El Pollo Loco Wants to Grow, But It Can't After Court Ruling

(Bloomberg) -- El Pollo Loco Holdings Inc. is being forced to halt sales of new restaurants too close to existing franchises, potentially curbing growth for the grilled-chicken chain.

Under a recent court ruling, the company isn't able to sell new locations until it revises its franchisee contract, after a franchisee complained that building new locations near existing restaurants was unfair and hurting sales. El Pollo Loco said in a filing Friday that the court injunction could hit expected franchise revenue and its ability to open new locations in desirable areas.

“We disagree with the court's ruling and the decision is currently under appeal,” the company said in an emailed statement Monday. “We are also exploring several alternatives to mitigate any negative impact to our business.”

The ruling casts a shadow on El Pollo Loco's strong quarterly earnings report from last week, which sent the stock surging on Friday. The company posted comparable sales, revenue and profit that topped estimates as $5 combos and quesadillas drew diners. The Costa Mesa, California-based chain of about 480 restaurants is about 56 percent franchised.

In a lawsuit, owners of an El Pollo Loco store challenged the company's right to open two new locations near their own. A jury recently found in favor of the franchisee, and now the company is trying to figure out how to proceed while maintaining the healthy sales clip that's helped drive its stock up more than 60 percent this year.

“It's going to compel the franchisors to act more fairly and in good faith with the franchisees. It serves to balance the relationship,” Robert Zarco, an attorney representing the franchisees, said in an interview, noting that the ruling also requires the company to pay damages. “This case levels the playing field between franchisor and franchisee, which is long overdue.”

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Jonathan Roeder

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