Arcos Dorados (ARCO)

Fast-food chain Arcos Dorados (NYSE:ARCO) missed Wall Street’s revenue expectations in Q1 CY2025, with sales flat year on year at $1.08 billion. Its GAAP profit of $0.07 per share was 30% 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).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $4.47 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 7.1% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Arcos Dorados missed Wall Street’s estimates and reported a rather uninspiring 0.4% year-on-year revenue decline, generating $1.08 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 10.4% over the next 12 months, an acceleration versus the last six years. This projection is healthy and implies its newer menu offerings will spur better top-line performance.

Number of Restaurants

Arcos Dorados operated 2,439 locations in the latest quarter. It has opened new restaurants quickly over the last two years, averaging 2.5% 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 30.3%. 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 11.1% year on year. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if Arcos Dorados can reaccelerate growth.

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, giving it less room to reinvest and grow its presence. As you can see below, it averaged a 21.4% gross margin over the last two years. Said differently, Arcos Dorados had to pay a chunky $78.58 to its suppliers for every $100 in revenue.

Arcos Dorados produced a 79.2% gross profit margin in Q1, up 67 percentage points year on year. Arcos Dorados’s full-year margin has also been trending up over the past 12 months, increasing by 15.8 percentage points. If this move continues, it could suggest an environment where the company has better pricing power and stable or shrinking input costs (such as ingredients and transportation expenses).

Arcos Dorados was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.9% was weak for a restaurant business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Arcos Dorados’s operating margin might fluctuated slightly but has generally stayed the same 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.

This quarter, Arcos Dorados generated an operating profit margin of 4.2%, down 2.1 percentage points year on year. Conversely, its gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like marketing, and administrative overhead.

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 management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 8.1%, slightly better than typical restaurant business.

Arcos Dorados reported $494.8 million of cash and $2.20 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 $482.5 million of EBITDA over the last 12 months, we view Arcos Dorados’s 3.5× net-debt-to-EBITDA ratio as safe. We also see its $43.83 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 struggled to find many positives in these results. Its same-store sales missed and its revenue fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 3.6% to $7.87 immediately after reporting.

Updated: May 16, 2025 at 10:46 PM EDT

Are you wondering whether to buy Arcos Dorados or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Arcos Dorados isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was decent over the last six years and Wall Street believes it will continue to grow, 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. You should avoid this stock for now - better opportunities lie elsewhere.

Wall Street analysts have a consensus one-year price target of $10.93 on the company (compared to the current share price of $7.57).

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.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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