Popeyes’ Louisiana Kitchen, Inc.
(PLKI - Nasdaq)
By: Kevin Farshchi, Drew Szilagyi, Tom Van Spankeren
Presented May 5, 2015
Agenda
 Introduction
 Business Overview
 Industry Overview
 Macroeconomic Review
 Recent Financial Performance
 Financial Analysis
 Valuation
 Recommendation
Screening
Considered sectors
Identified favorable
trends
Fundamentals
• What is our client not exposed to?
• Our team is bullish on consumer discretionary
• Came up with restaurant industry
• Declining oil prices and consumer confidence
• Quick Service Restaurants
• Investing by walking around
• High RoE with low leverage, growing same store sales (High Growth and
Profitability)
• Low PEG ratio, P/S
• Gaining Market Share and brand value
• Detailed 10-K
Popeyes’ Louisiana Kitchen
 Second largest quick-service chicken concept
 Menu features spicy chicken, chicken tenders, fried shrimp,
seafood and a variety of regional sides
 Founded in New Orleans, LA in 1972
 Develops, operates and franchises quick-service restaurants
 Two business segments
 Franchise Operations and Company Operated restaurants
 2,379 Popeyes’ restaurants
2014 10-K Pages 1-3
Popeyes’ Four Pillars
Build a
distinctive
brand
Create
Memorable
experiences
Grow
restaurant
profits
• Continue to
innovate the
menu and
provide
superior
• Reimaging
restaurants
• Focused on
long-term
growth and
the
relationship
with the
franchisees
2014 10-K page 1
Accelerate
quality
restaurant
openings
• Determined
to deliver
both same
store sales
and new store
sales growth
Popeyes’ Presence
 High presence in the Southern United States where fried chicken is favored
 60% of international franchised stores are in South Korea, Turkey and
Canada
2014 10-K Page 1
Growth Story
 Company has been growing top




line, bottom line and market
share
Has outpaced Chicken Quick
Service Restaurant Same Store
Sales for 27 consecutive
quarters
19 quarters of same store sales
growth
Global Same Store Sales: 6.2%
Market Share: 23.2% vs. 20.8%
Popeyes’ Investor Conference 2015 Page 16,
2014 Annual Report Page 1
Franchise Model
 Franchise royalties and fees have three basic components:
1) percentage of sales royalty payments
2) franchise fees for opening new restaurants
3) development fees for new restaurants in a given market.
 Franchise customers pay large fees to operate a Popeyes’ and subsequent
royalties
 $35,000 domestic franchise fee
 $12,500 development fee per restaurant
 9% claim on gross sales
 5% revenue to Popeye’s on gross sales
 4% advertising fund
 Strong relationship with franchisees
 In 2013, approximately 90% of new restaurants were opened by existing
franchisees
2014 10-K Page 19
Revamping of Stores
 On plan to have 80% of stores re-imaged by year end 2015
 Improve the customer experience
 Desire for customers to “hang out”
2014 10-K Page 8, 18
Customers
 Louisiana style meals focusing on
flavored Chicken and Seafood
 Limited Time Offers
 $5 Bonafide Big Box!, Beer Can
Chicken, Spice Box
 Signature sides
 Offers the customer a variety of sides
 Red Beans & Rice, Cole Slaw, Cajun
Fries, Cajun Rice
 “At Popeyes we never compromise
quality for value”- Chief Marketing
Officer Hector Muñoz
This company truly knows their customers – always looking for new ways to enhance products
and prices.
2015 Investors’ Conference Page 7-8
Popeyes’ Performance
Domestic Franchisee Restaurant Operating Profit before rent
2014 YoY Performance
• EPS Growth: 15%
• Operating Profits: 22.4%
• $300,000 per location
• FCF growth of ~13%
• 587% return since end of 2009
2014 Investor’s Conference
Technical Analysis
Investors are
taking profits
Support at $55?
