SEC Filing | El Pollo Loco Holdings, Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36556

EL POLLO LOCO HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware		20-3563182
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


3535 Harbor Blvd., Suite 100, Costa Mesa, California		92626
(Address of principal executive offices)		(Zip Code)

(714) 599-5000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	LOCO	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☐	Accelerated Filer	☒

Non-accelerated Filer	☐	Smaller Reporting Company	☐

		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of July 28, 2023, there were 35,464,393 shares of the issuer’s common stock outstanding.

Table of Contents


Table of Contents		Page

PART I—FINANCIAL INFORMATION		3
Item 1. Financial Statements.		3
Condensed Consolidated Balance Sheets (Unaudited)		3
Condensed Consolidated Statements of Income (Unaudited)		4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)		5
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)		6
Condensed Consolidated Statements of Cash Flows (Unaudited)		8
Notes to Condensed Consolidated Financial Statements (Unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		26
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		43
Item 4. Controls and Procedures.		44

PART II—OTHER INFORMATION		45
Item 1. Legal Proceedings.		45
Item 1A. Risk Factors.		45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		45
Item 3. Defaults Upon Senior Securities.		45
Item 4. Mine Safety Disclosures.		46
Item 5. Other Information.		46
Item 6. Exhibits.		47
Signatures		48

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)


	June 28,		December 28,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	10,183	$	20,493
Accounts and other receivables, net		11,439		10,084
Inventories		2,041		2,442
Prepaid expenses and other current assets		3,473		3,662
Income tax receivable		—		768
Total current assets		27,136		37,449
Property and equipment, net		85,079		78,644
Property and equipment held under finance lease, net		1,467		1,532
Property and equipment held under operating leases, net ("ROU asset")		169,565		165,584
Goodwill		248,674		248,674
Trademarks		61,888		61,888
Deferred tax assets		449		512
Other assets		2,906		2,935
Total assets	$	597,164	$	597,218
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of obligations under finance leases	$	111	$	110
Current portion of obligations under operating leases		19,464		19,995
Accounts payable		16,576		12,741
Accrued salaries and vacation		10,698		8,873
Accrued insurance		11,480		11,120
Accrued income taxes payable		3,459		—
Accrued interest		366		291
Current portion of income tax receivable agreement payable		271		263
Other accrued expenses and current liabilities		11,318		15,120
Total current liabilities		73,743		68,513
Revolver loan		60,000		66,000
Obligations under finance leases, net of current portion		1,570		1,626
Obligations under operating leases, net of current portion		169,742		165,149
Deferred taxes		8,829		8,517
Income tax receivable agreement payable, net of current portion		400		409
Other noncurrent liabilities		5,920		5,856
Total liabilities		320,204		316,070
Commitments and contingencies (Note 7)
Stockholders’ equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding		—		—
Common stock, $0.01 par value, 200,000,000 shares authorized; 35,643,747 and 37,008,061 shares issued and outstanding as June 28, 2023 and December 28, 2022, respectively		356		370
Additional paid-in-capital		276,222		292,244
Retained earnings (Accumulated deficit)		382		(11,592)
Accumulated other comprehensive income		—		126
Total stockholders’ equity		276,960		281,148
Total liabilities and stockholders’ equity	$	597,164	$	597,218

See notes to condensed consolidated financial statements (unaudited).

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except share data)


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 28, 2023		June 29, 2022		June 28, 2023		June 29, 2022
Revenue
Company-operated restaurant revenue	$	103,901	$	106,454	$	201,774	$	200,411
Franchise revenue		10,119		10,064		19,791		19,319
Franchise advertising fee revenue		7,472		7,593		14,453		14,429
Total revenue		121,492		124,111		236,018		234,159
Cost of operations
Food and paper cost		28,474		31,691		55,376		59,423
Labor and related expenses		32,277		33,015		63,818		65,687
Occupancy and other operating expenses		25,576		25,832		50,462		49,677
Gain on recovery of insurance proceeds, lost profits, net		—		—		(151)		—
Company restaurant expenses		86,327		90,538		169,505		174,787
General and administrative expenses		11,108		9,679		22,307		19,633
Franchise expenses		9,492		9,557		18,524		18,288
Depreciation and amortization		3,694		3,618		7,331		7,215
(Gain) loss on disposal of assets		(80)		42		(50)		108
Gain on recovery of insurance proceeds, property, equipment and expenses		—		—		(242)		—
Loss (gain) on disposition of restaurants		25		—		(111)		—
Impairment and closed-store reserves		38		248		115		379
Total expenses		110,604		113,682		217,379		220,410
Income from operations		10,888		10,429		18,639		13,749
Interest expense, net		976		419		1,980		849
Income tax receivable agreement expense (income)		121		(186)		(1)		(316)
Income before provision for income taxes		9,791		10,196		16,660		13,216
Provision for income taxes		2,735		3,055		4,686		3,960
Net income	$	7,056	$	7,141	$	11,974	$	9,256
Net income per share
Basic	$	0.20	$	0.20	$	0.33	$	0.26
Diluted	$	0.20	$	0.20	$	0.33	$	0.25
Weighted-average shares used in computing net income per share
Basic		35,433,414		36,331,099		35,833,759		36,278,423
Diluted		35,534,104		36,473,960		36,018,288		36,478,808

