Tag Archives: POPEYES


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Restaurant Brands is here to stay (not surprisingly), but the operating details of this situation reflect a great deal of financial engineering rather than predictable, above average,  long term operating progress. The unit growth at Burger King will continue, but the profitability “levers” are largely played out. Tim Horton’s has serious franchisee tension still to be dealt with, and we are sure that peace will be made. However, the improvement in franchisor margins at Horton’s, (which the franchisees claim was largely at their expense) will not be duplicated. Popeye’s is no doubt the best growth vehicle within this brand portfolio, but their scale is not large enough to move the overall corporate profitability or cash flow by much. The bottom line is that the earnings and cash flow of this situation are unlikely to grow by more than mid single digits in the near future, having grown by even less than that in calendar ’18. The cash generation may well be used to reduce the $11B of net debt, but that hasn’t been the case in the last two years.  The dividend, yielding 3.2% currently, is secure, but the stock is no bargain at 23x ’19 earnings, and about 20x trailing EBITDA.


Restaurant Brands (QSR), one of the highest visibility “asset light”, “free cash flow” multi-brand franchisors, with Tim Horton’s, Burger King, and Popeye’s, and they reported their ’18 yearend result this morning. We have written many times on this situation, which readers can access through the “Search” function on our home page. With that background, the highlights of the fourth quarter report follow. Readers should know that the fourth quarter sales were reported in mid-January, and QSR ran up about 10%, from $57 to $63 on something of a relief rally. Today’s report filled in the accompanying profit numbers.

Refreshing our memory of the comps, Tim Horton’s had Q4 and calendar ’18 comps of 1.9% and 0.6% respectively. Burger King had comps of 1.7% and 2.0% respectively. Popeye’s had comps of 0.2% and 1.6% respectively.  Traffic has not been described but can be assumed to be two or three points less than the same store sales.

Unit growth was better. Tim Horton’s net unit growth was 2.1% and 2.1% respectively. Burger King was 6.1% and 6.1%, Popeye’s was 7.3% and 7.3%.

The reported GAAP (remember General Accepted Accounting Principles?) earnings per share are a bit confusing because of a change in accounting “Standards”. In Q4, Diluted EPS was $0.64 (New Standard) and $0.68 (Previous Standard) vs. $1.59 (Previous). The twelve months were $2.42 (New) and $2.49 (Previous) vs $2.54 (Previous). Setting aside the Q4 quarterly adjusted large fluctuation, the year, on a GAAP basis was down, on either standard.

Investors are very interested these days in EBITDA, so that was provided, by segment, on an “adjusted” basis, and adjusted EPS was provided as well.

Tim Horton’s had adjusted EBITDA, in Q4 of $297M (New Standard) and $295M (Previous Standard) vs. $304M (Previous). That’s down. For the year, TH had segment EBITDA of $1,127M (New) and $1,128 (Previous) vs $1,136M (Previous). That’s down. Burger King, in Q4 had adjusted EBITDA of $247M (New) and $265M (Previous) vs $265M (Previous). That’s flat to down. For the year, BK had $928M (New) and $950M (Previous) vs $903M (Previous). That’s up 2.7% and 5.2% respectively. Popeye’s, for Q4, had adjusted EBITDA of $37M (New) and $42M (Previous) vs. $37M (Previous). That’s flat to down. For the year, Popeye’s had adjusted EBITDA of $157M (New) and $169M (Previous) vs. $107M (Previous). That’s up sharply, 47-58%, but we will come back to this, in the next paragraph. Adding up the segment EBITDA, total Q4 was $581 (New) and $602M (Previous) vs. $606M (Previous). That’s down. Total calendar adjusted EBITDA was $2,212M (New) and $2,247 (Previous) vs $2,146 (Previous). That’s up 3.0-4.7%.

However, in a note following the segment breakdown, the company says “since RBI’s consolidated results include Popeye’s starting in Q2 of 2017 (post acquisition), RBI’s consolidated year over year results…are favorably impacted by the inclusion of a full year of Popeye’s in 2018 and only a partial year in 2017.”

While we cannot know what Popeye’s organic annual change in EBITDA was, it seems reasonable that an “adjustment” to the $50-$62M apparent increase in PLKI’s annual EBITDA would have largely wiped out the increase in adjusted EBITDA for the company as a whole.

It’s possible that our interpretation of the above is misguided, but, at best, QSR’s EBITDA is growing year to year at a very modest rate. If we are right, it is growing hardly at all.

