10-Q: El Pollo Loco Q3 2025: Net Income Rises Amid Sales Dip

El Pollo Loco Holdings, Inc. reported increased net income for the third quarter and year-to-date 2025, despite a slight decrease in company-operated restaurant revenue and system-wide comparable sales.

Summary

• Total revenue for the thirteen weeks ended September 24, 2025, was $121.5 million, a 0.9% increase from the prior year, while year-to-date total revenue was $366.5 million, up 2.2%.
• Net income for the thirteen weeks increased by 18.9% to $7.4 million, and year-to-date net income increased by 1.1% to $19.9 million.
• Basic and diluted earnings per share (EPS) for the thirteen weeks were $0.25, up from $0.21 in the prior year, and year-to-date EPS was $0.68, up from $0.66 (basic) and $0.65 (diluted).
• System-wide comparable restaurant sales decreased by 0.8% for the thirteen weeks and 0.6% for the thirty-nine weeks.
• Company-operated restaurant revenue decreased by 0.5% to $100.7 million for the thirteen weeks, but increased by 0.9% to $303.4 million year-to-date.
• Franchise revenue increased significantly by 13.5% to $12.9 million for the thirteen weeks and 14.8% to $39.4 million year-to-date, primarily due to franchisee IT pass-through revenue and new restaurant openings.
• Food and paper costs decreased by 2.1% for both the thirteen and thirty-nine weeks, attributed to cost-management initiatives and commodity deflation.
• Labor and related expenses decreased by 6.4% for the thirteen weeks and 1.3% for the thirty-nine weeks, mainly due to improved labor efficiencies, despite higher wage rates in California.
• General and administrative expenses increased by 8.1% for the thirteen weeks and 5.7% year-to-date, driven by higher stock compensation, legal/professional fees related to shareholder activism, restructuring costs, and ERP system implementation.
• The company operated 498 restaurants in seven states as of September 24, 2025, and announced the opening of its 500th restaurant on October 14, 2025.
• Completed 34 remodels (7 company-operated) during the thirty-nine weeks ended September 24, 2025, with plans for at least 55 remodels in fiscal 2025.
• Outstanding borrowings under the 2022 Revolver were $61.0 million as of September 24, 2025, with $78.7 million in borrowing availability. An additional $6.0 million was paid down post-quarter end, reducing the balance to $55.0 million by October 30, 2025.
• The Share Repurchase Program expired on March 31, 2025; 163,229 shares were repurchased for $1.8 million year-to-date under this program.

Sentiment

Score: 6

Explanation: The company demonstrated effective cost management, leading to increased net income and EPS despite a challenging environment with declining comparable restaurant sales. Liquidity remains strong, and the company is executing on its growth strategies, including reaching its 500th restaurant milestone. However, ongoing macroeconomic and labor cost pressures present headwinds.

Positives

• Net income increased by 18.9% to $7.4 million for the thirteen weeks and by 1.1% to $19.9 million for the thirty-nine weeks ended September 24, 2025.
• Franchise revenue saw strong growth, increasing by 13.5% for the thirteen weeks and 14.8% for the thirty-nine weeks, driven by IT pass-through revenue and new franchise openings.
• Food and paper costs decreased by 2.1% for both periods, reflecting successful cost-management initiatives and commodity deflation.
• Labor and related expenses decreased by 6.4% for the thirteen weeks and 1.3% for the thirty-nine weeks, indicating improved labor efficiencies.
• Interest expense, net, decreased by 27.0% for the thirteen weeks and 24.2% for the thirty-nine weeks, due to lower interest rates and reduced debt balances.
• The company successfully opened its 500th restaurant on October 14, 2025, marking a significant growth milestone.
• Maintained compliance with all financial covenants under the 2022 Revolver as of September 24, 2025.
• Strong liquidity position with $10.9 million in cash and cash equivalents and $78.7 million in borrowing availability under the 2022 Revolver.

