LOCO - El Pollo Loco: Fairly Valued But Watch Its Expansion Strategy Closely

2024-04-30 13:25:27 ET

Summary

• Pollo Loco is a restaurant chain with 495 restaurants, including company-owned and franchised locations.
• The company is strategically shifting its focus from company-owned restaurants to franchises, selling off some of its least profitable assets.
• Pollo Loco's value proposition is centered around healthy and authentic Mexican cuisine, offering customizable and non-occasional meals to cater to customer preferences.

Corporate panorama

El Pollo Loco ( LOCO ) is a restaurant chain that has been operating in the fast-casual segment for 43 years. Currently, the company has 495 restaurants, which are subdivided between own restaurants and franchises.

Currently, there are 172 company-owned restaurants (about 34.75% of units in terms of quantity), which generate about 85% of all company revenue (approximately $398 million) and 323 franchised restaurants (about 65.25% in terms of quantity), which generate approximately 8.7% of revenue directly in the form of royalties and profit sharing (around $41 million). The advertising fees that Pollo charges from franchises represent 6.3% of its revenue.

The company is going throu gh a process of divestment of its least profitable assets. It is interesting to put it in perspective with other companies in the industry that strategically buy franchise restaurants. Since 2021, Pollo has reduced the number of its own restaurants that it operates directly by around 9%, on the other hand, in the same period the number of franchises has grown by 11% (either from the 19 owned units sold to the franchise model or the 14 units opened under this business model).

Speaking now in marketing terms, Pollo has a value proposition crafted into a healthy and differentiated option in the LSR segment, always valuing aspects originating from Mexican cuisine with the Los Angeles lifestyle and the culinary habits of the Southwest....

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