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 12th 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.
The success of these promotions allowed Popeye’s to attain a 20% market share of the Chicken-QSR. It have also worked on drive through speed, recently achieving a consistent drive through time of 180 seconds in 70% of their store locations. With its focus on quality of food and service, the Popeye’s brand is steadily growing as seen by its improvement in same store sales.
The numbers back it up
AFC Enterprises, Inc. (NASDAQ:AFCE) has a market cap of $872 million, which is tiny compared to Yum! and McDonald’s who have market caps of $30.48 billion and $96.82 billion, respectively. While it is a small-cap business, other measures show that it is doing business right. AFC Enterprises’ current return on equity is 126.67%, showing high growth. Its revenue is $178.8 million, which yields net income of $30.4 million and diluted earnings per share of $1.24.
AFC Enterprises, Inc. (NASDAQ:AFCE) generated $11.5 million of free cash flow in the previous quarter which was used to convert restaurants acquired in 2012 and repurchase shares as a method of returning value to investors. Both are good uses of cash in my opinion.
AFC Enterprises expects high growth going forward. According to CEO Cheryl Bachelder, they expect in-store sales growth of 3%-4% and earnings per share to be between $1.37 and $1.42. They are also planning another share repurchase of $15 to $20 million.
Conclusion
Popeye’s is looking hotter than its chicken. AFC Enterprises, Inc. (NASDAQ:AFCE) is a solid business with massive growth potential that I don’t see slowing down any time soon. With the slow and negative growth seen by McDonald’s and Yum! brands, AFC Enterprises is clearly the fastest growing fast food operator out among them. Focusing on delivering quality food and service to customers worked for Popeye’s this past quarter and should continue to work in the future. With a current share price of around $35, I think AFC Enterprises, Inc. (NASDAQ:AFCE) is a good investment.
The article Why This Fast Food Stock Is Worth a Look originally appeared on Fool.com and is written by Ben Popkin.
Ben Popkin has no position in any stocks mentioned. The Motley Fool recommends McDonald’s. The Motley Fool owns shares of McDonald’s. Ben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
