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Why Popeyes Louisiana Kitchen Inc. Dropped 11.6% in February

By Timothy Green – Mar 10, 2016 at 12:00PM

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The company is making investments this year in an effort to drive future growth, hurting earnings growth in 2016.

Image source: Popeyes.

What: Shares of Popeyes Louisiana Kitchen (PLKI) tumbled 11.6% in February, according to data provided by S&P Global Market Intelligence. A mixed earnings report, as well as EPS guidance that came in below analyst estimates, were the main drivers behind the decline.

So what: Overall, Popeyes' fourth-quarter results were fine. Revenue grew by 3.7% year over year, driven by global same-store sales growth of 2.8% and U.S. same-store sales growth of 2%. Domestic growth did slow down compared to the fourth quarter of 2014, when the company reported U.S. same-store sales growth of 10.7%, but international same-store sales rose 8.5%, compared to a 4% increase in the prior-year period.

Popeyes' reported non-GAAP EPS of $0.42, a 10.5% increase year over year, and a penny higher than analysts were expecting. The company expects same-store sales growth of 2%-3% during 2016, with non-GAAP earnings expected between $2.10 and $2.15, compared to $1.91 in 2015. Popeyes' earnings will be hurt by a $2 million investment in various initiatives, which caused the company's earnings guidance to fall short of an average analyst estimate of $2.25 per share.

Now what: While Popeyes still expects to grow earnings per share at a double-digit pace in 2016, despite the additional investments, investors were not pleased with the company's results or guidance. One reason could be the stock's lofty valuation -- at $62 per share, where Popeyes traded prior to earnings, the stock traded at about 32.5 times 2015 earnings. That price bakes in a lot of future growth, and Popeyes' minor guidance miss was enough to spook investors.

Popeyes' long-term guidance still calls for 13%-15% annual EPS growth, and the company stated that the investments it's making in 2016 are necessary to drive this growth rate in the future. Investors don't seem so sure, though, pushing the stock down in February.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Popeyes Louisiana Kitchen. 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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