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El Pollo Loco heats up on positive earnings results

El Pollo Loco in Los Angeles, Calif.
David Livingston | Getty Images

Tex-Mex food chain El Pollo Loco gained nearly 3 percent Friday after its second quarter results were stronger than analysts expected.

El Pollo Loco's system-wide comparable restaurant sales grew 2.4 percent including a 2.7 percent increase at franchise restaurants.

The restaurant chain beat estimates by a penny with adjusted quarterly profit of 19 cents per share. The company's quarterly revenues of $97 million were in line with forecasts, as was its full year earnings guidance.

On the company's conference call, CEO Stephen J. Sather said "The primary driver of margin performance was lower food cost, driven by commodity deflation and a favorable marketing calendar which more than offset higher labor costs."

Many analysts were pleased with the results, but remain cautious on the stock. Analysts at Jefferies, SunTrust, Guggenheim, Stifel and William Blair all made positive comments about it's second quarter, and pointed to El Pollo Loco's traffic rebounding, and Dallas and Houston franchise development as a bright spot.

In the company's quarterly release, El Pollo Loco plans to enter the Dallas market this year, and expects to open 17-20 company-operated restaurants and 10-15 franchised restaurants. It's also discounting aggressively and making additional investments in labor in support of the Houston market.

Out of 5 analysts, only SunTrust's Jake Barlett raised his price target on the stock to $15 from $14. In a note to investors, Barlett said "We are encouraged that management is aggressively addressing performance in Houston, but still see risk that the market will be difficult to turn around given heavy competition, which would call into question the portability of the brand."

More bearish analysts like Andy Barish of Jefferies expect more near-term challenges such as "rent costs rising, competition increasing, and slowing macro conditions/weather in TX, " he said in a note.

Shares of El Pollo Loco closed higher for 10th straight week.