Restaurant stocks are always a hot favorite among investors, especially when it is a growth stock. A great player in this industry is Carrols Restaurant Group Inc. (TAST, Financial).
This restaurateur has posted excellent quarterly results, including a 18.7% increase in restaurant sales. During the quarter, it has acquired 46 Burger King (BKW, Financial) restaurants resulting in total 705 Burger King restaurants at the end of fiscal 2015. Further, during fiscal 2015, Carrols has aggressively reimaged its restaurants.
Carrols, including Carrols Corporation, which operates through its subsidiaries, is a leading quick-service restaurant operator. It is the largest operator of Burger King franchises in the U.S. and second-largest fast food hamburger restaurant brand in the world. As of March 3, the company has 717 restaurants across 16 states. 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 fourth-quarter results
On March 3, Carrols reported its financial results for the fourth quarter and full year ended Jan. 3. Restaurant sales increased 18.7% to $229.1 million compared to $192.9 million in the same quarter a year ago. Restaurant sales include $46.7 million in sales from 178 Burger King restaurants that were acquired in 2014 and 2015, along with a comparable restaurant sales increase of 5.1%.
Restaurant-level EBITDA (a non-GAAP financial measure) increased 87.47% to $36.8 million compared to $19.63 million in the prior year period, and restaurant-level EBITDA margin increased 589 basis points to 16.1%. Adjusted EBITDA jumped to $23.73 million from $10.05 million in the prior year period.
Income from operations increased to $11.6 million in the reported quarter from a loss of $3 million in the prior year period. Net income was $7 million, or 16 cents per diluted share.
The company’s general and administrative expenses for the reported quarter were $14.3 million compared to $11.1 million in the prior year quarter. Interest expenses decreased to $4.5 million from $4.7 million in the same period last year.
Attributes for the fourth-quarter results
- Company’s effective marketing and promotional initiatives have increased sales.
- The company’s improved commodity outlook has helped in the overall performance.
- Carrols’ restaurant remodeling strategy has contributed to sales growth.
- 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.
Fiscal 2015 results
For fiscal 2015, Carrols’ comparable restaurant sales increased 7.4%, and it owned and operated 705 Burger King restaurants. On Feb. 23, it has further acquired 12 additional restaurants located in central Pennsylvania and currently operates 717 Burger King restaurants. During fiscal 2015, more than 60% of the company’s 705 restaurants featured the updated 20/20 design image. Further, a chart has been provided below to show the company’s different metrics for fiscal 2015.
Projections for fiscal 2016
For fiscal 2016, Carrols’ expects its total restaurant sales in the range of $930 million to $955 million, including a comparable restaurant sales increase of 2% to 4%. Commodity costs are expected in between 1% decrease and a 1% increase including a 5% to 10% decrease in beef costs. General and administrative expenses and adjusted EBITDA are expected in the range of $50 million to $52 million and $80 million to $90 million.
Carrols is currently focussing on remodeling its restaurants and therefore expects its capital expenditure in the range of $75 million to $85 million. This includes remodeling a total of 85 to 95 restaurants (including the scrape and rebuilding of 4 to 6 restaurants) and the construction of 6 to 8 new restaurants (including relocations of 4 to 5 existing restaurants). Carrols further expects that its remodeling expenditures to return to more moderate levels in 2017.
Acquisition
Carrols has 55 years of operating history driven by numerous mergers and acquisitions. Since May 2012, it has acquired a total of 468 restaurants. During the fourth quarter, Carrols has acquired 46 Burger King restaurants in six transactions. These restaurants are located in West Virginia, Ohio, Kalamazoo, Indiana, Kentucky, Michigan (Detroit market), and Northern New Jersey.
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)
A peek into the restaurant industry
Eating out has become a fashion now, and perceptions have changed. There is a constant rise in the disposable income of people around the world, and eating out is comforting, too.
According to reports, the U.S. economy surged by 5% in the third quarter of 2014 (since 2003, this has been the strongest three-month period). Consumer behavior has changed and so the restaurants have come up with different marketing strategies – loyalty programs, ordering, etc.
As per the National Restaurant Association, restaurant industry sales are expected to reach $783 billion in 2016 and will represent the seventh consecutive year of real growth in restaurant sales. Further, the National Restaurant Association has predicted that the restaurant industry will remain the nation’s second-largest private sector employer with a workforce of 14.4 million and will create 1.7 million new restaurant jobs by 2026.
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 expects that its remodeling will drop significantly in 2017, which will add more free cash flows for further acquisitions and new restaurants.
Further, Carrols has positive comparable sales growth in 16 of the last 18 quarters. It has an efficient management team with a proven track record of achieving strong operating performance. Finally, with the recent quarterly release, the company is aiming for a better future and is all set to deliver a healthy menu to its investors. It is expected to create greater shareholder returns.
Disclosure: I do not hold any position in the company.
