Longbow Research Downgrades Popeyes, Believes Sales Growth Is Below Expectations

• The share price of Popeyes Louisiana Kitchen Inc PLKI has declined 11.11 percent over the last three months, touching a low of $52.12 on November 5.
• Longbow’s Alton Stump has downgraded the rating on the company to Neutral.
• Latest checks suggest that system-wide same-store sales growth in the US has been below the estimate and the consensus during 3Q15.

According to the Longbow report, “New products in general provided a lighter y/y contribution to same-store traffic in early 3Q in comparison to the first half of the year.”

Analyst Alton Stump believes that Popeyes has begun to experience a year-on-year increase in consumer spending power as of mid-3Q15, mainly due to the declining oil prices during 3Q14.

Stump also mentioned that U.S. franchisees expected to take an additional 2-3 percent price hike during early 2016, partly driven by “the fact commodity chicken costs are expected to drive at least a low single-digit increase in overall commodity costs next year.”

Same-store sales have, however, decelerated further so far in 4Q15 to a mere 1-1.5 percent growth, against more challenging comps, below the estimates and consensus for the full quarter.

“We are now concerned PLKI could face difficulties hitting consensus same-store sales growth projections against tougher comparisons over the next couple of quarters,” Stump stated.

However, Stump also expressed optimism regarding Popeyes’ long-term fundamentals, given the company’s “attractive” store growth platform, both in the US and internationally, along with the “expected acceleration of cash returns to shareholders over the next 18-24 months.”

The EPS estimates for 3Q15, 2015 and 2016 have been lowered to reflect expectations of lower same-store sales growth.