Shareholders in quick-serve restaurant chain Popeyes Louisiana Kitchen (NASDAQ: PLKI) have undoubtedly enjoyed the ride over the past five years, with the company's stock price up more than 300%. Popeyes Louisiana Kitchen has benefited from growing popularity for its Cajun-inspired menu, evidenced by consistently higher customer traffic volumes and 16 straight quarters of positive comparable store sales, which has anecdotally allowed it to take market share from struggling competitors, like Yum Brands' (NYSE: YUM) KFC unit.
Case in point was the company's latest fiscal quarter, where it reported a 3.6% increase in comparable store sales that helped to propel a double-digit pickup in total revenues, up 12%. On the downside, though, Popeyes Louisiana Kitchen's operating margin contracted slightly, due to the rising costs of marketing and overhead support for its growing store base. So, after a solid multi-year run for its share price, is the company a good bet?
What's the value?
Popeyes Louisiana Kitchen is one of the largest players in the chicken quick-serve category, operating a network of more than 2,200 stores around the world. Despite an anecdotally tough environment for the quick-serve restaurant segment, the company has been able to outperform the industry by utilizing an almost exclusively franchise-based operating model, a strategy that has allowed it to focus its resources on developing new menu offerings, like its popular Chicken Waffle Tenders. The net result for Popeyes Louisiana Kitchen has been a growing customer base and a 39.2% increase for its top-line over the past four fiscal years.
In its latest fiscal year, it was a continuation of the positive trend for Popeyes Louisiana Kitchen, highlighted by a 15.2% top-line gain that was a function of a 3.7% gain in comparable store sales and another bump-up in the size of its store base. More importantly, the company maintained an adherence to a low corporate overhead structure, roughly 3% of system-wide sales, which drove a 40 basis point improvement in its adjusted operating profitability during the period, culminating in a 16.6% increase in operating profit. Consequently, Popeyes Louisiana Kitchen was able to generate higher operating cash flow, fueling its ability to invest further in its product development and geographic expansion efforts.
So far, so good
Of course, the question for investors is whether Popeyes Louisiana Kitchen can maintain profit growth in the future, thereby providing a solid foundation for a higher market valuation. Based on the company's results to-date in FY2014, the answer would seem to be yes, evidenced by a 14.1% increase in adjusted operating income during the period, which led management to forecast a double-digit gain in EPS for the current fiscal year.
That being said, Popeyes Louisiana Kitchen does have some big name competitors looking to steal some of its market share, such as Yum Brands' KFC unit. The former king of the chicken quick-serve category has struggled to create positive momentum in its domestic operations lately, hurt by some product missteps, not to mention bad publicity from its well-publicized quality control problems in its China segment. While results in KFC's China segment have been positive in FY2014, including a 21% gain in comparable store sales in its latest fiscal quarter, KFC's domestic operations remain a work in process, evidenced by a 2% decline in comparable store sales during the same period. On the upside, though, the KFC unit remains solidly profitable, providing management with time to continue looking for the right formula to reverse its sliding fortunes in the domestic market.
An even bigger threat for Popeyes Louisiana Kitchen seems to be Chipotle Mexican Grill (NYSE: CMG), the growing chain of fast casual restaurants that has attracted a loyal customer base that seems to get bigger every day, thanks in part to a focus on healthier food options, including antibiotic-free chicken. In FY2014, Chipotle has continued to report strong results, highlighted by a 15.5% increase in comparable store sales that helped to propel double-digit increases in both total revenues and adjusted operating income. Not surprisingly, the company's cash flow generation also advanced at a healthy rate during the period, which is allowing it to continue expanding its store base at a double-digit pace, no doubt putting even more pressure on its competitors, like Popeyes Louisiana Kitchen.
The bottom line
Popeyes Louisiana Kitchen has been a winner for investors over the past few years, thanks to innovative menu introductions and a focus on greater average store productivity, factors that have combined to create favorable profit growth, as illustrated by the upward trajectory of its earnings per share in the below table.
|Share Price @ Dec. 31||$38.50||$26.13||$14.70||$13.90||$8.16|
Source: Popeyes Louisiana Kitchen 2013 10K Report
However, the significant expansion of the company's P/E multiple over the past few years is a cause of concern, given that the current level in the mid 20s is well above Popeyes Louisiana Kitchen's forecasted growth in EPS, which is expected to be between 12% and 15% for the current fiscal year. As such, the company seems to have more downside risk than upside potential at current price levels and investors should probably avoid the shares for the time being.
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