Quarterly Report for Quarter Ending July 1, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our "Condensed Consolidated Financial Statements (Unaudited)" and accompanying "Notes to Condensed Consolidated Financial Statements (Unaudited)" included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion may contain forward-looking statements that involve risks, uncertainties, and assumptions that could cause actual results to differ materially from management's expectations. See "Cautionary Statement Concerning Forward-Looking Statements" below. We assume no obligation to update any such forward-looking statements.

Cautionary Statement Concerning Forward-Looking Statements

This report contains forward-looking statements within the meaning of federal securities laws that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Examples of forward-looking statements in this report include, but are not limited to, discussions of our current expectations, projections, intentions, or beliefs relating to our financial condition, results of operations, liquidity, prospects, growth, trends, strategies, and the industry in which we operate. You can identify forward-looking statements because they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other words and terms of similar meaning used in connection with any discussion of the timing or nature of future operating or financial performance or other events. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those that we expected. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations. These factors include, but are not limited to: our ability to open new restaurants in new and existing markets; our ability to compete successfully; global economic or other business conditions, including trade policies, tariff and import regulations by the United States, as well as consumer preferences; our ability to attract, develop, assimilate, and retain employees; our vulnerability to regional geographic conditions; our ability to maintain business continuity in the event of a disaster or disruption; impairment of our assets; changes in food and supply costs, especially for chicken, labor, construction and utilities; the impacts of public health crises; potential negative publicity; our ability to continue to expand our digital business, delivery orders and catering; concerns about food safety and quality and about food-borne illness; dependence on frequent and timely deliveries of food and supplies; our ability to service our level of indebtedness; the success of our marketing programs, new menu items, advertising campaigns and restaurant designs and remodels; risks related to our dependence on our franchisees, including their vulnerability to economic changes; exposure from our self-insurance programs; obligations under long-term and non-cancelable leases, and our ability to renew leases at the end of their terms; our ability to achieve our corporate responsibility goals; information technology system failures, cybersecurity breaches, or failure to protect our customers' data or personal information; our ability to enforce and maintain our intellectual property; the impact of federal, state and local laws, including those governing our relationships with our employees fluctuations in our quarterly operating results due to seasonality and other factors; any future offerings of debt or equity securities that may impact the market price of our common stock or dilute existing shareholders' ownership; the possibility that Delaware law, our organizational documents, our shareholder rights agreement, and our existing and future debt agreements may impede or discourage a takeover; the impact of shareholder activism on our expenses, business and stock price; and the risks set forth in our filings with the SEC from time to time, including under Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2025, which filings are available online at www.sec.gov. We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the ways that we expect. The forward-looking statements included in this report are made only as of the date hereof, and we caution you to not place undue reliance on any forward-looking statement made in this report. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

Overview

El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the limited service restaurant segment. We strive to offer quality chicken served fast and easy. Our distinctive menu features our signature product-citrus-marinated fire-grilled chicken-and a variety of contemporary entrees that we create from our chicken. We serve individual and family-sized chicken meals, including a variety of entrees like our Double Chicken Tostada, Guacamole Chicken Burrito, and Salsa Verde Chicken Quesadilla. Our famous Creamy Cilantro dressings and salsas are prepared fresh daily, allowing our customers to create their favorite flavor profiles to enhance their culinary experience. We believe that our distinctive menu that features quality chicken is a flavorful and affordable option that appeals to consumers across a wide variety of socio-economic backgrounds and drives our balanced composition of sales throughout the day, including at lunch and dinner. In 2025, El Pollo Loco launched a brand refresh, inclusive of a new advertising campaign, restaurant design, new products, and an emphasis on hospitality in our restaurants. All these elements reinforce our position in the market of "Quality Chicken, Fast & Easy."

Market Trends and Uncertainties

As a result of California legislation increasing wages of fast food workers, we experienced an increase in our labor and regulatory compliance costs in recent periods. Although we have been able to substantially offset these cost pressures through various actions, such as increasing menu prices, managing menu mix, and productivity improvements, we expect these cost pressures to continue in 2026.

Furthermore, recent California legislation may establish further requirements for responsible packaging and single-use plastic food service ware which could affect our operations and compliance costs in that state. For additional information, see "Item 1A. Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2025, including the risk factor titled "We are subject to extensive laws, government regulation, and other legal requirements and our failure to comply with existing or new laws and regulations could adversely affect our operational efficiencies and results of operations."

