Arcos Dorados (ARCO)

Fast-food chain Arcos Dorados (NYSE:ARCO) fell short of the markets revenue expectations in Q3 CY2025, but sales rose 5.2% year on year to $1.19 billion. Its GAAP profit of $0.71 per share was significantly above 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).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $4.56 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 7.5% annualized revenue growth over the last six years (we compare to 2019 to normalize for COVID-19 impacts) was decent as it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Arcos Dorados’s revenue grew by 5.2% year on year to $1.19 billion, missing Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 10.6% 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

Arcos Dorados operated 2,479 locations in the latest quarter. It has opened new restaurants quickly over the last two years, averaging 2.8% annual growth, 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 is an industry measure of whether revenue is growing at those existing restaurants and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

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 23.1%. 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 12.7% 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.

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 $87.34 to its suppliers for every $100 in revenue.

In Q3, Arcos Dorados produced a 11.9% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as ingredients and transportation expenses) have been stable and it isn’t under pressure to lower prices.

Arcos Dorados was profitable over the last two years but held back by its large cost base. Its average operating margin of 7.3% was weak for a restaurant business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, Arcos Dorados’s operating margin rose by 1.1 percentage points over the last year, as its sales growth gave it operating leverage.

In Q3, Arcos Dorados generated an operating margin profit margin of 12.3%, up 5.3 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

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 a remarkable 27.1% compounded annual growth rate over the last six years, higher than its 7.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q3, Arcos Dorados reported EPS of $0.71, up from $0.17 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. 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.

Over the last two years, Arcos Dorados’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.1%, meaning it lit $1.14 of cash on fire for every $100 in revenue.

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).

Although Arcos Dorados hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 10.9%, higher than most restaurant businesses.

Arcos Dorados reported $256.9 million of cash and $2.07 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 $549.9 million of EBITDA over the last 12 months, we view Arcos Dorados’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $15.8 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.

It was good to see Arcos Dorados beat analysts’ EPS expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its revenue missed and its same-store sales was in line with Wall Street’s estimates. Overall, this print was mixed but still had some key positives. The stock traded up 4.7% to $7.56 immediately after reporting.

Updated: December 4, 2025 at 9:41 PM EST

Before deciding whether to buy Arcos Dorados or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

There are things to like about Arcos Dorados. First off, its revenue growth was decent over the last six years and is expected to accelerate over the next 12 months. And while its cash burn raises the question of whether it can sustainably maintain growth, its marvelous same-store sales growth is on another level. On top of that, its new restaurant openings show it’s growing its brand.

Arcos Dorados’s EV-to-EBITDA ratio based on the next 12 months is 3.2x. Looking at the restaurant space right now, Arcos Dorados trades at a compelling valuation. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $9.50 on the company (compared to the current share price of $7.64), implying they see 24.3% upside in buying Arcos Dorados in the short term.