What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-08-04 · 170 added, 145 removed, 374 unchanged (46% of the section changed)

18 unchanged sentences

● 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;

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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● potential obligations under long-term and non-cancelable leases, and our ability to renew leases at the end of their terms;

● the possibility that Delaware law, our organizational documents, our shareholder rights agreement, and our existing and future debt agreements may impede or discourage a takeover;

● the impact of shareholder activism on our expenses, business and stock price;

● the impact of any failure of our information technology system or any breach of our network security;

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Market Trends and Uncertainties

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.

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, 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 .

On September 28, 2023, Governor Newsom signed AB 1228 into law, which will repeal and replace the Fast Food Accountability and Standards Recovery Act (FAST Act) on January 1, 2024 if a referendum seeking repeal of the FAST Act is withdrawn prior to that date.

The FAST Act was previously signed into law in September 2022 and would have, among other things, established a council to set minimum wage standards for industry workers in California.

In connection with the adoption of AB 1228, the proponents of the referendum seeking repeal of the FAST Act indicated their agreement to withdraw the referendum.

If AB 1228 becomes effective January 1, 2024, the minimum wage at fast food restaurants that are part of brands which have more than 60 establishments nationwide will rise to $20 an hour on April 1, 2024, and a Fast Food Council created by AB 1228 will have limited power to approve annual wage increases until 2029.

Under the law, the Fast Food Council will also have the power to develop and propose minimum standards for fast food workers, including standards for working hours, working conditions, and health and safety.

As a result of AB 1228, we expect our labor and regulatory compliance costs will increase beginning in fiscal 2024 and that our results of operations and profitability will be adversely affected if we are not able to implement other measures to counter these increased costs.

We have experienced inflationary pressures affecting our operations in certain areas such as food cost, labor costs, construction costs and utility costs.

We have also experienced temporary shortages in food, equipment and other goods, as well as an increase in freights costs, due in part to supply chain impacts of overall economic conditions in the markets in which we operate.

We have been able to substantially offset these inflationary and other cost pressures through various actions, such as increasing menu prices, managing menu mix, and productivity improvements.

However, we expect these inflationary and other cost pressures to continue throughout the remainder of fiscal year 2023 and we may not be able to offset cost increases in the future.

Growth Strategies and Outlook

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

As of September 27, 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 twenty-six weeks ended June 28, 2023, we opened one new company-operated in Nevada and our franchisees opened one new restaurant in California.

For the thirty-nine weeks ended September 27, 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 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.

For the thirteen weeks ended September 27, 2023, system-wide comparable restaurant sales increased by 0.8% from the comparable period in the prior year.

For the thirty-nine weeks ended September 27, 2023, system-wide comparable restaurant sales decreased by 0.7% from the comparable period in the prior year.

For company-operated restaurants, comparable restaurant sales for the thirteen and thirty-nine weeks ended September 27, 2023 increased by 0.3% and 0.5%, respectively.

For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of a 1.3% increase in average check size, partially offset by a 0.9% decrease in transactions, and the year-to-date change in comparable restaurant sales consisted of a 3.2% increase in average check size, partially offset by a 2.6% decrease in transactions .

For franchised restaurants, comparable restaurant sales increased 1.1% and decreased 1.4% for the thirteen and thirty-nine weeks ended September 27, 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 twenty-six weeks ended June 28, 2023, were as follows:

Twenty-Six Weeks Ended

Our restaurant counts at the beginning and end of each of the last three fiscal years and the thirty-nine weeks ended September 27, 2023, were as follows:

Thirty-Nine Weeks Ended

Fiscal Year Ended

June 28, 2023

September 27, 2023

Company-operated restaurant activity:

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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.

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.

During the thirty-nine weeks ended September 27, 2023, we completed 12 company-operated restaurant remodels and 21 franchise remodels.

In fiscal 2023, we plan to continue our standard practices for remodels, which includes completing a total of 14-15 company and 28-32 franchise remodels.

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.

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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.

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 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.

As of September 27, 2023 and December 28, 2022, the revenue allocated to loyalty points that had not been redeemed was $0.6 million and $0.5 million , respectively, which is reflected in our accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities.

We had over 3.6 million loyalty program members as of September 27, 2023.

Critical Accounting Policies and Use of Estimates

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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 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.

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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.

Factors that influence labor costs include minimum wage and payroll tax legislation, state labor laws (which, in California, may include AB 1228), 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

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Comparison of Results of Operations

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.

