Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Concerning Forward-Looking Statements
This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements because they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those that we expected.
While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations. These factors include, but are not limited to:
● the impacts of the ongoing COVID-19 pandemic or another pandemic, epidemic or infectious disease outbreak on our company, our employees, our customers, our partners, our industry and the economy as a whole, as well as our franchisees’ ability to maintain operations in their individual restaurants;
● global economic or other business conditions that may affect the desire or ability of our customers to purchase our products such as inflationary pressures, high unemployment levels, increases in gas prices, and declines in median income growth, consumer confidence and consumer discretionary spending;
● our ability to open new restaurants in new and existing markets, including difficulty in finding sites and in negotiating acceptable leases;
● our ability to compete successfully with other quick-service and fast casual restaurants;
● vulnerability to changes in consumer preferences and political and economic conditions;
● our ability to attract, develop and retain employees;
● vulnerability to conditions in the greater Los Angeles area and to natural disasters given the geographic concentration and real estate intensive nature of our business;
● the possibility that we may continue to incur significant impairment of certain of our assets, in particular in our new markets;
● changes in food and supply costs, especially for chicken;
● social media and negative publicity, whether or not valid, and our ability to respond to and effectively manage the accelerated impact of social media;
● our ability to continue to expand our digital business, delivery orders and catering;
● concerns about food safety and quality and about food-borne illness, particularly avian flu;
● dependence on frequent and timely deliveries of food and supplies and our dependence on a single supplier to distribute substantially all of our products to our restaurants;
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● our ability to service our level of indebtedness;
● uncertainty related to the success of our marketing programs, new menu items, advertising campaigns and restaurant designs and remodels;
● our reliance on our franchisees, who may incur financial hardships, lose access to credit, close restaurants, or declare bankruptcy, and our limited control over our franchisees and potential liability for their acts;
● potential exposure to unexpected costs and losses from our self-insurance programs;
● potential obligations under long-term and non-cancelable leases, and our ability to renew leases at the end of their terms;
● the impact of any failure of our information technology system or any breach of our network security;
● the impact of any security breaches of confidential customer data or personal information in connection with our electronic process of credit and debit card transactions;
● our ability to enforce and maintain our trademarks and protect our other proprietary intellectual property;
● risks related to government regulation and litigation, including employment and labor laws; and
● other risks set forth in our filings with the SEC from time to time, including under Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 29, 2021, which filings are available online at www.sec.gov .
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the ways that we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
Overview
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. Our entrees include favorites such as our Chicken Avocado Burrito, Pollo Fit entrees, chicken tostada salads, and Pollo Bowls. Our famous Creamy Cilantro dressings and salsas are prepared fresh daily, allowing our customers to create their favorite flavor profiles to enhance their culinary experience. We believe that our distinctive menu with better for you and more affordable alternatives appeals to consumers across a wide variety of socio-economic backgrounds and drives our balanced composition of sales throughout the day (our “day-part mix”), including at lunch and dinner.
Market Trends and Uncertainties
We may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. During both thirteen weeks ended September 28, 2022 and September 29, 2021, respectively, we incurred $0.5 million in COVID-19 related expenses, primarily due to leaves of absence. During the thirty-nine weeks ended September 28, 2022 and September 29, 2021, respectively, we incurred $3.1 million and $3.5 million, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. In addition, while all of our restaurants had dining rooms open as of September 28, 2022, we continue to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs. Labor costs could also be adversely impacted as a result of California Assembly Bill No. 257, the Fast Food Accountability and Standards Recovery Act (“FAST Act”), which was signed into law in September 2022 and authorizes the creation of a council to set minimum standards for industry workers in California, including minimum wages. The FAST Act, currently subject to a referendum campaign , could result in increased labor cost at our California restaurants thereby potentially impacting the profitability of our California restaurants. Further, this bill could prompt similar legislation in other states . Further, we continue to experience inflationary pressures, which resulted in increased commodity prices and impacted our business
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and results of operations during the thirteen and thirty-nine weeks ended September 28, 2022. We expect these pressures to continue during the rest of fiscal 2022.
Due to the fluidity of the COVID-19 pandemic and current macroeconomic environment, we cannot determine the ultimate impact on our condensed consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on our condensed consolidated financial condition, liquidity, and future results of operations is uncertain.
Growth Strategies and Outlook
As of September 28, 2022, we had 487 locations in six states. In fiscal 2021, we opened two new company-operated restaurants, one in Nevada and one in California, and our franchisees opened two new restaurants, one in Texas and one in Louisiana. For the thirty-nine weeks ended September 28, 2022, one new company-operated restaurant was opened in Nevada and two new company-operated restaurants were opened in California. For the thirty-nine weeks ended September 28, 2022, seven new franchised restaurants were opened in California. We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing the following strategies:
● develop a people-first culture ;
● differentiate the brand;
● simplify operations; and
● accelerate new restaurant development.
