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Latin American Currency Volatility Once Again Dents Arcos Dorados' Growth

Asit Sharma, The Motley Fool

On Wednesday, Latin America-based Arcos Dorados Holdings (NYSE: ARCO), the world's largest McDonald's franchisee, reported fourth-quarter 2018 results that boasted decent underlying revenue and comparable sales growth. However, as has often been the case in recent quarters, the volatility of major Latin American currencies diminished results in the company's home reporting currency, the U.S. dollar. Note that in the discussion that follows, all comparative numbers refer to the prior-year quarter (the fourth quarter of 2017).

Arcos Dorados: The raw numbers

Metric Q4 2018 Q4 2017 Growth (YOY)
Revenue $753.3 million $896.9 million (13.4%)
Net income $9.2 million $69.3 million (86.7%)
Diluted EPS $0.04 $0.33 (87.9%)

Data source: Arcos Dorados Holdings. EPS = earnings per share. YOY = year over year.  

What happened with Arcos Dorados this quarter?

McDonald's french fries in iconic red packaging.

Image source: McDonald's. 

  • The depreciation of the Argentinian and Brazilian currencies against the prior year proved a drag on reported revenue expansion over the last three months. In currency-neutral terms, however, Arcos' top line expanded by 9.8% to $928.2 million.

  • Similar to the trend in the third quarter, Arcos netted a healthy systemwide comparable-store sales improvement of 7.5%.

  • The company's net income and earnings per share declined primarily from foreign currency effects. In addition, in the fourth quarter of 2017, Arcos' recorded $35.6 million in redevelopment benefits, which negatively affected the year-over-year comparison.

  • Arcos opened 28 new restaurants during the last three months, tallying 70 new units for the full year. The company ended 2018 with 2,223 locations at Dec. 31, an increase of 1.6% over total restaurants at year-end 2017.
  • Adjusted EBITDA, which excludes effects of the company's business returns in the troubled Venezuelan economy, slipped 2.2% to $87.1 million (nonadjusted EBITDA landed at $86.1 million for the quarter).

  • Despite the lower reported top line, net income, and even adjusted results, Arcos continued to make progress in controlling selected overhead expenses. The company held food and paper costs roughly in line with the prior-year quarter as a percentage of sales, and decreased payroll and benefits expenses relative to sales against the prior period.

  • Under its new share repurchase program, Arcos bought back $17.7 million worth of its own shares on the open market during the quarter, bringing its full-year repurchase total to $46 million. The organization has $14 million remaining in potential share repurchases under the current authorization.

  • Arcos Dorados' board approved total dividend payments per share of $0.11 in 2019, representing an increase of 9% over the $0.10 in total dividends paid in 2018. At the current share price, the 2019 dividend will yield approximately 1.6%.

Management's perspective

In the company's earnings press release, CEO Sergio Alonso reflected on successes achieved during the full year, including the rapid adoption of McDonald's' technology programs, improved shareholder returns, and a reduction of balance sheet leverage: 

As we roll out Experience of the Future (EOTF) restaurants across markets, continually refresh our menus in innovative ways, and further enhance customer service through the Cooltura de Servicio (Culture of Service) program, loyalty to the McDonald's brand is growing and our customer satisfaction scores are increasing. At the end of the year, we had 329 EOTF restaurants and are on track to deliver approximately 650 by the end of 2019. Not only did we accelerate our [Capital Expenditure] program to support faster EOTF deployment, we also returned $67 million to our shareholders through a combination of dividend payments and share repurchases. With a net debt to Adjusted EBITDA ratio of 1.5x, going into 2019, we have a very healthy balance sheet to support our growth plans.

Looking forward

While Arcos Dorados refrains from providing earnings guidance, the company did update its restaurant opening plans for 2019. Management expects to open between 80 and 85 new locations, which will equal 3.6%-3.8% expansion over the present store base. The midpoint of the range will represent a growth rate of 17% over the 70 restaurants the company launched in 2018. Brisk unit growth may prove to be an effective tool over time as Arcos Dorados seeks to smooth over the effects of volatile Latin American currencies on its business results.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Arcos Dorados. The Motley Fool has a disclosure policy.