Is Popeye Eating his Spinach?

By Jon Quast - September 12, 2012 | Tickers: AFCE, JACK, MCD, YUM | 0 Comments

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If you aren't familiar with Popeye's restaurants, you're not alone.  This is a relatively small chain operated by AFC Enterprises (NASDAQ: AFCE).  Contrary to what you might think, these are not restaurants serving up spinach inspired delicacies; they specialize in fried chicken.  Specifically, they cook Louisiana specialties which include things like fried shrimp and red beans.  They are a stock play for people interested in bayou food.

I was looking at their most recent report, and found some interesting stuff.  I thought it would be fun to look at AFC's report, but also compare them to two big players in the industry: YUM! Brands (NYSE: YUM), and McDonald's (NYSE: MCD).  I also want to compare them to a company closer to their size: Jack in the Box (NASDAQ: JACK).

Revenue

First, let's look at how AFC Enterprises is doing in the revenue category.  Revenues are up over last year.  This year they reported $39.6 million opposed to $35.3 million last year.  As a percentage, they are doing pretty good growing revenues the last couple of years.  The chart below depicts trailing twelve month profits compared to their competitors.

AFCE Revenue Growth data by YCharts

As you can see, revenue growth over the last 3 years rival the growth that Yum has experienced.  Yum is known to be one of the fastest growing companies in the restaurant business, so this is encouraging data.  Also you can see that AFC Enterprises has experienced fairly steady revenue growth.

Perhaps we should ask: "why are revenues growing?"  Management has cited two things that have been propelling revenue growth:

1. Same Store Sale Growth
2. New Restaurant Growth.

Same Store Sales

Same store sales looked really good for AFC this quarter.  Globally same store sales are up 7.5% for 2012.  Through this same six month period last year, same store sales were up only 2.5%.  Normally, 2.5% is a respectable increase in same store sales.  But no doubt, 7.5% is very good.  And if you look at the domestic results, it gets better.  Domestically they grew same store sales 8.4%.

But more than just same store sales; sales are up overall.  Globally Popeyes' sales are up a whopping 11.5%.  All of this is encouraging info.

New Restaurant Growth

You always want to see a restaurant chain opening up in new locations.  At first glance things looked pretty good.  So far this year they've opened up 51 locations.  For perspective, Jack in the Box only opened up 31 new locations all of last year, and this year they are only hoping for 35.  When looked at from this perspective, 51 new locations through six months sounds pretty good.

But, there is more.  Although they opened 51 locations,  they also permanently closed 33.  That is unsettling.  So net stores were only 18, compared to 23 through six months last year.  I loved seeing how many restaurants they opened, but when I saw how many they closed I asked myself "why?"  Details aren't given, but we can assume they were under-performing locations.

When I look at any company's growth, I am interested in international growth.  I sank down a little lower in my chair as I read the results.  Of the 16 restaurants closed in the 2nd quarter, 15 were international locations.  Does this mean that Popeyes doesn't do well overseas?  Are people in Latin America not into Louisiana food?  

It may still be too early to tell.  Popeyes opened up 12 new locations for the quarter (for a net loss of 3).  Of these new locations, the company has moved into San Jose Costa Rica, and Lima Peru for the first time with free-standing restaurants.  We'll have to wait and see how they do in new markets.

Earnings Per Share

I felt like I was riding a roller coaster reading this report.  It seemed like I was flying high reading the good news.  Then I sunk back down when I read the bad news of closing restaurants.  What would this mean in the end for net profits/earnings per share?

AFCE Earnings Per Share Growth data by YCharts

That's kind of a spiky chart, but if you look close you see that AFC Enterprises has the highest earnings per share percentage growth.  It may be unfair to compare AFC Enterprises to McDonalds.  McDonalds is a behemoth of a company.  For them to grow earnings per share by 20% would be a phenomenal feat.  We would naturally expect a higher growth rate from a growth company than from an established performer.  But it does go to underline the growth potential of this company.

I'm going to interpret this data a little bit.  Revenue was up decently.  Management had to close some restaurants.  Yet, earnings per share is growing at a good clip.  This signals to me that management is getting rid of dead weight, and opting for new restaurants that will pull their weight.  There are other factors to consider such as operation costs (where AFC also did well), but it seems like in this case, restaurants closing might be a sign that management is interested in growing, and won't let under-performers hold them back.

Conclusion

Personally I think things look decent for AFC Enterprises.  A fairly small man like Popeye could take on the huge lumbering Bluto by just eating a can of spinach, but I wouldn't go so far to suggest that AFC can hold its own against other bigger players in the industry when it comes to long-term growth prospects.  Specifically, I'm going to wait and see if the rate at which they are closing restaurants slows down, and confirms my business "pruning" suspicions.  For now, I'm just going to keep an eye on the company.

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