Executive Summary / Key Takeaways

• El Pollo Loco (NASDAQ:LOCO) is undergoing a significant brand transformation, leveraging its 50-year heritage of fire-grilled, citrus-marinated chicken to modernize its image, enhance operations, and expand nationally.
• The company delivered strong Q3 2025 results, including positive system-wide traffic growth of 1.6% and a notable 160 basis point expansion in restaurant-level operating profit margins to 18.3%.
• Strategic menu innovation, a "digital-first" approach, and operational efficiencies are driving profitability, with digital business now accounting for 27% of system sales.
• LOCO is accelerating unit growth, aiming for at least 10 new restaurants in 2025 (the most since 2022) and nearly doubling that pace in 2026, with a strong focus on expansion outside California and utilizing cost-effective second-generation sites.
• Despite macroeconomic headwinds and California wage pressures, management projects full-year 2025 restaurant-level contribution margins of 17.5% to 17.75% and anticipates a long-term return to the 18% to 20% range.

A Heritage Rekindled: El Pollo Loco's Strategic Transformation

El Pollo Loco, founded in 1975, has built a 50-year legacy around its distinctive fire-grilled, citrus-marinated chicken, a core differentiator in the competitive quick-service restaurant (QSR) landscape. This unique cooking process, where chicken is prepared fresh daily over an open flame, underpins the brand's reputation for quality and flavor, setting it apart from traditional fast-food offerings. The company's journey, from its first U.S. restaurant in 1980 to its current footprint across seven states and licensed locations in the Philippines, has culminated in a comprehensive brand transformation initiated in 2024. This strategic overhaul aims to modernize the brand, streamline operations, and elevate the customer experience, positioning El Pollo Loco for national expansion.

The QSR industry currently faces a "choppy" macroeconomic environment, characterized by inflationary pressures, increased labor costs (particularly due to California's fast-food worker wage legislation), and a value-conscious consumer base stretched across all income groups. Despite these headwinds, El Pollo Loco is demonstrating resilience and outperforming peers in its core California market on both sales and transactions, indicating market share gains. The company's strategy is built on five pillars: "Brand That Wins," "Hospitality Mindset," "Digital First," "Winning Unit Economics," and "Drive Unit Growth Again with National Expansion".

Technological Edge and Operational Innovation

El Pollo Loco's technological advancements and operational innovations are central to its transformation and competitive positioning. The company's core differentiator, its fire-grilled chicken, is supported by ongoing efforts to enhance consistency and quality through supplier partnerships and optimized marination processes. This focus on the fundamental product ensures a superior customer experience, which is crucial in a crowded market.

Beyond its culinary core, El Pollo Loco is making significant strides in digital and operational technology. The "Digital First" pillar has seen remarkable progress, with the digital business, including kiosks, growing to 27% of system sales in Q3 2025, up from 20% in the prior year. Loyalty program engagement is robust, with transactions up 28% year-over-year and customer frequency increasing by 15%. The company has completed the rollout of kiosks in all company-owned restaurants, with approximately 50% of the entire system now equipped. These kiosks, along with refreshed app and web experiences, are designed to simplify ordering, customize meals, and drive check averages through add-ons. Third-party delivery sales also continue to grow, representing 15.1% of the business in Q3 2025, a 9% year-over-year increase, serving as a key guest acquisition tool.

Operationally, the "Hospitality Mindset" pillar is being reinforced through new tools and systems. The company now utilizes an industry-leading customer feedback system from Service Management Group (SMG), which, coupled with an AI tool, provides instant feedback and actionable insights for restaurant teams. This data-driven approach has already led to customer complaints reaching a three-year low and overall satisfaction scores rising. Investments in kitchen equipment, such as holding cabinets rolled out in Q4 2024, not only improve chicken quality but also enhance labor efficiency by allowing grills to be shut down earlier, saving approximately half an hour of labor per shift. These technological and operational improvements are directly contributing to El Pollo Loco's competitive moat by enhancing customer experience, driving efficiency, and supporting margin expansion.

Financial Performance and Strategic Momentum

El Pollo Loco's recent financial performance reflects the positive impact of its strategic initiatives. For the third quarter ended September 24, 2025, total revenue reached $121.52 million, up from $120.39 million in the prior-year period. Company-operated restaurant revenue, while slightly down 0.5% to $100.72 million for the quarter, showed a 0.9% increase year-to-date to $303.40 million. This year-to-date growth was driven by new restaurant openings and a 0.2% increase in company-operated comparable restaurant sales, which saw a 1.6% increase in average check size partially offset by a 1.3% decrease in transactions.

Franchise revenue demonstrated robust growth, increasing 13.5% to $12.86 million in Q3 2025 and 14.8% year-to-date to $39.42 million. This surge was primarily due to $0.9 million in franchisee IT pass-through revenue related to the new POS system rollout, five new franchise-operated restaurant openings, and royalty rate adjustments. Franchise traffic growth accelerated to 2.5% in Q3 2025, contributing to a positive system-wide traffic growth of 1.6%.

Profitability has been a key highlight. Restaurant contribution margin for Q3 2025 improved significantly to 18.3%, a 160 basis point increase from 16.7% in the prior-year period. This expansion was driven by a 40 basis point decrease in food and paper costs (to 24.7% of company-operated restaurant revenue) due to higher menu pricing and approximately 100 basis points of commodity deflation, and a 200 basis point decrease in labor and related expenses (to 30.4%) due to improved operating efficiencies and menu price increases. General and administrative expenses increased to $12.3 million in Q3 2025, partly due to increased stock compensation and legal fees related to shareholder activism. Net income for Q3 2025 was $7.36 million, or $0.25 per diluted share, up from $6.19 million, or $0.21 per diluted share, in the prior year.

