What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 136 added, 135 removed, 366 unchanged (43% of the section changed)

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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.

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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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.

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:

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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 LSR segment.

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 LA-inspired entrees, and sides,

and, throughout the year, on a limited-time basis, additional proteins like shrimp.

We serve individual and family-sized chicken meals, a variety of Mexican and 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, Pollo Fit entrees, chicken tostada salads, and Pollo Bowls.

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COVID-19 Impact

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 our sales are associated with dine-in service.

During the COVID-19 pandemic, we have experienced periods of significant disruption to our restaurant operations.

Following the pandemic declaration in March 2020, federal, state and local governments have periodically responded to the public health crisis by requiring social distancing, issuing “stay at home” directives, and implementing restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery).

Many state and local governments continue to periodically implement certain restrictions to try and contain the spread of the virus.

As of June 30, 2021, the nearly all of our restaurants have dining rooms open at full capacity and continue to maintain take-away, mobile pick-up, delivery, and drive-thru operations where available.

During the thirteen and twenty-six weeks ended June 30, 2021, we temporarily closed 5 and 50 restaurants, respectively, of which all have reopened as of June 30, 2021.

Similarly, during both thirteen and twenty-six weeks ended June 30, 2021, our franchisees temporarily closed 27 restaurants, of which all have reopened as of June 30, 2021.

For both franchise-operated and company-operated restaurants, this represents total temporary closures and may include more than one closure for the same restaurant.

These closures typically lasted from one to three days.

As of June 30, 2021, we had not permanently closed any restaurants due to the COVID-19 pandemic.

Subsequent to June 30, 2021, the Company has not temporarily closed any restaurants, and franchisees have not temporarily closed any restaurants.

During the thirteen and twenty-six weeks ended June 30, 2021, we incurred $0.2 million and $3.0 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

During both thirteen and twenty-six weeks ended June 24, 2020, the Company incurred $ 1.1 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

As of September 29, 2021, all of our restaurants have dining rooms open at full capacity and continue to maintain take-away, mobile pick-up, delivery, and drive-thru operations where available.

We continue to experience staffing challenges which resulted in reduced operating hours and service channels.

Further, there have been inflationary pressures due to supply chain disruptions that have impacted our business and results of operations during the thirteen and thirty-nine weeks ended September 29, 2021 .

During the thirteen and thirty-nine weeks ended September 29, 2021, we incurred $0.5 million and $3.5 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

During the thirteen and thirty-nine weeks ended September 23, 2020, the Company incurred $0.9 million and $ 2.0 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

Growth Strategies and Outlook

As of June 30, 2021, we had 480 locations in six states.

As of September 29, 2021, we had 480 locations in six states.

In fiscal 2020, we opened one new company-operated restaurant in Nevada, which was in process prior to the COVID-19 pandemic and our franchisees opened three new restaurants, two in California and one in Arizona.

For the twenty-six weeks ended June 30, 2021, two new company-operated restaurants were opened, one in Nevada and one in California, and no new franchised restaurants were opened.

For the thirty-nine weeks ended September 29, 2021, two new company-operated restaurants were opened, one in Nevada and one in California, and no new franchised restaurants were opened, although we sold eight of our company-owned restaurants to a franchisee during the thirteen and thirty-six weeks ended September 29, 2021.

We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing the following strategies:

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Comparable Restaurant Sales

For the thirteen and twenty-six weeks ended June 30, 2021, system-wide comparable restaurant sales increased by 21.0% and 14.2%, 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 30, 2021 increased by 16.4% and 9.8%, respectively.

For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of an approximately

0.4% increase in average check size and an increase in transactions of 15.9%, and the year-to-date change in comparable restaurant sales consisted of a 1.5% increase in transactions and a 8.2% increase in average check size .

For franchised restaurants, comparable restaurant sales increased 24.5% and 17.5% for the thirteen and twenty-six weeks ended June 30, 2021, respectively.

For the thirteen and thirty-nine weeks ended September 29, 2021, system-wide comparable restaurant sales increased by 9.3% and 12.5%, respectively, from the comparable period in the prior year.

For company-operated restaurants, comparable restaurant sales for the thirteen and thirty-nine weeks ended September 29, 2021 increased by 4.8% and 8.1%, respectively.

For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of an approximately 3.5% increase in average check size and an increase in transactions of 1.2% and the year-to-date change in comparable restaurant sales consisted of a 6.6% increase in average check size and a 1.4% increase in transactions .

For franchised restaurants, comparable restaurant sales increased 12.6% and 15.7% for the thirteen and thirty-nine weeks ended September 29, 2021, respectively.

