AFC Enterprises Inc. (AFCE) posted second quarter 2011 adjusted earnings of 23 cents per share in line with the Zacks Consensus Estimate, but 9.5% higher than the year-ago quarter level of 21 cents per share. On a GAAP basis, earnings per share stood at 22 cents versus 26 cents in the year-ago quarter.
The year-over-year improvement in results was driven by positive same-store sales and lower interest expense. Moreover, the company has four strategic plans in place.
These include development of the Popeye’s brand, offering more value services to guests through its restaurant concepts, strengthening unit economics with cost-saving initiatives and higher new unit growth. We believe all these plans also contributed to the earnings improvement.
Quarter Highlights
The operator and franchisor of Popeye’s restaurants reported total revenue of $35.3 million, up 2.9% from the year-ago quarter on positive same-store sales and sales from new restaurants opened in 2010.
AFC Enterprises’ total revenue comprises company-operated restaurant sales (up 1.7% from the year-ago quarter to $12.3 million), franchise revenues (rose 3.8% to $22.0 million) and rent and other revenues (flat to $1.0 million).
The company’s global same-store sales inched up 0.7%, resulting from a 0.5% upside in domestic same-store sales and a 2.3% jump in international same-store sales. This increase was primarily driven by strong same-store sales in Turkey and Canada; partially offset by a decline in same-store sales in Korea.
The company-operated restaurant margin contracted 110 basis points to 16.3% in the reported quarter attributable to food cost inflation, partially offset by menu price increases on certain select items.
Store Update
The Popeye’s system opened 30 restaurants in the second quarter of 2011, including 19 domestic and 11 international restaurants. The company closed 25 restaurants, resulting in 5 net openings compared to zero net openings in the second quarter of 2010.
At the end of the quarter, the Popeye’s system had 2,000 restaurants, out of which 1,962 were franchised and 38 company-operated.
Financial Position
AFC Enterprises ended the quarter with cash and cash equivalents of $6.3 million and shareholders’ equity of $0.9 million.
During the second quarter, the company repurchased 1.03 million shares of its common stock for approximately $15.8 million.
Outlook
Popeye lowered its fiscal 2011 global same-store sales guidance range to 1.0% to 2.0% from its previous guidance of 1% to 3%. However, the company reaffirmed its adjusted earnings projection in the range of 91 cents to 95 cents per share.
The world’s second largest quick-service chicken restaurant chain expects to open 120–140 new restaurants globally in 2011. The company also expects to close 60–80 restaurants for the same period.
Our Take
We expect estimates to go up in the coming days, as the economy is showing signs of improvement and the company is witnessing solid growth momentum. Additionally, management plans to partially counter costs through top-line growth, additional supply chain cost savings, selective menu pricing and in-restaurant cost controls. AFC is implementing its cost-reduction initiatives globally. Apart from these, the company is focusing on limited-time-offers and promotions.
However, for 2011, management expects food costs to increase 6%, which will likely hurt restaurant operating profit margins by approximately 200 basis points.
AFC currently has a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.
One of AFC’s primary competitors, Jamba Inc. (JMBA) reported second quarter 2011 earnings of 5 cents per share, which beat the Zacks Consensus Estimate of 3 cents.