Reversal of
20 below 50
Supply Chain
 Suppliers are required to purchase all supplies from approved
suppliers
 Primary supply is chicken
 Main suppliers include Sysco and Pilgrim’s Pride
Popeyes’
Corporate
Chicken
Farmers
Bloomberg
Suppliers
Franchises
The
Consumer
Industry Analysis
 Quick service restaurants are becoming more popular
 Consumers are preferring the experience rather than fast food
 U.S. Broiler Chicken demand will grow at 5.8% in 2015
 High beef prices has been a tailwind for Chicken
 Pounds of chicken per year per person is at all time highs
Pounds per Person Per Year Consumed
Chicken Prices
U.S. Cents Per Pound
120
100
80
60
40
20
Date
Earth Policy Institute, National Chicken Council
Mar-15
Dec-14
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Sep-12
Dec-12
Jun-12
Mar-12
Dec-11
Jun-11
Sep-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
0
Chicken Bird Flu Epidemic
 An Iowa based chicken breeding broiler breeding
farm tested birds positive for the H5N2 bird flu
 17 total outbreaks of the flu
 Prompted the Governor to declare a state of
emergency on May 1, 2015
 U.S. Centers for Disease Control and Prevention
states there is no food safety risk for consumers
yet Iowa is on track to exterminate 5 million hens
 Could be a great buying opportunity amidst with
uniformed investors
 “Ban imposed by importing nations has led to
extra domestic supplies of chicken legquarters”- Tyson CEO: Donnie Smith
 Similar to Ebola affecting the airline industry
http://www.usatoday.com/story/money/business/2015/04/30/bird-flu-strikes-another-million-iowachickens/26657913/
http://www.bloomberg.com/news/articles/2015-05-04/tyson-says-bird-flu-s-primary-effect-is-lost-export-sales
Industry Trends
 Quick service restaurants are becoming more popular
 Consumers are preferring the experience rather than fast food
 U.S. Broiler Chicken demand will grow at 5.8% in 2015
Chicken Prices
120
U.S. Cents Per Pound
100
80
60
40
20
Date
Earth Policy Institute, National Chicken Council
Mar-15
Dec-14
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Sep-12
Dec-12
Jun-12
Mar-12
Dec-11
Jun-11
Sep-11
Mar-11
Dec-10
Sep-10
Jun-10
0
Mar-10
Pounds per Person Per Year Consumed
 High beef prices has been a tailwind for Chicken
Porter’s Five Forces
Threat of
Substitutes:
High
Threat of
New
Entrants:
Low
Competitive
Rivalry:
High
Bargaining
Power of
Suppliers:
Medium
Bargaining
Power of
Buyers:
Medium
Macro-Economic Overview
St. Louis Federal Reserve, University of Michigan, National Restaurant Association 2015 outlook,
Macro-Economic Overview
 Pounds of chicken per year per person is at all time highs
 More eating out - food expenditures outside the home are making up a larger
portion of overall household expenditures
Pounds of Poultry Consumption per Capita
140
50%
120
40%
Pounds (lbs)
100
30%
20%
80
60
40
10%
20
0%
Total Food Expenditures
Food Expenditures Away from Home
Source: IBISworld, Source: Calculated by the Economic Research Service from various data sets from the U.S. Census Bureau and the Bureau of Labor Statistics.
