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POPEYES LOUISIANA KITCHEN, INC. 2014 ANNUAL REPORT
Growth
Begins
Here

Table of contents

  • Page 1
    POPEYES LOUISIANA KITCHEN, INC. 2014 ANNUAL REPORT Growth Begins Here

  • Page 2
    ...YEAR INCREASE IN OPERATING EBITDA CHERYL A. BACHELDER CHIEF EXECUTIVE OFFICER, POPEYES LOUISIANA KITCHEN, INC. 27 consecutive quarters Outpaced domestic CQSR same-store sales 19 QUARTERS OF POSITIVE SAME-STORE SALES GROWTH Check out our online annual report at http://popeyes.com/investors/annual...

  • Page 3
    ...year and international same-store sales grew for the eighth consecutive year. With six years of steadily increasing market share, we commanded 23.2 percent of the domestic chicken quick service restaurant (CQSR) segment at the end of 2014. Our strong sales and unit growth allowed us to generate free...

  • Page 4
    ... drive our performance and the hard work they do every day. From franchisees opening new locations to corporate employees and restaurant team members around the world, I want to recognize everyone for a job well done. Together you have delivered another year of outstanding results. And for Popeyes...

  • Page 5
    ...and profitability. Our goal is to generate profits so good you are thrilled to own Popeyes. 5) ACCELERATE QUALITY RESTAURANT OPENINGS To expand our footprint, we are opening new locations in the United States and around the world. We want to offer returns so good you can't wait to build more Popeyes...

  • Page 6
    ... same level as sales, operations, profitability and new restaurant growth. We have set out to transform Popeyes into a people-driven company, because our culture drives the results we deliver. Partnering with our franchisees, we are starting by investing in leadership development - a foundation for...

  • Page 7
    5 "I started as a cashier in 1989 and today I manage 22 restaurants. I love being able to build a team, develop people and impact their lives in a positive way." NORA SANCHEZ DIRECTOR OF OPERATIONS AMCO FOODS, INC.

  • Page 8
    ... quick service restaurant category. A HIGH-PERFORMING BRAND We have spent the past six years building our brand. In fact, with industry-leading same-store sales and unit growth, Popeyes is acting more like a new concept than a 43-year-old brand. Our strength is spicy, bold, flavorful food - a point...

  • Page 9
    7 new PRODUCT LAUNCHES 7 Cr acked Pepper but terfly Shrimp 12 FLIGHTS OF NATIONAL TELEVISION

  • Page 10
    ... our operations behind the counter. This is important because as we grow, we need to make sure our newest restaurants can handle higher average unit volumes. With every order, we need to serve a product that is hot, fresh and ready. This is why in 2015 we are beginning a multi-year process to...

  • Page 11
    9 80% of Domestic Restaurants reimaged "We treat our guests like family and always make sure they leave with a smile on their face. That's what good service is all about." CYNTHIA HARDAWAY RESTAURANT GENERAL MANAGER MEMPHIS, TENNESSEE

  • Page 12
    .... -ast year alone, the average restaurant operating profit before rent of Popeyes' domestic freestanding franchised restaurants increased to 22.4 percent or approximately $300,000 per store, up from 21.6 percent and $279,000 in 2013. BIGGER MARGINS, BETTER SALES With our highly franchised model...

  • Page 13
    11 22.4% RESTAURANT OPERATING PROFIT MARGIN $100,000 INCREASE IN FREESTANDING RESTAURANT OPERATING PROFIT - BEFORE RENT SINCE 2008 "The marketing and food innovation keep our sales growing. Popeyes is a strong brand with a lot of upside for years to come." AMIN DHANANI FRANCHISEE OF THE YEAR

  • Page 14
    ... influenced by restaurant location. Our goal is to increase our global market share by building high-volume restaurants on the best sites adjacent to current markets or high-potential countries. Around the world, the untapped opportunity is vast. POPEYES LOUISIANA KITCHEN, INC. 2014 ANNUAL REPORT

  • Page 15
    13 "In new markets, guests can't wait to try Popeyes. Our formula for success is simple: great locations, great facilities and great food." GUILLERMO PERALES DEVELOPER OF THE YEAR 85% OF OUR NEW RESTAURANTS WERE BUILT BY EXISTING FRANCHISEES 201 RESTAURANT OPENINGS GLOBALLY IN 2014 2,379 Global ...

