Arcos Dorados (ARCO)

Fast-food chain Arcos Dorados (NYSE:ARCO) met Wall Street’s revenue expectations in Q4 CY2025, with sales up 10.7% year on year to $1.27 billion. Its GAAP profit of $0.12 per share was 40.5% below analysts’ consensus estimates.

Company Overview

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 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.

Fast-food competitors operating in Latin America include Burger King (owned by Restaurant Brands International, NYSE:QSR), Domino’s (NYSE:DPZ), and KFC and Pizza Hut (owned by Yum! Brands, NYSE:YUM).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years.

With $4.68 billion in revenue over the past 12 months, Arcos Dorados is one of the larger restaurant chains in the industry and benefits from a well-known brand that influences consumer purchasing decisions.

As you can see below, Arcos Dorados’s sales grew at a decent 7.9% compounded annual growth rate over the last six years as it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Arcos Dorados’s year-on-year revenue growth was 10.7%, and its $1.27 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 12% over the next 12 months, an acceleration versus the last six years. This projection is commendable and indicates its newer menu offerings will spur better top-line performance.

Number of Restaurants

The number of dining locations a restaurant chain operates is a critical driver of how quickly company-level sales can grow.

Arcos Dorados sported 2,520 locations in the latest quarter. Over the last two years, it has opened new restaurants quickly, averaging 3% annual growth. This was faster than the broader restaurant sector.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at restaurants open for at least a year.

Arcos Dorados has been one of the most successful restaurant chains over the last two years thanks to skyrocketing demand within its existing dining locations. On average, the company has posted exceptional year-on-year same-store sales growth of 21%. This performance suggests its rollout of new restaurants is beneficial for shareholders. We like this backdrop because it gives Arcos Dorados multiple ways to win: revenue growth can come from new restaurants or increased foot traffic and higher sales per customer at existing locations.

In the latest quarter, Arcos Dorados’s same-store sales rose 16% year on year. This growth was a deceleration from its historical levels, showing the business is still performing well but losing a bit of steam.

Gross profit margins tell us how much money a restaurant gets to keep after paying for the direct costs of the meals it sells, like ingredients, and indicate its level of pricing power.

Arcos Dorados has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 12.7% gross margin over the last two years. Said differently, Arcos Dorados had to pay a chunky $87.31 to its suppliers for every $100 in revenue.

In Q4, Arcos Dorados produced a 14.2% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as ingredients and transportation expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Arcos Dorados was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.5% was weak for a restaurant business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, Arcos Dorados’s operating margin decreased by 1.5 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Arcos Dorados’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Arcos Dorados generated an operating margin profit margin of 1.1%, down 7.9 percentage points year on year. Since Arcos Dorados’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Arcos Dorados’s EPS grew at 17% compounded annual growth rate over the last six years, higher than its 7.9% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t improve and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q4, Arcos Dorados reported EPS of $0.12, down from $0.28 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Arcos Dorados broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Arcos Dorados’s five-year average ROIC was 10.9%, higher than most restaurant businesses. This illustrates its management team’s ability to invest in profitable growth opportunities and generate value for shareholders.

Arcos Dorados reported $422.3 million of cash and $2.27 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $575.2 million of EBITDA over the last 12 months, we view Arcos Dorados’s 3.2× net-debt-to-EBITDA ratio as safe. We also see its $2.35 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Arcos Dorados blew past analysts’ EBITDA expectations this quarter. We were also excited its same-store sales outperformed Wall Street’s estimates by a wide margin. On the other hand, its EPS missed and its revenue was in line with Wall Street’s estimates. Overall, this print was mixed. The market seemed to be hoping for more, and the stock traded down 2.9% to $7.48 immediately following the results.

Updated: March 19, 2026 at 7:43 AM EDT

When considering an investment in Arcos Dorados, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Arcos Dorados isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was decent over the last six years and is expected to accelerate over the next 12 months, its projected EPS for the next year is lacking. And while the company’s marvelous same-store sales growth is on another level, the downside is its cash burn raises the question of whether it can sustainably maintain growth.

Arcos Dorados’s forward price-to-sales ratio is 0.3x. The market typically values companies like Arcos Dorados based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. There’s no rush to buy the stock - add this one to your watchlist and come back to it later.

Wall Street analysts have a consensus one-year price target of $9.91 on the company (compared to the current share price of $7.48).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.