IPO Preview: El Pollo Loco Holdings

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 |  About: El Pollo Loco Holdings (LOCO)
by: IPOdesktop

Summary

Differentiated restaurant concept that specializes in fire-grilling citrus-marinated chicken in front of its customers.

System-wide same-store sales increased 7.2% in Q1 '14 vs Q1 '13.

Over the long term, LOCO plans to grow the number of El Pollo Loco restaurants by 8% to 10% annually.

Based in Costa Mesa, CA, El Pollo Loco Holdings (Pending:LOCO) scheduled a $100 million IPO on the Nasdaq with a market capitalization of $502 million at a price range midpoint of $14 for Friday, July 25, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents

Manager, Co-Managers: Jefferies, Morgan Stanley, Baird

Joint Managers: Blair, Stifel

End of lockup (180 days): Tuesday, January 20, 2015

End of 25-day quiet period: Tuesday, September 2, 2014

Summary

El Pollo Loco is a differentiated restaurant concept that specializes in fire-grilling citrus-marinated chicken in front of its customers. LOCO has both company-owned and franchised stores.

System-wide same-store sales increased 7.2% in Q1 '14 vs Q1 '13.

LOCO has 400 stores and believes the long-term potential is 2300 locations in the US.

Over the long term, LOCO plans to grow the number of El Pollo Loco restaurants by 8% to 10% annually.

LOCO is the product of a leveraged buyout by private equity firms and is highly leveraged.

Valuation

Glossary

Valuation Ratios

Mrkt Cap ($mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

Annualizing Q1 '14 pro forma

El Pollo Loco Holdings

$504

1.5

15.5

3.6

-2.9

20%

Click to enlarge

Conclusion

Buy because of
. recent same store sales increases,
. pro forma annualized P/E multiple of 15.5, and
. 8-10% annual expected growth in store locations.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken in front of its customers.

LOCO operates within the fastest growing segment of the restaurant industry, the limited service restaurants ("LSRs") segment.

Growth plan
LOCO believes it is in the early stages of our growth story with 401 current locations in five states, as of March 26, 2014, and estimate, based on internal analysis and a study prepared by Buxton Co., a long-term total restaurant potential in the United States of approximately 2,300 locations.

For the year ended December 25, 2013, LOCO opened two new company-operated and five new franchised restaurants, and in 2014 LOCO intends to open eight to 10 new company-operated and four to six new franchise restaurants across California, Nevada and Texas.

Over the long term, LOCO plans to grow the number of El Pollo Loco restaurants by 8% to 10% annually.

LOCO quality & menus

LOCO believes it offers the quality of food typical of fast casual restaurants while providing the speed, convenience and value typical of traditional QSRs, a combination which LOCO calls "QSR+" and which provides a value-oriented fast casual dining experience.

LOCO's distinctive menu features its signature product-citrus-marinated fire-grilled chicken-and a variety of Mexican-inspired entrees that LOCO creates from its chicken.

Every day in every restaurant's kitchen LOCO marinates and fire-grills its chicken over open flames, hand-slice whole tomatoes, avocados, serrano peppers and cilantro to make its salsas, guacamole and cilantro dressings from scratch.

The open design of LOCO's kitchens reveals its Mexican-inspired cooking process and allows its customers to watch its Grill Masters and team members fire-grill and hand-cut its signature chicken, as well as make burritos, salads, tostadas, bowls, stuffed quesadillas and chicken entrees.

LOCO offers its customers healthier alternatives to traditional food on the go, served by its engaging team members in a colorful, bright and contemporary restaurant environment.

LOCO serves individual and family-sized chicken meals, a variety of Mexican-inspired entrees, sides, and, throughout the year, on a limited-time basis, alternative proteins like shrimp, carnitas and beef.

LOCO's entrees include favorites such as its Poblano Burrito, Under 500 Calorie Mango Grilled Tostada, Ultimate Pollo Bowl, Grand Baja Shrimp Tacos and Chicken, Bacon and Guacamole Stuffed Quesadilla.

LOCO's freshly-prepared salsas and dressings are prepared daily allowing its customers to create their favorite flavor profiles to enhance their culinary experience.

LOCO's distinctive menu with healthier alternatives appeals to consumers across a wide variety of socio-economic backgrounds and drives its balanced composition of sales throughout the day (LOCO's "day-part mix"), including at lunch and dinner.

El Pollo Loco is Spanish for "The Crazy Chicken." LOCO opened its first location on Alvarado Street in Los Angeles, California in 1980, and have grown its restaurant system to 401 restaurants, comprised of 168 company-operated and 233 franchised restaurants as of March 26, 2014.

LOCO's restaurants are located in California, Arizona, Nevada, Texas and Utah.

LOCO's typical restaurant is a free-standing building with drive-through service that ranges in size from 2,400 to 3,000 square feet with seating for approximately 70 people.

LOCO's restaurants generated company-operated restaurant revenue of $294.3 million and $76.2 million and system-wide sales of $657.6 million and $172.0 million, for the year ended December 25, 2013 and the thirteen weeks ended March 26, 2014, respectively.

Dividend Policy

No dividends are planned.

Intellectual Property

LOCO has registered El Pollo Loco®, Pollo Bowl®, The Crazy Chicken® and certain other names used by its restaurants as trademarks or service marks with the United States Patent and Trademark Office and El Pollo Loco® in approximately 42 foreign countries. LOCO's current brand campaign, Crazy You Can Taste™, has also been approved for registration with the United States Patent and Trademark Office.

In addition, the El Pollo Loco logo, website name and address and Facebook and Twitter accounts are LOCO's intellectual property.

LOCO's policy is to pursue and maintain registration of service marks and trademarks in those countries where business strategy requires it to do so and to oppose vigorously any infringement or dilution of the service marks or trademarks in such countries. LOCO maintains the recipe for its chicken marinade, as well as certain proprietary standards, specifications and operating procedures, as trade secrets or confidential proprietary information.

Competition

There are no significant direct competitors with respect to menus that feature marinated, fire-grilled chicken.

However, LOCO indirectly competes with fast casual restaurants, including Chipotle, Panera, Qdoba, Rubio's and Taco Cabana, among others, and with chicken-specialty QSRs and Mexican QSRs, such as Chick-fil-A, Church's Chicken, KFC, Popeyes Louisiana Kitchen and Taco Bell, among others.

5% stockholders (CHECK THIS)

Trimaran Pollo Partners, L.L.C. 99.5%

Investment funds affiliated with Trimaran Capital Partners 57.4%

Investment funds affiliated with Freeman Spogli & Co. 32.9%

Use of proceeds

LOCO intends to use the $90 million in proceeds from its IPO as follows:

to repay in whole or in part its existing Second Lien Term Loan Facility.

LOCO's $100 million Second Lien Term Loan Facility matures on April 11, 2019 and bears interest at an adjusted LIBOR or Alternate Base Rate plus an applicable margin.

The applicable margin rate is 8.50% with respect to adjusted LIBOR advances and 7.50% with respect to Alternate Base Rate advances.

Disclaimer: This LOCO IPO report is based on a reading and analysis of LOCO's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.