What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-01 compared with 2024-08-02 · 145 added, 133 removed, 387 unchanged (42% of the section changed)

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These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.

All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those that we expected.

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These factors include, but are not limited to:

● global economic or other business conditions that may affect the desire or ability of our customers to purchase our products such as inflationary pressures, high unemployment levels, increases in gas prices, and declines in median income growth, consumer confidence and consumer discretionary spending;

● our ability to open new restaurants in new and existing markets, including difficulty in finding sites and in negotiating acceptable leases;

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● the impact of federal, state and local labors laws governing our relationships with our employees, including minimum wage laws, minimum standards for fast food workers or other similar laws;

● the impacts of the uncertainty regarding pandemics, epidemics or infectious disease outbreaks (such as the recent COVID-19 pandemic) 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 impacts of the uncertainty regarding pandemics, epidemics or infectious disease outbreaks (such as the COVID-19 pandemic) 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;

● our limited control over our franchisees and potential deterioration of our relations with existing or potential franchisees;

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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 and shrimp.

We serve individual and family-sized chicken meals, a variety of Mexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like beef and shrimp.

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

On September 28, 2023, Governor Newsom signed AB 1228 into law, which repealed and replaced the Fast Food Accountability and Standards Recovery Act (“FAST Act”) on January 1, 2024.

On September 28, 2023, Governor Newsom signed AB 1228 into law in California, which repealed and replaced the Fast Food Accountability and Standards Recovery Act (FAST Act) on January 1, 2024.

Pursuant to AB 1228, the minimum wage at fast food restaurants that are part of brands which have more than 60 establishments nationwide was increased 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 during the remainder of 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.

As a result of AB 1228, we have experienced an increase in our labor and regulatory compliance costs and we expect these costs will continue to increase for the remainder of 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.

Additionally, we have experienced inflationary pressures affecting our operations in certain areas such as food cost, labor costs, construction costs and other restaurant operating costs.

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Growth Strategies and Outlook

As of June 26, 2024, we had 495 locations in seven states.

As of September 25, 2024, we had 496 locations in seven states.

In fiscal 2023, we opened two new company-operated restaurants in Nevada, and our franchisees opened three new restaurants, one in California, one in Colorado and one in Utah.

Additionally, we completed the sale of 18 restaurants within California, Utah and Texas to existing franchisees during fiscal 2023.

For the twenty-six weeks ended June 26, 2024, our franchisees opened one new restaurant in California.

Additionally, during the twenty-six weeks ended June 26, 2024, we completed the sale of one restaurant in California to existing franchisees.

For the thirty-nine weeks ended September 25, 2024, we opened one new company-operated restaurant in California, and our franchisees opened one new restaurant in California.

Additionally, during the thirty-nine weeks ended September 25, 2024, we completed the sale of one restaurant in California to an existing franchisee.

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

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● Winning Unit Economics;

● New Unit Growth.

● Drive Unit Growth Again with National Expansion.

To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend.

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Revenue Overview

For the thirteen and twenty-six weeks ended June 26, 2024, our total revenue was $122.2 million and $238.3 million, respectively.

For the thirteen and twenty-six weeks ended June 26, 2024, our company-operated restaurant revenue was $102.3 million and $199.5 million, respectively, and our franchise and franchise advertising fee revenue was $19.9 million and $38.9 million, respectively.

For the thirteen and thirty-nine weeks ended September 25, 2024, our total revenue was $120.4 million and $358.7 million, respectively.

For the thirteen and thirty-nine weeks ended September 25, 2024, our company-operated restaurant revenue was $101.2 million and $300.6 million, respectively, and our franchise and franchise advertising fee revenue was $19.2 million and $58.1 million, respectively.

Comparable Restaurant Sales

For the thirteen and twenty-six weeks ended June 26, 2024, system-wide comparable restaurant sales increased by 4.5% and 4.8%, 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 26, 2024 increased by 3.2% and 3.4%, respectively.

For the thirteen and thirty-nine weeks ended September 25, 2024, system-wide comparable restaurant sales increased by 2.7% and 4.1%, respectively, from the comparable period in the prior year.

For company-operated restaurants, comparable restaurant sales for the thirteen and thirty-nine weeks ended September 25, 2024 increased by 2.8% and 3.2%, respectively.

