Popeyes Louisiana Kitchen Serves Up Solid Results

Popeyes' revenue may have come in light, but its long-term story still holds.

Aug 21, 2014 at 9:00AM

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Popeyes Louisiana Kitchen (NASDAQ:PLKI) may have just dished out mixed quarterly results according to Wall Street, but that doesn't mean investors shouldn't be content with where this quick-service restaurant chain is headed. To be sure, Popeyes' fiscal second-quarter revenue grew 12% year over year, to $53.7 million, bolstered both by 21 net new locations opened during the quarter, and a respectable 3.6% bump in global same-store sales. The company reported results Wednesday evening.

Thanks in part to the company repurchasing roughly 222,000 shares for $10 million during the quarter, that translated to 11.4% growth in adjusted earnings per diluted share, to $0.39. Meanwhile, analysts were looking for the same earnings of $0.39 per share, but on higher revenue of $54.8 million.

On perfectly palatable same-store sales
Then again, Popeyes' modest bump in global same-store sales, or SSS -- which includes domestic and international SSS growth of 3.8% and 2.2%, respectively -- doesn't sound all that impressive on the surface. Last quarter, for example, SSS increased 4.3% at domestic restaurants, and 5.8% internationally.

But it does mark a notable improvement since falling consumer confidence dragged down the chain's comps to nearly breakeven two quarters ago. Popeyes also stated its domestic SSS performance has outpaced the broader quick-service restaurant (QSR) industry for the past 11 consecutive quarters. In addition, drilling down specifically in the domestic chicken-QSR segment, its market share grew to 23.1%, up from 20.5% this time last year, the company said.

On the new(ish) deal
Also during the quarter, Popeyes announced the purchase of recipes and formulas used in the preparation of many of its core menu items from Diversified Foods and Seasonings -- a company incidentally owned by Popeyes' founder Alvin Copeland -- for $43 million. As part of the deal, Popeyes also agreed to use Diversified as its exclusive supplier of certain core products in its domestic markets through March 2034.

The new deal replaces an existing royalty and supply agreement signed in 2010 under which Popeyes would have continued to pay the estate of Copeland roughly $3.1 million annually until March 2029. Now free of those royalty payments, Popeyes says that $3.1 million will instead be reinvested each year -- net of incremental interest expenses -- into "various growth initiatives."

On guidance
Finally, Popeyes reiterated its existing fiscal 2014 guidance, which notably calls for same-store sales growth of 3% to 4%, share repurchases of $20 million to $30 million, net restaurant openings of 100 to 130 (good for 5% system growth), and adjusted earnings per share of $1.58 to $1.63 (or growth of 12.2% at the midpoint over last year).

What can we glean here? First, note that Popeyes had already repurchased $20 million in shares as of the end of Q2, which leaves, at most, another $10 million -- or roughly 1% of its float -- in repurchases through the end of this fiscal year. Next, analysts were optimistically modeling earnings at the high end of that range; they were obviously hoping for the company to boost its existing guidance.

And that was a fair assumption, especially considering management's own long-term guidance calls for growth in earnings per diluted share of 13% to 15%. Even so, Popeyes' planned net restaurant growth is right in the middle of its own targets, and same-store sales are tracking ahead of expectations. In the end, for patient investors willing to watch its long-term story unfold, Popeyes' results were solid enough to not present any major concerns.

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Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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