A Golden Quarter from this Restaurateur
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Arcos Dorados (NYSE: ARCO) were shining brightly after reporting second quarter earnings. The McDonald's (NYSE: MCD) of Latin America continues to face many economic headwinds, but they did much better than expected to the relief of their investors. I’m not sure if they could have ordered up a better quarter if they tried, especially given their expectations coming into the quarter.
Revenue, while just up 1.8% year-over-year, was actually up by 15.5% on an organic basis thanks to double digit comparable sales growth, which was offset by the impact of the depreciation of local currencies versus the US Dollar. The big news of the quarter was a 10.4% year-over-year increase in comparable sales, driven both by larger average check growth and an increased guest count. That combo is exactly what investors have been craving.
The only item from this order that investors might have wanted to send back to the kitchen is the currency situation, especially in Brazil. Due to a 23% depreciation against the dollar by the Brazilian Real, Arcos saw Adjusted EBITDA dip by 0.9% while net income was off $2.1 million. However, if you strip away the currency impact and a few other special items then Adjusted EBITDA rose 6.3% year-over-year.
CEO Woods Stanton had this to day about the quarter: “Our operations continue to be very strong, led by higher average check growth, increased guest counts and successful marketing activities across all regions. The result is double digit organic revenue growth, which is on target with our stated expectations. While various economic issues persist in the region, the underlying strength of our enterprise is indisputable and will serve as a driver of ongoing future revenue growth. However, in the near term, given the slower than expected recovery in Brazil as well as expectations for continued currency weakness in that country, we are revising our guidance for full year Adjusted EBITDA growth over 2011 to between 8-10%." With Brazil as their biggest market, they face that proverbial double edged sword; when Brazil does well, they’ll excel but in the short term they’ll continue to see some negative pressure on their business.
While short term pressures remain, this has always been a long term growth story. Lately though, investors have even been questioning whether that long term story is indeed intact. Both comparable growth and revenue growth have been slowing down on a constant currency basis. Investors seem to be keying in on the pickup in both average check and the guest count in hopes that it is a sign of things to come. When you look at the growth of the middle class and compare this to Arcos’ current market penetration and it is easy to be excited about this growth story.
Currency fluctuations are one of the risks to international investing that can hit even the best of them. In McDonald’s recently reported quarter, they too were bitten by a stronger dollar, while even YUM! Brands (NYSE: YUM) saw its operating profit dinged in the quarter to the tune of $5 million thanks to negative foreign currency impart.
Despite the currency problems that will fluctuate between a boost and a blow to earnings, I still think that we’re being provided a golden opportunity to buy this emerging market gem. They have a world renowned brand and operating model to go with their dedicated and engaged management team. While this one quarter doesn’t mean Arcos has hit their stride to take their growth to another level, it still ranks as a golden quarter for investors who feared much worse.
latimerburned owns shares of Arcos Dorados. The Motley Fool owns shares of Arcos Dorados and McDonald's. Motley Fool newsletter services recommend Arcos Dorados, McDonald's, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. 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.If you have questions about this post or the Fool’s blog network, click here for information.