This year has not been kind to fast-food and fast-casual restaurants. Earnings releases from a number of companies, including Chipotle Mexican Grill (NYSE: CMG) and Yum Brands (NYSE: YUM) have been huge disappointments.
It was widely assumed that 2015 would be a banner year for restaurants. Coming into the year, the backdrop for the consumer was extremely positive. The housing and labor markets continued to improve, wages rose, and energy prices collapsed to their lowest levels in years.
But many restaurant companies simply haven’t seen business pick up. It seems that consumers are using their increasing disposable income to purchase more experiences like travel, rather than spend more on fast food.
Fortunately for the industry, Popeyes Louisiana Kitchen (NASDAQ: PLKI) bucked this trend with an excellent third-quarter earnings report.
Comfort Food, Comforting Earnings Report
Popeyes has gained an edge over bigger competitors like Yum’s KFC. Customers clearly love the Popeyes experience. Popeyes earnings totaled $0.46 per share last quarter, up 9.5% from the year-earlier quarter. This beat Wall Street expectations, which called for $0.44 per share of profit.
Revenue clocked in at $61.1 million, slightly below analyst forecasts. Still, revenue grew 11% year over year. Double-digit revenue growth is no small feat for a fast-food restaurant nowadays. Consider that even Chipotle, one of the market’s premier growth stocks, grew revenue by 12% last quarter.
Popeyes’ same-store sales, a crucial metric that evaluates sales at restaurants open at least one year, rose 5% in the United States and 9% in the international markets.
Popeyes has a lot of momentum working in its favor, and management expects that momentum to continue building over the latter part of the year. Going forward, Popeyes expects full-year earnings in the range of $1.86 to $1.91 per share. Same-store sales are expected to rise 5% to 5.5% for the full year, up from prior expectations of 4.5% to 5.5%.
Reflecting its success, the company announced a new $200 million share repurchase authorization, which replaces the current buyback program. This is a significant buyback; at its recent stock price, $200 million could retire as many as 3.6 million shares. That represents approximately 16% of Popeyes current diluted share count.
Popeyes Goes Worldwide
Throughout its existence so far, Popeyes has primarily been a U.S. based company with a domestic focus. But this is about to change. Popeyes is aggressively opening new restaurants abroad, and for good reason. International growth is accelerating. Popeyes’ 9% comparable sales in international regions last quarter was higher than the 8% international comps growth reported in the same quarter last year.
As a result, it is no surprise that Popeyes opened 23 international restaurants last quarter, compared with 23 domestic openings.
Not only do international customers love the Popeyes experience, but Popeyes’ international business has an added advantage in that all of the restaurants are franchised. This is not so in the U.S.; the company still owns 68 restaurants in the United States. Accelerating refranchising is a smart strategy, since franchising restaurants allows the parent company to collect a steady royalty stream and places most of the renovation expenses onto the franchisee.
It’s clear that franchising is the best way to go: in the U.S., Popeyes’ franchised restaurants grew comparable sales by 5.9% last quarter. At the same time, its company-owned U.S. restaurants experienced a 1% decline in comparable sales.
A Small-Cap Hidden Gem
While most fast food and restaurant stocks struggle with weak consumer spending and are not benefiting from the low energy price tailwind, Popeyes is firing on all cylinders.
Popeyes is growing, opening new restaurants, and accelerating its rate of franchising. It is rewarding investors with strong share buybacks, which will help fuel future earnings growth.
Popeyes is just starting to gain traction, particularly in the emerging markets. As the company grows its restaurant count and acquires scale, strong earnings growth should follow due to high sales growth and margin expansion. Investors hungry for growth should give small-cap stock Popeyes a closer look.
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