AFC Enterprises, Inc., the franchisor and operator of Popeyes restaurants, has reported results for its fiscal second quarter which ended July 10, 2011. The Company also reaffirmed its fiscal 2011 earnings guidance and provided a business update on its Strategic Plan.
Second Quarter 2011 Highlights Compared to Second Quarter 2010:
- Reported net income was $5.5 million, or $0.22 per diluted share, compared to $6.8 million, or $0.26 per diluted share, last year. The prior year included a $0.05 per diluted share impact from the settlement of a federal income tax audit. Adjusted earnings per diluted share were $0.23 compared to $0.21 in 2010. The increase in adjusted earnings per diluted share was primarily due to lower interest expense. Adjusted earnings per diluted share is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
- Global system-wide sales increased 4.8 percent compared to a 2.8 percent increase last year.
- Global same-store sales increased 0.7 percent compared to a 0.6 percent increase last year. Domestic same-store sales increased 0.5 percent compared to a 0.4 percent increase in 2010. International same-store sales increased 2.3 percent compared to a 2.7 percent increase last year. According to independent data, in the second quarter of 2011, Popeyes domestic same-store sales continued to outpace the chicken QSR category, beating the segment for the 13th consecutive quarter.
- The Popeyes system opened 30 restaurants during the second quarter, resulting in 62 new restaurants opened in the first half of 2011. The Company permanently closed 39 restaurants through the end of the second quarter, resulting in 23 net openings in 2011 compared to 5 in the same period of the prior year.
- Through the end of the second quarter, Operating EBITDA was $24.1 million, at 29.4 percent of total revenue, compared to $24.4 million, at 31.2 percent of total revenue last year. The decrease in Operating EBITDA as a percent of total revenue was primarily due to new investments in general and administrative expenses, partially offset by higher revenues. Operating EBITDA is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
- The Company generated $12.1 million of free cash flow through the end of the second quarter, which included $0.3 million of other income, compared to $13.8 million in the same period of 2010, which included $0.1 million of other income. The reduction in free cash flow was primarily attributable to the Company’s new 2010 credit facility which required $1.9 million in higher mandatory debt repayments, partially offset by a significantly lower interest rate. Free cash flow is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
- Through the second quarter, the Company used $22.3 million of cash to repurchase 1,465,436 shares of common stock under the Company’s current Share Repurchase Program.
AFC Enterprises Chief Executive Officer Cheryl Bachelder stated, “Popeyes delivered on earnings expectations and had another quarter of positive same-store sales and strong new unit openings. Same-store sales gains were modest this quarter, but remain positive at 2.5 percent for the first half of the year. Despite a choppy economy and higher commodity costs, Popeyes continues to gain market share among its competitors. Higher commodity costs exerted downward pressure on operating margins; however, we took modest pricing increases on select menu items to buffer the full effect. Our strategic plan and our 2011 goals remain on track.”
Strategic Plan Update
The Company’s Strategic Plan is built on the foundation of the Four Pillars below.
1. Build the Popeyes Brand
- The Company continued its promotion of its core Bonafide chicken throughout the second quarter, both in Limited-Time-Only offers such as the “Buy One-Get One” promotion in May as well as a variety of locally priced box and bundle promotions. In addition, the Company delivered innovative seafood and boneless chicken products to its guests, such as Firecracker Shrimp and Wicked Chicken.
- In June, Popeyes celebrated the launch of its Louisiana Leaux menu and its new Get Up & Geaux Kids Meal, both with lower fat, calorie and sodium content. The new program returns Popeyes’ Naked Chicken Tenders to the menu, and adds two new side items – green beans and apple sauce.
- During the second quarter, Popeyes International franchisees offered multiple Limited-Time-Only promotions across regions to gain efficiencies and build excitement, driving guests into our restaurants abroad.
2. Run Great Restaurants
- Popeyes continues to remain focused on improving its Guest Experience Monitor (“GEM”) scores with “% Delighted” and “Speed of Service” scores consistent with first quarter performance and higher over last year. Additionally, by the end of the second quarter, approximately 65 percent of domestic restaurants were reporting drive-thru times at or below 180 seconds.