Refer to Comparable Restaurant Sales definition in “Key Performance Indicators” section below.

Restaurant Development

Our restaurant counts at the beginning and end of each of the last three fiscal years and the twenty-six weeks ended June 30, 2021, were as follows:

Twenty-Six Weeks Ended

Our restaurant counts at the beginning and end of each of the last three fiscal years and the thirty-nine weeks ended September 29, 2021, were as follows:

Thirty-Nine Weeks Ended

Fiscal Year Ended

June 30, 2021

September 29, 2021

Company-operated restaurant activity:

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We believe that our remodels using this new design will result in higher restaurant revenue and a strengthened brand.

As of June 30, 2021, we have completed seven remodels using the new asset design.

As of September 29, 2021 we have completed 12 remodels using the new asset design including 10 this year.

In fiscal 2021, we plan to complete a total of 10-12 company and 5-7 franchise remodels using the new design.

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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 reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote.

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 reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote.

A portion of the transaction price is allocated to loyalty points on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty point’s terms.

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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 June 30, 2021 and December 30, 2020, the revenue allocated to loyalty points that had not been redeemed was $0.6 million and $0.9 million, respectively, which is reflected in the Company’s

accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities.

The Company had over 2.4 million loyalty program members as of June 30, 2021.

As of September 29, 2021 and December 30, 2020, the revenue allocated to loyalty points that had not been redeemed was $0.7 million and $0.9 million, respectively, which is reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities.

The Company had over 2.5 million loyalty program members as of September 29, 2021.

Critical Accounting Policies and Use of Estimates

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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.

Like other expense items, we expect labor costs to grow proportionately as our

restaurant revenue grows.

Factors that influence labor costs include minimum wage and payroll tax legislation, overtime, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.

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Comparison of Results of Operations

Our operating results for the thirteen weeks ended June 30, 2021 and June 24, 2020 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.

Our operating results for the thirteen and thirty-nine weeks ended September 29, 2021 and September 23, 2020 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 in the tables below.

Thirteen Weeks Ended

June 30, 2021

June 24, 2020

September 29, 2021

September 23, 2020

Increase / (Decrease)

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Occupancy and other operating expenses (1)

Gain on recovery of insurance proceeds, lost profits (1)

Company restaurant expenses (1)

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Loss on disposal of assets

Recovery of securities lawsuits related legal expenses and other insurance claims

Loss on assets held for sale

Loss on disposition of restaurants

Impairment and closed-store reserves

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Interest expense, net of interest income

Income tax receivable agreement expense

Income tax receivable agreement expense (income)

Income before provision for income taxes

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All other percentages use total revenue.

Our operating results for the twenty-six weeks ended June 30, 2021 and June 24, 2020 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.

Twenty-Six Weeks Ended

June 30, 2021

June 24, 2020

Thirty-Nine Weeks Ended

September 29, 2021

September 23, 2020

Increase / (Decrease)

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Occupancy and other operating expenses (1)

Gain on recovery of insurance proceeds, lost profits(1)

Company restaurant expenses (1)

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Recovery of securities lawsuits related legal expenses and other insurance claims

Loss on assets held for sale

Loss on disposition of restaurants

Impairment and closed-store reserves

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The company-operated comparable restaurant sales increase consisted of an approximately 3.5% increase in average check size and a 1.2% increase in transactions.

In addition, company-operated revenue was favorably impacted by $1.3 million of additional sales from restaurants opened during or after the second quarter of the prior year and a $1.1 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the second quarter of the prior year.

In addition, company-operated restaurant revenue was favorably impacted by $0.9 million of additional sales from restaurants opened during or after the third quarter of the prior year and a $0.4 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the third quarter of the prior year.

This restaurant sales increase was partially offset by a $2.6 million decrease in revenue from the eight company-operated restaurants sold by the Company to an existing franchisee during the quarter and a $0.4 million decrease in revenue recognized for our loyalty points program.

Year-to-date, company-operated restaurant revenue increased $23.5 million, or 8.5%, from the comparable period in the prior year.

The increase in company-operated restaurant sales was primarily due to a $23.5 million, or 8.1% increase in company-operated comparable restaurant revenue.

In addition, company-operated revenue was favorably impacted by $1.7 million of additional sales from restaurants opened during or after the first quarter of the prior year and a $0.2 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the year-to-date period of the prior year.

In addition, company-operated restaurant revenue was favorably impacted by $2.7 million of additional sales from restaurants opened during or after the second quarter of the prior year and a $0.4 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the year-to-date period of the prior year.

