Image source: El Pollo Loco.

What happened

Shares of El Pollo Loco (NASDAQ:LOCO) slumped on Friday after the restaurant chain reported disappointing third-quarter results. The company missed analyst estimates across the board and cut its guidance for the full year, sending the stock down about 10.5% by noon EDT.

So what

El Pollo Loco reported third-quarter revenue of $95.8 million, up 7.8% year over year but about $1.4 million below the average analyst estimates. Systemwide comparable sales rose by 1.6%, with company-operated restaurants registering slower 1.4% comparable sales growth. Transactions were flat at company-operated restaurants, with the increase solely driven by average check growth.

Non-GAAP EPS came in at $0.18, flat year over year and $0.01 short of analyst expectations. GAAP EPS was $0.13, up from $0.12 in the prior-year period. El Pollo Loco's restaurant contribution margin was 20.9%, down from 21.2% during the third quarter of 2015. The company pointed to increased labor and occupancy expenses and higher new restaurant costs as the main drivers behind the decline.

"We continue to focus on the four pillars of our brand -- great food, excellent service, a warm and inviting atmosphere, and a good price," said El Pollo Loco CEO Steve Sather. "This focus continues to strengthen our core business and has enabled us to achieve our 21st consecutive quarter of system wide comparable restaurant sales growth."

Now what

El Pollo Loco now expects to produce systemwide comparable-restaurant sales growth of 1% during 2016, a deterioration from its previous guidance calling for growth in the low single digits. The company also lowered its guidance for restaurant contribution margin. El Pollo Loco now expects a full-year restaurant contribution margin between 20.6% and 20.8%, down from a previous range of 20.8% to 21.2%.

Investors are no doubt concerned about El Pollo Loco's ability to drive customers to its restaurants, given the company's weak results and guidance. It is still growing its store count, but with transactions flat at company restaurants, the market's reaction to El Pollo Loco's weak report seems justified.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.