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Wednesday January 7th, 2009 |
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AFC Reports Financial Results for Third Quarter 2008
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Net income was $4.0 million, or $0.16 per diluted share, compared to $6.5 million, or $0.23 per diluted share, last year. Excluding the pre-tax impact of $1.3 million of other non-operating income last year, net income last year would have been $5.6 million, or $0.20 per diluted share. |
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AFC Enterprises, Inc. (NASDAQ: AFCE) , the franchisor and operator of Popeyes(R) restaurants, reported results for its fiscal third quarter which ended October 5, 2008. The Company announced preliminary fiscal third quarter earnings per share and operational results in its press release dated October 24, 2008.
Third Quarter 2008 Highlights Compared to Third Quarter 2007:
• Net income was $4.0 million, or $0.16 per diluted share, compared to $6.5 million, or $0.23 per diluted share, last year. Excluding the pre-tax impact of $1.3 million of other non-operating income last year, net income last year would have been $5.6 million, or $0.20 per diluted share.
• Total system-wide sales growth was flat to last year.
• Total domestic same-store sales decreased 2.8 percent compared to a decrease of 1.9 percent last year. International same-store sales increased 7.4 percent compared to an increase of 0.5 percent last year. Total global same-store sales decreased 1.9 percent compared to a decrease of 1.7 percent last year.
• The Popeyes system opened 28 and closed 24 restaurants, bringing total net unit count to 1,905 compared to 1,881 last year.
• Popeyes new national cable advertising strategy was launched in support of new value, portable and lunch menu items. The first media flight introduced Popeyes new Big Deals value sandwiches and wraps priced at $1.49 and attracted guests to both lunch and snack dayparts.
• Consistent with the Company's strategic initiative to re-franchise company-operated restaurants, the Company completed the re-franchising sale of 11 restaurants in the Atlanta market. The Company received $3.5 million in cash from the sale proceeds and fees associated with new franchise and development agreements.
• The Company made $2.8 million in debt repayments under its 2005 Credit Facility. The Company's cash balance at the end of third quarter was $10.4 million.
• The Company's third quarter year-to-date free cash flow remains strong at $22.3 million, including $5.1 million of other non-operating income, compared to $23.3 million last year. AFC's free cash flow computation and reconciliation to GAAP measures are described in detail under the heading "Use of Non-GAAP Financial Measures."
Cheryl Bachelder, AFC Chief Executive Officer, stated, "We are satisfied with our solid earnings performance in the third quarter, despite the economic challenges our customers and our restaurant operators are facing in this environment. We made a conscious decision to invest in gaining market share in these slow economic times, making traffic retention our top priority. Our commitment to national cable advertising behind our $1.49 Big Deals sandwiches and wraps helped us during this quarter. According to NPD SalesTrac Weekly, our same-store sales performance during the three week Big Deals advertising window outpaced the chicken QSR category by approximately 1.7 percentage points.
"We remain committed to our menu expansion to address value, portability and lunch. Our new menu boards are now in place at virtually all Popeyes restaurants. We have partnered with our franchisees to utilize national cable advertising to build awareness and new trial of these products and have significantly increased the media reach of our plan. We also remain committed to steadily improve the guest's experience at our restaurants through the use of metric-based tools launched earlier this year. And finally, we are helping our restaurant owners improve profitability through diligence on every expense line item at the restaurant. These initiatives are consistent with the pillars of our new strategic plan we announced in the first quarter.
"Given the times, we have shifted to more conservative financial strategies by tightly managing our general and administrative expenses to mission critical items. We have increased our cash position and have made debt repayment a priority. We have a highly franchised business model which continues to generate strong free cash flows and EBITDA margins at the top end of our industry. We believe this business model positions us to remain a financially strong and viable investment for the years ahead."