The company-operated comparable restaurant sales increase consisted of an approximately 6.6% increase in average check size and a 1.4% increase in transactions.

This restaurant sales increase was partially offset by a $2.6 million decrease in revenue from the eight company-operated restaurants sold by the Company to an existing franchisee during the quarter and a $0.5 million decrease in revenue recognized for our loyalty points program.

See above under “COVID-19 Impact” for additional information related to the impact of the COVID-19 pandemic on our business.

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For the quarter, franchise revenue increased $1.1 million, or 14.6%, from the comparable period in the prior year.

This increase was primarily due to a franchise comparable restaurant sales increase of 24.5% and the opening of two restaurants during or subsequent to the second quarter of 2020.

This franchise revenue increase was partially offset by the closure of three franchise locations during or subsequent to the second quarter of 2020.

This increase was primarily due to a franchise comparable restaurant sales increase of 12.6%, the opening of one restaurant during or subsequent to the third quarter of 2020 and revenue generated from eight company-operated restaurants sold by the Company to an existing franchisee during the quarter.

This franchise revenue increase was partially offset by the closure of two franchise locations during or subsequent to the third quarter of 2020.

Year-to-date, franchise revenue increased $3.4 million, or 15.6%, from the comparable period in the prior year.

This increase was primarily due to a franchise comparable restaurant sales increase of 17.5% and the opening of three restaurants during or subsequent to the first quarter of 2020 .

This franchise revenue increase was partially offset by the closure of seven franchise locations during or subsequent to the first quarter of 2020.

This increase was primarily due to a franchise comparable restaurant sales increase of 15.7%, the opening of three restaurants during or subsequent to the first quarter of 2020 and revenue generated from eight company-operated restaurants sold by the Company to an existing franchisee during the quarter .

This franchise revenue increase was partially offset by the closure of eight franchise locations during or subsequent to the first quarter of 2020.

Franchise Advertising Fee Revenue

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Year-to-date, franchise advertising fee revenue increased $2.8 million, or 16.9%, from the comparable period in the prior year.

As advertising fee revenue is a percentage of franchisees’ revenue, the quarter-to-date fluctuations were due to the increases and decreases noted in franchise revenue above.

As advertising fee revenue is a percentage of franchisees’ revenue, the quarter and year-to-date fluctuations were due to the increases and decreases noted in franchise revenue above.

Food and Paper Costs

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The increase in food and paper costs for the quarter and year-to-date periods resulted primarily from higher company transactions, sales mix and commodity inflation.

For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 26.1%, consistent with the comparable period of the prior year as higher prices offset the cost increases above.

For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 26.7%, up from 25.6% in the comparable period of the prior year primarily due to commodity inflation and investment in new elevated packaging, partially offset by an increase in pricing.

Year-to-date, food and paper costs as a percentage of company-operated restaurant revenue were 26.2%, down from 26.4% in the comparable period of the prior year.

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Labor and Related Expenses

For the quarter, labor and related expenses increased $5.8 million, or 22.4%, from the comparable period in the prior year.

The increase for the quarter was pr imarily due to $2.6 million related to the 15.9% increase in year-over-year sales transactions, a $1.3 million increase in overtime, a $0.6 million increase related to higher minimum wage increases in California during fiscal 2020 and 2021, a $0.5 million increase in medical and workers compensation expense, due to higher claims activity, $0.4 million higher in payroll taxes and $0.4 million related to employee training and other labor related expenses.

For the quarter, labor and related expenses decreased $1.0 million, or 3.3%, from the comparable period in the prior year.

The decrease for the quarter was pr imarily due to recognizing a $3.2 million ERC which was recorded as an offset to the corresponding payroll tax expense and was classified as part of the labor and other operating expenses on the condensed consolidated statements of income during the thirteen weeks ended September 29, 2021.

See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements ” for add itional information related to the ERC.

Additionally, the labor and related expenses were favorably impacted by a $0.9 million reduction in labor related to the eight locations sold to an existing franchisee during the quarter.

The decrease in labor and related expenses was partially offset by a $1.5 million increase primarily related to minimum wage increases in California during fiscal 2020 and 2021 and other labor wage increases as a result of competitive pressure, a $0.8 million increase related to the 1.2% increase in year-over-year sales transactions, a $0.3 million increase in overtime, a $0.3 million increase in medical and workers compensation expense due to higher claims activity and a $0.2 million increase in other labor related expenses.

Year-to-date, labor and related expenses increased $6.9 million, or 8.2%, from the comparable period in the prior year.

