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AFC Tops, Outlook Bright

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AFC Enterprises Inc. posted adjusted earnings of 27 cents per share in the second quarter of 2012, surpassing the Zacks Consensus Estimate of 26 cents as well as the year-ago earnings of 23 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 $39.6 million, up 12.2% from the year-ago quarter on positive same-store sales and unit growth. Revenues also beat the Zacks Consensus Estimate of $39.0 million.   

AFC Enterprises' total revenue primarily comprises company-operated restaurant sales (up 16.3% year over year at $14.3 million), franchise revenues (up 10.5% at $24.3 million) and rent and other revenues (flat at $1.0 million).

The company's global comps spiked 7.5% compared with a rise of 0.7% in comps in the year-ago quarter, marking the ninth successive quarter of positive comps. The solid improvement in comps resulted from an 8.4% upside in domestic same-store sales and a 0.9% gain in the international same-store sales.

The company-operated restaurant operating profit escalated 120 basis points to 17.5% buoyed by strong sales coupled with supply chain as well as cost saving initiatives.

Store Update

The Popeye’s system opened 25 franchised restaurants in the second quarter of 2012, 13 of which were domestic and 12 international. The company also permanently shut down 16 units. At the end of the quarter, the company had 2,049 units among which 40 were domestic company-owned outlets, 1,597 franchised domestic units and 412 franchised international units.

At quarter-end, approximately 14% of the Popeyes domestic system restaurants had received the new Louisiana Kitchen look. Management expects to refurbish approximately one-third of the domestic system by the year-end.


AFC Enterprises ended the quarter with cash and cash equivalents of $20.6 million and shareholders' equity of $22.9 million.


The company now expects global same-store sales growth in the range to 5%–6% (previously guided 4%–5%) for 2012. In the preceding quarter, AFC lifted it comps guidance from 3%–4% to 4%–5%.  

Adjusted earnings per share are projected at $1.17–$1.19 (previously guided $1.13–$1.16), including approximately a penny gain for the 53rd week of operations in fiscal 2012. Prior to this, the adjusted earnings guidance was raised from $1.09–$1.13 to $1.13–$1.16 per share.

The world's second largest quick-service chicken restaurant chain expects to open 135-155 restaurants in 2012, including 4–6 company-owned units, slated to open in the fourth-quarter.  It also expects net restaurant openings to be in the range of 60–90 (previously guided 60-100).

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 strong sales momentum, 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 to perform better over the rest of 2012. The consecutive raise in guidance amid a faltering business environment reflects the company’s sound business model.    

However, management believes that commodity inflation and higher effective tax rates in 2012 compared with 2011 may weigh on the company’s net earnings. Food costs are expected to increase by around 3%, adversely impacting the restaurant operating margins by 1%.  

AFC, which competes with companies like Kona Grill Inc. , currently has a Zacks #3 Rank (short-term Hold rating). We are maintaining our long-term Neutral recommendation on the stock.

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