Carrols Restaurant Group is slowing down.
The big Burger King and Popeyes franchisee on Tuesday said that it plans to “aggressively” cut back on acquisitions, remodels and new units as it looks to build profitability following a quarter in which it reported a net loss of $9.9 million.
The Syracuse, N.Y.-based company said that it plans to cut projected capital expenditures to as low as $55 million from the $98 million it originally planned. That’s a significant cut for a company that has long been active in buying, building and sprucing up restaurants and generating returns on its improved performance.
Yet it’s also an acknowledgment of the current operating environment, in which rising labor and other costs and heavy debt loads are making it more difficult for franchisees to continue to do business the way they'd been doing for much of the past decade.
“We are laser-focused on capital allocation and will only invest in the highest return projects,” CEO Dan Accordino said in a statement. He noted that Burger King “is in full agreement” with the reduction.
Carrols’ shares declined more than 3% in morning trading on Tuesday.
Carrols is Burger King’s largest U.S. franchisee, with more than 1,000 locations. It also operates 65 Popeyes restaurants.
For much of the past seven years, it has been acquiring restaurants at breakneck speed. Over the past 12 months alone, for instance, it acquired 179 Burger King locations and built another 21, while acquiring 55 Popeyes units and building another 10—an overall unit count growth rate of 31%.
With all the new restaurants, revenues have soared: Carrols generated $1.5 billion in revenue in 2019, up 24% from the previous year.
Yet costs have gone up, too. The company said that restaurant-level margins declined by 300 basis points in the fourth quarter, as higher labor and commodity costs, along with employee training, ate into profits. In addition, sales at Burger King slowed in November and December.
By cutting back on capital expenses, while also focusing on operating expenses to improve operational efficiency, the company hopes to improve its overall cash flow, which it can use to pay off debt.
Carrols has $470 million in long-term debt, much of it as a result of its acquisition of Cambridge Franchise Holdings last year.
The decision to slow its rate of acquisitions alone is a major step for the company, which emphasized on Tuesday that it was a “pause” in the pace of deals.
“While we still firmly believe that Carrols is better positioned than most operators to pursue acquisitions within both the Burger King and Popeyes systems, we also appreciate the need to pause our pace,” Accordino said on the company’s earnings call Tuesday, according to a transcript on the financial services site Sentieo.
That way, he said, the company can “demonstrate organic growth within our existing business” and cut back on its debt level.
Carrols will only develop six new Burger King restaurants, in addition to the six that were started late last year. That would reduce the number of new opens in that brand to 12 from 21, to go along with the 10 new Popeyes.
It also plans to remodel just 12 Burger King locations, compared with the 74 remodels a year ago.
Carrols has already remodeled 85% of its restaurants, Accordino said.
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