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For McDonald’s, Head South of the Border

By Nickey Friedman – Feb 26, 2014 at 2:00PM

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This McDonald’s franchisee is seeing exploding sales.

Arcos Dorados Holdings Source: NYSE

Chipotle Mexican Grill (CMG -1.29%) and Taco Bell of Yum! Brands are seeing unprecedented sales and profits north of the border, while the same is true of McDonald's (MCD) and Burger King Worldwide (BKW.DL) south of the border. With Arcos Dorados Holdings (ARCO 3.27%), Latin America's largest restaurant chain and the world's largest McDonald's franchisee, trading at 52-week lows, now may be the time to take a peek ahead of its next earnings release on March 11, as various clues suggest it could be a blowout quarter.

Why Latin America?
It's no secret that McDonald's has been struggling with its same-store sales numbers in the U.S. For Latin America, it's the opposite story.

In the third quarter, Arcos Dorados saw same-store sales rocket 12.6% in local currency compared to just 0.7% growth for McDonald's U.S. Arcos Dorados annihilated the growth numbers for every other major region of the world, while McDonald's overall averaged just a 0.9% rise in global sales. Its top-performing region saw a 25% gain in same-store sales, and all of its subdivisions saw large gains as well.

As a result, adjusted earnings before interest, taxes, depreciation, and amortization soared 25.8%. Chief executive Woods Staton isn't finished. He stated, "We will redouble our efforts to improve profitability." Look for further soaring gains, and look to Burger King for clues.

What's up with Burger King down there?
It's hard to imagine there is suddenly such an explosive jump in McDonald's sales across an entire continent unless there is a cultural or economic positive shift toward fast food in general. As such, changes in sales from Burger King could easily mean changes in sales for Arcos Dorados.

Source: Burger King

Burger King was experiencing declining same-store sales up until two quarters ago. Results have now gone positive and are picking up steam.

For the fourth quarter, Burger King in Latin America had same-store sales growth of 2% and systemwide sales growth of 17%, primarily a result of its aggressive growth in Brazil.

 Though Burger King credits various product introductions for the improvements, the momentum gains for Burger King in the region bode well for McDonald's as well, as they suggest there may have been a continuing growing market for the fast- food burger industry in general down there.

But what about inflation?
Inflation has been a concern for a number of years in the region. After all, what good is it to American investors for Arcos Dorados to rake in pesos if by the time they are converted into dollars (for reporting purposes) they collapse in value? Brazil as an example is Arcos Dorados' largest growth market. Last month, Brazil reported the slowest increase in inflation in four years. The annual rate is anywhere between 5% and 6%. Not great by today's U.S. low-inflation standards, but not the end of the world either. The country is targeting a reduction down to 4.5%. Arcos Dorados says it's able to successfully raise prices with inflation as well.

Foolish final thoughts
What does this have to do with Chipotle Mexican Grill? Arcos Dorados is one of the few major public quick-service restaurants that is showing growth numbers similar to Chipotle. On Jan. 30, Chipotle released its fiscal fourth-quarter results. Revenue jumped 20.7%, same-store sales climbed 9.3%, and net income leaped 30%. The result was all-time new highs for the stock, with Chipotle trading at a 2013 P/E of more than 50.

If Arcos Dorados can continue to churn out similar growth numbers or better, perhaps over the long term it too will trade at healthy ratios. In the meantime, Fools should take a closer look at Arcos Dorados before and when the company reports on March 11. 

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Arcos Dorados, Chipotle Mexican Grill, and McDonald's. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Arcos Dorados Stock Quote
Arcos Dorados
$7.58 (3.27%) $0.24
McDonald's Stock Quote
$273.40 (%)
Chipotle Mexican Grill Stock Quote
Chipotle Mexican Grill
$1,604.88 (-1.29%) $-20.95
Restaurant Brands International Inc. Stock Quote
Restaurant Brands International Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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