Texas Roadhouse & Popeye's: Different Growth Strategies

NEW YORK, NY - Texas Roadhouse (NASDAQ: TXRH) projected a strategy of organic growth. Currently the company has 330 outlets in 46 states, and projects opening 15 new units in 2010. Founded in 1993, the company went public in 2004 and since going public the company has taken opportunities to acquire 33 of its franchised outlets. Currently it has about 70 franchised outlets, and of those it has the contractual ability to repurchase 60 outlets.

Louisville-based Texas Roadhouse has restaurant managers, known as managing partners, who commit to a 5-year contract and put down a $25,000 "deposit" in exchange for which they are paid a base salary (est. $45K) plus performance-based compensation and stock. The average manager compensation is currently just above $100,000 exclusive of stock options. The locations are open for dinner from 4pm to 10pm during the week, with a lunch service added on the weekends; the result is that most managers arrive around 2pm and stay until closing at 10pm, which is a relatively short day for the restaurant industry.

Atlanta-based AFC Enterprises (NASDAQ: AFCE) follows a different approach with its Popeye's concept.

The 1,900 unit chain describes itself as "heavily franchised." The company's presentation to analysts pointedly noted its good relations with the PIFA franchisee association. It regularly surveys franchisees to quantify franchisee satisfaction; the satisfaction rate of franchisees rose from the previous year. Notwithstanding that, the company chief financial officer noted that while Popeye's opened 95 restaurants last year, it closed 81 for a net gain of 14 units. The CFO explained that many closings were due to "enforcing system standards."

Popeye's noted that market share growth was key to profitability and hence the company pays close attention to customer satisfaction metrics, with the percentage of customers saying they "inten[ded] to return" rising from 67% in the first quarter of 2009 to 73% in the fourth quarter. Same-store sales rose seven-tenths of one percent, but customer counts remained healthy and restaurant operating profit margins rose 1 percent.

A key constraint on AFC is the large debt burden. In FY08, the company repurchased $19M in stock and paid down $13.4M in debt. During FY09, the company has shifted to more aggressively paying off debt, reducing debt by $30.6M in Q3.