El Pollo Loco Holdings Inc. $LOCO Part 1

Nothing loco about good chicken and big inflections

Disclaimer: This is not investing advice. Everything written here is my own opinion and is for informational purposes only. Everything written here is subject to my own errors, biases, and other types of mistakes. You should do your own research and consult a financial advisor before making any investment decisions. I own shares of LOCO.

Tower Road near Denver International Airport is somewhere I end up eating a lot. This 5-mile stretch of road contains all the restaurants that are closest to the airport, so I, like many hungry people, visit them frequently when coming and going. The restaurant selection is heavily skewed towards fast food and fast casual dining, much to my delight.

This road is absolutely packed with fast food and drive-thru options to a degree that I consider impressive. The photo above barely scratches the surface. For the likes of McDonald’s and Chipotle, having one location along this stretch of road isn’t enough - each of these companies has added a second location in recent years.

Younger restaurants have added first locations along Tower Road within the last several years. Raising Cane’s, Freddy’s, and Cava have settled in among older and more ubiquitous fast food establishments.

Restaurant systems expanding nationally from the east and midwest - such as Cava and Culver’s - meet up here with other chains originating from the west, like Dave’s Hot Chicken. Portillo’s has scoped out a corner along Tower Road for a location - though the recent slowdown in unit growth most likely affected the timing and probability of this proposed location coming into existence.

In other words, you can find just about anything along this road. Even so, I was still slightly surprised one day this year when, driving down Tower Road, I saw a brand new, attractive, and colorful restaurant in the final stages of construction. The name was familiar, but not for Colorado.

El Pollo Loco.

Now, if you’re from California, El Pollo Loco is going to feel about as commonplace as any other quick-service restaurant. If you’re from a state other than California, like me, you might have some familiarity with El Pollo Loco, but still associate the chain with California. If you’ve never been to California, I wouldn’t be surprised if you didn’t know what El Pollo Loco is.

That dynamic is the result of the following geographic breakdown of the company’s locations:

With just over 500 restaurants system-wide, nearly 400 of them are in the state of California. The rest are mostly in western states, and the company has a presence in only 9 states total. So, it’s no surprise that this restaurant is associated primarily with California, perhaps to the point where someone from the midwest or east might have never heard of the company.

So what is El Pollo Loco, and why is it interesting now?

El Pollo Loco

The name itself tells you quite a bit. It’s a chicken-focused restaurant with Mexican roots. El Pollo Loco started operating in Mexico in the 1970s, and after growing within Mexico, the company opened a location in Los Angeles in 1980. Shortly thereafter, the founder sold the U.S. restaurants and rights while retaining ownership of the Mexican locations.

The company that we’re talking about here is the U.S. company, which has changed hands a few times between 1980 and today but is currently the public company that we know, trading under the symbol LOCO. The Mexican locations still exist, but they are still owned by the founding family, and are a completely separate company so they won’t be discussed here.

The U.S. El Pollo Loco has grown to just over 500 locations. These locations serve a menu that is very easy to wrap your head around. There are usual Americanized Mexican food items like burritos, tacos, and quesadillas which are straightforward and further simplified by the fact that chicken is almost the only meat option. And there are the chicken meals, which are similarly easy to understand and compare to other restaurants’ meals if you can’t make it to El Pollo Loco.

The chicken meals generally each include a selection of pieces of chicken, some number of sides, and tortillas (or chips). Sides are options like rice, beans, corn, and mashed potatoes. There are family meals that come with 8, 12, and 16 chicken pieces, and individual meals that come with 2, 3, or 4.

The chicken is the star of the show. Even though the founding family with the Mexican company and the American company parted ways many years ago, the American El Pollo Loco has kept chicken front and center and prioritized chicken quality. I think keeping the chicken cooking process consistent over the years has indeed led to El Pollo Loco having a differentiated and higher quality product than a lot of fast food.

The basic cooking process for El Pollo Loco’s chicken involves marinating whole chickens in a blend of citrus juice and spices, and then fire-grilling the chickens over a large open-flame grill. The grills is the heart of the restaurant - they are critically important, large, centrally located, and often very visible to customers from the counter.

