Bojangles Inc. (NASDAQ: BOJA) stock remains mired in a slump that can be traced back to its initial public offering in 2015, with shares down 44% since.
Recently, however, Bojangles' shares have engaged in a relative rally, appreciating 11% year to date at the time of this writing. In November, I tackled the quick-service chain's disappointing performance over the past couple of years. As we look forward to its fiscal fourth-quarter 2017 earnings report on March 6, let's briefly review three key themes to which investors should pay attention when gauging Bojangles' overall health.
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1. Reversing the comps decline
Comparable sales, or comps, at Bojangles' restaurants have remained soft in recent quarters, even as many quick-service restaurant (QSR) competitors like McDonald's (NYSE: MCD) and Wendy's (NASDAQ: WEN) notched improving trends in 2017. Through the first three quarters of 2017, Bojangles' reported negative comps of 1.8%. A somewhat steeper plunge of 2.2% in the third quarter was due to falling traffic, a trend that has management's attention. To combat milder traffic, the company promoted a value campaign known as "Welcome Home" to celebrate its 40th anniversary last year. While this initiative pulled customers back in stores, traffic dissipated once the promotion ended.
When Bojangles' reports next week, investors should look for a reversal of the comps trend, and even if positive numbers materialize, it's important to analyze their composition. For example, a strong comps number built on improved traffic but heavy promotional activity (i.e., discounting) won't be healthy for the company's operating margin, nor will it foreshadow sustained improvement.
2. Menu strategy for 2018
As I discussed in November, while Bojangles' management blames lower comps and flat sales on skittish consumers, it's worth noting that other chains have seen healthy revenue increases over the last four quarters. It's legitimate for shareholders to worry that perhaps Bojangles' menu is problematic, given that consumers, especially millennials, are trending toward healthier diets and demand alternate options even at the fast-food chains they frequent.
While Bojangles' offers a delicious menu built around fried chicken and southern sides, it lacks a vibrant list of alternative, healthier items. Granted, such items stray from the company's core value proposition. But Bojangles' can potentially stem some traffic losses by launching limited time offerings (LTOs) which, if not necessarily healthier, at least grab customers' attention.
The restaurant's "BojAngler" LTO, a fillet of Alaskan pollock that has appeared in each of the last three years in late winter, is an example of the type of menu innovation that might offset some of the company's traffic woes. Shareholders should look for management to provide the current menu innovation strategy when Bojangles' 2018 outlook is discussed during the earnings call next week.
3. Store opening expectations
As results weakened throughout the first three quarters of 2017, Bojangles' dialed back the pace of its new store openings. In the third quarter, the company revised its final new unit opening count for fiscal 2017 from a range of 53 to 56 restaurants to a band of 50 to 52 new restaurants.
With a base of nearly 750 systemwide units, Bojangles' is expanding its store count at a fairly aggressive rate of nearly 7% per year. Obviously, a healthy development pipeline and vigorous store expansion are crucial for revenue growth. But as the company has encountered revenue headwinds over the last 12 months, barring an unexpected jump in same-store sales in the fourth quarter, shareholders shouldn't be surprised if Bojangles' crimps its store-opening goals for 2018.
This is because it's often prudent when revenue stagnates for management to concentrate both its attention and available resources on fixing traffic, product mix, and pricing issues. Given 2017's anemic top line, a more modest store-launch schedule might be welcomed by investors. The company can always resume faster store growth, but entering new markets in the face of lukewarm demand may only serve to drag on margins and overall sales volume. And that's a scenario that investors may dread, given the stock's two-year swoon.
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