To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend. The success of these growth plans is not guaranteed.
Highlights and Trends
Comparable Restaurant Sales
For the thirteen and thirty-nine weeks ended September 28, 2022, system-wide comparable restaurant sales increased by 3.8% and 6.3%, 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 28, 2022 increased by 3.4% and 2.9%, respectively. For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of an approximately 7.5% increase in average check size and a decrease in transactions of 4.1% and the year-to-date change in comparable restaurant sales consisted of a 4.1% decrease in transactions and a 7.0% increase in average check size . For franchised restaurants, comparable restaurant sales increased 4.1% and 8.6% for the thirteen and thirty-nine weeks ended September 28, 2022, respectively. Refer to Comparable Restaurant Sales definition in “Key Performance Indicators” section below.
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Restaurant Development
Our restaurant counts at the beginning and end of each of the last three fiscal years and the thirty-nine weeks ended September 28, 2022, were as follows:
Thirty-Nine Weeks Ended
Fiscal Year Ended
September 28, 2022
2021
2020
2019
Company-operated restaurant activity:
Beginning of period
189
196
195
213
Openings
3
2
1
2
Restaurant sale to franchisee
—
(8)
—
(16)
Closures
(2)
(1)
—
(4)
Restaurants at end of period
190
189
196
195
Franchised restaurant activity:
Beginning of period
291
283
287
271
Openings
7
2
3
2
Restaurant sale to franchisee
—
8
—
16
Closures
(1)
(2)
(7)
(2)
Restaurants at end of period
297
291
283
287
System-wide restaurant activity:
Beginning of period
480
479
482
484
Openings
10
4
4
4
Closures
(3)
(3)
(7)
(6)
Restaurants at end of period
487
480
479
482
Restaurant Remodeling
In 2020, we finalized a new restaurant design that we believe will clearly differentiate and communicate our brand, both on the exterior and interior. We believe that our remodels using this new design will result in higher restaurant revenue and a strengthened brand. During the year ended September 28, 2022, we have completed four company-operated restaurant remodels and eight franchise remodels using the new asset design. In fiscal 2022, we plan to continue our standard practices for remodels, which includes completing a total of six company and 20-30 franchise remodels using the new design. The cost of our restaurant remodels varies depending on the scope of the work required, but on average the investment is $0.3 million to $0.4 million per restaurant.
Loco Rewards
Our Loco Rewards loyalty program offers rewards that incentivize customers to visit our restaurants more often each month. Customers earn points for each dollar spent and 50 points can be redeemed for a $5 reward to be used for a future purchase. If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire. Additionally, if a reward is not used within six months, it expires. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a 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.
In addition, customers can earn additional points and free entrées for a variety of engagement activities. As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred until redemption or expiration. As of September 28, 2022 and December 29, 2021, the revenue allocated to loyalty points that had not been redeemed was $0.5 million and $0.7 million, respectively, which is reflected in our accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. We had over 3.1 million loyalty program members as of September 28, 2022.
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Critical Accounting Policies and Use of Estimates
The preparation of our condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances in making judgments about the carrying value of assets and liabilities that are not readily available from other sources. We evaluate our estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies are an integral part of our condensed consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that our critical accounting policies and estimates involve the most difficult management judgments, due to the sensitivity of the methods and assumptions used. For a summary of our critical accounting policies and a discussion of our use of estimates, see “Critical Accounting Policies and Estimates” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 29, 2021.
There have been no material changes to our critical accounting policies or uses of estimates since our annual report on Form 10-K for the year ended December 29, 2021.
Recent Accounting Pronouncements
Recent accounting pronouncements are described in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements above.
Key Financial Definitions
Revenue
Our revenue is derived from three primary sources: company-operated restaurant revenue, franchise revenue, which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income, and franchise advertising fee revenue. See Note 10, “Revenue from Contracts with Customers” in the Notes to Condensed Consolidated Financial Statements above for further details regarding our revenue recognition policy.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs. We expect food and paper costs, particularly those items not subject to purchasing commitments, to increase in the short-term due to current inflationary pressures.
Labor and Related Expenses
Labor and related expenses include wages, payroll taxes, workers’ compensation expense, benefits, and bonuses paid to our restaurant management teams. Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows. Factors that influence labor costs include minimum wage and payroll tax legislation, state labor laws (which, in California, may include the FAST Act), overtime, wage inflation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.