I admire the full visibility into the food being cooked, which sets El Pollo Loco apart from many restaurants, and especially fast food restaurants, that hide the cooking process from the customer. I also appreciate the commitment to doing one thing really well and taking pride in it. The result is great chicken, and whether it’s being eaten by itself or in something like a burrito, the process and atmosphere of the restaurant gives the Chipotle-esque feeling that the food is fresh and higher-quality than something that came out of a deep fryer.

Good chicken is the core of the customer experience. From there, I feel that the menu allows for something of a “choose your own adventure” regarding dining experience. There are items that allow customers to have a very fast, on-the-go individual type of meal, like burritos and bowls. Other meals feel more geared towards a sit-down family dinner, whether that be in the restaurant or taken somewhere else. For the people who want to prioritize health in terms of calories there are salad and tostada options, and for those who prioritize maximizing protein consumption there are options which are doubled up on protein and display the stats.

It’s worth noting that the menu also allows customers to effectively choose where they want to be on a spectrum from Mexican food to American food. Plenty of the menu is heavily Americanized, giving an experience reminiscent of Chipotle, or in some cases, Taco Bell. But the chicken meals, which have remained pretty loyal to the company’s roots, are pretty authentically Mexican. They’re very similar to the meals still served by the Mexican El Pollo Loco today.

I think the convenient family dinner option is a place where El Pollo Loco shines. It’s easy, fast, healthy compared to a lot of other options, and it won’t break the bank. Most other options that are equally convenient and similarly priced are far less healthy. Chicken grilled rather than fried and plenty of fresh Mexican ingredients like lettuce, tomato, and avocado are a recipe to help any parent feel better about feeding the family compared to, say, pizza, burgers, or fried chicken. More broadly, there’s optionality in the menu, so the preferences of various family members can be accommodated. El Pollo Loco is a versatile and easy choice to make.

One last note on the customer experience: newer El Pollo Loco locations, like the one I saw in Denver, look attractive, colorful, and clean. This new design, along with the remodeling of old restaurants, is giving the restaurant a fresh look that I think matches the brand’s goals with the food. El Pollo Loco is a fairly old company - recall that the first U.S. location opened in 1980. Some locations look visibly outdated, and giving those locations a refresh has been a component of the ongoing brand transformation.

Here is the result of a recent remodel of a location in California.

For anyone curious, this location looked like this prior to the refresh:

Having more attractive and new looking restaurants is good for all of El Pollo Loco’s constituents. The modern and colorful build of the one I went to was a big reason why it caught my attention and honestly, drew me in. “El Pollo Loco? I thought that was just an old boring version of Taco Bell from California. This one looks fresh and new. Plus, I’ve never seen it in Denver before, so they must be expanding and doing well.” You get the point.

Eye-catching new locations can draw customers in, which is surely good for the company, but there’s another type of person who is bound to be impressed by the new El Pollo Loco design: franchisees. Specifically, prospective franchisees. Making El Pollo Loco as attractive a concept as possible is important if the company hopes to grow by adding new franchisees, and by having existing franchisees add new locations. And that is exactly the company’s goal. Let’s talk about El Pollo Loco franchising next.

Franchising and Growth

You probably noticed the following fact in the location breakdown chart that I posted above: most El Pollo locations (328 out of 503) are franchised locations. Franchising is already very important to the company, but there is even more emphasis on its importance right now because the company intends for franchised units to be the growth engine and mechanism by which El Pollo Loco scales from a regional chain to a nationwide restaurant system.

It’s important to remember that for businesses that scale using franchising, the concept has to be attractive enough that people want to own it. In a sense, franchisees are a type of customer of El Pollo Loco. They are being sold franchises, so there needs to be value there.

Obviously much of whether a franchise business looks attractive enough for a potential franchisee to invest in has to do with the attractiveness of the financial picture. But I’ll add that appearances matter, too. Imagine that your family owns one unit of one franchised business. You’d likely want it to be a beautiful, clean space that you’re proud to show off to friends and family, not a dusty and old looking restaurant that has your neighbors wondering whether you’ll survive in business.