See notes to condensed consolidated financial statements (unaudited).

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands)


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 28, 2023		June 29, 2022		June 28, 2023		June 29, 2022
Net income	$	7,056	$	7,141	$	11,974	$	9,256
Other comprehensive (loss) income
Changes in derivative instruments
Unrealized net gains arising during the period from interest rate swap		—		347		—		931
Reclassifications of (gains) losses into net income		(85)		55		(170)		172
Income tax benefit (expense)		22		(108)		44		(297)
Other comprehensive (loss) income, net of taxes		(63)		294		(126)		806
Comprehensive income	$	6,993	$	7,435	$	11,848	$	10,062

See notes to condensed consolidated financial statements (unaudited).

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands, except share data)


	Thirteen Weeks Ended June 28, 2023
						(Accumulated		Accumulated
				Additional		Deficit)		Other		Total
	Common Stock			Paid-in		Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
Balance, March 29, 2023	36,450,477	$	364	$	286,791	$	(6,674)	$	63	$	280,544
Stock-based compensation	—		—		842		—		—		842
Issuance of common stock related to restricted shares	363,210		4		(4)		—		—		—
Issuance of common stock upon exercise of stock options, net	179,950		2		779		—		—		781
Shares repurchased for employee tax withholdings	(18,490)		—		(171)		—		—		(171)
Repurchase of common stock	(1,272,287)		(13)		(11,928)		—		—		(11,941)
Repurchase of common stock - excise tax	—		—		(88)		—		—		(88)
Forfeiture of common stock related to restricted shares	(59,113)		(1)		1		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(63)		(63)
Net income	—		—		—		7,056		—		7,056
Balance, June 28, 2023	35,643,747	$	356	$	276,222	$	382	$	—	$	276,960

	Thirteen Weeks Ended June 29, 2022
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income		Equity
Balance, March 30, 2022	36,743,496	$	366	$	345,296	$	(30,278)	$	222		315,606
Stock-based compensation	—		—		970		—		—		970
Issuance of common stock related to restricted shares	298,638		3		(3)		—		—		—
Issuance of common stock upon exercise of stock options	8,627		—		50		—		—		50
Shares repurchased for employee tax withholdings	(20,317)		—		(218)		—		—		(218)
Forfeiture of common stock related to restricted shares	(27,931)		—		—		—		—		—
Other comprehensive income, net of tax	—		—		—		—		294		294
Net income	—		—		—		7,141		—		7,141
Balance, June 29, 2022	37,002,513	$	369	$	346,095	$	(23,137)	$	516	$	323,843

Table of Contents


	Twenty-Six Weeks Ended June 28, 2023
						(Accumulated		Accumulated
				Additional		Deficit)		Other		Total
	Common Stock			Paid-in		Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
Balance, December 28, 2022	37,008,061	$	370	$	292,244	$	(11,592)	$	126	$	281,148
Stock-based compensation	—		—		1,613		—		—		1,613
Issuance of common stock related to restricted shares	363,210		4		(4)		—		—		—
Issuance of common stock upon exercise of stock options, net	184,294		2		822		—		—		824
Shares repurchased for employee tax withholdings	(18,490)		—		(171)		—		—		(171)
Repurchase of common stock	(1,824,636)		(19)		(18,133)		—		—		(18,152)
Repurchase of common stock - excise tax	—		—		(150)		—		—		(150)
Forfeiture of common stock related to restricted shares	(68,692)		(1)		1		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(126)		(126)
Net income	—		—		—		11,974		—		11,974
Balance, June 28, 2023	35,643,747	$	356	$	276,222	$	382	$	—	$	276,960

	Twenty-Six Weeks Ended June 29, 2022
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		(Loss) Income		Equity
Balance, December 29, 2021	36,601,648	$	365	$	342,941	$	(32,393)	$	(290)	$	310,623
Stock-based compensation	—		—		1,796		—		—		1,796
Issuance of common stock related to restricted shares	298,638		3		(3)		—		—		—
Issuance of common stock upon exercise of stock options, net	150,475		1		1,579		—		—		1,580
Shares repurchased for employee tax withholdings	(20,317)		—		(218)		—		—		(218)
Forfeiture of common stock related to restricted shares	(27,931)		—		—		—		—		—
Other comprehensive income, net of tax	—		—		—		—		806		806
Net income	—		—		—		9,256		—		9,256
Balance, June 29, 2022	37,002,513	$	369	$	346,095	$	(23,137)	$	516	$	323,843

See notes to condensed consolidated financial statements (unaudited).

