This McDonald’s Franchisee Is Growing Like a Weed

Arcos Dorados Holdings (NYSE: ARCO  ) is a bright spot among the McDonald's (NYSE: MCD  ) family of company-owned and franchised restaurants, a family that is otherwise seeing anemic growth. Arcos Dorados Holdings bills itself as "Latin America's largest restaurant chain and the world's largest McDonald's franchisee." The company is seeing a growth spurt reminiscent of the earlier days of McDonald's in North America.

Results
Arcos Dorados Holdings reported third-quarter results on Nov. 5. Revenue increased by 6.2% in US dollar terms, but it also grew by 18.5% at the local currency level. The strength of the US dollar compared to weakening Latin American currencies is the reason for the difference. Compare either number to McDonald's, which only saw a 2% rise in global sales. This means Arco Dorados Holdings outpaced its parent by a factor of three to nine times, depending on which number you want to use.

Arco Dorados Holdings saw system-wide same-store sales increase by 12.6%. This compares to McDonald's global sales increase of 0.9%, and 0.7% in the US. Adjusted earnings before interest, taxes, depreciation, and amortization grew an eye-popping 25.8% compared to operating income growth of just 6% for McDonald's. Part of this improvement was due to improved efficiency of its operations, yet it still recognizes there is "more to be done in this area." This means you should expect even greater improvement in future quarters.

Arcos Dorados Holdings did mention that it has macroeconomic concerns. This is similar to McDonald's claim of "broad-based challenges of the current environment." Then again, that's not stopping CEO Woods Staton. He stated, "In this low growth macro economic environment we will redouble our efforts to improve profitability." Arcos Dorados Holdings plans to open 130 new restaurants by year-end in addition to its 1,880 total restaurants at quarter-end. This was a tad shy of the original 140 goal.

Most notable is its Argentina, Chile, Peru, Ecuador, and Uruguay division--it showed 25% same-store sales growth and a 31.3% increase in EBITDA. The number one driver of growth across all divisions was credited to the introduction of its Chicken McBites, which were a smash hit.

Burger King Worldwide (NYSE: BKW  ) is also experiencing some success in Latin America, but at a slower rate. Burger King Worldwide saw just 0.9% growth in same-store sales worldwide, but in Latin America specifically it saw 2.1% growth. Not bad, but it's nowhere close to Arcos Dorados Holdings' 12.6% growth. Burger King has 1,451 restaurants in the region, comparable to the number of McDonald's restaurants. Burger King credited the same-store sales growth, which reversed a previously negative-growth trend, with the introduction of its WHOPPER FURIOSO JR.

Final foolish thoughts
Consumers in Latin America clearly are willing to open their wallets if the right menu items entice them. Follow the same-store sales trends along with new menu introductions at Arcos Dorados Holdings. Beware of weakening currencies against the dollar because this does shrink the numbers reported to shareholders. When the economy firms up in Latin America, expect to see the pace of new restaurant openings pick up. Arcos Dorados Holdings believes it will continue to grow strong regardless of the economy. It pays a modest dividend with a 2% yield while you wait.

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  • Report this Comment On December 04, 2013, at 3:25 PM, whyaduck1128 wrote:

    I bought this stock a bit over four months ago, and so far it resolutely refuses to move much. Can anyone explain this?

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