Reported net income was $6.9 million, or $0.29 per diluted share, compared to $5.8 million or $0.24 per diluted share in 2011. Adjusted earnings per diluted share were $0.29, compared to $0.25 last year. Through the end of the third quarter, adjusted earnings per diluted share were $0.91 compared to $0.75 last year, an increase of 21%.
AFC Enterprises, Inc. (NASDAQ: AFCE), the franchisor and operator of Popeyes® restaurants, today reported results for its fiscal third quarter which ended September 30, 2012. The Company also raised earnings guidance for fiscal 2012 and provided a business update on its Strategic Plan.
“Operating EBITDA as a percentage of Total Revenues”
Third Quarter Highlights:
AFC Enterprises CEO Cheryl Bachelder stated, “We delivered another solid quarter with a 16% increase in adjusted EPS stemming from strong global same-store sales of 6.3%. With strong advertising and our distinctive Louisiana food, we are successfully driving traffic into our restaurants and winning market share from the broader QSR category. We are ideally poised for accelerated restaurant growth, both from existing franchisees that are experiencing record profitability, and new franchisees that recognize the brand’s success.”
Third Quarter 2012 Financial Performance
Global system-wide sales increased by 10.5%. System-wide sales were comprised of $497.7 million in franchise restaurant sales and $13.5 million in company-operated restaurant sales.
Global same-store sales increased 6.3% rolling over a 1.7% increase in 2011, for a two-year growth of 8.0%. Through the end of the third quarter, global same-store sales increased 7.1% rolling over a 2.2% increase last year, for a two-year growth rate of 9.3%.
Total domestic same-store sales increased 6.8% compared to a 1.7% increase last year, representing the 10th consecutive quarter of same-store sales growth. International same-store sales increased 2.5% compared to a 1.8% increase in 2011, representing the 11th consecutive quarter of same-store sales growth. Same-store sales growth at company-operated restaurants in the third quarter of 2012 was 1.9% compared to negative 1.9% last year. Adjusting for the effect of Hurricane Isaac on the Company’s New Orleans restaurants, company-operated restaurant same-store sales growth would have been positive 4.0%.
Company-operated restaurant operating profit (“ROP”) was $2.2 million at 16.3% of sales, compared to $2.1 million at 17.1% of sales last year. The majority of the Company-operated restaurants located in New Orleans were temporarily closed for some period during Hurricane Isaac. The 0.8% decrease in ROP was primarily attributable to personnel expenses and other fixed expenses incurred at those restaurants during the period they were closed. Company-operated restaurant operating profit margin is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
General and administrative expenses were $14.7 million, at 2.9% of system-wide sales, compared to $14.1 million, at 3.0% of system-wide sales in 2011. The $0.6 million increase was primarily attributable to a $0.4 million increase in company-operated restaurant support and pre-opening development costs in new markets and a $0.2 million increase in domestic franchise development expenses. General and administrative expenses as a percentage of system-wide sales remain among the lowest in the restaurant industry.
Through the end of the third quarter, Operating EBITDA of $40.9 million was 31.2% of total revenues, compared to $34.5 million, at 29.4% of total revenues, in 2011. The 180 basis point increase in Operating EBITDA was primarily due to strong same-store sales increases. Operating EBITDA as a percentage of total revenues remains among the highest in the restaurant industry. Operating EBITDA is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
Interest expense, net was $0.7 million compared to $0.8 million last year.
Income tax expense was $3.5 million at an effective tax rate of 33.7%, compared to an effective tax rate of 31.0% in 2011. Excluding favorable return to provision adjustments, adjustments to estimated tax reserves and recognition of tax credits in each period, the effective tax rates were 37.5% and 36.9% in 2012 and 2011, respectively. The effective tax rates differ from statutory rates due to credits and permanent differences between reported income before income taxes and taxable income for tax purposes.
