Carrols Restaurant Group Has Potential Upside
- By Mrinalini Chaudhuri
Carrols Restaurant Group Inc. (TAST) is a Burger King franchisee and operates around 737 restaurants in the U.S. Headquartered in Syracuse, New York, the company reported decent third-quarter results with an increase in restaurant sales and adjusted EBITDA. It revised its annual guidance and expanded the restaurant portfolio by more than 11% from last year.
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The intrinsic value of TAST
Although the comparable restaurant sales were flat, the company's acquisitions have remained an important component of its growth strategy. It has a balanced marketing approach and the ability to effectively apply its operating and financial systems to improve both sales and operating margins. The aggressive remodelling of its restaurants contributed to the sales increase.
Third-quarter performance
Restaurant sales increased by 9.7% and were $238.9 million in the third quarter of 2016, up from $217.7 million in the prior-year quarter.
Restaurant-level EBITDA was $34.8 million, up from $33.3 million in the prior-year quarter.
General and administrative expenses during the quarter were $13 million, up from $11.8 million a year ago.
Adjusted EBITDA was $22.7 million, an increase from $22 million in the prior-year quarter.
Income from operations was $9 million, down from $11.8 million a year ago.
Interest expenses increased to $4.6 million from $4.5 million in the prior-year quarter.
Net income for the quarter was $4.5 million, or 10 cents per diluted share, down from $7.2 million, or 16 cents per diluted share, the year before.
Adjusted net income was $5.6 million, or 13 cents per diluted share, down from $7.7 million, or 17 cents per diluted share, the previous year.
Comparable restaurant sales were flat compared to an increase of 6.5% in the prior-year period.
Full year outlook
Range | |
Total restaurant sales | To be between $940 million-$950 million |
General and administrative expenses | To be between $51 million-$53 million |
Adjusted EBITDA | To be between $88 million-$92 million |
Capital expenditure | To be between $90 million-$95 million |
Focus
Executing acquisition plans.
Reimaging strategies.
Effective marketing and promotional initiatives.
Improve operating performance.
Strong attributes of the company
Carrols has achieved positive comparable sales growth in 20 of the last 22 quarters.
It boasts of strong financial momentum and has significant growth opportunities.
The company is characterized by best-in-class operations and adheres to strict P&L disciplines.
Carrols is rich in robust technology and strong operating culture.
Conclusion
Restaurant stocks are favorites among investors. Even more so if it is a growth stock. Disposable income across the world has risen and perceptions about eating out have changed. With a proven track record of achieving strong operating performance, Carrols is making significant improvements to its financial performance. It expects a notable reduction in capital spending in 2017.
It recently entered an agreement to purchase 43 Burger King restaurants in and around Cincinnati. The deal is expected to close in January. It also completed the acquisition of seven Burger King restaurants located north of Columbus, Ohio.
The higher labor and remodelling costs are a negative point, but it is expected to perform well in the long run. It is a growth stock that witnessed significant EPS growth last year. As per the Global Fast Food Market Research Report, the Global Fast Food Market will grow at a compound annual growth rate (CAGR) of 4.7% and cross $700 billion by 2021. Therefore, this company has plenty of opportunities.
A great player in the industry, it has the infrastructure to support growth. It benefited from favorable commodity costs and improved margins at acquired restaurants. The company is well positioned for expansion and growth opportunities. Effective Burger King strategic initiatives, along with Carrols' operating improvements to recently acquired restaurants, are driving improving financial results. The company is confident it will enhance long-term shareholder value through its acquisition strategy. I think adding this company will benefit shareholders.
Disclosure: I do not hold any position in the company.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Sign with TAST. Click here to check it out.
The intrinsic value of TAST
