Why El Pollo Loco Holdings Stock Dropped Today

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What happened

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Shares of El Pollo Loco Holdings (NASDAQ: LOCO) were looking overcooked today, as the fast-casual chicken chain sold off following its third-quarter earnings report. Shares closed down 12.9% as the company missed estimates on the top and bottom lines, and cut its guidance for the fiscal year.

So what

Comparable sales in the period ticked up 0.9%, as overall revenue increased 5.6%, to $101.2 million, missing estimates at $103.7 million. Revenue would've been $0.5 million higher without the impact of Hurricane Harvey. On the bottom line, adjusted earnings per share slipped from $0.18 to $0.16, factoring in the effects of Harvey, which was also short of the analyst consensus at $0.18.  

Rising labor and occupancy costs ate into margins, erasing the benefit of the modest growth in comparable sales. CEO Steve Sather credited the Family Meal offering and Taco Platters limited-time offer for the increase in comp sales, but also acknowledged that restaurants in Texas continue to underperform. The company plans to do a brand relaunch in the Houston and Dallas market to reenergize sales.

Now what 

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Sather said that comparable sales had slowed toward the end of the quarter and remain soft thus far into the fourth quarter. Management lowered its full-year guidance, calling for adjusted earnings per share of $0.61-$0.63, down from $0.66 a year ago, and a previous range of $0.64-$0.67. It also sees same-store sales growth of 1%-1.5%, down from its prior forecast of 1%-2%, and expects lower restaurant-level operating margin of 19.3%-19.6%.

Based on that forecast, it's easy to see why the stock slipped today, and shares hit an all-time low on the news. The stock is reasonably valued based on its current earnings forecast, but if management can't deliver profit growth next year, shares could fall further.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.