Carrols Restaurant Group Drives Sales With Higher Promotions

Carrols Restaurant Group (TAST -0.10%) announced fourth-quarter 2018 results late last week, detailing delicious comparable-restaurant sales growth and an enormous recent acquisition by the country's largest Burger King franchiser. But Carrols also raised a point of concern with margin pressure stemming from increased promotions.

With shares down slightly on the heels of its report, let's dig in for a better idea of how Carrols ended the year, as well as what investors should be watching in the coming quarters.

Check out the latest earnings call transcript for Carrols.

IMAGE SOURCE: GETTY IMAGES.

Carrols Restaurant Group results: The raw numbers

DATA SOURCE: CARROLS RESTAURANT GROUP. GAAP = generally accepted accounting principles. 

What happened with Carrols Restaurant Group this quarter?

• This brought full-year sales to $1.18 billion, near the high end of guidance provided in November.
• Adjusted for items like stock-based compensation and acquisition costs, Carrols' (non-GAAP) net income fell 36.8% year over year to $2.4 million, and declined 37.5% on a per-share basis to $0.05.
• Comparable-restaurant sales rose 2.7%, accelerating from 1.6% growth last quarter on top of an 8.9% increase in the same year-ago period.
• Quarterly adjusted EBITDA declined 5.8% to $24.3 million, bringing full-year adjusted EBITDA to $102.3 million (at the midpoint of guidance provided in November).
• As of Dec. 30, 2018, Carrols owned and operated 849 Burger King Restaurants, up from 838 three months earlier.
• On Feb. 20, 2019, Carrols announced it had agreed to acquire 166 Burger King restaurants and 55 Popeyes restaurants across 10 southeastern and southern states from Cambridge Franchise Holdings. In conjunction with this deal, Carrols also entered a new Area Development and Remodeling agreement with Burger King Corporation expanding its first right of refusal for the acquisition of up to 500 of its additional namesake restaurants. 

What management had to say

CEO Daniel Accordino stated:

We were pleased with our comparable restaurant sales performance during the fourth quarter as we outpaced the U.S. Burger King system by almost 200 basis points while lapping a formidable 8.9% comparable restaurant sales comparison from the prior year period. We improved adjusted EBITDA margin modestly in 2018, however, the impact from the heightened promotional environment was evident in our fourth quarter results. The variety of promotional deals included the $1 Chicken Nuggets offer, the $3.49 King Deal, a 2 for $6 Mix & Match, the $6 King Box and the 2 for $10 Meal Deal, balanced somewhat with the Cheesy Bacon Crispy Chicken and Philly Cheese King offers. Despite driving higher sales, adjusted EBITDA margin decreased from the prior year quarter reflecting the impact of these deals combined with ongoing pressure on our labor costs.

Looking forward 

Accordino added that 2019 "should be an exciting year" as the company closes on its merger with Cambridge. Thus, for the full-year 2019, Carrols expects total restaurant sales to increase to a range of $1.25 billion to $1.28 billion, assuming comparable-restaurant sales growth of 2% to 3.5%. Trending toward the bottom line, Carrols is targeting 2019 adjusted EBITDA of $100 million to $110 million. 

In the end, Carrols' current margin headwinds notwithstanding, I see little not to like in this report. As the company ramps its core Burger King acquisition and expansion strategy while at the same time adding a second brand to its portfolio (with dozens of Popeyes locations), maintaining market share in the increasingly crowded fast-food restaurant space is paramount -- and something Carrols can leverage down the road as its restaurant portfolio continues to grow.