E El Pollo Loco: Avoid The Crazy Chicken

El Pollo Loco (LOCO) is the nation’s leading fast food fire-grilled chicken restaurant chain. This of course translates to “the crazy chicken.” We love the name, but the stock, not so much. It features southwestern style recipes, which often incorporated citrus-marinated, fire-grilled chicken and handcrafted entrees using fresh ingredients inspired by Mexican recipes. It is a growing business, and is currently in the Southwestern US for the most part. It has nearly 500 restaurants in Arizona, California, Nevada, Texas and Utah. On top of that, El Pollo Loco is expanding its presence in key markets. While there may be short-term headwinds, the company is delivering growth. However, we still think the stock is to be avoided.

This is evident by performance in Q4 2017. The fourth quarter displayed moderately strong top line growth, along with increasing comparable sales. Company-operated restaurant revenue in the fourth quarter of 2017 increased 3.3% to $89.3 million, compared to $86.5 million in the same period last year. The growth in company-operated restaurant revenue was largely driven by the 24 new restaurants opened during and subsequent to the fourth quarter of 2016, partially offset by 5 restaurant closures during the same time period.

We mentioned comp growth. Well, comparable company-operated restaurant sales in the fourth quarter increased 0.9%, driven by a 1.9% increase in average check, partially offset by a 1.0% decrease in transactions.

There was some weakness in franchises, mostly due to fee issues. Franchise revenue in the fourth quarter of 2017 decreased 1.5% to $5.9 million, compared to $6.0 million in the fourth quarter of 2016. The decline in franchise revenue was largely driven by a decline in franchise and development agreement fees. This was partially offset by the contribution from the 14 new restaurants opened during and subsequent to the fourth quarter of 2016, partially offset by two restaurant closures during the same period, and a 1.9% increase in franchised comparable restaurant sales during the quarter.