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)


	Twenty-Six Weeks Ended
	June 28, 2023		June 29, 2022
Cash flows from operating activities:
Net income	$	11,974	$	9,256
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		7,331		7,215
Stock-based compensation expense		1,613		1,796
Income tax receivable agreement income		(1)		(316)
Fire insurance proceeds for expenses paid and lost profit		151		—
(Gain) loss on disposal of assets		(50)		108
Gain on recovery of insurance proceeds, property, equipment and expenses, net		(242)		—
Impairment of property and equipment		53		253
Gain on disposition of restaurants		(111)		—
Amortization of deferred financing costs		106		126
Deferred income taxes, net		249		1,180
Changes in operating assets and liabilities:
Accounts and other receivables		(1,355)		(592)
Inventories		401		68
Prepaid expenses and other current assets		189		262
Income taxes payable (receivable)		4,227		(2,316)
Other assets		(81)		(812)
Accounts payable		(1,095)		(454)
Accrued salaries and vacation		1,826		(1,891)
Accrued insurance		360		281
Other accrued expenses and liabilities		(3,749)		(2,344)
Net cash flows provided by operating activities		21,796		11,820
Cash flows from investing activities:
Proceeds from disposition of restaurants		175		—
Proceeds from fire insurance for property and equipment		163		—
Purchase of property and equipment		(9,237)		(8,831)
Net cash flows used in investing activities		(8,899)		(8,831)
Cash flows from financing activities:
Proceeds from borrowings on revolver and swingline loans		2,000		—
Payments on revolver and swingline loan		(8,000)		—
Minimum tax withholdings related to net share settlements		(171)		(218)
Repurchases of common stock		(17,784)		—
Proceeds from issuance of common stock upon exercise of stock options, net of expenses		824		1,580
Payment of obligations under finance leases		(76)		(86)
Net cash flows (used in) provided by financing activities		(23,207)		1,276
(Decrease) increase in cash and cash equivalents		(10,310)		4,265
Cash and cash equivalents, beginning of period		20,493		30,046
Cash and cash equivalents, end of period	$	10,183	$	34,311



	Twenty-Six Weeks Ended
	June 28, 2023		June 29, 2022
Supplemental cash flow information
Cash paid during the period for interest	$	2,077	$	531
Cash paid during the period for income taxes	$	45	$	5,097
Unpaid purchases of property and equipment	$	5,894	$	1,388
Unpaid repurchases of common stock	$	518	$	—

See notes to condensed consolidated financial statements (unaudited).

Table of Contents

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively referred to herein as the “Company.” The Company’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses, and operates quick-service restaurants under the name El Pollo Loco® and operates under one operating segment. At June 28, 2023, the Company operated 188 and franchised 304 El Pollo Loco restaurants.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position and results of operations and cash flows for the periods presented. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The condensed consolidated financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 28, 2022.

The Company uses a 52- or 53-week fiscal year ending on the last Wednesday of the calendar year. In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations, and the fourth quarter includes 14 weeks of operations. Every six or seven years, a 53-week fiscal year occurs. Fiscal 2023 and 2022 are both 52-week years, ending on December 27, 2023 and December 28, 2022, respectively. Revenues, expenses, and other financial and operational figures may be elevated in a 53-week year.

Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 2022 Revolver (as defined below) on a full and unconditional basis (see Note 4, “Long-Term Debt”), and Intermediate has no subsidiaries other than EPL. EPL is a separate and distinct legal entity and has no obligation to make funds available to Intermediate. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively, subject to the terms of the 2022 Revolver.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and revenue and expenses during the periods reported. Actual results could materially differ from those estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurance reserves, lease accounting matters, stock-based compensation, income tax receivable agreement liability, contingent liabilities and income tax valuation allowances.

Table of Contents

COVID-19

During both the thirteen and twenty-six weeks ended June 28, 2023, the Company incurred $0.1 million in COVID-19 related expenses. During the thirteen and twenty-six weeks ended June 29, 2022, the Company incurred $0.3 million and $2.6 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. The Company may face future business disruption and related risks resulting from the uncertainty regarding a potential resurgence of COVID-19 or another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business.