Occupancy Costs and Other Operating Expenses
Occupancy costs include rent, common area maintenance (“CAM”), and real estate taxes. Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.
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General and Administrative Expenses
General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support the development and operations of our restaurants, including compensation and benefits, travel expenses, stock compensation costs, legal and professional fees, and other related corporate costs. Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise field operational support.
Franchise Expenses
Franchise expenses are primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, expenses incurred in support of franchisee information technology systems, and the franchisee’s portion of advertising expenses.
Depreciation and Amortization
Depreciation and amortization primarily consists of the depreciation of property and equipment, including leasehold improvements and equipment.
Loss on Disposal of Assets
Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
Impairment and Closed-Store Reserves
We review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values and record an impairment charge when appropriate. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset’s carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.
When we close a restaurant, we will evaluate the right of use (“ROU”) asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense, in addition to property tax and CAM charges for closed restaurants.
Interest Expense, Net
Interest expense, net, consists primarily of interest on our outstanding debt. Debt issuance costs are amortized at cost over the life of the related debt.
Provision for Income Taxes
Provision for income taxes consists of federal and state taxes on our income.
Comparison of Results of Operations
Our operating results for the thirteen weeks ended September 28, 2022 and September 29, 2021 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as percentages of company-operated restaurant revenue, are compared in the tables below.
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Thirteen Weeks Ended
September 28, 2022
September 29, 2021
Increase / (Decrease)
($,000)
(%)
($,000)
(%)
($,000)
(%)
Statements of Income Data
Company-operated restaurant revenue
$
103,174
86.0
$
99,986
86.4
$
3,188
3.2
Franchise revenue
9,543
8.0
8,918
7.7
625
7.0
Franchise advertising fee revenue
7,161
6.0
6,796
5.9
365
5.4
Total revenue
119,878
100.0
115,700
100.0
4,178
3.6
Cost of operations
Food and paper costs (1)
30,163
29.2
26,698
26.7
3,465
13.0
Labor and related expenses (1)
33,279
32.3
27,802
27.8
5,477
19.7
Occupancy and other operating expenses (1)
26,920
26.1
25,108
25.1
1,812
7.2
Company restaurant expenses (1)
90,362
87.6
79,608
79.6
10,754
13.5
General and administrative expenses
9,855
8.2
9,357
8.1
498
5.3
Franchise expenses
9,027
7.5
8,545
7.4
482
5.6
Depreciation and amortization
3,530
2.9
3,685
3.2
(155)
(4.2)
Loss on disposal of assets
21
0.0
83
0.1
(62)
(74.7)
Loss on disposition of restaurants
—
—
10
0.0
(10)
N/A
Impairment and closed-store reserves
219
0.2
167
0.1
52
31.1
Total expenses
113,014
94.3
101,455
87.7
11,559
11.4
Income from operations
6,864
5.7
14,245
12.3
(7,381)
(51.8)
Interest expense, net of interest income
108
0.1
449
0.4
(341)
(75.9)
Income tax receivable agreement income
(29)
(0.1)
(19)
(0.0)
(10)
52.6
Income before provision for income taxes
6,785
5.7
13,815
11.9
(7,030)
(50.9)
Provision for income taxes
1,776
1.5
3,654
3.2
(1,878)
(51.4)
Net income
$
5,009
4.2
$
10,161
8.7
$
(5,152)
(50.7)
(1) Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue.
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Our operating results for the thirty-nine weeks ended September 28, 2022 and September 29, 2021 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.
Thirty-Nine Weeks Ended
September 28, 2022
September 29, 2021
Increase / (Decrease)
($,000)
(%)
($,000)
(%)
($,000)
(%)
Statements of Income Data
Company-operated restaurant revenue
$
303,585
85.7
$
301,117
87.2
$
2,468
0.8
Franchise revenue
28,862
8.2
24,919
7.2
3,943
15.8
Franchise advertising fee revenue
21,590
6.1
19,370
5.6
2,220
11.5
Total revenue
354,037
100.0
345,406
100.0
8,631
2.5
Cost of operations
Food and paper costs (1)
89,586
29.5
78,971
26.2
10,615
13.4
Labor and related expenses (1)
98,966
32.6
90,060
29.9
8,906
9.9
Occupancy and other operating expenses (1)
76,597
25.2
74,288
24.7
2,309
3.1
Company restaurant expenses (1)
265,149
87.3
243,319
80.8
21,830
9.0
General and administrative expenses
29,488
8.3
30,354
8.8
(866)
(2.9)
Franchise expenses
27,315
7.7
24,457
7.1
2,858
11.7
Depreciation and amortization
10,745
3.0
11,540
3.3
(795)
(6.9)
Loss on disposal of assets
129
0.0
194
0.1
(65)
(33.5)
Loss on disposition of restaurants
—
—
1,534
0.4
(1,534)
N/A
Impairment and closed-store reserves
598
0.2
1,091
0.3
(493)
(45.2)
Total expenses
333,424
94.2
312,489
90.5
20,935
6.7
Income from operations
20,613
5.8
32,917
9.5
(12,304)
(37.4)
Interest expense, net of interest income
957
0.3
1,399
0.4
(442)
(31.6)
Income tax receivable agreement income
(345)
(0.1)
(69)
(0.0)
(276)
400.0
Income before provision for income taxes
20,001
5.6
31,587
9.1
(11,586)
(36.7)
Provision for income taxes
5,736
1.6
8,644
2.5
(2,908)
(33.6)
Net income
$
14,265
4.0
$
22,943
6.6
$
(8,678)
(37.8)
(1) Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue.
