Can the Momentum Continue at Popeyes Louisiana Kitchen?

Source: Popeyes Louisiana Kitchen

Shareholders in quick-serve restaurant chain Popeyes Louisiana Kitchen (NASDAQ: PLKI  ) have been all smiles lately, with the company's stock price up more than 500% over the past five years. Popeyes Louisiana Kitchen has benefited from growth in customer traffic volumes and comparable-store sales, which has allowed it to outpace struggling competitors, like Yum Brands' (NYSE: YUM  ) KFC unit.

Case in point was the company's latest fiscal quarter, where it reported a double-digit increase in revenue and better-than-expected profitability, data points that led to a subsequent pop in its stock price. However, after a strong multi-year run, is there more upside ahead for Popeyes Louisiana Kitchen?

What's the value?
Popeyes Louisiana Kitchen is one of the largest players in the chicken quick-serve category, operating a network of more than 2,200 stores around the world. Despite an anecdotally tough environment for the quick-serve restaurant segment, the company has been able to outperform the industry by utilizing an almost exclusively franchise-based operating model, a strategy that has allowed it to focus its resources on developing new menu offerings, like its popular Chicken Waffle Tenders. The net result for Popeyes Louisiana Kitchen has been rising volumes of customers and an upward trajectory for its top line over the past five years.

In its latest fiscal year, it was a continuation of the positive trend for Popeyes Louisiana Kitchen, highlighted by a 15.2% top-line gain that was a function of comparable-store sales growth and an expansion of its store base. More importantly, the company maintained an adherence to a low corporate overhead structure, which drove a slight improvement in operating profitability during the period. Consequently, Popeyes Louisiana Kitchen was able to generate an uptick in its operating cash flow, fueling its ability to invest further in its business development efforts.

So far, so good
Of course, the question for investors is whether Popeyes Louisiana Kitchen can maintain profit growth in the future after a strong run over the past few years.  Based on the company's latest quarterly result, it would seem that the answer is yes, evidenced by a double-digit operating profit increase during the period, which led management to proffer a bullish outlook for the remainder of the fiscal year.

That being said, Popeyes Louisiana Kitchen does have some big name competitors looking to steal some of its market share, such as Yum Brands' KFC unit. The former king of the chicken quick-serve category has been in the doldrums lately, hurt by some product missteps, not to mention bad publicity from recent, well-publicized quality control issues in its KFC China segment. 

While the China segment's results seem to have regained their footing in FY 2014, KFC's domestic operations remain a work in process, evidenced by a decline in comparable-store sales in its latest fiscal quarter. On the upside, though, the KFC unit remains highly profitable on a global basis, providing management with time to continue looking for the right formula for growth.

An even bigger threat for Popeyes is Chipotle Mexican Grill (NYSE: CMG  ) , the growing chain of fast-casual restaurants that has attracted a loyal customer base that seems to get bigger every day, thanks in part to the company's focus on healthier food options, including antibiotic-free chicken. In its latest fiscal year, Chipotle came through with another strong showing, highlighted by a double-digit increase in revenue and adjusted operating income. 

More importantly, the company is a cash flow juggernaut, which is allowing it to expand its store base at a double-digit clip, no doubt putting even more pressure on its competitors, like Popeyes Louisiana Kitchen.

The bottom line
Popeyes Louisiana Kitchen has been a winner for investors over the past few years, thanks to innovative menu introductions and a laser-focus on efficient operations, two factors that have combined to create favorable profit growth for the company. While Popeyes Louisiana Kitchen's success has likely put a bulls-eye on its back, there seems to be room for multiple growth stories in the chicken quick-serve category. The company isn't exactly cheap, at a P/E multiple of roughly 29, but investors should consider a position in this smart operator on any market weakness.

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