  • Page 16
    ... basis for fiscal years 2014, 2013 and 2012, the Company's Operating EBITDA on a consolidated basis to the line on its consolidated statement of POPEYES LOUISIANA KITCHEN, INC. 2014 ANNUAL REPORT (6) Adjusted earnings per diluted share, Operating EBITDA, and Free cash flow are supplemental non-GAAP...

  • Page 17
    ... company (as defined in Exchange Act rule 12b-2). Yes No As of July 11, 2014 (the last business day of the registrant's second quarter for 2014), the aggregate market value of the registrant's voting common stock held by non-affiliates of the registrant, based on the closing sale price as reported...

  • Page 18
    ...Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services...

  • Page 19
    ... in 1972 and is the world's second largest quick-service chicken concept based on the number of units. Within the QSR industry, Popeyes distinguishes itself with a unique "Louisiana" style menu that features spicy chicken, chicken tenders, fried shrimp and other seafood, red beans and rice and other...

  • Page 20
    ...are our number one customer. As such, our primary objective is to deliver sales and profits by offering excellent investment opportunities in the Popeyes brand and providing exceptional support systems and services to our franchise owners who sign long-term franchise agreements. In 2008, the Company...

  • Page 21
    ...our domestic franchised and company-operated restaurants pursuant to supply agreements negotiated by Supply Management Services, Inc. ("SMS"), a not-for-profit purchasing cooperative. We and our Popeyes franchisees hold membership interests in SMS in proportion to the number of restaurants owned. As...

  • Page 22
    ... operations represented approximately 10.3% of our total franchise revenues. For each of 2014, 2013, and 2012, international revenues represented 5.7%, 6.4% and 6.9% of total revenues, respectively. Insurance We carry property, general liability, business interruption, crime, directors and officer...

  • Page 23
    ... documents (except for exhibits) available to the public free of charge through our web site at www.investor.popeyes.com or by contacting our Secretary at our principal offices, which are located at 400 Perimeter Center Terrace, Suite 1000, Atlanta, Georgia 30346, telephone number (404) 459-4450. 5

  • Page 24
    ... for Popeyes is fresh chicken. Any material increase in the costs of fresh chicken could adversely affect our operating results. Our company-operated and franchised restaurants purchase fresh chicken from various suppliers who service us from various plant locations. These costs are significantly...

  • Page 25
    ... and investors, the market price of our common stock could decline. Factors that may cause our results or same-store sales to fluctuate include the following the opening of new restaurants by us or our franchisees; the closing of restaurants by us or our franchisees; increases in the number of...

  • Page 26
    ..., currency exchange rates, local economic conditions, political instability and other risks associated with doing business in foreign countries. We expect that our franchise revenues generated from international operations will increase in the future, thus increasing our exposure to changes in...

  • Page 27
    ... of poultry and other foods. As a result, Popeyes restaurants could experience a significant increase in food costs if there are additional instances of avian flu or food-borne illnesses. In addition to losses associated with higher prices and a lower supply of our food ingredients, instances of...

  • Page 28
    ... our leases vary depending on the facility. The following table sets forth the locations by state of our company-operated restaurants as of December 28, 2014: Land and Buildings Owned Land and/or Buildings Leased Total Louisiana Tennessee Indiana Mississippi North Carolina Arkansas South Carolina...

  • Page 29
    ... PURCHASES OF EQUITY SECURITIES Our common stock currently trades on the NASDAQ Global Market under the symbol "PLKI." The following table sets forth the high and low per share sales prices of our common stock, by quarter, for fiscal years 2014 and 2013. 2014 (Dollars per share) High Low High 2013...

  • Page 30
    ..., 2015, the Company's Board of Directors approved a multi-year share repurchase authorization increasing the maximum value of shares that may be repurchased under the plan to $100 million. Shareholders of Record As of January 25, 2015, we had 121 shareholders of record of our common stock. Dividend...

