In what has been a very disconcerting environment for retail and similar discretionary-spending sectors, El Pollo LoCo Holdings Inc. (NASDAQ:LOCO) upped — or is that downed? — the ante, evaporating 15% of market capitalization on Friday. El Pollo’s disappointing stock performance hit upon an increasingly familiar theme within the fast-food industry. Once Wall Street’s darling trading sector, where the term “fast casual” became a buzz word, many companies failed to live up to the high expectations of the search for the next Chipotle Mexican Grill, Inc. (NYSE:CMG). Will El Pollo recover in time to offer up a respectable challenge? Or has too much damage been inflicted in its relatively short lifespan as a publicly traded company?
The fast-food chain, which specializes in rotisserie chicken, failed to impress investors despite beating first quarter earnings estimates for 2015. The company also beat revenue expectations, up 11% from the year prior. However, that was not enough to overcome slowing same-store sales growth in the first quarter, and management released a reduced guidance for the current quarter. The “what have you done for me lately” attitude of Wall Street was likely more pernicious this time around due to equally disappointing earnings results from other retailers. The general message, it would appear, is that the economy is not improving at the often-advertised rate. Otherwise, wouldn’t more people show up to buy stuff?
That nagging question is almost certainly behind the aforementioned 15% drop in LOCO’s share price. The same-store sales decline is an indication of a shrinking market share for the entire fast-food industry, and not something that is simply the domain of one company. Unless the underlying economy improves dramatically, investors see little reason to put money at risk.
This interpretation is confirmed by the technical price action. The single-day volatility didn’t just upset the tight channel that LOCO shares were trading in; it veritably punctured it. LOCO now hangs on a thread. Another sell-off with just half the magnitude of Friday’s drop would place shares in no man’s land. Loco indeed.
There is a small case to be made to play the part of the contrarian. El Pollo LoCo is a popular brand, especially in the lucrative California market, and its food offerings do differentiate itself from the competition. That said, from an investment perspective, LOCO shares have been volatile from the very beginning. Shortly after its initial public offering, LOCO began charting a pennant formation. With no context as to whether this pennant was bullish or bearish, the market quickly answered that question in the winter of 2014 with a dramatic freefall.
Given that context, El Pollo LoCo may not be out of the woods. And that should scare any reasonable investor away.