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AFC Posts Mixed 3Q, Raises View

PZZA

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AFC Enterprises Inc. posted adjusted earnings of 29 cents per share in the third quarter of 2012, surpassing the Zacks Consensus Estimate of 27 cents as well as the year-ago earnings of 25 cents per share.

The year-over-year improvement was driven by strong same-store sales (comps). Moreover, the company has implemented certain strategic plans in order to achieve better results. These include development of the Popeye’s brand, more value-added services through its restaurant concepts, strengthening of unit economics with cost-saving initiatives and higher new unit growth.

Quarter Highlights

The company which operates and franchises Popeye’s restaurants reported total revenue of $38.9 million, up 9.9% from the year-ago quarter on positive same-store sales and unit growth. Revenues, however, missed the Zacks Consensus Estimate of $40.0 million.   

AFC Enterprises' total revenue primarily comprises company-operated restaurant sales (up 9.8% year over year at $13.5 million), franchise revenues (up 9.9% at $24.4 million) and rent and other revenues (up 11.1% at $1.0 million).

The company's global comps spiked 6.3% compared with a rise of 1.7% in comps in the year-ago quarter, marking the 10th successive quarter of positive comps. The solid improvement in comps resulted from a 6.8% upside in domestic same-store sales and a 2.5% gain in the international same-store sales. On the domestic front, franchised restaurant posted 7.0% rise in comps and company-owned restaurants were up 1.9%.

The company-operated restaurant operating margins declined 80 basis points to 16.3% hurt by many temporary store closings in New Orleans during Hurricane Isaac. Although many stores were closed, the company incurred personnel expenses and other fixed expenses at those units during that closing period led to the decline in margins.

 Store Update

The Popeye’s system opened 28 franchised restaurants in the third quarter of 2012, 18 of which were domestic and 10 international. The company also permanently shut down 23 units. At the end of the quarter, the company had 2,060 units among which 40 were domestic company-owned outlets, 1,606 franchised domestic units and 414 franchised international units. Management expects to refurbish approximately one-third of the domestic system by the year-end.

Liquidity

AFC Enterprises ended the quarter with cash and cash equivalents of $24.8 million and shareholders' equity of $26.9 million.

Outlook

The company now expects global same-store sales growth in the range to 6%–6.5% (previously guided 5%–6%) for 2012. AFC had lifted its comps guidance in the preceding two quarters as well.

Adjusted earnings per share are projected at $1.19–$1.21 (previously guided $1.17–$1.19), including approximately a penny gain for the 53rd week of operations in fiscal 2012. Prior to this, the adjusted earnings per share guidance were raised twice.

The world's second largest quick-service chicken restaurant chain also raised its unit opening guidance from 135–155 restaurants to 140–150 restaurants. The company is likely to open many units, scheduled for fourth quarter openings, in late December.  However, AFC also expects net restaurant openings to be in the range of 65–85 (previously guided 60-90).

AFC Enterprises also reiterated its plan to buy back approximately $15 million in outstanding shares in 2012.

The company’s long-term guidance comprises 1%–3% growth in comps, 4%–6% increase in unit openings and 13%–15% expansion in earnings per share.

Our Take

With a solid pipeline of products, market share gains in the chicken category, revamp of units’ outlook, acceleration of unit growth and widening of international footprint, AFC Enterprises is well positioned over the longer term. The consecutive hikes in guidance amid a faltering business environment inspire optimism around the stock.    

However, higher commodity inflation could weigh on the company’s net earnings. Lower-than-expected revenue in the third quarter also remains a drawback in the third quarter results. The company will also face tough comparison in the upcoming fourth quarter.  

AFC currently has a Zacks #4 Rank (short-term Sell rating). One of its competitors Papa Johns International Inc. (PZZA - Snapshot Report) currently carries a Zacks #2 Rank (short-term Buy rating)

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