Is Arcos Dorados About to Get Better?

After a slow start to the year, can Arcos Dorados turn its fortunes around?

Amal Singh
Amal Singh
Apr 9, 2014 at 4:00PM
Consumer Goods

Arcos Dorados (NYSE:ARCO), which holds McDonald's (NYSE:MCD) franchisee rights in Latin America and the Caribbean, has gotten off to a bad start in 2014. However, the company has gained some momentum in the last month following its fourth-quarter results. Arcos' results came in well above the consensus estimates as the company achieved double-digit growth in revenue. In addition, it reported 10.6% growth in comparable-store sales, and with Brazil hosting the FIFA World Cup Arcos could see a spike in its business this year.

A slight hiccup
Arcos' net income declined to $32.1 million in the previous quarter from $44.2 million in the year-ago period due to foreign currency headwinds and a refinancing initiative which the company undertook in the second half of the year. However, Arcos has positioned itself nicely for growth over the long run and investors should look beyond these recent hiccups.

Arcos is focusing on key profitability drivers such as expanding its market share and maximizing traffic. As a result, it opened 130 new restaurants in fiscal 2013 which increased its tally to 2,062 restaurants. 

Arcos has a consistent track record which reflects in its strong revenue growth and effective cost management across all of its regions. More importantly, Arcos has a total of 812 restaurants in Brazil which constitute more than a third of its total store count. Arcos saw organic growth of 9.5% in Brazil in the fourth quarter and it opened 42 new freestanding restaurants. With Brazil serving as the site of the FIFA World Cup this year, Arcos' strong presence in Brazil could come in handy.

McDonald's FIFA tie-up to boost Arcos' results
McDonald's has already started to promote itself in Brazil before the World Cup through many in-store promotions that it has aimed at soccer fans of all ages. Also, McDonald's is a leading sponsor and the official restaurant partner of the 2014 FIFA World Cup and this means that Arcos Dorados, which is also the world's largest McDonald's franchisee, will benefit from this move in Brazil. The World Cup paraphernalia at McDonald's locations in Brazil should attract more customers to the restaurants, which will benefit both McDonald's and its franchise partner.

Moreover, Arcos' market share in Brazil is three times that of its closest competitor and the company has the best coverage of any quick-service restaurant in the country, which places it in a good position to benefit from the World Cup fever.

Also, Arcos will train approximately 15,000 World Cup volunteers with the intention of delivering consistent and memorable customer experiences. The company believes that this training program will benefit both the volunteers and the audience, eventually helping Arcos to increase its sales during this period. 

Some more moves
Arcos has also taken various measures such as restructuring its debt in order to control earnings volatility and reduce foreign exchange exposure to maintain the consistency of its bottom line. 

Moreover, Arcos is working closely with its partner McDonald's to build a dynamic operating environment in Venezuela that will help the company reduce the overall cost of funding and extend the average maturity of its debt.

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Bottom line
Arcos Dorados occupies a strong place in Latin America, especially Brazil. The company is focusing on improving its bottom line with initiatives such as bolstering its market share further, enhancing traffic, and tapping the World Cup craze. In addition, the debt restructuring will reduce its funding cost and it should lend stability to the bottom line. Thus, despite a slow start, Arcos Dorados could do better as the year progresses.