RRGB Red Robin Gourmet Burgers Inc

AFC Enterprises Inc. (AFCE) posted first quarter 2011 earnings of 27 cents per share, which surpassed the Zacks Consensus Estimate by a penny and improved from 23 cents earned a year ago. On a GAAP basis, earnings were 28 versus 23 cents in the year-ago quarter.

The earnings results were driven by positive same-store sales and lower interest expense. Moreover, the company has four strategic plans in place.

These include developing the Popeye’s brand, offering more value services to guests through its restaurant concepts, strengthening unit economics with cost saving initiatives and improve margins by accelerating new unit growth. We believe all these plans also contributed to the earnings improvement.

Quarter Highlights

The operator and franchisor of Popeye’s restaurants reported total revenue of $46.8 million, which spiked up 6.8% from the year-ago quarter on positive same-store sales and sales from new restaurants opened in 2010. The revenue also inched ahead of the Zacks Consensus Estimate of $46.0 million.

AFC Enterprises' total revenue comprises company-operated restaurant sales (up 9.3% from the year-ago quarter to $17.6 million), franchise revenues (rose 5.7% to $27.9million) and rent and other revenues (flat to $1.3 million).

The company's global same-store sales upped 3.9%, resulting from a rise of 3.9% in domestic same-store sales and a 4.1% hike in international same-store sales. This increase was primarily driven by strong same-store sales in Turkey, Latin America and Canada; partially offset by Korea and U.S. military bases abroad.

The company-operated restaurant margin contracted 60 basis points to 19.3% in the reported quarter attributable to higher cost of expense. In the first quarter, Popeye’s restaurants witnessed a nearly 6% increase in food costs from the year-ago quarter.

Store Update

The Popeye’s system opened 32 restaurants in the first quarter of 2011, including 11 domestic and 21 international restaurants. The company closed 14 restaurants, resulting in 18 net openings compared to 5 net openings in the first quarter of 2010.

At the end of the quarter, the Popeye’s system had 1,997 restaurants, out of which 1,959 were franchised and 38 were company-operated.

Financial Position

AFC Enterprises ended the quarter with cash and cash equivalents of $15.4 million and shareholders' equity of $10.6 million.

During the first quarter, the company repurchased 438,288 shares of its common stock for approximately $6.5 million.

Outlook

Popeye’s expects its fiscal 2011 global same-store sales in the range of 1.0% to 3.0%. The company estimates adjusted earnings in the range of 91 cents to 95 cents per share.

The world's second largest quick-service chicken restaurant chain expects to open 120–140 new restaurants globally in 2011. The company also projects system-wide unit closings in the range of 60–80 restaurants.

Our Take

We expect estimates to go up in the coming days, as the economy is showing signs of improvement and the company continues with its solid growth momentum. However, although the company anticipates posting strong same-store sales in the second quarter, AFC’s second half will be soft due to tough comparison.

For 2011, management expects food costs to increase 4–5% that will hurt restaurant operating profit margins by approximately 150 basis points.

However, management plans to partially counter these costs through top-line growth, additional supply chain cost savings, selective menu pricing and in-restaurant cost controls. AFC is implementing its cost-reduction initiatives globally.  Apart from these, the company is focusing on limited-time-offers and promotions.

AFC currently retains a Zacks #2 Rank (short-term Buy rating). We are also maintaining our long-term Neutral recommendation on the stock.  One of AFC’s primary competitors, Red Robin Gourmet Burgers Inc. (RRGB) reported first quarter 2011 adjusted earnings of 58 cents per share, comprehensively beating the Zacks Consensus Estimate of 24 cents and the year-ago quarter earnings of 15 cents.

 
AFC ENTERPRISES (AFCE): Free Stock Analysis Report
 
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
 
Zacks Investment Research