Additionally, we are impacted by macroeconomic challenges, such as inflationary pressures and changes in trade policies, that have in the past affected, and may continue in the future, to affect our operations in certain areas such as food cost, labor costs, construction costs and other restaurant operating costs. We have been able to substantially offset these inflationary and other cost pressures through various actions, such as increasing menu prices, managing menu mix, and productivity improvements. However, we expect these inflationary and other cost pressures to continue in 2026 and we may not be able to offset cost increases in the future. Global events, such as the ongoing war in Iran, may also impact our business costs, including the costs of transportation and energy.

There is ongoing uncertainty regarding increased tariff duties on goods imported into the United States, which has caused substantial market uncertainty and in certain cases, retaliatory measures by trading partners. Such changes include the imposition of tariffs under the authority of the International Emergency Economic Powers Act, which the U.S. Supreme Court found unlawful in February 2026, the creation of a refund process for such tariff duties, and, most recently, the imposition of new tariffs under Section 301 of the Trade Act of 1974 on imports from numerous trading partners, effective July 24, 2026. Certain of the produce, packaging materials, and other items procured by our Company are sourced from outside the United States, including from Canada, Mexico and Asia. Current and proposed tariff rates range widely, depending on the country of origin and the availability of product-specific exemptions.

Although the United States-Mexico-Canada Agreement ("USMCA") remains in force, the United States did not agree to renew the agreement in its current form following the July 2026 joint review, and certain goods from Canada and Mexico, including USMCA-compliant goods, may be subject to new tariffs unless an exemption applies. While we continue to evaluate the potential impacts of increased tariff rates, as well as our ability to mitigate any related impacts, the imposition of tariffs on goods we import into the United States may increase our foods and paper costs and adversely impact our financial results. Any new or increased import duties, tariffs, or taxes, or other changes in U.S. trade or tax policy could result in further increases to our food and paper costs and other restaurant operating costs that would adversely impact our financial results. For additional information, see "Item 1A. Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2025, including the risk factor titled "We are vulnerable to changes in political and economic conditions, such as trade policies, tariff and import regulations by the United States, as well as consumer preferences."

Seasonality

Seasonal factors, including weather and the timing of holidays, cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced January and December transactions, and higher in the second and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators, such as company-operated restaurant revenue and comparable restaurant sales, may fluctuate.

Growth Strategies and Outlook

As of July 1, 2026, we had 511 locations in ten states. For the twenty-six weeks ended July 1, 2026, our franchisees opened six new restaurants, two in Colorado and one in each of the following states: California, Arizona, Idaho, and Texas, and the Company opened one new restaurant in California and one new restaurant in Texas. In fiscal 2025, we opened one new company-operated restaurant in California, and our franchisees opened eight new restaurants, two in California, two in Arizona, and one in each of the following states: Colorado, Texas, New Mexico and Washington.

We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning by executing the following five key strategies:

To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend. The success of these growth plans is not guaranteed.

Highlights and Trends

Revenue Overview

For the thirteen and twenty-six weeks ended July 1, 2026, our total revenue was $129.6 million and $255.8 million, respectively. For the thirteen weeks ended July 1, 2026, our company-operated restaurant revenue was $108.1 million, and our franchise revenue and franchise advertising fee revenue was $21.5 million. For the twenty-six weeks ended July 1, 2026, our company-operated restaurant revenue was $214.1 million, and our franchise revenue and franchise advertising fee revenue was $41.7 million.

Comparable Restaurant Sales

For the thirteen and twenty-six weeks ended July 1, 2026, system-wide comparable restaurant sales increased by 3.9% and 4.9%, respectively, from the comparable period in the prior year. For company-operated restaurants, comparable restaurant sales for the thirteen and twenty-six weeks ended July 1, 2026 increased by 3.0% and 4.2%, respectively. For franchise-operated restaurants, comparable restaurant sales increased by 4.5% and 5.2% for the thirteen and twenty-six weeks ended July 1, 2026, respectively. A restaurant enters our comparable restaurant base the first full week after its 15-month anniversary. System-wide comparable restaurant sales include restaurant sales at all comparable company-operated restaurants and at all comparable franchise-operated restaurants, as reported by franchisees. Refer to "Comparable Restaurant Sales" definition in the section titled "Key Performance Indicators" below.

