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AFC Tops Sales, Lifts Outlook

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AFC Enterprises Inc. posted adjusted earnings of 25 cents per share in the third quarter of 2011, above the Zacks Consensus Estimate of 23 cents and 8.7% higher than the year-ago quarter level of 23 cents per share. On GAAP basis, earnings per share stood at 24 cents versus 23 cents in the year-ago quarter.

The year-over-year improvement in results was driven by positive same-store sales. Moreover, the company has four strategic plans in place going forward.

These include development of the Popeye’s brand, more value-added services to the 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 earnings growth.

Quarter Highlights

The operator and franchisor of Popeye’s restaurants reported total revenue of $35.4 million, up 3.8% from the year-ago quarter on positive same-store sales and unit growth.

AFC Enterprises' total revenue primarily comprises company-operated restaurant sales (flat year over year at $12.3 million), franchise revenues ( up 6.7% to $22.2 million) and rent and other revenues ( down 10% to $0.9 million).

The company's global same-store sales spiked 1.7%, resulting from a 1.7% upside in domestic same-store sales and a 1.8% jump in international same-store sales. The domestic same-store sales growth was attributable to the success of Bonafide bone-in chicken value offerings and introduction of a new exciting product, Rip’n Chick during the quarter.

The international comparable sales growth was driven by strong performance in Turkey and Canada; partially offset by sluggish performance in Latin America and South Korea.  

The company-operated restaurant margin remained flat year over year at 17.1% in the reported quarter as higher food cost was offset by labor cost savings and decline in other expenses.

Store Update

The Popeye’s system opened 26 restaurants in the third quarter of 2011, including 11 domestic and 15 international restaurants. The company also closed 25 restaurants, of which 10 were domestic and 15 international.

Financial Position

AFC Enterprises ended the quarter with cash and cash equivalents of $12.1 million and shareholders' equity of $7.0 million.


Popeye raised its fiscal 2011 outlook. The company now expects global same-store sales growth in the range to 2.0% to 2.5%, up from its previous guidance of 1% to 2%, with an expectation of 6.2% comparable growth in the fourth quarter of 2011. The company has also raised its adjusted earnings per share outlook to 93 cents to 97 cents as compared with the previous outlook of 91 cents to 95 cents per share.

The world's second largest quick-service chicken restaurant chain has also accelerated its unit growth target to 130–140 new restaurants globally in 2011 as opposed to the previous projection of 120-140 units. The company also expects to close 70–80 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, resulting in upside in outlook.

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 8%, which will likely hurt restaurant operating profit margins by approximately 250 basis points.

AFC currently has a Zacks #2 Rank (short-term Buy rating). We are also maintaining our long-term Neutral recommendation on the stock. One of AFC’s primary competitors, Kona Grill Inc. recently reported third quarter 2011 adjusted earnings of 8 cents per share, which beat the Zacks Consensus Estimate by 2 cents and improved substantially from the year-ago loss of 3 cents.

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