Furthermore, you want the product to be something you can take pride in. That probably means having a high quality system and high quality employees - people who can reliably produce the consistently good product that you want to serve. As franchisor, it’s El Pollo Loco’s duty to make sure the system works in your (the franchisee’s) favor by systematizing the concept to the greatest degree possible, so that it is as foolproof as possible.

You can see that there are a lot of individual flywheels here, such as the customer flywheel, the employee flywheel, and the franchisee flywheel, and that together they spin the big flywheel, which is the overall brand and national expansion flywheel.

El Pollo Loco has been working on transforming itself for the past several years. This transformation effort first focused on improving and/or fixing the existing operations so that El Pollo Loco locations would be more compelling to customers, employees, and franchisees. In other words, addressing the individual flywheels at the unit level among existing locations. I think this was a wise move. Many restaurant chains would have tried to skip straight to growth. El Pollo Loco recognized that growth would necessarily mean having something very attractive to offer new franchisees, and that there were things that needed to be improved and fixed before that was realized.

Now, I believe we are in a stage of the transformation where those improvements to operations are yielding meaningful results, and the goal is shifting towards growing the unit count at a decent clip while applying the improvements to the model.

What are the actual improvements? We’ve touched on the restaurant redesign and how a fresh look and bright colors can draw new attention to the restaurants. But the changes aren’t just cosmetic. The company has also worked to simplify the build of new restaurants because reducing the cost of a newly built location is directly more attractive to new franchisees.

New restaurants are being built with more modern functionality in addition to a modern look. This essentially means getting with the times regarding how people order and receive food. Nowadays, fast food restaurants ought to accommodate everything from DoorDash to drive-thru to ordering kiosks within the restaurant if they want to maximize. The new restaurants support these mechanisms better than the old ones did. The back-of-house is also being refined with better technology and streamlined processes that aim to improve consistency.

Some other noticeable improvements and experiments have to do with menu additions. Salads and Baja Tostadas push the menu in the direction of lighter and healthier meals, perhaps aimed at a lunch crowd. The Baja Tostadas in particular have already been a meaningfully successful addition to the menu. Chicken tenders have been launched most recently and cited as aiming to have something even more affordable on the menu. It will be interesting to see if El Pollo Loco can catch some of the wind that is carrying the larger chicken tender-focused fast food chains.

Anecdotally, my experience in Denver is a piece of evidence that the larger plan is working. The location I went to, as well as the other new locations popping up around Colorado, are franchisee-owned restaurants. They employ the modern restaurant design which came from El Pollo Loco’s transformation effort. The food was better than I expected and I was impressed with the restaurant overall.

It’s not a stretch to think that potential franchisees would be attracted to the same things that I was. I’ll continue to visit the new El Pollo Loco locations in Denver (another one just opened within the past month), but from what I’ve seen so far, it looks like the franchising flywheel is turning and beginning to spin under its own momentum.

In the 2025 fiscal year, 8 new franchised locations were opened. However, 4 franchise locations were closed in that year, so I think of the year as +4 overall. In the guidance for the 2026 fiscal year, the company expects 15 to 16 franchised locations to open, in addition to 3 or 4 company operated locations. Opening about 20 new locations this year would be meaningful. For context, LOCO has been stuck in the neighborhood of 490 - 500 stores for the better part of the last decade. As I’ll discuss later, we might be right at the point of inflection where El Pollo Loco goes from a trivial amount of unit growth to a meaningful amount of growth, and from a regional player to national system.

Unit Economics

Let’s take some time to examine El Pollo Loco’s unit economics, which are important to anyone looking at the business but especially relevant to franchisees.

The average El Pollo Loco restaurant does a little over $2 million in sales annually. Now, if you’ve read my other writing, you’ll know I’ve spent a lot of time thinking about restaurants like Portillo’s and Chick-fil-A, which occupy the top end of the AUV rankings. El Pollo Loco isn’t in this category, and I don’t think it ever will be.