Restaurant Development

Our restaurant counts at the beginning and end of each of the twenty-six weeks ended July 1, 2026 and June 25, 2025 were as follows:

Restaurant Remodeling

During the twenty-six weeks ended July 1, 2026, we completed a total of 24 remodels of which 12 were company-operated restaurant remodels. In fiscal 2026, we plan to continue our standard practices for remodels, which includes a goal of completing a total of 25 to 35 company-operated restaurant remodels and 30 to 40 franchise-operated restaurant remodels. Remodeling is a use of cash and has implications for our net property and depreciation line items on our consolidated balance sheets and consolidated statements of income, among others. The cost of our restaurant remodels varies depending on the scope of the work required, but on average the investment is approximately $0.4 million per restaurant.

Loco Rewards

Our Loco Rewards loyalty program is designed to increase customer engagement and visit frequency by allowing members to earn points on qualifying purchases that can be redeemed for a variety of rewards. We defer a portion of the revenue associated with qualifying purchases until the related rewards are redeemed or expire. See Note 10, "Revenue from Contracts with Customers," to the Condensed Consolidated Financial Statements above for additional information regarding our accounting for the program.

As of July 1, 2026 and December 31, 2025, the revenue allocated to loyalty points that had not been redeemed was $1.3 million and $1.1 million, respectively, which is reflected in our accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. We had over 5.6 million loyalty program members as of July 1, 2026.

Critical Accounting Policies and Use of Estimates

The preparation of our condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances in making judgments about the carrying value of assets and liabilities that are not readily available from other sources. We evaluate our estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions.

Accounting policies are an integral part of our condensed consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that our critical accounting policies and estimates involve the most difficult management judgments, due to the sensitivity of the methods and assumptions used. For a summary of our critical accounting policies and a discussion of our use of estimates, see "Critical Accounting Policies and Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2025.

There have been no material changes to our critical accounting policies or uses of estimates since our Annual Report on Form 10-K for the year ended December 31, 2025.

Key Financial Definitions

Revenue

Our revenue is derived from three primary sources: company-operated restaurant revenue, franchise revenue, which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income, and franchise advertising fee revenue. See Note 10, "Revenue from Contracts with Customers" to the Condensed Consolidated Financial Statements above for further details regarding our revenue recognition policy.

Food and Paper Costs

Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs.

Labor and Related Expenses

Labor and related expenses include wages, payroll taxes, workers' compensation expense, benefits, and bonuses paid to our restaurant management teams. Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows. Factors that influence labor costs include minimum wage and payroll tax legislation, state labor laws (which, in California, includes AB 1228), overtime, wage inflation, the frequency and severity of workers' compensation claims, health care costs, and the performance of our restaurants.

Occupancy Costs and Other Operating Expenses

Occupancy costs include rent, common area maintenance ("CAM"), and real estate taxes. Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, delivery service provider fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.

General and Administrative Expenses

General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support the development and operations of our restaurants, including compensation and benefits, travel expenses, stock-based compensation expense, legal and professional fees, and other related corporate costs. Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise field operational support.

Franchise Expenses

Franchise expenses are primarily comprised of rent expenses incurred on properties leased or owned by us and then sublet to franchisees, expenses incurred in support of franchisee information technology systems, and the franchisee's portion of advertising expenses.

Depreciation and Amortization

Depreciation and amortization primarily consists of the depreciation of property and equipment, including leasehold improvements and equipment.

Loss on Disposal of Assets

Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

Impairment and Closed-Store Reserves

We review long-lived assets such as property, and equipment, right-of-use ("ROU") assets and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values and record an impairment charge when appropriate. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset's carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.

When we close a restaurant, we will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense, in addition to property tax and CAM expenses for our closed restaurants.

Interest Expense, Net

Interest expense, net, consists primarily of interest on our outstanding debt. Debt issuance costs are amortized at cost over the life of the related debt.

Provision for Income Taxes

Provision for income taxes consists of federal and state taxes on our pre-tax income.

Comparison of Results of Operations

Our operating results for the thirteen and twenty-six weeks ended July 1, 2026 and June 25, 2025 are expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as percentages of company-operated restaurant revenue, and are compared in the tables below.

