El Pollo Loco (LOCO) is the nation’s leading fast food fire-grilled chicken restaurant chain. This of course translates to “the crazy chicken.” We love the name, but the stock, not so much. It features southwestern style recipes, which often incorporated citrus-marinated, fire-grilled chicken and handcrafted entrees using fresh ingredients inspired by Mexican recipes. It is a growing business, and is currently in the Southwestern US for the most part. It has nearly 500 restaurants in Arizona, California, Nevada, Texas and Utah. On top of that, El Pollo Loco is expanding its presence in key markets. While there may be short-term headwinds, the company is delivering growth. However, we still think the stock is to be avoided. This is evident by performance in Q4 2017. The fourth quarter displayed moderately strong top line growth, along with increasing comparable sales. Company-operated restaurant revenue in the fourth quarter of 2017 increased 3.3% to $89.3 million, compared to $86.5 million in the same period last year. The growth in company-operated restaurant revenue was largely driven by the 24 new restaurants opened during and subsequent to the fourth quarter of 2016, partially offset by 5 restaurant closures during the same time period. We mentioned comp growth. Well, comparable company-operated restaurant sales in the fourth quarter increased 0.9%, driven by a 1.9% increase in average check, partially offset by a 1.0% decrease in transactions.
There was some weakness in franchises, mostly due to fee issues. Franchise revenue in the fourth quarter of 2017 decreased 1.5% to $5.9 million, compared to $6.0 million in the fourth quarter of 2016. The decline in franchise revenue was largely driven by a decline in franchise and development agreement fees. This was partially offset by the contribution from the 14 new restaurants opened during and subsequent to the fourth quarter of 2016, partially offset by two restaurant closures during the same period, and a 1.9% increase in franchised comparable restaurant sales during the quarter.
Expenses were up marginally in the quarter, but the company did see a $16.4 million expense related to the impairment of the assets of 11 restaurants in Texas and one in Arizona. This less to a net loss for the fourth quarter of 2017. The company lost $0.038 million. This compares to net income of $0.4 million, or $0.01 per diluted share in the fourth quarter of 2016. Pro forma net income was $4.4 million, or $0.11 per diluted share during the fourth quarter of 2017, compared to $4.6 million, or $0.12 per diluted share during the fourth quarter of 2016. This was a beat against estimates.
Looking ahead, there are some headwinds but we expect a few key strengths in 2018. On another note, short interest has been on the rise in the last quarter. ~13.5% of the float is currently short, up ~600 bps from Q3. The short interest is not particularly large in our opinion, yet the increase was noticeable. When comparing the company to its peers, it currently trades on the high side at 38 times trailing earnings, with the sector average in the mid-20 range. Industry average net margin is ~8.6%, more than double LOCO’s current net margin of ~3%.
But are better days ahead? We expect 2018 pro forma diluted net income per share ranging from $0.66 to $0.72. This compares to pro forma diluted net income per share of $0.63 in 2017. So, we expect some growth on the back of low single digit comp sales growth, and mostly on the back of the opening of 6-8 new company-owned restaurants and 6-8 new franchised restaurants. We expect flat margins relative to 2017 but a slightly better tax rate. All things considered we are avoiding the name here.
Note: This article originally appeared on our partner site TalkMarkets
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