What happened
Shares of Carrols Restaurant Group (TAST), the largest Burger King franchisee in the U.S., were up 15% as of 11:47 a.m. ET on Thursday after a better-than-expected earnings report for the second quarter.
Improving revenue and profitability have pushed the stock up 425% year to date, following its slide over the last few years.
So what
Carrols reported one of its best quarters in its history. Revenue hit a quarterly record of $485 million, with comparable-restaurant (comps) sales growth of 10.5%.
Higher average menu orders drove higher margins. This turned the company's year-ago adjusted net loss into a profit of $17 million, or $0.27 per share.
Growth was balanced across the company's franchises. Carrols' Burger King restaurants reported comps growth of 10.4%, while the company's Popeyes locations posted comps growth of 11.6%.
Now what
Better sales and profit trends should allow the company to continue improving its financial health as it pays down debt.
Moreover, management sees further growth potential in the near term. Burger King's Royal Reset and Reclaim the Flame initiatives are expected to drive continued growth in traffic.
Restaurant Brands International, the parent company of Burger King and Popeyes, announced these initiatives last year. They involve a $400 million investment over two years in advertising, digital technology, and other enhancements and remodels to its restaurants.
Based on Carrols' positive sales trends, the plan is working as intended. The stock is not as cheap as it was a year ago, but with a price-to-sales ratio of 0.22, it is still trading at a discount to its pre-pandemic valuation of around 0.30 times trailing sales. But Carrols will have to generate more-consistent profits to earn a higher valuation over the long term.