Strategic Plan Update
1. Build the Popeyes Brand
-- In connection with the launch of Popeyes new menu boards and new products, the Company shifted the majority of Popeyes' media advertising funds to national cable advertising during this quarter. This decision was taken in partnership with Popeyes' franchisees. The Company agreed to invest $2.0 million additional advertising fund dollars in 2008. The majority of Popeyes' franchisees agreed to contribute an additional 1 percent of their restaurants' sales to the Popeyes' advertising fund during the same time period. As a result, Popeyes television media weight was more than doubled, evidence of the Company's commitment to grow guest traffic and market share in these slow economic times.
-- Popeyes introduced seven new products in three new permanent menu platforms - value, portable and lunch.
-- The Big Deals value sandwich platform features the Loaded Chicken Wrap, Delta Mini and a Chicken Biscuit, each priced at $1.49.
-- The Louisiana Travelers platform consists of two portable products - Louisiana Tenders and Louisiana Nuggets.
-- The Big Easy lunch platform introduced the Big Easy chicken sandwich and the Big Easy Rice Bowl.
-- At the end of October, the Popeyes system put in place new menu boards, featuring Popeyes core bone-in chicken as well as the three new menu platforms mentioned above.
2. Run Great Restaurants
-- The Company remains focused on improving operations consistency and performance.
-- The guest experience monitor (GEM) survey is now in place at more than 90 percent of Popeyes domestic restaurants.
-- The Company has also implemented an operations scorecard for all Popeyes domestic restaurants. The new scorecard serves as a benchmarking tool - ranking each restaurant's overall performance against national, regional, and market level performance.
-- These tools enable the Company to now make measurable improvements in its operations.
3. Strengthen Unit Economics
-- The Company remains focused on improving restaurant level margin profitability. In October the Company released a new web-based tool to enhance food cost management and also implemented a new process to improve cooking oil efficiency.
4. Align People and Resources to Deliver Results
Re-franchising of company-operated restaurants
-- Consistent with the Company's strategic initiative to re-franchise company-operated restaurants, the Company completed the re-franchising sale of 11 restaurants in the Atlanta market. The Company received $3.5 million in cash proceeds from the sale of assets and fees associated with new franchise and development agreements.
-- The Company is in negotiations to re-franchise the remaining 14 restaurants in the Atlanta market. The Company expects that the sale of the assets will be completed by the end of the first quarter of 2009.
-- The Company continues to seek qualified operators to re-franchise the 4 restaurants in the Nashville market. The Company is unable to estimate the timing of this future re-franchising transaction.
-- The Company has also chosen, due to the current economic conditions, to postpone the re-franchising of its Memphis and New Orleans restaurants until management is more certain it can realize acceptable and appropriate values for these restaurants.
Third Quarter Performance Review Compared to Third Quarter Last Year
Total system-wide sales growth was flat. System-wide sales were comprised of a 0.2 percent increase in franchisee restaurant sales to $386.6 million, and a 5.4 percent decrease in company-operated restaurant sales to $17.4 million.
Total domestic same-store sales decreased 2.8 percent compared to a decrease of 1.9 percent last year, and total global same-store sales decreased 1.9 percent compared to a decrease of 1.7 percent last year. Same-store sales for company-operated restaurants decreased 6.1 percent compared to a 10.5 percent decrease last year. Traffic trends improved due to the successful introduction of the new Big Deal value sandwiches, and average ticket went down as the Company continued to promote more and stronger value propositions to its customers.
Total revenues were $38.3 million, compared to $38.9 million last year. This decrease was comprised of $1.3 million due to negative same-store sales and $1.2 million related to the re-franchising of 11 company-operated restaurants in the Atlanta market. This decrease was partially offset by $1.2 million from new openings of company-operated restaurants in the Atlanta and Tennessee markets and the re-opening of temporarily closed restaurants in New Orleans, and $0.6 million from royalties and fees primarily from new franchised restaurants.
