|Shares Out. (in M):||0||P/E|
|Market Cap (in M):||318||P/FCF|
|Net Debt (in M):||0||EBIT||0||0|
Popeyes is the number 2 chicken QSR concept behind KFC and currently has 1,506 domestic franchisees, 61 company-operated restaurants and 314 international franchisees. There is capacity and, more importantly, the demand to easily double the current number of restaurants over time. The company is 97% franchised which translates into 100+% returns on fixed assets and exceptional free cash flow.
In addition to the market’s recent flight away from small cap stocks, the stock is down for several reasons: the company took 6 months to fill the vacant CEO position (filled in October); same store sales (“SSS”) are shaping up to be ~-2.5% for ’07 after posting 1.6% in ’06, 3.3% in ’05 and 1.3% in ’04 for domestic franchisee and owned restaurants; and the company recently guided down ’07 EPS to 0.78-0.80 from 0.81-0.85 per share as well as guiding to the lower end for new gross restaurant additions of 155-165 units. It should be noted that 2007 was the first time since 2002 that management had given guidance and was too aggressive.
Recently, the company completed its CEO search and selected board member Cheryl Bachelder, former President and
At 12.5X consensus ’08 EPS and 11X ’09 EPS (my estimate), AFCE is a compelling value. Admittedly, the company is in a bit of a turnaround.
Popeyes was founded in
Customers generally view Popeyes as a home meal replacement. Most of the dining takes place off premises—estimated at 80% of total sales. Analysts estimate that 65-70% of total sales are done via drive-through which is above the industry average of 60%. Roughly 65% of the revenue is dinner and 35% lunch—which is skewed more towards dinner than the 60/40 average for the industry.
The opportunity to improve the menu and directly affect sales is fairly clear for several reasons. First, boneless chicken has been growing more quickly as a category than bone-in (it is perceived as more healthful and is more portable), and Popeyes needs to add more boneless to its menu. Second, the company needs to add snack day-parts (menu items for between meals) and “value” pricing items on its menu as McDonalds and other successful QSR players have recently done. With a lower economic demographic and the changing eating patterns in this country, this part of the menu is lacking. Third, the company needs to add late nights and breakfast to its arsenal more widely where applicable. Management has indicated that although store-specific, meal additions has been successful depending on the location of the store. Store re-imaging began in 2000 and is 85% done (the rest is due to be completed in 2008).
I view it positively that only menu changes and not time and capital consuming PP&E changes or big changes to the restaurant concept need to occur to get SSS headed in the right direction. Additionally, the company needs to improve its store level operations, especially drive-through service levels. This is very important given that drive-through is such a large portion of sales.
Same Store Sales
The company is almost entirely franchised so
AFCE currently trades at 14X ’07 consensus EPS estimates and 12.5X ’08. Free cash flow approximates Net Income as there is little capex. I believe that the company will do $1.00 per share in ’09 based on the increase in franchisees. Using the current 14X multiple creates a stock price target of $14 per share in 18-24 months. Comps trade in the 20X forward range. I think a higher multiple, more in line with comps, is warranted for the following reasons: AFCE is more of a franchisor rather than restaurant operator and as such has considerably less capital intensity; the company has been a prodigious buyer of its own stock with free cash flow; net restaurant units are growing; and the franchise revenue is remarkably stable. Slight improvements in SSS and early signs of improved menu changes would create a more favorable perception of the company and increase the multiple to the 15-20X where it had been previously trading.
The biggest driver of growth in earnings is adding new franchised restaurants. At maturity, a franchisee will do north of $1.1MM which creates approximately $55k of earnings (using a 5% franchise fee) with little incremental corporate cost as well as generating a one-time $35K startup fee. Gross new franchised units added were 139 in 2006 and 155 (est.) this year. Roughly 2.5 to 3% of franchised restaurants drop out each year or roughly 50 per year. These numbers were somewhat skewed over the past few years due to a problem with the Korean master franchisor which has now abated. Analysts estimate that net adds are going to be in the 50-75 unit range per year for the next several years given the that the development pipeline seems robust in spite of the management turnover and weaker SSS. Bachelder also mentioned in the last quarterly call that growth is important to the company but has not announced 2008 targets yet. She anticipates giving more information on openings and earnings guidance for 2008 on the Q4 call.
|Subject||RE: Unit economics / recap|
|Entry||03/03/2008 10:58 AM|
I don't have other franchise economics other than what is in the write up.
I think there is a huge opportunity to lever up further. They increased the buy back by $50MM back in December (now $65MM)--all on a $218MM market cap!
New management might be a little gun shy to lever too much due to an uncertain economy and operational fixes underway as well as tighter debt markets. However, she mentioned in her first call as CEO that this in an important part of her plan. Hard to handicap ..... I am still a believer.