Bear of the Day: Carrols Restaurant Group (TAST)

Madeleine Johnson

Carrols Restaurant Group (TAST) owns and operates over 1,000 restaurants under the Burger King and Popeyes brands, though it was back in 1975 when it first entered into a franchise agreement with Burger King (now owned by Restaurant Brands International (QSR)). Before then, Carrols was one of the largest regional fast food chains throughout the northeastern U.S.

Q1 Results Left Investors Wanting

Back in May, Carrols reported disappointing first quarter results after a challenging quarter.

The company posted a loss of 29 cents per share, missing the Zacks Consensus Estimate and coming in well below the eight cent per share loss Carrols notched in the year-ago quarter.

Revenues of $291 million also missed our consensus estimate but managed to grow 7.1% year-over-year. Additionally, comparable restaurant sales climbed 2.4%, beating the Street estimate of 1.6% growth.

Carrols’ restaurant-level EBITDA margin was 9.8% of total restaurant sales, which was down 244 basis points year-over-year due to a combination of higher wages and promotional deals.

The company also closed on a previously announced merger with Cambridge Franchise Holdings in Q1; the deal adds 165 Burger King and 55 Popeyes restaurants to Carrols total restaurant count.

Underwhelming Guidance

Looking ahead, Carrols reiterated its full-year 2019 guidance and expects total restaurant sales of $1.25 billion to $1.28 billion (which assumes comparable restaurant growth of 2% to 3.5%). If you include the Cambridge acquisition, sales will increase to a range of $1.45 billion to $1.48 billion.

Excluding the Cambridge deal, Carrols reduced its 2019 adjusted EBITDA outlook for its main business to an approximate range of $99 million to $106 million.

Estimates Keep Falling

Analysts have since turned bearish on Carrols, with four cutting estimates in the last 60 days for the current fiscal year. Earnings are expected to decline 26.7% for the year, and the Zacks Consensus Estimate has dropped seven cents during that same time period from $0.29 to $0.22 per share.

This sentiment has stretched into 2020. Though earnings growth could bounce back into positive territory, our consensus estimate has dropped 21 cents in the past two months.

TAST is now a Zacks Rank #5 (Strong Sell).

Shares of the restaurant group have fallen about 9% since January compared to the S&P 500’s gain of 15.4%.

Bottom Line

One thing Carrols will have to strategize for going forward are the adverse effects from the recent breakouts of African swine fever in China; it does expect to see increases in beef and pork prices.

But, Accordino did comment that the company is “well along” on integrating Cambridge into its portfolio, and the deal should ultimately help increase total sales.

Investors who are interested in adding a restaurant peer to their portfolio should take a look at Noodles & Co. (NDLS) or Starbucks (SBUX). The two companies hold a Zacks Rank #1 (Strong Buy) and #2 (Buy) and expect earnings growth of 700% and 14.9% for this fiscal year, respectively.

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