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
0
1980
As a Percentage of Household
Expenditures
Food Expenditure Breakdown
Management Long Term Guidance
 CEO: Cheryl Bachelder
 Served since November 2007
 Management if focused on transparency of
company performance, shareholder
friendly
 Same-store sales growth approximately
2%-4%
 Next year growth rate of 3.5% to 4.5%





Diluted EPS Growth rate of 11%-14%
Net Unit Growth rate of 5% to 7%
Buy back $40-$50 million shares in 2015
International expansion
Continue to gain market share
2014 10-K Page 18
Financial Ratios
Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio
2011A
1.26
0.77
0.46
2012A
1.20
0.63
0.38
Turnover Ratios
2013A
1.26
0.63
0.21
2014A
1.08
0.46
0.16
2013A
28.25%
16.55%
18.29%
73.33%
2014A
27.50%
16.13%
16.49%
61.00%
2013A
34%
15.73
2014A
42%
21.60
A/R Turnover
Days Sales Outstanding
Fixed Asset Turnover
Total Asset Turnover
2011A
24.41
14.95
6.33
1.19
2012A
25.01
14.60
4.54
1.16
2013A
25.43
14.35
3.20
1.10
2014A
26.93
13.56
2.72
1.02
2013A
0.63
0.94
0.28
1.10
4.01
73.33%
2014A
0.61
0.95
0.28
1.02
3.70
61.00%
2013A
37%
6%
2014A
34%
4%
Profitability Ratios
Operating Profit Margin
Net Margin
ROA
ROE (Book Value)
2011A
2012A
26.46% 28.69%
15.73% 17.00%
18.65% 19.74%
210.43% 126.67%
Leverage Ratios
Debt/Assets
Interest Coverage
2011A
47%
11.00
2012A
42%
14.25
DuPont Analysis
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
2011A
2012A
0.65
0.64
0.91
0.93
0.26
0.29
1.19
1.16
11.28
6.42
210.43% 126.67%
Greenblatt Ratios
EBIT/Tangible Assets
EBIT/EV
2011A
45%
10%
2012A
49%
9%
Debt
Current Obligations
• $106.4 million in
contractual obligations due
in 2018
• They are likely going to
refinance this @ 2.697%
swap
• Roughly $7-$8 million in
minimum operating lease
payments due until 2019,
$115.7 million thereafter
2014 10-K Pages 24,25
Going Forward, the company
plans to increase leverage
• At attractive interest rates,
this is not the worst idea
• Expect to increase total
leverage ratio from 1.4 to
2.5 to 3.5
• Covenant in its 2013
Credit Facility is <3.5
leverage ratio
• Leverage Ratio = Net
Debt/EBITDA
Debt Projection
Total Leverage Ratio for Liabilities Projection
Current debt maturities
Long-term debt
Total indebtedness
Historical
2013
0.3
66.9
67.2
Net income
Interest expense, net
Income tax expense
Depreciation and amortization
Other expenses (income), net
Stock-based compensation expense
Consolidated EBITDA
34.1
3.7
20.4
6.7
0.3
5.4
70.6
38
3
23.8
8.7
1.2
5.3
80
46.71
4.95
28.63
9.78
0.44
0
90.51
52.16
7.05
31.97
10.72
0.49
1
103.39
60.59
9.95
37.14
11.61
0.53
2
121.81
64.57
11.64
39.57
12.39
0.56
3
131.73
66.98
13.23
41.05
13.32
0.60
4
139.18
Total indebtedness / consolodated EBITDA
0.95
1.37
2.00
2.50
3.00
3.25
3.50
5.53%
2.74%
2.74%
4.95
2.74%
7.05
2.74%
9.95
2.74%
11.64
2.74%
13.23
Interest Expense as a % of Long Term Debt
Projected Interest Expense
2014
0.3
109.6
109.9
2015
0.3
180.73
181.03
2016
1.3
257.18
