• Total Revenue Growth: Increased by 6.8% in the second quarter, reaching the highest level ever for the second quarter in US dollars.

• Systemwide Comparable Sales Growth: 2.4 times the company's blended inflation, excluding Argentina.

• Brazil Comparable Sales Growth: Rose 10.2%, up 2.6 times inflation.

• NOLAD Comparable Sales Growth: Grew 2.5 times the division's blended inflation.

• SLAD Comparable Sales Growth: Grew 2 times the division's blended inflation, excluding Argentina.

• Adjusted EBITDA: Grew about in line with revenue, with a relatively flat margin versus the prior year.

• Digital Sales Growth: Increased by 24% in US dollars versus the prior-year quarter, accounting for 57% of systemwide sales.

• Restaurant Openings: 15 new restaurants opened in the second quarter, all freestanding units, with 10 in Brazil.

• Capital Expenditures: Totaled $88 million in the quarter.

• Net Leverage: Maintained at a healthy 1.2 times at the end of the second quarter.

• Warning! GuruFocus has detected 2 Warning Sign with ARCO.

Release Date: August 14, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Arcos Dorados Holdings Inc (NYSE:ARCO) achieved a 6.8% increase in total revenue for the second quarter, marking the highest level ever for this period in US dollars.

• Guest traffic grew for the thirteenth consecutive quarter, supporting comparable sales growth despite challenging consumer environments.

• The company's Three D strategy (digital, delivery, and drive-thru) has set a new standard for quality, service, and value in the Latin American and Caribbean QSR industry.

• Arcos Dorados Holdings Inc (NYSE:ARCO) opened 37 EOTF restaurants in the first half of the year, with strong first-year returns on investments supporting future growth.

• Digital sales accounted for 57% of systemwide sales, with significant growth in markets like Brazil, where digital sales penetration reached 67%.

Negative Points

• The company faced margin pressure due to increased occupancy and other operating expenses, particularly related to delivery fees, utilities, and IT expenses.

• Despite strong sales growth, the Argentina market remains challenging due to macroeconomic conditions, impacting overall results.

• NOLAD's margin was down by 70 basis points in the first half of the year, with payroll expenses in Mexico contributing significantly to this decline.

• Delivery sales, while growing, have lower-margin profitability compared to other segments, impacting overall margin performance.

• Utilities costs increased, outpacing revenue growth, prompting efforts to reduce energy consumption in restaurants and offices.

Q & A Highlights

Q: Can you provide more details on the Master Franchise Agreement (MFA) renewal process and timeline? A: Marcelo Rabach, CEO: We received a renewal notice from McDonald's for a new 20-year MFA starting January 1, 2025. The renewal process is ongoing, and we will communicate additional information as per legal and regulatory requirements.

Q: What factors contributed to the EBITDA margin contraction despite strong sales growth? A: Mariano Tannenbaum, CFO: The main pressure on margins came from occupancy and other operating expenses, particularly due to the growth of the delivery segment, which has lower margins. Additionally, there were increased costs in utilities and IT investments.

Q: How does demand elasticity in Latin America compare to other regions, and what are the trends in Brazil? A: Marcelo Rabach, CEO: Latin America faces a discerning consumer similar to other regions. We focus on offering great value and competitive pricing. In Brazil, sales and volume growth were strong, with significant market share gains over competitors.

Q: Can you maintain same-store sales growth above inflation in the coming years? A: Luis Raganato, COO: Yes, we believe it's possible due to our Three D strategy (digital, delivery, drive-thru), investments in technology, and focus on product categories like chicken and coffee.

Q: What are the impacts of delivery channel growth on margins, and what are the expectations? A: Mariano Tannenbaum, CFO: Delivery growth pressures margins but is highly accretive in US dollar terms. It helps dilute fixed costs at the restaurant level, and we are pleased with the market share gains and benefits delivery brings to EBITDA.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.