Liquidity remains solid, with $10.87 million in cash and cash equivalents as of September 24, 2025. The company had $61 million in outstanding borrowings under its 2022 Revolver, with $78.7 million in borrowing availability. Subsequent to the quarter, an additional $6 million was paid down on the revolver, reducing outstanding debt to $55 million as of October 30, 2025. Management believes current liquidity sources are adequate for the next twelve months.

Competitive Landscape and Strategic Positioning

El Pollo Loco operates in the highly competitive QSR segment, facing direct competition from established players like Chipotle Mexican Grill (CMG), Yum Brands (YUM), Restaurant Brands International (QSR), and Jack in the Box (JACK). While CMG and YUM often exhibit higher profitability margins and stronger cash flow generation due to broader digital adoption and global franchising, El Pollo Loco differentiates itself through its unique fire-grilled chicken and Mexican-inspired flavors. This niche positioning allows it to attract health-conscious consumers and those seeking authentic, high-quality options, a segment where it has been recognized as a "Best Restaurant for Quick, Healthy Food".

El Pollo Loco's "winning unit economics" pillar is crucial in this environment. The new "Iconic" restaurant prototype aims to reduce build costs to under $2 million, with a bold goal of $1.8 million in some markets, significantly improving cash-on-cash returns. This is further bolstered by the strategic use of second-generation sites, which can be acquired and converted at substantially lower costs (around $1 million), yielding even higher returns. This flexible format allows El Pollo Loco to capitalize on restaurant closures in the industry, turning competitors' misfortunes into growth opportunities.

Compared to fast-casual competitors, El Pollo Loco's new Double Chicken Street Corn and Queso Crunch burrito bowls are strategically priced below comparable offerings, delivering superior value for a high-quality, hearty meal. Its quesadilla combo, priced at $9.99 with guacamole, offers a compelling value proposition against competitors who often charge extra for such additions. While competitors like QSR may lead in aggressive value pricing, El Pollo Loco aims to pair value with innovation rather than engaging in price wars that erode margins. The company's focus on operational consistency and customer service, benchmarked against industry leaders using SMG data, is designed to match its food quality, fostering lasting customer loyalty and driving transactions.

Outlook and Growth Trajectory

El Pollo Loco's outlook for 2025 and beyond is characterized by an accelerating growth trajectory. The company plans to open at least 10 new system-wide restaurants in 2025, marking the largest unit growth since 2022. The majority of these new openings will be outside California, targeting emerging markets like Arizona, Colorado, Idaho, New Mexico, Texas, and Washington. The opening of the 500th restaurant in Colorado Springs in October 2025, followed by another in El Paso, Texas, underscores this national expansion. New restaurants opened in 2024 and 2025 are averaging $2 million in annualized volumes, demonstrating the success of the new unit strategy.

Looking ahead to 2026, management is confident in nearly doubling the development pace, driven by strong franchise partnerships and robust demand for the brand in new markets. The company itself plans to invest capital to accelerate development in California, Las Vegas, Dallas, and Denver. The remodeling program is also a key component, with approximately 35 company-operated restaurants slated for updates in 2026, contributing to a goal of modernizing about half of the total system over four years. These remodels are yielding a positive mid-single-digit sales lift on average.

The menu innovation pipeline is robust for 2026, including new Double Pollo salads (Mexican Caesar, Bacon Ranch, Street Corn), flavor innovations for tostadas, bowls, and quesadillas, and the reintroduction of popular items like Mango Habanero and a new barbecue chicken. The company is also testing new portable options such as "Loco Tenders" with signature dipping sauces and a "fire-fried chicken sandwich" (grilled, not fried), aiming to expand into growing categories with differentiated twists. A comprehensive beverages platform is also planned to increase check averages and fulfill multiple daypart needs.

Management's guidance for full-year 2025 includes capital spending of $28 million to $30 million, G&A expenses of $47.5 million to $49.5 million (excluding one-time charges), and an estimated effective income tax rate of 29% to 29.25%. Commodity inflation is expected to be flat for the full year 2025, with wage inflation for company-owned locations projected between 3% and 3.5%. The restaurant-level contribution margin is expected to be between 17.5% and 17.75% for the full year 2025, with a long-term target of 18% to 20%.

Conclusion

El Pollo Loco is executing a compelling brand transformation, moving beyond its regional roots to pursue national expansion with a revitalized strategy. The company's commitment to its differentiated fire-grilled chicken, coupled with significant investments in digital technology, operational efficiency, and menu innovation, is yielding tangible financial results, including positive traffic growth and expanding restaurant-level margins. The strategic focus on winning unit economics through cost-effective new builds and conversions positions El Pollo Loco for accelerated unit growth, particularly in new markets.

While macroeconomic pressures and labor cost challenges persist, El Pollo Loco's proactive approach to value, innovation, and customer service demonstrates its ability to adapt and gain market share. The robust pipeline of new menu items and the ambitious development plans for 2026, supported by a strong and passionate team culture, underscore a positive long-term outlook. Investors should recognize El Pollo Loco's potential for sustained profitable growth, driven by its unique brand identity and a clear roadmap for operational and technological leadership in the evolving QSR landscape.