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Coverage Initiation: AFC Enterprises, Inc.
We recently welcomed AFC Enterprises (AFCE) to The Value Line Investment Survey. The Atlanta-based company develops, operates, and franchises quick-service restaurants under the trade names Popeyes Chicken & Biscuits and Popeyes Louisiana Kitchen. The fast food chain is known for a unique “New Orleans” style menu that features everything from spicy chicken and Cajun rice to buttermilk biscuits and seasonal items like fried crawfish. In terms of overall store count, the company trails only Yum Brands’ (YUM) KFC unit within the quick service restaurant (QSR) chicken category.
AFC operates 37 highly-profitable company-owned restaurants in Louisiana and Tennessee. Still, the majority of its sales and earnings are generated from the roughly 1,900 franchised Popeyes locations in the lower 48 and overseas. U.S. franchisees typically pay the company regular royalties equal to 5% of net sales. They also chip in to an advertising fund (generally 4% of their sales) and pay one-time franchise fees totaling $37,500 per location. (Overseas franchise arrangements are slightly different) For its part, AFC is tasked with managing the Popeyes brand. That includes identifying new restaurant sites, keeping a lid on supply-chain costs, and developing in-store promotions/new menu items. Ensuring that franchisees earn high returns on their investment (and are thus more apt to open additional restaurants) is also a priority.
AFC became a publicly-traded company nearly ten years ago, via an initial public offering. Since then, it has given investors little to smile about. Indeed, at the current quotation, AFC shares are actually down nearly 30% from their March, 2001 offering price of $15. Comparatively, shares of Yum Brands have more than tripled in price (+340%) over the same nine-and-a-half-year stretch. Still, a new management team, eager to capitalize on global growth opportunities and more rigorously-enforced operating standards, has a good shot at delivering fairly reliable earnings growth and improved share-price performance.
Good to Grow
AFC is hoping to bring its regional Louisiana cuisine to an increasing number of domestic and international markets. Indeed, the company plans to increase its overall store count by 4%-6% annually over the next five years. The high end of the range translates into an overall store count of approximately 2,600 by the end of 2015. That seems a fairly reasonable goal, considering that category leader KFC currently operates over 15,000 locations worldwide. Management firmly believes that Popeyes’ spicy taste profile will translate well into overseas (non-U.S.) markets like Mexico and Vietnam, where home-grown populations are accustomed to food “with a kick”. Still, the company faces stiff competition from purveyors of quintessential American cuisine like hamburgers and more-traditionally prepared fried chicken.
A Turnaround in the Making
In the past, the Popeyes chain has had a fairly dubious reputation, be it for slow customer-service or untidy restaurants. Indeed, the company’s restaurants in major metro areas like New York and Chicago still receive relatively low marks for overall customer satisfaction (according to the most recent J.D. Power surveys). That said, a newly-installed management team, led by Chief Executive and KFC veteran Cheryl Bachelder, has instituted more rigorous operating standards throughout the entire Popeyes chain. Underperforming stores are being shuttered and a new level of accountability and competition is being fostered throughout the system. Every month, for example, each of AFC’s U.S. restaurants is now ranked from top to bottom on such metrics as sales and overall guest experience. Field personnel also face increased scrutiny.
Better store-level execution ought to have AFC ringing up higher sales of its signature spicy chicken and Cajun rice. Earnings and the company’s stock price should benefit in kind. Too, a highly-franchised restaurant system requires little in the way of capital investment (for AFC) and provides the company with a good amount of recurring cash flow. That’s a real plus, especially during tough economic times.