Costa Mesa-based grilled chicken chain El Pollo Loco continued to ride a wave of momentum that carried it from an eye-popping initial public offering in July to a master franchisee deal in August and a solid first quarterly report this month.
The developments have caused another ripple for the chain and its parent, El Pollo Loco Holdings Inc., which now has prospective franchisees lining up to talk about possibilities to carry the chain into new markets.
Chief Executive Steve Sather said franchising inquiries increased after El Pollo Loco signed a master franchise deal with Fremont-based AA Pollo Inc. involving 26 restaurants. The agreement calls for the addition of 20 restaurants in Houston and San Antonio.
Houston is expected to get its first in October, with one or two more locations expected there by the end of the year and nine or 10 more in the future. AA Pollo bought six existing restaurants in San Antonio and signed on to open eight more there.
Sather said the company—which had systemwide sales of $657.6 million from more than 400 restaurants last year—is now in talks with “three solid” operators looking to open restaurants in new markets in the Southwest U.S., where the chain wants to focus its efforts.
And expansion plans among existing franchisees have picked up in the wake of the deal in Texas, according to Sather.
IPO
El Pollo’s run-up started with its July 25 initial public offering, which was priced at $15. Shares were trading above $41 within a week and have held at around $35 since then, good for a market capitalization of about $1.3 billion as of Sept. 5.
The chain gave its first quarterly report last week, with net income of $6.6 million for the June quarter, compared with $440,000 a year earlier.
The chain posted a 6.3% gain in sales for the period to $86.9 million.
Same-store sales increased 5.4% quarter-to-quarter, while its average check grew 2.8% and traffic increased 2.2%.
Costs are down for the chain, which refinanced its debt in October to lower interest payments on nearly $300 million in debt. The payments came to $36 million a year at the time.
The chain trimmed costs more when it used most of its IPO proceeds of $112 million to further pay down debt.
Chief Financial Officer Larry Roberts said in the conference call for last week’s earnings report that the company owes about $189 million.
Annual interest payments are expected to be about $12 million.
Sather has said the lower interest payments will help provide cash flow to fund the company’s growth going forward. It plans to open 13 to 15 locations for all of 2014, with an emphasis on Southwestern states besides California, which is home to about 85% of its restaurants now.
El Pollo Loco has identified 325 potential locations, with priority for markets in Texas, Nevada, Arizona and Utah.
Experienced Operator
The Houston master franchisee AA Pollo Inc. is owned by Anil Yadav, who owns and operates 262 Jack in the Box, Sizzler, and Denny’s restaurants in California and Texas through a Fremont-based company called JIB Management.
More than 80% of its restaurants are Jack in the Box locations.
Yadav’s deal with El Pollo Loco comes as other restaurant companies—including the parent of Irvine-based the Habit Burger Grill, according to the Wall Street Journal—have said they might go public.
New York-based Shake Shack is mulling a $1 billion IPO at valuations comparable to El Pollo Loco’s current valuation, according to Bloomberg.
About 80% of El Pollo Loco is owned by Trimaran Pollo Partners LLC, a partnership of private equity firms Trimaran Capital Partners in New York and Los Angeles-based Freeman Spogli & Co.
