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Bear of the Day: Carrols (TAST)

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Carrols Restaurant Group TAST, one of the largest Burger King franchisees in the United States, is getting hit by inflationary pressures in 2021. This Zacks Rank #5 (Strong Sell) is expected to see a bigger earnings loss in 2021 compared to 2020, when the pandemic had shut many of its restaurants.

Carrols operates both Burger King and Popeye franchises in North America. It's the largest Burger King franchisee, operating 1,028 restaurants in 23 states. But it also operates 65 Popeye restaurants in 7 states.

A Beat in the Third Quarter

On Nov 10, Carrols reported its third quarter results and beat on the Zacks Consensus Estimate by a penny. Earnings were a loss of $0.16 versus the Zacks Consensus of a loss of $0.17.

Total restaurant sales rose 3.6% to $421.7 million compared to $407 million last year.

But inflation and labor shortages really hit Carrols in the quarter.

Burger King comparable sales jumped 2.7% with monthly trends improving sequentially through the quarter resulting in October comparable sales, in the fourth quarter, up 5% year-over-year.

Burger King traffic was about 95% of 2020 levels, however. But it offset that decline through higher pricing and reduced promotional activity. It also saw a nearly 5% delivery sales mix, which raised the average check by approximately 7.8%.

But ongoing staff issues resulted in $3.5 million in lost sales and impacted the Burger King comparables by about 1%.

Popeyes comparable sales fell 3.2% compared to a 5.5% increase in the third quarter last year. Staffing problems also hit Popeyes, particularly in the evening hours.

But Popeyes were just 4.8% of Carrols total restaurant sales in the third quarter.

Costs Rise Sharply

Inflation also played havoc with the quarter as beef prices rose 15.5% year-over-year while team member average hourly wage costs jumped 13.3% compared to the same period last year.

In response, Carrols has been raising prices. It took two price actions during the third quarter and another one in October to help manage the cost pressures.

Carrols believes it will be able to "claw back" a portion of the margin erosion as it moves into next year. This will be achieved through menu price actions taken to date and in the future combined with continued menu and promotional activity optimization.

Analysts Cut Carrols Earnings Estimates

Given all the challenges, it's not surprising that the analysts have gotten pessimistic on Carrols.

2 estimates were lowered in the week after the earnings report, pushing down 2021's Zacks Consensus Estimate to a loss of $0.53 from a loss of $0.32 just 30 days ago.

That's an earnings decline of 657% as the company only lost $0.07 last year during the height of the pandemic.

The 2022 Zacks Consensus also fell to a loss of $0.23 from a loss of $0.07 in the last month as 2 analysts cut in the last week.

Carrols Shares Sink

It's tough being in the restaurant business in 2021. Investors have been fleeing Carrols stock over the last several months, with the shares now hitting new 52-week lows, down 47% year-to-date.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

They haven't yet reached the coronavirus lows set last March however.

Until the pandemic challenges of inflation and labor shortages ease, hopefully, Carrols believes, by the second half of 2022, these shares are likely to continue to be pressured.

Investors should watch the analyst estimate revisions for clues on when things are expected to improve with Carrols.

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