Moving on, net unit growth is steady, most importantly at Burger King, their most well established worldwide brand, with 17,796 locations, up 6.1% in ‘18. Popeye’s is growing nicely, up 7.3% on a smaller base of 3,102 units. Tim Horton’s continues to grow, at a 2.1% rate in ‘18, on a base 4,846 restaurants, in spite of the well publicized franchisee unrest. Clearly, unit growth, internationally in particular, is the largest opportunity for improved profitability and cash flow. The potential for growth at Tim Horton’s in China was emphasized, with an objective of 1,500 units over ten years, the growth led by an affiliate of QSR. Ongoing growth in Brazil is also predictable, also led by a QSR affiliate, in this case publicly traded in Brazil. The same Brazilian affiliate is leading the growth there of Popeye’s.

The conference call consisted of the Company reiterating their dedication to building profitable sales for each of their franchise systems. Analysts questioned management about the unit level profitability, and the company continues to claim that franchisee profitability improved in ’18 vs. ’17. Various questioners seemed skeptical, citing wage increases as a continuing burden. Since comp sales are up 2.0% at best, and traffic (while not disclosed) is likely down, virtually every publicly held company has reported that profit margins are suffering under these conditions and it is unclear why Burger King, Tim Horton’s or Popeye’s would be an exception.

The Company adhered closely to their mantra of building top line sales for each of their franchise systems, which truly does solve all other issues. As referenced above, while one could question their assertion of improved franchise profitability, we can’t doubt the Company dedication to improved future sales. Loyalty programs, digital ordering, renovations, and other operating initiatives are important elements in maintaining market share, at the very least, and hopefully building it.

In terms of “capital allocation”, reference was made to ongoing “delevering” of the balance sheet. This is an important objective since net debt is 5.1x the adjusted EBITDA of 2.1B. However, the free cash flow of $1.1B was a lot less, after dividends and $550M of repurchased exchange units from their 3G affiliate. Furthermore, there has yet to be any “delevering”, since net debt is still $11.8B, virtually unchanged from a year earlier, still at a year end high after calendar ’17 capital allocations to dividends, another $500M plus repurchase from 3G, and redeeming Warren Buffet’s $3B of preferred stock.

CONCLUSION: Provided at the beginning of this article

Roger Lipton

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About a year ago, two high priced acquisitions were made, namely Panera Bread and Popeye’s Chicken. We said at the time that these two deals were not harbingers of a broader trend. Panera was a strategic acquisition by a deep pocketed European buyer (JAB) . Popeye’s (PKLI) was a another franchise vehicle for the highly leveraged financial engineers at Restaurant Brands (QSR). Inexpensive capital (i.e.very low interest rates) and highly valued paper (QSR equity was trading at over 20x trailing EBITDA, with access to billions of debt) allow for some abnormal risk taking. Some have called it “misallocation of capital”.

It’s a year later, and two more highly priced deals are now on the radar screen. Zoe’s Kitchen has been bid for by Cava Grill, joined by Ron Shaich of Panera fame. ZOES is trading above the $12.75 suggested price, in the expectation that a higher bid could emerge. You can find our most recent description of Zoe’s, from our website article here:


We are not going to comment further  on this situation, at the current time, other than to alert our readers that it is an interesting case study.

Dunkin’ Brands Group, a much larger company, has been recently touted as an acquisition target, perhaps by Coca Cola (KO), and DNKN is trading at an all time high. The latest writeup, from our website, on DNKN is provided here:


Our attitude here is that, Coca Cola, or anyone else, would be paying an unnecessarily high price for a Company that is not the industry leader. The Dunkin’ brand has been lagging the dominant Starbucks by a large measure, clearly losing market share, and there is no reason to believe that will change in the foreseeable future. While Dunkin’ works to refresh it’s approach, Starbucks is more aggressive than ever as it works to overcome the “law of large numbers” and cope with industry headwinds such as the increasing cost of labor.

DNKN trades today at about 18x trailing twelve months EBITDA,  twenty seven times estimated earnings for 12/31/18, and it is difficult to project more than high single digit earnings growth in ’19 and beyond. If DNKN remains public, stock buybacks might take EPS growth into low low double digits, but DNKN has already leveraged its  balance sheet to about 5x trailing EBITDA, so stock buybacks won’t do too much more than cover executive options. Few investors are enthused about paying 25x forward earnings, and 18x TTM EBITDA,  for a company building earnings something like 10%. This is especially true in the case of DNKN, where a cash can be made that much of the free cash flow should be re-invested in the system. New and improved products, marketing, mobile order and pay, and other obviously lagging elements of the system are overdue to be addressed. The franchisees have been fighting the daily battle while the Company has bought back over a billion dollars worth of stock, and new highs in the stock have enriched the franchisor’s executives.