Nonetheless, I’m impressed by the consistent $2+ million in average sales for a few reasons:

• El Pollo Loco is old and mature - it’s approaching 50 years of business in the United States. This number feels like a stable base that is unlikely to change partly due to the maturity of the company, and partly due to the number of locations.

• There are already 500 locations, so the sample size is large enough that the average is meaningful. This is in contrast to something like Portillo’s, which has a few dozen super high performing locations around Chicago, only has 100 locations in total, and where underperforming new locations can make people question the whole business model and where the average is heavily subject to change. For Portillo's, people are wondering what number the AUV is going to converge to as the system scales into the hundreds. Is it $8 million, $6 million, or $4 million? For El Pollo Loco, this AUV mathematically isn’t as sensitive to new locations, even if they do underperform for a time.

• The existing locations are heavily concentrated both nearby one another and also nearby many, many other compelling food options. The current AUV reflects El Pollo Loco’s current existence in a very saturated market. New markets will be less saturated by El Pollo Loco, and that gives me mild optimism regarding future AUV.

I’ll also point out that whole-system AUV of $2.2 or $2.3 million isn’t anything to cry about relative to peers. That number is comparable to restaurants like Wendy’s, Taco Bell, and Wing Stop. Chipotle is just a step higher at around $3 million. Overall, I’m optimistic about El Pollo Loco’s AUV situation - it’s respectable right now, and I wouldn’t be surprised if operational improvements, growth, and maybe a touch of social media virality push the numbers higher.

How about profitability? The company reports “Restaurant Contribution” which is essentially its measure of restaurant-level EBITDA for the company-owned locations, of which there are 175. I consider it a large enough sample to get a representative idea of average profitability.

In recent years, restaurant contribution has been increasing into the high teens, and in the most recently reported quarter it was 19.2% of revenue. This is a promising number and a trend that has been supported by the operational improvements that El Pollo Loco has been rolling out over the last few years.

It is also a decent time in history to be a chicken-focused restaurant, rather than a beef-focused (i.e. burger) restaurant. The price of ground beef has risen rapidly and consistently essentially all the time over the past 5 years. The price of chicken, on the other hand, has risen like everything else in the world, but not nearly as much as beef, and seems to have plateaued more than beef in the last couple years. This is a factor that has undoubtedly lent support to margins, and could also make chicken-focused restaurants more attractive to prospective franchisees going forward.

One other piece of the unit economics story that the company and franchisees are likely to pay close attention to is the cost to build a new restaurant. Finding ways to reduce the new unit cost has been a big focal point for management, since I think they probably see a pretty direct relationship between lowering that hurdle and being able to sign on new franchisees.

The new redesigned restaurant model is less expensive to build than previous iterations of El Pollo Loco. People talk about the target as pushing to get away from a new build cost in the mid-$2 million neighborhood and end up with a restaurant that can consistently be built below the $2 million mark - I’ve seen the number $1.8 million specifically mentioned.

Besides making a restaurant slightly smaller, simpler, and more efficient to build, new locations can also reduce their build cost by potentially using what management calls “second-generation” sites. In other words, not needing to build an entirely new building, but rather turning an existing building - probably from another fast food establishment - into a new El Pollo Loco. The Q4 2025 earnings call highlighted a handful of new locations that used the strategy of finding second-generation sites, and for all of them the mentioned build cost was in the low- to mid-$1 million range.

This strategy could work out well, since so many areas of the country currently have zero El Pollo Loco locations. A metropolitan area might have 17 Arby’s, maybe too many for the area, and it could make sense for the owner of the worst performing location to close and sell the building. An El Pollo Loco moving into that building could still perform well, since it’s a brand new concept in our made up metropolitan area, not to mention the only location (for now). It’s something that could work well for everyone.

I’ll also call out something that I believe will turn into a tailwind for El Pollo Loco as it increasingly builds in new areas of the country: California is an unusually difficult and costly place to build restaurants. Since 80% of locations are in California, I think the build cost data still leans heavily on California restaurants, and I think that El Pollo Loco and its franchisees will find that it costs much less to open restaurants in states that are less difficult regulatory environments, and where generally, almost everything is less expensive.

Why Is El Pollo Loco So Interesting Right Now?