258.48
Projected
2017
2.3
363.13
365.43
2018
3.3
424.83
428.13
2019
4.3
482.81
487.11
Financial Projections
Historical
2013
9
1.7
15.5
Capital Expenditures:
(Dollars in millions)
New company-operated restaurants
CAPEX per New Restaurant
C onstruction of new C ompany-operated restaurants
2012
5
1.3
6.7
Acquisition and conversion of restaurants in C alifornia and Minnesota
Reimaging activities at C ompany-operated restaurants
Information technology hardware and software
Point of sale hardware and software at C ompany-operated restaurants
C onstruction of the new corporate office
General and administrative assets
Other capital assets(1)
Total capital expenditures
14.9
1.1
1.1
0.2 —
0.7 —
0.2
1.3
26.2
Net Working Capital:
Current Assets
Accounts and current notes receivable, net
Other current assets
Advertising cooperative assets, restricted
Current Liabilities
Accounts payable
Other current liabilities
Current debt maturities
Advertising cooperative liabilities
Net Working Capital
Change in Net Working Capital
13.6
1.7
0.4
2014
13
1.6
20.9
2015
4
1.5
6
2016
5
1.5
7.5
Projected
2017
7
1.5
10.5
2018
5
1.5
7.5
2019
5
1.5
7.5
2.9
0.6
0.8
0
0.3
0.8
0
0
0.8
0
0
0.8
0
0
0.8
0
0
0.8
1.3
0.3
1
27.8
0
0.3
1
8.4
0
0.3
0
0.3
0
0.3
0
0.3
8.6
11.6
8.6
8.6
—
0.3
1.3
32.8
Historical
2013
8.90
9.80
27.80
2014
8.60
7.40
32.40
2015
9.66
7.81
34.25
2016
10.60
11.36
36.41
Projected
2017
11.48
15.27
38.65
2018
12.25
20.31
40.79
2019
13.16
24.14
43.11
8.50
8.10
0.30
27.80
7.40
12.40
0.30
32.40
7.92
13.02
0.30
34.25
8.56
18.94
1.30
36.41
8.88
25.45
2.30
38.65
9.44
33.84
3.30
40.79
10.28
40.24
4.30
43.11
1.80
9.80
-4.10
-5.90
-3.76
0.34
-6.83
-3.07
-9.88
-3.05
-14.03
-4.15
-17.51
-3.48
Revenue Projections
Assumptions
2010
37
1
38
2011
38
2
40
Historical
2012
40
5
45
2013
45
9
(1)
53
2014
53
13
(1)
65
2015
65
4
0
69
2016
69
5
-1
73
Projected
2017
73
7
0
80
2018
80
5
-1
84
2019
84
5
0
89
1.387
4.00%
1.365
1.10%
1.422
5.30%
1.485
2.30%
1.495
5.70%
1.563
4.50%
1.633
4.50%
1.698
4.00%
1.762
3.75%
1.824
3.50%
52.70
54.60
64.00
78.70
97.20
107.82
119.21
135.87
148.01
162.31
(67)
(5)
(75)
(7)
(75)
3
(67)
(5)
(52)
6
(60)
(5)
(65)
4
(55)
(5)
(63)
(5)
(58)
4
Franchise Sales (in billions)
1,811
72.44
1,932
77.28
2,189
87.56
2,358
94.32
2,640
106
2,958
118
3,224
129
Franchised restaurants (domestic)
Restaurants at beginning of year
New restaurant openings
Alotment of Permanent Closings
Alotment of Temporary (closings)/re-openings, net
Restaurants at end of year
2010
1,542
44
(53)
(4)
1,529
2011
1,587
71
(60)
(6)
1,593
Historical
2012
1,634
79
(60)
2
1,656
2013
1,716
115
(53)
(4)
1,774
2014
1,805
108
(41)
5
1,877
2015
1,877
115
(46)
(4)
1,942
2016
1,942
120
(49)
3
2,017
Domestic franchised restaurants same-store
sales increase
Proportion of Franchise Sales
Sales/stores
2.50%
3.10%
7.50%
3.60%
6.40%
5.70%
1,404
0.92
1,500
0.94
1,707
1.03
1,831
1.03
2,018
1.07
397
61
(14)
(1)
443
408
67
(15)
(1)
458
425
57
(15)
1
467
456
70
(14)
