42,025 | 39,093 | 39,852 | | Franchise expenses | 38,404 | 36,169 | 32,831 | | Depreciation and amortization | 15,235 | 14,418 | 15,176 | | Loss on disposal of assets | 192 | 165 | 289 | | Gain on recovery of insurance proceeds | (247) | — | — | | Franchise revenue | (41,002) | (38,225) | (33,729) | | Franchise advertising fee revenue | (29,225) | (28,516) | (25,901) | | Impairment and closed-store reserves | 1,732 | 752 | 1,087 | | (Gain) loss on disposition of restaurants | (5,034) | (848) | 1,534 | | Restaurant contribution | $61,872 | $53,128 | $72,474 | | Company-operated restaurant revenue | $398,437 | $403,218 | $394,733 | | Restaurant contribution margin (%) | 15.5% | 13.2% | 18.4% | EBITDA and Adjusted EBITDA Reconciliation (2021-2023) | (Amounts in thousands) | 2023 (52-Weeks) | 2022 (52-Weeks) | 2021 (52-Weeks) | | :--------------------------------------- | :-------------- | :-------------- | :-------------- | | Net income | $25,554 | $20,801 | $29,121 | | Provision for income taxes | 9,324 | 8,078 | 10,332 | | Interest expense, net | 4,811 | 1,677 | 1,824 | | Depreciation and amortization | 15,235 | 14,418 | 15,176 | | EBITDA | $54,924 | $44,974 | $56,453 | | Stock-based compensation expense | 3,337 | 3,491 | 3,220 | | Loss on disposal of assets | 192 | 165 | 289 | | Impairment and closed-store reserves | 1,732 | 752 | 1087 | | (Gain) loss on disposition of restaurants | (5,034) | (848) | 1,534 | | Income tax receivable agreement expense (income) | 103 | (436) | 58 | | Securities class action legal expense | — | 443 | 495 | | Special dividend | 129 | 350 | — | | Legal settlements | — | (541) | — | | Special legal expenses | 137 | — | — | | Shareholder advisory fees | 293 | — | — | | Gain on recovery of insurance proceeds | (399) | — | — | | Executive transition costs | 618 | — | — | | Severance | 1,055 | — | — | | Pre-opening costs | 269 | 326 | 259 | | Adjusted EBITDA | $57,356 | $48,676 | $63,395 | Liquidity and Capital Resources The company's primary liquidity sources are cash from operations, cash and cash equivalents, and its $150.0 million 2022 Revolver, which are believed sufficient for the next 12 months - Primary liquidity sources are cash from operations, cash and cash equivalents, and the $150.0 million 2022 Revolver312 - Key capital requirements include new restaurant openings, existing restaurant capital investments (remodels and maintenance), legal defense costs, lease obligations, interest payments on debt, working capital, and general corporate needs312 - The company believes its liquidity sources are sufficient for at least the next 12 months, but macroeconomic conditions could impact its ability to meet financial covenants under the 2022 Credit Agreement314315 Cash Flows In fiscal 2023, net cash provided by operating activities increased by $2.1 million, while net cash used in investing activities decreased by $5.5 million, and net cash used in financing activities increased by $11.3 million due to stock repurchases Summary Cash Flow Information (2021-2023) | (Amounts in thousands) | 2023 (52-Weeks) | 2022 (52-Weeks) | 2021 (52-Weeks) | | :--------------------------------- | :-------------- | :-------------- | :-------------- | | Net cash provided by operating activities | $40,688 | $38,549 | $52,099 | | Net cash used in investing activities | (13,447) | (18,915) | (12,485) | | Net cash used in financing activities | (40,446) | (29,187) | (22,787) | | Net (decrease) increase in cash | $(13,205) | $(9,553) | $16,827 | - Net cash provided by operating activities increased by $2.1 million in fiscal 2023 compared to 2022, driven by increased profitability and favorable working capital317 - Net cash used in investing activities decreased by $5.5 million in fiscal 2023, primarily due to $7.7 million in cash proceeds from the sale of 18 company-operated restaurants318 - Net cash used in financing activities increased by $11.3 million in fiscal 2023, mainly due to $59.2 million in common stock repurchases, partially offset by $18.0 million in net borrowings on the 2022 Revolver320 Debt and Other Obligations The company's debt includes a $150.0 million