Company-Operated Restaurant Revenue

For the quarter ended July 1, 2026, company-operated restaurant revenue increased $3.8 million, or 3.7% from the comparable period in the prior year. The increase in company-operated restaurant revenue was mainly due to an increase in company-operated comparable restaurant revenue of $3.1 million, or 3.0%, as well as $1.0 million of additional sales from the opening of three restaurants after the second quarter of 2025. This company-operated restaurant revenue increase was partially offset by $0.3 million of higher discounts and net revenue deferrals associated with our Loco Rewards loyalty program. The company-operated comparable restaurant sales increase consisted of a 4.2% increase in average check size, partially offset by a 1.1% decrease in transactions.

For the year-to-date period ended July 1, 2026, company-operated restaurant revenue increased $11.4 million, or 5.6% from the comparable period in the prior year. The increase in company-operated restaurant revenue was mainly due to an increase in company-operated comparable restaurant revenue of $8.5 million, or 4.2%, as well as $1.7 million of additional sales from the opening of three restaurants after the second quarter of 2025. The company-operated comparable restaurant sales increase consisted of a 4.9% increase in average check size, partially offset by a 0.7% decrease in transactions.

Franchise Revenue

For the quarter ended July 1, 2026, franchise revenue decreased $0.5 million, or 3.8% from the comparable period in the prior year. This decrease was primarily due to a $1.1 million decrease in franchisee information technology ("IT") pass-through revenue related to the franchise rollout of the new Point of Sale ("POS") system completed in 2025, which was partially offset by a corresponding decrease in related franchise expenses. The decrease was also partially offset by the increase in franchise revenue related to the 11 franchise-operated restaurant openings during or subsequent to the second quarter of 2025 and a franchise comparable restaurant sales increase of 4.5%. The franchise comparable restaurant sales increase consisted of a 5.3% increase in average check size, partially offset by a 0.8% decrease in transactions.

For the year-to-date period ended July 1, 2026, franchise revenue decreased $1.7 million, or 6.3% from the comparable period in the prior year. This decrease was primarily due to a $3.0 million decrease in franchisee IT pass-through revenue related to the franchise rollout of the new POS system completed in 2025, which was partially offset by a corresponding decrease in related franchise expenses. The decrease was also partially offset by the increase in franchise revenue related to the 11 franchise-operated restaurant openings during or subsequent to the second quarter of 2025 and a franchise comparable restaurant sales increase of 5.2%. The franchise comparable restaurant sales increase consisted of a 5.1% increase in average check size, combined with a 0.1% increase in transactions.

Franchise Advertising Fee Revenue

For the quarter ended July 1, 2026, franchise advertising fee revenue increased $0.4 million, or 5.3% from the comparable period in the prior year. As advertising fee revenue is a percentage of franchisees' revenue, the fluctuations for the quarter were due to the increases and decreases noted in franchise revenue above.

For the year-to-date period ended July 1, 2026, franchise advertising fee revenue increased $1.0 million, or 6.6% from the comparable period in the prior year. As advertising fee revenue is a percentage of franchisees' revenue, the fluctuations for the year-to-date period were due to the increases and decreases noted in franchise revenue above.

Food and Paper Costs

For the quarter ended July 1, 2026, food and paper costs increased $2.0 million, or 7.7%, from the comparable period in the prior year. The increase in food and paper costs was primarily due to higher sales, higher commodity costs, increased discounts, and menu-mix shifts. For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 25.4%, up from 24.5% in the comparable period of the prior year. The percentage increase was primarily due to higher commodity costs, increased discounts, and menu-mix shifts highlighted above, partially offset by menu price increases and cost-management initiatives.

For the year-to-date period ended July 1, 2026, food and paper costs increased $3.6 million, or 7.2%, from the comparable period in the prior year. The increase in food and paper costs was primarily due to higher sales, increased discounts, and higher commodity costs. For the year-to-date period ended July 1, 2026, food and paper costs as a percentage of company-operated restaurant revenue were 25.2%, up from 24.8% in the comparable period of the prior year. The percentage increase was primarily due to the increased discounts and commodity cost increases, partially offset by menu price increases and cost-management initiatives.

Labor and Related Expenses

For the quarter ended July 1, 2026, labor and related expenses increased $0.1 million, or 0.4%, from the comparable period in the prior year. The increase in labor and related expenses was primarily due to a $0.7 million increase in labor associated with the opening of three new restaurants after the second quarter of 2025, combined with higher wage inflation, higher management incentive expense, and higher overtime expense. These increases were partially offset by a $0.6 million reduction in group insurance and worker's compensation expense. For the quarter ended July 1, 2026, labor and related expenses as a percentage of company-operated restaurant revenue were 29.9%, down from 30.8% in the comparable period in the prior year. The percentage change was driven by leverage on higher company-operated restaurant sales, reduced group insurance, and workers' compensation claim expenses.

