Fiesta Restaurant Group (NASDAQ:FRGI) may not be a name you recognize. However, there is a good chance you've eaten at one of their quick casual chains: Pollo Tropical and Taco Cabana. The company is steadily growing its presence in the United States and abroad through its franchise model. At the end of 2013, Pollo Tropical was Fiesta's fastest growing brand with 39 franchised locations, compared to just four franchised Taco Cabana restaurants.
While this may seem like a small franchise network, its Pollo Tropical business is successfully operating in over 11 tropical markets including Puerto Rico, Miami, Ecuador, Honduras, and Costa Rica. Because Fiesta Restaurant Group already has experience operating in these markets it should be easier for the company to expand its franchise partnerships in those regions going forward.
Growing through franchises
There is no doubt that Fiesta Group is still in the early stages of franchise development. However, this creates an opportunity for potential franchisees and stock investors alike. If you want to open a Pollo Tropical franchise, you will have to settle with a location abroad. That's because the chain doesn't yet offer franchises in the continental United States, though it does sell them in markets outside of the U.S.. Pollo Tropical franchises currently operate in 10 markets outside of the U.S., with plans for additional development in Aruba and Curacao now in the works.
Nonetheless, there are other considerations for potential franchisees to consider, such as net worth and capital investment. To open a Pollo Tropical franchise, for example, you must have a net worth of at least $5 million and commit to a minimum of five restaurant developments. That is asking a lot of most individuals, which is why it could make more sense to simply invest in shares of Fiesta Restaurant Group.
By growing its franchise model, Fiesta Group will have more cash on hand to reinvest in the business and to reward shareholders through share buybacks. The franchise model helps increase profitability by offering a steady stream of revenue in the form of rent and royalty income. Therefore, while sales may falter at company-operated locations from time to time, Fiesta Group will always generate a reliable flow of cash from the fees it collects from its franchisees.
Franchise revenues totaled $2.4 million last year, according to Fiesta Group's latest annual report. Moreover, because Fiesta Group doesn't commit significant amounts of its own money to finance its expansion in international markets, much of the risk falls on the franchisees rather than the company's stockholders. The company added seven new Pollo Tropical franchise restaurants in 2013 and has plans to far outpace that rate in the years ahead. This is important because as it continues to add new franchises, investors should see a meaningful bump in income from these establishments.
Fiesta Restaurant Group's stock is down nearly 5% year to date to where it currently trades at around $48 a pop. Yet, even if you purchase 100 shares at this price it comes to an out of pocket cost below $5,000 -- or significantly less than the minimum $5 million required to franchise with Fiesta Group.
Tamara Rutter 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.