Asset light franchisors, with their supposedly free cash flow (because franchise systems have to be supported) are very desirable properties. Furthermore, Coca Cola, or another deep pocketed strategic acquirer could make the case, as Warren Buffet has often made, that one can afford to pay a fair price for a high quality asset run by proven dedicated executives, and the long term success will overcome the initial premium price. In this case, however, we don’t believe that DNKN has either a dominant industry position, nor is the management team outstanding.

Lastly, if KO or someone else is determined to get into the franchised coffee shop business, we suggest that this USA economic expansion and stock market boom is closer to its end than its beginning. A more opportune time to purchase almost anything may not be far away. We wouldn’t want to own DNKN at this valuation because the Company’s performance doesn’t support the stock price. We suggest, further,  that potential purchaser’s of DNKN would be better advised to play another day.

Roger Lipton

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Restaurant Brands reported Q2 earnings this morning and disappointed the investment community, primarily because of softer sales (by a couple of points) at Burger King than expected and EBITDA comparisons that were anywhere from flat to up 6%, depending on the “standard” employed. The stock was trading down several percent as the conference call was being conducted, recovering to be down just slightly at the opening.

In summary: Comp sales at TH were flat, BK was up 1.8%, Popeye’s was up 2.9%. Net restaurant growth was up 3.0%, 6.4% and 7.5% respectively.  There are two “standards” of reporting here, as discussed below. On the “new” versus “previous” standard, Adjusted EBITDA was down 1.1%, up 1.8% and down 5.4% respectively. Total Adjusted EBITA, Net Income, and Adjusted Diluted Earnings Per Share were virtually flat YTY. On the “previous” standard versus “previous”, Adjusted EBITDA was up 2.7%, up 7.0%, up 28.0% respectively, up 6.0% overall. We discuss the differences further below.

 The Conference Call:

Management, CEO Daniel Schwartz, started off the call by saying that “we plan to provide more details than we historically have on initiatives across each of our brands”.

There was, predictably, substantial discussion by management about the continued growth at Burger King, the effort to generate renewed growth at Tim Horton’s as a result of the “Winning Together” program, and worldwide expansion of the Popeye’s brand.  There was major emphasis on the improved communication with the Tim Horton’s franchise community. Over 1/3 of the franchise network have agreed to renovate their stores in ’18 and ’19, with QSR helping to finance that investment.  Supply chain margins at Tim Horton’s improved from Q1 to Q2, as a result of seasonal sales influences. Management indicated that profits and EBITDA at Tim Horton’s should improve in the second half as the price adjustments in the supply chain, and the introduction of Espresso (when equipment was sold to franchisees), about a year ago are lapped.

We have no doubt that a major effort is being made to repair the relationship with the TH franchise community. Peace will be made, because it will be in everyone’s interest, but the profit growth in the supply chain in the future will be far less than in the past.

In terms of management’s guidance for overall future growth of profits and EBITDA, management declined to provide an objective, maintaining that their objective is unit growth, sales growth, and profit growth at each brand.

The question was asked about menu price increases, but management declined to quantify that. Menu prices have obviously been increased, so traffic would be something like a couple of points less than the comps indicate.

When asked about the profitability at the franchisee level, management declined to be specific but said that profitability is up at all three brands.

When asked about the TH performance, country by country, management talked about softness in the US (being countered by renovations, etc.), differences by each market, and long term optimism about each, but nothing more specific.

In reference to supply chain margin at Horton’s, and the $100M capex there over ’18 and mostly ’19, management said that the current structure is good, and should be more efficient in the future with new distribution centers in Alberta and BC. Management declined to provide specific objectives in terms of improved profitability, for franchisees or QSR.


It has to do with revenue recognition, as described in the following note from the first quarter’s 10Q filing:

 Note 4. Revenue Recognition

Revenue from Contracts with Customers

We transitioned to FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts with Customers(“ASC 606”), from ASC Topic 605,Revenue Recognition and ASC Subtopic 952-605, Franchisors – Revenue Recognition(together, the “Previous Standards”) on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our consolidated financial statements for prior periods were prepared under the guidance of Previous Standards. The$249.8 million cumulative effect of our transition to ASC 606 is reflected as an adjustment to January 1, 2018 Shareholders’ equity.