- Popeyes’ international team continues to leverage many of the domestic core operating systems with over 40 percent of international restaurants now using GEM. The Company also increased the number of its certified training restaurants in its international markets.
3. Strengthen Unit Economics
- As with many others in the restaurant industry, Popeyes continued to face commodity inflation in the second quarter, with an approximate 9 percent increase in food costs compared to last year. On a full year basis, the Company now expects food costs to increase by approximately 6 percent, which equates to approximately 200 basis points on restaurant operating profit margins. As previously indicated, management expects these costs to be partially offset by top-line sales growth, additional supply chain cost savings, selective menu pricing and in-restaurant cost controls.
- Maximizing restaurant profitability and returns on investment in Popeyes’ International markets are areas of continued focus. Efforts continue to address higher food costs through localized product sourcing, regional volume leverage, and alternative equipment opportunities.
4. Ramp Up New Unit Growth
- With a stronger new opening pipeline and new development incentive program, the Popeyes domestic system opened 30 new restaurants in the first half of 2011 as compared to 11 last year. These new restaurants are opening with average weekly sales performance significantly higher than the Popeyes system.
- Internationally, the Company is building the foundation to replicate the same development disciplines and methods employed in the brand’s domestic business. Management expects this will lead to a deliberate and sustainable long-term international growth plan.
Second Quarter 2011 Financial Performance Compared to Second Quarter 2010
Global system-wide sales increased by 4.8 percent. System-wide sales were comprised of $447.2 million in franchise restaurant sales and $12.3 million in company-operated restaurant sales.
Global same-store sales increased 0.7 percent compared to a 0.6 percent increase in 2010. Total domestic same-store sales increased 0.5 percent compared to a 0.4 percent increase last year. According to independent data, in the second quarter 2011, Popeyes same-store sales outpaced the chicken QSR category for the 13th consecutive quarter.
International same-store sales increased 2.3 percent and represented the 6th consecutive quarter of positive same-store sales. This increase was primarily driven by strong same-store sales in Turkey and Canada partially offset by a decrease in same-store sales in Korea.
Total revenues were $35.3 million, compared to $34.3 million last year. This increase was primarily attributable to sales from new restaurants opened in the second half of 2010 and higher same-store sales.
Company-operated restaurant operating profit (“ROP”) was $2.0 million, or 16.3 percent of sales, compared to $2.1 million, or 17.4 percent of sales, last year. The $0.1 million decrease in ROP was primarily due to higher food costs as a result of increased commodity costs partially offset by modest pricing increases on select menu items. Company-operated restaurant operating profit is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
General and administrative expenses were $13.6 million, or 3.0 percent of system-wide sales, compared to $12.6 million, or 2.9 percent of system-wide sales, last year. This increase was primarily attributable to new restaurant development support, additional marketing initiatives, and franchise support services.
Other expense, net was $0.2 million, primarily related to the Company’s pending relocation to a new corporate support center in close proximity to its existing offices.
Through the end of the second quarter, Operating EBITDA was $24.1 million, at 29.4 percent of total revenue, compared to $24.4 million, at 31.2 percent of total revenue, last year. The decrease in Operating EBITDA as a percentage of total revenue was primarily due to higher commodity costs and new investments in general and administrative expenses, partially offset by higher revenues. Operating EBITDA is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
Operating profit was $9.6 million, compared to operating profit of $10.2 million last year.
Interest expense, net was $0.9 million, an $0.8 million decrease from 2010. This decrease was primarily due to lower average interest rates under the Company’s new 2010 credit facility, and lower amortization for bank fees recognized in the second quarter of 2010.
Income tax expense was $3.2 million, yielding an effective tax rate of 36.8 percent, compared to an effective tax rate of 20.0 percent in the prior year. In the second quarter of 2010, the Company recorded a tax benefit of $1.4 million, or $0.05 per diluted share, related to the completion of a federal income tax audit. Excluding this tax benefit, the effective tax rate would have been 36.5 percent. The effective rates differ from statutory rates due to adjustments to estimated tax reserves and other permanent differences.