five-year senior secured revolving credit facility maturing in July 2027, with $84.0 million outstanding as of December 27, 2023, and compliance with all financial covenants - The company has a $150.0 million five-year senior secured revolving credit facility (2022 Revolver) maturing on July 27, 2027324 - As of December 27, 2023, $84.0 million was outstanding under the 2022 Revolver, with $56.2 million available. The interest rate range for borrowings in fiscal 2023 was 5.7% to 7.0%326327 - The 2022 Credit Agreement contains financial covenants, with which the company was in compliance as of December 27, 2023327 Material Cash Requirements Total capital expenditures for 2023 were $21.3 million, with projected 2024 expenditures of $25.0 million to $28.0 million, alongside significant future obligations for operating leases, long-term debt, and chicken purchasing commitments - Total capital expenditures for 2023 were $21.3 million, including $5.1 million for new restaurants and $16.2 million for existing restaurant investments328 - Expected capital expenditures for 2024 are $25.0 million to $28.0 million, with $4.0 million to $6.0 million for new restaurants and $19.0 million to $21.0 million for existing restaurant investments, primarily funded by operating cash flows328330 Material Cash Requirements (as of December 27, 2023) | (Amounts in thousands) | Total | 2024 | 2025 - 2026 | 2027 - 2028 | 2029 and thereafter | | :-------------------------------- | :--------- | :--------- | :---------- | :---------- | :------------------ | | Operating leases | $243,888 | $28,328 | $52,169 | $44,965 | $118,426 | | Finance leases | 2,155 | 191 | 341 | 247 | 1,376 | | Long-term debt | 101,245 | 5,682 | 11,275 | 84,288 | — | | Income tax receivable agreement | 422 | 422 | — | — | — | | Purchasing commitments—chicken | 31,298 | 31,298 | — | — | — | | Total | $379,008 | $65,921| $63,785 | $129,500| $119,802 | Share Repurchase Programs The company completed its 2022 Stock Repurchase Plan and approved a new $20.0 million program in October 2023, under which 1.5 million shares were repurchased from related parties in November 2023 - The 2022 Stock Repurchase Plan, authorizing up to $20.0 million, was completed by July 12, 2023, with 2,030,850 shares repurchased333558 - A new $20.0 million share repurchase program was approved on October 31, 2023, set to terminate on March 31, 2025333334560 - In November 2023, the company repurchased 1,500,000 shares for $12.6 million from FS Equity Partners V, L.P. and FS Affiliates V, L.P., leaving approximately $7.4 million available under the new repurchase program as of December 27, 2023219337561564 Critical Accounting Policies and Estimates The company's critical accounting policies involve significant management judgment in revenue recognition, impairment assessments of assets, insurance reserves, lease obligations, and income taxes, with potential material effects from changes in estimates - Critical accounting policies and estimates include revenue recognition (especially for gift cards and loyalty programs), impairment of goodwill, intangible assets, property and equipment, and ROU assets338340341346347 - Significant judgment is applied in estimating insurance reserves, accounting for lease obligations (determining lease terms and discount rates), and income taxes (deferred tax assets/liabilities, valuation allowances, and uncertain tax positions)348349350353354355 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate fluctuations on its variable-rate debt, inflation impacting operating costs, and commodity price volatility, particularly for food products like chicken - The company is exposed to interest rate risk on its variable-rate 2022 Revolver, with outstanding borrowings of $84.0 million as of December 27, 2023. A 1.0% increase in the effective interest rate would increase pre-tax interest expense by $0.8 million annually360 - Inflation impacts food, paper, construction, utility, labor, and benefits costs. The company generally offsets these through menu price increases, menu mix management, and productivity improvements, but future offsets are not