Our operating results for the thirteen weeks ended September 27, 2023 and September 28, 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

September 27, 2023

September 28, 2022

Increase / (Decrease)

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Depreciation and amortization

(Gain) loss on disposal of assets

Loss on disposition of restaurants

Loss on disposal of assets

Gain on disposition of restaurants

Impairment and closed-store reserves

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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

Our operating results for the thirty-nine weeks ended September 27, 2023 and September 28, 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.

Thirty-Nine Weeks Ended

September 27, 2023

September 28, 2022

Increase / (Decrease)

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Interest expense, net of interest income

Income tax receivable agreement income

Income tax receivable agreement expense (income)

Income before provision for income taxes

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Company-Operated Restaurant Revenue

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.

For the quarter ended September 27, 2023, company-operated restaurant revenue decreased $0.5 million, or 0.5%, from the comparable period in the prior year.

The decrease in company-operated restaurant revenue was mainly due to a $1.6 million decrease in revenue primarily from the four company-operated restaurants sold by the Company to existing franchisees during the prior quarters and a $0.2 million decrease in revenue recognized for our loyalty points program .

This company-operated restaurant revenue decrease was partially offset by $1.0 million of additional sales from restaurants opened during or after the third quarter of 2022 as well as an increase in company-operated comparable restaurant revenue of $0.3 million, or 0.3%.

The company-operated comparable restaurant sales increase consisted of a 1.3% increase in average check size due to increases in menu prices, partially offset by an approximately 0.9% decrease in transactions.

Year-to-date, company-operated restaurant revenue increased $0.9 million, or 0.3%, 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.

The increase in company-operated restaurant revenue was primarily due to $3.8 million of additional sales from restaurants opened during or after the first quarter of 2022.

In addition, the increase in company-operated restaurant sales was due to an increase in company-operated comparable restaurant revenue of $1.4 million, or 0.5%.

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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.

restaurant revenue increase was offset by a $4.2 million decrease in revenue primarily from the four company-operated restaurants sold by the Company to existing franchisees during the prior quarters.

Franchise Revenue

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%.

For the quarter ended September 27, 2023, franchise revenue increased $0.7 million, or 7.5%, from the comparable period in the prior year.

This increase was primarily due to a franchise comparable restaurant sales increase of 1.1%, seven franchise-operated restaurant openings and four company-operated restaurants sold by the Company to existing franchisees in each case, during the prior quarters.

Year-to-date, franchise revenue increased $1.2 million, or 4.1%, 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 increase was primarily due to ten franchise-operated restaurant openings and four company-operated restaurants sold by the Company to existing franchisees during the prior quarters.

This franchise revenue increase was partially offset by a franchise comparable restaurant sales decrease of 1.4% and the closure of one franchise location during or subsequent to the first quarter of 2022.

Franchise Advertising Fee Revenue

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.

For the quarter ended September 27, 2023, franchise advertising fee revenue increased $0.3 million, or 3.9%, from the comparable period in the prior year.

Year-to-date, franchise advertising fee revenue increased $0.3 million, or 1.4%, 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 June 28, 2023, food and paper costs decreased $3.2 million, or 10.2%.

For the quarter ended September 27, 2023, food and paper costs decreased $2.6 million, or 8.7%.

Year-to-date, food and paper costs decreased $6.7 million, or 7.4%, from the comparable period in the prior year.

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Year-to-date, food and paper costs as a percentage of company-operated restaurant revenue were 27.2%, down from 29.5% 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.

The percentage decrease for both the quarter and year-to-date period was primarily due to an increase in pricing, partially offset by commodity inflation.

Labor and Related Expenses

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.

For the quarter ended September 27, 2023, labor and related expenses decreased $0.2 million, or 0.6%, from the comparable period in the prior year.

The decrease in labor and related expenses for the quarter was primarily due to a $0.8 million decrease related to the 0.9% decrease in quarter-over-quarter sales transactions and a $0.6 million decrease in overtime pay due to improvements in operational execution.

The decrease in labor and related expenses for the quarter was partially offset by a $0.7 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 $0.6 million increase in worker’s compensation expenses.

Year-to-date, labor and related expenses decreased $2.1 million, or 2.1%, from the comparable period in the prior year.

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The decrease in labor and related expenses for the year was partially offset by a $3.1 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 $1.8 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.

For the quarter ended September 27, 2023, labor and related expenses as a percentage of company-operated restaurant revenue were 32.2%, down from 32.3% 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 .

Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 31.8%, down from 32.6% 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 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.

