El Pollo Loco Holdings, Inc. (LOCO) Q3 2025 Earnings Call Transcript

El Pollo Loco Holdings (LOCO) reported Q3 2025 adjusted EPS of $0.27, up from $0.21 year-over-year, driven by a 160 basis point expansion in restaurant contribution margin to 18.3% due to commodity deflation and labor efficiencies. Despite a 1.1% decline in company-operated comparable sales, the company achieved 1.6% system-wide traffic growth and saw digital sales reach 27% of system sales, fueled by strategic menu innovation and value offerings. LOCO is accelerating unit expansion, opening its 500th restaurant and projecting at least 10 new units in 2025 with a robust 2026 pipeline, while successful remodels yield mid-single-digit sales lifts. Management noted positive sales momentum into Q4, with system-wide comparable sales up 2.2% through October 22, indicating market share gains in a challenging environment.

Analysis

El Pollo Loco Holdings (LOCO) reported a robust Q3 2025, with adjusted EPS increasing to $0.27 from $0.21 year-over-year, driven by a significant 160 basis point expansion in restaurant contribution margin to 18.3%. This margin improvement was primarily attributed to 100 basis points of commodity deflation and enhanced labor efficiencies, despite a 1.1% decline in company-operated comparable restaurant sales. The company successfully drove system-wide traffic growth of 1.6% through strategic menu innovation, such as the $9.99 quesadilla combos, and targeted value offerings.

Digital sales demonstrated strong momentum, reaching 27% of system sales, up from 20% in the prior year, supported by a 28% increase in loyalty transactions and a 15% rise in customer frequency. LOCO is also accelerating its unit expansion, celebrating its 500th restaurant opening and projecting at least 10 new units in 2025, marking the largest system-wide growth since 2022. New restaurants are performing strongly, averaging $2 million in annualized sales, with approximately half utilizing cost-effective second-generation sites.

Management expressed optimism for Q4, noting a 2.2% increase in system-wide comparable sales through October 22, comprising a 1.5% rise in company-operated and a 2.5% rise in franchise restaurants. This positive sales momentum, coupled with outperformance against peers in the California market, suggests market share gains in a challenging consumer environment. The company anticipates further labor and COGS efficiencies in 2026, aiming for a long-term restaurant contribution margin of 18%-20%.

Key Decisions for Investors

• Monitor Q4 sales and margin trends closely, as the company anticipates lower Q4 RCM due to seasonal sales volumes, despite positive early Q4 comparable sales.
• Evaluate the impact of accelerated unit growth and remodel programs on future revenue and profitability, given the strong initial performance of new units and mid-single-digit sales lifts from remodels.
• Assess the sustainability of market share gains and digital channel growth, as these are key drivers offsetting broader industry challenges and declining average check sizes.
• Watch for further details on 2026 menu innovations and cost efficiency initiatives, which are expected to drive long-term margin expansion towards the 18%-20% target.