While the Company believes the trend towards more moderate labor related costs and less inflationary pressure continues, the Company cannot determine the ultimate impact of a potential resurgence of COVID-19 (and related economic effects) and the current macroeconomic environment will have on the Company’s condensed consolidated financial condition, liquidity, and future results of operations. Therefore, any prediction as to the ultimate materiality of the adverse impact on the Company’s condensed consolidated financial condition, liquidity, and future results of operations is uncertain.

Cash and Cash Equivalents

The Company considers all liquid instruments with an original maturity of three months or less at the date of purchase to be cash equivalents.

Liquidity

The Company’s principal liquidity and capital requirements are new restaurants, existing restaurant capital investments (remodels and maintenance), interest payments on its debt, lease obligations and working capital and general corporate needs. At June 28, 2023, the Company’s total debt was $60.0 million. The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures depends on available cash and its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond the Company’s control. Based on current operations, the Company believes that its cash flow from operations, available cash of $10.2 million at June 28, 2023 and the outstanding borrowing availability under the 2022 Revolver will be adequate to meet the Company’s liquidity needs for the next twelve months from the date of filing of these condensed consolidated financial statements.

Concentration of Risk

Cash and cash equivalents are maintained at financial institutions and, at times, these balances may exceed federally-insured limits. The Company has never experienced any losses related to these balances.

The Company had one supplier to whom amounts due totaled 30.9% and 41.7% of the Company’s accounts payable at June 28, 2023 and December 28, 2022, respectively. Purchases from the Company’s largest supplier totaled 27.8% and 27.3% of total expenses for the thirteen and twenty-six weeks ended June 28, 2023, respectively, and 27.4% and 28.5% of total expenses for the thirteen and twenty-six weeks ended June 29, 2022, respectively.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 70.9% and 70.8% of total revenue for the thirteen and twenty-six weeks ended June 28, 2023, respectively, and 70.9% for both the thirteen and twenty-six weeks ended June 29, 2022.

Goodwill and Indefinite Lived Intangible Assets

The Company’s indefinite-lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquired in business combinations accounted for under the purchase method. The Company does not amortize its goodwill and indefinite-lived intangible assets. Goodwill resulted from the acquisition of certain franchise locations.

Upon the sale or refranchising of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained. The fair value of the

Table of Contents

portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which includes a deduction for the anticipated, future royalties the franchisee will pay the Company associated with the franchise agreement entered into simultaneously with the refranchising transition. The fair value of the reporting unit retained is based on the price a willing buyer would pay for the reporting unit and includes the value of franchise agreements. As such, the fair value of the reporting unit retained can include expected cash flows from future royalties from those restaurants currently being refranchised, future royalties from existing franchise businesses and company restaurant operations. The Company did not record any decrement to goodwill related to the disposition of restaurants in fiscal 2023 and 2022.

The Company performs an annual impairment test for goodwill during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise.

The Company reviews goodwill for impairment utilizing either a qualitative assessment or a fair value test by comparing the fair value of a reporting unit with its carrying amount. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs the fair value test, the Company will compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.

The Company performs an annual impairment test for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with its carrying amount. The excess of the carrying amount of an intangible asset over its fair value is recognized as an impairment loss.

The assumptions used in the estimate of fair value are generally consistent with the past performance of the Company’s reporting segment and are also consistent with the projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and competitive conditions.

The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen and twenty-six weeks ended June 28, 2023. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen and twenty-six weeks ended June 28, 2023.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

●

Level 1: Quoted prices for identical instruments in active markets.

●

Level 2: Observable prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

●

Level 3: Unobservable inputs used when little or no market data is available.

Certain assets and liabilities are measured at fair value on a nonrecurring basis. In other words, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances (e.g., when there is evidence of impairment).

Table of Contents

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen and twenty-six weeks ended June 28, 2023, reflecting certain property and equipment assets and right-of-use (“ROU”) assets for which an impairment loss was recognized during the corresponding periods, as discussed under Note 2, “Property and Equipment” and immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):


									Thirteen Weeks		Twenty-Six Weeks
			Fair Value Measurements at June 28, 2023 Using						Ended June 28, 2023		Ended June 28, 2023
	Total		Level 1		Level 2		Level 3		Impairment Losses		Impairment Losses
Certain ROU assets, net	$	265	$	—	$	—	$	265	$	—	$	39

The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen and twenty-six weeks ended June 29, 2022, reflecting certain property and equipment assets and ROU assets for which an impairment loss was recognized during the corresponding periods, as discussed immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):