SEC Filing | El Pollo Loco Holdings, Inc.

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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 September 27, 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
Rights to Purchase Series A Preferred Stock, par value $0.01 per share		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 October 27, 2023, there were 32,953,268 shares of the issuer’s common stock outstanding.

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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.		28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		46
Item 4. Controls and Procedures.		47

PART II—OTHER INFORMATION		49
Item 1. Legal Proceedings.		49
Item 1A. Risk Factors.		49
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.		51
Item 3. Defaults Upon Senior Securities.		51
Item 4. Mine Safety Disclosures.		51
Item 5. Other Information.		52
Item 6. Exhibits.		53
Signatures		55

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)


	September 27,		December 28,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	13,815	$	20,493
Accounts and other receivables, net		9,622		10,084
Inventories		2,039		2,442
Prepaid expenses and other current assets		3,653		3,662
Income tax receivable		—		768
Total current assets		29,129		37,449
Property and equipment, net		82,187		78,644
Property and equipment held under finance lease, net		1,434		1,532
Property and equipment held under operating leases, net ("ROU asset")		166,697		165,584
Goodwill		248,674		248,674
Trademarks		61,888		61,888
Deferred tax assets		—		512
Other assets		3,019		2,935
Total assets	$	593,028	$	597,218
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of obligations under finance leases	$	111	$	110
Current portion of obligations under operating leases		19,425		19,995
Accounts payable		10,087		12,741
Accrued salaries and vacation		7,253		8,873
Accrued insurance		11,557		11,120
Accrued income taxes payable		5,622		—
Accrued interest		246		291
Current portion of income tax receivable agreement payable		323		263
Other accrued expenses and current liabilities		14,975		15,120
Total current liabilities		69,599		68,513
Revolver loan		80,000		66,000
Obligations under finance leases, net of current portion		1,542		1,626
Obligations under operating leases, net of current portion		166,864		165,149
Deferred taxes		9,270		8,517
Income tax receivable agreement payable, net of current portion		454		409
Other noncurrent liabilities		6,627		5,856
Total liabilities		334,356		316,070
Commitments and contingencies (Note 7)
Stockholders’ equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized; 100,000 shares designated as Series A Preferred Stock; none issued or outstanding		—		—
Common stock, $0.01 par value, 200,000,000 shares authorized; 32,957,470 and 37,008,061 shares issued and outstanding as of September 27, 2023 and December 28, 2022, respectively		329		370
Additional paid-in-capital		248,732		292,244
Retained earnings (accumulated deficit)		9,611		(11,592)
Accumulated other comprehensive income		—		126
Total stockholders’ equity		258,672		281,148
Total liabilities and stockholders’ equity	$	593,028	$	597,218

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except share data)


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 27, 2023		September 28, 2022		September 27, 2023		September 28, 2022
Revenue
Company-operated restaurant revenue	$	102,703	$	103,174	$	304,477	$	303,585
Franchise revenue		10,255		9,543		30,046		28,862
Franchise advertising fee revenue		7,441		7,161		21,894		21,590
Total revenue		120,399		119,878		356,417		354,037
Cost of operations
Food and paper cost		27,552		30,163		82,928		89,586
Labor and related expenses		33,092		33,279		96,910		98,966
Occupancy and other operating expenses		27,289		26,920		77,751		76,597
Gain on recovery of insurance proceeds, lost profits, net		—		—		(151)		—
Company restaurant expenses		87,933		90,362		257,438		265,149
General and administrative expenses		9,144		9,855		31,451		29,488
Franchise expenses		9,583		9,027		28,107		27,315
Depreciation and amortization		3,946		3,530		11,277		10,745
Loss (gain) on disposal of assets		16		21		(34)		129
Gain on recovery of insurance proceeds, property, equipment and expenses		—		—		(242)		—
Gain on disposition of restaurants		(4,923)		—		(5,034)		—
Impairment and closed-store reserves		1,008		219		1,123		598
Total expenses		106,707		113,014		324,086		333,424
Income from operations		13,692		6,864		32,331		20,613
Interest expense, net		1,382		108		3,362		957
Income tax receivable agreement expense (income)		106		(29)		105		(345)
Income before provision for income taxes		12,204		6,785		28,864		20,001
Provision for income taxes		2,975		1,776		7,661		5,736
Net income	$	9,229	$	5,009	$	21,203	$	14,265
Net income per share
Basic	$	0.28	$	0.14	$	0.61	$	0.39
Diluted	$	0.28	$	0.14	$	0.60	$	0.39
Weighted-average shares used in computing net income per share
Basic		33,412,674		36,402,899		35,026,731		36,329,938
Diluted		33,490,004		36,507,050		35,179,483		36,491,624

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands)


