I’ve never been crazy about El Pollo Loco (LOCO) stock … nor the company itself.
The food, to me, is the same as every other chicken offering out there. I’ve never found a restaurant that wasn’t at least dirty, at worst filthy, and in some cases, in neighborhoods with some really sketchy characters. So it’s no surprise that I thought an El Pollo Loco IPO would eventually flame out.
The financials we got from the IPO filing weren’t great, but I’ve been waiting for some really lousy El Pollo Loco earnings reports to confirm how bad LOCO stock looks.
Well, one landed last night.
The El Pollo Loco earnings are so instructive for investors that we can’t pass examining them. After all, they’ll show us where the business is not being run terribly well.
El Pollo Loco Earnings
The headline numbers were utterly underwhelming. El Pollo Loco earnings came to 18 cents per share of LOCO stock on revenues of $89.5 million. The former number merely came in line with estimates, while the latter figure fell well short of the $93 million analyst consensus.
Company-operated restaurant revenue ticked up slightly by 2.7% to $83.6 million, up from $81.4 million last year. Alas, this was due to 13 new stores opening, and then offset by selling six stores to a franchise.
You should always look at same-store sales to see how things are really doing, and here you’ll find that LOCO is not doing well. Keeping in mind that any restaurant chain would be delighted to have mid-single-digit comps growth, El Pollo Loco earnings showed a 0.5% decline in company-owned same-store sales, thanks to a 3.9% decline in traffic. Heck, the only reason numbers weren’t worse was a 3.4% increase in the average check.
These are depressing numbers, because it means fewer people think El Pollo Loco is the place to eat. Though, here’s where we should look at the contrast between LOCO’s company-owned restaurants and franchises.
Franchise revenue increased 6% to $5.9 million, from $5.5 million, on a comps increase of 2.6%. There might be several explanations for this disparity, but it at least suggests suggests that the franchised operations care a lot more about their stores than El Pollo Loco does about its own. That’s a sign of potential tension between independent operators and corporate, which leads to a question of vision and execution.
There are 244 franchises vs. 174 company stores. I hate the fact that investors can’t access the franchise success, because the parent only receives royalty payments from them, not their bottom lines.
Chicken is a tough business. Restaurants are essentially commoditized. What separates LOCO stock from the likes of, say, Buffalo Wild Wings (BWLD) is that the former is a fast-food chicken place. The latter is a chain of sports bars that happens to serve chicken. Big difference in vision, folks.
There’s also a problem that has arisen with respect to chicken wing prices. That’s a commodity, and that means volatility. Chicken wing prices have been on the rise, and that cuts into profitability.
As for valuation, I’m shaking my head. Pro forma net income increased 21.4% to $7.4 million, or 19 cents per share. LOCO stock is set to earn 70 cents per share in FY15, or a 30% increase over last year. Thus, shares are priced at 21 times El Pollo Loco’s roughly $15 per-share price as of Friday’s open.
Sure, the P/E ratio is not out of line with the growth rate … but revenues and same-store sales are going in the wrong direction.
The only place left to try to justify the valuation is cash flow, but even that runs at just about $64 million per year. It’s not terrible, but it isn’t impressive, either.
For now, and probably forever, I suggest staying away from LOCO stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