The increase for the year-to-date period was due to a $2.2 million increase in overtime, $1.4 million related to the 1.5% increase in year-over-year sales transactions, a $1.2 million increase related to higher minimum wage increases in California during fiscal 2020 and 2021, $1.2 million in labor costs associated with the COVID-19 pandemic, a $0.4 million increase in medical and workers compensation expense due to higher claims activity, $0.5 million in higher payroll taxes and $0.9 million related to employee training and other labor related expenses.

For the quarter, labor and related expenses as a percentage of company-operated restaurant revenue were 29.5%, consistent with the comparable period in the prior year as higher prices and efficiencies offset the cost increases highlighted above.

Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 31.0%, up from 30.2% in the comparable period in the prior year.

The year-to-date percentage was impacted by the cost increases highlighted above, partially offset by an increase in pricing and labor efficiencies.

The increase for the year-to-date period was due to a $2.6 million increase primarily related to minimum wage increases in California during fiscal 2020 and 2021 and other labor wage increases as a result of competitive pressure, a $2.5 million increase in overtime, a $2.3 million increase related to the 1.4% increase in year-over-year sales transactions, a $1.1 million increase primarily related to employee training and other labor related expenses, $0.9 million in labor costs associated with the COVID-19 pandemic and $0.7 million in higher payroll taxes.

This labor and related expense increase was partially offset by recognizing a $3.2 million ERC which is recorded as an offset to the corresponding payroll tax expense and is classified as part of the labor and other operating expenses on the condensed consolidated statements of income during the thirty-nine weeks ended September 29, 2021.

For the quarter, labor and related expenses as a percentage of company-operated restaurant revenue were 27.8%, down from 29.6% in the comparable period in the prior year due to the cost increases highlighted above, partially offset by the obtained ERC.

Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 29.9%, compared to 30.0% in the comparable period in the prior year.

The year-to-date percentage was impacted by the cost increases highlighted above, offset by an obtained ERC.

Occupancy and Other Operating Expenses

For the quarter, occupancy and other operating expenses increased $1.3 million, or 5.3%, from the comparable period of the prior year.

Fluctuations in occupancy and other expenses consisted primarily of a $0.8 million increase in advertising fees, a $0.6 million increase in utilities, a $0.4 million increase in repairs and maintenance costs, a $0.4 million increase in other operating expenses, a $0.4 million increase in market place delivery fees, a $0.3 million increase in operating supplies, a $0.2 million increase in occupancy costs, primarily related to rent expense and higher general liability claims and a $0.3 million increase in credit card charges.

Fluctuations in occupancy and other expenses consisted primarily of a $0.5 million increase in utilities, a $0.4 million increase in other operating expenses, a $0.2 million increase in repairs and maintenance costs and a $0.2 million increase in market place delivery fees.

Year-to-date, occupancy and other operating expenses increased $6.4 million, or 9.5%, from the comparable period of the prior year.

The increase was primarily due to a $0.9 million increase in advertising fees, $0.9 million increase in market place delivery fees, a $0.7 million increase in utilities, a $0.7 million increase in operating supplies, a $0.7 million increase in repairs and maintenance costs, a $0.5 million increase in occupancy costs, primarily related to rent expense and higher general liability claims, a $0.4 million increase in credit card charges and a $0.4 million increase in other operating expenses.

For the quarter, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 23.7% down from 25.0% in the comparable period in the prior year.

The increase was primarily due to a $1.2 million increase in utilities, a $1.1 million increase in market place delivery fees, a $1.0 million increase in advertising fees, a $0.9 million increase in repairs and maintenance costs, a $0.8 million increase in other operating expenses, a $0.6 million increase in operating supplies, a $0.4 million increase in occupancy costs, primarily related to rent expense and higher general liability claims, and a $0.4 million increase in credit card charges.

For the quarter, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.1%, up from 24.5% in the comparable period in the prior year.

Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 24.7%, up from 24.4% in the comparable period of the prior year.

The decrease for the quarter resulted primarily from higher revenue, partially offset by the increase in costs noted above.

The slightly higher percentage on a year-to-date basis reflects the cost increases noted above partially offset by higher year-to-date revenue.

The higher percentage on both a quarter and year-to-date basis reflects the cost increases noted above partially offset by higher year-to-date revenue.

General and Administrative Expenses

For the quarter, general and administrative expenses increased $0.1 million, or 0.6%, from the comparable period in the prior year.

