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Highlights of the second quarter of 2002 versus second quarter of 2001 highlights include: a diluted EPS from continuing operations increase of 42.9 percent to $0.40; a net income from continuing operations increase of 43.3 percent to $13 million; a system-wide sales increase of 5.7 percent to $628 million; and a wholesale revenues increase of 7.5 percent to $16 million
During the quarter, AFC and its franchisees opened 100 new restaurants, bakeries and cafes; converted 106 company-operated restaurants and bakeries into franchisee-owned units; added 300 new commitments; and announced a $50 million share repurchase program
Frank Belatti, Chairman and CEO said, "We are extremely proud of our second quarter results. AFC's earnings remain solid as evidenced by our 42.9 percent growth rate driven by our 24.7 percent increase in franchise revenues and overall improvement in our EBITDA margin. We continue to demonstrate that we are a sound investment, consistently delivering strong results in a time of broader market uncertainty. The AFC business model is easy to understand, has straightforward measurements to evaluate execution and provides AFC a strong platform for future growth."
Diluted earnings per share from continuing operations of $0.40 for the second quarter of 2002 represents an increase of 42.9 percent over diluted earnings per share from continuing operations of $0.28 for the second quarter of 2001.
AFC's net income from continuing operations in the second quarter of 2002 increased to $13 million, or 8.6 percent of revenues, compared with $9 million, or 5.6 percent of revenues for the second quarter of 2001. The improvement in net income was mostly driven by improved EBITDA margins (primarily resulting from franchising related revenues), lower amortization expense and lower interest expense.
Operating EBITDA (as defined) for the second quarter of 2002 increased 10.2 percent to $33 million as compared to $30 million for the same period in 2001. EBITDA margin for the second quarter of 2002 increased by 360 basis points to 22.2 percent, an increase from 18.6 percent for the second quarter of 2001. The improved operating EBITDA margin was primarily due to the higher profit margin associated with increased franchise related revenues, as well as increased rental revenue on real estate leased to franchisees who purchased company-operated units in conjunction with AFC's conversion strategy.
System-wide sales at AFC's 3,911 restaurants, bakeries and cafes and Seattle Coffee Company's wholesale operations were $628 million compared with system-wide sales of $594 million during the second quarter of 2001. This 5.7 percent increase was primarily due to new franchise unit growth, wholesale revenue growth and domestic system-wide comparable sales growth.
AFC's franchise revenues were up 24.7 percent and wholesale revenues increased 7.5 percent. Franchise revenues increased primarily due to the addition of 424 newly opened franchised units and the conversion of 195 company-operated units to franchise units during the last twelve months, in addition to a domestic franchised comparable store sales increase of 0.9 percent for the second quarter of 2002. AFC's total revenue for the second quarter of 2002 was $150 million compared to $162 million for the second quarter of 2001. The $12 million decline in revenues was primarily due to the conversion of 195 company-operated units to franchised units over the last twelve months as part of AFC's ongoing conversion strategy.
For the second quarter of 2002 compared to the second quarter of 2001, overall domestic system-wide comparable sales were up 0.4 percent. Popeyes comparable store sales increased 1.2 percent domestically system-wide for the quarter after a 4.1 percent increase in the prior year. Church's domestic system-wide comparable store sales were up 0.5 percent for the quarter. Church's comparable sales were impacted by competitive pricing in the segment and limited new menu roll-outs. AFC has already begun addressing these factors entering into the second half of the year by introducing new products and innovative promotions. Domestic comparable sales for the second quarter of 2002 were down 4.4 percent at Cinnabon, and down 2.7 percent at Seattle Coffee Company, as a result of lower volume in captive venues and the slowing economy. While traffic counts are down, both Cinnabon and Seattle Coffee Company are focused on increasing their overall capture rate at captive venues, as well as leveraging product sales through expanded distribution channels.
Dick Holbrook, President and Chief Operating Officer noted, "We are very excited about AFC's 24.7 percent franchise revenue improvement for the quarter, since such a significant portion of these dollars flow through to net income. Additionally, our wholesale revenues were up almost 7.5 percent as we continue to expand our distribution channels. System sales were up a respectable 5.7 percent, primarily from new franchise partners unit growth, which is a key driver to our success and domestic comparable store sales which were up slightly. We are focused on implementing initiatives such as new products and limited time product offers, in conjunction with additional marketing and more aggressive promotions, to align comparable store sales more closely with our overall targeted growth rate."
International revenue, which represents approximately 2.7 percent of AFC's total revenue, was down 4.9 percent to $4.1 million for the second quarter of 2002 compared to $4.3 million for the second quarter of 2001. During the second quarter, we opened 45 new international units versus 41 new units for the same period last year, bringing the total international unit count at the end of the second quarter of 2002 to 737, which included the termination of 50 Church's units, compared to 683 at the end of the second quarter of 2001. New commitments internationally stood at 163 at the end of the second quarter of 2002 compared to 284 at the end of the second quarter of 2001.
During the quarter, as part of its ongoing conversion strategy, the company sold 59 Church's units and 47 Cinnabon units for cash proceeds of approximately $20 million. Since 2000, the year the conversion program began, AFC has sold 312 units, including 62 Popeyes restaurants, 156 Church's restaurants and 94 Cinnabon bakeries, and it has added 285 new development commitments related to these conversions.
Gerald Wilkins, Executive Vice President and CFO of AFC Enterprises commented, "Our conversion strategy continues to play a key role in AFC's overall business performance. It reduces AFC's overhead costs and capital requirements, improves AFC's EBITDA and net income margins and accelerates our franchising growth strategy. It also provides franchise partners who purchase these units with immediate cash flow. This cash flow helps strengthen our franchise partners business both today, and in the future, as they add additional units. It really provides a win for both our franchise partners and for AFC and its shareholders."
On July 22, 2002, AFC announced that its Board of Directors approved a share repurchase program of up to $50 million effective immediately. The program, which is open-ended, will allow AFC to repurchase its shares on the open market from time to time in accordance with the requirements of the Securities and Exchange Commission.
"AFC is focused on three primary elements to be the "Franchisor of Choice"; innovation, brand building and service. Our second quarter results demonstrate that we are building on these core principles that drive our EPS growth. We are extremely excited about AFC's future as the company continues to grow. Even in a less than robust economic environment, we expect to meet the analyst consensus EPS estimate of $1.72 from continuing operations for fiscal year 2002," concluded Frank Belatti, Chairman and CEO.