(1)
511
3.10%
3.30%
2.60%
407
0.92
432
0.94
4
6
Company-operated restaurants (all domestic)
Restaurants at beginning of year
New restaurant openings
Permanent closings
Restaurants at end of year
Same Store Sales
Company-operated restaurants SSS increase (decrease)
Sales by company-operated restaurants
Total Changes:
Permanent closings
Temporary (closings)/re-openings, net
Franchised restaurants (international)
Restaurants at beginning of year
New restaurant openings
Alotment of Permanent closings
Alotment of Temporary (closings)/re-openings, net
Restaurants at end of year
International Franchised Restaurants same-store
sales increase
Proportion of Franchise Sales
Sales/stores
Franchise Fees
3,351
134
3,522
141
3,736
149
Projected
2017
2,017
110
(40)
(4)
2,083
2018
2,083
100
(45)
(4)
2,135
2019
2,135
90
(40)
3
2,187
8.00%
4.00%
3.50%
4.00%
2,203
1.10
2,389
1.12
2,423
1.12
2,472
1.12
2,545
509
80
(11)
1
579
579
90
(14)
(1)
654
654
105
(16)
1
743
743
120
(15)
(1)
847
847
130
(18)
(1)
957
957
140
(18)
1
1,081
4.70%
5.10%
7.00%
6.50%
6.00%
5.00%
4.60%
482
1.03
527
1.03
622
1.07
746
1.05
825
1.03
918
1.04
1040
1.05
1181
1.00
6
8
8
9
10
10
10
10
Discount Rate
Return To Investor
Cost of Equity
1 Year
2 Year Annualized
48.09%
34.03%
5 year Annualized
Return To Investor
37.55%
39.89%
CAPM Approach
Risk Free Adjusted Rate
Equity Risk Premium
1yr Beta
2yr Beta
5yr Beta
Adjusted Beta
Cost of Equity
Discount Rate
Cost of Equity
After Tax Cost of Debt
Wacc
Risk Premium
Discount Rate
Terminal Growth Rate
2.10%
5.50%
0.77
0.78
0.98
0.84
6.74%
ROE
CAPM
Return To Shareholder
Graham Implied Growth Rate
Cost of Equity
57.75%
6.74%
39.89%
13.32%
13.02%
Cost of Debt
Pre-Tax Cost of Debt
Tax Rate
After Tax Cost of Debt
2.69%
38.50%
1.65%
2015
13.02%
1.65%
11.29%
1.00%
12.29%
3.00%
Weightings
0%
45%
10%
45%
2016
2017
2018
2019
10.7%
10.4%
10.3%
10.1%
11.7%
11.4%
11.3%
11.1%
DCF Model
Discounted Cash Flow Valuation
EBIT
Add: Depreciation
Add: Change in Advertising Fee
Less: Taxes
Less: Capital expenditures
Less: Change in NWC
Unlevered Free Cash flows
Terminal value
PV
Discount Rate
2
3
4
5
2015
80.3
9.8
3.6
28.6
8.4
0.3
56
2016
91.2
10.7
3.7
32.0
8.6
-3.1
68
2017
107.7
11.6
3.1
37.1
11.6
-3.1
77
2018
115.8
12.4
2.4
39.6
8.6
-4.1
87
2019
121.3
13.3
2.9
41.0
8.6
-3.5
91
55.6
11.3%
1012.2
638.8
11.1%
50.1
12.3%
Enterprise value
Total debt
Advertising Fund
Cash
Equity value
Shares
Price/Share
$32.14
2.0%
2.5%
3.0%
3.5%
4.0%
1
54.3
11.7%
$854
$142
$36
$8
$739.3
23.00
$32.14
10.29%
$35.67
$37.67
$39.94
$42.55
$45.57
11.29%
$32.23
$33.81
$35.58
$37.58
$39.85
12.29%
$29.45
$30.73
$32.15
$33.73
$35.50
54.9
11.4%
***Step Function WACC
due to anticipated changes
in capital structure
13.29%
$27.15
$28.20
$29.37
$30.65
$32.07
14.29%
$25.20
$26.10
$27.06
$28.12
$29.29
Comparable Analysis
 QSR
 Chicken and non-Chicken
 Franchise Business Model Focus
 Eliminates many big players such as MCD, CMG, SBUX
 5% gross sales franchise fee
 2-4% gross sales directed to brand management/advertising
funds
 Regionally focused in the US while also making international
expansion a primary objective
 Extremely competitive in terms of price, quantity, location
and input costs
Comparable Analysis
6.0x
18.8x
EV/Forward
NTM EV/Forward P/Diluted EPS Before NTM Forward
Revenue
EBITDA
Ex
P/E
21.2x
5.21x
16.52x
34.8x
29.25x
3.4x
2.6x
3.6x
1.5x
3.3x
3.0x
12.9x
14.1x
19.0x
13.8x
19.0x
14.6x
18.3x
21.0x
20.6x
30.5x
23.5x
20.0x
EV/Revenue
EV/EBITDA
EV/EBIT
High
Low
Mean
Median
3.6x
1.5x
2.9x
3.3x
19.0x
12.9x
15.8x
14.1x
30.5x
18.3x
22.8x
21.0x
Weighted Average
2.8x
16.0x
22.9x
Company
EV/Revenue
EV/EBITDA
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Jack in the Box Inc. (NasdaqGS:JAC K)
Domino's Pizza, Inc. (NYSE:DPZ)
Noodles & C ompany (NasdaqGS:NDLS)
El Pollo Loco Holdings, Inc. (NasdaqGS:LOC O)
Yum! Brands, Inc. (NYSE:YUM)
Summary Statistics
Weight
0.05
0.25
0.10
0.15
0.30
0.15
Revenue
EV Based on Weighted Average Multiples
Less Total Debt
Less C ash
Equity Value
Shares Outstanding
Implied Price
Weightings
EV/Revenue
EV/EBITDA
EV/EBIT
EV/FwdRev
NTM EV/Fwd EBITDA
TTM P/E
Forward P/E
EV/EBIT
EBITDA
EBIT
3.20x
2.47x
3.37x
1.31x
3.04x
2.80x
11.62x
13.17x
16.70x
11.65x
17.12x
12.81x
EV/Forward NTM EV/Forward
Revenue
EBITDA
3.4x
17.1x
1.3x
11.6x
2.7x
14.1x
3.0x
13.2x
2.6x
14.3x
29.5x
35.8x
36.4x
54.1x
21.1x
38.1x
24.93x
28.33x
30.41x
44.54x
37.40x
23.62x
P/Diluted EPS Before NTM Forward
Ex
P/E
54.1x
44.5x
21.1x
24.9x
35.4x
33.1x
35.8x
30.4x
34.2x
235.6
74.7
66.0
NTM Revenue
264.71
670.28
142.0
8.4
536.7
1197.44
142.0
8.4
1063.8
1508.10
142.0
8.4
1374.5
699.64
142.0
8.4
566.0
1292.38
142.0
8.4
1158.8
23.30
23.30
23.30
23.30
23.30
23.30
23.30
$23.03
$45.66
$58.99
$24.29
$49.73
$54.64
$66.65
10.00%
10.00%
30.00%
10.00%
10.00%
10.00% Implied Price
20.00%
$50.76
NTM EBITDA
Diluted EPS Before Ex
90.07
$1.6
32.8x
1273.2
NTM EPS
2.03
1552.8
In Conclusion,
Catalysts
•
•
•
•
•
Franchised system provides consistent cash flow
Brand and restaurant growth phase
A sustainable business grows at the customer level.
International growth
6 Analysts covering the firm
Risks
• Commodity Market Risk
• Highly dependent on Chicken prices
• Foreign Currency Exchange
• 509 franchised restaurants abroad in 26 countries
• Food Safety
• Consumer Preferences and Demographic Trends
• The covenant in the 2013 credit facility
• Leverage ratio to remain below 3.5
2014 10-K Pages 6-9
Recommendation
 DCF suggests a price target of $32.14
 Comps suggest a price at roughly $50
 Technical Analysis suggests a price support at $55
 Further analysis of “what the market is thinking” led us to
realize that the differences in valuation that we were
experiencing was because of the differences in Discount
Rate. We have applied a higher rate than have analysts
covering the issue, as we see risks to adding leverage.
Recommendation
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