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EL Pollo Loco Is a Fire Grilled Franchise with a Growing Runway

By: MarketBeat

May 15, 2024 at 07:30 AM EDT

Photo of El Pollo Loco restaurant exterior and sign.El Pollo Loco: Growth Potential in Fire-Grilled Franchise Quick-service Mexican chicken restaurant operator El Pollo Loco Holdings Inc. (NASDAQ: LOCO) specializes in the flame-grilled, citrus-marinated chicken. The consumer discretionary sector company develops, franchises, and operates over 470 restaurants throughout California, Nevada, Texas, Arizona, Utah, Colorado, and Louisiana. The company recently hired a new permanent CEO, Liz Williams, formerly of Yum! Brands Inc. (NYSE: YUM) and president of Taco Bell.

Pandemic Pushes Modernization

During the pandemic, El Pollo Loco had to modernize itself to the digital, takeout, and delivery model, mobile app ordering, and a loyalty program. What started as a temporary modification to adapt to social distancing has turned into a cornerstone of its day-to-day operations. El Pollo Loco is a brand that has improved because of the pandemic.

The company competes with other quick-service restaurants like Chipotle Mexican Grill Inc. (NYSE: CMG), Chick-fil-A and Restaurant Brands International Inc. (NYSE: QSR)-owned Popeyes Louisiana Kitchen.

Competitive Advantage

With so many fast food and local restaurants specializing in chicken, the category may be considered saturated. El Pollo Loco is at the apex between chicken and Mexican fast food restaurant categories. Its chicken is never frozen. Since the chicken is open-flame grilled, it is healthier than fried chicken and fried wings. The chicken is thoroughly marinated with the flame-grilled citrus flavor, grilled for 55 minutes, and cut to order. Its salsa, guacamole and cilantro dressings are freshly made from scratch every day. Grill Masters hand cut the chicken to make burritos, salads, tostadas, bowls, and stuffed quesadillas daily.

Value Proposition

El Pollo Loco, which means "the crazy chicken," fashions itself as a quick-service restaurant that serves restaurant-quality fast food, which they term QSR+. They target customers seeking healthier chicken options instead of fried chicken. The price points are competitive with fast food chicken restaurants minus the frozen chicken and pre-made sides and condiments.

Expansion Runway

With nearly 400 of its 490 or so restaurants located in California, El Pollo Loco has a long runway for domestic expansion. The company's restaurants are only 60% franchised. Expansion has been extremely slow as the company hasn't taken much risk exploring locations outside of California. Utah, Louisiana, and Colorado have single-digit franchised locations. El Pollo sold 18 company-owned locations to franchisees and opened three new restaurants in Q1 2024. El Pollo plans to open up to seven new franchised and two new company-owned locations in 2024. CEO Williams is expected to expand El Pollo Local into a national brand.

Chart showing how El Pollo Loco gapped on strong Q1 2024 earnings to form a pennant pattern.

Daily Pennant Pattern

The daily candlestick chart on LOCO is forming a pennant pattern. While the formation is not a classic pennant due to the lack of a traditional flagpole, the gap up may be considered the flagpole. Shares peaked on the earning gap at $11.99. From there, the ascending trendline formed at the $9.64 gap level, catching each pullback at a higher low. The body high of the earnings gap candle commenced the descending trendline at $10.87. The channel gets tighter as it gets closer to the apex for an eventual breakout or breakdown. The daily relative strength index (RSI) is relatively flat at the 54 bands. Pullback support levels are at $16.56, $15.51, $13.72 and $12.30.

Steady Improvement

El Pollo Loco reported Q1 2024 EPS of 22 cents, beating consensus estimates by eight cents. Revenues climbed 1.4% YoY to $116.15 million, beating $111.09 million consensus analyst estimates. System-wide comparable sales rose 5.1% YoY. Incoming from operations improved to $9.7 million, up from $7.8 million in the year-ago period. The company bought back 136,400 shares for $1.2 million during the quarter. El Pollo Loco has 478 total comparable restaurants, of which 168 are company-operated and 310 are franchised.

Forward Guidance

El Pollo Loco plans to open two new company-owned restaurants and five to seven new franchise restaurants in 2024. The capital spending is expected to be between $25 million to $28 million. General and administrative expenses are expected to be between $45 million to $47 million.

Strategy Pillars

CEO Williams started at the beginning of March 2024, and Q1 2024 was her first company earnings conference call. Williams stressed the strategic pillars for growth, which include driving awareness of the brand and hospitality mindset, which will initiate the rollout of new equipment to simplify the preparation of its freshly made condiments and sides. The goal of delivering speed and consistency in its operations starts with clear systems, tools, processes and best-in-class training.

Beefing Up Digital and Updating Restaurant Design

El Pollo will beef up its digital experience, which includes a digital menu and confirmation boards for kiosks. Its test restaurants have already proven to serve customers more efficiently with less labor. The company is updating its restaurant designs with the current prototype costing $2.2 million to build. They are working with multiple partners to reduce the costs.

Williams concluded, “We also recently launched a new development incentive for all of our franchise partners. We are excited about the combination of reducing the build cost and improving the unit-level margins with our winning economic focus, together with a meaningful development incentive. Coupled with strong sales growth, we believe this formula will reinvigorate the pipeline over time.”

El Pollo Loco analyst ratings and price targets are at MarketBeat.

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