  • Page 31
    ...") and the S&P 1500 Restaurants Index (the "peer group index"). Stock performance is compared for the five fiscal year period ended December 28, 2014. The cumulative total return computations set forth in the performance graph assume the investment in the Company's common stock and in each index was...

  • Page 32
    ... Annual Report. (In millions, except per share data) 2014 2013 2012 2011 2010 Summary of Operations: Revenues:(1) Sales by company-operated restaurants(2) Franchise royalties and fees(3) Rent from franchised restaurants(4) Total revenues Expenses: Restaurant food, beverages and packaging Restaurant...

  • Page 33
    ... service restaurant concept. Twenty-six of the acquired restaurants were converted into the Popeyes Louisiana Kitchen image and leased to Popeyes franchisees to operate under our standard franchise agreement. The remaining restaurant property was sold in 2013. Non-recurring franchise fees associated...

  • Page 34
    ...-store sales increase Total domestic same-store sales increase International franchised restaurants same-store sales increase Total global same-store sales increase (2) Company-operated restaurants (all domestic) Restaurants at beginning of year New restaurant openings Permanent closings Restaurants...

  • Page 35
    ...develops, operates, and franchises quick-service restaurants under the trade names Popeyes® Chicken & Biscuits and Popeyes® Louisiana Kitchen (collectively "Popeyes") in 48 states, the District of Columbia, Puerto Rico, Guam, the Cayman Islands, and 26 foreign countries. Popeyes has two reportable...

  • Page 36
    ... impacted as new restaurants are developed in those emerging markets and rollover high first year sales volumes. International same-store sales increased 5.1%, compared to a 4.7% increase last year, the eighth consecutive year of positive same-store sales growth. 2015 Operating and Financial...

  • Page 37
    ... due to an increase in same-store sales of 5.7% and new restaurant openings in 2014 and 2013. Company-operated restaurant operating profit margin was 18.9% of sales in 2014 compared to 18.7% of sales last year. The higher restaurant operating profit margin was primarily due to overall lower food and...

  • Page 38
    ...increase in multi-unit management expenses of Company-operated restaurants primarily in our new Indianapolis and Charlotte markets, $1.1 million increase in domestic franchise restaurant support services, $0.7 million decrease in provision for credit recoveries, $0.5 million increase in domestic new...

  • Page 39
    ...million in 2013, a $14.7 million increase from 2012. The increase was primarily due to new restaurant openings in 2013 and 2012 and an increase in same-store sales of 2.3% partially offset by the $1.2 million sales impact of the 53rd week in 2012. Franchise Royalties and Fees Franchise revenues were...

  • Page 40
    ... due to an increase in same-store sales of 2.3% and new restaurant openings in 2013 and 2012. Company-operated restaurant operating profit margin was 18.7% of sales in 2013 compared to 17.3% of sales in 2012. The higher restaurant operating profit margin was primarily due to overall lower food and...

  • Page 41
    ... in operating profit by business segment. Operating profit for each reportable segment includes operating results directly attributable to each segment. (Dollars in millions) 2013 2012 Fluctuation As a Percent Franchise operations Company-operated restaurants Operating profit before unallocated...

  • Page 42
    ... years 2014, 2013 and 2012: (Dollars in millions) 2014 2013 2012 Construction of new Company-operated restaurants Acquisition and conversion of restaurants in California and Minnesota Reimaging activities at Company-operated restaurants Information technology hardware and software Point of sale...

  • Page 43
    ... 2018. The previous interest rate swap agreements were terminated on December 16, 2013. The Company's Board of Directors has approved a share repurchase program. During 2014, 2013 and 2012, we repurchased and retired 891,931 shares, 504,295 shares and 741,228 shares of common stock for $40.0 million...

  • Page 44
    ... operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The discount rate is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit...

  • Page 45
    ... risks inherent in the business increase, the resulting change in the discount rate could also result in future impairment of the recorded goodwill. Fair Value Measurements. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability (exit price) in an orderly...

