Restaurant stocks are always a hot favorite among people, especially when it is a growth stock. A great player playing well in this industry is Carrols Restaurant Group, Inc. (TAST, Financial).
This restaurateur has posted excellent quarterly results, including double-digit growth in restaurant sales. The company has also taken remodeling initiatives and has acquired several restaurants. Further, Carrols has updated its guidance for 2015 which is a 53-week fiscal period.
Carrols, including Carrols Corporation, which operates through its subsidiaries, is a leading quick-service restaurant operator. It is the largest operator of Burger King (BKW, Financial) franchises in the U.S. and second-largest fast food hamburger restaurant brand in the world. As of Nov. 3, 2015, the company has 665 restaurants in the U.S. Carrols has a global scale with over 14,000 locations in approximately 98 countries, and approximately 7,400 restaurants across the U.S. and Canada.
Strong third-quarter results
On Nov. 3, 2015, Carrols reported its financial results for the third quarter ended Sept. 27, 2015. Restaurant sales increased 21.1% to $217.7 million compared to $179.8 million in the same quarter a year ago. Restaurant sales include $39.4 million in sales from 132 Burger King restaurants that were acquired in 2014 and 2015, along with a comparable restaurant sales increase of 6.5%.
Restaurant-level EBITDA (a non-GAAP financial measure) increased 63.0% to $33.3 million compared to $20.5 million in the prior year period, and restaurant-level EBITDA margin increased over 390 basis points to 15.3%. Adjusted EBITDA nearly doubled to $22.0 million from $11.1 million in the prior year period.
Income from operations increased to $11.8 million in the reported quarter from $0.3 million in the prior year period. Net income was $7.2 million, or 16 cents per diluted share, compared to a net loss of $1.7 million, or 5 cents per diluted share, in the prior year period which included a $2.6 million benefit from income taxes.
The company’s general and administrative expenses for the reported quarter were $11.8 million compared to $10.0 million in the prior year quarter. Interest expense decreased to $4.5 million from $4.7 million in the same period last year. Carrols ended up the quarter with 660 owned and operated Burger King restaurants.
Factors that contributed to the third-quarter success
- Company’s effective marketing and promotional initiatives have increased the sales.
- The company’s improved commodity outlook has helped in the overall performance.
- Restaurant-level EBITDA increased due to effective leveraging of the sales increases, lower cost of sales in part due to lower beef costs and improved operating performance.
- General and administrative expenses improved 17 basis points from the prior year period due to higher sales leverage.
Projections for fiscal 2015
Since the company has performed well, Carrols has updated its guidance for 2015. Carrols expects its total restaurant sales to be in the range of $840 million to $850 million, and comparable restaurant sales to increase 6% to 7% on a comparable 52-week basis. A commodity cost decrease of approximately 2.5% to 3.0%, primarily due to lower beef costs, can be expected. Further, Carrols expects adjusted EBITDA of $65 million to $70 million.
General and administrative expenses will be approximately $47 million to $49 million, and capital expenditure will be $50 million to $55 million, which includes remodeling a total of 90 to 95 restaurants. Carrols expects to close up to 25 restaurants, of which 22 were closed through the end of the third quarter of 2015.
Acquisition and remodeling
Carrols has 55 years of operating history driven by numerous mergers and acquisitions. Since May 2012, it has acquired a total of 414 restaurants. Through Oct. 31, 2015, Carrols has completed the acquisition of 15 Burger King restaurants in Vermont, South Carolina, Ohio, West Virginia and Michigan. Further, the company is currently negotiating a number of additional transactions and expects to acquire an additional 40 restaurants by the end of 2015. On Dec. 9, 2015, Carrols had completed the acquisition of 46 Burger King restaurants in six transactions during the fourth quarter of fiscal 2015.
Carrols has reimaged over 340 restaurants to the new 20/20 design and anticipates reimaging an additional 90 to 100 restaurants in 2015. Reimaged restaurants have experienced an average sales lift of 10% to 12%.
Growth opportunities
Compared to traditional company-owned business models, Carrols’ growth opportunities offer a reasonably predictable risk/reward profile. Its wide geographic footprint provided opportunities to fill in markets including selective new unit development. The company has a strong and scalable infrastructure with the capacity to support significant growth. It controls franchiser’s right of first refusal which Burger King has assigned to Carrols in 20 states in 2012, and there are more than 2,000 additional franchised restaurants in that 20-state territory. Further, Carrols is preapproved to expand to 1,000 restaurants in the territory.
(Source: Company website)
On a concluding note
Overall, Carrols is a rock solid company with the strong operating culture and strict profit and loss disciplines which have made significant improvements to the operating and financial performances of the restaurants acquired in 2012. The company has enough cash to remodel its other restaurants and expand its footprints. It has an efficient management team with a proven track record of achieving strong operating performance.
The fast food industry is large and diverse and has plenty of opportunities to grow. This leading quick-service restaurant operator won’t let its customers as well as valued investors down in the future.
Disclosure: I do not hold a position in the company.