Our transition to ASC 606 represents a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled for the exchange of those goods or services.

There are a lot of complexities these days relative to accounting treatment, and many companies are reporting all kind of “adjusted” results. Our comments here could be considered cynical, but we don’t see other franchising companies changing their “standard”, reporting both ways, and the net effect here of the “New Standard” was A REDUCTION OF SHAREHOLDER’S EQUITY OF $249.8 MILLION ON 12/31/17. As analysts would say, there are a lot of “puts and takes”, but the bottom line is that shareholder’s equity is materially less than had been reported.


Restaurant Brands, International (QSR) is a strong company, to be admired from many standpoints. We stand by our previous discussions which have pointed out that the financial engineering of the past will not be possible in the future. The company is already levered up pretty fully, though they could be tempted by the availability of Papa John’s.  The reduction of G&A at Burger King, and especially at Tim Horton’s, combined with the supply chain “efficiencies” (price increases to franchisees) will not be possible going forward. The growth rate of profits and EBITDA will obviously be lower in the next several years than has been produced in the past.

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Credit Cheryl Bachelder and Ron Shaich, Cheryl for her ten year stint leading Popeye’s Louisiana Kitchen (“Popeye’s”) to prosperity, and Ron Shaich, who built Panera Bread Company (“Panera”) from 20 stores (originally called “St.Louis Bread”) to 2000 stores over 25 years. Each has now sold, (agreed to sell, at PNRA) at valuations at the very top of historic ranges, roughly 20 times trailing EBITDA.

Popeye’s was bought by Restaurant Brands International (publicly traded QSR), which also owns Burger King and Tim Horton’s. It must be acknowledged that QSR has produced admirable operating results since acquiring Burger King and Tim Horton’s. The largest shareholder (16.66% according to Bloomberg) in QSR is Pershing Square Capital, managed by William Ackman. Simply put, Popeye’s has become the third leg within their QSR platform.

Panera is about to be acquired by JAB Holding Co., a Luxembourg-based privately held investment fund that has also acquired (at top dollar) Einstein Noah Restaurant Group, Caribou Coffee, Krispy Kreme Doughnuts, Peet’s Coffee & Tea, Keurig Green Mountain, (all previously publicly held in the US). Also in their portfolio, unfamiliar to us, are Stumptown Coffee Roasters  plus Intelligentsia Coffee.  JAB Holdings, according to Wikipedia, is 95% owned by descendants of chemist Ludwig Reimann, who co-founded, in 1828, with Adam Benckiser, the Benckiser chemical company. JAB is obviously very substantial since they paid $13.9 billion for Keurig Green Mountain, $1.35 billion for Krispy Kreme, and now over $7 billion for Panera.

We don’t doubt there will be corporate synergies at both parent companies. Popeye’s, Burger King, and Tim Horton’s can learn from one another and administrative overhead can be shared.  Panera and Einstein’s and others can sell the various coffee related products controlled by JAB, and some of Panera’s food skills (and technology expertise) can be installed elsewhere in the portfolio. Corporate overhead can be spread more efficiently, and the public expenses at Popeye’s and Panera can obviously be eliminated, reducing the apparent valuation modestly. The point of this discussion, however, is more general. While Restaurant Brands and JAB holdings have taken stakes that will be very long term in nature, the history of the restaurant industry does not provide comfort.

People have to eat and drink, and investors are invariably seduced by the apparent simplicity and attractive returns on capital for successful operators, but there is no consumer product line more demanding to produce and deliver than freshly prepared food and drink. The challenges have only become more intense over the years, with increased competition which leads to more choice for consumers, higher labor costs, and higher rents for prime locations. Lately, slowing mall traffic, financially stretched lower and middle class consumers, and deflating grocery store prices have exacerbated the situation. Problems such as experienced at Chipotle can happen almost anywhere, so even a company that’s “on a roll” can be undermined at any time.