Reported net income grew to $6.9 million, or $0.29 per diluted share, compared to $5.8 million, or $0.24 per diluted share, in 2011. Adjusted earnings per diluted share were $0.29 compared to $0.25 last year. This improvement was primarily due to stronger same-store sales and higher average new restaurant sales. Through the end of the third quarter, adjusted earnings per diluted share were $0.91 compared to $0.75, representing a 21% increase over last year. Adjusted earnings per diluted share is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
Free cash flow through the end of the third quarter was $26.3 million compared to $22.1 million in 2011. As a percentage of Total Revenue, Free Cash Flow was 20.0% compared to 18.8% last year. Free cash flow is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
During the third quarter, the Company repurchased approximately 132,000 shares of its common stock for approximately $2.9 million. Through November 7, 2012, the Company has repurchased approximately 600,000 shares of common stock for approximately $11.5 million. These purchases were made in accordance with the Company's previous share repurchase guidance of $15 million for 2012. Approximately $5.2 million remains under the Company's current share repurchase program.
During the third quarter, the Popeyes system opened 28 restaurants, which included 18 domestic and 10 international. The Popeyes system permanently closed 23 restaurants, including 14 domestic and 9 international. Through the third quarter, Popeyes opened 79 restaurants and permanently closed 56 restaurants, resulting in 23 net openings, compared to 88 restaurant openings, 64 permanent closures and 24 net openings in 2011. The lower number of new openings in 2012 is largely attributable to the more measured pace of growth in international markets. Full-year international openings for 2012 are expected to be approximately 60 units compared to 67 in 2011.
Strategic Plan Update
The Company’s Strategic Road Map is founded on the five Pillars below.
1. Build a Distinctive Brand
2. Run Great Restaurants
3. Grow Restaurant Profits
4. Accelerate Quality Restaurants
5. Create a Culture of Servant Leaders
On October 11, 2012, we entered into an agreement to acquire 29 restaurants in Minnesota and California at a price of $13.8 million. The Company intends to convert 28 of the restaurants to Popeyes Louisiana Kitchen restaurants at a cost of approximately $11.5 million and to dispose of one of the restaurant sites. Following the conversions, the restaurants will be leased to Popeyes franchisees to operate. The closing of the acquisition, the Asset Purchase Agreement, the number of acquired restaurants, the resulting number of restaurants converted to the Popeyes concept, and the conversion costs are subject to bankruptcy court approval of the transaction and customary closing conditions. As of 12:00 noon Eastern Time on November 7, 2012, the bankruptcy court had not ruled with respect to approval. The Company will provide an update following such ruling.
During November 2012, the Company’s 2010 Credit Facility was amended to exclude the initial purchase price and conversion costs for the acquired restaurants from the Company’s debt covenant calculations. As a result, the Company expects to be compliant with its covenant requirements through the life of the facility.
Fiscal 2012 Guidance
Global same-store sales were positive 7.1% through the end of the third quarter. Accordingly, the Company is raising full year guidance on global same-store sales for fiscal 2012 to positive 6% to 6.5% from 5% to 6% to reflect the strong third quarter performance tempered by a difficult 5.8% comparison in the fourth quarter. Global same-store sales for fiscal 2011 were 3.1%.
Popeyes now expects its global new openings will be in the range of 140-150 restaurants, compared to previous guidance of 135-155 restaurants. Many of the fourth quarter units are scheduled to open in late December. The Company expects net unit growth of 65-85, compared to previous guidance of 60-90 net unit growth. Total net unit growth in 2011 was 65.
Adjusted earnings per diluted share are now expected to be in the range of $1.19-$1.21, an increase from our previous guidance of $1.17 to $1.19. This represents an approximate 21% increase over the $0.99 of adjusted earnings per diluted share reported in fiscal 2011. Our guidance includes approximately $0.01 for the 53rd week in fiscal 2012.
