AFC Enterprises, Inc. (AFCE): Why This Fast Food Stock Is Worth a Look

Sweet tea, biscuits, and fried everything are all staples of good old southern cooking. There are many fast food restaurants that have taken up this style of cooking as a business, and among those fryers is Popeye’s Louisiana Kitchen. Owned by AFC Enterprises, Inc. (NASDAQ:AFCE), Popeye’s opened in 1972 and specializes in spicy, New Orleans style chicken which, in my personal opinion, is delicious. But, Popeye’s has more than great southern food, it has growth opportunity and a good management.

All the place to grow

Popeye’s business strategy focuses on five “roadmap pillars.” Of the five “roadmap pillars,” two focus on immediate, quantitative growth. These include growing profits, and accelerating quality restaurant openings. Currently, AFC Enterprises, Inc. (NASDAQ:AFCE) has 2,119 Popeye’s restaurants operating globally. This is a tiny number compared to other fast food chain managers such as KFC owner Yum! Brands, Inc. (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD) who own 16,027 and 12,804 restaurants, respectively, in the United States alone.

Popeye’s restaurants do not overpopulate America, leaving the company plenty of room to grow without the threat of cannibalizing its own profits. Popeye’s took advantage of this fact by opening 23 restaurants in the first quarter of 2013. This is an increase from the 11 restaurants it opened last year.

Popeye’s has also had success growing profits. With in-store sales growing 11.9%, the 12^th quarter of positive growth, Popeye’s locations have been able to achieve profits of $250,000 per restaurant before rent. This is the fourth year of increased profits, leading to a quarterly earnings growth of 50.90% (year over year).

Both McDonald’s Corporation (NYSE:MCD) and Yum! have been struggling to attain positive growth. With competitively high profit and operating margins of 15.42% and 30.31%, respectively, McDonald’s Corporation (NYSE:MCD) is a well run brand with loyal customers. McDonald’s growth strategy has been to develop new restaurants in new markets, modernize existing restaurants, and invest in initiatives like multiple ordering points to increase capacity and convenience. This strategy does not seem to be working, as McDonald’s saw a decrease in global sales of 1% during its last quarter. With quarterly revenue growth of only 0.90% and earnings growth of 0.30%, it appears that the fast food giant is slowing down.

Yum! has been having an even harder year than McDonald’s. The avian flu epidemic in China has crushed same store sales for Yum! and, more specifically, KFC. In April, same store sales for Yum! Brands, Inc. (NYSE:YUM) were down 29%, and for KFC, they were down 35%. These upsetting numbers caused a revenue drop of 7.60% and an earnings drop of 26.40%. In 2005, Yum! Brands, Inc. (NYSE:YUM) dealt with a similar situation and bounced back with good earnings in 2006. Yum! should weather the storm and eventually bring earnings back to former levels. But for now, Yum! is struggling because of its position in China.

Building the brand

Of course, all of this growth potential is worthless without a quality brand. The three roadmap pillars that focus on branding are — build a distinctive brand, run great restaurants, and create a culture of servant leaders. Popeye’s has been improving its brand by renovating existing restaurants and creating new, innovative platters. Popeye’s ran three national promotions to sell the Butterfly Shrimp Tackle Box, Cajun Surf & Turf, and Rip’n Chick’n platters.