KeyBanc Explains Why Popeyes Unit Economics Matters

Restaurant chain Popeyes Louisiana Kitchen accounts for around 7 percent of Restaurant Brands International Inc QSR's total EBITDA and last week released a franchise presentation that shows some metrics are below pre-acquisition levels, according to KeyBanc.

The Analyst

KeyBanc Capital Markets' Eric Gonzalez maintains an Overweight rating on Restaurant Brands with a $72 price target.

The Thesis

Popeyes publicly released its 2019 franchise disclosure document (FDD), which includes multiple unit-level economic data readouts. Gonzalez said, for example, the document showed U.S. franchisee cash flows were flat-to-slightly-negative in 2018 but the research firm's estimates suggest slightly improved profitability last year.

Gonzalez said restaurant level operating profit excluding lease expenses are 130 to 150 basis points below 2015 and 2016 levels, likely due to sales deleverage and wage pressures.

Restaurant companies typically shy away from offering the type of information Popeyes disclosed, which prevents investors from fully understanding the overall health of the business. In Popeyes' case, investors should give management the opportunity to strike a balance between value and innovation to reverse poor trends moving forward.

The Popeyes brand remains "overlooked" by investors given its small size relative to sister brands like Tim Hortons and Burger King. The Popeyes brand is more likely to see international success across different cultures, however, and a 2018 master franchise agreement in Brazil could prove to be the first of many.