guaranteed363 - The company faces commodity price risk, particularly for chicken, grains, produce, dairy, and cooking oil. While purchasing commitments exist, price fluctuations due to supply/demand factors (e.g., disease, weather) can materially impact food and beverage costs. The company does not use financial instruments to hedge commodity risk364 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for El Pollo Loco Holdings, Inc. and its subsidiaries, including balance sheets, income statements, comprehensive income, stockholders' equity, cash flows, and detailed notes Report of Independent Registered Public Accounting Firm BDO USA, P.C. issued unqualified opinions on the consolidated financial statements and internal control over financial reporting, noting the estimation of future cash flows for restaurant property impairment as a critical audit matter - BDO USA, P.C. provided an unqualified opinion on the consolidated financial statements for the period ended December 27, 2023, and on the effectiveness of internal control over financial reporting368369 - A critical audit matter involved the company's estimation of undiscounted future cash flows for restaurant property and equipment impairment, requiring challenging judgments on future revenue transaction growth rates, menu pricing changes, and restaurant operating margins due to inflationary pressures372376 Consolidated Balance Sheets As of December 27, 2023, total assets slightly decreased to $592.3 million, while total liabilities increased to $341.6 million, and stockholders' equity decreased to $250.7 million, primarily due to share repurchases Consolidated Balance Sheets (Amounts in thousands) | Metric | December 27, 2023 | December 28, 2022 | | :----------------------------------------- | :---------------- | :---------------- | | Assets | | | | Cash and cash equivalents | $7,288 | $20,493 | | Total current assets | 25,134 | 37,449 | | Property and equipment, net | 84,027 | 78,644 | | ROU asset | 168,007 | 165,584 | | Goodwill | 248,674 | 248,674 | | Trademarks | 61,888 | 61,888 | | Total assets | $592,301 | $597,218 | | Liabilities | | | | Total current liabilities | 72,581 | 68,513 | | Revolver loan | 84,000 | 66,000 | | Obligations under operating leases, net | 168,084 | 165,149 | | Total liabilities | 341,605 | 316,070 | | Stockholders' Equity | | | | Common stock | 313 | 370 | | Additional paid-in-capital | 236,421 | 292,244 | | Retained earnings (accumulated deficit) | 13,962 | (11,592) | | Total stockholders' equity | 250,696 | 281,148 | - Cash and cash equivalents decreased from $20.5 million in 2022 to $7.3 million in 2023380 - Retained earnings shifted from an accumulated deficit of $(11.6) million in 2022 to positive retained earnings of $14.0 million in 2023380 Consolidated Statements of Income For fiscal year 2023, total revenue was $468.7 million, a slight decrease from 2022, while net income increased to $25.6 million, driven by lower food and paper costs and improved labor efficiency Consolidated Statements of Income (Amounts in thousands, except share data) | Metric | December 27, 2023 | December 28, 2022 | December 29, 2021 | | :----------------------------------------- | :---------------- | :---------------- | :---------------- | | Company-operated restaurant revenue | $398,437 | $403,218 | $394,733 | | Franchise revenue | 41,002 | 38,225 | 33,729 | | Franchise advertising fee revenue | 29,225 | 28,516 | 25,901 | | Total revenue | 468,664 | 469,959 | 454,363 | | Food and paper cost | 108,250 | 117,774 | 104,394 | | Labor and related expenses | 127,244 | 130,773 | 120,308 | | Occupancy and other operating expenses | 101,398 | 101,543 | 97,557 | | Company restaurant expenses | 336,565 | 350,090 | 322,259 | | General and administrative expenses | 42,025 | 39,093 | 39,852 | | Franchise expenses | 38,404 | 36,169 | 32,831 | | Depreciation and amortization | 15,235 | 14,418 | 15,176 | | (Gain) loss on disposition of restaurants | (5,034) | (848) | 1,534 | | Impairment and closed-store reserves | 1,732 | 752 | 1,087 | | Total expenses | 428,872 | 439,839 | 413,028 | | Income from operations | 39,792 | 