For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of an 11.3% increase in average check size, partially offset by a 7.6% decrease in transactions , and the year-to-date change in comparable restaurant sales consisted of a 7.5% increase in average check size, partially offset by a 4.0% decrease in transactions .

For franchised restaurants, comparable restaurant sales increased 5.3% and 5.6% for the thirteen and twenty-six weeks ended June 26, 2024, respectively.

For franchised restaurants, comparable restaurant sales increased 2.7% and 4.6% for the thirteen and thirty-nine weeks ended September 25, 2024, respectively.

Refer to “Comparable Restaurant Sales” definition in the section titled “Key Performance Indicators” 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 26, 2024, 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 25, 2024, were as follows:

Thirty-Nine Weeks Ended

Fiscal Year Ended

June 26, 2024

September 25, 2024

Company-operated restaurant activity (1) :

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Restaurant Remodeling

During the twenty-six weeks ended June 26, 2024, we completed five company-operated restaurant remodels and 28 franchise remodels.

During the thirty-nine weeks ended September 25, 2024, we completed five company-operated restaurant remodels and 35 franchise remodels.

Considering our efforts to finalize our new prototype design, we currently expect to complete 2-4 company-operated restaurant remodels and 5-10 franchise remodels for the remainder of fiscal 2024.

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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As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred until redemption or expiration.

As of June 26, 2024 and December 27, 2023, the revenue allocated to loyalty points that had not been redeemed was $0.8 million and $0.7 million, respectively, which is reflected in our accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities.

We had over 3.9 million loyalty program members as of June 26, 2024.

As of September 25, 2024 and December 27, 2023, the revenue allocated to loyalty points that had not been redeemed was $0.8 million and $0.7 million, respectively, which is reflected in our accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities.

We had over 4.1 million loyalty program members as of September 25, 2024.

Critical Accounting Policies and Use of Estimates

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Labor and related expenses include wages, payroll taxes, workers’ compensation expense, benefits, and bonuses paid to our restaurant management teams.

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

restaurant revenue grows.

Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows.

Factors that influence labor costs include minimum wage and payroll tax legislation, 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.

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Comparison of Results of Operations

Our operating results for the thirteen and twenty-six weeks ended June 26, 2024 and June 28, 2023 are 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, and are compared in the tables below.

Our operating results for the thirteen and thirty-nine weeks ended September 25, 2024 and September 27, 2023 are 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, and are compared in the tables below.

Thirteen Weeks Ended

June 26, 2024

June 28, 2023

September 25, 2024

September 27, 2023

Increase / (Decrease)

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Depreciation and amortization

Loss (gain) 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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Interest expense, net of interest income

Income tax receivable agreement expense (income)

Income tax receivable agreement expense

Income before provision for income taxes

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All other percentages use total revenue.

Twenty-Six Weeks Ended

June 26, 2024

June 28, 2023

Thirty-Nine Weeks Ended

September 25, 2024

September 27, 2023

Increase / (Decrease)

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Interest expense, net of interest income

Income tax receivable agreement expense (income)

Income tax receivable agreement expense

Income before provision for income taxes

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Company-Operated Restaurant Revenue

For the quarter ended June 26, 2024, company-operated restaurant revenue decreased $1.6 million, or 1.5%, from the comparable period in the prior year.

The decrease in company-operated restaurant revenue was mainly due to a $5.4 million decrease related to the 19 company-operated restaurants sold by us to our existing franchisees during or subsequent to the second quarter of 2023.

This company-operated restaurant revenue decrease was partially offset by $0.7 million of additional sales from restaurants opened during or after the second quarter of 2023, as well as an increase in company-operated comparable restaurant revenue of $3.1 million, or 3.2%.

The company-operated comparable restaurant sales increase consisted of an 8.8% increase in average check size due to increases in menu prices, partially offset by a 5.2% decrease in transactions.

For the quarter ended September 25, 2024, company-operated restaurant revenue decreased $1.5 million, or 1.5%, from the comparable period in the prior year.

The decrease in company-operated restaurant revenue was mainly due to a $5.3 million decrease related to the 19 company-operated restaurants sold by us to our existing franchisees during or subsequent to the third quarter of 2023.