Company-Operated Restaurant Revenue
For the quarter, company-operated restaurant revenue increased $3.2 million, or 3.2%, from the comparable period in the prior year. The increase in company-operated restaurant sales was primarily due to an increase in company-operated comparable restaurant revenue of $3.3 million, or 3.4%. The company-operated comparable restaurant sales increase consisted of an approximately 7.5% increase in average check size due to increases in menu prices, partially offset by a 4.1% decrease in transactions. 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 2021 and a $0.1 million increase in revenue recognized for our loyalty points program. This company-operated restaurant sales increase was partially offset by a $1.1 million decrease in revenue from the closure of three restaurants during or subsequent to the third quarter of 2021.
Year-to-date, company-operated restaurant revenue increased $2.5 million, or 0.8%, from the comparable period in the prior year. The increase in company-operated restaurant sales was primarily due an increase in company-operated comparable restaurant revenue of $8.3 million, or 2.9%. The company-operated comparable restaurant sales increase consisted of an approximately 7.0% increase in average check size due to increases in menu prices, partially offset by a 4.1% decrease in transactions. In addition, company-operated restaurant revenue was favorably impacted by $1.9 million of additional sales from restaurants opened during or after the third quarter of 2021 and a $0.2 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during or subsequent to the third quarter of 2021. This company-operated restaurant sales increase was partially offset by a $5.3 million decrease in revenue from the eight company-operated restaurants sold by the Company to an existing franchisee and a $2.6 million decrease in revenue from the closure of three restaurants, in each case, during or subsequent to the first quarter of 2021.
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Franchise Revenue
For the quarter, franchise revenue increased $0.6 million, or 7.0%, from the comparable period in the prior year. This increase was primarily due to a franchise comparable restaurant sales increase of 4.1%, the opening of nine restaurants and eight company-operated restaurants sold by the Company to an existing franchisee, in each case, during or subsequent to the third quarter of 2021. This franchise revenue increase was partially offset by the closure of two franchise locations during or subsequent to the third quarter of 2021.
Year-to-date, franchise revenue increased $3.9 million, or 15.8%, from the comparable period in the prior year. This increase was primarily due to a franchise comparable restaurant sales increase of 8.6% and the opening of nine restaurants during or subsequent to the third quarter of 2021. The remainder of the franchise revenue increase is attributed to the pass through income related to a corresponding increase in franchise expenses. This franchise revenue increase was partially offset by the closure of three franchise locations during or subsequent to the first quarter of 2021.
Franchise Advertising Fee Revenue
For the quarter, franchise advertising fee revenue increased $0.4 million, or 5.4%, from the comparable period in the prior year. Y ear-to-date, franchise advertising fee revenue increased $2.2 million, or 11.5%, from the comparable period in the prior year. As advertising fee revenue is a percentage of franchisees’ revenue, the quarter-to-date and year-to-date fluctuations were due to the increases and decreases noted in franchise revenue above.
Food and Paper Costs
For the quarter, food and paper costs increased $3.5 million, or 13.0%, from the comparable period in the prior year, primarily due to a $3.2 million increase in food costs and a $0.3 million increase in paper costs. Year-to-date, food and paper costs increased $10.6 million, or 13.4%, from the comparable period in the prior year, due to a $1.4 million increase in paper costs and a $9.2 million increase in food costs. The increase in food and paper costs for the quarter and year-to-date periods resulted primarily from commodity inflation, partially offset by lower transactions. For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 29.2%, up from 26.7% in the comparable period of the prior year.
Year-to-date, food and paper costs as a percentage of company-operated restaurant revenue were 29.5%, up from 26.2% in the comparable period of the prior year. The percentage increase for the quarter and year-to-date periods was primarily due to an investment in new elevated packaging, partially offset by an increase in pricing.
