Wall Street Is Loco for This Chicken Chain

www.elpolloloco.com
One of this year's hottest initial public offerings is a quick-service restaurant chain that prides itself on its grilled citrus-marinated chicken. El Pollo Loco (LOCO) has seen its stock more than double since it went public at $15 in July.

The California-based eatery had its first chance to impress investors with its first quarterly report as a public company on Thursday. It didn't disappoint.

Sales inched 6.3 percent higher to $86.9 million, fueled primarily by a 5.4 percent increase in system-wide comparable-restaurant sales. Adjusted earnings climbed 10 percent to $6.1 million -- or 16 cents a share. The results were in line with analyst targets of 16 cents a share in net income on $86.4 million in sales.

This isn't the kind of monster growth that investors associate with stocks that double within two months of storming out of the IPO gate, but El Pollo Loco now has the ammo to begin expanding its reach beyond the 401 locations open at the end of June. For investors, El Pollo Loco offers an opportunity to cash in on the fast-casual trend that's been faring better than traditional fast-food chains or casual-dining establishments.

Spreading Its Wings

Going public has its challenges. It forces companies to live up to Wall Street's quarterly expectations, and that can often get in the way of carrying out long-term growth plans. However, trading publicly gives a company the ability to tap equity markets to raise capital. It also helps validate brands, and that's a pretty big deal for a consumer-facing restaurant operator that relies on third-party franchisees to help build out its empire. A majority of its eateries -- 233 locations, or 58 percent -- are owned and operated by franchisees.

Expansion has been slow until now. El Pollo Loco had 347 locations when it originally tried but ultimately failed to go public in 2006. Growing your store count by 16 percent through eight years isn't very impressive.

El Pollo Loco had 398 restaurants open a year ago. It has added only one company-owned location and a pair of franchised outlets to get to 401 today. The pace should intensify at this point. El Pollo Loco's IPO proceeds went to pay down debt, but that still gives it more financial freedom than it had over the past year, when it saw its store tally expand by just three locations. It's hoping to open as many as 11 company-owned eateries this year, with franchisees opening another four.

As long as store-level sales continue to hold up -- and that's just what El Pollo Loco sees for the balance of 2014 -- it should hold up well.

Heating Things Up

El Pollo Loco's success comes at a time when other recent restaurant debutantes are taking a step back. Potbelly (PBPB) went public at $14 late last year, also more than doubling shortly after its IPO. A few disappointing quarters later, the sandwich baker is now trading in the pre-teens, below its original IPO price.

Noodles & Co. (NDLS) also was a hot plate special last year, trading north of $50 shortly after the pasta boiler's market debut. A few quarterly duds later and the stock is down to the high teens.

All three chains initially drummed up investor interest as fast-casual concepts. Eateries that offer diners the convenience of fast food but with quality commensurate with casual dining have scored well with hungry patrons and even hungrier investors. However, Potbelly and Noodles & Co. proved mortal. El Pollo Loco held up well in its first quarter since going public. It's encouraging to see it come through with strong comparable-restaurant sales during the same period that Potbelly and Noodles & Co. clocked in with negative comps. El Pollo Loco will need to keep it coming. If its less-fortunate fast-casual peers have proven anything, it's that the market can spit you out if you lose your flavor.

Motley Fool contributor Rick Munarriz and the Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. For info on promising dividend stocks, check out our free report.
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