One of the most predictable elements of long term success within the restaurant industry has been the intense involvement of the founder. Off the top of my head, examples include Ray Kroc at McDonald’s, Dave Thomas at Wendy’s, Alex Schoenbaum at Shoney’s, Norman Brinker at Chili’s, Robert Rosenberg at Dunkin’ Donuts,  Jim Patterson at Long John Silver’s, Jim Collins at Collin’s Foods, Howard Schultz at Starbucks, Jack Fulk and Richard Thomas at Bojangles, to name just a few.  Almost all of these companies, some of which are still prominent, do not enjoy the “first mover” leadership and prestige of their earlier days. The only one still clearly at the top of the heap is Starbucks.  We attribute that to the fact that Howard Schultz, clearly a visionary and an exceptional leader, happened to be a young man when he started Starbucks, and of course the four wall economics (to this day)  provide a powerful growth engine. Schultz has stayed healthy, enthusiastic and deeply involved over thirty years (still young in his early 60s). Interestingly, Starbucks stumbled noticeably when he stepped aside seven or eight years ago. He stepped back after a couple of years and the great performance resumed. We should note that he is currently taking a step back, if not aside, so hopefully the company won’t suffer noticeably from his reduced role.

It is ironic that 2016 was a banner year for bankruptcies within the chain restaurant industry. Nine restaurant companies, including 14 chains, filed for bankruptcy. For the purpose of this discussion, we need not concern ourselves with secondary or tertiary brands. However, among the bankruptcies were Logan’s Roadhouse, Hometown Buffet, and Ryan’s Family Steakhouse. We “knew” these chains, and even owned stock in each of them when they were publicly held. They were generating compelling store level economics, excellent corporate returns on capital and steady growth. They had long runways for future growth. In short, they were “best of breed” at the time (just like Popeye’s and Panera today) and the stocks were valued accordingly. Ted Moats at Logan’s, Roe Hatlan at Hometown, and Alvin McCall at Ryan’s were dedicated and effective leaders. The reasons for each corporate demise have varied, but we contend that if the original dedication to detail and operational excellence had been maintained, bankruptcy need not have been the result. Times change and people change but competitive pressures or general  economic downturns have never put any well situated restaurant company out of business. The problems have invariably been self inflicted. Why should Logan’s be gone when Texas Roadhouse has done so well? Why should Hometown and Ryan’s be gone when Fogo de Chao (all you can eat) is doing well. The departed companies might not be as dominant today as they once were but they could have still be reasonably prosperous. At the very least they could have been survivors, even in an increasingly challenging environment.

This brings us back to the top dollar purchases of today’s “best of breed” Popeye’s and Panera. Forty years ago investors bought “conglomerates”. Twenty years ago, they called them “rollups”. Over the last couple of years “platform companies” have come into vogue. Unfortunately, especially for many institutional investors, Valeant Pharmaceuticals recently demonstrated that not all apparent synergies at platform companies pay off. Williiam Ackman’s Pershing Capital Management, 16.6% owner of QSR as noted above, took a $4B realized loss on the sale of Valeant.

QSR enjoys a high valuation (30x ’17 EPS estimates and 19.9x trailing EBITDA), and can borrow at still low rates, so could afford to pay about 20x trailing EBITDA for Popeye’s. QSR is obviously comfortable expanding their “platform” JAB Holdings has billions of equity and more billions of borrowing power. They have to own “something” with long term “value” no doubt in addition to other assets and currencies around the world in an effort to maintain the family wealth over future generations. (I suspect they own at least a  little GOLD, as well.)  People have to eat, after all, and the apparent leadership position and predictable growth at Panera will make the price seem reasonable over time. On the other hand, as discussed above, Logan’s Roadhouse, Hometown Buffet, and Ryan’s Family Steakhouse looked pretty good in their time.

In conclusion: QSR and JAB Holdings can’t buy them all so I wouldn’t be buying restaurant stocks with the prospect of being taken out by a possibly overenthusiastic purchaser. Cheryl Bachelder has already left Popeye’s, and we hear that franchisees are already a bit apprehensive. They will get over that, but a new CEO will have to prove himself or herself. Ron Shaich at Panera has said “we’re here, nothing changes”, but he is a dedicated family man, very philanthropic, no doubt has other interests as well, so time will tell.  A couple of predictions we are prepared to make: (1) The valuations of Popeye’s and Panera will prove to be “outliers” on the high side over time, a reflection of the still very low interest rate environment which encourages unnecessary risk taking (2) Cheryl Bachelder’s absence and our prediction of Ron Shaich’s reduced commitment and involvement over time will be reflected in less impressive performance at the store level, for both customers and owners. We are not predicting disaster, just “underperformance” relative to expectations implied by the purchase price.

Lastly, we’d like to take this opportunity to wish both Cheryl and Ron all the best for their future. Both are extraordinary business people and admirable individuals. They did a great job for all their stakeholders, including a shareholder exit at “top dollar”. Most importantly, they invariably provided the best possible leadership by example to their respective organizations.








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