El Pollo Loco (LOCO)

Fast food chain El Pollo Loco (NASDAQ:LOCO) announced better-than-expected revenue in Q1 CY2025, with sales up 2.6% year on year to $119.2 million. Its non-GAAP profit of $0.19 per share was in line with analysts’ consensus estimates.

Company Overview

With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ:LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Competitors offering Mexican-inspired fare or specialty chicken dishes include Chipotle (NYSE:CMG), Fiesta Restaurant Group (NASDAQ:FRGI), Chuy’s (NASDAQ:CHUY), and private company Qdoba.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $476 million in revenue over the past 12 months, El Pollo Loco is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.

As you can see below, El Pollo Loco’s sales grew at a weak 1.4% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it barely increased sales at existing, established dining locations.

This quarter, El Pollo Loco reported modest year-on-year revenue growth of 2.6% but beat Wall Street’s estimates by 0.6%.

Looking ahead, sell-side analysts expect revenue to grow 4.7% over the next 12 months. Although this projection suggests its newer menu offerings will fuel better top-line performance, it is still below average for the sector.

Number of Restaurants

El Pollo Loco sported 499 locations in the latest quarter. Over the last two years, it has generally opened new restaurants, averaging 1% annual growth. This was faster than the broader restaurant sector.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing restaurants and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

El Pollo Loco’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.3% per year. This performance suggests it should consider improving its foot traffic and efficiency before expanding its restaurant base.

In the latest quarter, El Pollo Loco’s year on year same-store sales were flat. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if El Pollo Loco can reaccelerate growth.

Gross profit margins tell us how much money a restaurant gets to keep after paying for the direct costs of the meals it sells, like ingredients, and indicate its level of pricing power.

El Pollo Loco has bad unit economics for a restaurant company, giving it less room to reinvest and grow its presence. As you can see below, it averaged a 21% gross margin over the last two years. Said differently, El Pollo Loco had to pay a chunky $78.99 to its suppliers for every $100 in revenue.

El Pollo Loco’s gross profit margin came in at 20.3% this quarter, down 1.7 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as ingredients and transportation expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

El Pollo Loco has done a decent job managing its cost base over the last two years. The company has produced an average operating margin of 8.7%, higher than the broader restaurant sector.

Looking at the trend in its profitability, El Pollo Loco’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, El Pollo Loco generated an operating profit margin of 7.5%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

El Pollo Loco has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 6% over the last two years, better than the broader restaurant sector.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

El Pollo Loco’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 8.6%, slightly better than typical restaurant business.

El Pollo Loco reported $4.32 million of cash and $73 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $60.93 million of EBITDA over the last 12 months, we view El Pollo Loco’s 1.1× net-debt-to-EBITDA ratio as safe. We also see its $3.16 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see El Pollo Loco beat analysts’ revenue and EBITDA expectations this quarter. On the other hand, its same-store sales slightly missed. Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The stock remained flat at $9.50 immediately after reporting.

Updated: May 16, 2025 at 10:34 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own El Pollo Loco, you should also grasp the company’s longer-term business quality and valuation.

El Pollo Loco doesn’t pass our quality test. To kick things off, its revenue growth was weak over the last six years. And while its stable growth in new restaurants shows it has steady demand, the downside is its brand caters to a niche market. On top of that, its projected EPS for the next year is lacking.

El Pollo Loco’s EV-to-EBITDA ratio based on the next 12 months is 4.4x. This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $14 on the company (compared to the current share price of $9.52).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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