Burger King franchisee Carrols sees its inflation problems easing

The burger chain’s largest operator said it believes its labor costs and commodity prices are improving, which could help its profit margins later this year.
Burger King franchisee profitability
Burger King franchisee Carrols sees its inflation problem improving as beef costs and labor costs moderate. / Photograph: Shutterstock.

Carrols Restaurant Group, the largest franchisee in the Burger King system, on Thursday reported a net loss of $26.5 million, or 52 cents per share, more than twice the loss it reported in the same period a year ago even though its sales improved.

The problem is inflation. Its wage rates are up 10% over the past year. And its commodity costs are up 19% over the past year, worse than the 17% in the previous period. Its profitability numbers were enough to send its stock price down 7%.

Yet company executives believe they see light at the end of their inflationary tunnel. Those wage rates are an improvement over the second quarter, when they were up 13.6%. In addition, the company said that its beef costs have moderated over the past month, and they’ve seen improving rates for other commodities.

Add this to operational improvements the company is making, coupled with oncoming news from Burger King about brand changes, and executives believe they could get some real margin relief by the end of the year.

“We’re encouraged that the significant cost inflation that hampered our business performance the past 12 months may be moderating,” CEO Paolo Pena told analysts on Thursday. “We’re not out of the woods yet but believe that the margin pressures that were such a headwind over the last year may start to turn now and provide operating leverage going forward.”

Indeed, while the company reported a higher net loss, its EBITDA margins improved in the quarter—though they remain low. Adjusted EBITDA margin was 3.4% in the second quarter, down from 6.9% the same period a year ago. But that was an improvement from the 1.1% margin in the first three months of 2022. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

The weakening profits followed years of weaker sales at Burger King, of which it operates more than 1,000 locations, coupled with soaring prices for labor and food.

The margin problems were enough that various bond rating agencies downgraded Carrols’ debt. It also sent the price of its shares plunging. Its stock lost two-thirds of its value since late 2020, even after a recent uptick in its price.

Carrols, under new CEO Pena, is undertaking an effort to improve operations and profits, details of which the company has yet to share. Yet it has cut back on its capital spending, focusing only on spending that generates a high return on investment. It is not remodeling any units it hasn’t already started and is building only six new locations, four of which were already started last year.

It is also working to improve store operations, particularly at its weakest-performing locations. It is managing labor more tightly and has focused on improving speed of service. Executives said their customer satisfaction scores have improved, which they believe will lead to higher sales going forward.

The company is also among Burger King franchisees working with the brand on major changes that are being developed to turn the brand around in the U.S.

Same-store sales at Carrols’ Burger King locations rose 2.8% in the second quarter, which ended July 3, on top of 12.6% in the same period a year ago. All its growth came from an increase in average check of 9.8%, mostly from higher prices but some from a lower level of promotional activity.

Executives said more customers are coming in with coupons, both print and digital, but those coupons have been designed to ensure that operators can make a profit. That’s a major change at Burger King, which has heavily relied on discounts in recent years to drive business.

Traffic declined 6.4%.

The big change for the company was in labor, which appears to improve. Pena said the company has a “strong flow of qualified job applicants above pre-COVID levels” that are enabling the company to upgrade its restaurant staff and remain open longer. Nearly all of its restaurants have returned to full operations.

The company’s beef costs moderated in the second quarter, rising 19.3% compared with 31.9% in the first quarter. But other commodities, including cheese, potatoes, chicken and shortening, rose enough to result in an increase in its overall basket of commodities.

But with beef costs and other prices moderating, the company believes that its margins will improve, particularly with the operational changes being made both at its restaurants and with the Burger King brand.

“We are seeing an improved picture of our business,” CFO Tony Hull said. “Our restaurant sales are performing well. Our commodities have stabilized. Our labor is being more tightly managed and we are executing operationally.”

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