ARCO Q3 Deep Dive: Profitability Surges Despite Softer Sales, Margin Focus Ahead

Fast-food chain Arcos Dorados (NYSE:ARCO) missed Wall Street’s revenue expectations in Q3 CY2025, but sales rose 5.2% year on year to $1.19 billion. Its non-GAAP profit of $0.71 per share was significantly above analysts’ consensus estimates.

Is now the time to buy ARCO? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Arcos Dorados delivered a third quarter that was well received by the market, with higher profitability outweighing a modest revenue shortfall compared to Wall Street expectations. Management attributed the results to disciplined cost controls, particularly in Brazil, as well as operational gains across key markets like Argentina and Mexico. CEO Luis Raganato pointed to digital engagement and loyalty program expansion as instrumental in offsetting challenging consumer demand, stating, “We successfully navigated challenging consumer dynamics in a couple of our largest markets, as well as persistent input cost pressure.”

Looking ahead, management is prioritizing margin expansion and operational efficiency, especially as Brazil’s consumer environment remains uncertain. The company aims to maintain its leadership position by adapting pricing strategies and accelerating digital and loyalty initiatives. Raganato noted, “Our focus for next year is to expand EBITDA margin versus this year,” and highlighted the significance of the upcoming FIFA World Cup sponsorship, which is expected to drive traffic in the company’s largest markets. CFO Mariano Tannenbaum also emphasized flexibility in investment pace to respond to ongoing macroeconomic volatility.

Key Insights from Management’s Remarks

Management pointed to operational efficiencies, digital and loyalty penetration, and targeted marketing as key levers in the quarter, while also responding to input cost pressures and evolving consumer behaviors.

• Margin gains despite cost pressure: Margin improvement was driven by operational efficiencies in payroll and occupancy, despite persistent food and paper cost inflation, particularly in Brazil where beef prices rose over 35% year over year.
• Digital and loyalty expansion: Digital channels generated 61% of system-wide sales, and the loyalty program grew membership by nearly 50%, now reaching 23.6 million members across seven countries. These channels helped boost average check and customer retention.
• Market-specific strategies: Argentina and Mexico performed strongly due to local marketing and operational innovation, while Brazil focused on maintaining market share with value menus and balancing pricing against traffic declines.
• Tax credit impact: Reported profitability benefited from a $125 million federal tax credit in Brazil, which management plans to monetize over the next five years to support cash flow and future investments.
• Capital allocation and expansion: The company opened 22 new restaurants in the quarter and remains on track for 90 to 100 openings this year, but emphasized flexibility in future expansion plans based on market conditions and prioritizing returns on investment.

Drivers of Future Performance

Management’s outlook centers on restoring margin growth, leveraging digital engagement, and responding flexibly to regional consumer and cost dynamics.

• Margin recovery and cost discipline: Management aims to expand EBITDA margin by focusing on operational efficiencies, especially in Brazil, and adjusting pricing to offset lingering input cost pressures. Plans include capturing further payroll and supply chain efficiencies across divisions.
• Digital and loyalty as growth engines: The ongoing rollout of the loyalty program, expected to cover 90% of restaurants by year-end 2025, and increasing digital penetration are anticipated to drive sustainable sales growth and customer frequency.
• Marketing and event-driven demand: The FIFA World Cup sponsorship in 2026 is expected to boost brand engagement and traffic, particularly through delivery channels, while continued marketing innovations and value propositions are designed to shield market share amid volatile consumer demand.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be tracking (1) stabilization and improvement in Brazil’s margins as input cost pressures moderate, (2) the rollout and adoption rate of the loyalty program across additional markets, and (3) the effectiveness of value-driven marketing and digital engagement, particularly as the FIFA World Cup approaches. The pace of new restaurant openings and capital allocation decisions will also be key indicators of execution.

Arcos Dorados currently trades at $7.66, up from $7.22 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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