Why El Pollo Loco Stock Tumbled 31% in August

What:Shares of El Pollo Loco fell 31% in August, according to data from S&P Capital IQ. The fast-casual chicken chain got fried following a disappointing earnings report and a subsequent investor backlash. The chart below tells the tale.

LOCO data by YCharts.

So what:Shares of El Pollo Loco spilled 20% on Aug. 14 after a second-quarter earnings report that dialed down its full-year forecast in several categories. Management said it expected same-store sales growth to come in at just 3% -- at the low end of its previously announced range of 3%-5% -- and said it would only open 24 restaurants this year, three fewer than the market had expected.

Surprisingly, the company's quarterly profit actually beat expectations by a penny, with earnings per share of $0.19, but investors were more concerned about future growth. Same-store sales for the quarter were also weak at just 1.3%, while overall revenue only increased by 3%. For a recent IPO and a once-promising growth stock, those numbers simply are not enough.

Now what:Following the path of other fast-casual IPOs likePotbellyandNoodles& Company,El Pollo Loco boomed following its market debut but shares have since fizzled as the company's growth has not lived up to expectations. Shares are now down 70% from their 52-week high and fell further after the earnings report as several lawsuits were filed against the company on behalf of investors in the aftermath of the scaled-back forecast.

The silver lining for investors is that shares are modestly priced at this point, trading at a P/E of less than 20, and there are reasons to believe in the concept's potential. El Pollo Loco delivers a solid restaurant-level operating margin of over 21%, and the Mexican-style fire-grilled chicken concept seems relatively untapped nationwide. The company has already opened more than 400 locations in just a handful of states in the Southwest, meaning similar success across the country could lead to a total store count around 2,000. Still, I'd need to see El Pollo Loco execute better on its existing stores' sales growth before buying in on that level of expansion.

The article Why El Pollo Loco Stock Tumbled 31% in August originally appeared on Fool.com.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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