Labor and Related Expenses
For the quarter, labor and related expenses increased $5.5 million, or 19.7%, from the comparable period in the prior year. The increase for the quarter was pr imarily due to recognizing a $3.2 million Employee Retention Credit (“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. Further, the increase for the quarter was impacted by a $2.1 million increase primarily related to minimum wage increases in California during fiscal 2022 and other labor wage increases as a result of competitive pressures, a $1.0 million increase in other labor related expenses primarily related to overtime and payroll taxes and a $0.4 million increase from restaurants opened during or after the third quarter of the prior year and. The increase in labor and related expenses for the quarter was partially offset by a $0.8 million decrease related to the 4.1% decrease in year-over-year transactions and a $0.4 million decrease in worker’s compensation expense .
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Year-to-date, labor and related expenses increased $8.9 million, or 9.9%, from the comparable period in the prior year. The increase for the year-to-date period was due to a $6.2 million increase related to higher minimum wage increases in California during fiscal 2022 and other labor wage increases as a result of competitive pressures , a $1.3 million increase in overtime, $0.8 million in higher payroll taxes, a $0.7 million increase from restaurants opened during or after the third quarter of the prior year and a $1.1 million increase in other labor related expenses primarily related to training. Further, the increase for the year-to-date period 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 thirty-nine weeks ended September 29, 2021. The increase in labor and related expenses for the year-to-date period was partially offset by a $2.0 million reduction in labor related to the eight locations sold to an existing franchisee during the prior year, a $1.8 million decrease related to the 4.1% decrease in year-over-year transactions and a $0.6 million decrease in worker’s compensation expense .
For the quarter, labor and related expenses as a percentage of company-operated restaurant revenue were 32.3%, up from 27.8% in the comparable period in the prior year due to the cost increases highlighted above, partially offset by the higher menu prices. Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 32.6%, up from 29.9% 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 menu pricing.
Occupancy and Other Operating Expenses
For the quarter, occupancy and other operating expenses increased $1.8 million, or 7.2%, from the comparable period in the prior year. The increase was primarily due to a $0.7 million increase in utilities, a $0.2 million increase in repairs and maintenance, a $0.2 million increase in market place delivery fees, a $0.2 million increase in occupancy costs and a $0.5 million increase in other operating supplies.
Year-to-date, occupancy and other operating expenses increased $2.3 million, or 3.1%, from the comparable period in the prior year. The increase was primarily due to a $1.6 million increase in utilities, a $0.5 million increase in market place delivery fees, a $0.3 million increase in repairs and maintenance and a $0.4 million increase in other operating expenses. The increase in occupancy and other operating expenses was partially offset by a $0.3 million decrease in occupancy costs and a $0.2 million decrease in operating services and supplies.
For the quarter, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 26.1%, up from 25.1% in the comparable period. Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.2%, up from 24.7% in the comparable period of the prior year. Both the quarter and year-to-date increases resulted from cost increases highlighted above.
General and Administrative Expenses
For the quarter, general and administrative expenses increased $0.5 million, or 5.3%, from the comparable period in the prior year. The increase for the quarter was primarily due to a $0.4 million increase in recruiting and training costs.
Year-to-date, general and administrative expenses decreased $0.9 million, or 2.9%, from the comparable period in the prior year. The decrease for the year-to-date period was due primarily to a $0.5 million decrease in labor related costs, primarily related to a decrease in estimated management bonus expense and a $0.5 million decrease in legal and outside professional services. This decrease was partially offset by a $0.1 million increase in professional services.
For the quarter, general and administrative expenses as a percentage of total revenue were 8.2%, up from 8.1% in the comparable period of the prior year. Year-to-date, general and administrative expenses as a percentage of total revenue were 8.3%, down from 8.8% in the comparable period of the prior year. The percentage increase for the quarterly period is primarily due to the cost increases discussed above. The percentage decrease for the year-to-date period is primarily due to the cost decreases noted above.
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 the Sacramento area to an existing franchisee. This sale resulted in cash proceeds of $4.6 million and a net loss on
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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 thirty-nine weeks ended September 28, 2022, we recorded non-cash impairment charges of $0.1 million and $0.4 million, respectively, primarily related to the long-lived assets of one restaurant in California. 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 . Given the inherent uncertainty in projecting results for newer restaurants in newer markets we are 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.
When a restaurant is closed, we will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and CAM payments relating to closed restaurants are included within closed-store expense. During the thirteen and thirty-nine weeks ended September 28, 2022, we recognized $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 thirty-nine weeks ended September 29, 2021, we recognized $0.1 million and $0.4 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
For the quarter, interest expense, net, decreased $0.3 million from t he comparable period in the prior year. For the year-to-date period, interest expense, net, decreased $0.4 million from the comparable period in the prior year. Both the quarter and year-to-date decreases in interest expense were primarily related to the unwinding of our interest rate swap and the corresponding payout that was recognized as part of interest income during the thirteen and thirty-nine weeks ended September 28, 2022 and lower outstanding balances on our 2022 Revolver (as defined below).
Income Tax Receivable Agreement
On July 30, 2014, we entered into the income tax receivable agreement (the “TRA”). 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 net operating losses (“NOLs”) and other tax attributes attributable to preceding periods. For the thirteen and thirty-nine weeks ended September 28, 2022, we recorded income tax receivable agreement income of less than $0.1 million and $0.3 million, respectively, and 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.
Provision for Income Taxes
For the quarter ended September 28, 2022, we recorded an income tax provision of $1.8 million, reflecting an estimated effective tax rate of 26.2%. For the quarter ended September 29, 2021, we recorded an income tax provision of $3.7 million, reflecting an estimated effective tax rate of approximately 26.4%. For the year-to-date period ended September 28, 2022, we recorded an income tax provision of $5.7 million, reflecting an estimated effective tax rate of approximately 28.7%. For the year-to-date ended September 29, 2021, we recorded an income tax provision of $8.7 million, reflecting an estimated effective tax rate of approximately 27.4%.
The difference between the 21.0% statutory rate and our effective tax rate of 28.7% for the year-to-date ended September 28, 2022 is primarily a result of state taxes , the change in valuation allowance against certain state credits, a tax shortfall related to non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit .
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Key Performance Indicators
To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.
System-Wide Sales
System-wide sales are neither required by, nor presented in accordance with GAAP. System-wide sales are the sum of company-operated restaurant revenue and sales from franchised restaurants. Our total revenue in our condensed consolidated statements of income is limited to company-operated restaurant revenue and franchise revenue from our franchisees. Accordingly, system-wide sales should not be considered in isolation or as a substitute for our results as reported under GAAP. Management believes that system-wide sales are an important figure for investors, because they are widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration.
The following table reconciles system-wide sales to company-operated restaurant revenue and total revenue:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
(Dollar amounts in thousands)
September 28, 2022
September 29, 2021
September 28, 2022
September 29, 2021
Company-operated restaurant revenue
$
103,174
$
99,986
$
303,585
$
301,117
Franchise revenue
9,543
8,918
28,862
24,919
Franchise advertising fee revenue
7,161
6,796
21,590
19,370
Total Revenue
119,878
115,700
354,037
345,406
Franchise revenue
(9,543)
(8,918)
(28,862)
(24,919)
Franchise advertising fee revenue
(7,161)
(6,796)
(21,590)
(19,370)
Sales from franchised restaurants
159,742
151,657
481,351
432,752
System-wide sales
$
262,916
$
251,643
$
784,936
$
733,869
Company-Operated Restaurant Revenue
Company-operated restaurant revenue consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals, and other discounts. Company-operated restaurant revenue in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, and comparable restaurant sales.
Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced January and December traffic and higher in the second and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company-operated restaurant revenue and comparable restaurant sales may fluctuate.
Comparable Restaurant Sales
Comparable restaurant sales reflect year-over-year sales changes for comparable company-operated, franchised, and system-wide restaurants. A restaurant enters our comparable restaurant base the first full week after it has operated for fifteen months. Comparable restaurant sales exclude restaurants closed during the applicable period. At September 28, 2022 and September 29, 2021, there were 466 and 462 comparable restaurants, 184 and 189 company-operated restaurants and 282 and 273 franchised restaurants, respectively. Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded.
Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in the average check amount, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases.
Restaurant Contribution and Restaurant Contribution Margin
Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses
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which includes food and paper cost, labor and related expenses and occupancy and other operating expenses, where applicable. Restaurant contribution excludes certain costs, such as general and administrative expenses, depreciation and amortization, impairment and closed-store reserve and other costs that are considered normal operating costs and, accordingly, restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of stockholders because of the exclusion of certain corporate-level expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of net company-operated restaurant revenue.
Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants, and our calculations thereof may not be comparable to those reported by other companies. 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 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. Restaurant contribution and restaurant contribution margin may also assist investors in evaluating our business and performance relative to industry peers and provide greater transparency with respect to our financial condition and results of operations.
A reconciliation of restaurant contribution and restaurant contribution margin to company-operated restaurant revenue is provided below:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
(Dollar amounts in thousands)
September 28, 2022
September 29, 2021
September 28, 2022
September 29, 2021
Restaurant contribution:
Income from operations
$
6,864
$
14,245
$
20,613
$
32,917
Add (less):
General and administrative expenses
9,855
9,357
29,488
30,354
Franchise expenses
9,027
8,545
27,315
24,457
Depreciation and amortization
3,530
3,685
10,745
11,540
Loss on disposal of assets
21
83
129
194
Loss on disposition of restaurants
—
10
—
1,534
Franchise revenue
(9,543)
(8,918)
(28,862)
(24,919)
Franchise advertising fee revenue
(7,161)
(6,796)
(21,590)
(19,370)
Impairment and closed-store reserves
219
167
598
1,091
Restaurant contribution
$
12,812
$
20,378
$
38,436
$
57,798
Company-operated restaurant revenue:
Total revenue
$
119,878
$
115,700
$
354,037
$
345,406
Less:
Franchise revenue
(9,543)
(8,918)
(28,862)
(24,919)
Franchise advertising fee revenue
(7,161)
(6,796)
(21,590)
(19,370)
Company-operated restaurant revenue
$
103,174
$
99,986
$
303,585
$
301,117
Restaurant contribution margin (%)
12.4
%
20.4
%
12.7
%
19.2
%
New Restaurant Openings
The number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a new restaurant opens, we and our franchisees incur pre-opening costs, as described below. New restaurants often open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. New restaurants typically experience normal inefficiencies in the form of
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higher food and paper, labor, and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation. The average start-up period after which our new restaurants’ revenue and expenses normalize is approximately fourteen weeks. When we enter new markets, we may be exposed to start-up times and restaurant contribution margins that are longer and lower than reflected in our average historical experience.
EBITDA and Adjusted EBITDA
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 other 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. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our on-going operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.
We believe that EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or NOLs) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally for a number of benchmarks, including to compare our performance to that of our competitors.
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The following table sets forth reconciliations of our net income to our EBITDA and Adjusted EBITDA:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
(Amounts in thousands)
September 28, 2022
September 29, 2021
September 28, 2022
September 29, 2021
Net income
$
5,009
$
10,161
$
14,265
$
22,943
Non-GAAP adjustments:
Provision for income taxes
1,776
3,654
5,736
8,644
Interest expense, net of interest income
108
449
957
1,399
Depreciation and amortization
3,530
3,685
10,745
11,540
EBITDA
$
10,423
$
17,949
$
31,703
$
44,526
Stock-based compensation expense (a)
1,009
1,042
2,806
2,936
Loss on disposal of assets (b)
21
83
129
194
Loss on disposition of restaurants (c)
—
10
—
1,534
Impairment and closed-store reserves (d)
219
167
598
1,091
Income tax receivable agreement income (e)
(29)
(19)
(345)
(69)
Securities class action legal expense (f)
(10)
(415)
443
256
Legal settlements (g)
(541)
—
(541)
—
Special legal expenses (h)
350
—
350
—
Pre-opening costs (i)
131
36
280
220
Adjusted EBITDA
$
11,573
$
18,853
$
35,423
$
50,688
(a) Includes non-cash, stock-based compensation.
(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 thirty-nine weeks ended September 29, 2021, we completed the sale of eight restaurants within the 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) Includes costs related to impairment of long-lived and ROU assets and closing restaurants. During the thirteen and thirty-nine weeks ended September 28, 2022, we recorded non-cash impairment charges of $0.1 million and $0.4 million , respectively , primarily related to the long-lived assets of one restaurant in California.
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 28, 2022, we recognized $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 thirty-nine weeks ended September 29, 2021, we recognized $0.1 million and $0.4 million , respectively, of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.
(e) 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 NOLs and other tax attributes attributable to preceding periods. For the thirteen and thirty-nine weeks ended September 28, 2022 and September 29, 2021, income tax receivable agreement income consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.
(f) Consists of costs and recoveries 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 a derivative complaint.
(g) Includes $0.5 million received from legal settlement, net of legal expenses.
(h) Consists of costs related to a special dividend declaration. On October 11, 2022, the Board of Directors declared a special dividend of $1.50 per share on the common stock of the Company.
(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. These are generally incurred over the three to five months prior to opening. Pre-opening costs also include occupancy costs incurred between the date of possession and the opening date for a restaurant.
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Liquidity and Capital Resources
Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and our revolving credit facility. Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (remodels and maintenance), legal defense costs, lease obligations, interest payments on our debt, working capital and general corporate needs. Our working capital requirements are not significant, since our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers. Our restaurants do not require significant inventories or receivables. We believe that these sources of liquidity and capital are sufficient to finance our continued operations, including planned capital expenditures, for at least the next 12 months from the issuance of the condensed consolidated financial statements.
