Popeyes Is No Turkey

By Ryan C. Fuhrmann | March 13, 2012 AAA

AFC Enterprises (Nasdaq:AFCE) is better known for its chain of Popeyes chicken and biscuit restaurant base. The company is still in the process of establishing a consistent growth track record, but the recent trends are very encouraging.

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Full-Year Recap
Revenues advanced 5.1% to $153.8 million. This consisted of 3.6% growth at company-owned restaurants to $54.6 million, or 35.5% of the total top line. Franchise revenue garnered from franchised locations improved 6.3% to $95 million, or 61.8% of the total. The remaining revenue stemmed from rent and other sources and was flat at $4.2 million to make up roughly the remaining 3% in total revenue.

For the year, the Popeyes system of stores, which includes company-owned and franchised locations, operated 2,035 stores. Eighty percent were in the U.S., with the remaining 20% scattered among 25 foreign countries. Total system-wide sales were just shy of $2 billion, meaning the company-owned locations account for a small fraction of the total system. System same-store sales rose a healthy 3.1% while total sales increased an even healthier 6.6%. (For related reading, see The 4 R's Of Investing In Retail.)

Returning to the company's results, operating profits fell 1.3% to $40.7 million. Management was able to keep restaurant occupancy and employee costs in check, but higher commodity costs sent restaurant food, beverage and packaging expenses up at a faster rate than sales. General and administrative expense growth also outpaced sales growth to suggest management did not do a good job of controlling costs in this category.

However, interest expense dropped significantly and helped net income advance 5.7% to $24.2 million. Share buybacks pushed per-share earnings up 7.8% to 97 cents per diluted share. Free cash flow was flat at $25.2 million, or about $1 per diluted share.

Outlook
For 2012, analysts project sales growth of nearly 9% and total sales of $167 million. They expect earnings of $1.14 per share, which would represent year-over-year growth of approximately 17.5%.

Management has a goal to grow earnings between 13 and 15% annually over the next five years. It expects to do this by growing comps 1 to 3% annually and grow its stores in a range of 4 and 6% each year.

The Bottom Line
AFC Enterprises doesn't have a long-term track record of consistent growth, but does appear to be stringing together a consecutive period of solid profit growth. The forward P/E of 14.2 already discounts some of the future growth potential, but will prove to be a very reasonable entry point if management can deliver on its goal of mid-teens annual earnings growth over the next five years. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

In the market for chicken food, casual dining rival Buffalo Wild Wings (Nasdaq:BWLD) offers more appealing business growth potential above 20% annually, but trades at a lofty earnings multiple above 22. The same goes for Chipotle Mexican Grill (NYSE:CMG) at nearly 37 times forward earnings expectations, though it sells a wider array of food. Generally in the restaurant space, Texas Roadhouse (Nasdaq:TXRH) offers roughly 10% annual growth potential for nearly 18 times earnings, while Caribou Coffee (Nasdaq:CBOU) is aiming for 25% annual profit growth but trades at more than 25 times forward earnings. Overall then, AFC offers a tasty mix of solid earnings growth at a somewhat reasonable valuation.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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