The increase for the quarter was due primarily to a $1.3 million increase in labor related costs, primarily related to an increase in management bonus expense, a $0.3 million increase in stock compensation expenses, and a $0.4 million increase in temporary office staff and recruiting fees, partially offset by a $2.1 million decrease in legal and professional expenses.

For the quarter, general and administrative expenses decreased $0.4 million, or 4.5%, from the comparable period in the prior year.

The decrease for the quarter was due primarily to a $1.3 million decrease in labor related costs, primarily related to a decrease in estimated management bonus expense.

This general and administrative expenses decrease was partially offset by a $0.6 million increase in recruiting and other outside services fees and a $0.3 million increase in legal and professional expenses.

Year-to-date, general and administrative expenses increased $0.8 million, or 2.6%, from the comparable period in the prior year.

The increase for the year-to-date period was due primarily to a $1.6 million increase in labor related costs, primarily related to an increase in management bonus expense, a $0.7 million increase in stock compensation expenses and a $0.7 million increase in temporary office staff and recruiting fees.

The increase for the year-to-date period was due primarily to a $1.2 million increase in recruiting and other outside services fees, a $0.8 million increase in stock compensation expenses and a $0.3 million increase in labor related costs, primarily related to an increase in management bonus expense .

This increase was partially offset by a $1.5 million decrease in legal and professional expenses, related primarily to a $2.5 million legal settlement in the prior year period discussed in Note 7, “Commitments and Contingencies, Legal Matters” in the Notes to Condensed Consolidated Financial Statements above.

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The year-to-date percentage decrease is primarily due to the higher revenue, partially offset by the cost increases discussed above.

Loss on held for sale assets

During the thirteen and twenty-six weeks ended June 30, 2021, we agreed in principle to sell eight restaurants within the Sacramento area to an existing franchisee.

The net assets were recorded to assets held for sale at the lower of carrying value or fair value less costs to sell, which resulted in a loss on held for sale assets of $1.5 million for the thirteen and twenty-six weeks ended June 30, 2021.

Prior to June 30, 2021, we received $4.6 million of cash primarily representing the purchase price of the transaction.

The funds were recorded within our cash and cash equivalents and other accrued expenses and current liabilities within our condensed consolidated balance sheet.

The eight restaurants were sold subsequent to June 30, 2021.

Loss on Disposition of Restaurants

During the thirteen and thirty-nine weeks ended September 29, 2021, we completed the sale of our eight restaurants within Sacramento area to an existing franchisee.

This sale resulted in cash proceeds of $4.6 million and a net loss on sale of restaurants of less than $0.1 million and $1.5 million for the thirteen and thirty-nine weeks ended September 29, 2021, respectively.

Impairment and Closed-Store Reserves

During the thirteen and twenty-six weeks ended June 30, 2021, we recorded non-cash impairment charges of $0.4 million and $0.7 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California, and the long-lived assets of three restaurants in California.

During the thirteen and twenty-six weeks ended June 24, 2020, we recorded non-cash impairment charges of $0.1 million and $2.0 million, respectively, primarily related to the carrying value of the assets of one restaurant in Texas and the long-lived assets of three restaurants in California.

Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, the Company is monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis.

During the thirteen and thirty-nine weeks ended September 29, 2021, we recorded non-cash impairment charges of $0.1 million and $0.7 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California, and the long-lived assets of three restaurants in California.

During the thirteen and thirty-nine weeks ended September 23, 2020, we recorded non-cash impairment charges of $1.5 million and $3.5 million, respectively, primarily related to the carrying value of the assets of one restaurant in Texas and the long-lived assets of four restaurants in California.

Given the inherent uncertainty in

projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, the Company is monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis.

For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

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Additionally, any property tax and CAM payments relating to closed restaurants are included within closed-store expense.

During the thirteen and twenty-six weeks ended June 30, 2021, we recognized less than $0.1 million and $0.2 million, respectively, of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

During the thirteen and twenty-six weeks ended June 24, 2020, we recognized $0.4 million and $0.9 million, respectively, of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

During the thirteen and thirty-nine weeks ended September 29, 2021, we recognized $0.1 million and $0.4 million, respectively, of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

During the thirteen and thirty-nine weeks ended September 23, 2020, we recognized $0.3 million and $1.1 million, respectively, of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

Interest Expense, Net

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The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our NOLs and other tax attributes attributable to preceding periods.

For the thirteen and twenty-six weeks ended June 30, 2021, we recorded income tax receivable agreement expense of less than $0.1 million and income tax receivable agreement income of less than $0.1 million, respectively, and for the thirteen and twenty-six weeks ended June 24, 2020 we recorded income tax receivable agreement expense of $0.3 million and $0.2 million, respectively.