This company-operated restaurant revenue decrease was partially offset by an increase in company-operated comparable restaurant revenue of $2.7 million, or 2.8% as well as $0.5 million of additional sales from restaurants opened during or after the third quarter of 2023 The company-operated comparable restaurant sales increase consisted of an 11.3% increase in average check size due to increases in menu prices, partially offset by a 7.6% decrease in transactions.

Year-to-date, company-operated restaurant revenue decreased $3.8 million, or 1.3%, from the comparable period in the prior year.

The decrease in company-operated restaurant revenue was mainly due to a $10.4 million decrease related to the 19 company-operated restaurants sold by us to our existing franchisees during or subsequent to the first quarter of 2023 and a $0.1 million increase in revenue recognized for our loyalty points program .

The decrease in company-operated restaurant revenue was mainly due to a $15.7 million decrease related to the 19 company-operated restaurants sold by us to our existing franchisees during or subsequent to the first quarter of 2023.

This company-operated restaurant revenue decrease was partially offset by $2.0 million of additional sales from restaurants opened during or after the first quarter of 2023 as well as an increase in company-operated comparable restaurant revenue of $9.3 million, or 3.2%.

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Franchise Revenue

For the quarter ended June 26, 2024, franchise revenue increased $1.5 million, or 15.1%, from the comparable period in the prior year.

This increase was primarily due to a franchise comparable restaurant sales increase of 5.3%, four franchise-operated restaurant openings and 19 company-operated restaurants sold by us to our existing franchisees in each case, during or subsequent to the second quarter of 2023.

For the quarter ended September 25, 2024, franchise revenue increased $1.1 million, or 10.5%, from the comparable period in the prior year.

This increase was primarily due to a franchise comparable restaurant sales increase of 2.7%, three franchise-operated restaurant openings and 19 company-operated restaurants sold by us to our existing franchisees in each case, during or subsequent to the third quarter of 2023.

Year-to-date, franchise revenue increased $4.3 million, or 14.3%, from the comparable period in the prior year.

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Franchise Advertising Fee Revenue

For the quarter ended June 26, 2024, franchise advertising fee revenue increased $0.7 million, or 10.0%, from the comparable period in the prior year.

For the quarter ended September 25, 2024, franchise advertising fee revenue increased $0.4 million, or 6.0%, from the comparable period in the prior year.

Year-to-date, franchise advertising fee revenue increased $1.9 million, or 8.5%, from the comparable period in the prior year.

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Food and Paper Costs

For the quarter ended June 26, 2024, food and paper costs decreased $2.7 million, or 9.6%.

For the quarter ended September 25, 2024, food and paper costs decreased $2.2 million, or 7.8%.

Year-to-date, food and paper costs decreased $6.2 million, or 7.4%, from the comparable period in the prior year.

The decrease in food and paper costs for the quarter resulted primarily from a $1.5 million reduction related to the sale of 19 company-operated locations to franchisees, coupled with the decline in transactions referenced above, partially offset by commodity inflation.

The decrease in food and paper costs for the quarter and year-to-date resulted primarily from a $1.5 million and $4.5 million reduction, respectively, related to the sale of 19 company-operated locations to franchisees, coupled with the

decline in transactions referenced above, partially offset by commodity inflation.

For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 25.1%, down from 26.8% in the comparable period of the prior year.

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Labor and Related Expenses

For the quarter ended June 26, 2024, labor and related expenses increased $0.6 million, or 1.8%, from the comparable period in the prior year.

The increase in labor and related expenses for the quarter was primarily due to a $3.9 million increase due to higher wage rates during fiscal 2024 and 2023 primarily as a result of legislative increases in the California state minimum wage, which became effective April 1, 2024, as well as a $0.4 million increase in worker’s compensation expense and vacation and sick pay.

The increase in labor and related expenses for the quarter ended June 26, 2024 from the comparable period in the prior year was partially offset by a $1.9 million reduction in labor-related costs resulting from the 19 company-operated restaurants sold by us to our existing franchisees during or subsequent to the second quarter of 2023 as well as $1.9 million reduction related to improved labor efficiencies.

For the quarter ended September 25, 2024, labor and related expenses decreased $0.3 million, or 1.1%, from the comparable period in the prior year.