The Company also reiterates its guidance on the following items:
Consistent with previous guidance, over the course of the next five years, the Company believes that the execution of its Strategic Plan will deliver on an average annualized basis the following results: same-store sales growth of 1% to 3%; net unit growth of 4% to 6%; and earnings per diluted share growth of 13% to 15%.
AFC Enterprises, Inc. is the franchisor and operator of Popeyes® restaurants, the world's second-largest quick-service chicken concept based on number of units. As of September 30, 2012, Popeyes had 2,060 operating restaurants in the United States, Guam, Puerto Rico, the Cayman Islands and 25 foreign countries. AFC’s primary objective is to deliver sales and profits by offering excellent investment opportunities in its Popeyes brand and providing exceptional franchisee support systems and services to its owners.
Supplemental Financial Information on pages 7-16.
|AFC Enterprises, Inc.|
|Condensed Consolidated Balance Sheets (unaudited)|
|(In millions, except share data)|
|Cash and cash equivalents||$||24.8||$||17.6|
|Accounts and current notes receivable, net||6.7||7.0|
|Other current assets||3.6||4.8|
|Advertising cooperative assets, restricted||23.5||18.9|
|Total current assets||58.6||48.3|
|Property and equipment, net||29.2||27.4|
|Trademarks and other intangible assets, net||46.0||46.5|
|Other long-term assets, net||1.9||2.3|
|Total long-term assets||88.2||87.3|
|LIABILITIES AND SHAREHOLDERS' EQUITY|
|Other current liabilities||7.6||8.2|
|Current debt maturities||6.0||5.2|
|Advertising cooperative liabilities||23.5||18.9|
|Total current liabilities||40.2||38.4|
|Deferred credits and other long-term liabilities||26.8||24.6|
|Total long-term liabilities||79.7||83.4|
|Commitments and contingencies|
|Preferred stock ($.01 par value; 2,500,000 shares authorized;||-||-|
|0 shares issued and outstanding)|
|Common stock ($.01 par value; 150,000,000 shares authorized;|
|24,020,745 and 24,383,274 shares issued and outstanding||0.2||0.2|
|at September 30, 2012 and December 25, 2011, respectively)|
|Capital in excess of par value||89.0||97.6|
|Accumulated other comprehensive loss||(0.9||)||(0.8||)|
|Total shareholders' equity||26.9||13.8|
|Total liabilities and shareholders' equity||$||146.8||$||135.6|
|AFC Enterprises, Inc.|
|Condensed Consolidated Statements of Operations (unaudited)|
|(In millions, except per share data)|
|12 Weeks Ended||40 Weeks Ended|
|Sales by company-operated restaurants||$||13.5||$||12.3||$||47.6||$||42.2|
|Rent and other revenues||1.0||0.9||3.3||3.2|
|Restaurant employee, occupancy and other|
|Restaurant food, beverages and packaging||4.6||4.2||16.0||14.1|
|Rent and other occupancy expenses||0.6||0.7||2.1||2.1|
|General and administrative expenses||14.7||14.1||49.7||46.2|
|Depreciation and amortization||1.1||0.9||3.5||3.2|
|Other expenses (income), net||0.1||0.3||0.2||-|
|Interest expense, net||0.7||0.8||2.7||2.8|
|Income before income taxes||10.4||8.4||34.0||28.5|
|Income tax expense||3.5||2.6||12.2||10.0|
|Earnings per common share, basic:||$||0.29||$||0.24||$||0.91||$||0.75|
|Earnings per common share, diluted:||$||0.29||$||0.24||$||0.89||$||0.74|
|Weighted-average shares outstanding:|
|AFC Enterprises, Inc.|
|Condensed Consolidated Statements of Cash Flows (unaudited)|
|40 Weeks Ended|
|Cash flows provided by (used in) operating activities:|
|Adjustments to reconcile net income to net cash provided by|
|(used in) operating activities:|
|Depreciation and amortization||3.5||3.2|
|Net gain on sale of assets||(0.1||)||(0.7||)|
|Deferred income taxes||1.9||0.2|
|Non-cash interest expense, net||0.3||0.4|
|Provision for credit losses||(0.1||)||(0.2||)|
|Excess tax benefits from stock-based compensation||(0.3||)||-|