30,120 | 41,335 | | Interest expense, net | 4,811 | 1,677 | 1,824 | | Provision for income taxes | 9,324 | 8,078 | 10,332 | | Net income | $25,554 | $20,801 | $29,121 | | Net income per share - Basic | $0.75 | $0.57 | $0.81 | | Net income per share - Diluted | $0.74 | $0.57 | $0.80 | - Net income increased by $4.75 million (22.8%) from $20.8 million in 2022 to $25.6 million in 2023259382 - Basic earnings per share increased to $0.75 in 2023 from $0.57 in 2022382 Consolidated Statements of Comprehensive Income For fiscal year 2023, comprehensive income was $25.4 million, a slight increase from $21.2 million in 2022, including net income and other comprehensive loss related to derivative instrument reclassifications Consolidated Statements of Comprehensive Income (Amounts in thousands) | Metric | December 27, 2023 | December 28, 2022 | December 29, 2021 | | :----------------------------------------- | :---------------- | :---------------- | :---------------- | | Net income | $25,554 | $20,801 | $29,121 | | Other comprehensive (loss) income, net of taxes | (126) | 416 | 543 | | Comprehensive income | $25,428 | $21,217 | $29,664 | - Other comprehensive income (loss), net of taxes, was $(126) thousand in 2023, compared to $416 thousand in 2022, primarily due to reclassifications of derivative instrument gains384 Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity decreased from $281.1 million in 2022 to $250.7 million in 2023, primarily due to $59.2 million in common stock repurchases, partially offset by net income and stock-based compensation Consolidated Statements of Changes in Stockholders' Equity (Amounts in thousands, except share data) | Metric | December 27, 2023 | December 28, 2022 | December 29, 2021 | | :----------------------------------------- | :---------------- | :---------------- | :---------------- | | Balance, beginning of period | $281,148 | $310,623 | $277,578 | | Stock-based compensation | 2,964 | 3,491 | 3,220 | | Issuance of common stock (net) | 1,171 | 1,713 | 866 | | Shares repurchased for employee tax withholdings | (243) | (322) | (705) | | Common stock cash dividends paid | — | (55,574) | — | | Repurchase of common stock | (59,216) | — | — | | Net income | 25,554 | 20,801 | 29,121 | | Other comprehensive income (loss), net of tax | (126) | 416 | 543 | | Balance, end of period | $250,696 | $281,148 | $310,623 | - The company repurchased $59.2 million of common stock in fiscal 2023, contributing to the decrease in stockholders' equity388 Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $40.7 million in 2023, while net cash used in investing activities decreased to $13.4 million, and net cash used in financing activities increased to $40.4 million Consolidated Statements of Cash Flows (Amounts in thousands) | Metric | December 27, 2023 | December 28, 2022 | December 29, 2021 | | :----------------------------------------- | :---------------- | :---------------- | :---------------- | | Net cash flows provided by operating activities | $40,688 | $38,549 | $52,099 | | Net cash flows used in investing activities | (13,447) | (18,915) | (12,485) | | Net cash flows used in financing activities | (40,446) | (29,187) | (22,787) | | Net (decrease) increase in cash and cash equivalents | $(13,205) | $(9,553) | $16,827 | | Cash and cash equivalents, end of period | $7,288 | $20,493 | $30,046 | - Cash paid for interest increased to $4.8 million in 2023 from $1.5 million in 2022392 - Unpaid purchases of property and equipment increased to $5.1 million in 2023 from $1.3 million in 2022392 Notes to Consolidated Financial Statements The notes provide detailed information on the company's business, significant accounting policies, and financial statement line items, offering crucial context for the financial figures 1. Description of Business El Pollo Loco Holdings, Inc. operates and franchises quick-service restaurants specializing in fire-grilled citrus-marinated chicken and Mexican/LA-inspired entrees, primarily in California - The company operates 172 company-owned and 323 franchised El Pollo Loco restaurants as of December 27, 2023, primarily in California394 - The company operates in one segment, with all significant revenues derived from retail sales of food and beverages through company or franchised restaurants395 2. Summary of Significant Accounting Policies This note outlines the company's critical accounting policies, including its fiscal year, consolidation principles, and estimates for impairment, insurance, and leases, while also detailing revenue recognition and market trends - The company's significant estimates include impairment of goodwill, intangible assets, property and equipment, insurance reserves, lease accounting matters, contingent liabilities, and income tax valuation allowances400 - AB 1228 in California is expected to increase labor and regulatory compliance costs in fiscal 2024, potentially impacting profitability401 - The company expects inflationary pressures on food, labor, construction, and other operating costs to continue throughout fiscal year 2024402 - One supplier accounted for 15.14% of accounts payable at December 27, 2023, and 26.6% of total purchases for fiscal 2023, indicating a concentration of risk405 - Company-operated and franchised restaurants in the greater Los Angeles area generated approximately 71.3% of total revenue in fiscal 2023407 - Revenue from the loyalty rewards program is deferred and recognized when points are redeemed or expire. As of December 27, 2023, $0.7 million was deferred430 - Initial franchise and development fees are recognized over the typical 20-year franchise term, as they are considered a single performance obligation with continuing rights and services433434 - The company terminated its interest rate swap on July 28, 2022, receiving approximately $0.6 million in settlement454 - As of December 27, 2023, the company had no federal and less than $0.1 million state NOL carryforwards, with state NOLs expiring beginning 2029531 3. Property and Equipment As of December 27, 2023, net property and equipment totaled $84.0 million, with $15.2 million in depreciation and amortization expense for 2023, and $1.5 million in non-cash impairment charges Property and Equipment (Amounts in thousands) | Category | December 27, 2023 | December 28, 2022 | | :------------------------------ | :---------------- | :---------------- | | Land | $12,323 | $12,323 | | Buildings and improvements | 148,259 | 153,377 | | Other property and equipment | 86,423 | 83,035 | | Construction in progress | 7,270 | 3,196 | | Less: accumulated depreciation and amortization | (170,248) | (173,287) | | Net property and equipment | $84,027 | $78,644 | - Depreciation and amortization expense was $15.2 million in 2023, $14.4 million in 2022, and $15.2 million in 2021479 - Non-cash impairment charges of $1.5 million were recorded in 2023, primarily for one restaurant in Nevada and one in California480 4. Trademarks and Other Intangible Assets The company's indefinite-lived intangible assets, primarily domestic trademarks, were valued at $61.9 million net of impairment as of December 27, 2023, with no impairment recorded for goodwill or trademarks in fiscal 2023, 2022, or 2021 Domestic Trademarks (Amounts in thousands) | Category | December 27, 2023 | December 28, 2022 | | :------------------------------ | :---------------- | :---------------- | | Cost | $120,700 | $120,700 | | Accumulated impairment charges | (58,812) | (58,812) | | Trademarks, net | $61,888 | $61,888 | - Goodwill and indefinite-lived intangible assets (trademarks) are not amortized but are subject to annual impairment tests. No impairment was recorded for these assets in fiscal 2023, 2022, or 2021420423 5. Leases The company primarily uses operating leases for its properties, recognizing ROU assets and lease liabilities, with $42.8 million in ROU assets for closed/subleased locations and $21.5 million in additional ROU assets from lease term reassessments in 2023 - As of December 27, 2023, ROU assets related to closed or subleased restaurant locations totaled $42.8 million414 - In 2023, the company reassessed lease terms for 36 restaurants, resulting in an additional $21.5 million of ROU assets and lease liabilities487 Total Lease Cost (Amounts in thousands) | Category | December 27, 2023 | December 28, 2022 | December 29, 2021 | | :---------------------------------------- | :---------------- | :---------------- | :---------------- | | Lease cost – Occupancy and other operating expenses | $23,736 | $23,730 | $24,020 | | Lease cost – General & administrative | 492 | 465 | 413 | | Lease cost – Depreciation and amortization | 75 | 73 | 78 | | Lease cost – Interest expense | 45 | 45 | 59 | | Lease cost – Closed-store reserve | 19 | 86 | 283 | | Total lease cost | $24,367 | $24,399 | $24,853 | Future Minimum Lease Obligations (as of December 27, 2023, Amounts in thousands) | For the Years Ending | Finance Leases Minimum Lease Payments | Operating Minimum Lease Payments | Sublease Income | | :------------------- | :------------------------------------ | :------------------------------- | :-------------- | | December 25, 2024 | $191 | $28,328 | $5,886 | | December 31, 2025 | 187 | 27,126 | 5,518 | | December 30, 2026 | 154 | 25,043 | 5,034 | | December 29, 2027 | 144 | 23,581 | 4,858 | | December 27, 2028 | 103 | 21,384 | 4,484 | | Thereafter | 1,376 | 118,426 | 27,854 | | Total | $2,155 | $243,888 | $53,634 | 6. Long-Term Debt The company refinanced its credit facility in July 2022, establishing a $150.0 million five-year senior secured revolving credit facility maturing in July 2027, with $84.0 million outstanding and 7.0% interest as of December 27, 2023 - The company refinanced its credit facility in July 2022, establishing a $150.0 million five-year senior secured revolving credit facility (2022 Revolver) maturing on July 27, 2027509510 - As of December 27, 2023, $84.0 million was outstanding under the 2022 Revolver, with an interest rate of 7.0%. The company was in compliance with all financial covenants515516 - The interest rate swap, previously designated as a cash flow hedge, was terminated on July 28, 2022, resulting in a settlement receipt of approximately $0.6 million518 7. Other Accrued Expenses and Current Liabilities Other accrued expenses and current liabilities totaled $18.4 million as of December 27, 2023, primarily comprising accrued sales and property taxes, gift card liability, loyalty rewards program liability, and accrued advertising Other Accrued Expenses and Current Liabilities (Amounts in thousands) | Category | December 27, 2023 | December 28, 2022 | | :---------------------------------------- | :---------------- | :---------------- | | Accrued sales and property taxes | $5,229 | $5,270 | | Gift card liability | 4,877 | 4,667 | | Loyalty rewards program liability | 687 | 526 | | Accrued advertising | 3,010 | 831 | | Accrued legal settlements and professional fees | 720 | 1,303 | | Deferred franchise and development fees | 586 | 610 | | Other | 3,252 | 1,913 | | Total | $18,361 | $15,120 | 8. Other Noncurrent Liabilities Other noncurrent liabilities amounted to $6.4 million as of December 27, 2023, primarily consisting of deferred franchise and development fees Other Noncurrent Liabilities (Amounts in thousands) | Category | December 27, 2023 | December 28, 2022 | | :---------------------------------------- | :---------------- | :---------------- | | Deferred franchise and development fees | $6,411 | $5,767 | | Other | 34 | 89 | | Total | $6,445 | $5,856 | 9. Income Taxes The company recorded an income tax expense of $9.3 million in fiscal 2023, with an effective tax rate of 26.7%, and recognized $0.1 million in Income Tax Receivable Agreement (TRA) expense Provision for Income Taxes (Amounts in thousands) | Category | December 27, 2023 | December 28, 2022 | December 29, 2021 | | :------------------- | :---------------- | :---------------- | :---------------- | | Current income taxes: | | | | | Federal | $6,572 | $2,366 | $7,163 | | State | 1,846 | 1,112 | 2,158 | | Total current | 8,418 | 3,478 | 9,321 | | Deferred income taxes: | | | | | Federal | (29) | 2,958 | 93 | | State | 935 | 1,642 | 918 | | Total deferred | 906 | 4,600 | 1,011 | | Tax provision for income taxes | $9,324 | $8,078 | $10,332 | Effective Tax Rate Reconciliation | Factor | December 27, 2023 | December 28, 2022 | December 