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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

or

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.

Table of Contents

    

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2

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).

3

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).

4

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).

5

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

6

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).

7

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).

8

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.

9

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

10

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:

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.

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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

$

$

$

$

 

$