For both the thirteen and thirty-nine weeks ended September 29, 2021, we recorded income tax receivable agreement income of less than $0.1 million, and for the thirteen and thirty-nine weeks ended September 23, 2020 we recorded income tax receivable agreement income of $0.1 million and income tax receivable expense of less than $0.1 million, respectively.

Provision for Income Taxes

For the quarter ended June 30, 2021, we recorded an income tax provision of $3.4 million, reflecting an estimated effective tax rate of 27.8%.

For the quarter ended June 24, 2020, we recorded an income tax provision of $0.8 million, reflecting an estimated effective tax rate of approximately 12.0%.

For the year-to-date period ended June 30, 2021, we recorded an income tax provision of $5.0 million, reflecting an estimated effective tax rate of approximately 28.1%.

For the year-to-date ended June 24, 2020, we recorded an income tax provision of $2.1 million, reflecting an estimated effective tax rate of approximately 18.4%.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 28.1% for the year-to-date ended June 30, 2021 is primarily a result of a windfall tax benefit related to stock options exercised, non-deductible executive compensation, state taxes, a Work Opportunity Tax Credit benefit, the change in valuation allowance against certain state credits and prior year true up related to stock based compensation.

For the quarter ended September 29, 2021, we recorded an income tax provision of $3.7 million, reflecting an estimated effective tax rate of 26.4%.

For the quarter ended September 23, 2020, we recorded an income tax provision of $1.6 million, reflecting an estimated effective tax rate of approximately 14.2%.

For the year-to-date period ended September 29, 2021, we recorded an income tax provision of $8.7 million, reflecting an estimated effective tax rate of approximately 27.4%.

For the year-to-date period ended September 23, 2020, we recorded an income tax provision of $3.7 million, reflecting an estimated effective tax rate of approximately 16.3%.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 27.4% for the year-to-date period ended September 29, 2021 is primarily a result of a windfall tax benefit related to stock options exercised, non-deductible executive compensation, state taxes, a Work Opportunity Tax Credit benefit, the change in valuation allowance against certain state credits and prior year true up related to stock based compensation.

Key Performance Indicators

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Thirteen Weeks Ended

Twenty-Six Weeks Ended

June 30, 2021

June 24, 2020

June 30, 2021

June 24, 2020

Thirty-Nine Weeks Ended

September 29, 2021

September 23, 2020

September 29, 2021

September 23, 2020

Company-operated restaurant revenue

18 unchanged sentences

Comparable restaurant sales exclude restaurants closed during the applicable period.

At June 30, 2021 and June 24, 2020, there were 465 and 469 comparable restaurants, 191 and 191 company-operated restaurants and 274 and 278 franchised restaurants, respectively.

At September 29, 2021 and September 23, 2020, there were 462 and 468 comparable restaurants, 189 and 191 company-operated restaurants and 273 and 277 franchised restaurants, respectively.

Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded.

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Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation, or superior to, or as substitutes for the analysis of our results as reported under GAAP.

Management uses restaurant contribution and restaurant contribution margin as key metrics to evaluate the profitability of incremental sales at our restaurants, to evaluate our restaurant performance across periods, and to evaluate our restaurant financial performance compared with our competitors.

Management uses restaurant contribution and restaurant contribution margin as key metrics to evaluate the profitability of incremental sales

at our restaurants, to evaluate our restaurant performance across periods, and to evaluate our restaurant financial performance compared with our competitors.

Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance.

2 unchanged sentences

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

(Dollar amounts in thousands)

June 30, 2021

June 24, 2020

June 30, 2021

June 24, 2020

September 29, 2021

September 23, 2020

September 29, 2021

September 23, 2020

Restaurant contribution:

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Loss on disposal of assets

Loss on assets held for sale

Loss on disposition of restaurants

Franchise revenue

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EBITDA represents net income before interest expense, provision for income taxes, depreciation, and amortization.

Adjusted EBITDA represents net income before interest expense, provision for income taxes, depreciation, amortization, and items that we do not consider representative of our on-going operating performance, as identified in the reconciliation table below.

Adjusted EBITDA represents net income before interest expense, provision for income taxes, depreciation, amortization,

and items that we do not consider representative of our on-going operating performance, as identified in the reconciliation table below.

EBITDA and Adjusted EBITDA as presented in this report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP.

