A big Burger King franchisee defends its business

Dan Accordino, CEO of Carrols Restaurant Group, lamented the company’s stock price and defended its business model, says RB’s The Bottom Line.
Carrols Restaurant Group sales
Photograph: Shutterstock

The Bottom Line

Executives of publicly traded restaurant companies can often seem exasperated by the reaction of analysts and investors to their strategies. It’s relatively rare for them, however, to get into the business of their actual valuation.

Which made comments Wednesday from Dan Accordino so interesting. After the CEO of big Burger King franchisee Carrols opened a conference call with a vigorous defense of the company’s business model and its cash flow, he basically said its stock price was too low.

“While we leave it to the analysts and investor communities to determine what the right multiple is for our business,” he said, according to a transcript on the financial services site Sentieo, “we certainly believe our current stock price doesn’t reflect our current level of free-cash-flow generation.”

The comments didn’t work, at least if Accordino’s goal was to give the stock price a boost. Carrols’ stock price fell 5% through early afternoon trading on Wednesday.

But such is life for a franchisee of a big brand. Historically, publicly traded franchisees—what few of them there are—do not quite get that much love on Wall Street. Franchisees generally have lower overall valuations because they are at the whims of their franchisor’s strategies.

They also require a lot of capital spending to generate returns. That’s something that Carrols did rather aggressively over the past decade—it bought units by the dozens and built others to become Burger King’s largest franchisee, with over 1,000 units, while also becoming one of the largest franchisees of any kind in the U.S.

But the company is now shifting away from that over-aggressive acquisition strategy to one that focuses on more moderate growth, coupled with cash generation.

Yet investors haven’t quite fallen in love with that move. While the stock is twice where it was a year ago, it remains half of the price it was at in 2018 and 2019 before it shifted its focus.

Franchisees are cash machines that can have benefits for investors outside of typical appreciation in value. But that benefit can be lost on growth-focused equity buyers.

At the same time, there were growing concerns in recent years about franchisees’ massive debt levels, brought on by remodel and new unit growth demands by franchisors. That concern was clearly warranted—many franchisees’ debt levels had grown too high in recent years, and the country’s second largest operator, NPC Internatioinal, filed for bankruptcy specifically because of its debt levels.

Accordino, however, said that concern was “misguided,” at least as far as his company is concerned.

“For a long time, a recurring concern we have heard from investors regarding franchisees, including large ones like Carrols, was that we’d be perpetually hampered by onerous capital requirements imposed by the franchisors,” he said. “Any free cash flow generated by the business would be required to go towards seemingly endless new store construction, refurbishments and renovations. Additionally, some portion of those projects would inevitably have low returns on invested capital.

“Over the last three quarters and even through a pandemic, we believe we have demonstrated that those concerns were misguided.”

Carrols over the past year paid off debt, cut back on its remodels and took a break from acquisitions. It also ended a unique ability to buy back any Burger King restaurant that went up for sale in numerous states.

Since then the company has generated a “meaningful level of cash flow” and used $10 million of that cash to buy back shares. The company does plan to spend some cash on initiatives that generate a strong return, such as preparing for Burger King’s new chicken sandwich and adding new digital menu boards.

Accordino also noted that the company maintains the ability to buy restaurants—it can buy up to 500 Burger Kings and plans to “opportunistically acquire stores, should that be attractive.”

“Under our new arrangement with our franchisor, we have the flexibility to grow our business organically and through acquisitions in a manner that we believe will best optimize our profit growth potential,” he said.

“Longtime investors and followers of the sector have to reorient their thinking to this new reality.”


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