The Chicken Chain that can Deliver Long-Term Growth

AFC Enterprises (NASDAQ: PLKI  ) , the company behind the Popeyes Louisiana Kitchen chain, recently saw its stock price dip despite growing revenue and sales driven by the company's strategic plan. The plan focuses on five pillars that include building a distinctive brand, growing profits through reducing operating costs, accelerating restaurant openings, and improving their quality.

Branding southern charm
Popeyes combines menu innovations with national marketing to promote its brand of "superior food at affordable prices." Recent limited-time offers include "Love that Chicken Month," a month featuring a menu item with two pieces of chicken and a biscuit for $2.99, and Chicken Waffle Tenders, chicken tenders dipped in waffle batter and then fried. According to CEO Cheryl Bachelder, "It [Chicken Waffle Tenders] is the most successful LTO [limited time offer] in the last 5 years in terms of average weekly sales."

These promotions drove a 5.1% increase in Popeyes' third-quarter domestic same-store sales, which marked the 14th consecutive quarter of growth in this area. This growth also outperformed the domestic chicken quick-service restaurant, or QSR, segment by 4.2% according to NPD's Sales Track. Popeyes' overall market share in the chicken QSR category is 21.2%, up 6.4% since the company began its rebranding in 2008. International same-store sales increased 5.1% in the third quarter as a result of newly introduced television advertising.

The increase in same-store sales helped drive quarterly revenue to $49.3 million, roughly a 27% increase.

AFCE Revenue (Quarterly YoY Growth) Chart

AFCE Revenue (Quarterly YoY Growth) data by YCharts

The chart shows AFC Enterprise's quarterly revenue growth compared to Yum! Brands (NYSE: YUM  ) and McDonald's (NYSE: MCD  ) . Over the past year, AFC's revenue consistently outgrew its larger competition while the company also strengthened its profitability. The company has a high gross margin of 68% compared to Yum!'s and McDonald's gross margins of 26% and 39%, respectively. This shows that AFC retains more of its revenue than these peers, which translates into earnings. The company's EPS grew to $0.38 in its most recent quarter compared to $0.29 for the quarter in the previous year. AFC generated $33.2 million of free cash flow in the first three quarters of 2013, which has given the company capital to continue restaurant expansion.

Serving more chicken
Two of AFC's five pillars focus on expanding and running quality restaurants in the U.S. and internationally.

The company measures restaurant quality through speed of service at the drive-thru and a Guest Experience Monitor, or GEM. GEM is an optional survey that guests can fill out in exchange for a chance to win prizes. Roughly 59% of the surveys taken at the end of the third quarter ranked "delighted" and 70% of domestic restaurants had consistent drive-thru times of under three minutes. The company is also remodeling existing restaurants to help improve customer experience. Remodeled restaurants experience an average sales lift of 3%-4%, and the company expects to have remodeled 650 locations by the end of 2013.

In the third quarter, 33 new Popeyes were opened domestically, including seven restaurants that were acquired in Minnesota and California. The company estimates there will be between 185 and 195 new Popeyes openings for 2013, which includes eight company-owned and 65 international restaurants. There are over 2100 Popeyes restaurants operating worldwide, while its peers are much larger: McDonald's and Yum! have over 39,000 and 30,000 restaurants, respectively. This means that Popeyes has more room to expand without risk of cannibalization.

Final Foolish thoughts
Popeyes has had consistent growth for three and a half years with the help of its five pillars strategy. With a lower PEG ratio at 1.6 than those of Yum! and McDonald's at 2.25 and 2.12, respectively, AFC Enterprises is a better value for its growth than its competition. Moving forward, the company expects EPS to grow 13% to 15% over the next five years. If AFC continues focusing on the five pillars I think it will deliver for long term investors.

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