Company-operated restaurant expenses for food, beverages and packaging as a percentage of sales were 34 percent compared to 34 percent last year, despite the decrease in sales. This reflects better management of food costs and a 2 percent price increase the Company took during the second quarter which helped offset higher commodity costs primarily from chicken, wheat, and shortening. Restaurant employee, occupancy and other expenses as a percentage of sales were 56 percent compared to 49 percent last year. Last year's expenses benefited from a credit for business interruption insurance recoveries of $0.4 million, or 2.3% of sales from company-operated restaurants. The remaining increase was primarily associated with additional managers and higher utility expenses resulting from elevated third quarter fuel costs.
General and administrative expenses were $13.3 million, or 3.3 percent of system-wide sales, compared to $11.3 million, or 2.8 percent of system-wide sales last year. This increase was due primarily to an expenditure of $1.3 million of the additional $2.0 million investment for national cable advertising in 2008, and the costs of new management talent.
Operating profit was $8.1 million, compared to $11.9 million last year.
Income tax expense was $2.5 million, an effective tax rate of 38.5 percent, compared to an effective tax rate of 34.3 percent last year. Last year's effective tax rate benefited from the reversal of tax reserves due to the expiration of certain statutes of limitation. Had the statutes of limitation not expired, the effective tax rate for the third quarter would have been 37.7 percent.
Net income was $4.0 million, or $0.16 per diluted share, compared to $6.5 million, or $0.23 per diluted share, last year. Excluding the pre-tax impact of $1.3 million of other non-operating income last year, net income last year would have been $5.6 million, or $0.20 per diluted share.
Third quarter year-to-date EBITDA was $39.3 million, including $5.1 million of other non-operating income, at a margin of 30.0 percent of total revenues, compared to last year's EBITDA of $42.9 million, at a margin of 33.5 percent. The Company's third quarter year-to-date free cash flow remains strong at $22.3 million, including $5.1 million of other non-operating income, compared to $23.3 million last year. AFC's EBITDA and free cash flow computation and reconciliation to GAAP measures are described in detail under the heading "Use of Non-GAAP Financial Measures."
The Company received [$3.5] million from the re-franchising transaction of 11 company-operated restaurants in the Atlanta market. The Company also reduced its borrowings under the 2005 Credit Facility by $2.8 million and had $10.4 million of cash at the end of the third quarter. During the remainder of 2008, the Company anticipates that it will increase its cash position to provide financial flexibility with a prioritization on debt repayment.
Third quarter year-to-date, the Company repurchased 2.1 million shares of common stock for $19.0 million. Under the terms of its current credit facility, the Company has the ability to repurchase an additional $19.3 million of shares during fiscal year 2008. As of October 31, 2008, there were approximately 25.3 million shares of the Company's common stock outstanding.
During the third quarter, the Popeyes system opened 28 new restaurants, including 12 units domestically and 16 units internationally, compared to 32 new restaurants last year. The Company reported 24 permanent restaurant closures during the quarter.
On a system-wide basis, Popeyes had 1,905 units operating at the end of the third quarter, compared to 1,881 units last year. Total unit count was comprised of 1,571 domestic units and 334 international units in 25 foreign countries and two territories. Of this total, 1,849 were franchised and 56 were company-operated restaurants.
Fiscal 2008 Guidance
The Company expects total domestic same-store sales for fiscal 2008 to be at the lower-end of negative 1.0 to 2.0 percent, consistent with previous guidance. The Company also expects global new restaurant openings for 2008 to remain in the range of 115-130 and expects its closure rate to be similar to the past few years. Net openings are expected to be consistent with previous guidance of 5-15 units.
The Company expects its full year earnings to be $0.75-$0.77 per diluted share, consistent with previous guidance.
As indicated previously, with the commitment the Company has made in 2008 to invest $2.3 million in national cable advertising and new menu board development, general and administrative expenses as a percentage of system- wide sales are expected to be approximately 3.3 percent for 2008. The Company's general and administrative expenses remain among the lowest percentage in the industry.
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