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 27, 2023		September 28, 2022		September 27, 2023		September 28, 2022
Net income	$	9,229	$	5,009	$	21,203	$	14,265
Other comprehensive (loss) income
Changes in derivative instruments
Unrealized net gains arising during the period from interest rate swap		—		43		—		974
Reclassifications of gains into net income		—		(369)		(170)		(197)
Income tax benefit (expense)		—		—		44		(297)
Other comprehensive (loss) income, net of taxes		—		(326)		(126)		480
Comprehensive income	$	9,229	$	4,683	$	21,077	$	14,745

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

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

(Amounts in thousands, except share data)


	Thirteen Weeks Ended September 27, 2023
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Retained		Comprehensive		Stockholders’
	Shares	Amount		Capital		Earnings		(Loss) Income		Equity
Balance, June 28, 2023	35,643,747	$	356	$	276,222	$	382	$	—	$	276,960
Stock-based compensation	—		—		926		—		—		926
Issuance of common stock related to restricted shares	28,222		—		—		—		—		—
Issuance of common stock upon exercise of stock options, net	35,666		—		347		—		—		347
Shares repurchased for employee tax withholdings	(4,639)		—		(46)		—		—		(46)
Repurchase of common stock	(2,706,214)		(27)		(28,437)		—		—		(28,464)
Repurchase of common stock - excise tax	—		—		(280)		—		—		(280)
Forfeiture of common stock related to restricted shares	(39,312)		—		—		—		—		—
Net income	—		—		—		9,229		—		9,229
Balance, September 27, 2023	32,957,470	$	329	$	248,732	$	9,611	$	—	$	258,672

	Thirteen Weeks Ended September 28, 2022
								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		(Loss) Income		Equity
Balance, June 29, 2022	37,002,513	$	369	$	346,095	$	(23,137)	$	516		323,843
Stock-based compensation	—		—		1,009		—		—		1,009
Issuance of common stock related to restricted shares	53,476		1		(1)		—		—		—
Shares repurchased for employee tax withholdings	(2,584)		—		(24)		—		—		(24)
Other comprehensive income, net of tax	—		—		—		—		(326)		(326)
Net income	—		—		—		5,009		—		5,009
Balance, September 28, 2022	37,053,405	$	370	$	347,079	$	(18,128)	$	190	$	329,511

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	Thirty-Nine Weeks Ended September 27, 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	—		—		2,539		—		—		2,539
Issuance of common stock related to restricted shares	391,432		4		(4)		—		—		—
Issuance of common stock upon exercise of stock options, net	219,960		2		1,169		—		—		1,171
Shares repurchased for employee tax withholdings	(23,129)		—		(217)		—		—		(217)
Repurchase of common stock	(4,530,850)		(46)		(46,570)		—		—		(46,616)
Repurchase of common stock - excise tax	—		—		(430)		—		—		(430)
Forfeiture of common stock related to restricted shares	(108,004)		(1)		1		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(126)		(126)
Net income	—		—		—		21,203		—		21,203
Balance, September 27, 2023	32,957,470	$	329	$	248,732	$	9,611	$	—	$	258,672

	Thirty-Nine Weeks Ended September 28, 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	—		—		2,806		—		—		2,806
Issuance of common stock related to restricted shares	352,114		4		(4)		—		—		—
Issuance of common stock upon exercise of stock options, net	150,475		1		1,579		—		—		1,580
Shares repurchased for employee tax withholdings	(22,901)		—		(243)		—		—		(243)
Forfeiture of common stock related to restricted shares	(27,931)		—		—		—		—		—
Other comprehensive income, net of tax	—		—		—		—		480		480
Net income	—		—		—		14,265		—		14,265
Balance, September 28, 2022	37,053,405	$	370	$	347,079	$	(18,128)	$	190	$	329,511

See notes to condensed consolidated financial statements (unaudited).

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EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)


