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Is Carrols Restaurant Group a Buy After Its Earnings Disappointment?

Carrols Restaurant Group (NASDAQ: TAST) released disappointing first-quarter 2019 results and underwhelming forward guidance last week. With the stock down 20% since then, it's obvious the market wasn't pleased.

But that raises the question: Would opportunistic investors be wise to pick up shares of the country's biggest Burger King franchiser after its plunge? To find out, let's take a closer look at what drove Carrols' results last quarter and what investors can expect going forward.

IMAGE SOURCE: CARROLS RESTAURANT GROUP.

Carrols Restaurant Group results: The raw numbers

Metric

Q1 2019

Q1 2018

Year-Over-Year Change

Restaurant sales

$290.8 million

$271.6 million

7.1%

GAAP net income (loss)

($11.5 million)

($3.1 million)

N/A

GAAP earnings (loss) per share

($0.32)

($0.09)

N/A

DATA SOURCE: CARROLS RESTAURANT GROUP. GAAP = generally accepted accounting principles.

What happened with Carrols Restaurant Group this quarter?

  • On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation and acquisition expenses, Carrols incurred a net loss of $10.4 million, or $0.29 per share, larger than a loss of $0.08 per share in the same year-ago period.
  • These results were well below analysts' consensus estimates for an adjusted loss of $0.16 per share on revenue closer to $292 million.
  • That said, comparable restaurant sales climbed 2.4% -- above the 1.6% most on Wall Street were modeling -- lapping a 6.2% increase in last year's first quarter.
  • Adjusted EBITDA fell 30.7% year over year, to $13.1 million.
  • Restaurant-level EBITDA margin was 9.8% of total restaurant sales, down 244 basis points year over year. The decline was driven by a combination of higher wages and, to a greater extent, the same heightened promotions we've seen the company use to drive top-line growth and sustain market share the past two quarters.
  • As of March 31, 2019, Carrols owned and operated 845 Burger King restaurants.
  • On April 30, 2019 Carrols closed on its previously announced merger with Cambridge Franchise Holdings, adding 165 additional Burger King and 55 Popeyes restaurants across 10 Southeastern states. That brings Carrols' total to 1,010 Burger King and 55 Popeyes restaurants in 23 states.
    • As part of the deal, Carrols also entered into an Area Development and Remodeling agreement with Burger King Corporation expanding its first right of refusal for the acquisition of as many as 500 additional restaurants.

What management had to say

CEO Daniel Accordino noted the company's admirable comparable-restaurant sales growth despite lapping its most difficult year-over-year comparison to date. But he also elaborated:

Despite solid top line growth, restaurant level profitability was negatively affected on a year over year basis in the first quarter by promotional activity that accelerated during the second half of last year, and by continued labor cost pressures. Although discounting was much higher relative to the first quarter of 2018, these elevated levels began to taper off mid-way through the first quarter this year resulting in a modestly lower impact sequentially from the fourth quarter of 2018. We expect the impact from this discounting to subside as we move further into the year.

Looking forward

Carrols reiterated its full-year 2019 guidance (excluding Cambridge) for total restaurant sales of $1.25 billion to $1.28 billion, which still assumes comparable-restaurant growth of 2% to 3.5%. Including roughly eight months of sales from Cambridge, that total will increase to a range of $1.45 billion to $1.48 billion.

Trending toward the bottom line, Carrols now sees total 2019 adjusted EBITDA of $114 million to $121 million, including $14 million to $16 million from Cambridge. After backing out the $15 million midpoint of its Cambridge expectations, Carrols modestly reduced its 2019 adjusted EBITDA guidance for its core business to an approximate range of $99 million to $106 million (compared to $100 million to $110 million before).

Considering Accordino's comments that discounting should taper off as the year progresses, it might be surprising that Carrols still reduced its adjusted EBITDA guidance for the year. But the company elaborated that it now expects recent increases in beef and pork prices -- stemming largely from recent breakouts of African swine fever in China -- "to continue for the foreseeable future."

Judging by recent comments from other food-industry leaders, that's not an overexaggeration. Only a few days ago, the CEO of Tyson Foods pointed out that the epidemic has wiped out around 35% of China's pig herd -- representing a loss of more than 5% of the world's protein production -- and argued the event will have a "profound impact on global meat supplies for at least two years."

The bottom line

That doesn't mean Carrols can't bolster its profitability in the face of these extended cost headwinds. Accordino also stated that Carrols is "well along" with the integration of Cambridge into its portfolio, though the effort will take several more months to complete. When that happens, Carrols should be able to to leverage its expertise as the world's largest Burger King franchiser to increase sales and operating efficiency at these hundreds of new locations.

With that in mind, I'm content to continue watching from the sidelines for at least another quarter to see how this story unfolds. But with the caveat that I won't be surprised if shares have a little further to fall even from today's levels, patient investors could do well to take a nibble at Carrols stock today, add it to your watchlists, and maintain the flexibility to increase that position on any signs of tangible improvements.

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


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