As I touched on earlier, El Pollo Loco looks to be sitting at an inflection point. The system is more dialed in than ever, the flywheels are picking up speed, and the results are showing up. But the opportunity in front of the company is even more interesting than anything El Pollo Loco has accomplished so far.

That opportunity is basically the entire country besides the state of California. El Pollo Loco is in a position that I consider unique, or at least don’t know of any other companies that find themselves in a similar position. 500 locations, and yet barely any presence outside of California. Go back and look at the chart showing how many locations are in each state, because it’s actually incredible to think about how extreme that distribution is. A natural follow-on thought is that the opportunity for the company is equally extreme.

So yes, much of why I find El Pollo Loco interesting right now has to do with the growth opportunity in front of it. There are nearly 400 locations in California. How many El Pollo Loco restaurants do you think could comfortably exist in a state like Texas?

The effort to become a national restaurant chain is interesting right here because it doesn’t even need to be very successful in order to yield a wonderful result for the company and shareholders. Suppose the following very conservative nationwide rollout occurred - half of the states weren’t a good fit for the concept, and the other half of the states each added 20 new locations. A very mildly successful national expansion. This alone would add 500 locations to the existing 500, doubling the size of the system.

1000 restaurants in the system is an interesting target to consider for right now. I’m certainly not saying this is going to happen overnight. If El Pollo Loco grows the unit count at 5% - 10% annually, it will still take 8 - 15 years to reach 1000 locations. But my point is that 1000 locations is a totally reasonable target given an appropriately long time horizon, because the opportunity is right in front of the company and it’s already moving in that direction.

I have a lot of confidence that El Pollo Loco can achieve this because a) there are already 500 locations and b) 400 of those locations are in California. In my mind, it has been proven that this concept can exist in great number and high concentration in a region large enough that new locations have a high likelihood of success in any new metropolitan area that is currently devoid of El Pollo Loco.

It would be a different story if El Pollo Loco were a 10-location chain in one city in California attempting to roll out a national expansion effort right now. It would also be a different story if El Pollo Loco had 500 locations distributed more or less proportionally among the states. El Pollo Loco’s story is one where right now, about 10% of the map is colored in and the rest is almost completely blank. The company just spent several years figuring out how to color in the rest of the map consistently, and it just started coloring.

The other side of why this company is so interesting at this moment is valuation: the market is valuing El Pollo Loco more like an average, stable business and not like a business that potentially has decades of growth runway ahead of it. Right now, LOCO trades around 15x EPS, and I’m sure many people glance at this multiple and think it looks about fairly priced. And perhaps it is a fair price for now - even though I’ve presented the direction that I think the company is going in terms of growth, there’s no guarantee it will actually happen.

Fortunately, today’s market price doesn’t demand any heroic assumptions regarding growth. In fact, I’d argue it’s a fair price to pay even if El Pollo Loco doesn’t end up growing at all. LOCO’s earnings power is stable for a number of reasons that we’ve already mentioned: there are 500 locations supporting earnings, over 300 of them are franchised, and many of them have already been around for decades. El Pollo Loco’s system is mature, large, and doesn’t feel very vulnerable to sudden change.

In other words, the current earning power is robust, and paying 15x just for that earnings power isn’t an absurdly high price. If you forget about any growth for a moment, it’s not unreasonable to think that someone would find the existing business acceptably priced today. But if the current price is fair under the assumption that LOCO doesn’t end up growing, then it is cheap in the version of the universe where LOCO does experience meaningful growth. Today’s price suggests to me that the market is aware that a shift to consistent growth is possible, but doesn’t currently expect it to materialize.

If an inflection to substantial growth does materialize, the market will demand a higher multiple of earnings at the same time that earnings are growing. Today’s valuation allows for a very real possibility of the dual engine of multiple expansion combined with earnings growth over a long period of time. For a company that could compound for years or decades into the future, 15x today’s earnings doesn’t seem like overpaying.

I think you can continue to map out the asymmetry that today’s valuation provides in various versions of the world. Overall, the valuation is waiting to see further evidence of an inflection that I believe is already occurring.