The decrease in labor and related expenses for the quarter was primarily due to a $1.9 million reduction in labor-related costs resulting from the 19 company-operated restaurants sold by us to our existing franchisees during or subsequent to the third quarter of 2023 as well as a $2.0 million reduction related to improved labor efficiencies.

The decrease in labor and related expenses for the quarter ended September 25, 2024 from the comparable period in the prior year was partially offset by a $3.7 million increase due to higher wage rates during fiscal 2024 and 2023 primarily as a result of legislative increases in the California state minimum wage, which became effective April 1, 2024.

Year-to-date, labor and related expenses decreased $0.7 million, or 0.7%, from the comparable period in the prior year.

The decrease for the year-to-date period was due primarily to a $5.8 million reduction in labor related costs resulting from the 19 company-operated restaurants sold by us to our existing franchisees during or subsequent to the first quarter of 2023 and as well as $4.3 million reduction related to improved labor efficiencies.

The decrease in labor and related expenses for the year was partially offset by a $5.0 million increase due to higher wage rates during fiscal 2024 and 2023 primarily as a result of legislative increases in the California state minimum wage, which became effective April 1, 2024, as well as a $0.8 million increase in other labor-related costs primarily related to worker’s compensation expense and vacation and sick pay.

For the quarter ended June 26, 2024, labor and related expenses as a percentage of company-operated restaurant revenue were 32.1%, up from 31.1% in the comparable period in the prior year.

The percentage change for the quarter was driven by the cost increases highlighted above, partially offset by higher menu prices.

Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 31.8%, up from 31.6% in the comparable period in the prior year primarily d ue to the cost increases highlighted above, partially offset by the increase in menu pricing and improved labor efficiencies.

The decrease in labor and related expenses for the year was partially offset by a $8.7 million increase due to higher wage rates during fiscal 2024 and 2023 primarily as a result of legislative increases in the California state minimum wage, which became effective April 1, 2024, as well as a $0.7 million increase in other labor-related costs.

For the quarter ended September 25, 2024, labor and related expenses as a percentage of company-operated restaurant revenue were 32.4%, up from 32.2% in the comparable period in the prior year.

The percentage change for the quarter was driven by the higher wage rates, partially offset by higher menu prices and improved labor efficiencies .

Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 32.0%, up from 31.8% in the comparable period in the prior year primarily d ue to the higher wage rates , partially offset by the increase in menu pricing and improved labor efficiencies.

Occupancy and Other Operating Expenses

For the quarter ended June 26, 2024, occupancy and other operating expenses decreased $0.9 million, or 3.6%, from the comparable period in the prior year.

The decrease was primarily due to a $0.7 million decrease in utilities, repairs and maintenance costs and other operating expense primarily driven by the sale of 19 company-operated locations to existing franchisee during or subsequent to the second quarter of 2023 and a $0.2 million decrease in other operating costs.

For the quarter ended September 25, 2024, occupancy and other operating expenses decreased $1.2 million, or 4.4%, from the comparable period in the prior year.

The decrease was primarily due to a $1.7 million decrease in utilities, repairs and maintenance costs and other operating expense primarily driven by the sale of 19 company-operated locations to existing franchisee during or subsequent to the third quarter of 2023, partially offset by a $0.5 million increase in other operating expenses and the two new company restaurant openings.

Year-to-date, occupancy and other operating expenses decreased $3.1 million, or 4.0%, from the comparable period in the prior year.

The decrease was primarily due to a $1.2 million decrease in utilities, repairs and maintenance costs and other operating expense primarily driven by the sale of 19 company-operated locations during or subsequent to the first quarter of 2023 to existing franchisee and a $0.7 million decrease in other operating costs.

For the quarter ended June 26, 2024, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 24.1%, down from 24.6% in the comparable period in the prior year .

The decrease was primarily due to a 4.8 million decrease in utilities, repairs and maintenance costs and other operating expense primarily driven by the sale of 19 company-operated locations during or subsequent to the first quarter of 2023 to existing franchisees, partially offset by a $1.3 million increase in other operating expenses and the three new company restaurant openings.

For the quarter ended September 25, 2024, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.8%, down from 26.6% in the comparable period in the prior year .

Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 24.8%, down from 25.5% in the comparable period of the prior year.

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General and Administrative Expenses

For the quarter ended June 26, 2024, general and administrative expenses increased $0.7 million, or 6.1%, from the comparable period in the prior year.

The increase for the quarter was primarily due to a $0.6 million increase in labor- related costs, primarily related to an increase in estimated management bonus expense.

For the quarter ended September 25, 2024, general and administrative expenses increased $2.3 million, or 24.9%, from the comparable period in the prior year.

The increase for the quarter was primarily due to a $1.9 million increase in

labor- related costs, primarily related to an increase in estimated management bonus expense and a $0.4 million increase in other general and administrative expenses.

Year-to-date, general and administrative expenses increased $3.7 million, or 11.7%, from the comparable period in the prior year.

The increase for the year-to-date period was due primarily to a $2.5 million increase in labor-related costs, primarily related to an increase in estimated management bonus expense, a $0.6 million increase in executive transition costs and a $0.6 million increase in other general and administrative expenses.

For the quarter ended June 26, 2024, general and administrative expenses as a percentage of total revenue were 9.6%, up from 9.1% in the comparable period of the prior year.

For the quarter ended September 25, 2024, general and administrative expenses as a percentage of total revenue were 9.5%, up from 7.6% in the comparable period of the prior year.

Year-to-date, general and administrative expenses as a percentage of total revenue were 9.8%, up from 8.8% 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.

Franchise Expenses

For the quarter ended September 25, 2024, franchise expenses increased $0.9 million, or 9.4%, from the comparable period in the prior year .

Year-to-date, franchise expenses increased $3.9 million, or 13.7%, from the comparable period in the prior year.

The increase for both quarterly and year-to-date periods was due to an increase in advertising expenses, primarily resulting from higher franchise revenue, higher franchise services expense and higher rent expense for locations sub-leased to franchisees that have a portion of the rent based on a percentage of revenue generated.

Loss (Gain) on Disposition of Restaurants

During the thirteen and twenty-six weeks ended June 26, 2024, we completed the sale of one restaurant within California to an existing franchisee due to an expiring lease term on April 30, 2024.

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

During the thirty-nine weeks ended September 25, 2024, we completed the sale of one restaurant within California to an existing franchisee due to an expiring lease term on April 30, 2024.

This sale resulted in cash proceeds of $0.1 million and a net loss on sale of restaurant of less than $0.1 million for the thirty-nine weeks ended September 25, 2024.

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.

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 .

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 its relative standalone selling price.

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

This sale resulted in cash proceeds of $0.1 million and $0.2 million, respectively, and a net loss on sale of restaurant of less than $0.1 million and a net gain on sale of restaurant of $0.1 million for the twenty-six weeks ended June 26, 2024 and June 28, 2023, respectively.

Since the date of their sale, this restaurant is now included in the total number of franchised El Pollo Loco restaurants.

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 the thirteen and twenty-six weeks ended June 26, 2024, we did not record any non-cash impairment charges.

During 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 the ROU assets of one restaurant in California .

During the thirteen and thirty-nine weeks ended September 25, 2024, we did not record any non-cash impairment charges.

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 .

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 26, 2024 and 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 thirty-nine weeks ended September 25, 2024 and September 27, 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.

Interest Expense, Net

For the quarter ended June 26, 2024, interest expense, net, increased $0.6 million from t he comparable period in the prior year.

For the quarter ended September 25, 2024, interest expense, net, increased $0.2 million from t he comparable period in the prior year.

For the year-to-date period, interest expense, net, increased $1.3 million from the comparable period in the prior year .

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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 26, 2024, we did not record any income tax receivable agreement income or expense, and 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.

For the thirteen and thirty-nine weeks ended September 25, 2024, we did not record any income tax receivable agreement income or expense, and for both the thirteen and thirty-nine weeks ended September 27, 2023, we recorded income tax receivable agreement expense of $0.1 million.

On May 29, 2024, we terminated most of the obligations under the TRA, with respect to any payments or obligations owed to the FS Equity Partners V, L.P.

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(together, the “Sellers”) thereunder in exchange for a payment to the Sellers of $398,896.

