Tuesday, May 20, 1997

Pollo Tropical, Inc.
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Phone: 305-670-7696
Price (5/20/97): $6 1/2

HOW DID IT DOUBLE?

For investors pecking away at fast-food chicken chain Pollo Tropical, it has been quite the season. This spring, this chicken has sprung. From ugly hatchling to prized poultry, the company has overcome last year's domestic failures to successfully set its sights on growth in the Caribbean and South America. The southward expansion has sent the stock northward as the company has more than tripled so far this year.

With its money-draining units in Chicago and New York now shuttered, the company has managed to improve sales and margins in its Florida stronghold, while penning potentially lucrative licensing deals for franchised units south of the peninsula.

BUSINESS DESCRIPTION

Pollo Tropical owns 35 and franchises 10 quick-service restaurants specializing in grilled chicken marinated in tropical juices and spices. The company-owned units are located in South and Central Florida, primarily near its Miami base. Nine of the franchised units are in Puerto Rico with the first Dominican Republic unit opening earlier this year. The company has also signed development deals to open units in Ecuador and the Netherland Antilles.

FINANCIAL FACTS

Income Statement

      12-month sales: $65.3 million
      12-month income: $2.9 million*
      12-month EPS: $0.33*
      Profit Margin: 4.4%
      Market Cap: $53.3 million
      (*Excludes extraordinary charges)

      Balance Sheet*
      Cash: $0.1 million
      Current Assets: $3.2 million
      Current Liabilities: $10.6 million
      Long-term Debt: $11.3 million
      (*As of Dec. 29, 1996)

      Ratios
      Price-to-earnings: 18.4
      Price-to-sales: 0.82

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Four years ago, in the heyday of rotisserie chicken chains, shares of Pollo Tropical fetched more than $20 a share. As cluck luck ran thin, investors rightfully began to discard all of the companies beyond BOSTON MARKET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOST)") else Response.Write("(Nasdaq: BOST)") end if %>. Pudgie's and Clucker's filed for bankruptcy. Kenny Roger's Roasters, the privately held giant, had to retreat from its Canadian expansion.

Pollo Tropical struggled as well. The warm reception it found in South Florida was cool when it branched out elsewhere. Its ethnic side dishes turned off patrons outside of the predominantly Hispanic Miami market. Even a name change and new menu item introductions like a steak sandwich were ill received. Eventually the company closed all of its units outside of Florida as well as a pair of underperforming eateries in the Tampa area.

Watching their investment in Pollo Tropical become chicken feed, shareholders fled the henhouse. Still, as the equity was plucked, those who took a closer look at the company found that Chicken Little was wrong. The sky was not falling, only the share price. As the underperforming restaurants were closed, the company began to show signs of improvement. Even in this difficult climate for fast-food operators, Pollo Tropical has managed four consecutive quarters of same-store sales growth.

Cynics who were vindicated when Long Island mouths rejected side dishes like black beans with white rice and the starchy cassava would probably have been the first to applaud the Latin American expansion. Grilled chicken has long been a staple in many of its new franchised markets, and the side dishes can always be adapted to local tastes.

WHERE TO FROM HERE?

In April the company reported strong quarterly earnings of $0.12 a share vs. $0.05 the year before. This powerful showing prompted the only analyst casting an estimate to raise his full-year guess from $0.37 to $0.48 a share. CEO Larry J. Harris said then that based on its momentum, the company believed that "the prospects are good to achieve our goal of record sales and earnings for 1997 as a whole."

Looking back to its best year, 1994, when the company netted $0.34 a share, Harris seems well on his way to steer Pollo Tropical to higher ground. However, liquidity could be a problem. While the company is rich in real estate, its current liabilities outweigh its current assets 3-to-1. That is probably why the company will only open two new restaurants this year with the emphasis being on a dozen new franchised units overseas.

So, do chickens fly? Pollo Tropical certainly has. Flying south for the winter has made this company a spring chicken once again. But, will it fall come autumn?

-Rick Aristotle Munarriz ([email protected])

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