Raising Cane’s is one of the strongest performing restaurant chains in the U.S., and some bond ratings agencies have confirmed that. But that doesn’t mean they don’t see risk in the company’s business.
The Louisiana-based chain is going to the credit markets to borrow $500 million to pay down part of a $1.2 billion credit facility. Ratings agencies examining the company give us a relatively rare look into the finances of the privately held Cane’s.
Moody’s, for instance, gave the company a rating of “B1 CFR.” Standard & Poor’s (S&P) rated the company “BB-”, as did Fitch Ratings. In each case, the credit ratings agencies lauded the company’s financial performance, but said that its aggressive spending to add new locations is draining the chain of cash that could become a risk if something were to happen.
“The ratings are tempered by its single-brand concept with narrow consumer appeal,” Fitch said in its rating of the chain. “This leaves the company more vulnerable to brand-specific weakness.” And it leaves the company vulnerable to free cash flow deficits and a higher debt load.
Cane’s is one of the most extraordinary growth stories in the country right now. System sales grew 31% last year and has more than tripled over the past five years. The chain now has more than 700 locations.
A lot of that has come through organic growth. Average unit volumes are up 74% over those five years. A typical Cane’s now generates $5.4 million in revenues per location, selling a highly limited menu of chicken tenders, fries, Texas Toast and beverages.
Drive-thru has been a huge driver of that, now accounting for nearly 70% of the chain’s sales. “In our view, the company’s solid execution and focus on efficient operations have helped it generate near industry-leading average unit volumes that track well above those of its peers, including larger players like KFC and Popeyes,” S&P wrote. “Raising Cane’s good value proposition drives frequent customer visits, which has supported superior same-restaurant traffic and sales growth.”
Moody’s in particular cited the company’s narrow product offering, which in theory could leave Cane’s vulnerable to competition. It wouldn’t take much for customers to potentially move off chicken tenders, for instance.
Cane’s is a mostly company-run brand and funds its own growth using cash and debt. That aggressive spending is also a risk. Fitch noted that Cane’s plans to double its company-operated locations over the next five to six years and also noted that distributions to the company’s owners will all drain free cash flow, or FCF.
“This will result in a material FCF deficit annually over the forecast period,” Fitch wrote. “Any weakness in the business could result in higher FCF deficits posing a significant credit risk, although the company could choose to pull back on unit growth or member distributions to preserve liquidity and manage leverage.”
The company’s profitability is also more volatile because it operates most of its own units and depends on chicken prices. EBITDA margins, or earnings before interest, taxes, depreciation and amortization, declined by 400 basis points in 2022 as chicken prices and wage rates soared and the company delayed menu price increases, according to the ratings agencies.
Still, S&P believes Cane’s profitability and cash flow will improve as it gets bigger and can get more advantage of scale. The agency also expects higher-than-average revenue growth thanks to its restaurant development, same-store sales and “growing brand awareness.”
And the agency expects Cane’s has room to grow, given the chain’s 700 locations, compared with the 3,000 at Popeyes and 4,000 at KFC. S&P expects Cane’s revenue will grow in the “high teens” on an annual basis.
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