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Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

(Amounts in thousands)

June 30, 2021

June 24, 2020

June 30, 2021

June 24, 2020

September 29, 2021

September 23, 2020

September 29, 2021

September 23, 2020

Non-GAAP adjustments:

Provision (benefit) for income taxes

Provision for income taxes

Interest expense, net of interest income

2 unchanged sentences

Loss on disposal of assets (b)

Loss on assets held for sale (c)

Loss on disposition of restaurants (c)

Recovery of securities lawsuits related legal expense and other insurance claims (d)

Impairment and closed-store reserves (e)

Income tax receivable agreement expense (income) (f)

Income tax receivable agreement (income) expense (f)

Securities class action legal expense (g)

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(b) 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.

(c) During the thirteen and twenty-six weeks ended June 30, 2021, we agreed in principle to sell eight restaurants within Sacramento area to an existing franchisee.

The related net assets were reclassified to assets held for sale and remeasured at their fair value less costs to sell, which resulted in a loss on held for sale assets of $1.5 million for the twenty-six weeks ended June 30, 2021.

(d) During the thirteen and twenty-six weeks ended June 24, 2020, we received insurance proceeds of $0.1 million related to a property claim.

(c) During the thirteen and thirty-nine weeks ended September 29, 2021, we completed the sale of our eight restaurants within Sacramento area to an existing franchisee.

This sale resulted in cash proceeds of $4.6 million during the thirty-nine weeks ended September 29, 2021 and a net loss on sale of restaurants of less than $0.1 million and $1.5 million for the thirteen and thirty-nine weeks ended September 29, 2021, respectively.

(d) During the thirty-nine weeks ended September 23, 2020, we received insurance proceeds of $0.1 million related to a property claim.

(e) Includes costs related to impairment of long-lived and ROU assets and closing restaurants.

During the thirteen and twenty-six weeks ended June 24, 2020, we recorded non-cash impairment charges of $0.1 million and $2.0 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of three restaurants in California.

During the thirteen and twenty-six weeks ended June 30, 2021, we recognized less than $0.1 million and $0.2 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

During the thirteen and thirty-nine weeks ended September 23, 2020, we recorded non-cash impairment charges of $1.5 million and $3.5 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California.

(f) On July 30, 2014, we entered into the TRA.

This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our NOL and other tax attributes attributable to preceding periods.

For the thirteen and twenty-six weeks ended June 30, 2021 and June 24, 2020, income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.

For the thirteen and thirty-nine weeks ended September 29, 2021 and September 23, 2020, income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.

(g) Consists of costs related to the defense of securities lawsuits.

During the thirteen and thirty-nine weeks ended September 29, 2021, we received $0.5 million in insurance proceeds, net of legal expenses, related to the derivative complaint.

See Note 7, “Commitments and Contingencies, Legal Matters” in the Notes to Condensed Consolidated Financial Statements above.

(h) Includes amounts incurred related to the payment of the final settlement amounts for multiple wage and hour class action suits.

(i) Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs.

costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs.

These are generally incurred over the three to five months prior to opening.

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We believe that these sources of liquidity and capital are sufficient to finance our continued operations for at least the next 12 months from the issuance of the consolidated financial statements.

However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a subsequent resurgence of the COVID-19 outbreak after the current outbreak subsides, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a subsequent resurgence of the COVID-19 outbreak, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

The following table presents summary cash flow information for the periods indicated.

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

(Amounts in thousands)

June 30, 2021

June 24, 2020

September 29, 2021

September 23, 2020

Net cash provided by (used in)

2 unchanged sentences

Financing activities

Net increase (decrease) in cash

Net increase in cash

Operating Activities

For the twenty-six weeks ended June 30, 2021, net cash from operating activities changed by approximately $15.5 million from the comparable period of the prior year.

For the thirty-nine weeks ended September 29, 2021, net cash from operating activities changed by approximately $8.8 million from the comparable period of the prior year.

This change was due primarily to an increase in profitability after non-cash items and favorable working capital fluctuations.

Investing Activities

For the twenty-six weeks ended June 30, 2021, net cash used in investing activities increased by $1.8 million from the comparable period of the prior year.

This increase was due primarily to opening two new company-operated restaurants and remodeling five restaurants in the twenty-six weeks ended June 30, 2021 compared to opening no new company-operated restaurants and completing no new remodels in the twenty-six weeks ended June 30, 2020.

In addition, during the twenty-six weeks ended June 30, 2021, the Company received a deposit of $4.6 million on sale of eight restaurants within the Sacramento area.

For the thirty-nine weeks ended September 29, 2021, net cash used in investing activities increased by $3.8 million from the comparable period of the prior year.