For the quarter ended September 27, 2023, occupancy and other operating expenses increased $0.4 million, or 1.4%, from the comparable period in the prior year.

The increase was primarily due to a $0.3 million increase in occupancy costs as well as $0.1 million increase in higher utility costs.

Year-to-date, occupancy and other operating expenses increased $1.2 million, or 1.5%, 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 increase was primarily due to a $1.0 million increase in occupancy costs, a $0.5 million increase in other operating services and supplies and a $0.2 million increase in repairs and maintenance.

The year-to-date increase in occupancy and other operating expenses was partially offset by a $0.5 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 .

For the quarter ended September 27, 2023, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 26.6%, up from 26.1% in the comparable period .

Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.5%, up from 25.2% in the comparable period of the prior year.

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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 the twenty-six weeks ended June 28, 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 thirty-nine weeks ended September 27, 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 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.

For the quarter ended September 27, 2023, general and administrative expenses decreased $0.7 million, or 7.2%, from the comparable period in the prior year.

The decrease for the quarter was primarily due to a $0.9 million decrease in labor related costs, primarily related to a decrease in estimated management bonus expense and a $0.1 million decrease in stock compensation expense partially offset by a $0.3 million increase in other legal related costs pertaining to an adoption of a Shareholder Rights Agreement (see Note 12, “Shareholder Rights Agreement” for further details on the Shareholder Rights Agreement ).

Year-to-date, general and administrative expenses increased $2.0 million, or 6.7%, 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.

The increase for the year-to-date period was due primarily to a $0.5 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, a $0.3 million increase in special costs related to the share distribution on March 28, 2023 and a $0.3 million increase in other legal related costs pertaining to the adoption of the Shareholder Rights Agreement (see Note 9, “Related Party Transactions” and Note 12, “Shareholder Rights Agreement” for further details on the share distribution and the Shareholder Rights Agreement, respectively ).

The increase in general and administrative expenses for the year was partially offset by a $0.2 million decrease in professional fees.

For the quarter ended September 27, 2023, general and administrative expenses as a percentage of total revenue were 7.6%, down from 8.2% in the comparable period of the prior year.

The percentage decrease for the quarterly period is primarily due to the cost decreases noted above.

Year-to-date, general and administrative expenses as a percentage of total revenue were 8.8%, up from 8.3% 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.

The percentage increase for the year-to-date period is primarily due to the cost increases discussed above.

Gain on Disposition of Restaurants

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.

During the thirteen and thirty-nine weeks ended September 27, 2023, we completed the sale of 17 and 18 restaurants, respectively, within California, Utah and Texas to existing franchisees.

We determined that these restaurant dispositions represent multiple element arrangements, and as a result, the cash consideration received was allocated to the separate elements based on their relative standalone selling price.

Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees.

The cash consideration per restaurant related to franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements.

We initially defer and subsequently recognize the franchise fees over the term of the franchise agreement.

During the thirteen and thirty-nine weeks ended September 27, 2023, these sales resulted in cash proceeds of $7.5 million and $7.7 million, respectively, and a net gain on sale of restaurant of $4.9 million and $5.0 million, respectively .

Since the date of their sale, these restaurants are now included in the total number of franchised El Pollo Loco restaurants.

Impairment and Closed-Store Reserves

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 .

During both the thirteen and thirty-nine weeks ended September 27, 2023, we recorded non-cash impairment charges of $1.0 million, primarily related to the carrying value of the ROU assets of one restaurant in California and the carrying value of the long-lived assets of one restaurant in Nevada .

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 .

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 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.

During both the thirteen and thirty-nine weeks ended September 27, 2023, 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.

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.

Interest Expense, Net

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 quarter ended September 27, 2023, interest expense, net, increased $1.3 million from t he comparable period in the prior year.

For the year-to-date period, interest expense, net, increased $2.4 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.

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 thirty-nine weeks ended September 27, 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 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 .

For both the thirteen and thirty-nine weeks ended September 27, 2023, we recorded income tax receivable agreement expense of $0.1 million and 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 .

Provision for Income Taxes

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 .

For the quarter ended September 27, 2023, we recorded an income tax provision of $3.0 million, reflecting an estimated effective tax rate of 24.4%.

For the quarter ended September 28, 2022, we recorded an income tax provision of $1.8 million, reflecting an estimated effective tax rate of approximately 26.2%.

For the year-to-date period ended

September 27, 2023, we recorded an income tax provision of $7.7 million, reflecting an estimated effective tax rate of approximately 26.5%.