Negatives

• Company-operated restaurant revenue decreased by 0.5% for the thirteen weeks ended September 24, 2025.
• System-wide comparable restaurant sales decreased by 0.8% for the thirteen weeks and 0.6% for the thirty-nine weeks.
• Company-operated comparable restaurant sales decreased by 1.1% for the thirteen weeks, primarily due to a 1.3% decrease in average check size.
• Franchised comparable restaurant sales decreased by 0.6% for the thirteen weeks and 1.0% for the thirty-nine weeks.
• Occupancy and other operating expenses increased by 2.5% for the thirteen weeks and 6.1% for the thirty-nine weeks, driven by higher software maintenance, occupancy, and marketplace delivery fees.
• General and administrative expenses increased by 8.1% for the thirteen weeks and 5.7% for the thirty-nine weeks, partly due to legal and professional fees related to shareholder activism and restructuring costs.
• Net cash from operating activities decreased by $7.0 million for the thirty-nine weeks ended September 24, 2025, due to unfavorable working capital fluctuations.
• Two licensed restaurants in the Philippines were closed during the thirty-nine weeks ended September 24, 2025.

Risks

• Ability to open new restaurants in new and existing markets, including difficulty in finding sites and negotiating acceptable leases.
• Ability to compete successfully with other quick-service and fast-casual restaurants.
• Global economic or other business conditions that may affect customer purchasing power, such as inflationary pressures, high unemployment, and declines in consumer confidence.
• Ability to attract, develop, assimilate, and retain employees.
• Vulnerability to changes in political and economic conditions and consumer preferences.
• Vulnerability to conditions in the greater Los Angeles area and natural disasters due to geographic concentration.
• Possibility of incurring significant impairment of assets, particularly in new markets.
• Changes in food and supply costs (especially for chicken), labor, construction, and utilities.
• Impacts of uncertainty regarding pandemics, epidemics, or infectious disease outbreaks.
• Social media and negative publicity, and the ability to respond to and effectively manage its accelerated impact.
• Ability to continue expanding digital business, delivery orders, and catering.
• Concerns about food safety and quality and food-borne illness.
• Dependence on frequent and timely deliveries of food and supplies.
• Ability to service the level of indebtedness.
• Uncertainty related to the success of marketing programs, new menu items, advertising campaigns, and restaurant designs/remodels.
• Changes in trade policies, tariff, and import regulations by the United States and other countries from which supplies are sourced.
• Limited control over franchisees and potential deterioration of relations with existing or potential franchisees.
• Potential exposure to unexpected costs and losses from self-insurance programs.
• Potential obligations under long-term and non-cancelable leases, and the ability to renew leases at the end of their terms.
• Ability to achieve social and environmental sustainability goals.
• Impact of any failure of information technology systems or any breach of network security.
• Impact of any security breaches on the ability to protect customer payment method data or personal information.
• Ability to enforce and maintain trademarks and protect other proprietary intellectual property.
• Adverse changes in the economic environment, including inflation and increased labor and supply costs, which may affect franchisees.
• Impact of federal, state, and local labor laws governing relationships with employees, including minimum wage laws and minimum standards for fast food workers (e.g., California AB 1228).
• Risks related to government regulation and litigation, including employment and labor laws.
• Impact of any liabilities arising from environmental laws.
• Fluctuations in quarterly operating results due to seasonality and other factors.
• Any future offerings of debt or equity securities that may impact the market price of common stock.
• Delaware law, organizational documents, and existing and future debt agreements potentially impeding or discouraging a takeover.
• Impact of shareholder activism on expenses, business, and stock price.
• Interest rate risk from changes in SOFR on variable-rate debt.
• Commodity price risk from market price fluctuations in food products, including chicken, other proteins, grains, produce, dairy products, and cooking oil.

Future Outlook

The company expects cost pressures from increased fast food worker wages and macroeconomic challenges like inflation and changes in trade policies to continue for the remainder of fiscal 2025. It plans to expand its business, drive restaurant sales growth, and enhance competitive positioning through five key strategies: Brand That Wins, Hospitality Mindset, Digital First, Winning Unit Economics, and Drive Unit Growth Again with National Expansion. The goal is to increase comparable restaurant sales by boosting customer frequency, attracting new customers, and improving per-person spend. The company anticipates completing at least 55 company-operated and franchise remodels for fiscal 2025. Fiscal 2025 is a 53-week year, which may lead to elevated revenues and expenses. Management believes current liquidity sources are sufficient to finance operations and planned capital expenditures for at least the next 12 months and beyond.