29, 2021 | | :----------------------------------------- | :---------------- | :---------------- | :---------------- | | Statutory federal income tax rate | 21.0% | 21.0% | 21.0% | | State income tax expense (net of federal benefit) | 6.4% | 7.7% | 5.9% | | Change in valuation allowance | (19.3)% | — | 0.1% | | State credit expiration | 19.1% | — | — | | TRA expense (income) | 0.1% | (0.3)% | — | | 162(m) | 0.6% | 0.5% | 0.8% | | WOTC Credit | (0.7)% | (0.9)% | (0.5)% | | Stock option exercises | 0.1% | 0.3% | (1.4)% | | Deferred tax liability true up | (1.1)% | — | — | | Other | 0.5% | (0.3)% | 0.3% | | Total Effective Tax Rate | 26.7% | 28.0% | 26.2% | - As of December 27, 2023, the company released the valuation allowance related to California Enterprise Zone credits, which expired at the end of fiscal 2023532 - The Income Tax Receivable Agreement (TRA) resulted in $0.1 million of expense in fiscal 2023, and the company paid $0.3 million to pre-IPO stockholders under the TRA533 10. Employee Benefit Plans The company sponsors a defined contribution employee benefit plan, matching 100% of employee contributions up to 3% of qualified compensation and 50% of the next 2%, with contributions of $0.8 million for each of the fiscal years 2023, 2022, and 2021 - The company matches 100% of employee contributions up to 3% of qualified compensation and 50% of the next 2% in its defined contribution plan539 - Company contributions to the plan were $0.8 million for each of the fiscal years 2023, 2022, and 2021539 11. Stock-Based Compensation The company recognized $3.0 million in stock-based compensation expense in fiscal 2023, with 843,320 stock options outstanding and 537,461 restricted share awards unvested as of December 27, 2023 - Stock-based compensation expense was $3.0 million in fiscal 2023, $3.5 million in 2022, and $3.2 million in 2021541 Stock Options Activity (2021-2023) | Metric | Shares | Weighted-Average Exercise Price | | :----------------------------------- | :-------- | :------------------------------ | | Outstanding - December 29, 2021 | 978,078 | $11.45 | | Grants | 372,958 | $10.54 | | Exercised | (185,798) | $9.22 | | Forfeited, cancelled or expired | (97,059) | $12.06 | | Outstanding – December 28, 2022 | 1,068,179 | $9.92 | | Grants | 562,344 | $9.15 | | Exercised | (219,960) | $5.32 | | Forfeited, cancelled or expired | (567,243) | $10.63 | | Outstanding – December 27, 2023 | 843,320 | $10.13 | | Vested and expected to vest at Dec 27, 2023 | 835,581 | $10.14 | | Exercisable at December 27, 2023 | 380,896 | $11.09 | - The weighted-average estimated fair value of employee stock options granted in fiscal 2023 was $4.41 per share548 - As of December 27, 2023, total unrecognized compensation expense for unvested stock options was $1.8 million (weighted average period of 2.9 years) and for unvested restricted share awards was $3.5 million (weighted average period of 2.48 years)549556 12. Earnings Per Share Basic EPS for fiscal 2023 was $0.75, and diluted EPS was $0.74, following the completion of a $20.0 million stock repurchase plan and the initiation of a new $20.0 million program Earnings Per Share Data (Amounts in thousands, except per share data) | Metric | December 27, 2023 | December 28, 2022 | December 29, 2021 | | :----------------------------------------- | :---------------- | :---------------- | :---------------- | | Net income | $25,554 | $20,801 | $29,121 | | Weighted-average shares outstanding—basic | 34,253,542 | 36,350,579 | 35,973,892 | | Weighted-average shares outstanding—diluted | 34,374,706 | 36,575,904 | 36,446,756 | | Net income per share—basic | $0.75 | $0.57 | $0.81 | | Net income per share—diluted | $0.74 | $0.57 | $0.80 | - The company repurchased 2,030,850 shares of common stock for $20.0 million under the 2022 Stock Repurchase Plan, which was completed on July 12, 2023558 - In November 2023, 1,500,000 shares were repurchased for $12.6 million from FS Equity Partners V, L.P. and FS Affiliates V, L.P. under a new $20.0 million share repurchase program, leaving $7.4 million available560561564 [13. Commitments and Contingencies](index=153&ty