El Pollo Loco’s Q1 Results Highlight Growth Strains Amid Margin Pressure

El Pollo Loco (NASDAQ: LOCO) delivered mixed results in its first quarter of 2025, with revenue narrowly exceeding estimates but profitability lagging as labor costs and transaction declines underscored operational challenges. While the company’s non-GAAP earnings per share of $0.19 matched consensus expectations, the broader picture reveals a balancing act between price-driven revenue growth and the risks of over-reliance on cost increases in a weakening consumer environment.

Revenue Growth, But at a Cost

Total revenue rose 2.6% year-over-year to $119.2 million, beating estimates by $1 million. This growth was largely fueled by a 4.6% increase in average check size at company-operated locations—a direct result of menu price hikes. However, this strategy came at the expense of customer volume: company-operated restaurant transactions fell by 3.8%, reflecting heightened price sensitivity.

The franchise segment provided a brighter spot, with revenue surging 16.2% to $13.2 million, driven by new POS systems and four new franchised units. Yet system-wide comparable sales dipped 0.6%, with franchised locations struggling even more (-1.3% comparable sales) compared to company-operated stores (+0.6%). This divergence suggests uneven execution across the franchise network.

Margin Compression Signals Structural Challenges

Profitability took a hit as labor costs surged. The restaurant contribution margin—the key gauge of store-level profitability—dropped to 16.0% of company-operated revenue, down from 17.6% in 2024. This was primarily due to California’s April 2024 minimum wage hike to $20 per hour, which pushed labor expenses as a percentage of restaurant revenue to 32.7%, up from 31.5%. Despite improvements in food and paper costs (25.2% of revenue vs. 26.4%), the overall margin squeeze dragged down adjusted EBITDA by 11.3% to $13.9 million.

The company’s debt load also rose to $73.0 million, up from $71.0 million at the end of 2024, while cash reserves dipped to $4.3 million. Share repurchases, totaling $1.8 million in Q1, were discontinued, leaving less than $0.1 million unused in the program. This signals a shift toward preserving liquidity amid margin pressures.

Strategic Shifts and Risks Ahead

CEO Liz Williams acknowledged the quarter “fell short of expectations,” citing both the California wage increase and a broader consumer slowdown. The company’s response includes accelerating franchising, with plans to open 10–11 new units in 2025 (mostly franchised), and rolling out menu innovations like the Mango Habanero to boost trial and engagement.

Yet risks remain. Over 80% of El Pollo Loco’s 495 restaurants are concentrated in California, Texas, and other U.S. Sun Belt states, making it vulnerable to regional economic shifts and regulatory pressures like minimum wage hikes. Capital expenditures of $30–34 million in 2025—nearly half the company’s annual revenue—highlight the high fixed costs required to sustain even modest expansion.

Conclusion: A Delicate Balance

El Pollo Loco’s Q1 results reveal a company caught between growth and cost control. While franchising and price increases are driving top-line gains, rising labor costs and declining traffic are eroding profitability. The company’s decision to prioritize franchising—where it retains lower financial risk—suggests a cautious approach to expansion.

However, the path to sustained growth hinges on two key factors:
1. Customer Retention: Can menu innovations like the Mango Habanero offset the impact of price hikes on transaction volumes?
2. Cost Management: Will labor costs stabilize, or will further wage pressures (California’s next minimum wage increase to $24 by 2027 is already on the horizon) intensify margin headwinds?

Investors should monitor Q2 results for signs of stabilization in comparable sales and margin recovery. Until then, El Pollo Loco’s story remains one of resilience in a tough environment, but its ability to turn around profitability will determine whether its stock, currently valued at around $30 (down 15% year-to-date), can regain momentum. For now, the company’s cautious capital allocation and focus on franchising suggest a wait-and-see strategy is prudent.