For the year-to-date period ended July 1, 2026, labor and related expenses decreased $0.2 million, or 0.3%, from the comparable period in the prior year. The decrease in labor and related expenses was primarily due to a $1.2 million reduction in group insurance and workers' compensation claim expenses and other benefit-related costs, partially offset by a $1.0 million increase in direct labor-related costs, including restaurant labor and management incentive compensation, an increase in overtime and wage inflation and labor associated with the opening of three restaurants after the second quarter of 2025. For the year-to-date period ended July 1, 2026, labor and related expenses as a percentage of company-operated restaurant revenue were 30.0%, down from 31.7% in the comparable period in the prior year. The percentage change was driven by leverage on higher company-operated restaurant sales, reduced group insurance and workers' compensation claims and improved labor efficiencies, partially offset by higher other labor-related costs.

Occupancy and Other Operating Expenses

For the quarter ended July 1, 2026, occupancy and other operating expenses increased $0.6 million, or 2.1%, from the comparable period in the prior year. The increase was primarily due to a $0.4 million increase in other operating expenses, primarily from delivery fees, mobile order fees and credit card fees, and a $0.4 million increase in repairs and maintenance costs. These increases were partially offset by a $0.2 million decrease in utility costs and other controllable expenses. For the quarter ended July 1, 2026, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.3%, down from 25.6% in the comparable period in the prior year. The decrease as a percentage of sales resulted primarily from leverage on higher company-operated restaurant sales.

For the year-to-date period ended July 1, 2026, occupancy and other operating expenses increased $2.2 million, or 4.3%, from the comparable period in the prior year. The increase was primarily due to a $1.1 million increase in other operating expenses, primarily from delivery fees, mobile order fees and credit card fees, a $0.8 million increase in utilities and repairs and maintenance costs, and a $0.3 million increase in other operating expenses. For the year-to-date period ended July 1, 2026, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.5%, down from 25.9% in the comparable period in the prior year. The decrease as a percentage of sales resulted from leverage on higher company-operated restaurant sales.

General and Administrative Expenses

For the quarter ended July 1, 2026, general and administrative expenses decreased $6.5 million, or 47.9%, from the comparable period in the prior year. The decrease for the quarter was primarily due to $6.3 million received from a legal settlement, net of legal expenses, in the current year, a $0.8 million decrease in legal and professional fee costs related to shareholder activism and related matters in the prior year, and a $0.7 million decrease related to restructuring and executive transition costs in the prior year. The general and administrative expenses decrease was partially offset by a $0.3 million increase in legal fees, a $0.5 million increase in outside services and software maintenance, a $0.2 million increase in store pre-opening costs and a $0.3 million increase in other general and administrative expenses.

For the year-to-date period ended July 1, 2026, general and administrative expenses decreased $4.9 million, or 20.0%, from the comparable period in the prior year. The decrease was primarily due to a $5.7 million favorable change related to legal settlements, reflecting $6.3 million received from a legal settlement, net of legal expenses, in the current-year period compared with $0.6 million received in the prior-year period, net of legal expenses, a $1.4 million decrease in legal and professional fee costs related to shareholder activism, and a $0.7 million decrease in restructuring and executive transition costs in the prior year. The general and administrative expenses decrease was partially offset by a $0.8 million increase in outside services and software maintenance, a $0.6 million increase in other legal costs, a $0.3 million increase in store pre-opening costs, a combined $0.2 million increased related to our corporate office relocation and the implementation of a new enterprise resource planning system, and a $1.0 million increase in other general and administrative expenses.

Franchise Expenses

For the quarter ended July 1, 2026, franchise expenses decreased $0.8 million, or 6.0%, from the comparable period in the prior year. The decrease was primarily due to a $1.2 million decrease in franchise IT pass-through expense related to the franchise rollout of the new POS system completed in 2025, partially offset by a $0.4 million increase in advertising expenses.

For the year-to-date period ended July 1, 2026, franchise expenses decreased $2.0 million, or 8.0%, from the comparable period in the prior year. The decrease was primarily due to a $3.2 million decrease in franchise IT pass-through expense related to the franchise rollout of the new POS system completed in 2025, partially offset by a $1.0 million increase in advertising expenses and a $0.2 million increase in other franchise expenses.

