10-Q: El Pollo Loco Reports Mixed Q2 Results Amid Rising Costs, System-Wide Sales Dip

El Pollo Loco Holdings, Inc. reported a 3.0% increase in total revenue for the second quarter, reaching $125.8 million, but net income declined by 6.9% to $7.1 million, impacted by higher operating expenses and labor costs.

Summary

• Total revenue for the thirteen weeks ended June 25, 2025, increased by 3.0% to $125.8 million, up from $122.2 million in the prior year.
• Company-operated restaurant revenue grew by 2.0% to $104.3 million, while franchise revenue surged by 14.8% to $13.4 million.
• Net income for the quarter decreased by 6.9% to $7.1 million, down from $7.6 million in the comparable prior-year period.
• Diluted earnings per share (EPS) for the quarter was $0.24, a slight decrease from $0.25 in the prior year.
• System-wide comparable restaurant sales decreased by 0.3% for the thirteen weeks and 0.4% for the twenty-six weeks ended June 25, 2025.
• Company-operated comparable restaurant sales increased by 1.2% for the quarter, driven by a 1.5% increase in average check size, partially offset by a 0.3% decrease in transactions.
• Franchised comparable restaurant sales decreased by 1.1% for the quarter.
• Food and paper costs as a percentage of company-operated restaurant revenue improved to 24.5% from 25.2% in the prior year, primarily due to menu price increases and commodity deflation.
• Labor and related expenses as a percentage of company-operated restaurant revenue decreased to 30.8% from 32.1%, benefiting from improved labor efficiencies despite higher wage rates.
• General and administrative expenses increased by 14.8% to $13.5 million, largely due to higher stock compensation, legal fees related to shareholder activism, and executive transition costs.
• The company completed 20 restaurant remodels during the twenty-six weeks ended June 25, 2025, and expects to complete 55-65 more for the remainder of fiscal 2025.
• The Share Repurchase Program, which authorized up to $20 million in repurchases, expired on March 31, 2025, with $1.8 million in repurchases made during the twenty-six weeks ended June 25, 2025.
• Cash and cash equivalents significantly increased to $8.99 million as of June 25, 2025, from $2.48 million at December 25, 2024.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative. While revenue increased and some cost management initiatives showed success (food/paper, labor efficiency), the decline in net income and EPS, coupled with negative system-wide comparable sales and increased G&A expenses due to specific events (shareholder activism, executive transition), indicates underlying challenges. The expiration of the share repurchase program also removes a potential positive catalyst. The company is navigating a tough cost environment, but profitability is suffering.

Positives

• Total revenue increased by 3.0% for the quarter and 2.8% year-to-date, demonstrating overall top-line growth.
• Company-operated comparable restaurant sales increased by 1.2% for the quarter and 0.9% year-to-date, indicating strength in existing company-owned locations.
• Food and paper costs as a percentage of company-operated restaurant revenue decreased due to menu price increases and commodity deflation, improving restaurant-level profitability.
• Labor and related expenses as a percentage of company-operated restaurant revenue decreased due to improved labor efficiencies, partially offsetting wage rate increases.
• Interest expense, net, decreased by 21.0% for the quarter and 22.9% year-to-date, driven by lower interest rates and reduced outstanding debt balances.
• Cash and cash equivalents significantly increased to $8.99 million from $2.48 million, enhancing liquidity.
• The company was in compliance with all financial covenants under its 2022 Revolver as of June 25, 2025, with $70.7 million in borrowing availability.

Negatives

• Net income decreased by 6.9% for the quarter and 7.1% year-to-date, despite revenue growth, indicating pressure on profitability.
• Diluted EPS decreased from $0.25 to $0.24 for the quarter and from $0.44 to $0.43 year-to-date.
• System-wide comparable restaurant sales decreased by 0.3% for the quarter and 0.4% year-to-date, reflecting a decline in overall brand performance.
• Franchised comparable restaurant sales decreased by 1.1% for the quarter and 1.2% year-to-date, indicating challenges within the franchised segment.
• General and administrative expenses increased significantly by 14.8% for the quarter, driven by higher stock compensation, legal fees related to shareholder activism, and executive transition costs.
• Occupancy and other operating expenses increased by 8.5% for the quarter and 8.0% year-to-date, impacting company-operated restaurant profitability.
• Net cash flows provided by operating activities decreased by $9.2 million year-to-date due to unfavorable working capital fluctuations.

Risks

• Ability to open new restaurants in new and existing markets, including difficulty in finding sites and negotiating acceptable leases.
• Competition with other quick-service and fast-casual restaurants.
• Global economic conditions affecting customer purchasing power, such as inflationary pressures, high unemployment, and increases in gas prices.
• 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.
• Potential for significant impairment of assets, particularly in new markets, if expected performance is not realized.
• Changes in food and supply costs, especially for chicken, labor, construction, and utilities.
• Impacts of pandemics, epidemics, or infectious disease outbreaks on operations, employees, customers, partners, and the industry.
• Negative publicity and the ability to effectively manage social media 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 current level of indebtedness.
• Uncertainty related to the success of marketing programs, new menu items, advertising campaigns, and restaurant designs/remodels.
• Changes in trade policies, tariffs, and import regulations, which could increase food and supplies costs.
• Limited control over franchisees and potential deterioration of relations with them.
• Potential exposure to unexpected costs and losses from self-insurance programs.
• Potential obligations under long-term and non-cancelable leases, and ability to renew leases.
• Ability to achieve social and environmental sustainability goals.
• Impact of any failure of information technology systems or network security breaches.
• Impact of any security breaches on 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/supply costs, affecting franchisees.
• Impact of federal, state, and local labor laws, including minimum wage laws and minimum standards for fast food workers (e.g., AB 1228 in California).
• 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.
• Future offerings of debt or equity securities that may impact the market price of common stock.
• Delaware law, organizational documents, and existing/future debt agreements potentially impeding or discouraging a takeover.
• Impact of shareholder activism on expenses, business, and stock price.

