All we can do is look at the keys to successful restaurant expansion, see how AFC Enterprises, Inc. (NASDAQ:AFCE) is doing currently, and closely monitor it as they expand.
Cash flow, profitability, and same-store growth, are the blocking and tackling of retail expansion. As you can see by the table below, this chicken maker is on a big win streak.
| AFC FY totals | Same store sales growth | Total restaurants | Free Cash Flow* | |
| 2012 | 6.9% | 2,104 | $36.7 | |
| 2011 | 3.1% | 2,035 | $28.5 | |
| 2010 | 2.6% | 1,977 | $26.3 |
*Dollar amounts in millions
The biggest danger in restaurants, or all retail for that matter, is over-expansion. Too many CEO’s focus on making EPS numbers look good, by opening droves of new stores, even as cash flow and comparable’s fall.
The best part of AFC Enterprises, Inc. (NASDAQ:AFCE)’s blow-out second quarter was that operating margins were still able to increase, to 18.3%, which justifies further expansion. Sales grew 21% for AFC, which was great, but they also had same-store sales growth of 4.4%.
Popeye’s is growing store count and earnings but, more importantly, they’re doing it in a sustainable way. That gives me some comfort that Popeye’s is making enough money, with every new store, to justify expanding overseas.
Think of Popeye’s as Tom Brady as a rookie. It just got its shot, it’s shown tremendous upside, but there’s still a lot to prove.
If profitability, same-store sales, or cash flow decline with expansion–then you’ll know it’s time to “cut” AFC Enterprises, Inc. (NASDAQ:AFCE) from your portfolio.
China: The red zone
The truth is that Yum! Brands, Inc. (NYSE:YUM) has a long road to go for a Chinese recovery.While the company expects Chinese sales growth to resume in the fourth quarter, August sales were still down 10% and they’ve dropped over 50% from pre-crisis levels.
I like Yum! Brands, Inc. (NYSE:YUM), mostly because of Taco Bell’s refocused brand image, and they’ll grow again in China. Recent figures out of China have shown comparable sales declines, but those declines have slowed, from -19% in May to -10% in June, which could signal stabilization. But their latest set back, combined with Popeye’s healthy growth, has me thinking they could have some competition in China soon.
If AFC Enterprises, Inc. (NASDAQ:AFCE), through Popeye’s, can grow as efficiently overseas as they have in the U.S.–watch out!
Foolish investing tip: Scouting matters
In the stock market, the “obvious picks” are typically the worst ones.
Tom Brady, Randy Moss, and countless other All-Pro’s slipped in the NFL draft because they were either overlooked or carried headline risk. The same is true in the stock market; unknown or un-followed stocks can turn into “All-Pro’s” with just a little time and patience.
In my opinion, Popeye’s is a higher quality version of KFC without the negative PR. They currently have a scant 2,000, profitable, locations and are only just beginning to test the waters overseas. While I like both stocks, if we’re talking chicken, I prefer Popeye’s as a growth play.
If Popeye’s can grow overseas as profitably as they have in the U.S., then the sky truly is the limit.
The article Fried Chicken, Tom Brady, and 1 All-Star Stock originally appeared on Fool.com and is written by Adem Tahiri.
Adem Tahiri has no position in any stocks mentioned. The Motley Fool owns shares of AFC Enterprises.
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