AFC Enterprises Inc (AFCE), the world’s second largest quick-service chicken restaurant chain, announced its preliminary operating results for the fourth quarter and fiscal 2010 and also raised its earnings outlook for 2010.
Atlanta, Georgia-based AFC experienced strong same-store sales growth with global same-store sales up 6.0% during the fourth quarter as compared to a drop of 1% in the year-ago quarter. The global same-store sales also jumped 2.6% in fiscal 2010, ahead of the previous forecast range of 2% to 2.5% and a 0.7% rise in 2009.
The solid same-store sales results are driven by the company’s marketing efforts to offer its guests the brand’s distinctive cuisine at compelling value to drive the traffic. The Zacks sales estimates for the fourth quarter and 2010 are respectively, $34 million and $146.0 million.
Outlook
AFC expects fourth quarter adjusted earnings to be in a range of 18 cents to 19 cents and GAAP earnings in the range of 16 cents to 17 cents. The Zacks Consensus Estimate for the fourth quarter is 17 cents.
The operator and franchisor of Popeye’s restaurants increased its fiscal 2010 adjusted earnings outlook to 85 cents to 86 cents per share, from 81 cents to 83 cents, based on same store sales results. The Zacks Consensus Estimate for fiscal 2010 is 83 cents and for 2011 is 99 cents.
Store Update
The Popeye’s system opened 22 domestic and 26 international restaurants in the fourth quarter. The total number of restaurants opened in 2010 was 106, lower than the target range of 120-130 restaurants, due to the slowdown in construction. The company missed its goal by 14 units, of which 8 are expected to open by the end of January.
At the end of 2010, the Popeye’s system had 1,977 restaurants, out of which 1,939 were franchised restaurants and 38 were company-operated restaurants.
Financial Update
On December 23, AFC Enterprises completed a $100 million credit agreement and secured a new credit facility with a maturity of 5 years and lower interest rate.
Besides paying down the company’s high-cost debt, the new credit facility will increase available funds and extend the maturity period of debt. Additionally, the company intends to use its available cash balance to fund its core business as well as the share repurchase program in 2011.
AFC Enterprises is expected to recognize approximately $0.6 million of interest charges and defer approximately $1.0 million of fees associated with the refinancing in the fourth quarter of 2010.
Our Take
We expect the company to report better-than-expected fourth quarter results as AFC Enterprises lifted its outlook andthe economy is also showing signs of improvement. AFC Enterprises also have 4 strategic plans, which focus on developing the brand, offering more value service to guests and introduce new product innovation along with cost saving initiatives to improve margins and ramp-up new unit growth.
Based on the execution of the company’s strategic plan, in the next five years, the company expects same-store sales growth of 1% to 3%; net new unit growth of 4% to 6%; and earnings to grow double digit i.e. 13% to 15%.
One of Its prime competitors Ruby Tuesday Inc. (RT) reported second quarter 2011 adjusted earnings of 7 cents per share surpassing the Zacks Consensus Estimate by 2 cents. The strong results were driven by top-line growth.
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