How big Burger King franchisee Carrols plans to combat historic inflation

The company’s labor issues have improved, but food costs have risen 17% over the past year, thanks to high beef costs. It says pricing alone won’t fix the problem.
Carrols Restaurant Group earnings
Photograph: Shutterstock

Carrols Restaurant Group, Burger King’s largest franchisee, has struggled with soaring costs and generally weak sales of late and last quarter was no different.

Sales rose 2.4% in the quarter ended April 3. But costs rose more. After adjustments for one-time events, restaurant-level EBITDA, or earnings before interest, taxes, depreciation and amortization, declined 43% to $22.5 million. Total adjusted EBITDA was $4.3 million, or just 1% of total revenues in the period. The company reported a net loss of $21.3 million, or 42 cents per share, about three times the size of the loss from the same quarter last year.

Carrols’ stock price, down 80% from its 52-week high, rebounded slightly and was up 1.4% in morning trading.

Paolo Pena, brought in this year to replace longtime CEO Dan Accordino, who retired, said Carrols planned to limit capital spending to critical maintenance and holdover remodels and construction. He also said the company was focused on using cash to repay debt.

But it is also taking a hard look at the organization to improve profits. The operator plans to work on improving speed of service and customer satisfaction and devise ways to improve staff turnover. It plans to work on weaker locations to get them up to the company’s standards.

“Even if inflation moderates in the back half of this year, we’re likely to feel its impact on our cost structure for some time,” Pena told investors on Thursday. “To deal with it, we are going to need to adapt and evolve as never before. And to do that, we are going to need to look at all aspects of our operations with fresh eyes.

“Pricing actions alone will not be sufficient to restore margins.”

He plans to look at “every facet of how we operate our business.”

“While COVID has already dictated that we make a number of fundamental changes, the post-pandemic environment will demand still more,” he said.

Carrols operates more than 1,000 Burger King restaurants, as well as some Popeyes locations. It operates about one out of every seven Burger King restaurants in the U.S. While the company has generally outperformed the broader brand, at least on the sales front, its profitability challenges are indicative of problems in the system as weak sales have combined with rising labor and commodity costs to create financial problems.

The company raised prices 7.7% in the first quarter when compared with the same period a year earlier, prices only somewhat higher than average menu price inflation at fast-food restaurants. But it has also benefited from Burger King’s reduced reliance on discounting. Carrols CFO Anthony Hull said that there was a “meaningful reduction in our discount levels” that improved profitability.

But costs have just soared. Wage rates are up 13.6% over the past year, though the company said that was better than the 14.2% wage rate increase. The company has been able to slow the acceleration of wages as it gets more applications and turnover improves.

The bigger problem is commodities, and particularly beef. Overall, food costs are up more than 17% over the past year, a number that equals wholesale food cost inflation. Beef, which represents a quarter of the company’s commodity basket, is up 32% over the past year.

Carrols executives said that the Burger King franchisor has been focused on improving operator profits. “They’re focusing on maximizing [return on investment] for their franchisees,” Hull said. “They understand the current headwinds and they’re very focused on franchisee profitability right now.”

Average check at the company, thanks to increased delivery sales and higher prices, is up 9.9% over the past year. But traffic was down 7.5%.

Hull did say same-store sales improved in the second half of April and into May, due at least in part to a free fries promotion by Burger King to encourage customers to join the company’s Royal Perks loyalty program. “It was literally like lights on, lights off,” Pena said. “Starting the second week of April, we’ve seen improvement in comps overall.”

Of note, Pena said, was a coupon drop last week that apparently generated customer traffic. “The consumer is clearly value conscious,” he said. “I think we’re seeing some opportunity for us in the trade-down market.”

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