Arcos Dorados Holding, Inc. Earnings: What to Expect Tuesday

Arcos Dorados (ARCO 1.08%) will release its quarterly report on Tuesday, and the franchisee of McDonald's (MCD -1.34%) restaurants in Latin America hopes to post results that will signal a possible turnaround after a tough 2013. Yet even as McDonald's, Yum! Brands (YUM -0.90%), and other fast-food establishments make efforts to boost their earnings, investors don't expect Arcos Dorados to get its earnings back to 2012 levels this year, raising questions about future growth.

Argentina-based Arcos Dorados went public in 2011 to great fanfare, as the fast-food company named after the golden arches of McDonald's logo seemed like a natural way for investors to capitalize on the rising middle-class prospects throughout Latin America. Yet emerging markets haven't kept pace with the booming U.S. stock market for a while now, and slowing growth in key regional economic powerhouse Brazil has hurt Latin American stocks for a while. The question Arcos Dorados faces is whether it can bounce back and capitalize on a key year for Latin America's future economic prosperity. Let's take an early look at what's been happening with Arcos Dorados over the past quarter and what we're likely to see in its report.

Source: Arcos Dorados.

Stats on Arcos Dorados

Source: Yahoo! Finance.

Can Arcos Dorados earnings start growing again?
In recent months, analysts have marked down their views somewhat on Arcos Dorados earnings, cutting full-year 2014 projections by $0.03 per share. The stock has continued falling to new lows, plunging another 20% since early December.

Arcos Dorados' third-quarter results gave investors a mixed bag. Revenue has definitely been a huge benefit for the franchisee, with a 6% jump in sales measured in U.S. dollars actually reflecting a better than 18% rise in local-currency terms. Same-store sales growth of almost 13% crushed McDonald's, Yum! Brands, and even higher-growth food concepts including McDonald's spinoff Chipotle Mexican Grill (CMG -1.35%).

Success for Arcos Dorados comes from many fronts. On one hand, large markets like Brazil and Mexico play a pivotal role in driving overall results. But some of the company's lesser-known markets performed even better for Arcos Dorados in its most recent quarter, with the division that includes Uruguay, Peru, Ecuador, Chile, and Argentina seeing same-store sales soar 25%. Obviously, Arcos Dorados needs both groups of countries to do well to maximize its growth potential.

But Arcos Dorados faces several challenges. First, it's exposed to the economic difficulties that have hit parts of the region it serves. In January, the stock fell after Arcos Dorados cut prices for its Big Mac Combo in Venezuela, which has had to deal with the threat of hyperinflation through currency devaluations. Although Latin America has huge growth potential, it also has continued economic risk, with free-market capitalism maintaining a tenuous hold on many nations in the region.

In addition, competition has gotten even fiercer. Burger King Worldwide (BKW.DL) has aimed squarely at Latin America for growth efforts, with partnerships aimed at bolstering revenue from the region. Just as McDonald's and Yum! have had to fight hard in China to reap the rewards of a growing market, so too will Burger King and Arcos Dorados go head-to-head to make the most of the Latin American opportunity.

In the Arcos Dorados earnings report, watch to see how the company's latest World Cup promotions are faring. With so much riding on both the World Cup this summer and the 2016 Olympics, both of which are happening in Brazil, Arcos Dorados needs to make the most of the attention it will get as the key events get nearer.

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