Reported net income was $5.5 million, or $0.22 per diluted share, compared to $6.8 million, or $0.26 per diluted share, last year. The prior year included a $0.05 share impact from the settlement of a federal income tax audit. Adjusted earnings per diluted share were $0.23 compared to $0.21 in 2010. This increase was primarily due to lower interest expense as discussed above. Adjusted earnings per diluted share is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
The Company generated $12.1 million of free cash flow through the end of the second quarter, which included $0.3 million of other income, compared to $13.8 million in the same period of 2010, which included $0.1 million of other income. The reduction in free cash flow was primarily attributable to the Company’s new 2010 credit facility which required $1.9 million in higher mandatory debt repayments, partially offset by a significantly lower interest rate. Free cash flow is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
During the second quarter, the Company repurchased 1,027,148 shares of its common stock for approximately $15.8 million. Through July 10, 2011, the Company used $22.3 million of cash to repurchase 1,465,436 shares of common stock under the Company’s current Share Repurchase Program. These purchases were made in accordance with the Company’s previous stock repurchase guidance for 2011 of $20-$25 million. As of July 10, 2011, approximately 24.4 million shares of the Company’s common stock were outstanding.
The Popeyes system opened 30 restaurants in the second quarter, which included 19 domestic and 11 international restaurants, compared to 17 total openings in the second quarter of 2010. The Company permanently closed 25 restaurants, including 9 domestic and 16 international restaurants, resulting in 5 net openings during the second quarter of 2011, compared to zero net openings in the second quarter of 2010. Through the second quarter, the Company opened 62 restaurants and permanently closed 39 restaurants, resulting in 23 net openings in 2011, as compared to 5 net openings in the same period last year.
On a system-wide basis, Popeyes had 2,000 restaurants operating at the end of the second quarter, compared to 1,945 at the end of the second quarter of 2010. Total unit count in 2011 was comprised of 1,595 domestic restaurants and 405 international restaurants in 27 foreign countries and three territories. Of this total, 1,962 were franchised restaurants and 38 were company-operated restaurants.
The Company announced after the end of the second quarter that it had entered into a lease for a new corporate support center, located in close proximity to its current offices. The new location offers approximately 40 percent more capacity at a lower cost per square foot. Management expects the support center will accommodate its continued global growth and increase productivity throughout the organization. The anticipated move-in date is the fourth quarter of 2011.
Fiscal 2011 Guidance
The Company now expects that Popeyes global same-store sales growth will be in the range of positive 1.0 to 2.0 percent versus prior guidance of positive 1.0 to 3.0 percent, as Popeyes restaurants roll over strong same-store sales from the third and fourth quarters of 2010.
Global new openings are still expected to be in the range of 120-140 restaurants. As previously indicated, international new unit openings are expected to remain on pace with the system’s 2010 growth of approximately 60 restaurants.
Consistent with previous guidance, the Company expects system-wide unit closings will be in the range of 60-80 restaurants, resulting in 40-80 net openings as compared to 39 net openings in 2010.
The Company continues to expect general and administrative expenses will be in the range of $60-$62 million, at a rate of 3.1-3.2 percent of system-wide sales, among the lowest in the restaurant industry. As previously disclosed, this expense includes $1.0 million for a planned corporate office relocation. Absent this unusual item, general and administrative expenses as a percent of system-wide sales would be 3.0-3.1 percent.
Consistent with previous guidance, the Company expects 2011 reported earnings per diluted share will be in the range of $0.87-$0.91. The Company continues to expect that adjusted earnings per diluted share will be in the range of $0.91-$0.95, compared to $0.86 in 2010. Adjusted earnings per diluted share is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.” Full year 2011 adjusted diluted earnings per share excludes approximately $1.5 million for the corporate office relocation ($1.0 million for general and administrative expenses and $0.5 million for depreciation and other expenses), or $0.04 per diluted share.
Corporate Profile
AFC Enterprises, Inc. is the franchisor and operator of Popeyes® restaurants, the world’s second-largest quick-service chicken concept based on number of restaurants. As of July 10, 2011, Popeyes had 2,000 operating restaurants in the United States, Puerto Rico, Guam, the Cayman Islands and 27 foreign countries. AFC’s primary objective is to deliver superior sales and profits by offering excellent investment opportunities in its Popeyes brand and providing exceptional franchisee support systems and services to its owners. AFC Enterprises can be found at www.afce.com.