|Stock-based compensation expense||3.5||2.2|
|Change in operating assets and liabilities:|
|Other operating assets||1.4||0.8|
|Accounts payable and other operating liabilities||(4.3||)||(2.0||)|
|Net cash provided by operating activities||28.2||21.8|
|Cash flows provided by (used in) investing activities:|
|Proceeds from dispositions of property and equipment||-||0.7|
|Proceeds from notes receivable and other investing activities||-||0.3|
|Net cash used in investing activities||(5.0||)||(1.7||)|
|Cash flows provided by (used in) financing activities:|
|Principal payments - 2010 credit facility (term loan)||(5.0||)||(3.8||)|
|Borrowings under 2010 revolving line of credit||-||2.0|
|Proceeds from exercise of employee stock options||0.5||0.5|
|Excess tax benefits from stock-based compensation||0.3||-|
|Other financing activities, net||(0.3||)||(0.3||)|
|Net cash used in financing activities||(16.0||)||(23.9||)|
|Net increase (decrease) in cash and cash equivalents||7.2||(3.8||)|
|Cash and cash equivalents at beginning of year||17.6||15.9|
|Cash and cash equivalents at end of quarter||$||24.8||$||12.1|
|AFC Enterprises, Inc.|
|Same-store sales and restaurant count|
|12 Weeks ended||Year-to-date|
|Same-store sales growth|
|Domestic franchised restaurants||7.0||%||1.8||%||7.9||%||2.2||%|
|Total domestic (company-operated and franchised restaurants)||6.8||%||1.7||%||7.8||%||2.2||%|
|International franchised restaurants||2.5||%||1.8||%||2.0||%||2.8||%|
|Total global system||6.3||%||1.7||%||7.1||%||2.2||%|
|Company-operated restaurants (all domestic)|
|Restaurants at beginning of period||40||38||40||38|
|New restaurant openings||-||-||-||-|
|Temporary (closings)/re-openings, net||-||-||-||-|
|Restaurants at end of period||40||38||40||38|
|Franchised restaurants (domestic)|
|Restaurants at beginning of period||1,597||1,557||1,587||1,542|
|New restaurant openings||18||11||42||41|
|Temporary (closings)/re-openings, net||5||2||-||2|
|Restaurants at end of period||1,606||1,560||1,606||1,560|
|Franchised restaurants (international)|
|Restaurants at beginning of period||412||405||408||397|
|New restaurant openings||10||15||37||47|
|Temporary (closings)/re-openings, net||1||(5||)||2||(5||)|
|Restaurants at end of period||414||400||414||400|
|Total restaurant count at end of period||2,060||1,998||2,060||1,998|
Management’s Use of Non-GAAP Financial Measures
Company-operated restaurant operating profit margins, Operating EBITDA, free cash flow and adjusted earnings per diluted share are supplemental non-GAAP financial measures. The Company uses Company-operated restaurant operating profit margins, Operating EBITDA, free cash flow and adjusted earnings per diluted share, in addition to net income, operating profit and cash flows from operating activities, to assess its performance and believes it is important for investors to be able to evaluate the Company using the same measures used by management. The Company believes these measures are important indicators of its operational strength and performance of its business. Company-operated restaurant operating profit margins, Operating EBITDA, free cash flow and adjusted earnings per diluted share as calculated by the Company are not necessarily comparable to similarly titled measures reported by other companies. In addition, Company-operated restaurant operating profit margins, Operating EBITDA, free cash flow and adjusted earnings per diluted share: (a) do not represent net income, cash flows from operations or earnings per share as defined by GAAP; (b) are not necessarily indicative of cash available to fund cash flow needs; and (c) should not be considered as an alternative to net income, earnings per share, operating profit, cash flows from operating activities or other financial information determined under GAAP.
