Popeyes: Southern Comfort?

02/18/2015 8:00 am EST

Focus: STOCKS

Peter Staas

Managing Editor, Capitalist Times and Energy & Income Advisor

Our favorite name in the fast food niche is an outfit that is changing the brand, shifting the focus of its menu’s bold, regional Louisiana flavors and tapping into the rising profile of Southern food, observes Peter Staas, editor of Capitalist Times.

Formerly called Popeyes Chicken & Biscuits, the rebranded Popeyes Louisiana Kitchen (PLKI) has revitalized the restaurant’s product lineup with popular new offerings in the sandwich and seafood category.

The major strategic changes that the company has implemented in recent years have built a foundation for future success for its franchisees.

The company has also stepped up its marketing efforts, transitioning from primarily local advertising to bringing its brand to the national stage, including sponsoring a college football bowl game.

Popeyes Louisiana Kitchen deserves plaudits for finding a spokeswoman, “Annie,” who embodies the chain’s New Orleans roots and delivers advertising campaigns that center around limited-time offers to pull in new customers and drive more frequent visits from regulars.

Management has also made efforts to improve customers’ experience by installing digital menu boards; a newly created restaurant support center will also help to steer general managers at its franchises toward best practices.

Taken together, these efforts have created a virtuous circle where the profitability of existing locations has improved, current operators have opened new restaurants, and new franchisees have entered the fold.

The company and franchisees last year opened a record 201 Popeyes Louisiana Kitchen locations (121 in the US and 80 in international markets), while the firm’s same-store sales growth has outperformed its peers for 11 consecutive quarters.

Although Popeyes Louisiana Kitchen undoubtedly has benefited from momentum-driven money looking to add exposure to consumer-discretionary names, the business itself continues to build momentum and offers exposure to an impressive growth story that’s still in its early innings.

With only 1,870 domestic locations and about 500 international restaurants, Popeyes Louisiana Kitchen has ample opportunity to expand in the US and in international markets.

Its asset-light model generates a reliable stream of free cash flow that the company can plow into its turnaround efforts and fund opportunistic acquisitions.

Popeyes Louisiana Kitchen rates a buy up to $60 per share. Investors should scale into this position gradually over a longer time frame to take advantage of potential pullbacks related to fears of higher minimum wage and concerns about the rising cost of chicken.

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