As of June 26, 2024, an immaterial amount of obligations owed remained outstanding on our condensed consolidated balance sheets.

As of September 25, 2024, an immaterial amount of obligations owed remained outstanding on our condensed consolidated balance sheets.

Provision for Income Taxes

For the quarter ended June 26, 2024, we recorded an income tax provision of $3.2 million, reflecting an estimated effective tax rate of 29.3%.

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

For the year-to-date period ended June 26, 2024, we recorded an income tax provision of $5.4 million, reflecting an estimated effective tax rate of approximately 28.4%.

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%

The difference between the 21.0% statutory rate and our effective tax rate of 28.4% for the year-to-date period ended June 26, 2024 is primarily a result of state taxes , the impact of non-tax deductible executive compensation expense, a tax shortfall related to equity compensation deductible for tax as compared to the cumulative amount recorded as stock-based compensation expense, partially offset by a Work Opportunity Tax Credit benefit .

For the quarter ended September 25, 2024, we recorded an income tax provision of $2.4 million, reflecting an estimated effective tax rate of 28.1%.

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

For the year-to-date period ended September 25, 2024, we recorded an income tax provision of $7.8 million, reflecting an estimated effective tax rate of approximately 28.3%.

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%

The difference between the 21.0% statutory rate and our effective tax rate of 28.3% for the year-to-date period ended September 25, 2024 is primarily a result of state taxes , the impact of non-tax deductible executive compensation expense, a tax shortfall related to equity compensation deductible for tax as compared to the cumulative amount recorded as stock-based compensation expense, 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 26, 2024

June 28, 2023

June 26, 2024

June 28, 2023

September 25, 2024

September 27, 2023

September 25, 2024

September 27, 2023

Company-operated restaurant revenue

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Comparable restaurant sales exclude restaurants closed during the applicable period.

At June 26, 2024 and June 28, 2023, there were 482 and 470 comparable restaurants, 168 and 182 company-operated restaurants and 314 and 288 franchised restaurants, respectively.

At September 25, 2024 and September 27, 2023, there were 482 and 470 comparable restaurants, 168 and 181 company-operated restaurants, and 314 and 289 franchised restaurants, respectively.

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

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Management further believes restaurant level

operating is useful to investors to highlight trends in our core business that may not otherwise be apparent to investors when relying solely on GAAP financial measures.

operating margin is useful to investors to highlight trends in our core business that may not otherwise be apparent to investors when relying solely on GAAP financial measures.

A reconciliation of restaurant contribution and restaurant contribution margin to company-operated restaurant revenue is provided below:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

(Dollar amounts in thousands)

June 26, 2024

June 28, 2023

June 26, 2024

June 28, 2023

September 25, 2024

September 27, 2023

September 25, 2024

September 27, 2023

Restaurant contribution:

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Impairment and closed-store reserves

Loss (gain) on disposition of restaurants

(Gain) loss on disposition of restaurants

Restaurant contribution

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EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity.

In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted

In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA.

Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

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Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

(Amounts in thousands)

June 26, 2024

June 28, 2023

June 26, 2024

June 28, 2023

September 25, 2024

September 27, 2023

September 25, 2024

September 27, 2023

Non-GAAP adjustments:

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Impairment and closed-store reserves (c)

Loss (gain) on disposition of restaurants (d)

Income tax receivable agreement expense (income) (e)

(Gain) loss on disposition of restaurants (d)

Income tax receivable agreement expense (e)

Special other expenses (f)

Gain on recovery of insurance proceeds (g)

Executive transition costs (h)

Restructuring charges (i)

Pre-opening costs (j)

Shareholder advisory fees (g)

Gain on recovery of insurance proceeds (h)

Executive transition costs (i)

Restructuring charges (j)

Pre-opening costs (k)

Adjusted EBITDA

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During the thirteen and twenty-six weeks ended June 26, 2024, we did not record any non-cash impairment charges.

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 the ROU assets of one restaurant in California.

(d) During the twenty-six weeks ended June 26, 2024, we completed the sale of one restaurant within California to an existing franchisee due to an expiring lease term on April 30, 2024.

During the twenty-six weeks ended June 26, 2024 and June 28, 2023, we completed the sale of one restaurant within California to an existing franchisee.

