So what: The fast-casual chain known for its whole chickens grilled over an open flame has been facing concerns over slowing growth for much of the second half of this year. A poorly received fiscal Q2 2015 earnings report sent El Pollo Loco's stock tumbling more than 31% in August. To recap, the company lowered almost every metric for which it provides guidance in the quarterly report. Most notably, management decreased the organization's full-year systemwide comparable-store sales growth outlook to 3%, from a previous range of 3%-5%.
But management also dialed back 2015 forecasts for restaurant openings (from 27 to 24), restaurant contribution margin (lowered by 0.5%, to a new range of 21.2%-21.5%), and adjusted EBITDA (from a range of $66.5 million-$69.2 million to $65.0 million-$67.0 million).
These revisions have caused investors to sour on El Pollo Loco, despite its consistent quarterly net profit in the neighborhood of 7%-8% and a robust balance sheet. Investors in the fast-casual space are currently paying a premium for companies that can expand rapidly. And while this may be an affront to common sense, the herd appears to have little patience for a solidly profitable franchise with modest growth prospects.
In what seems to be a common practice when an earnings miss is accompanied by a deep stock slide, the company has a raft of shareholder lawsuits to deal with over its revised guidance. During September, absent other company news, these class action suits dominated the headlines, pushing the stock down another 17% for the month.
Now what: I've argued recently that El Pollo Loco suffers not from any glaring business defect, but from comparisons with the overoptimistic location expansion plans of its peers. Investors who are trying to find the next breakout company in the mold of Chipotle or Panera Bread are assigning perhaps unrealistic multiples to companies like Zoe's Kitchen and The Habit Restuarants, which have more ambitious store opening plans but not nearly the profit level of El Pollo Loco.
Investors with a bent for value situations may thus want to take a closer look at Loco. Despite a few analysts recently coming out in support of the franchise, the restaurant's stock price is nonetheless still sunk in a deep malaise -- down more than 40% since the beginning of the year.