This increase was due primarily to opening two new company-operated restaurants and remodeling ten restaurants in the thirty-nine weeks ended September 29, 2021 compared to opening one new company-operated restaurant and completing no new remodels in the thirty-nine weeks ended September 29, 2020.

Financing Activities

For the twenty-six weeks ended June 30, 2021, net cash from financing activities changed by $66.6 million from the comparable period of the prior year.

This change was due primarily to an increase in net borrowings of $44.5 million on the 2018 Revolver during the twenty-six weeks ended June 24, 2020, primarily as a precautionary measure to bolster our existing cash position in light of the COVID-19 pandemic, as well as to provide for the $16.3 million litigation settlement payment.

In addition, during the twenty-six weeks ended June 30, 2021, the Company paid down $22.8 million on the 2018 Revolver.

For the thirty-nine weeks ended September 29, 2021, net cash from financing activities changed by $15.0 million from the comparable period of the prior year.

This change was due primarily to an increase in net pay downs of $22.8 million on the 2018 Revolver during the thirty-nine weeks ended September 29, 2021, compared to the net pay downs of $13.2 million on the 2018 Revolver during the thirty-nine weeks ended September 23, 2020.

Debt and Other Obligations

The 2018 Revolver, which is available pursuant to the 2018 Credit Agreement, includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans.

The 2018 Revolver and 2018 Credit Agreement will mature on July 13, 2023.

The 2018 Revolver and 2018 Credit Agreement will

mature on July 13, 2023.

The obligations under the 2018 Credit Agreement and related loan documents are guaranteed by the Company and Intermediate.

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Borrowings under the 2018 Revolver may be repaid and reborrowed.

The interest rate range was 1.35% to 1.36% and 1.35% to 1.65% for the thirteen and twenty-six weeks ended June 30, 2021, respectively, and 1.67% to 3.11% and 1.67% to 3.29% for the thirteen and twenty-six weeks ended June 24, 2020.

The interest rate range was 1.34% to 1.35% and 1.34% to 1.65% for the thirteen and thirty-nine weeks ended September 29, 2021, respectively, and 1.67% to 1.68% and 1.67% to 3.29% for the thirteen and thirty-nine weeks ended September 23, 2020, respectively.

The 2018 Credit Agreement contains certain financial covenants.

The Company was in compliance with the financial covenants as of June 30, 2021.

At June 30, 2021, $8.4 million of letters of credit and $40.0 million of borrowings were outstanding under the 2018 Revolver.

There were $101.6 million remaining borrowings available under the 2018 Revolver at June 30, 2021.

The Company was in compliance with the financial covenants as of September 29, 2021.

At September 29, 2021, $8.4 million of letters of credit and $40.0 million of borrowings were outstanding under the 2018 Revolver.

There were $101.6 million remaining borrowings available under the 2018 Revolver at September 29, 2021.

During the year ended December 25, 2019, we entered into an interest rate swap with a notional amount of $40.0 million, related to the outstanding borrowings under our 2018 Revolver.

The interest rate swap was designated as a cash flow hedge and effectively converted a portion of our outstanding borrowings to a fixed rate of 1.31%, plus the applicable margin spread, which was 1.5% for the thirteen weeks ended March 31, 2021.

The interest rate swap matures in June 2023.

Contractual Obligations

Other than our paydown of $22.8 million on the 2018 Revolver during the twenty-six weeks ended June 30, 2021 described above, our contractual obligations outstanding on June 30, 2021 have not changed materially since those disclosed under “Debt and Other Obligations – Contractual Obligations” in Part II, Item 7 of our annual report on Form 10-K for the year ended December 30, 2020.

Other than our paydown of $22.8 million on the 2018 Revolver during the thirty-nine weeks ended September 29, 2021 described above, our contractual obligations outstanding on September 29, 2021 have not changed materially since those disclosed under “Debt and Other Obligations – Contractual Obligations” in Part II, Item 7 of our annual report on Form 10-K for the year ended December 30, 2020.

Our contractual commitments relate to future (i) debt payments, including expected interest expense, calculated based on current interest rates, (ii) restaurant operating lease payments, (iii) income tax receivable agreement payments, and (iv) purchasing commitments for chicken.

Off-Balance Sheet and Other Arrangements

As of June 30, 2021 and December 25, 2020, we were using $8.4 million of borrowing capacity on the 2018 Revolver for letters of credit in support of our insurance programs.

As of September 29, 2021 and December 25, 2020, we were using $8.4 million of borrowing capacity on the 2018 Revolver for letters of credit in support of our insurance programs.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis