What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 179 added, 113 removed, 340 unchanged (46% of the section changed)

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These factors include, but are not limited to:

● the impacts of the uncertainty regarding a potential resurgence of the 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;

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● 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 impacts of the uncertainty regarding a potential resurgence of COVID-19 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 operate their individual restaurants without disruption;

● the possibility that we may continue to incur significant impairment of certain of our assets, in particular in our new markets;

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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 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 strive to offer food that integrates the culinary traditions of Mexico with the healthier lifestyle.” 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 beef.

Our entrees include favorites such as our Chicken Avocado Burrito, Pollo Fit entrees, chicken tostada salads, and Pollo Bowls.

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Market Trends and Uncertainties

We may face future business disruption and related risks resulting from the uncertainty regarding a potential resurgence of the COVID-19 pandemic or another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business.

During the thirteen weeks ended March 29, 2023 we incurred $0.1 million in COVID-19 related expenses, primarily due to leaves of absence.

During the thirteen weeks ended March 30, 2022 we incurred $2.3 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

In addition, while we continue to experience staffing challenges, higher wages, overtime costs and increased commodity prices, these cost pressures are beginning to moderate.

During both the thirteen and twenty-six weeks ended June 28, 2023, we incurred $0.1 million in COVID-19 related expenses.

During the thirteen and twenty-six weeks ended June 29, 2022, we incurred $0.3 million and $2.6 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

We may face future business disruption and related risks resulting from the uncertainty regarding a potential resurgence of COVID-19 or another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business.

While we believe the trend towards more moderate labor related costs and less inflationary pressure continues, we cannot determine the ultimate impact of a potential resurgence of COVID-19 (and related economic effects) and the current macroeconomic environment will have on the Company’s condensed consolidated financial condition, liquidity, and future results of operations.

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.

Additionally, labor costs could also be adversely impacted as a result of California Assembly Bill No.

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The FAST Act, which will take effect if approved by voters in November 2024, could result in increased labor cost at our California restaurants thereby potentially impacting the profitability of our California restaurants .

While we believe the trend towards more moderate labor related costs and less inflationary pressure continues, we cannot determine the ultimate impact of a potential resurgence of the COVID-19 pandemic (and related economic effects) and the current macroeconomic environment will have on the Company’s condensed consolidated financial condition, liquidity, and future results of operations.

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 March 29, 2023, we had 490 locations in seven states.

As of June 28, 2023, we had 492 locations in seven states.

In fiscal 2022, we opened four new company-operated restaurants, two in Nevada and two in California, and our franchisees opened nine new restaurants, seven in California, one in Colorado and one in Utah.

For the thirteen weeks ended March 29, 2023, there were no new company-operated or franchised restaurants opened.

For the twenty-six weeks ended June 28, 2023, we opened one new company-operated in Nevada and our franchisees opened one new restaurant in California.

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 weeks ended March 29, 2023, system-wide comparable restaurant sales increased by 0.8% from the comparable period in the prior year.

For company-operated restaurants, comparable restaurant sales for the thirteen weeks ended March 29, 2023 increased by 3.8%.

For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of an approximately 6.3% increase in average check size partially offset by a 2.4% decrease in transactions.

For franchised restaurants, comparable restaurant sales decreased 1.0% for the thirteen weeks ended March 29, 2023.

For the thirteen and twenty-six weeks ended June 28, 2023, system-wide comparable restaurant sales decreased by 3.4% and 1.4% , 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 28, 2023 decreased by 2.3% and increased by 0.5%, respectively.

For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of a 4.5% decrease in transactions, partially offset by an approximately 2.3% increase in average check size, and the year-to-date change in comparable restaurant sales consisted of a 4.2% increase in average check size, partially offset by a 3.5% decrease in transactions .

For franchised restaurants, comparable restaurant sales decreased 4.1% and 2.6% for the thirteen and twenty-six weeks ended June 28, 2023, 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 thirteen weeks ended March 29, 2023, were as follows:

Thirteen Weeks Ended

Our restaurant counts at the beginning and end of each of the last three fiscal years and the twenty-six weeks ended June 28, 2023, were as follows:

Twenty-Six Weeks Ended

Fiscal Year Ended

March 29, 2023

June 28, 2023

Company-operated restaurant activity:

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In 2020, we finalized a new restaurant design that we believe will clearly differentiate and communicate our brand, both on the exterior and interior.

As of March 29, 2023, we have completed seven company-operated restaurant remodels and seven franchise remodels using the new asset design.

During the twenty-six weeks ended June 28, 2023, we completed 9 company-operated restaurant remodels and 14 franchise remodels using the new asset design.

In fiscal 2023, we plan to continue our standard practices for remodels, which includes completing a total of 10-15 company and 20-30 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 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 both March 29, 2023 and December 28, 2022, the revenue allocated to loyalty points that had not been redeemed was $0.5 million, which is reflected in our accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities.

We had over 3.3 million loyalty program members as of March 29, 2023.

As of both June 28, 2023 and December 28, 2022, the revenue allocated to loyalty points that had not been redeemed was $0.5 million , which is reflected in our accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities.

We had over 3.5 million loyalty program members as of June 28, 2023.

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.

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.

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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 28, 2022.

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

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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

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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.

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

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Comparison of Results of Operations

Our operating results for the thirteen weeks ended March 29, 2023 and March 30, 2022 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.

Thirteen Years Ended

March 29, 2023

March 30, 2022

Our operating results for the thirteen weeks ended June 28, 2023 and June 29, 2022 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.

Thirteen Weeks Ended

June 28, 2023

June 29, 2022

Increase / (Decrease)

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Occupancy and other operating expenses (1)

Company restaurant expenses (1)

General and administrative expenses

Franchise expenses

Depreciation and amortization

(Gain) loss on disposal of assets

Loss on disposition of restaurants

Impairment and closed-store reserves

Total expenses

Income from operations

Interest expense, net of interest income

Income tax receivable agreement expense (income)

Income before provision for income taxes

Provision for income taxes

(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.

Our operating results for the twenty-six weeks ended June 28, 2023 and June 29, 2022 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 28, 2023

June 29, 2022

Increase / (Decrease)

Statements of Income Data

Company-operated restaurant revenue

Franchise revenue

Franchise advertising fee revenue

Total revenue

Cost of operations

Food and paper costs (1)

Labor and related expenses (1)

Occupancy and other operating expenses (1)

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

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Depreciation and amortization

Loss on disposal of assets

(Gain) loss on disposal of assets

Gain on recovery of insurance proceeds, property, equipment and expenses

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Company-Operated Restaurant Revenue

For the quarter ended March 29, 2023, company-operated restaurant revenue increased $3.9 million, or 4.2%, 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 $3.5 million, or 3.8%.

For the quarter ended June 28, 2023, company-operated restaurant revenue decreased $2.6 million, or 2.4%, from the comparable period in the prior year.

The decrease in company-operated restaurant sales was primarily due to a decrease in company-operated comparable restaurant revenue of $2.4 million, or 2.3%.

The company-operated comparable restaurant sales decrease consisted of an approximately 4.5% decrease in transactions, partially offset by a 2.3% increase in average check size due to increases in menu prices.

In addition, company-operated restaurant revenue was negatively impacted by a $1.5 million decrease in revenue from the four company-operated restaurants sold by the Company to existing franchisees during or subsequent to the second quarter of 2022.

This company-operated restaurant revenue decrease was partially offset by $1.3 million of additional sales from restaurants opened during or after the second quarter of 2022.

Year-to-date, company-operated restaurant revenue increased $1.4 million, or 0.7%, from the comparable period in the prior year.

The increase in company-operated restaurant revenue was primarily due to $2.8 million of additional sales from restaurants opened during or after the second quarter of 2022.

In addition, the increase in company-operated restaurant sales was due to an increase in company-operated comparable restaurant revenue of $1.0 million, or 0.5%.

The company-operated comparable restaurant sales increase consisted of an approximately 4.2% increase in average check size due to increases in menu prices, partially offset by a 3.5% decrease in transactions.

In addition, company-operated restaurant revenue was favorably impacted by $1.5 million of additional sales from restaurants opened during or after the first quarter of 2022 and a $0.3 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the first quarter of 2022 .

This company-operated restaurant sales increase was partially offset by a $1.5 million decrease in revenue from the closure of two restaurants and the four company-operated restaurants sold by the Company to existing franchisees, in each case, during or subsequent to the first quarter of 2022.

This company-operated

restaurant revenue increase was offset by a $2.6 million decrease in revenue from the four company-operated restaurants sold by the Company to existing franchisees during or subsequent to the first quarter of 2022.

Franchise Revenue

For the quarter ended March 29, 2023, franchise revenue increased $0.4 million, or 4.5%, from the comparable period in the prior year.

This increase was primarily due to nine franchise-restaurants openings and four company-operated

restaurants sold by the Company to an existing franchisees during or subsequent to the first quarter of 2022.

For the quarter ended June 28, 2023, franchise revenue increased $0.1 million, or 0.5%, from the comparable period in the prior year.

This increase was primarily due to eight franchise-operated restaurant openings and four company-operated restaurants sold by the Company to existing franchisees in each case, during or subsequent to the second quarter of 2022.

This franchise revenue increase was partially offset by a franchise comparable restaurant sales decrease of 4.1%.

Year-to-date, franchise revenue increased $0.5 million, or 2.4%, from the comparable period in the prior year.

This increase was primarily due to ten franchise-operated restaurant openings and four company-operated restaurants sold by the Company to existing franchisees during or subsequent to the first quarter of 2022.

This franchise revenue increase was partially offset by a franchise comparable restaurant sales decrease of 2.6% and the closure of one franchise location during or subsequent to the first quarter of 2022.

Franchise Advertising Fee Revenue

For the quarter ended March 29, 2023, franchise advertising fee revenue increased $0.1 million, or 2.1%, 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.

For the quarter ended June 28, 2023, franchise advertising fee revenue decreased $0.1 million, or 1.6%, from the comparable period in the prior year.

Year-to-date, franchise advertising fee revenue increased less than $0.1 million, or 0.2%, from the comparable period in the prior year.

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

Food and Paper Costs

For the quarter ended March 29, 2023, food and paper costs decreased $0.8 million, or 3.0%, from the comparable period in the prior year.

The decrease in food and paper costs for the quarter resulted primarily due to lower transactions, partially offset by commodity inflation.

For the quarter ended June 28, 2023, food and paper costs decreased $3.2 million, or 10.2%.

Year-to-date, food and paper costs decreased $4.0 million, or 6.8%, from the comparable period in the prior year.

The decrease in food and paper costs for the quarter and year-to-date resulted primarily due to lower transactions, partially offset by commodity inflation.

For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 27.4%, down from 29.8% in the comparable period of the prior year.

The percentage decrease for the quarter was primarily due to an increase in pricing, partially offset by the increase noted in food and paper costs above.

Year-to-date, food and paper costs as a percentage of company-operated restaurant revenue were 27.4%, down from 29.7% in the comparable period of the prior year.

The percentage decrease for both the quarter and year-to-date period was primarily due to an increase in pricing, partially offset by the increase noted in food and paper costs above.

Labor and Related Expenses

For the quarter ended March 29, 2023, labor and related expenses decreased $1.1 million, or 3.5%, from the comparable period in the prior year.

The decrease in labor and related expenses for the quarter was primarily due to a $1.0 million decrease related to COVID-19 sick pay, a $1.0 million decrease in overtime due to improvements in operational execution, a $0.7 million decrease related to the 2.4% decrease in quarter-over-quarter sales transactions and a $0.6 million decrease in worker’s compensation expenses.

The decrease in labor and related expenses for the quarter was partially offset by a $1.2 million increase primarily related to minimum wage increases in California during fiscal 2023 and 2022 and other labor wage increases as a result of competitive pressure and $0.9 million increase in labor related costs due to improved management staffing.

For the quarter ended March 29, 2023, labor and related expenses as a percentage of company-operated restaurant revenue were 32.2%, down from 34.8% in the comparable period in the prior year primarily due to the increase in pricing, partially offset by the cost increases highlighted above.

For the quarter ended June 28, 2023, labor and related expenses decreased $0.7 million, or 2.2%, from the comparable period in the prior year.

The decrease in labor and related expenses for the quarter was primarily due to a $1.5 million decrease related to the 4.5% decrease in quarter-over-quarter sales transactions, a $1.1 million decrease in overtime pay due to improvements in operational execution and a $0.2 million decrease related to COVID-19 sick pay.

The decrease in labor and related expenses for the quarter was partially offset by a $1.2 million increase primarily related to higher wage rates from minimum wage increases in California during fiscal 2023 and 2022 and other labor wage increases as a result of competitive pressure and a $0.4 million increase in worker’s compensation expenses and a $0.5 million increase in labor related costs related to improved management staffing.

Year-to-date, labor and related expenses decreased $1.9 million, or 2.8%, from the comparable period in the prior year.

The decrease for the year-to-date period was due to a $2.2 million decrease related to the 3.5% decrease in year-over-year sales transactions, a $2.1 million decrease in overtime pay due to improvements in operational execution and a $1.4 million decrease related to COVID-19 sick pay.

The decrease in labor and related expenses for the year was partially offset by a $2.4 million increase primarily related to higher wage rates from minimum wage increases in California during fiscal 2023 and 2022 and other labor wage increases as a result of competitive pressure and a $1.4 million increase in labor related costs related to improved management staffing.

For the quarter ended June 28, 2023, labor and related expenses as a percentage of company-operated restaurant revenue were 31.1%, up from 31.0% in the comparable period in the prior year.

The percentage change for the quarter was impacted by the cost increases highlighted above, partially offset by an increase in pricing .

Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 31.6%, down from 32.8% in the comparable period in the prior year primarily d ue to the increase in pricing, and overtime and sick pay decreases, partially offset by the cost increases highlighted above .

Occupancy and Other Operating Expenses

For the quarter ended March 29, 2023, occupancy and other operating expenses increased $1.0 million, or 4.4%, from the comparable period in the prior year.

The increase was primarily due to a $0.3 million increase in repairs and maintenance, a $0.2 million increase in advertising fees, a $0.2 million increase in occupancy costs and a $0.3 million increase in other operating supplies.

For the quarter ended March 29, 2023, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were consistent with the comparable period in the prior year .

For the quarter ended June 28, 2023, occupancy and other operating expenses decreased $0.3 million, or 1.0%, from the comparable period in the prior year.

The decrease was primarily due to a $0.6 million decrease in utilities, offset by a $0.3 million increase in occupancy costs.

Year-to-date, occupancy and other operating expenses increased $0.8 million, or 1.6%, from the comparable period in the prior year.

The increase was primarily due to a $0.7 million increase in occupancy costs, a $0.2 million increase in other operating supplies and a $0.3 million increase in repairs and maintenance.

The year-to-date increase in occupancy and other operating expenses was partially offset by a $0.4 million decrease in utilities.

For the quarter ended June 28, 2023, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 24.6%, up from 24.3% in the comparable period .

Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.0%, up from 24.7% in the comparable period of the prior year.

Both the quarter and year-to-date period increases resulted from the cost increases highlighted above.

Gain on Recovery of Insurance Proceeds

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We recognized gains of $0.2 million related to the reimbursement of property and equipment and expenses incurred and $0.2 million related to the reimbursement of lost profits.

The gain on recovery of insurance proceeds and reimbursement of lost profits, net of the related costs is included in the accompanying condensed consolidated statements of income, for fiscal 2023, as a reduction of company restaurant expenses.

The gain on recovery of insurance proceeds and reimbursement of lost profits, net of the related costs is included in the accompanying condensed consolidated statements of income, for the twenty-six weeks ended June 28, 2023, as a reduction of company restaurant expenses.

We received from the insurance company cash of $0.4 million, net of the insurance deductible, during fiscal 2023.

General and Administrative Expenses

For the quarter ended March 29, 2023, general and administrative expenses increased $1.2 million, or 12.5%, from the comparable period in the prior year.

The increase for the quarter was primarily due to a $0.8 million increase in labor related costs, primarily related to an increase in management bonus expense and a $0.3 million increase in special costs related to the recent share distribution (see Note 9, “Related Party Transactions” for further details on the share distribution).

For the quarter ended March 29, 2023, general and administrative expenses as a percentage of total revenue were 9.8%, up from 9.0% in the comparable period of the prior year.

The percentage increase for the quarterly period is primarily due to the cost increases discussed above.

For the quarter ended June 28, 2023, general and administrative expenses increased $1.4 million, or 14.8%, from the comparable period in the prior year.

The increase for the quarter was primarily due to a $1.1 million increase in restructuring costs related to certain positions in the organization and a $0.3 million increase in labor related costs.

Year-to-date, general and administrative expenses increased $2.7 million, or 13.6%, from the comparable period in the prior year.

The increase for the year-to-date period was due primarily to a $1.4 million increase in labor related costs, primarily related to an increase in estimated management bonus expense, a $1.1 million increase in restructuring costs related to certain positions in the organization, and a $0.3 million increase in special costs related to the recent share distribution (see Note 9, “Related Party Transactions” for further details on the share distribution).

As of June 28, 2023, there were no material restructuring-related accrued liabilities on our condensed consolidated balance sheet.

For the quarter ended June 28, 2023, general and administrative expenses as a percentage of total revenue were 9.1%, up from 7.8% in the comparable period of the prior year.

Year-to-date, general and administrative expenses as a percentage of total revenue were 9.5%, up from 8.4% in the comparable period of the prior year.

The percentage increase for both the quarterly and year-to-date periods is primarily due to the cost increases discussed above.

Gain on Disposition of Restaurants

During the thirteen weeks ended March 29, 2023, we completed the sale of one restaurant within the Orange County area to an existing franchisee.

This sale resulted in cash proceeds of $0.2 million and a net gain on sale of restaurant of $0.1 million for the thirteen weeks ended March 29, 2023.

During the twenty-six weeks ended June 28, 2023, we completed the sale of one restaurant within the Orange County area to an existing franchisee.

This sale resulted in cash proceeds of $0.2 million and a net gain on sale of restaurant of $0.1 million for the twenty-six weeks ended June 28, 2023.

Impairment and Closed-Store Reserves

During the thirteen weeks ended March 29, 2023, we recorded non-cash impairment charges of less than $0.1 million, primarily related to the carrying value of ROU assets of one restaurant in California.

During the thirteen weeks ended March 30, 2022, we recorded non-cash impairment charges of $0.1 million, primarily related to the long-lived assets of one restaurants in California .

During both the thirteen and twenty-six weeks ended June 28, 2023, we recorded non-cash impairment charges of less than $0.1 million, primarily related to the carrying value of ROU assets of one restaurant in California.

During the thirteen and twenty-six weeks ended June 29, 2022, we recorded non-cash impairment charges of $0.2 million and $0.3 million, respectively, primarily related to the long-lived assets of one restaurant 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.

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

During both the thirteen weeks ended March 29, 2023 and March 30, 2022, we recognized less than $0.1 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

During both the thirteen and twenty-six weeks ended June 28, 2023, we recognized less than $0.1 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

During both the thirteen and twenty-six weeks ended June 29, 2022, we recognized $0.1 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

Interest Expense, Net

For the quarter ended March 29, 2023, interest expense, net, increased $0.6 million from t he comparable period in the prior year.

The increase in interest expense was primarily related to the higher outstanding balances on our 2022 Revolver (as defined below) as well as the higher interest rate in the current quarter versus t he comparable period in the prior year .

This increase was partially offset by the unwinding of our interest rate swap and the corresponding payout that was recognized as part of interest income during the thirteen weeks ended March 29, 2023.

For the quarter ended June 28, 2023, interest expense, net, increased $0.6 million from t he comparable period in the prior year.

For the year-to-date period, interest expense, net, increased $1.1 million from the comparable period in the prior year.

Both the quarter and year-to-date period increase in interest expense was primarily related to the higher outstanding balances on our 2022 Revolver (as defined below) as well as the higher interest rates in the fiscal 2023 periods versus t he comparable periods in the prior year .

This increase was partially offset by the unwinding of our interest rate swap and the corresponding payout that was recognized as part of interest income during the thirteen and twenty-six weeks ended June 28, 2023.

Income Tax Receivable Agreement

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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 net operating losses (“NOLs”) and other tax attributes attributable to preceding periods.

For the thirteen weeks ended March 29, 2023, we recorded income tax receivable agreement income $0.1 million and for the thirteen weeks ended March 30, 2022 we recorded income tax receivable agreement income of $0.1 million.

For the thirteen and twenty-six weeks ended June 28, 2023, we recorded income tax receivable agreement expense of $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 29, 2022 we recorded income tax receivable agreement income of $0.2 million and $0.3 million, respectively .

Provision for Income Taxes

For the quarter ended March 29, 2023, we recorded an income tax provision of $2.0 million, reflecting an estimated effective tax rate of 28.4%.

For the quarter ended March 30, 2022, we recorded an income tax provision of $0.9 million, reflecting an estimated effective tax rate of approximately 30.0%.

The difference between the 21.0% statutory rate and our effective tax rate of 28.4% for the quarter ended March 29, 2023 is primarily a result of state taxes , the change in

valuation allowance against certain state credits, a non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit .

For the quarter ended June 28, 2023, we recorded an income tax provision of $2.7 million, reflecting an estimated effective tax rate of 27.9%.

For the quarter ended June 29, 2022, we recorded an income tax provision of $3.1 million, reflecting an estimated effective tax rate of approximately 30.0%.

For the year-to-date period ended June 28, 2023, we recorded an income tax provision of $4.7 million, reflecting an estimated effective tax rate of approximately 28.1%.

For the year-to-date period ended June 29, 2022, we recorded an income tax provision of $4.0 million, reflecting an estimated effective tax rate of approximately 30.0%.

The difference between the 21.0% statutory rate and our effective tax rate of 28.1% for the year-to-date period ended June 28, 2023 is primarily a result of state taxes , a non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit .

Key Performance Indicators

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Thirteen Weeks Ended

Twenty-Six Weeks Ended

(Dollar amounts in thousands)

March 29, 2023

March 30, 2022

June 28, 2023

June 29, 2022

June 28, 2023

June 29, 2022

Company-operated restaurant revenue

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Comparable restaurant sales exclude restaurants closed during the applicable period.

At March 29, 2023 and March 30, 2022, there were 468 and 464 comparable restaurants, 181 and 182 company-operated restaurants and 287 and 282 franchised restaurants, respectively.

At June 28, 2023 and June 29, 2022, there were 470 and 465 comparable restaurants, 182 and 183 company-operated restaurants and 288 and 282 franchised restaurants, respectively.

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

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Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses which includes food and paper cost, labor and related expenses and occupancy and other operating expenses, where applicable.

Restaurant contribution therefore excludes franchise revenue, franchise advertising fee revenue and franchise expenses as well as certain other costs, such as general and administrative expenses, franchise expenses, depreciation and amortization, asset impairment and closed-store reserve, loss on disposal of assets and other costs that are considered corporate-level expenses and are not considered normal operating costs of our restaurants.

and amortization, asset impairment and closed-store reserve, loss on disposal of assets and other costs that are considered corporate-level expenses and are not considered normal operating costs of our restaurants.

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.

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Thirteen Weeks Ended

Twenty-Six Weeks Ended

(Dollar amounts in thousands)

March 29, 2023

March 30, 2022

June 28, 2023

June 29, 2022

June 28, 2023

June 29, 2022

Restaurant contribution:

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Depreciation and amortization

Loss on disposal of assets

(Gain) loss on disposal of assets

Gain on recovery of insurance proceeds, property, equipment and expenses

2 unchanged sentences

Impairment and closed-store reserves

Gain on disposition of restaurants

Loss (gain) on disposition of restaurants

Restaurant contribution

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Thirteen Weeks Ended

Twenty-Six Weeks Ended

(Amounts in thousands)

March 29, 2023

March 30, 2022

June 28, 2023

June 29, 2022

June 28, 2023

June 29, 2022

Non-GAAP adjustments:

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Stock-based compensation expense (a)

Loss on disposal of assets (b)

(Gain) loss on disposal of assets (b)

Impairment and closed-store reserves (c)

Gain on disposition of restaurants (d)

Income tax receivable agreement income (e)

Loss (gain) on disposition of restaurants (d)

Income tax receivable agreement expense (income) (e)

Securities class action legal expense (f)

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Gain on recovery of insurance proceeds (i)

Pre-opening costs (j)

Severance (j)

Pre-opening costs (k)

Adjusted EBITDA

(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.

(b) (Gain) loss on disposal of assets includes the (gain) loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

During the thirteen weeks ended March 30, 2022, we recorded non-cash impairment charges of $0.1 million primarily related to the long-lived assets of one restaurants in California .

(d) During the thirteen weeks ended March 29, 2023, we completed the sale of one restaurant within the Orange County area to an existing franchisee.

This sale resulted in cash proceeds of $0.2 million during the thirteen weeks ended March 29, 2023 and a net gain on sale of restaurant of $0.1 million for the thirteen weeks ended March 29, 2023.

During both the thirteen and twenty-six weeks ended June 28, 2023, we recorded non-cash impairment charges of less than $0.1 million , primarily related to the carrying value of ROU assets of one restaurant in California.

During the thirteen and twenty-six weeks ended June 29, 2022, we recorded non-cash impairment charges of $0.2 million and $0.3 million, respecti vely, primarily related to the long-lived assets of one restaurant in California.

(d) During the twenty-six weeks ended June 28, 2023, we completed the sale of one restaurant within the Orange County area to an existing franchisee.

This sale resulted in cash proceeds of $0.2 million and a net gain on sale of restaurant of $0.1 million during the twenty-six weeks ended June 28, 2023.

(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 weeks ended March 29, 2023 and March 30, 2022, 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.

For the thirteen and twenty-six weeks ended June 28, 2023 and June 29, 2022, income tax receivable agreement expense (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.

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We recognized gains of $0.2 million, related to the reimbursement of property and equipment and expenses incurred and $0.2 million related to the reimbursement of lost profits.

reduction of company restaurant expenses.

We received from the insurance company cash of $0.4 million, net of the insurance deductible, during fiscal 2023.

(j) 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.

(j) On April 13, 2023 the Company made the decision to eliminate and restructure certain positions in the organization, which resulted in estimated one-time costs of approximately $1.1 million.

(k) 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.

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The following table presents summary cash flow information for the periods indicated (in thousands):

Thirteen Weeks Ended

Twenty-Six Weeks Ended

(Amounts in thousands)

March 29, 2023

March 30, 2022

Net cash provided by (used in)

June 28, 2023

June 29, 2022

Net cash (used in) provided by

Operating activities

1 unchanged sentence

Financing activities

Net decrease in cash

Net (decrease) increase in cash

Operating Activities

For the thirteen weeks ended March 29, 2023, net cash from operating activities changed by approximately $6.1 million from the comparable period of the prior year.

For the twenty-six weeks ended June 28, 2023, net cash from operating activities increased by approximately $10.0 million from the comparable period of the prior year.

This change was due to favorable working capital fluctuations and higher profitability compared to the same period in the prior year.

Investing Activities

For the thirteen weeks ended March 29, 2023, net cash used in investing activities changed by $1.9 million from the comparable period of the prior year.

This change was due primarily to remodeling seven restaurants in the thirteen weeks ended March 29, 2023, compared to opening one new company-operated restaurant and not remodeling any restaurants in the thirteen weeks ended March 30, 2022.

For the twenty-six weeks ended June 28, 2023, net cash used in investing activities changed by $0.1 million from the comparable period of the prior year.

This change was due primarily to remodeling more restaurants in the twenty-six weeks ended June 28, 2023, compared to the twenty-six weeks ended June 29, 2022.

Financing Activities

For the thirteen weeks ended March 29, 2023, net cash from financing activities changed by $15.3 million from the comparable period of the prior year.

The increase was due primarily to $8.0 million of net pay downs on the 2022 Revolver and repurchases of common stock of $5.9 million during the thirteen weeks ended March 29, 2023.

This change was offset by a $0.1 million received related to option exercises during the thirteen weeks ended March 29, 2023 compared to a $1.5 million cash inflow related to option exercises during thirteen weeks ended March 30, 2022.

For the twenty-six weeks ended June 28, 2023, net cash used in financing activities changed by $24.5 million from the comparable period of the prior year.

The change was due primarily to $6.0 million of net pay downs on the 2022 Revolver and repurchases of common stock of $17.8 million during the twenty-six weeks ended June 28, 2023.

This change was further impacted by a $0.8 million cash inflow related to option exercises during the twenty-six weeks ended June 28, 2023 compared to a $1.6 million cash inflow related to option exercises during twenty-six weeks ended June 29, 2022.

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, 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.

1 unchanged sentence

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 following sentence.

The special dividend announced by the Company’s Board of Directors on October 11, 2022 was permitted under the terms of 2022 Revolver pursuant to both subclause (iii)(d) and (iii)(e) of the following 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.

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Borrowings under the 2022 Revolver may be repaid and reborrowed.

The interest rate range was 5.69% to 6.30% for the thirteen weeks March 29, 2023 under the 2022 Revolver and 1.35% to 1.70% for the thirteen March 30, 2022 under the 2018 Revolver.

The interest rate range was 6.22% to 8.50% and 5.69% to 8.50% for the thirteen and twenty-six weeks ended June 28, 2023 under the 2022 Revolver , respectively, and 1.70% to 2.87% and 1.35% to 2.87% for the thirteen and twenty-six weeks ended June 29, 2022 under the 2018 Revolver , respectively .

The 2022 Credit Agreement contains certain financial covenants.

We were in compliance with the financial covenants as of March 29, 2023.

At March 29, 2023, $9.8 million of letters of credit and $58.0 million of borrowings were outstanding under the 2022 Revolver.

There were $82.2 million remaining borrowings available under the 2022 Revolver at March 29, 2023.

We were in compliance with the financial covenants as of June 28, 2023.

At June 28, 2023, $9.8 million of letters of credit and $60.0 million of borrowings were outstanding under the 2022 Revolver.

There were $80.2 million remaining borrowings available under the 2022 Revolver at June 28, 2023.

During the year ended December 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.

1 unchanged sentence

Material Cash Requirements

Our material cash requirements as of March 29, 2023 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 28, 2022.

Our material cash requirements as of June 28, 2023 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 28, 2022.

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 .

4 unchanged sentences

The Company’s repurchases will be executed using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

As of June 28, 2023, $1.9 million remained available for repurchases under the 2022 Stock Repurchase Plan of which the entire balance has been completed subsequent to period end.

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