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%.

The difference between the 21.0% statutory rate and our effective tax rate of 26.5% for the year-to-date period ended September 27, 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

Thirty-Nine Weeks Ended

(Dollar amounts in thousands)

June 28, 2023

June 29, 2022

June 28, 2023

June 29, 2022

September 27, 2023

September 28, 2022

September 27, 2023

September 28, 2022

Company-operated restaurant revenue

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Comparable restaurant sales exclude restaurants closed during the applicable period.

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.

At September 27, 2023 and September 28, 2022, there were 470 and 466 comparable restaurants, 181 and 184 company-operated restaurants and 289 and 282 franchised restaurants, respectively.

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

Because other companies may calculate this measure differently than we do, comparable restaurant sales as presented herein may not be comparable to similarly titled measures reported by other companies.

Because other companies may calculate this measure differently than we do, comparable restaurant sales as presented herein may not be comparable to similarly

titled measures reported by other companies.

Management believes that comparable restaurant sales is a valuable metric for investors to evaluate the performance of our store base, excluding the impact of new stores and closed stores.

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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.

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.

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.

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

Thirty-Nine Weeks Ended

(Dollar amounts in thousands)

June 28, 2023

June 29, 2022

June 28, 2023

June 29, 2022

September 27, 2023

September 28, 2022

September 27, 2023

September 28, 2022

Restaurant contribution:

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Depreciation and amortization

(Gain) loss on disposal of assets

Loss (gain) on disposal of assets

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

2 unchanged sentences

Impairment and closed-store reserves

Loss (gain) on disposition of restaurants

Gain on disposition of restaurants

Restaurant contribution

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

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

Adjusted EBITDA represents net income before interest expense, provision for income taxes, depreciation, amortization, and other items that we do not consider representative of normal operating expenses or 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.

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.

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Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

(Amounts in thousands)

June 28, 2023

June 29, 2022

June 28, 2023

June 29, 2022

September 27, 2023

September 28, 2022

September 27, 2023

September 28, 2022

Non-GAAP adjustments:

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Stock-based compensation expense (a)

(Gain) loss on disposal of assets (b)

Loss (gain) on disposal of assets (b)

Impairment and closed-store reserves (c)

Loss (gain) on disposition of restaurants (d)

Gain on disposition of restaurants (d)

Income tax receivable agreement expense (income) (e)

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Special dividend (g)

Special legal (h)

Gain on recovery of insurance proceeds (i)

Severance (j)

Pre-opening costs (k)

Legal settlements (h)

Special legal expenses (i)

Shareholder advisory fees (j)

Gain on recovery of insurance proceeds (k)

Severance (l)

Pre-opening costs (m)

Adjusted EBITDA

(a) Includes non-cash, stock-based compensation.

(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.

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

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.

During both the thirteen and thirty-nine weeks ended September 27, 2023, we recorded non-cash impairment charges of $1.0 million , primarily related to the carrying value of the ROU assets of one restaurant in California and the carrying value of the long-lived assets of one restaurant in Nevada.

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, respecti vely, primarily related to the long-lived assets of one restaurant in California.

(d) During the thirteen and thirty-nine weeks ended September 27, 2023, we completed the sale of 17 and 18 restaurants, respectively, within California, Utah and Texas to existing franchisees.

(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 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.

For the thirteen and thirty-nine weeks ended September 27, 2023 and September 28, 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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The special dividend was paid on November 9, 2022, to stockholders of record, including holders of restricted stock, at the close of business on October 24, 2022.

(h) Consists of legal costs related to the recent share distribution that occurred on March 28, 2023.

(h) Includes $0.5 million received from legal settlements, net of legal expenses.

(i) Consists of legal costs related to the share distribution that occurred on March 28, 2023.

Refer to Note 9, “Related Party Transactions” for further details on the share distribution.

(i) In September 2022, one of our restaurants incurred damage resulting from a fire.

(j) Consists of advisory fees pertaining to a Shareholder Rights Agreement adopted in connection with a shareholder’s accumulation of a significant amount of shares of our common stock.

Refer to Note 12, “Shareholder Rights Agreement” for further details on the Shareholder Rights Agreement.

(k) In September 2022, one of our restaurants incurred damage resulting from a fire.

In 2022, we disposed of less than $0.1 million of assets related to the fire.

2 unchanged sentences

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.

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.

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

(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.