Future Outlook

The company anticipates that cost pressures from macroeconomic challenges, including inflation and changes in trade policies, as well as legislative increases in the California state minimum wage (AB 1228), will continue for the remainder of fiscal 2025, and there is no guarantee that these cost increases can be fully offset. Strategic plans include expanding the business, driving restaurant sales growth, and enhancing competitive positioning through initiatives like 'Brand That Wins,' 'Hospitality Mindset,' 'Digital First,' 'Winning Unit Economics,' and 'Drive Unit Growth Again with National Expansion.' The company expects to complete 55-65 company-operated and franchise restaurant remodels for the remainder of fiscal 2025. Management believes that current cash flow from operations, available cash, and borrowing availability will be adequate to meet liquidity needs for at least the next twelve months and beyond.

Management Comments

• 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.
• Considering our efforts to finalize our new prototype design, we currently expect to complete 55-65 company-operated restaurant and franchise remodels for the remainder of fiscal 2025.

Industry Context

El Pollo Loco operates in the highly competitive quick-service and fast-casual restaurant segment. The industry is currently facing significant macroeconomic challenges, including persistent inflationary pressures on food, labor, and operating costs. Specifically, the implementation of AB 1228 in California, which raised the minimum wage for fast food workers to $20 an hour, has directly impacted labor costs for companies with a significant presence in the state, like El Pollo Loco. The company's strategy of increasing menu prices and improving labor efficiencies is a common industry response to these rising costs. The slight decline in system-wide comparable sales, despite company-operated sales growth, suggests a mixed consumer environment, potentially reflecting price sensitivity or increased competition.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• The company is involved in various claims, such as wage and hour and other legal actions, that arise in the ordinary course of business.
• Management does not believe that the ultimate resolution of these actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources.

Stakeholder Impact

• **Shareholders:** Net income and EPS declined, which is negative. System-wide comparable sales also declined. However, the company's liquidity position improved, and the share repurchase program expired, which could reduce future buyback support. The expiration of the Rights Agreement could impact takeover dynamics.
• **Employees:** Labor costs increased due to legislative changes (AB 1228), but the company is implementing labor efficiencies. Stock-based compensation expenses increased, potentially benefiting some employees.
• **Customers:** Menu prices increased to offset rising costs, which could impact affordability and transaction volume. The Loco Rewards program continues to incentivize customer engagement.
• **Franchisees:** Franchise revenue increased, partly due to IT pass-through revenue. However, franchised comparable restaurant sales decreased, indicating operational challenges for franchisees. The company is contingently liable on some franchisee lease agreements.
• **Suppliers:** The company has significant concentration with one supplier for accounts payable and total expenses, posing a potential risk if that relationship is disrupted. Purchase commitments for chicken are in place.

Next Steps

• Continue to evaluate the impact of the One Big Beautiful Bill Act (OBBB Act) on financial position, though no significant impact to the estimated effective tax rate for fiscal 2025 is expected.
• Continue to evaluate the impact of adopting ASU No. 2023-09 (Income Taxes) on disclosures.
• Continue to evaluate the impact of adopting ASU No. 2024-03 (Income Statement Reporting Comprehensive Income/Expense Disaggregation Disclosures) on disclosures.
• Finalize new prototype design and complete 55-65 company-operated restaurant and franchise remodels for the remainder of fiscal 2025.
• Execute five key growth strategies: Brand That Wins, Hospitality Mindset, Digital First, Winning Unit Economics, and Drive Unit Growth Again with National Expansion.
• Monitor the recoverability of assets for newer restaurants in newer markets, as impairment charges may be recognized if expected performance is not realized.

Key Dates

Recommendation

The company presents a mixed financial picture. While revenue growth is positive and company-operated comparable sales show strength, the decline in net income and EPS, coupled with negative system-wide comparable sales, indicates profitability pressures. The significant increase in G&A expenses due to shareholder activism and executive transition costs is a concern. The company is actively managing cost pressures through price increases and efficiencies, but the ongoing macroeconomic challenges and labor cost increases present headwinds. The strong liquidity position is a positive, but the expiration of the share repurchase program removes a potential support for the stock. Given the combination of growth in some areas and declines in key profitability metrics, a 'hold' recommendation is appropriate as the company navigates these challenges and its strategic initiatives unfold.

Keywords

Quick-service restaurant, Fast casual, Chicken, Franchise, Restaurant industry, SEC filing, Financial results, Comparable sales, Labor costs, Inflation, California minimum wage, Restaurant remodels, Loco Rewards, Share repurchase, Debt, Liquidity