Adjusted Earnings per Diluted Share: Calculation and Definition
The Company defines “Adjusted earnings” for the periods presented as the Company’s reported “Net income” after adjusting for certain non-operating items consisting of the following:
(i) other expense (income), net, as follow:
(ii) for third quarter 2012 year-to-date approximately $0.5 million in legal fees related to licensing arrangements;
(iii) accelerated depreciation for the third quarter 2011 related to the Company’s relocation to a new Global Service Center; and
(iv) the tax effect of these adjustments at the effective statutory rates.
Adjusted earnings per diluted share” provides the per share effect of Adjusted earnings on a diluted basis. The following table reconciles on a historical basis for third quarter 2012, third quarter 2011, third quarter year-to-date 2012, third quarter year-to-date 2011 and fiscal year 2011 the Company’s Adjusted earnings per diluted share on a consolidated basis to the line on its Condensed Consolidated Statement of Operations and Comprehensive Income entitled “Net income”, which the Company believes is the most directly comparable GAAP measure on its Condensed Consolidated Statement of Operations and Comprehensive Income to “Adjusted earnings per diluted share.”
|(in millions, except per share data)||
|Other expense (income), net||0.1||0.3||0.2||-||0.5|
|Legal fees related to licensing arrangements||-||-||0.5||-||-|
|Accelerated depreciation related to the|
|Company’s relocation to a new Global|
|Adjusted earnings per diluted share||$||0.29||$||0.25||$||0.91||$||0.75||$||0.99|
|Weighted average diluted shares|
Operating EBITDA: Calculation and Definition
The Company defines “Operating EBITDA” as earnings before interest expense, taxes, depreciation and amortization, other expenses (income), net, and legal fees related to licensing arrangements. The following table reconciles on a historical basis for third quarter year-to-date 2012 and third quarter year-to-date 2011, the Company’s earnings before interest expense, taxes, depreciation and amortization and other expenses (income), net and legal fees related to licensing arrangements (“Operating EBITDA”) on a consolidated basis to the line on its Condensed Consolidated Statement of Operations and Comprehensive Income entitled “Net income”, which the Company believes is the most directly comparable GAAP measure on its Condensed Consolidated Statement of Operations and Comprehensive Income to Operating EBITDA. “Operating EBITDA as a percentage of Total Revenues” is defined as “Operating EBITDA” divided by “Total revenues”.
|(dollars in millions)||
|Interest expense, net||2.7||2.8|
|Income tax expense||12.2||10.0|
|Depreciation and amortization||3.5||3.2|
|Other expenses (income), net||0.2||-|
|Legal fees related to licensing arrangements||0.5||-|
|Operating EBITDA as a percentage of Total revenues||31.2||%||29.4||%|
Company-operated restaurant operating profit: Calculation and Definition
The Company defines “Company-operated restaurant operating profit” as “Sales by company-operated restaurants” minus “Restaurant employee, occupancy and other expenses” minus “Restaurant food, beverages and packaging”. The following table reconciles on a historical basis for third quarter 2012, third quarter 2011, year-to-date 2012 and year-to-date 2011, Company-operated restaurant operating profit to the line item on its Condensed Consolidated Statement of Operations and Comprehensive Income entitled ”Sales by company-operated restaurants”, which the Company believes is the most directly comparable GAAP measure on its Condensed Consolidated Statement of Operations and Comprehensive Income to Company-operated restaurant operating profit. “Company-operated restaurant operating profit as a percentage of sales by company-operated restaurants” is defined as “Company-operated restaurant operating profit” divided by “Sales of company-operated restaurants.”
|(dollars in millions)||Q3 2012||Q3 2011||
|Sales by company-operated restaurants||$13.5||$12.3||$47.6||$42.2|
Less: Restaurant employee, occupancy and other
Less: Restaurant food, beverages and packaging
|Company-operated restaurant operating profit||$2.2||$2.1||$8.5|