El Pollo Loco Holdings Inc. will target focused growth in markets similar to where it’s already strong with its well-received public offering under its belt.
The Costa Mesa-based restaurant operator went public July 25 priced at $15, which valued it at $531 million.
It closed up 60% the first day and the following trading day popped another 43% to a market capitalization of $990 million.
It was a crazy couple of days for the company, whose ticker symbol is “LOCO.”
But Chief Executive Steve Sather said growth will be measured.
“It’s not national [growth],” he said. “We will stick with our five-year plan.”
That means El Pollo Loco will focus first on the Southwest, he said.
The company has identified 64 areas in five Southern California counties, including Orange County, that might be right for a site, part of 325 in the rest of the Southwest U.S.
“We do very well in Hispanic neighborhoods,” Sather said.
He said El Pollo Loco looks for at least 25,000 residents in a 2-mile radius of a potential restaurant site. Its first new market is Houston.
It has 401 restaurants today and systemwide sales of $657 million. El Pollo Loco has eight units in other parts of Texas and is also in Nevada, Arizona and Utah.
The more methodical approach contrasts with a previous planned IPO and national expansion—each of which fizzled eight years ago.
El Pollo Loco shelved its 2006 IPO and scaled back the expansion.
“They tried to aggressively expand across the country, but it was difficult to build the awareness and get the franchising straight,” said Darren Tristano, executive vice president at Chicago-based food industry researcher Technomic Inc.
Owners Trimaran Capital Partners LLC in New York City and Freeman Spogli & Co. in Los Angeles instead set about righting the company, which had taken on debt.
El Pollo Loco owed nearly $290 million by the time of last month’s IPO, according to its Securities and Exchange Commission filings.
Last October, the company refinanced its debt, shaving half of its $36 million a year in interest but incurring a one-time charge of $21 million for the early repayment.
Sather said the company would use IPO proceeds—$112.8 million at $15 a share—to pay down debt and cut interest to $10 million a year.
“Then we’ll take that cash flow and fund our growth,” he said.
Tristano said the company’s caution today gives it time to build on the strength of its core customer and look beyond California—home to 85% of its units.
It opened seven sites last year and plans eight to 10 new restaurants this year, including at least one in Houston.
“Not Chipotle”
The heady results of its IPO and its strength in Hispanic markets brought comparisons to Denver-based Chipotle Mexican Grill.
Chipotle stock doubled early after its IPO in 2006 and has since risen from about $46 to a recent price of $676 and a market capitalization of $21 billion.
“We are not Chipotle,” Sather said when El Pollo Loco went public.
He said Chipotle is firmly a “fast-casual” entrant and El Pollo Loco is a “quick-service restaurant,” or as Sather put it, “QSR-plus.”
“It’s the quality of fast-casual with the speed, convenience and value of QSR,” he said.
Tristano said QSRs have drive-thru windows and less-sophisticated decor. Fast-casual restaurants also often serve alcohol, while QSRs attract a lot of families.
“Consumers wouldn’t consider the two chains competitors,” Tristano said.
One financial difference: lower check averages. A fast-casual average is about $9, and El Pollo Loco is below that, he said.
Reports put the average check at about $6, up 2.7% in 2013, according to the company’s SEC filings.
Revenues increased at company-operated and franchised stores in 2012 and 2013, the company said.
It said annual unit volumes for an El Pollo Loco were $1.8 million in 2013, up from $1.5 million in 2011.
Comparable sales have grown for the past 11 quarters, and margins have also increased, according to the filings.
It had net income of $5.5 million in its most recent quarter, ending March 26, compared to a net loss of $60,000 in the same period last year and losses in each of the past three fiscal years.
According to its filings, the losses were due mainly to the higher interest expenses.
Trimaran and Freeman Spogli own nearly 80% of El Pollo Loco Holdings after the IPO under their partnership, Trimaran Pollo Partners LLC.
Sather beneficially owns 3.6%, the filings said.
On Aug. 1, El Pollo Loco traded near a market cap of $1.5 billion.
