Popeyes Louisiana Kitchen, Inc. (PLKI) continues to be on our Investment Ideas list as a long.
PLKI released earnings after the close yesterday, posting exceptional first quarter results despite a sluggish QSR environment. Rather than blame the weather, PLKI grew global, domestic and international same-store sales by 4.5%, 4.3% and 5.8%, respectively, while beating top and bottom line estimates. Similar to what we heard from Chipotle, management noted a strong bounce back in sales following periods of unfavorable weather.
Popeyes continues to outperform the domestic chicken-QSR and overall-QSR segments. Management noted intense competition in the quarter, as direct competitors sought to take advantage of favorable chicken costs by shifting their menu and promotional focus to chicken products. We believe this increased promotional activity actually benefitted Popeyes by bringing attention to its superior product. The company managed to increase its share in the domestic chicken-QSR segment to 22.3% from 20.2% a year ago.
Commodity prices are expected to be favorable throughout 2014, primarily led by lower chicken costs. Surging shrimp prices were a bit of a concern heading into the release, but management was quick to point out that shrimp only accounts for approximately 5% of total annual spend. All told, management doesn’t feel inclined to take any price increases this year as value continues to be very important to their guests.
The majority of leverage in its operating model moving forward will be driven by top line sales and, to a lesser degree, enhanced back of house operations. To that extent, management has notable top line drivers in place including the continuation of its reimage program (65% of domestic stores are currently remodeled; 80% will be by year end), the virtual success cycle of advertising (growing sales drive an increase in media spend), and a full calendar of resonant promotional activity. Remodels have typically resulted in a 3-4% sales lift although the remaining remodels will be some of the most expensive and dramatic ones to date, suggesting greater upside to any sales lift. In addition, the new model of restaurants (which is leading the expansion efforts) is generating $1.6 million in average unit volumes, significantly greater than the old model which generates $1.3 million.
Longer-term, we believe a significant domestic and international growth opportunity lies ahead for Popeyes and are confident they will expand at a rate that doesn’t sacrifice returns. Aside from continued expansion, we’re attracted to Popeyes’ diversified revenue stream and stable cash flows which enables management to continue pursuing value enhancing initiatives. In our view, Popeyes is well-positioned to outperform for the remainder of 2014 and we continue to view annual long-term guidance of 1-3% same-store sales growth, 4-6% unit growth and 13-15% adjusted EPS growth as achievable.
What we liked:
- It is clear to us that Popeyes is one of the best managed companies in the restaurant space.
- Global same-store sales increased 4.5% y/y.
- Total domestic same-store sales increased 4.3% y/y.
- International same-store sales increased 5.8% y/y.
- Management didn’t blame weather and noted a strong rebound in sales following unfavorable periods.
- Popeyes’ domestic same-store sales continue to outpace both the chicken-QSR segment and overall QSR segment.
- Popeyes increased its market share in the domestic chicken-QSR segment to 22.3%, up from 20.2% a year ago.
- Restaurant food, beverages and packaging costs for company operated stores decreased 40 bps to 32.7% of sales.
- Restaurant employee, occupancy and other costs for company operated stores decreased 34 bps to 46.9% of sales.
- Restaurant operating profit for company operated stores increased 74 bps to 20.4% of sales.
- Adjusted EPS of $0.46 grew 15% y/y.
- Free cash flow grew 21% y/y to $14.2 million.
- The company repurchased approximately $10 million worth of stock.
- The company increased full-year same-store sales guidance to 3-4%, up from 2-3%.
- The company increased full-year adjusted EPS guidance to $1.58-1.63, slightly up from $1.57-1.62.
What we didn’t like:
- Operating margin decreased 15 bps y/y to 26.7%.
Howard Penney
Managing Director
Fred Masotta
Analyst
