El Pollo Loco: Slowing Returns on Capital, What's Next?

Ladies and gentlemen, buckle up! We're diving into the world of el pollo loco Holdings (NASDAQ: LOCO), a company that's been serving up fire-grilled chicken since 1975. But lately, investors have been met with slowing returns on capital, and it's time to figure out what's next for this quick-service restaurant giant.

First things first, let's talk about the elephant in the room: the slowdown in same-store sales growth. El Pollo Loco's deceleration to just 0.5% growth is particularly weak compared to industry trends. Restaurant stocks have seen a significant slowdown in same-store sales growth, but El Pollo Loco's performance stands out as particularly concerning. This deceleration is attributed to several factors, including aggressive expansion plans and market pessimism. Despite these challenges, El Pollo Loco's Q4 FY 2024 results beat expectations with EPS of $0.20 and revenue of $114.28 million, indicating that the company is still performing relatively well despite the broader industry slowdown.



Now, let's talk about what El Pollo loco is doing to address this slowing returns on capital. The company is implementing several strategic initiatives to tackle this issue head-on. One of the key strategies is focusing on price increases and operational efficiencies. For instance, in the fourth quarter of 2024, the company reported a 9.0% increase in average check size due to increases in menu prices, which helped to offset a 6.8% decrease in transactions. This strategy has been effective in improving margins, as seen in the increase in restaurant contribution from 15.8% to 16.7% of company-operated restaurant revenue. Additionally, the company has been repurchasing its own shares, which can help to boost earnings per share and return capital to shareholders. For example, during the fourth quarter of 2024, El Pollo Loco repurchased 103,702 shares of its common stock for approximately $1.3 million. This initiative has been effective in the past, as it has helped to reduce the number of outstanding shares and increase earnings per share. Furthermore, El Pollo Loco is planning to expand beyond California, focusing on new unit growth and improving unit economics. This strategy has been effective in the past, as seen in the increase in franchise revenue by 2.5% in the fourth quarter of 2024, primarily due to the opening of four franchise-operated restaurants and the sale of one company-operated restaurant to existing franchisees.



So, what's next for El Pollo Loco? The company is planning to expand beyond California, focusing on new unit growth and improving unit economics. This strategy has been effective in the past, as seen in the increase in franchise revenue by 2.5% in the fourth quarter of 2024, primarily due to the opening of four franchise-operated restaurants and the sale of one company-operated restaurant to existing franchisees. Additionally, the company is planning to launch new products and promotions, such as the 3-day Burrito Block Party (April 2-4) offering Loco Rewards members exclusive burrito deals, giveaways, and a chance to win a Burrito Bag! This is a great opportunity for El Pollo Loco to drive traffic and increase sales.

In conclusion, El Pollo Loco is facing a challenging environment, but the company is taking proactive steps to address the slowing returns on capital. The company's strategic initiatives, including price increases, operational efficiencies, share repurchases, and expansion plans, have been effective in the past and are expected to continue to drive growth in the future. So, if you're an investor looking for a quick-service restaurant stock with growth potential, El Pollo Loco is definitely worth considering. But remember, the market is unpredictable, and past performance is not indicative of future results. So, do your own research and make an informed decision. And as always, stay tuned for more updates on El Pollo Loco and other exciting investment opportunities!

Ask Aime: What's next for El Pollo Loco?