These sales resulted in cash proceeds of $0.1 million and $0.2 million, respectively, during the twenty-six weeks ended June 26, 2024 and June 28, 2023, and a net loss on sale of restaurant of less than $0.1 million and a net gain on sale of restaurant of $0.1 million, respectively, for the twenty-six weeks ended June 26, 2024 and June 28, 2023.

During the thirteen and thirty-nine weeks ended September 25, 2024, we did not record any non-cash impairment charges.

(d) During the thirty-nine weeks ended September 25, 2024, we completed the sale of one restaurant within California to an existing franchisee due to an expiring lease term on April 30, 2024.

This sale resulted in cash proceeds of $0.1 million and a net loss on sale of restaurant of less than $0.1 million for the thirty-nine weeks ended September 25, 2024.

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.

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

(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 26, 2024, we did not record any income tax receivable agreement income or expense.

For the thirteen and twenty-six weeks ended June 28, 2023, income tax receivable agreement income consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.

(f) Consists of (1) nominal costs and recoveries related to the defense of securities lawsuits, (2) $0.3 million in legal costs related to the share distribution by Trimaran Group of substantially all shares of our common stock held by Trimaran Group to its investors, members and limited partners, which occurred on March 28, 2023, and (3) for the twenty-six weeks ended June 28, 2023, $0.1 million in costs related to a special dividend declaration which was paid on November 9, 2022, to stockholders of record, including holders of restricted stock.

(g) During fiscal 2022, one of our restaurants incurred damage resulting from a fire.

For the thirteen and thirty-nine weeks ended September 25, 2024, we did not record any income tax receivable agreement income or expense.

For the thirteen and thirty-nine weeks ended September 27, 2023, income tax receivable agreement expense 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 (1) nominal costs and recoveries related to the defense of securities lawsuits, (2) $0.3 million in legal costs related to the share distribution by Trimaran Group of substantially all shares of our common stock held by Trimaran Group to its investors, members and limited partners, which occurred on March 28, 2023, and (3) $0.1 million in costs related to a special dividend declaration which was paid on November 9, 2022, to stockholders of record, including holders of restricted stock.

(g) 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.

(h) During fiscal 2022, one of our restaurants incurred damage resulting from a fire.

In fiscal 2023, we incurred costs directly related to the fire of less than $0.1 million.

We received $0.4 million in cash, net of the insurance deductible, from the insurance company during fiscal 2023, for which 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 for the reimbursement of property and equipment and expenses and the 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.

(h) Includes costs associated with the transition of our former CEO, such as severance, executive recruiting costs and stock-based compensation costs.

(i) On March 8, 2024, we made the decision to eliminate and restructure certain positions in the organization, which resulted in one-time costs of approximately $0.6 million.

(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.

The gain on recovery of insurance proceeds for the reimbursement of property and equipment and expenses and the 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.

(i) Includes costs associated with the transition of our former CEO, such as severance, executive recruiting costs and stock-based compensation costs.

(j) On March 8, 2024, we made the decision to eliminate and restructure certain positions in the organization, which resulted in one-time costs of approximately $0.6 million.

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.

(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):

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

(Amounts in thousands)

June 26, 2024

June 28, 2023

Net cash (used in) provided by

September 25, 2024

September 27, 2023

Net cash provided by (used in)

Operating activities

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Financing activities

Net (decrease) increase in cash

Net increase (decrease) in cash

Operating Activities

For the twenty-six weeks ended June 26, 2024, net cash from operating activities increased by approximately $6.3 million from the comparable period of the prior year.

For the thirty-nine weeks ended September 25, 2024, net cash from operating activities increased by approximately $8.6 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 26, 2024, net cash used in investing activities increased by $1.7 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 twenty-six weeks ended June 26, 2024 when compared to the prior quarter.

For the thirty-nine weeks ended September 25, 2024, net cash used in investing activities increased by $7.0 million from the comparable period of the prior year.

This change was primarily due to the cash proceeds of $7.7 million received during the thirty-nine weeks ended September 27, 2023 related to the sale of 18 company-operated restaurants to existing franchisees.

Financing Activities

For the twenty-six weeks ended June 26, 2024, net cash used in financing activities changed by $8.8 million from the comparable period of the prior year.

