Can Popeyes Chicken and Louisiana Kitchen Provide a Pop for Your Portfolio?


Despite flat year-over-year visits to the country's restaurants in 2013, according to data provider NPD Group, consumers are rewarding their preferred dining establishments with slightly higher per-visit spending levels.

That is good news for the industry's victors, which in the quick-serve chicken category include AFC Enterprises , owner of the Popeyes Chicken and Louisiana Kitchen concepts. The company has spent the past 40 years building itself into the No. 3 brand in the space, trailing only competitors KFC and Chick-fil-A. After a strong five-year run, should investors keep betting on this rising star?

Chart forAFC Enterprises Inc. (AFCE)
Chart forAFC Enterprises Inc. (AFCE)

What's the value?
AFC Enterprises has been running on all cylinders lately, with a growing store network in the U.S. as well as in 27 international markets where it is riding 15 straight quarters of comparable-store sales gains. The company's almost exclusively franchise-based model has allowed it to quickly open new stores by leveraging its franchisees' capital, which has led to consistent market-share capture over the past five years.

AFC Enterprises' individual stores have also enjoyed greater customer traffic, thanks to a constantly evolving menu including recent innovations like Rip'n Chick'n and its Louisiana Leaux reduced-calorie options.

In fiscal year 2013, AFC Enterprises continued its solid growth, with a top-line increase of 20% that equally benefited from higher comparable-store sales and a pickup in the pace of new store openings. Its operating income rose at an even faster clip, up 25.6%, as a result of maintaining one of the industry's leanest overhead structures, roughly 2.9% of systemwide sales. The company's focus on the bottom line has allowed it to reinvest heavily in new store growth, with plans to open another 100 to 120 new stores in fiscal year 2014.

Of course, with restaurant industry growth flat in 2013, part of AFC Enterprises' success has hinged on its ability to take market share from competitors, notably Yum! Brands' KFC unit. While KFC's more than 4,600 domestic units make it the current category kingpin, its saturation of the domestic market has led it to focus on international markets for growth, especially in China, where it has aggressively built an operating footprint that rivals the size of its domestic store base.

However, KFC's hyper-growth in China hit a snag in late 2012, as concerns regarding its poultry supply chain led to a Chinese FDA investigation and a subsequent corrective action plan that the company is implementing.

In fiscal year 2013, Yum! Brands' overall results have been poor, caused by lower sales across its major geographies. While the company has continued opening new stores, with half of them in China, its comparable-store sales results have been hurt by double-digit declines in its China unit, indicating that Yum! Brands has not yet won back the hearts and minds of its former customer base.

In addition, the company's KFC unit has not been able to reinvigorate sales growth through innovation, highlighted by a lackluster start for its April introduction of boneless chicken that was supposed to capture consumers' strong preference for boneless offerings.

A better alternative
While AFC Enterprises' restaurant concepts have a solid position in the chicken quick-serve category, the quick-serve operators have an uphill battle against the so called fast-casual category, a segment that has been generating better overall growth thanks to its value proposition of freshly prepared food at an affordable price.

The best of breed in the space is Chipotle Mexican Grill , a company that employs quality food ingredients and an open-style format to deliver food served fast, an upgrade to traditional fast-food fare. Chipotle is also a big advocate of high standards for its supply chain, which helps it to avoid the trouble that has recently engulfed KFC's China unit.

In fiscal year 2013, Chipotle celebrated its 20th anniversary with more top-line growth, up 16.6% for the period, due primarily to continued store expansions and positive comparable sales trends in the U.S. Despite higher commodity costs in key areas, like salsa and oils, the company's simple menu and pricing power with its loyal customer base has allowed it to maintain an operating margin in the mid-teens. The net result has been strong operating cash flow that is funding its global ambitions, including plans for nearly 200 new stores in fiscal year 2014.

The bottom line
AFC Enterprises has built a solid chicken franchise in the quick-serve category, with Popeyes recently coming in 19th on QSR's list of top 50 operators. However, with consumers increasingly looking for healthier, fresher fare for their dining dollars, future growth may be harder to come by. As such, investors would be wise to take a pass on AFC Enterprises and stick with the king of fast casual, Chipotle.

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Fool contributor Robert Hanley has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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