Financing

For big Burger King franchisee Carrols, 8 months makes a world of difference

The operator’s stock surged again on Thursday, and is the year’s best performing, following “one of the best quarters in the company’s 63-year history.”
Burger King carrols
Carrols Restaurant Group is the year's top performing restaurant stock. | Photo: Shutterstock.

Few companies have had a turnaround this year quite as dramatic as that of Carrols Restaurant Group.

The giant Burger King franchisee’s stock took off on Thursday, rising as much as 22% at one point during the day. The brand’s sales continued to improve. Costs eased. Profits increased. Operations improved and so did customer satisfaction.

“We had one of the best quarters in the company’s 63-year history,” CEO Deb Derby told investors on Thursday, according to a transcript on the financial services site Sentieo/AlphaSense.

The result: Carrols stock is the industry’s best performing stock so far in 2023, with shares up more than 400%.

The Syracuse, N.Y.-based company was struggling at the turn of the year. Burger King’s sales had struggled coming out of the pandemic, which damaged profitability for numerous franchisees as labor and food costs soared in 2021 and 2022.

For Carrols, which operates one out of every seven Burger Kings in the U.S., that was a particular problem, leading to speculation that it could end up a candidate for a bankruptcy filing given the company’s debt load and dwindling cash flow.

And then tragedy struck when Paulo Pena, named last year to replace longtime CEO Dan Accordino, died unexpectedly on New Year’s Eve. Carrols’ stock traded below $1.50 per share as the 2023 started.

But price increases in the months since then have had their intended impact. Burger King’s investments in marketing, part of its Reclaim the Flame revitalization plan announced last year, also began driving sales. As costs improved, so has Carrols’ profits.

Same-store sales rose 10.4% in the second quarter at Carrols’ Burger King restaurants, and 11.6% at its Popeyes locations.

Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, was $44.3 million in the period, or 9.1% of restaurant sales. A year ago, Carrols’ adjusted EBITDA margin was 3.4% of sales. The company also has more cash, with $40.9 million as of July 2, up from just $18.4 million on Jan. 1. The company’s net leverage ratio was 3.61 times EBITDA, or about half of what it was at the beginning of the year.

Restaurant-level profit margins improved 620 basis points to 14% of sales.

The company worked to improve operations in the quarter, which led to a 30% increase in customer satisfaction scores. Speed of service improved by 6%, Derby said, and the company’s Burger King restaurants are “well on their way” to earning the highest rating on the franchisor’s operations evaluation system.

Carrols also improved efficiency, increasing hours of operation by 3% while reducing labor hours by 3.5%, Derby said.

To be sure, there are still efforts to be made. In particular, Carrols’ traffic declined 2%. The company plans to hold the line on price increases for the rest of the year. Derby said the company is testing digital menu boards in 10 markets that Derby believes will help drive traffic through locally targeted offers.

Derby believes traffic will improve the rest of the year, thanks to continued marketing investments by Burger King. “Traffic continues to be a primary area of focus, since it’s essential to the long-term health of the brand,” Derby said. “We’re looking at the things that we can impact, such as guest service, operational excellence and local value initiatives, which we believe will continue to move the needle in the right direction.”

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