The change was due primarily to a $3.0 million increase in net borrowings on the 2022 Revolver during the twenty-six weeks ended June 26, 2024 compared to the $6.0 million in net pay-downs during the twenty-six weeks ended June 28, 2023.

For the thirty-nine weeks ended September 25, 2024, net cash used in financing activities changed by $5.7 million from the comparable period of the prior year.

The decrease was primarily due to repurchases of shares of our common stock of $19.3 million during the thirty-nine weeks ended September 25, 2024 compared to repurchases of shares of our common stock of $46.6 million during the thirty-nine weeks ended September 27, 2023.

The change was offset by an $8.0 million in net pay downs on the 2022 Revolver during the thirty-nine weeks ended September 25, 2024 compared to a $14.0 million in net borrowings during the thirty-nine weeks ended September 27, 2023.

Debt and Other Obligations

We, as a guarantor, are 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”).

We, as a guarantor, are a party to a credit agreement (the “2022 Credit Agreement”) among our wholly-owned subsidiary, El Pollo Loco, Inc.

(“EPL”), as borrower, and our direct subsidiary, EPL Intermediate, Inc.

(“Intermediate”), as a guarantor, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolving credit facility (the “2022 Revolver”).

The 2022 Revolver, which is available pursuant to the 2022 Credit Agreement, includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans.

The 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027.

The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate.

The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

The special dividend announced by our 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.

The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by us and Intermediate.

The obligations of our company, 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.

Under the 2022 Revolver, we are restricted from making certain payments such as cash dividends or share repurchases, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem our qualified equity interests held by our past or present officers, directors, or employees (or their estates) upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2022 Revolver.

Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either the secured overnight financing rate (“SOFR”) or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid.

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Borrowings under the 2022 Revolver may be repaid and reborrowed.

The interest rate range under the 2022 Revolver was 6.67% and 6.96% and 6.67% to 6.94% for the thirteen and twenty-six weeks ended June 26, 2024 , respectively, and 6.22% to 8.50% and 5.69% to 8.50% for the thirteen and twenty-six weeks ended June 28, 2023, respectively.

The interest rate range under the 2022 Revolver was 6.52% to 6.95% and 6.52% to 6.96% for the thirteen and thirty-nine weeks ended September 25, 2024 , respectively, and 6.74% to 6.93% and 5.69% to 8.50% for the thirteen and thirty-nine weeks ended September 27, 2023, respectively.

The 2022 Credit Agreement contains certain customary financial covenants, subject to certain exceptions.

We were in compliance with the financial covenants as of June 26, 2024.

At June 26, 2024, we had $87.0 million in outstanding borrowings under the 2022 Revolver and one letter of credit in the amount of $9.8 million outstanding, and as a result, we had $53.2 million in borrowing availability.

We were in compliance with the financial covenants as of September 25, 2024.

At September 25, 2024, we had $76.0 million in outstanding borrowings under the 2022 Revolver and one letter of credit in the amount of $9.8 million outstanding, and as a result, we had $64.2 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, we and the 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.

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Material Cash Requirements

Our material cash requirements as of June 26, 2024 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 27, 2023.

Our material cash requirements as of September 25, 2024 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 27, 2023.

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) purchasing commitments for chicken, (iv) restaurant finance lease payments, and (v) capital expenditures .

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Following completion of this repurchase, approximately $7.4 million of our common stock remained available for repurchase under the Share Repurchase Program at December 27, 2023.

For the thirteen and twenty-six weeks ended June 26, 2024, we repurchased 203,483 and 339,883 shares of common stock, respectively, under the Share Repurchase Program, using open market purchases, for total consideration of approximately $2.0 million and $3.2 million, respectively.

Following completion of these repurchases, approximately $4.2 million of our common stock remained available for repurchase under the Share Repurchase Program at June 26, 2024.

For the thirteen and thirty-nine weeks ended September 25, 2024, we repurchased 92,043 and 431,926 shares of common stock, respectively, under the Share Repurchase Program, using open market purchases, for total consideration of approximately $1.1 million and $4.3 million, respectively.

Following completion of these repurchases, approximately $3.1 million of our common stock remained available for repurchase under the Share Repurchase Program at September 25, 2024.

Other Share Repurchases

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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