The second quarter just wrapped up for fast-food restaurant operator AFC Enterprises (NASDAQ:AFCE), and it's giving investors a good look at what the company will look like in the future with only Popeyes Chicken & Biscuits, the world's second-largest chicken chain, driving sales. So far, the outlook is mixed. While operating profits soared, the balance sheet leaves plenty of room for concern.
AFC has been busy downsizing itself in recent years. The divestitures started in July 2003, with the $72 million sale of Seattle Coffee's North American operations to Starbucks (NASDAQ:SBUX). AFC used the money from the sale to pay down debt.
Then in November 2004, the company completed the $30.25 million sale of its Cinnabon bakery chain to Focus Brands.
And just after last Christmas, Church's Chicken was jettisoned for $390 million in a deal with private equity firm Crescent Capital. AFC used Church's proceeds, and money from a new credit facility, to pay a $12-per-share ($352.9 million) special cash dividend on June 3 to return capital to shareholders. And now, only Popeyes remains.
Systemwide sales for AFC increased 5% from the comparable quarter last year. AFC revenue, though, declined by 8.8%, mainly because of some company-owned Popeyes restaurants being sold to franchisees and some closures of underperforming restaurants. Helping offset those losses was a modest 1.9% rise in same-store sales, leading to a $1.5 million increase in franchise revenue.
Overall, the Popeyes system opened 24 restaurants globally during the quarter, bringing the worldwide total to 1,827.
Operating profit jumped from $0.9 million in the year-ago quarter to $7.7 million -- that's an operating margin of 21.8%, which beats McDonald's (NYSE:MCD) and Yum! Brands' (NYSE:YUM) most recent quarterly margins of 19.6% and 12.2%, respectively.
The Achilles' heel, though, is the company's balance sheet. Although AFC has $71.2 million in cash and short-term investments, it also holds $192 million in debt -- that's 5.4 times this quarter's sales.
That's a high number, but it seems to be manageable for now. What's more, the company is projecting to have opened 120 to 130 new restaurants during this fiscal year and closed 70 to 80 underperforming sites. That focus on profitable growth should lead to a full-year increase in same-store sales of 2% to 3%.
At 40.5 times what analysts expect the company to earn this year, the stock is anything but cheap. But when AFC gets back on track in fiscal 2006, analysts expect earnings of $0.90 a share. That's a much more modest 15.5 times earnings -- but it's also the same multiple expected for McDonald's. Yikes!
At today's share price, investors are giving the slimmed-down restaurant chain an earnings multiple that's a little too rich for this observer's taste.
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Fool contributor W.D. Crotty owns shares in McDonald's and Yum! Brands. Click here to see The Motley Fool's disclosure policy.
