It's been an eventful week for restaurant franchisor Bojangles', Inc. (NASDAQ:BOJA). On Monday, the company announced the unexpected resignation of CEO Clifton Rutledge, which sent Bojangles' stock plummeting 6.4% on Tuesday. The timing especially unnerved investors, coming just one day before the release of fourth-quarter 2017 earnings.
Bojangles' ended up reporting results after the markets closed on Tuesday that were generally within its guided range. Additionally, investors felt reassured as Bojangles' board named former CEO James "Randy" Kibler as interim CEO. Shares regained most of their lost ground on Wednesday, climbing 6.8%.
To briefly recap the fourth quarter, revenue grew 6.2% to $148.1 million. Yet comparable sales continued within a recent weak trend, decreasing 3.1%. Bojangles' quarterly revenue improvement was thus due primarily to the sales lift provided by new store openings.
Operating income of $15.4 million slipped from $17.3 million in the prior-year quarter. Management attributed the lower profit to a 300-basis-point drop in restaurant margin (total revenue less direct restaurant expenses including food, labor, and occupancy).
A decision with positive ramifications
With the company under firm if temporary leadership, and given its punishing 2017, shareholders are now hoping for a reset. While Bojangles' revenue outlook for 2018 calls for flat comparable sales in the best-case scenario, it does appear that an important aspect of company strategy is being completely rethought.
We can glean this from Bojangles' projected store opening slate for 2018. Last year, Bojangles' opened 52 stores systemwide. This week, investors learned that management is shooting for just 30 to 40 new stores in 2018.
Shareholders should note three significant points about the expansion slowdown. First, as I argued in my earnings preview, paring back new units should have positive implications for restaurant margin, and consequently, total company operating margin.
By scaling back the rate of store additions, management can focus more time and monetary resources on fixing the traffic problems that have plagued the organization over the last several quarters. During Bojangles' earnings conference call, CFO John Jordan made clear that marketing of core menu items and targeted limited time offerings (LTOs) will serve as a primary method of bringing customers back into Bojangles' locations.
Second, the openings will slant toward franchisees -- Bojangles' is targeting 24-30 new franchised locations and just six to 10 company-operated stores. Shifting future development in the favor of franchisees versus corporate-operated stores is an extremely sensible decision.
Bojangles' franchisees have shown themselves to be more adept at managing revenue lately. During 2017, a systemwide comparable-sales decline of 2.1% was comprised of a 3.7% drop in company-operated stores and a much smaller 1.1% dip in franchisee-operated locations. And franchisee average unit volumes, a measure of annual dollar sales per store, have outpaced corporate-owned results in both core and expansion markets in recent quarters, according to management.
Finally, net additions may even be lower than forecast, as the company hasn't included the impact of store closures in 2018. Last year, Bojangles' closed only four stores, ending with 764 units. During Tuesday's earnings call, Jordan noted that Bojangles' has already shuttered seven franchised locations in 2018. Jordan warned that the closing of underperforming units by both corporate and franchisees in 2018 could exceed that of former years.
Slowing down to improve
If we take the midpoint of the 2018 store development range, and subtract out the seven closures that have already occurred, we find that Bojangles' is headed toward a 40%-50% reduction in store growth rate in 2018. Yet this action of slowing down will have tangible benefits. It will help the company stay keyed in on developing within core markets where volumes have proved more favorable. It will also allow current management, and at some point a new CEO, breathing room to experiment with Bojangles' menu. This significant change in Bojangles' financial model may be the first step in rehabilitating a stock that has only fallen since its 2015 IPO.