Is El Pollo Loco the Next KFC?

It may actually be a bigger hit than KFC.

Jul 10, 2014 at 6:00PM

El Pollo Loco Headquarters.  Source:  Wikimedia Commons.

The title of this article may sound a bit odd considering Yum! Brands' (NYSE:YUM) KFC at least at one point in time meant Kentucky Fried Chicken, while El Pollo Loco is known for its fire-grilled chicken. Sure, KFC has some grilled chicken too, though its quality is debatable. 

With its IPO coming this year -- it will trade under the symbol LOCO -- El Pollo Loco is the latest chicken chain to the public scene, and it holds much long-term promise.

Healthy yet flavorful
First, we all know there is a trend toward healthier food. Whether it's accurate or not, many people believe that Yum! Brands changed the name of Kentucky Fried Chicken to KFC to shy away from the negative connotation of the word "fried." Meanwhile, El Pollo Loco bills itself as catering to people looking for "healthier alternatives to traditional food on the go." It sounds like a bit of a dig at Yum! Brands and others that are known for fried food.

Of course, it's not that we're a nation of health freaks who won't eat artery-clogging unhealthy food anymore -- far from it. But if we can find something healthy without sacrificing flavor as Chipotle Mexican Grill seems to have figured it out, many of us will make the switch. Meanwhile, chicken purveyor Popeyes Louisiana Kitchen (NASDAQ:PLKI) has figured out that if you just make the food absolutely irresistible, then health-consciousness gets thrown out the window.

El Pollo Loco restaurant in Los Angeles. Source: Wikimedia Commons.

It's all about sales
In El Pollo Loco's prospectus, it states: "We expect that the trend toward healthier eating will attract and increase consumer demand for fresh and hand-prepared dishes, leading to a positive impact on our sales."

To back this up, El Pollo Loco shows that the first quarter of this year marked the 11th straight quarter of positive same-store sales, with a whopping 7.2% year over year agains..

This was on top of an 8.5% gain the year before and a 9.5% increase the year before that. For those of you playing along at home, that's a 27.4% same-store sales gain over three years. Something is up.

For Popeyes Louisiana Kitchen, which is very similar to Yum! Brands' KFC, same-store sales popped 4.3% last quarter on top of a 4.5% gain the year before. Not bad, Popeyes. Certainly better than what Yum! Brands reported for its non-China KFC division: just a 1% gain.

El Pollo Loco in Hacienda Heights, California.

Don't even think it
I know what you might be thinking: KFC sales are so huge that it's hard to establish bigger percentage gains, right? Wrong. On a per-restaurant basis, El Pollo Loco already does around double the sales of KFC, while Popeyes does something well north of 30% higher so KFC is the smaller guy on a per-unit basis and in theory would have an easier time showing bigger same store sales growth percentages. However, Yum! Brands probably just has too many KFCs and has already saturated the market in the U.S. so it's harder to grow sales. But this Fool thinks it may have something to do with higher quality and higher per-unit popularity at each El Pollo Loco and each Popeyes.

In terms of chain size domestically, Popeyes has over 1,600, and El Pollo Loco has just 400. Popeyes is the more direct threat to KFC, but if El Pollo Loco has its way with the more healthy yet still flavorful alternative, that could change. Yum! Brands has around 4,500 KFCs domestically, yet little El Pollo Loco already has around 20% of its sales levels and climbing despite 90% of its locations being in one state (California).

Foolish final thoughts
Some commentators will point out that El Pollo Loco hasn't booked a full year of net income yet, at least in the last three years. However, if you take a closer look at the financial info, El Pollo Loco has a large and quickly growing operating profit. This profit was hidden by a one-time temporary charge related to a debt refinancing  and large interest expenses on debt last year. The company plans to use the proceeds from the IPO to pay down debt. In turn, this will slash the interest expense, and you should see a dramatic and sustainable rise in the resulting net income.

With such a small concentration of restaurants having such relatively large sales yet still growing much faster than competitors Yum! Brands and Popeyes Louisiana Kitchen, El Pollo Loco is a company that all Fools who follow restaurant stocks should have on their radar. If El Pollo Loco is currently a baby KFC that long-term grows up to be a large KFC, or even a large anti-KFC, it could end up being a handsome investment, depending on what price tag the market assigns it in the short run.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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