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

(m) 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):

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

(Amounts in thousands)

June 28, 2023

June 29, 2022

September 27, 2023

September 28, 2022

Net cash (used in) provided by

2 unchanged sentences

Financing activities

Net (decrease) increase in cash

Net decrease in cash

Operating Activities

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.

For the thirty-nine weeks ended September 27, 2023, net cash from operating activities increased by approximately $10.6 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 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.

For the thirty-nine weeks ended September 27, 2023, net cash used in investing activities decreased by $5.6 million from the comparable period of the prior year.

This change was due to an increase in purchase of property and equipment mostly related to restaurant remodeling during the thirty-nine weeks ended September 27, 2023 when compared to the prior quarter.

The overall decrease in use of investing activities was partially offset by the cash proceeds of $7.7 million received during the thirty-nine weeks ended September 27, 2023 related to the sale of nine company-operated restaurants within Texas to an existing franchisee, eight company-operated restaurants within California to existing franchisees and one company-operated restaurant in Utah to another existing franchisee.

Financing Activities

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.

For the thirty-nine weeks ended September 27, 2023, net cash used in financing activities increased by $12.1 million from the comparable period of the prior year.

The increase was due primarily to repurchases of common stock of $46.6 million during the thirty-nine weeks ended September 27, 2023.

This increase was partially offset by $14.0 million in net borrowings on the 2022 Revolver during the thirty-nine weeks ended September 27, 2023 compared to the net pay downs of $20.0 million on the 2022 Revolver during the thirty-nine weeks ended September 28, 2022.

This change was further impacted by a $1.2 million cash inflow related to option exercises during the thirty-nine weeks ended September 27, 2023 compared to a $1.6 million cash inflow related to option exercises during thirty-nine weeks ended September 28, 2022.

Debt and Other Obligations

10 unchanged sentences

Borrowings under the 2022 Revolver may be repaid and reborrowed.

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 interest rate range was 6.74% to 6.93% and 5.69% to 8.50% for the thirteen and thirty-nine weeks ended September 27, 2023 under the 2022 Revolver , respectively, and 2.87% to 6.00% and 1.35% to 6.00%

for the thirteen and thirty-nine weeks ended September 28, 2022 , respectively, under the 2022 Revolver and 2018 Revolver.

The 2022 Credit Agreement contains certain financial covenants.

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.

We were in compliance with the financial covenants as of September 27, 2023.

At September 27, 2023, we had $80.0 million in outstanding borrowings under the 2022 Revolver and $9.8 million of letters of credit that further reduce the amount available under the line of credit to $60.2 million in borrowing availability.

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 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 as of September 27, 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 .

Share Repurchase Program

On October 11, 2022, the Company’s Board of Directors approved the 2022 Stock Repurchase Agreement under which the Company is authorized to repurchase up to $20.0 million of shares of its common stock.

The 2022 Stock Repurchase Agreement will terminate on March 28, 2024, may be modified, suspended or discontinued at any time, and does not obligate the Company to acquire any particular number of shares.

Under the 2022 Stock Repurchase Plan, the Company is permitted to repurchase its common stock from time to time, in amounts and at prices that the Company deemed appropriate, subject to market conditions and other considerations.

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.

On October 11, 2022, our Board of Directors approved the 2022 Stock Repurchase Agreement under which we were authorized to repurchase up to $20.0 million of shares of our common stock through March 28, 2024.

Under the 2022 Stock Repurchase Plan, we were permitted to repurchase our common stock from time to time, in amounts and at prices that we deemed appropriate, subject to market conditions and other considerations.

Pursuant to the 2022 Stock Repurchase Plan, we were authorized to repurchase shares of our common stock using open market purchases, including pursuant to Rule 10b5-1 trading plans, and/or through privately negotiated transactions.

As of September 27, 2023, the program was completed.

Repurchase Agreement

On August 7, 2023, we entered into a Stock Repurchase Agreement (the “Repurchase Agreement”) with FS Equity Partners V, L.P.

and FS Affiliates V, L.P.

(together, the “Sellers”), pursuant to which we agreed to purchase an aggregate of 2,500,000 shares of our common stock from the Sellers at a price of $10.63 per share for a total purchase price of $26.6 million.

The repurchase was completed in August 2023.

Prior to the repurchase, Freeman Spogli & Co.

(“Freeman Spogli”), collectively with the Sellers and certain other funds managed by Freeman Spogli, was our largest stockholder.

In addition, John Roth, a director of the Company until his resignation on August 16, 2023, is a general partner of Freeman Spogli and its chief executive officer.

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