El Pollo Loco's Earnings: What Wall Street's Saying

NEW YORK (TheStreet) -- El Pollo Loco (LOCO) shares ticked higher on Friday after the fast-casual chain reported quarterly net profit that exceeded Wall Street estimates.

The company went public in late July, raising $113 million in net proceeds that it used to pay down debt and expand operations. With approximately 400 restaurants, El Pollo Loco has positioned itself as a rival to Chipotle (CMG) and a healthier play on Yum! Brands' (YUM) Taco Bell-and-KFC combination restaurants, El Pollo Loco has 400 stores split between company-owned stores and franchised locations. The chain is known for its fire-grilled chicken and Mexican-themed menu items. Shares have more than doubled since its IPO price of $15 a share.

El Pollo Loco's fiscal second-quarter net income of $6.6 million, or 21 cents a share beat analysts' consensus estimate by 5 cents. The chain reported profit of $410,000, or a penny per share, in the year-earlier quarter. Revenue for the June 25-ending quarter rose 6.3% to $86.9 million.

El Pollo Loco reported comparable restaurant sales gains of 5.4%, which included a 5% comp gains for company-owned restaurants and a 5.9% comp gain for its franchised restaurants. For 2014, the company forecast comparable restaurant sales growth between 5.5% and 6.0%.

Shares were up 1.2% to $35.16 on Friday. Here's what analysts were saying.

Andy Barish, Jefferies (Hold; $30 PT)

[El Pollo Loco] drove 5.4% SSS, slightly above our model, as the brand repositioning continues to resonate with guests and drive both traffic and check. We see continued growth via menu innovation (note success of non-chicken proteins with Carne Asada in 2Q), effective LTOs & advertising, the Hacienda remodels (+3% SSS lift), and an increased focus on digital engagement (can be very efficient). Heading into 3Q, management reported solid topline trends, and expects 3Q system SSS to be about 6.5-7.0% (vs. 3Q cons 5.3%). Note that price is expected to be ~1.75% in the 2H (took modest increase in July to help offset the CA min wage increase), but we think EPL still has good price flexibility should it need it (10-15%+ below Chipotle, especially after their recent price hike).

We like LOCO's visible SSS drivers & reaccelerating unit growth story, but the stock trades at a premium to most other QSR & fast casual companies, leaving little room for error. We've seen some momentum names move downward on seemingly temporary missteps, and find it difficult to recommend putting new money to work in EPL while it's still very much a "show-me" story on the new market penetration into Houston.

David Tarantino, Baird Equity Research (Neutral; $33 PT)

We remain confident in the fundamental outlook following solid Q2 results and healthy initial 2014 guidance for core operating metrics. While optimistic about the company's ongoing operating momentum and long-term growth prospects, we believe the near-term risk/reward on LOCO is balanced at current valuation levels, which appear to be factoring in many of the positives of the story and may not be fully discounting some of the risks typically associated with accelerating unit growth into new markets.

LOCO expressed optimism about the outlook for faster unit expansion. The company remains on track to enter Houston (first major new market entry) with 2-3 openings in Q4, and we see potential for franchised development to ramp up following the recent signing of a 20-unit deal in Texas.

Sharon Zackfia, William Blair (Outperform)

While we are essentially leaving our pretax estimates unchanged, we are modestly reducing our EPS estimates to reflect a higher tax rate assumption going forward (40.5% versus 38.0% previously). As a result, we are lowering our 2014 EPS estimate by $0.02, to $0.60 (or $0.52 using a pro forma fully diluted share count, which compares with consensus of $0.54), reflecting net income growth of 12%. For 2015, our EPS estimate is now $0.59 (versus $0.62 previously and consensus of $0.61), based on a 14% increase in net income.

We expect investors will be heartened by El Pollo Loco's accelerating comp trends into the third quarter. While El Pollo Loco's stock trades at a premium multiple of 24 times our 2015 EBITDA estimate, we believe the valuation can be justified by the company's leverage to ongoing secular trends in the restaurant industry that include 1) a rising appetite among consumers for healthier fare; 2) an increasing preference for fresh, hand-prepared, made-to-order menu items; and 3) the growing popularity of both chicken and Mexican cuisine in the United States. In addition, we are optimistic that ongoing menu innovation (such as the recent carne asada limited time offer) and upcoming easier comparisons could provide upside to estimates in the near term, with new unit maturation in new markets potentially adding an incremental comp tailwind to our estimates in future years (particularly 2016).

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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