  • Page 46
    ... not yet adopted on the Company's financial position and the results of operations. Management's Use of Non-GAAP Financial Measures Adjusted earnings per diluted share, operating EBITDA,company-operated restaurant operating profit and free cash flow are supplemental non-GAAP financial measures. The...

  • Page 47
    ... a historical basis for fiscal years 2014, 2013 and 2012, the Company's company-operated restaurant operating profit to the line item on its consolidated statement of operations entitled sales by company-operated restaurants, which the Company believes is the most directly comparable GAAP measure on...

  • Page 48
    ... for the construction of new company-operated restaurants and $13.6 million related to the acquired restaurants in Minnesota and California . The following table reconciles on a historical basis for fiscal years 2014 and 2013, the Company's free cash flow on a consolidated basis to the line on its...

  • Page 49
    ... regarding future growth, planned share repurchases, projections and expectations regarding same-store sales for fiscal 2015 and beyond, expected capital expenditures, guidance for new restaurant openings and closures, effective income tax rate, and the Company's anticipated 2015 and long-term...

  • Page 50
    ... price of poultry and other food costs. Foreign Currency Exchange Rate Risk. We are exposed to foreign currency exchange risk from the potential changes in foreign currency rates that directly impact our royalty revenues and cash flows from our international franchise operations. In 2014, franchise...

  • Page 51
    ... features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 28, 2014, using the criteria set...

  • Page 52
    ... 2012, Mr. Lynch served as our Chief Marketing Officer following his consultancy as interim CMO. Mr. Lynch served as Principal of Go LLC, a marketing consulting firm specializing in restaurant and food retail from July 2003 to February 2008, where he developed brand strategy and innovation plans...

  • Page 53
    ... Management at Papa John's International from 2006 to 2009. During her tenure at Papa John's, Ms. Leblanc delivered cost savings and streamlined the global supply chain and quality control functions, securing local and regional supply to assist the company in opening restaurants in numerous new...

  • Page 54
    ...Catherine Copeland, Russell J. Jones, A. Copeland Enterprises, Inc. and Popeyes Famous Fried Chicken, Inc., as amended to date. Supply Agreement dated March 21, 1989 between New Orleans Spice Company, Inc. and Biscuit Investments, Inc. Recipe Royalty Agreement dated March 21, 1989 by and among Alvin...

  • Page 55
    ... AFC Enterprises, Inc. Employee Stock Purchase Plan.* AFC Enterprises, Inc. 2002 Incentive Stock Plan.* AFC Enterprises, Inc. Annual Executive Bonus Program.* Indemnity Agreement dated October 14, 2004 by and between the Company and Supply Management Services, Inc. Indemnity Agreement dated February...

  • Page 56
    ....* Popeyes Chicken and Biscuits 2006 Bonus Plan.* Employment Agreement dated as of March 14, 2007 between the Company and James W. Lyons.* Employment Agreement dated as of March 14, 2007 between the Company and Robert Calderin.* Non-Qualified Stock Option Certificate for Cheryl Bachelder (time-based...

  • Page 57
    ... re Severance Agreement to Tony Woodard, dated May 13, 2014.* Indemnification Agreement to Tony Woodard.* Recipe and Formula Purchase Agreement between the Company and Diversified Foods and Seasonings, L.L.C. ("DFS"), dated June 13, 2014. Supply Agreement between the Company and DFS, dated June 13...

  • Page 58
    ...Annual Shareholders Meeting of the Company...2012 and incorporated by reference herein. (bb) Filed as an Exhibit to the Form 8-K of the Company filed on October 10, 2013 and incorporated by reference herein. (cc) Filed as an exhibit to the Form 10-Q of the Company for the quarter ended April 20th, 2014...

  • Page 59
    ... duly authorized on the 25th day of February 2015. POPEYES LOUISIANA KITCHEN, INC. By: /s/ CHERYL A. BACHELDER Cheryl A. Bachelder Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons...

  • Page 60
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was...

  • Page 61
    ...As of December 28, 2014 and December 29, 2013 (In millions, except share data) 2014 2013 Current assets: Cash and cash equivalents Accounts and current notes receivable, net Other current assets Advertising cooperative assets, restricted Total current assets Long-term assets: Property and equipment...