Depreciation and Amortization

For the quarter ended July 1, 2026, depreciation and amortization increased $0.2 million, or 6.1%, from the comparable period in the prior year. The increase was primarily due to the completion of 17 company-operated restaurant remodels in 2025 and 5 company-operated restaurant remodels in 2026, along with the rollout of the new POS system to company-operated restaurants completed in 2025.

For the year-to-date period ended July 1, 2026, depreciation and amortization increased $0.7 million, or 8.5%, from the comparable period in the prior year. The increase was primarily due to the completion of 17 company-operated restaurant remodels in 2025 and 12 company-operated restaurant remodels in 2026, along with the rollout of the new POS system to company-operated restaurants completed in 2025.

Impairment and Closed-Store Reserves

During both the thirteen and twenty-six weeks ended July 1, 2026, we recorded $0.2 million in non-cash impairment charges related to the carrying value of the ROU assets of one restaurant in Nevada. During both the thirteen and twenty-six weeks ended June 25, 2025, we did not record any non-cash impairment charges. Given the inherent uncertainty in projecting results for newer restaurants in newer markets, we are monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

During both the thirteen and twenty-six weeks ended July 1, 2026 and June 25, 2025, we recognized less than $0.1 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM expenses for our closed locations.

Interest Expense, Net

For the quarter ended July 1, 2026, interest expense, net, decreased $0.5 million from the comparable period in the prior year. The decrease in interest expense was primarily related to the lower interest rates during the second quarter of 2026 and lower outstanding balances on our 2022 Revolver (as defined below) versus the comparable period in the prior year.

For the year-to-date period ended July 1, 2026, interest expense, net, decreased $0.9 million from the comparable period in the prior year. The decrease in interest expense was primarily related to the lower interest rates during 2026 and lower outstanding balances on our 2022 Revolver (as defined below) versus the comparable period in the prior year.

Provision for Income Taxes

For the quarter ended July 1, 2026, we recorded an income tax provision of $5.2 million, reflecting an estimated effective tax rate of 28.8%. For the quarter ended June 25, 2025, we recorded an income tax provision of $3.0 million, reflecting an estimated effective tax rate of approximately 29.6%.

For the year-to-date period ended July 1, 2026, we recorded an income tax provision of $8.5 million, reflecting an estimated effective tax rate of 28.8%. For the year-to-date period ended June 25, 2025, we recorded an income tax provision of $5.3 million, reflecting an estimated effective tax rate of approximately 29.7%. The difference between the 21.0% statutory rate and our effective tax rate of 28.8% for the year-to-date period ended July 1, 2026 is primarily a result of state tax rates based on apportioned income, the impact of non-tax deductible executive compensation, and tax deficiencies related to stock option exercises, for which the associated tax deductions were lower than the cumulative amount recorded as stock-based compensation expense, partially offset by the impact of higher stock compensation expense deductible for tax related to the vesting of restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, and federal targeted job credits.

Key Performance Indicators

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.

System-Wide Sales

System-wide sales are neither required by, nor presented in accordance with, GAAP. System-wide sales are the sum of company-operated restaurant revenue and sales from franchise-operated restaurants. Our total revenue in our condensed consolidated statements of income is limited to company-operated restaurant revenue and franchise revenue from our franchisees. Accordingly, system-wide sales should not be considered in isolation or as a substitute for our results as reported under GAAP. Management believes that system-wide sales are an important figure for investors, because they are widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration. System-wide sales do not include the eight licensed stores in the Philippines.

The following table reconciles system-wide sales to company-operated restaurant revenue and total revenue (in thousands):

Company-Operated Restaurant Revenue

Company-operated restaurant revenue consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals, and other discounts. Company-operated restaurant revenue in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, and comparable restaurant sales.

