El Pollo Loco reported its Q4 earnings just a few days before incoming CEO Liz Williams took her post this week. Interim CEO Maria Hollandsworth and CFO Ira Fils offered investors a glimpse at what’s to come under her leadership as the company looks to accelerate expansion with aspirations of becoming a stronger national player. 

First up is dedicating more resources toward the franchise business. El Pollo Loco is focused on improving its development capabilities, including helping franchisees with better site selection and lowering the cost of new builds. It is working toward value engineering its new restaurant investment with a target cost of $1.8 million to drive unit growth. 

Two corporate restaurants and three to five franchised restaurants are slated to open in 2024, a slight increase from the five restaurants that opened in 2023. Hollandsworth said the pipeline will grow this year as the company starts doubling down on franchise recruitment. El Pollo Loco ended 2023 with 495 stores systemwide, including 172 corporate stores and 323 franchised restaurants.

“Liz is actually very passionate about development, so you’re going to hear more about this in the next quarters to come,” she said during the company’s Q4 earnings call last week. “We know that if we get the economic model right with lower build costs, combined with higher sales volumes and store-level margins, the development flywheel will get going.” 

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The fast casual is zeroing in on consistency and operational improvements to drive profitability ahead of that growth push. To that end, it recently launched an updated operations manual and fresh training materials. It also implemented a semi-annual marination calibration and tested enhanced holding equipment to improve the execution of its signature fire-grilled chicken. 

Hollandsworth, who also serves as the brand’s COO, sees plenty of opportunities to continue driving consistency through simplification and labor efficiencies. She pointed to the ongoing rollout of self-order kiosks as one example. The company started experimenting with kiosks last year and recently expanded the pilot to include a handful of franchised units. With test stores seeing strong adoption from guests and a reduction in labor hours per day, the plan is to have them installed in all corporate restaurants by mid-2024. 

Another labor-saving initiative comes from the brand’s salsa offering. El Pollo Loco simplified its lineup last year when it introduced a new recipe and reduced its salsa count from two to one. Now, it’s gearing up to launch new salsa processing equipment. The new equipment is easier to use and easier to clean, so it’s expected to drive further labor and consistency gains. Other initiatives, like automated dishwashers, are in the works, too.

“We also know that labor alone is not enough to drive best-in-class margins … so we’re aggressively exploring all areas of the P&L, from COGS to R&M, utilities, and other controllable expenses,” Hollandsworth said. “We are leveraging third-party data and really scrutinizing all costs.” 

Those efforts are key to offsetting incremental labor costs from upcoming legislative changes in El Pollo Loco’s home state. The majority of the chain’s stores are located in California, where the minimum wage for fast food workers is set to increase to $20 per hour from the current $16 per hour in April. That’s expected to drive labor inflation as high as 12–14 percent this year, a significant uptick from the 3.6 percent labor inflation the company saw in Q4. 

Based on efficiencies already unlocked and ongoing efforts to enhance the operating model, Fils said a third to half of the impact of that wage hike will be offset by labor savings. The rest will be tackled through pricing actions. El Pollo Loco was carrying 6 percent of price in Q4 and is forecasting that figure to be in the mid-to-high-single digits throughout fiscal 2024. 

“We’ll adjust that as we manage the impact of the minimum wage increase and our labor savings,” Fils said. “Our whole goal is really to protect margins while balancing traffic because we’re cognizant of the impact pricing can have on traffic.” 

He repeated what’s become a common refrain from restaurant leaders lately, not just at El Pollo Loco, but across the quick-service landscape. Consumers, especially those with lower incomes, are under pressure and pulling back on spending. 

While prices were up 6 percent in Q4, the average check was down 0.4 percent. Fils said guests are managing their spending in a few ways. From a mix standpoint, they’re trading down and buying fewer items per order. The chain also is seeing a fall in family meals. An uptick in the lunch business, where guests already tend to spend less money per order, is weighing on the average check, too. 

El Pollo Loco has found some success with premium offerings that lean into its better-for-you positioning, which Hollandsworth said is a key differentiator for the brand. It launched a line of health-oriented Double Pollo Fit Bowls in December to strong results, with guests skewing female and higher income. 

The fast casual also launched a fresh menu board that makes it easier for customers to find new items. It’s been using that to spotlight recent additions, like the Fit Bowls and a chicken quesadilla stuffed with avocados, along with newer add-ons like queso blanco, crunchy tacos, and more Aguas Frescas flavors. While the menu board is receiving positive customer feedback for appearing “more modern and premium,” Hollandsworth said the priority going forward is “testing ways to offer more value” to meet the growing demand for budget-friendly options. 

The company posted Q4 revenue of $112.2 million, down 3.2 percent from $115.9 million in the same period a year ago. Company-operated restaurant revenue fell 5.7 percent to $94 million, mostly due to the refranchising of 18 stores to existing operators in prior quarters, along with a 0.2 percent dip in same-store sales. Franchise revenue increased 17 percent to $11 million driven by a 1.6 percent increase in comps, plus the five new openings in fiscal 2023 and the addition of those 18 refranchised restaurants. 

Food and paper costs as a percentage of sales fell 140 basis points year-over-year to 26.9 percent thanks to pricing actions. Higher menu prices couldn’t offset the impact of wage increases, though. Labor expenses as a percentage of sales increased 40 basis points year-over-year to 32.3 percent.