Concealed struggles lead to class action suit against El Pollo Loco

A securities class action suit was filed against a California-based restaurant chain following allegations that the company and its executives violated federal securities laws by making materially false and misleading statements.

The class action filing against El Pollo Loco Holdings, Inc. was made in the U.S. District Court for the Central District of California, Southern Division on behalf of investors who purchased shares in the company during the class period between May 15, 2015 and Aug. 13, 2015, a press release stated. The lawsuit claims that the restaurant chain violated the Securities and Exchange Act of 1934 as a result of certain, untrue statements about its business prospects.

El Pollo Loco is a restaurant chain specializing in Mexican-style grilled chicken. The company “develops, franchises, licenses and operates quick-service restaurants,” according to the press release. It offers consumers dine-in, take-out and, sometimes, drive through options.

The defendants purchased the company in 2005, and took it public nearly a decade later in 2014, according to Courthouse News. At the time, 8.2 million shares were issued at $15 per share. The defendants controlled 60 percent of the stock in the restaurant chain.

“The result the new strategy had on first quarter business was hidden by executives.”

Rising cost of labor forces El Pollo Loco to implement new strategies
The complaint explains that in an effort to mitigate the rising cost of labor – specifically, numerous wage increases – the company removed its $5 value menu from its menu boards in February 2015, and as a result, lost the valuable business of customers looking for affordable meal options. In addition to doing away with the less expensive options, the restaurant chain also began offering higher-priced meals such as steak and shrimp, which caused company costs to appreciate.

The lawsuit goes on to allege that the undesirable result the new strategy had on first quarter business was hidden by company executives. Instead, the suit claims, the company released a series of misleading statements concerning El Pollo Loco’s second quarter 2015 comparable store sales growth. These releases regarding quarterly growth led to artificially inflated stock prices, according to the complaint. This allegedly allowed executives with the restaurant chain to sell their personally held shares for substantial profit.

Second quarter earnings come in below expectations
On May 15, 2015, El Pollo Loco issued a statement noting strong first quarter financial results. It explained that the restaurant chain experienced robust operating momentum through the first three months of the year as a result of healthy sales and earnings growth. A conference call following the release produced similar contentions from company executives. Officials made note of stores’ positive sales trends and the company’s ability to reach its second quarter guidance.

New, high-priced meal options such as steak drove away some customers, causing a hit to second quarter results.New, high-priced meal options such as steak drove away some customers, causing a hit to second quarter results.

Several months later, though, the falsity of those statements came to light through the company’s second quarter earnings report. On Aug. 13, 2015, the restaurant announced its second quarter results, which saw sales grow a mere 1.3 percent – sales actually decreased for company operated restaurants.

On news of the worse-than-expected second quarter report, El Pollo Loco stock fell $3.80 per share, or 20 percent, to close at $14.56 per share on Aug. 14, 2014. The press release noted that is 33 percent below the price that company officials sold their own shares at for a combined $132 million profit.

For more information on this case or other class action litigations, please contact Adam Foulke at 203-987-4949 or