Apparently, Wall Street likes it when a company reports unexpected traffic growth and strong margin expansion, especially when that company not all that long ago appeared to be teetering on the edge of bankruptcy.
Carrols Restaurant Group, Burger King’s largest franchisee, on Thursday said its same-store sales for that chain rose 8.1% in the third quarter. While that was a bit lower than the company had reported in previous quarters, it included traffic growth, something not all that common in the restaurant business these days. It also operates 61 Popeyes restaurants, and those same-store sales rose 11.7%.
That traffic growth came sooner than the Syracuse, N.Y.-based company expected. And it fueled some remarkable margin growth. Restaurant-level EBITDA margins, or earnings before interest, taxes, depreciation and amortization, increased 530 basis points.
Its stock, the best-performing restaurant stock on Wall Street as it was, responded accordingly, soaring 23% on Thursday. It is up nearly 400% this year alone.
An investor who had acquired $1,000 worth of Carrols stock on the morning of Jan. 2 would have nearly $5,000 right now.
Carrols executives also appeared confident that they will end the year on a strong note, noting that Burger King is planning to pump $35 million into additional marketing toward the end of the year. “I think that would really help bolster traffic,” CFO Anthony Hull told investors on Thursday. Carrols operates just over 1,000 Burger King restaurants, or about one out of seven of the chain’s U.S. locations.
Executives added that they believe they are getting some “trade-down” from other, more expensive segments like casual dining.
Yet they also gave a lot of credit to operations improvements made over the past year. Burger King has focused much of its attention on improving speed and service in restaurants, believing that it is the key toward the chain’s long-term recovery.
Deborah Derby, the company’s CEO, said the company has seen strong improvements in performance measurements taken by the franchisor, including a 33% increase in customer satisfaction.
“We continue to see that guest satisfaction is a key driver of repeat business and incremental traffic growth,” Derby said. “That’s one of the reasons we believe we’ve had positive traffic sooner than we expected.”
For Carrols, the strong performance highlights early progress Burger King franchisees have made over the past 13 months since the company announced its $400 million “Reclaim the Flame” revitalization plan.
Burger King franchisees struggled with profitability issues as weak sales coming out of the pandemic coupled with soaring inflation drained many operators of cash. Three such operators filed for bankruptcy this year and hundreds of stores closed. And some of the chain’s biggest franchisees were in financial distress.
Carrols struggled to generate cash, forcing the operator to cut back on capital spending to preserve cash and pay off debt. Carrols’ adjusted EBITDA margin in the first quarter of 2022 was just 1% of sales, for instance, which led to speculation that the company could be headed for bankruptcy. Bond rating agencies last year cut the company’s credit rating, along with that of other Burger King franchisees. And then former CEO Paulo Pena, who was focused on improving operations, died unexpectedly on New Years Eve.
On Thursday, Carrols said it generated $30 million in free cash flow and reported an adjusted EBITDA margin of 9%. Earlier in the week, Moody’s Investors Service upgraded its credit rating. And for the first time in years the company paid out a quarterly dividend. “The dividend is an expression of the board’s confidence in the momentum and the strength of the business,” Derby said.
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