Popeyes On A Tasty Growth Trajectory

By Ryan C. Fuhrmann | March 15, 2011 AAA

AFC Enterprises (Nasdaq:AFCE) isn't a household name, but it is working to build the brand awareness of the Popeyes chicken brand it owns and operates. Actually, the vast majority of stores are operated by outside franchisees, which leads to more lucrative franchise revenues that grew nicely during the company's fourth quarter and full year. Ambitious growth plans if successful could push the share price higher going forward.

IN PICTURES: Companies Built On A Single Product

Fourth-Quarter Recap
AFC's total revenues increased 5.2% to $34.2 million as sales by company-owned stores and franchise revenues increased modestly. Total expenses rose faster than sales, increasing 8.3% to $26 million and pushing operating income down 3.5% to $8.2 million. Interest expense increased, but income taxes fell, the net of which allowed net income to increase 10% to $4.4 million, or 18 cents per diluted share.

Full-Year Review
AFC Enterprises sales fell slightly, declining 1.1% to $146.4 million, as management has been selling off company-owned stores to franchisees. As a result, sales from company-owned stores fell 8.2% to account for 36% of sales. Logically, franchise revenues increased 4% and grew to 61.1% of sales. The rest of the top line consisted of rent and other revenue, which fell 6.5%. (Predicting sales growth can be something of a black art - unless you ask the right questions, check out Great Expectations: Forecasting Sales Growth.)

Total "system-wide" sales of franchised and company-owned stores grew 5.1% and reached $1.8 billion to demonstrate that the vast majority of sales stem from stores that are not owned by the parent company. Total expenses fell 3.8% to allow operating income to increase 6.5% to $41.2 million. Both interest expense and income taxes fell and pushed net income up 21.8% to $22.9 million, or 90 cents per diluted share. Free cash flow increased 15.6% to $25.2 million, or approximately 99 cents per diluted share.

Outlook
For the coming year, Popeyes expects to see 120-140 new restaurants for growth between 6% and 7%, 60 of which will stem from overseas. Analysts project company sales growth of almost 5% and total sales of $153.5 million while the company expects earnings between 86 cents and 90 cents per diluted share, or at best flat from 2010 levels.

Popeyes has ambitious goals to "ramp up new unit growth" as well as increase the profitability of the existing store base. Part of this includes a closer relationship with drink providers Coca Cola (NYSE:KO) and Dr. Pepper Snapple (NYSE:DPS), which likely includes more drink exclusivity than rivals including Wendy's/Arby's (NYSE:WEN) and Yum! Brands (NYSE:YUM) have with Coke and PepsiCo (NYSE:PEP), respectively. (Read about discovering the best soft drink stocks, see Parched For Profits? Try Beverage Stocks.)

Bottom Line
AFC Enterprises is posting positive momentum in terms of sales and profits, and is also paying down debt, which will continue to lower interest expense and boost earnings. AFC currently has a trailing P/E of just over 16, if it hits the high end of guidance, but looking at the forward P/E we get under 13. The shares aren't a steal, but they trade at a lower earnings valuation than either Wendy's or Yum, the latter of which operates archrival KFC. With increased awareness of the Popeyes brand, the company should consider changing its name to the restaurants it is supporting.

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