Arcos Dorados (NYSE:ARCO) Delivers Impressive Q3

Adam Hejl /
2023/11/16 7:45 am EST

Fast-food chain Arcos Dorados (NYSE:ARCO) reported Q3 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 22.1% year on year to $1.13 billion. Turning to EPS, Arcos Dorados made a GAAP profit of $0.28 per share, improving from its profit of $0.22 per share in the same quarter last year.

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Arcos Dorados (ARCO) Q3 FY2023 Highlights:

  • Revenue: $1.13 billion vs analyst estimates of $1.09 billion (3.4% beat)
  • EPS: $0.28 vs analyst estimates of $0.21 (33.9% beat)
  • Gross Margin (GAAP): 14.3%, up from 13.9% in the same quarter last year
  • Same-Store Sales were up 37.3% year on year (beat vs. expectations of up 22.6% year on year)
  • Store Locations: 2,339 at quarter end, increasing by 42 over the last 12 months (in line vs. expectations)

The broad-based momentum we captured in the first half of 2023 continued in the third quarter. McDonald’s Brand strength, structural competitive advantages and consistent execution continued driving sales growth and market share gains across the Arcos Dorados footprint, with the strongest performance in markets such as Brazil, Chile, Costa Rica and Mexico.

Our strategy is clear: drive sustainable sales growth, supported by both guest volume and average check growth, to generate operating leverage and long-term profitability growth. To achieve this objective, we are leaning on Value, which has always been a cornerstone of the McDonald’s business. Value includes quality, service, convenience and optionality, in addition to price. This is where our Three D’s strategy of Digital, Delivery and Drive-thru are leveraging Latin America’s largest free-standing restaurant portfolio and most robust digital platform to offer Value to our guests and to the communities we serve.

Translating to “Golden Arches” in Spanish, Arcos Dorados (NYSE:ARCO) is the master franchisee of the McDonald's brand in Latin America and the Caribbean, responsible for its operations and growth in over 20 countries.

Traditional Fast Food

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Sales Growth

Arcos Dorados is one of the larger restaurant chains in the industry and benefits from a strong brand, giving it customer mindshare and influence over purchasing decisions.

As you can see below, the company's annualized revenue growth rate of 9% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was decent as it opened new restaurants and grew sales at existing, established dining locations.

Arcos Dorados Total Revenue

This quarter, Arcos Dorados reported remarkable year-on-year revenue growth of 22.1%, and its $1.13 billion in revenue topped Wall Street's estimates by 3.4%.

While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

The number of dining locations a restaurant chain operates is a major determinant of how much it can sell and how quickly company-level sales can grow.

When a chain like Arcos Dorados is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. Since last year, Arcos Dorados's restaurant count increased by 42, or 1.8%, to 2,339 locations in the most recently reported quarter.

Arcos Dorados Operating Retail Locations

Taking a step back, Arcos Dorados has generally opened new restaurants over the last eight quarters, averaging 1.6% annual increases in new locations. This growth is decent compared to other restaurant businesses but should be taken lightly as the industry is quite mature. Analyzing a restaurant's location growth is important because expansion means Arcos Dorados has more opportunities to feed customers and generate sales.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its restaurants that have been open for at least a year, give or take. This is a key performance indicator because it measures organic growth and demand.

Arcos Dorados has been one of the most successful restaurants over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 37.5%. This performance suggests its steady rollout of new restaurants is beneficial for shareholders. When a chain has strong demand, more locations should help it reach more customers seeking its meals.

Arcos Dorados Year On Year Same Store Sales Growth

In the latest quarter, Arcos Dorados's same-store sales rose 37.3% year on year. This growth was in line with the 34.2% year-on-year increase it posted 12 months ago.

Key Takeaways from Arcos Dorados's Q3 Results

With a market capitalization of $2.22 billion and more than $251.1 million in cash on hand, Arcos Dorados can continue prioritizing growth.

We were impressed by how significantly Arcos Dorados blew past analysts' revenue expectations this quarter, driven by a meaningfully same-store sales beat. We were also excited its EPS outperformed Wall Street's estimates. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The stock is up 2.4% after reporting and currently trades at $10.79 per share.

Arcos Dorados may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.