	Thirty-Nine Weeks Ended
	September 27, 2023		September 28, 2022
Cash flows from operating activities:
Net income	$	21,203	$	14,265
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		11,277		10,745
Stock-based compensation expense		2,539		2,806
Income tax receivable agreement expense (income)		105		(345)
Fire insurance proceeds for expenses paid and lost profit		151		—
(Gain) loss on disposal of assets		(34)		129
Gain on recovery of insurance proceeds, property, equipment and expenses, net		(242)		—
Impairment of property and equipment		1,032		392
Gain on disposition of restaurants		(5,034)		—
Amortization of deferred financing costs		153		292
Deferred income taxes, net		1,138		2,351
Changes in operating assets and liabilities:
Accounts and other receivables		462		(1,539)
Inventories		403		108
Prepaid expenses and other current assets		8		755
Income taxes payable (receivable)		6,391		(1,459)
Other assets		(236)		(150)
Accounts payable		(5,798)		1,285
Accrued salaries and vacation		(1,619)		(4,564)
Accrued insurance		437		93
Other accrued expenses and liabilities		173		(3,257)
Net cash flows provided by operating activities		32,509		21,907
Cash flows from investing activities:
Proceeds from disposition of restaurants		7,722		—
Proceeds from fire insurance for property and equipment		163		—
Purchase of property and equipment		(15,297)		(13,022)
Net cash flows used in investing activities		(7,412)		(13,022)
Cash flows from financing activities:
Proceeds from borrowings on revolver and swingline loans		25,000		—
Payments on revolver and swingline loan		(11,000)		(20,000)
Minimum tax withholdings related to net share settlements		(217)		(243)
Repurchases of common stock		(46,616)		—
Proceeds from issuance of common stock upon exercise of stock options, net of expenses		1,171		1,580
Payment of obligations under finance leases		(113)		(124)
Deferred financing costs for revolver loan		—		(869)
Net cash flows used in by financing activities		(31,775)		(19,656)
Decrease in cash and cash equivalents		(6,678)		(10,771)
Cash and cash equivalents, beginning of period		20,493		30,046
Cash and cash equivalents, end of period	$	13,815	$	19,275



	Thirty-Nine Weeks Ended
	September 27, 2023		September 28, 2022
Supplemental cash flow information
Cash paid during the period for interest	$	3,554	$	819
Cash paid during the period for income taxes	$	54	$	5,100
Unpaid purchases of property and equipment	$	4,476	$	3,030
Unpaid repurchases of common stock	$	430	$	—

See notes to condensed consolidated financial statements (unaudited).

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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 September 27, 2023, the Company operated 171 and franchised 321 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, contingent liabilities and income tax valuation allowances.

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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 September 27, 2023, the Company’s total debt was $80.0 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 $13.8 million at September 27, 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.

Subsequent Events

Subsequent to the quarter-end, on November 2, 2023, the Company announced that Laurance Roberts, the Company’s Chief Executive Officer and President, is leaving his position as Chief Executive Officer and President and as a member of the Company’s Board of Directors effective as of the close of business on November 3, 2023. In connection with Mr. Roberts’ departure, the Board has appointed Maria Hollandsworth as interim Chief Executive Officer and President of the Company, effective as of November 4, 2023. Ms. Hollandsworth currently serves as Chief Operating Officer of the Company and will continue in that role during her tenure as interim Chief Executive Officer and President. To help facilitate the transition from Mr. Roberts to Ms. Hollandsworth, the Company has retained Mr. Roberts as a consultant from November 4, 2023 through December 28, 2023 pursuant to a Release and Consulting Agreement dated November 1, 2023 between the Company and Mr. Roberts.

Further, on October 31, 2023, the Company’s Board of Directors approved a share repurchase program under which the Company is authorized to repurchase up to $20.0 million of shares of the Company’s common stock. The repurchase program will terminate on March 31, 2025, may be modified, suspended or discontinued at any time, and does not obligate the Company to acquire any particular number of shares.

Lastly, the Company paid down $9.0 million on its 2022 Revolver and outstanding borrowings as of November 2, 2023 were $71.0 million.

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 no supplier for which amounts due totaled more than 10.0% of the Company’s accounts payable at September 27, 2023. As of December 28, 2022, the Company had one supplier to whom amounts due totaled 41.7% of the Company’s accounts payable. Purchases from the Company’s largest supplier totaled 26.6% and 27.0% of total expenses for the thirteen and thirty-nine weeks ended September 27, 2023, respectively, and 28.4% and 28.5% of total expenses for the thirteen and thirty-nine weeks ended September 28, 2022, respectively.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 71.6% and 71.1% of total revenue for the thirteen and thirty-nine weeks ended September 27, 2023, respectively, and 71.9% and 71.2% for the thirteen and thirty-nine weeks ended September 28, 2022, respectively.

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

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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 Company reports as one reporting unit. The fair value of the 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 2022 or the thirty-nine weeks ended September 27, 2023.

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, in connection with the sale of 18 units, there were indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen and thirty-nine weeks ended September 27, 2023. After completing the impairment analysis, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen and thirty-nine weeks ended September 27, 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:

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

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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.

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

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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).

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen and thirty-nine weeks ended September 27, 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		Thirty-Nine Weeks
			Fair Value Measurements at September 27, 2023 Using						Ended September 27, 2023		Ended September 27, 2023
	Total		Level 1		Level 2		Level 3		Impairment Losses		Impairment Losses
Certain property and equipment, net	$	—	$	—	$	—	$	—	$	979	$	979
Certain ROU assets, net	$	254	$	—	$	—	$	254	$	—	$	39

The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen and thirty-nine weeks ended September 28, 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):