Popeye's Louisiana Kitchen (NASDAQ:PLKI) is a brand that is 42 years old, but it has been on a tear for the last several years. The president, Ralph W. Bower has attributed it to having a very clear focus. The strategic plan has remained unchanged for five years and the results have kept coming. There are 2,262 restaurants representing the brand. The company has done a solid job of growth through franchising, but it hasn't been shy about opening new restaurants internally either. Out of new franchise locations, about 90% are return investors. That's a very bullish statistic for the company's long term health. The company has impressed their franchise operators enough that they keep opening new restaurants. As I've said before, franchisees are the most profitable customers for a QSR (quick service restaurant).
During the second quarter a gross 36 new restaurants were added, net new restaurants is 21. System wide sales were up by 9.5% for the quarter. They were up 21% relative to the same quarter two years ago. Operating EBITDA was up by 14% year over year. The margin of 31.4% of total revenue is among the highest in the industry. Domestic SSS (same store sales) were up 3.8%.
The gains posted by PLKI have outpaced the rest of the QSR industry for the last 11 consecutive quarters. The simple strategy employed by PLKI has been fairly effective. There are four areas that the company focuses on to drive their growth:
- Build a distinctive brand
- Create memorial experiences
- Grow restaurant profits
- Accelerate quality restaurant openings
The points may seem over simplistic compared to the complicated and ill-fated promotions often discussed in earnings calls.
Building a distinctive brand
Popeye's has grown their market share from 20.5% in Q2 of 2013 to 23.1% in Q2 of 2014. This could create some eventual headwinds for the company. With over 2000 restaurants and a 23% market share, eventually there won't be many casual customers left to convert and PLKI's growth may be limited to growing the market rather than taking market share.
The company has built their brand using promotions that are very clear cut. They aren't redesigning the wheel. In Q2 the promotions were new meals at $3.99 and $4.99. In July, they unleashed another $4.99 offering of Cracked Pepper Butterfly Shrimp. It was an opportunity to remind customers that PLKI was also in the seafood business. Competing on price isn't a new concept, but the strategy has been a clear winner. When viewing smaller companies performance in Q2, those that had a very clear picture of their target customer and a clear cut value proposition to bring that customer in the door have dramatically outperformed the company's that failed to define their target customer. That sounds simple, right? If you read through all the earnings calls for QSRs and "upscale casual" restaurants you may be shocked at how many CEOs just don't get it.
International sales were up 2.2% quarter over quarter. International sales can be influenced by the timing of Ramadan season in their Middle East markets.
Popeye's introduced a new customer feedback program called "Voice the Guest" at the end of the first quarter. The company is currently compiling the data from the program to build a baseline so they can measure performance over time. The data is not expected to be available to investors in any way prior to 2015.
The company is remodeling their stores. From the consumer stand point, I wouldn't care about remodels. However, for many stores the sales figures suggest that there is a strong trend tying improved performance to remodels. At the start of the fiscal year 60% of the stores had completed remodels, that number was up to 71% at the end of Q2 and it looks like the 80% goal will be achieved by the end of the fiscal year.
Growing restaurant profits
PLKI has made a commitment to the profitability of their franchise owners. That seems to sit just fine with the franchise owners, as they keep opening new locations. It's a simple idea, but one that seems counter intuitive in today's short term driven environment. Long term investors want long term growth. Franchisees are the most valuable customers. PLKI wants to ensure they keep the repeat business. For franchisees, which are reported one quarter in arrears, average operating profits before rent had increased by 120 basis points to 23.4% for the first quarter. From the level of a single restaurant, that is an increase of $8,000. To the owner of that restaurant, that's a meaningful growth in their return.
Accelerate quality restaurant openings
In the quarter Popeye's opened 20 new domestic restaurants, down from 29 year over year. Internationally the company opened 16 restaurants and closed 12. In 2013, the Popeye's system opened 194 new locations across the globe.
Management reiterated guidance
Guidance for Fiscal 2014 is
- Global SSS up 3% to 4%
- Full year adjusted diluted EPS of $1.58 to $1.63
- Between 180 and 200 new restaurants opening
- Net restaurant openings of 100 to 130, which is a 5% increase in total branded stores
- G&A expenses at 3% of system wide sales
- Capital expenditures of $30 to $35 million.
- Share repurchases of $20 million to $30 million
With the company repurchasing shares it appears they may be operating with more financial leverage in future periods. Cheryl Bachelder, the CEO, stated that the company has access to leverage and referred to the terms as "very favorable". She also stated that they are willing to utilize that leverage to improve shareholder returns when they feel the time is right.
Exposure to rising food costs
Rising costs of food have been damaging operating margins for QSRs and upscale casual restaurants, but PLKI has reported that their food costs were favorable for the first half and were expected to finish the year flat relative to last year.
PLKI has done a great job of running the business. They are treating the endeavor as a long term investment rather than a series of short term stunts to cover the next quarter. Their clear value proposition has resonated with customers and kept the store's SSS growing. The premium they place on ensuring that their franchisees are having a positive investing experience has given them a strong level of repeat business. The focus on making the investment attractive for repeat business and delivering a value proposition to customers has allowed the brand to maintain rapid growth through a combination of increases in SSS and volume of locations.
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