El Pollo Loco Holdings, Inc.’s LOCO shares have performed poorly in the past three months, underperforming the S&P 500 and the industry. In the same time frame, LOCO has lost 11.2% against the industry and the S&P 500’s 4.5% and 5.2% growth, respectively.
As of Thursday, the stock closed at $12.09, below its 52-week high of $14.25 but above its 52-week low of $8.17. It has also underperformed other industry players like Chipotle Mexican Grill, Inc.'s CMG 11.5% rise, Restaurant Brands International Inc.'s QSR 0.8% dip and Brinker International, Inc.'s EAT 73.9% surge in the past three months.
Price Performance
Image Source: Zacks Investment Research
The company’s recent stock price decrease can be attributed to dismal customer traffic. Economic challenges, especially in California and markets like Las Vegas, are dampening customer spending and increasing price sensitivity. Intense competition from QSR, offering aggressive value deals, has pressured El Pollo Loco to introduce lower price points, such as $5 promotions, potentially impacting margins.
Factors Favoring LOCO
The company is benefiting from an increase in system-wide comparable restaurant sales. In the fiscal third quarter, LOCO reported a 2.7% increase in system-wide comparable restaurant sales, attributed to new menu offerings and targeted promotions.
El Pollo Loco has been taking a strategic approach to its cost-saving measures, ensuring that food quality and customer experience are enhanced throughout the process. The company made strategic hires, including a new chief development officer, to streamline operations and reduce unit build costs. These efforts are expected to improve franchise growth and financial performance in the coming years. A new prototype design is expected to reduce the unit build cost to $1.8 million, which will further fuel franchise growth in 2025.
These savings are expected to help balance the investments being made. With the progress achieved so far and a clear plan for the year ahead, the company is optimistic about reaching 18% restaurant contribution margins by 2025. This is strengthening its confidence in sustainably achieving 18-20% margins in the future.
The company is also benefiting from the introduction of items like double-chopped salads, fire-grilled burritos and Taco-Tuesday promotions helped to attract customers and improve the sales mix. El Pollo Loco's 2025 plans emphasize a blend of innovation and value while leveraging the company’s core strength—its reputation for offering the best chicken. The company recognizes that achieving long-term success requires a focus on improving customer traffic trends and expresses confidence in its strategic approach to achieving this goal in the coming years.
Looking ahead to 2025, El Pollo Loco aims to accelerate its restaurant development efforts with plans to open at least 10 new locations. The company intends to capitalize on its adaptable restaurant formats, including freestanding units, drive-thrus, NCAPs and non-traditional sites, to drive unit growth. El Pollo Loco is optimistic about resuming its expansion trajectory and anticipates sharing further updates in the near future.
Estimate Revision Favoring LOCO Stock
Indicating the positive sentiment around LOCO, the Zacks Consensus Estimate for earnings per share has seen upward revisions. In the past 30 days, analysts have raised their estimates for the current and the next fiscal years by 3.8% to 83 cents and 4.5% to 93 cents per share, respectively.
LOCO Trading at a Discount
The company is currently valued at a discount compared with the industry on a forward 12-month P/E basis. LOCO’s forward 12-month price-to-earnings ratio is 13.11, significantly lower than the industry’s ratio of 25.83 and the S&P 500's ratio of 22.28.
P/E (F12M)
Image Source: Zacks Investment Research
Conclusion
El Pollo Loco’s recent stock underperformance offers an attractive entry point for investors seeking value. Despite short-term challenges like declining customer traffic and competitive pressures, the company has been implementing initiatives to drive long-term growth. It has achieved comparable sales growth through menu innovation and targeted promotions while maintaining a strong focus on operational efficiency and cost savings. The introduction of a restaurant prototype and plans for expansion highlights its growth potential, supported by efforts to enhance franchisee alignment and reduce unit build costs. Furthermore, the company is trading at a significant valuation discount compared with its peers, making LOCO an appealing option for value-focused investors looking for a rebound opportunity. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Research Chief Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
This company targets millennial and Gen Z audiences, generating nearly $1 billion in revenue last quarter alone. A recent pullback makes now an ideal time to jump aboard. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
Free: See Our Top Stock And 4 Runners UpChipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
Brinker International, Inc. (EAT) : Free Stock Analysis Report
El Pollo Loco Holdings, Inc. (LOCO) : Free Stock Analysis Report
Restaurant Brands International Inc. (QSR) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