  • Page 62
    ...of Operations For Fiscal Years 2014, 2013, and 2012 (In millions, except per share data) 2014 2013 2012 Revenues: Sales by company-operated restaurants Franchise royalties and fees Rent from franchised restaurants Total revenues Expenses: Restaurant food, beverages and packaging Restaurant employee...

  • Page 63
    Popeyes Louisiana Kitchen, Inc. Consolidated Statements of Comprehensive Income For Fiscal Years 2014, 2013, and 2012 (In millions) 2014 2013 2012 Net income Other comprehensive income Net change in fair value of cash flow hedge Reclassification adjustments for derivative losses included in ...

  • Page 64
    Popeyes Louisiana Kitchen, Inc. Consolidated Statements of Changes in Shareholders' Equity For Fiscal Years 2014, 2013, and 2012 (Dollars in millions) Common Stock Number of Shares Balance at December 25, 2011 Net income Other comprehensive income, net of tax Repurchases and retirement of shares ...

  • Page 65
    ... of property and equipment Net gain on sale of assets Deferred income taxes Non-cash interest expense, net Provision for credit recoveries Excess tax benefit from share-based payment arrangements Stock-based compensation expense Change in operating assets and liabilities: Accounts receivable Other...

  • Page 66
    ...For Fiscal Years 2014, 2013, and 2012 Note 1 - Description of Business Popeyes Louisiana Kitchen, Inc. ("Popeyes" or "the Company") develops, operates and franchises quick-service restaurants under the trade name Popeyes® Chicken & Biscuits and Popeyes® Louisiana Kitchen in 48 states, the District...

  • Page 67
    ... Fiscal Years 2014, 2013, and 2012 - (Continued) Property and Equipment. Property and equipment is stated at cost less accumulated depreciation. Provisions for depreciation are made using the straight-line method over an asset's estimated useful life: 7 to 35 years for buildings; 5 to 15 years for...

  • Page 68
    ... "Restaurant employee, occupancy and other expenses." Additional contributions to the advertising cooperative for national media advertising and other marketing related costs are expensed as a component of "General and administrative expenses." During 2014, 2013, and 2012, the Company's advertising...

  • Page 69
    ...Fiscal Years 2014, 2013, and 2012 - (Continued) Revenue Recognition - Sales by Company-Operated Restaurants. Revenues from the sale of food and beverage products are recognized on a cash basis. The Company presents sales net of sales tax and other sales related taxes. Revenue Recognition - Franchise...

  • Page 70
    ...value of stock options with only service conditions are estimated using a Black-Scholes option-pricing model. Restricted share awards and restricted share units are valued at the market price of the Company's shares on the grant date. The fair value of restricted share awards with service and market...

  • Page 71
    ... 2017 which begins on December 26, 2016. The guidance will not impact our recognition of sales from Company-operated restaurants, ongoing royalty fees which are based on a percentage of franchise sales, or rent from franchised restaurants which is composed of rental income and other fees associated...

  • Page 72
    ... in 2015 through 2017, $0.4 million in 2018, and $0.3 million in 2019. The remaining weighted average amortization period for these assets is 5 years. In the second quarter 2014, the Company purchased the recipes and formulas (the "formulas") it uses in the preparation of many of its core menu items...

  • Page 73
    ... 40 basis points. The increment over LIBOR and the commitment fee are determined quarterly based upon the Consolidated Total Leverage Ratio. As of December 28, 2014 and December 29, 2013, the Company's weighted average interest rates for all outstanding indebtedness under its credit facilities were...

  • Page 74
    .... In 2013, the Company expensed $0.4 million associated with the extinguishment of the 2010 Credit Facility, which is reported as a component of "Interest expense, net." Additionally, the Company capitalized approximately $0.7 million of fees related to the new facility as debt issuance costs which...

  • Page 75
    ...2015, $2.6 million in 2016, $2.1 million in 2017, $1.6 million in 2018, $1.4 million in 2019, and $6.4 million thereafter. Note 11 - Deferred Credits and Other Long-Term Liabilities (in millions) 2014 2013 Deferred franchise revenues Deferred gains on unit conversions Deferred rentals Above-market...