Management Comments

• "We strive to make and serve food that is both high quality and flavorful."
• "Our distinctive menu of quality, flavorful food that is affordable 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."
• "In 2025, El Pollo Loco launched a brand refresh, inclusive of a new advertising campaign, restaurant design, new products, and an emphasis on hospitality in our restaurants. All these elements reinforce our position in the market of Quality Chicken, Fast & Easy."
• "Although we have been able to substantially offset these cost pressures through various actions, such as increasing menu prices, managing menu mix, and productivity improvements, we expect these cost pressures to continue for the remainder of 2025, and we may not be able to offset cost increases in the future."
• "Management believes that its cash flow from operations, available cash of $10.9 million at September 24, 2025, and the outstanding borrowing availability under the 2022 Revolver will be adequate to meet the Company’s liquidity needs for the next twelve months from the date of filing of these condensed consolidated financial statements."

Industry Context

El Pollo Loco operates in the competitive limited-service restaurant (LSR) segment, focusing on fire-grilled chicken. The company is navigating industry-wide challenges such as rising labor costs, particularly in California due to new legislation like AB 1228, and broader macroeconomic inflationary pressures affecting food, labor, and construction costs. Its strategic initiatives, including a brand refresh, new restaurant designs, and an emphasis on digital engagement and loyalty programs (Loco Rewards), align with industry trends to enhance customer experience and operational efficiency. The company's expansion beyond its core California market, evidenced by new openings in Nevada, Arizona, and Texas, and reaching its 500th restaurant milestone, reflects a common growth strategy among restaurant chains seeking to diversify geographic footprint and market share.

Corporate Governance

Legal Proceedings

• Involved in various claims such as wage and hour and other legal actions that arise in the ordinary course of business, but neither the company nor its subsidiaries are party to any material legal proceedings.
• Received $0.6 million from a legal settlement, net of legal expenses, during the thirty-nine weeks ended September 24, 2025.

Stakeholder Impact

• Shareholders: Increased net income and EPS are positive, but declining comparable sales and ongoing shareholder activism (contributing to increased legal fees) present mixed signals. The expiration of the Share Repurchase Program and the Rights Agreement could influence investor sentiment.
• Employees: Labor costs are impacted by legislative increases in minimum wage (e.g., California AB 1228), but the company is implementing labor efficiencies. Stock-based compensation remains a component of executive and employee incentives.
• Customers: Menu price increases are being used to offset cost pressures. The loyalty rewards program continues to engage customers, with over 4.6 million members.
• Franchisees: Franchise revenue increased, partly due to IT pass-through revenue for new POS system rollout. Franchisees are opening new restaurants, but also experienced a decline in comparable sales. The company is contingently liable on some franchisee lease agreements.
• Suppliers: The company is exposed to commodity price risk, particularly for chicken, and has long-term beverage supply agreements in place.
• Creditors: The company is in compliance with the financial covenants of its 2022 Revolver and has reduced its outstanding debt balance, indicating sound financial management of its obligations.

Next Steps

• Continue to expand business, drive restaurant sales growth, and enhance competitive positioning through five key strategies: Brand That Wins, Hospitality Mindset, Digital First, Winning Unit Economics, and Drive Unit Growth Again with National Expansion.
• Increase customer frequency, attract new customers, and improve per-person spend to increase comparable restaurant sales.
• Complete at least 55 company-operated and franchise remodels for fiscal 2025.
• Monitor the recoverability of the carrying value of assets for newer restaurants in newer markets.
• Evaluate the impact of adopting new accounting pronouncements ASU 2023-09 and ASU 2024-03 on disclosures.

Key Dates

Recommendation

The company demonstrated effective cost management, leading to an increase in net income and EPS despite a challenging environment with declining comparable restaurant sales. The expansion efforts, including reaching the 500th restaurant milestone, show strategic growth. However, the persistent decline in comparable sales and ongoing macroeconomic and labor cost pressures present headwinds. The stock is likely to remain range-bound until a clear trend of comparable sales growth re-emerges, warranting a 'hold' recommendation for seasoned investors.

Keywords

El Pollo Loco, QSR, Fast Casual, Restaurant, SEC Filing, 10-Q, Financial Results, Earnings, Revenue, Net Income, EPS, Comparable Sales, Franchise, Stock Repurchase, Debt, Liquidity, California, Restaurant Remodel, Loyalty Program, SOFR, Commodity Prices, Labor Costs, Inflation