Fire-Grilled Chicken Chain Will Modernize And Expand Nationally Through Digital Engagement

Key Takeaways

• El Pollo Loco aims to drive revenue growth by expanding its national brand reach and modernizing restaurant prototypes for better unit economics.
• The company focuses on digital engagement and margin improvement initiatives to boost sustainable growth and increase profitability.
• Competitive pressures, menu pricing, and reliance on California markets pose challenges to revenue and margin growth amidst economic uncertainties and consumer price sensitivity.

Catalysts

About El Pollo Loco Holdings

• Through its subsidiary, El Pollo Loco, Inc., develops, franchises, licenses, and operates quick-service restaurants under the El Pollo Loco name.

What are the underlying business or industry changes driving this perspective?

• El Pollo Loco is focused on becoming the national fire-grilled chicken brand with plans for modernization and national brand expansion. This strategic shift aims to drive revenue growth through enhanced brand recognition and market reach.
• The company is leveraging digital platforms by promoting app engagement and its loyalty program, which is expected to drive sustainable comp growth and increase revenue through enhanced customer engagement and retention.
• El Pollo Loco is rolling out a new restaurant prototype with reduced build costs, which should improve unit economics and net margins as they expand and remodel existing locations to boost sales and profitability.
• Initiatives are underway for margin improvement through cost savings across labor productivity, cost of goods sold, and other expenses. These are expected to increase net margins and earnings by continuing to enhance operational efficiency.
• The company plans to drive new unit growth by capitalizing on restaurant closures in the industry, enabling cost-effective conversions and expansion. This strategy is likely to increase both short-term revenue and long-term earnings through expanded market presence.

El Pollo Loco Holdings Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming El Pollo Loco Holdings's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 6.1% in 3 years time.
• Analysts expect earnings to reach $31.2 million (and earnings per share of $1.22) by about January 2028, up from $24.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2028 earnings, up from 14.3x today. This future PE is lower than the current PE for the US Hospitality industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 5.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.23%, as per the Simply Wall St company report. /li>

El Pollo Loco Holdings Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

• A sequential decrease in system-wide comparable store sales and the pressure of a competitive macro environment may signal challenges in maintaining revenue growth, putting strain on overall revenues.
• Concerns about menu pricing and the rising costs of goods and labor could lead to erosion of net margins, especially if consumer sensitivity to price increases grows stronger.
• Challenges in achieving and maintaining traffic growth despite aiming for margin improvements might limit the ability to translate cost efficiencies into increased earnings.
• Heavy reliance on California markets, where consumers are noted to be under significant financial pressure, might affect consistent revenue streams, particularly if regional economic conditions worsen.
• Increased focus on $5 value-led promotions could compress profit margins if the traffic gains do not sufficiently offset the lower average checks, negatively impacting earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $14.0 for El Pollo Loco Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $513.3 million, earnings will come to $31.2 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 9.2%.
• Given the current share price of $11.54, the analyst's price target of $14.0 is 17.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.