Carrols Restaurant Group Delivers an Encouraging Mix

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Carrols Restaurant Group, Inc. (NASDAQ: TAST) announced strong third-quarter 2017 results on Wednesday, highlighting impressive top-line gains driven by both new restaurants and accelerating comparable-sales growth. But rising costs also continued to take their toll, forcing the country's largest Burger King franchisee to reduce its full-year earnings guidance even as it boosted expectations for sales.

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Let's dig in to better understand how Carrols kicked off the second half of the year, and what we can expect from the company in the months ahead.

Carrols Restaurant Group results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Restaurant sales

$285.2 million

$238.9 million

19.4%

GAAP net income

$2.8 million

$4.5 million

(37.8%)

GAAP earnings per share

$0.06

$0.10

(40%)

What happened with Carrols Restaurant Group this quarter?

  • Top-line growth was driven by a combination of 7.5% comparable-restaurant sales growth and new restaurants acquired over the past year.
  • Comparable-sales growth included a 4.8% increase in average check thanks to favorable sales mix, and a 2.7% contribution from higher customer traffic.
  • On an adjusted (non-GAAP) basis, which adds perspective by excluding items like acquisition costs, net income was $3.5 million, or $0.08 per share, down from $5.6 million, or $0.13 per share in the same year-ago period.
  • Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 6.6% to $24.2 million.
  • Through the first nine months of the year, Carrols has acquired 60 Burger King restaurants and closed 17, bringing its total to 798 locations. Carrols expects to complete the acquisition of four additional restaurants in Maine later this month.

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What management had to say

CEO Daniel Accordino noted that sales momentum was steady "throughout all day parts," particularly during lunch and dinner thanks to Whopper, King, and Crispy Chicken sandwich offerings. He elaborated:

Burger King's barbell strategy of premium, value and limited time products is clearly resonating with consumers in a competitive QSR environment as reflected by both increases in customer traffic and a higher average check. Restaurant-level EBITDA and Adjusted EBITDA both increased on an absolute basis and we were able to leverage a number of expenses. However, higher beef prices lingered through much of the quarter, which along with higher promotional sales and continued wage pressures, resulted in lower operating margins compared to the prior year period.

Looking forward 

Carrols increased its outlook for 2017 restaurant sales to be in the range of $1.07 billion to $1.08 billion, assuming comparable-restaurant sales growth of 3.8% to 4.2% (up from previous guidance for $1.05 billion to $1.07 billion, and 2% to 3%, respectively). At the same time, given its year-to-date performance, Carrols reduced its full-year guidance for adjusted EBITDA to be the range of $85 million to $90 million (down from $90 million to $95 million previously).

On one hand, it's frustrating to see Carrols continue struggling to prop up its bottom line despite expense management initiatives. On the other hand, the primary sources of those headwinds -- namely higher costs -- are largely out of the company's control, and Carrols is doing an admirable job capitalizing on Burger King's popular concept to effectively drive traffic and check sizes higher. In the end, assuming Carrols can use this as an opportunity to take market share from competitors as it continues to steadily grow its restaurant base through acquisitions, I think this report contained more positives than negatives for long-term investors.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Carrols Restaurant Group. The Motley Fool has a disclosure policy.