The following table presents summary cash flow information for the periods indicated (in thousands):
Thirty-Nine Weeks Ended
(Amounts in thousands)
September 28, 2022
September 29, 2021
Net cash provided by (used in)
Operating activities
$
21,907
$
42,332
Investing activities
(13,022)
(8,143)
Financing activities
(19,656)
(22,739)
Net increase (decrease) in cash
$
(10,771)
$
11,450
Operating Activities
For the thirty-nine weeks ended September 28, 2022, net cash from operating activities changed by approximately $20.4 million from the comparable period of the prior year. This change was due to unfavorable working capital fluctuations and lower profitability compared to the same period in the prior year.
Investing Activities
For the thirty-nine weeks ended September 28, 2022, net cash used in investing activities changed by $4.9 million from the comparable period of the prior year. This change was due primarily to the Company receiving a deposit of $4.6 million on the sale of eight restaurants within the Sacramento area during the thirty-nine weeks ended September 29, 2021.
Financing Activities
For the thirty-nine weeks ended September 28, 2022, net cash from financing activities changed by $3.1 million from the comparable period of the prior year. The change was due primarily to $22.8 million of net pay downs on the 2018 Revolver during the thirty-nine weeks ended September 29, 2021, compared to net pay downs of $20.0 million during the thirty-nine weeks ended September 28, 2022. This change was partially offset by a $1.6 million cash inflow related to option exercises during the thirty-nine weeks ended September 28, 2022, compared to a $0.9 million cash inflow during the thirty-nine weeks ended September 29, 2021.
Debt and Other Obligations
The Company, as a guarantor, is a party to a credit agreement (the “2022 Credit Agreement”) among EPL, as borrower, Intermediate, as a guarantor, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolving credit facility (the “2022 Revolver”). The 2022 Revolver, which is available pursuant to the 2022 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 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027. The obligations under the 2022
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Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate. The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.
The special dividend announced by the Company’s Board of Directors on October 11, 2022 is permitted under the terms of 2022 Revolver pursuant to both subclause (iii)(d) and (iii)(e) of the preceding sentence. Under the 2022 Revolver, Holdings is restricted from making certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by our past or present officers, directors, or employees (or their estates) upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2022 Revolver.
Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either the secured overnight financing rate (“SOFR”) or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) Term SOFR with a term of one-month SOFR plus 1.00%. For Term SOFR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in a range of 0.25% to 1.25%. Borrowings under the 2022 Revolver may be repaid and reborrowed. The interest rate range was 2.87% to 6.00% and 1.35% to 6.00% for the thirteen and thirty-nine weeks ended September 28, 2022 , respectively , and 1.34% to 1.35% and 1.34% to 1.65% for the thirteen and thirty-nine weeks ended September 29, 2021 , respectively .
The 2022 Credit Agreement contains certain financial covenants. We were in compliance with the financial covenants as of September 28, 2022.
At September 28, 2022, $10.0 million of letters of credit and $20.0 million of borrowings were outstanding under the 2022 Revolver. There were $120.0 million remaining borrowings available under the 2022 Revolver at September 28, 2022.
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 (defined below). 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 thirty-nine weeks ended September 28, 2022.
During the thirty-nine weeks ended September 28, 2022, we refinanced and terminated our credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provided for a $150.0 million five-year senior secured revolving credit facility (the “2018 Revolver”) and entered into the 2022 Credit Agreement. On July 29, 2022, we made a $20.0 million payment to the 2022 Revolver and the outstanding balance as of September 28, 2022 was $20.0 million. See Note 4, “Long-term debt” for additional information.
Material Cash Requirements
Our material cash requirements as of September 28, 2022 have not changed materially since those disclosed under “Material Cash Requirements” in Part II, Item 7 of our annual report on Form 10-K for the year ended December 29, 2021. Our material cash requirements relate mostly 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, (iv) purchasing commitments for chicken, (v) restaurant finance lease payments, and (vi) capital expenditures .
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Share Repurchase Program and Subsequent Borrowings
On October 11, 2022, our Board of Directors approved a share repurchase program under which the Company is authorized to repurchase up to $20.0 million of shares of our Common Stock. The repurchase program will terminate on March 28, 2024, may be modified, suspended or discontinued at any time, and does not obligate us to acquire any particular number of shares.
In addition, on October 11, 2022, our Board of Directors declared a special dividend of $1.50 per share on our common stock. The special dividend is payable on November 9, 2022, to stockholders of record, including holders of restricted stock and restricted stock units, at the close of business on October 24, 2022.
Lastly, on November 3, 2022, we borrowed $46.0 million on our 2022 Revolver and outstanding borrowings as of November 3, 2022 were $66.0 million. After payment of the special dividend, we are expected to have approximately $10.0 million in cash on hand.
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