To Our Stakeholders
There is a good reason why we chose accelerating growth as the theme for this year's annual report. Put simply, it is an apt metaphor for the winning performance of our AFC team in 2006. Propelled by the momentum generated in 2005, 2006 was a year of accomplishment for Popeyes® — fueled by new restaurant openings, a growing development pipeline, new product news, a new advertising campaign, positive same-store sales, and strong support from our Popeyes operators around the globe.
Frank J. Belatti, Chairman
2006 results
2006 turned out to be a very successful year for Popeyes. At year-end, our Company revenues had grown approximately 7 percent to $153 million, yielding an operating profit of slightly over $45 million and net income of $22.4 million, or $0.75 per diluted share. We've spoken in the past about our two primary strategies for accelerating Popeyes growth — driving average unit volume and accelerating new restaurant development in both domestic and international markets. We saw positive momentum in both of these areas in 2006. Popeyes domestic system average unit volume increased by 4.6 percent to slightly over $1 million in 2006. This improvement was driven by domestic same-store sales growth of 1.6 percent, closure of underperforming restaurants, and the fact that our new freestanding restaurant sales are annualizing at approximately $1.3 million.
Maintaining momentum
At Popeyes, our positioning comes down to five simple words: "It's all about the food." Our operators know that; our employees know that; the marketplace knows that; and I hope after reading this annual report, you will, too. In 2006, we introduced a new advertising campaign, "Food with 'Tude™," based on the brand's superior quality and an array of flavorful menu items. It was a message that resonated with our core consumer demographic, who, as gasoline and other living expenses increased, were beginning to tighten their belts. Our core customers are still watching their spending carefully and consequently, demanding more value from every Quick Service Restaurant (QSR). Our food-focused positioning and strong line-up of new product concepts help us deliver it.
An emphasis on quality, limited time offers, including our seafood offerings of Butterfly Shrimp, Catfish and Popcorn Shrimp and our new Sweet Heat® boneless wings, as well as a continued focus on our core traditional chicken offerings, played an integral part in brand growth over the past two years. Going forward, we will continue to strengthen sales through a focus on value propositions and new product news that reinforce our brand heritage. New, appealing menu items — such as wings and onion rings, catfish strips, popcorn chicken and spicy new sauces that complement all of our menu items — will help drive traffic into our restaurants. We plan to continue our strategy to mix our messaging to include our best in class chicken, chicken strips, flavored nuggets and seafood items, all of which feature our unique spices and sauces that are only available at Popeyes.
Driving new growth
During fiscal year 2006, the Popeyes system opened 142 new restaurants, a 15.4 percent increase year-over-year in openings, with net new openings of 46 units. More importantly, the development team has put in place a robust pipeline to support approximately 20 percent more new domestic and international openings in 2007. We expect increased new openings and fewer closings to double the number of net openings for 2007. Our franchisees continue to be positive about growth and appreciate the variety of design and venue options available to them to spur new restaurant development.
Although damage from Hurricane Katrina necessitated the closing of 36 company-operated locations, by year-end 2006, we were operating 20 of those restaurants at significantly higher volumes than prior to the disaster. New Orleans is coming back, and we are proud to be part of that effort!
Our heritage
As the birthplace of Popeyes®, New Orleans and the surrounding communities of the Gulf Coast hold special meaning for us. In partnership with America's Second Harvest® - The Nation's Food Bank Network™, Popeyes franchisees, vendor partners and Company employees donated $265,000 earmarked for communities across the Gulf Coast. We are committed to working with America's Second Harvest to help win the battle against hunger.
Our brand growth
Along with accelerating growth, we are also accelerating value creation. We have the operational systems in place for peak performance at every step of fulfilling a guest's order — from more cost-effective product sourcing to better training of our operators and their staffs. To drive traffic, we are launching a new advertising campaign and using national cable to help deliver the message. To ensure consistency throughout the system, we have developed an overarching set of quality standards to which all Popeyes restaurants will adhere. We have strengthened our restaurant operations by holding regional operations meetings and inter-regional operations knowledge competitions. We continue to generate substantial free cash, thereby strengthening our credit position in the financial markets and giving us the benefit of financial flexibility for the future.
Of course, there are challenges ahead, also. Improving operating margins in 2007 and strengthening sales by daypart are high priorities. So, too, is improving the guest experience. People are looking for exceptional food that's also an exceptional value. The key to making that happen is a continued focus on our food and the development of value offerings that appeal to our consumer.
2006 was a busy, productive year for us, one made possible only with the support of our shareholders, our operators, our people and our guests. For that, I thank all of you. We continue to make Popeyes better — a better place to work, a better brand to own, a better stock to hold, and a better place to eat for more people in more places than ever before.
Frank J. Belatti
Chairman
AFC Enterprises, Inc.