Most Recent Quarter

Another reason why I think LOCO deserves to be looked at seriously and valued optimistically is that it is one of very few restaurant companies that has outperformed and improved in the recent months and years of challenging environment. The most recently reported quarter was a particularly impressive set of results to see.

One of the most important headline numbers from the quarter was system-wide same store sales growth of +5.8% compared to the prior year. This number alone is very meaningful given the backdrop that were’ familiar with - fast food and fast casual restaurants have been absolutely scrambling over the past year in an effort to preserve traffic, often resorting to discounting and promotions. Keeping same store sales flat has been a challenge for a lot of restaurants, so to see El Pollo Loco grow same store sales meaningfully was a pleasant surprise that really got my attention.

There was also margin expansion that took restaurant contribution (company owned locations) to 19.2% of sales. So it seems that the increase in revenue didn’t come at the expense of profitability, as we’ve seen at a lot of other restaurants that have resorted to discounting.

Company owned locations and franchised locations both showed strength during the quarter (franchise locations’ same store sales grew even more than company stores), and it is satisfying to see results improving as a demonstration that the actions the company is taking to improve operations are working. On the call, efforts like order accuracy and customer satisfaction were highlighted in addition to successful new menu items like the Baja Tostadas. The results were particularly impressive given the heavy concentration of locations in California - a place where I assume the average consumer is as pressured as anywhere, and a state with particularly high costs for things like labor and fuel.

This quarter’s results and commentary gave me the impression that the pieces were working together - or as I like to think of it, the smaller flywheels picking up speed and starting to spin the big flywheel. It’s nice to hear on the earnings call that management is thinking along the same lines, and working to keep the momentum going. The strong quarter gave them the confidence to raise the 2026 guidance for same store sales and adjusted EBITDA.

Perhaps my favorite sign of inflection, which I’ve mentioned previously, is the current year’s guidance regarding new locations. Nearly 20 locations are expected to open in the 2026 fiscal year, with 15-16 of those being franchised locations. That amount of growth is meaningful in any case, but especially when you consider that the company has been stuck at the just under 500 point for years and years.

Long time readers will know how much I appreciate share repurchases. El Pollo Loco has established itself as a continual repurchaser of shares over the past several years, chipping away at the share count and offsetting the dilution from stock compensation.

At the end of May, a few weeks after its great earnings report, the company announced a new $40 million repurchase program. $40 million is just under 10% of the company’s market cap, so this repurchase program has the potential to be meaningful depending on how quickly shares are actually purchased.

It also signals a couple of things from management. One is that even after a strong start to 2026 (the stock is up about 50% year-to-date), the current valuation still presents an opportunity to acquire shares at below intrinsic value. Second, it signals that despite the plan to grow the unit count meaningfully for a very long period of time, the company doesn’t expect to need capital, rather opting to return it to shareholders. This is consistent with the notion that the vast majority of El Pollo Loco’s expansion will be implemented by franchisees, as well as the fact that El Pollo Loco’s company owned stores generate free cash flow that can be distributed. It will be nice to have the share repurchase program working in the background while the other flywheels work to make the business more valuable.

Peter Lynch

Taco Bell was one of the first companies Peter Lynch invested in when he took over the Magellan Fund in the 1970s. There are remarkable similarities between Taco Bell of the 1970s and El Pollo Loco today.

Obviously both companies are players in the Mexican food fast-food space, and interestingly both companies began in California and grew substantial within the state before national expansion. Here’s Peter Lynch in Beating The Street commenting on his early investment in Taco Bell for Magellan:

“Taco Bell I liked because of its tasty tacos, because 90 percent of the country had not yet been exposed to the tasty tacos, and because the company had a good record, a strong balance sheet, and a home office that resembled a neighborhood garage.”

Now, I’m not sure about the neighborhood garage part, but the rest of the quote could just as easily apply to El Pollo Loco if you change the name and substitute the word “chicken” everywhere you see the word “taco.” If that quote isn’t enough for you, here’s another excerpt from the same book:

“I was attracted to fast-food restaurants because they were so easy to understand. A restaurant chain that succeeded in one region had an excellent chance of duplicating its success in another. I’d seen how Taco Bell had opened many outlets in California and, after proving itself there, had moved eastward, growing its earnings at 20 to 30 percent a year in the process.”

