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Financing

Big Burger King franchisee Carrols sees some dramatic improvement

Store closures, cost cuts and rising sales are putting the operator on a path toward positive cash flow.
Photograph by Jonathan Maze

Carrols Restaurant Group, Burger King’s largest franchisee, has seen a dramatic improvement in its sales in recent weeks that are giving the company confidence that it can generate positive cash flow later this spring—even as it closes restaurants.

The company said its same-store sales, down 6.4% in the current quarter through May 3, were down just 1.9% over the past seven days—a far more normalized level despite the widespread closure of the company’s dining rooms.

Carrols, which operates more than 1,000 restaurants along with 65 Popeyes Louisiana Kitchen units, has temporarily closed 46 locations—all but four of them Burger King restaurants—that it says were built too close to existing units. The company also closed 11 restaurants that were losing money.

Speaking on the company’s first quarter earnings call Thursday, Carrols executives said they were on track to generate positive free cash flow this quarter.

Indeed, company executives noted that they have not deferred royalty payments to its franchisor. “That’s not something we asked for or received from the franchisor,” CEO Dan Accordino said.

The company’s comments Thursday largely eased investor concern that Carrols would struggle to make it through the pandemic. Shares soared nearly 9% through midmorning trading.

Carrols operates with significant debt and, going into the pandemic, took steps to reduce capital spending to generate cash and pay down some of that leverage.

The moves largely ended a decadelong period of aggressive growth through acquisitions and new-store development, moves largely supported by a franchisor that saw Carrols as a key element in its strategy to grow domestic units and improve operations. The shutdown largely ground those moves to a halt.

The pandemic shutdown hammered traffic while increasing the number of large orders from families. Same-store sales declined 5.7% in the first quarter, including a decline of nearly 17% in March. Same-store sales were down in the 30% range in the first half of April before improving to the low to mid-teens in the second half of the month, and have improved further in May thus far.

Still, between January and April, average check was up 18%, the company said, suggesting the company lost about a quarter of its traffic.

Carrols added delivery at its locations, shedding the company’s reluctance toward the service, and about 3% of its total restaurant sales have come via delivery, making up about $800,000 per week.

The company cut staff and reduced hours, worked with landlords, cut wages for employees outside of the restaurants and streamlined management. It also suspended acquisitions and is delaying projects that haven’t started yet.

The company has $53.4 million in cash and $24.4 million available on its revolving credit facility.

Those steps, plus the improved sales, have helped the company’s finances. Executives on the call were bullish about the prospects of Burger King sales in particular—while its Popeyes locations have largely recovered to their pre-pandemic levels.

“There seems to be an increased amount of traffic across our entire portfolio in 23 states,” Accordino said. “More people are on the road. Our drive-thrus have picked up significantly, and delivery has increased dramatically on a week-to-week basis.”

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