  • Page 76
    ...the Company's Board of Directors approved a multi-year share repurchase authorization increasing the maximum value of shares that may be repurchased under the plan to $100 million. Pursuant to the terms of the Company's 2013 Credit Facility, the Company may repurchase its common stock when the Total...

  • Page 77
    ... three-year total shareholder return ("TSR") against a broader group of restaurant companies. Shares earned will be adjusted -10% if TSR performance is in the bottom quartile, and will be adjusted +10% if TSR performance is in the upper quartile. TSR represents stock price appreciation and dividends...

  • Page 78
    ... plan were based on the Company's closing stock price on the date of grant. The weighted average grant date fair value of restricted share awards granted during 2013 and 2012 were $34.81 and $15.27, respectively. Each tranche granted was amortized as expense on a straight line basis from the date...

  • Page 79
    ... total fair value at grant date of awards which vested during 2014, 2013, and 2012, was $0.1 million, $0.1 million, and $0.6 million, respectively. Restricted Share Units The Company grants restricted stock units (RSUs) to members of its board of directors pursuant to the 2006 Incentive Stock Plan...

  • Page 80
    ... during 2014, 2013, and 2012, respectively, for its contributions to the Plan. Note 15 - Commitments and Contingencies Supply Contracts. Supplies are generally provided to Popeyes franchised and company-operated restaurants, pursuant to supply agreements negotiated by Supply Management Services, Inc...

  • Page 81
    ... manage any potential risks related to environmental remediation liabilities. Foreign Operations. The Company's international operations are limited to franchising activities. During 2014, 2013, and 2012, such operations represented approximately 11.5%, 10.9%, and 11.2%, of total franchise revenues...

  • Page 82
    ... for 2014 compared to 2013 is primarily due to the lower effective interest rate under the 2013 Credit Facility. Note 18 - Income Taxes Total income taxes for fiscal years 2014, 2013, and 2012, were allocated as follows: (in millions) 2014 2013 2012 Income taxes in the statements of operations, net...

  • Page 83
    ... from international franchisees. Foreign taxes withheld are generally eligible for credit against the Company's U.S. income tax liabilities. Reconciliations of the Federal statutory income tax rate to the Company's effective tax rate are presented below: 2014 2013 2012 Federal income tax rate State...

  • Page 84
    ... For Fiscal Years 2014, 2013, and 2012 - (Continued) (in millions) 2014 2013 Deferred tax assets: Deferred franchise fee revenue State net operating loss carry forwards Deferred rentals Deferred compensation Allowance for doubtful accounts Other accruals Reorganization costs Total gross deferred...

  • Page 85
    ... average number of shares subject to antidilutive options were not significant for the fiscal year 2014, 2013 and 2012. Note 20 - Segment Information The Company is engaged in developing, operating and franchising Popeyes Louisiana Kitchen quick-service restaurants. Based on its internal reporting...

  • Page 86
    Popeyes Louisiana Kitchen, Inc. Notes to Consolidated Financial Statements For Fiscal Years 2014, 2013, and 2012 - (Continued) (in millions) 2014 2013 2012 Revenues Franchise operations Company-operated restaurants $ 138.4 97.2 $ 235.6 $ 127.3 78.7 $ 206.0 $ 114.8 64.0 $ 178.8 Operating profit ...

  • Page 87
    ...for 2014 and 2013 contained sixteen weeks. The remaining quarters of 2014 and 2013 were twelve weeks. (b) The Company opened seven company-operated restaurants during the fourth quarter 2014 compared to five during the same period last year. Total sales of the seven company-operated restaurants were...

  • Page 88
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  • Page 89
    ... per common share, diluted (3,6) Operating EBITDA (4,6) Operating EBITDA margin (4,6) Free Cash Flow (5,6) Global system-wide sales growth (7) Domestic same store sales growth International same-store sales growth Global same-store sales growth New restaurant openings Total restaurants See page...

  • Page 90
    iv Popeyes Louisiana Kitchen, Inc. 400 Perimeter Center Terrace, Suite 1000, Atlanta, GA 30346 www.popeyes.com/investors