Comparable Restaurant Sales

Comparable restaurant sales reflect year-over-year sales changes for comparable company-operated, franchise-operated, and system-wide restaurants. A restaurant enters our comparable restaurant base the first full week after it has operated for fifteen months. Comparable restaurant sales exclude restaurants closed during the applicable period. At July 1, 2026 and June 25, 2025, there were 489 and 485 system-wide comparable restaurants in both periods, respectively, 172 and 171 company-operated restaurants, respectively, and 317 and 314 franchise-operated restaurants, respectively. Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded. Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in the average check amount, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases. Because other companies may calculate this measure differently than we do, comparable restaurant sales as presented herein may not be comparable to similarly titled measures reported by other companies. Management believes that comparable restaurant sales is a valuable metric for investors to evaluate the performance of our store base, excluding the impact of new stores and closed stores.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses which includes food and paper cost, labor and related expenses and occupancy and other operating expenses, where applicable. Restaurant contribution therefore excludes franchise revenue, franchise advertising fee revenue and franchise expenses as well as certain other costs, such as general and administrative expenses, franchise expenses, depreciation and amortization, impairment and closed-store reserves, loss on disposal of assets and other costs that are considered corporate-level expenses and are not considered normal operating costs of our restaurants. Accordingly, restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of stockholders because of the exclusion of certain corporate-level expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of company-operated restaurant revenue.

Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants, and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation, or superior to, or as substitutes for the analysis of our results as reported under GAAP. Management uses restaurant contribution and restaurant contribution margin as key metrics to evaluate the profitability of incremental sales at our restaurants, to evaluate our restaurant performance across periods, and to evaluate our restaurant financial performance compared with our competitors. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance. Management further believes restaurant level operating margin is useful to investors to highlight trends in our core business that may not otherwise be apparent to investors when relying solely on GAAP financial measures.

A reconciliation of restaurant contribution and restaurant contribution margin to company-operated restaurant revenue is provided below:

New Restaurant Openings

The number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a new restaurant opens, we and our franchisees incur pre-opening costs, as described below. New restaurants often open with an initial start-up period of higher-than-normal sales volumes, which subsequently decrease to stabilized levels. New restaurants typically experience normal inefficiencies in the form of higher food and paper, labor, and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation. The average start-up period after which our new restaurants' revenue and expenses normalize is approximately fourteen weeks. When we enter new markets, we may be exposed to start-up times and restaurant contribution margins that are longer and lower than reflected in our average historical experience.

EBITDA and Adjusted EBITDA

EBITDA represents net income (loss) before interest expense, provision (benefit) for income taxes, depreciation, and amortization. Adjusted EBITDA represents net income (loss) before interest expense, provision (benefit) for income taxes, depreciation, amortization, and other items that we do not consider representative of on-going operating performance, as identified in the reconciliation table below.

EBITDA and Adjusted EBITDA as presented in this report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our on-going operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.

We believe that EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) management believes that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally for a number of benchmarks, including to compare our performance to that of our competitors.

The following table sets forth reconciliations of our net income to our EBITDA and Adjusted EBITDA:

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and the 2022 Revolver (as defined below). Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (remodels and maintenance), lease obligations, interest payments on our debt, working capital and general corporate needs. Our working capital requirements are not significant, since our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers. Our restaurants do not require significant inventories or receivables. We believe that these sources of liquidity and capital are sufficient to finance our continued operations, including planned capital expenditures, for at least the next 12 months and beyond from the issuance of the condensed consolidated financial statements.

During the second fiscal quarter of 2026, we received $13.9 million for a legal settlement, net of legal expenses, of which $7.6 million relates to franchisees and was recorded to Other accrued expenses and current liabilities as of the period ended July 1, 2026 and is expected to be disbursed to franchisees in the third fiscal quarter of 2026.

However, depending on macroeconomic conditions, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2022 Credit Agreement (as defined in Note 5, "Long-Term Debt"), specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

The following table presents summary cash flow information for the periods indicated (in thousands):

Operating Activities

For the twenty-six weeks ended July 1, 2026, net cash from operating activities increased by $25.9 million from the comparable period of the prior year. This increase was primarily due to an $8.4 million increase in net income, a $6.2 million favorable change in non-cash and reconciling items and an $11.4 million favorable change in operating assets and liabilities. The favorable change in non-cash and reconciling items was primarily driven by a $4.6 million favorable change in deferred income taxes, a $0.7 million increase in depreciation and amortization, and a $0.6 million increase in losses on the disposal of assets. The favorable change in operating assets and liabilities was primarily driven by favorable changes of $10.3 million in other accrued expenses and current liabilities, $1.0 million in income taxes receivable and payable and $1.0 million in other assets, partially offset by unfavorable changes of $1.4 million in prepaid expenses and other current assets and $0.6 million in accounts payable.