Again, he could be talking about El Pollo Loco here too, though I think we need to wait and see if earnings will grow by as much as 20% or 30% per year. I would have no problem with a smaller earnings growth number sustained over a very, very long period of time. Lynch’s return from investing in Taco Bell was good, but cut short due to the fact that Taco Bell was acquired by Pepsi.

Finally, I want to point out that Taco Bell in the 1970s was of similar size in terms of number of locations as El Pollo Loco today. Taco Bell went public in the year 1970 with 325 restaurants at the time. By 1978, the company had 868 locations when it was sold to Pepsi. Through the mid-1970s was when the company passed through the 500-location mark, and that was exactly when Lynch was following and investing in the stock.

Would Peter Lynch invest in El Pollo Loco today?

As I thought through the scenario of both Taco Bell and El Pollo Loco growing prevalent in California and then expanding into the rest of the country, I remembered the following post from Yet Another Value Blog way back in 2023:

Black Friday Thoughts: Identifying inevitable retail winners

The post discusses inevitability and inflection points among retail winners. In other words, maybe there’s an identifiable point when an investor can determine that a chain of stores is going to make the leap from regional to national and beyond, and the inevitability of that expansion can be a good entry point. It’s a good point to invest in the company because there is a long runway of growth/compounding ahead of it, and it can be an especially attractive time for the investor if he or she recognizes the inflection point before the market does. Does this sound familiar? Thus, Andrew Walker , El Pollo Loco is my (nearly 3 years delayed) answer to the question you asked in the post! I think it fits the inevitable retail (restaurant) winner model very well!

By the way, readers, I strongly encourage you to go down the rabbit hole from the post above. It will take you to other posts from Yet Another Value Blog and Base Hit Investing , both of which are brilliant investors and wonderful educational resources. You might find yourself at this podcast episode or the interview that kicked off the whole chain of thought, this conversation with Charlie Munger shortly before he passed.

Conclusion

A random encounter with a new El Pollo Loco location in Denver kicked off a discovery process for me. The foundation of this process was the realization that El Pollo Loco served better food than I had previously assumed, and the adjacent realization that the restaurant itself was more differentiated from other fast food than I had previously known.

This process of learning about the restaurant and its food was mirrored by similar learnings about the company and its future prospects. I now feel that I have gained a valuable understanding of a restaurant system that feels like it is bursting at the seams - ready to expand out of California and into the rest of the country. The company is at an inflection point and for many years beginning now, the story could be one of continual growth from 500 locations today to thousands as the presence goes from regional to national.

The market does not yet seem to appreciate the potential for this company to grow consistently and occupy the 90% of the country where it currently doesn’t exist. I also suspect that many investors dismiss the restaurant due to its current regional confinement - many people have never been a customer of El Pollo Loco and don’t understand the extent of its concentration in California. As El Pollo Loco spreads, understanding of the business will spread as well.

In my mind, today’s market price acknowledges an established and important regional fast food player with strong recent results. However, the potential for a wonderful investment result, which would occur due to consistent expansion and the passage of time, doesn’t seem baked into the current price. I think today’s owners of LOCO are getting that optionality for free.

The reason why I think it’s worth making the bet that El Pollo Loco ends up with a much larger, franchisee-heavy restaurant count in ten years is because it’s already happening. I’m not betting that something is possible or could occur, I’m betting that something already happening will continue to occur. I believe the inflection point is here, and the tangible proof of that is the fact that I can go to a number of locations in Denver that didn’t exist 1, 2, or 3 years ago. In fact, 5 years ago there wasn’t a single location in the state of Colorado. Sometimes, good investment ideas come to us without us seeking them out, and in those cases it is our job to observe, act, and be patient. That’s exactly what I intend to do with El Pollo Loco.

As always, then you for reading! I’m excited to continue following El Pollo Loco, visiting new locations on the frontier of expansion, and sharing anything I learn with you.

Check out my other work:

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