Investing Activities

For the twenty-six weeks ended July 1, 2026, net cash used in investing activities increased by $10.3 million from the comparable period of the prior year. This change was primarily due to an increase in purchase of property and equipment mostly related to restaurant remodeling and new restaurant development during the twenty-six weeks ended July 1, 2026 when compared to the prior year.

Financing Activities

For the twenty-six weeks ended July 1, 2026, net cash used in financing activities increased by $15.0 million from the comparable period of the prior year. This change was primarily due to a $21.0 million net paydown on the 2022 Revolver (as defined below) during the twenty-six weeks ended July 1, 2026, compared to a $2.0 million net paydown during the twenty-six weeks ended June 25, 2025. The increase was partially offset by a $2.2 million increase in proceeds from the exercise of stock options and the absence of common stock repurchases during the current-year period, compared to $1.8 million of repurchases during the prior-year period.

Debt and Other Obligations

We, as a guarantor, are a party to a credit agreement (the "2022 Credit Agreement") among our wholly-owned subsidiary, El Pollo Loco, Inc. ("EPL"), as borrower, and our direct subsidiary, EPL Intermediate, Inc. ("Intermediate"), as a guarantor, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolving credit facility (the "2022 Revolver"). The 2022 Revolver, which is available pursuant to the 2022 Credit Agreement, includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. The 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027. The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by us. The obligations of our company, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets subject to certain customary exceptions.

Under the 2022 Revolver, we are restricted from making certain payments such as cash dividends or share repurchases, except that we may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem our qualified equity interests held by our past or present officers, directors, or employees (or their estates) upon death, disability, or termination of employment, and (ii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to our compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2022 Revolver.

Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower's option, at rates based upon either the secured overnight financing rate ("SOFR") or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) Term SOFR with a term of one-month SOFR plus 1.00%. For Term SOFR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in a range of 0.25% to 1.25%. Borrowings under the 2022 Revolver may be repaid and reborrowed. The interest rate range under the 2022 Revolver was 4.97% to 5.02% and 4.97% to 7.00% for the thirteen and twenty-six weeks ended July 1, 2026, and 5.65% to 5.93% and 5.67% to 7.75% for the thirteen weeks and twenty six weeks ended June 25, 2025, respectively.

The 2022 Credit Agreement contains certain customary financial covenants, which covenants are subject to certain exceptions. We were in compliance with the financial covenants as of July 1, 2026.

At July 1, 2026, we had $30.0 million in outstanding borrowings under the 2022 Revolver and one letter of credit in the amount of $10.3 million outstanding, and as a result, we had $109.7 million in borrowing availability. Subsequent to the quarter-end, we paid down $4.0 million on the 2022 Revolver, resulting in outstanding borrowings of $26.0 million as of July 29, 2026.

Subsequent to the quarter end, on August 4, 2026 we amended our $150.0 million credit facility, extending the term to August 4, 2031.

See Note 5, Long-Term Debt, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for additional information.

Material Cash Requirements

Our material cash requirements as of July 1, 2026 have not changed materially since those disclosed under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Material Cash Requirements, of our Annual Report on Form 10-K for the year ended December 31, 2025. Our material cash requirements relate mostly to future (i) debt payments, including expected interest expense, calculated based on current interest rates, (ii) restaurant operating lease payments, (iii) purchasing commitments for chicken, (iv) restaurant finance lease payments, and (v) capital expenditures.

Share Repurchases

On May 28, 2026, we announced that our Board of Directors approved a share repurchase program (the "2026 Share Repurchase Program") under which we are authorized to repurchase up to $40.0 million of shares of our common stock. Under the 2026 Share Repurchase Program, we are permitted to repurchase our common stock from time to time, in amounts and at prices that we deem appropriate, based on various factors, including the market price of our common stock, general business, economic and market conditions, alternative investment opportunities and funding considerations. Pursuant to the 2026 Share Repurchase Program, we are authorized to effect repurchases through open market purchases, block trades, privately negotiated transactions or other transactions conducted in accordance with Rule 10b-18 under the Exchange Act, including pursuant to Rule 10b5-1 trading plans. The 2026 Share Repurchase Program does not obligate us to acquire any particular number of shares, has an open-ended term and may be expanded, modified, suspended or discontinued at any time.

For the thirteen and twenty-six weeks ended July 1, 2026, we did not repurchase any shares under the 2026 Share Repurchase Program.

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