What Arcos Dorados (ARCO) Said on Its Q3 Earnings Call

Key Points

• Arcos Dorados reported strong Q3 sales: Revenue rose more than 11% to $1.3 billion, while comparable sales increased 15.5% on higher average checks and positive guest traffic. Underlying adjusted EBITDA grew 9%, excluding a large prior-year Brazilian tax credit.
• The board authorized up to $25 million in share repurchases over six months. The company also invested more than $70 million in Q3 capital expenditures and opened 35 restaurants.
• Digital sales grew about 22% and reached roughly two-thirds of system-wide sales. Management reiterated long-term targets of mid- to high-single-digit revenue growth and high-single- to low-double-digit adjusted EBITDA growth, while noting wage inflation continued to pressure margins.

Arcos Dorados NYSE: ARCO reported third-quarter revenue of $1.3 billion and announced a $25 million share repurchase authorization as the McDonald’s operator said it continued to gain market share despite cautious consumer spending across Latin America.

System-wide comparable sales rose 15.5%, helped by higher average checks and positive guest traffic. Revenue increased more than 11% in U.S. dollars, while underlying adjusted EBITDA rose 9% from a year earlier, excluding the effect of a Brazilian tax credit recorded in the prior-year quarter.

Chief Executive Officer Luis Raganato said the fourth quarter was off to a solid start, with comparable sales trends continuing to normalize in October. He said the company was preparing targeted marketing campaigns and product launches for next year.

Buyback Adds to Capital Allocation Plan

The company’s board authorized the repurchase and cancellation of up to $25 million of Class A shares in the open market over the next six months. Raganato said it is the company’s second share repurchase program and that management considers the stock undervalued.

Raganato outlined a capital allocation framework that prioritizes investment in restaurants and technology, a healthy balance sheet, dividends and share repurchases. He said an updated restaurant development model has reduced the average investment required for a new location without sacrificing sales or cash flow, improving first-year returns by 3 to 5 percentage points.

Arcos Dorados spent more than $70 million on capital expenditures during the third quarter and $156 million in the first nine months of 2026. It opened 35 restaurants in the quarter and 70 through the first three quarters. Chief Financial Officer Mariano Tannenbaum said the remaining locations needed to meet this year’s opening targets had either opened or were under construction.

Net debt was roughly in line with the end of 2025, and net debt to adjusted EBITDA stood at 1.3 times at the end of September. Adjusted free cash flow for the preceding 12 months reached $156 million, about three times the level of a year earlier, Tannenbaum said.

Costs Weigh on Margins

Reported adjusted EBITDA was $125.9 million, representing a 9.5% margin. Tannenbaum said the prior-year quarter included an $85.6 million net federal tax credit in Brazil, making it necessary to exclude that benefit when comparing underlying performance.

Food and paper costs improved by 90 basis points as a percentage of revenue, supported by pricing, product mix and supply-chain initiatives. General and administrative costs rose well below blended inflation following a restructuring that began late last year. Higher payroll, occupancy and other operating expenses offset those gains as a percentage of revenue.

Net income attributable to Arcos Dorados was $31.2 million, or 15 cents per share. Excluding the prior-year tax credit, net income rose nearly 24%, aided by underlying operating performance and lower income tax expense, Tannenbaum said.

Wage inflation outpaced average-check growth in all three divisions during the quarter. Tannenbaum said the company expects payroll costs as a percentage of revenue for full-year 2026 to remain broadly in line with 2025, supported by productivity measures and improved scheduling.

Brazil Growth Moderates, NOLA Sales Stabilize

Brazil comparable sales rose 3.5%, while revenue in U.S. dollars increased more than 15%, aided by a stronger real and 70 additional restaurants compared with a year earlier. Raganato said comparable guest volume growth was the strongest in eight quarters, though sales momentum followed a second-quarter boost from World Cup-related promotions.

Brazil’s adjusted EBITDA rose about 10% to $68.1 million. Excluding the prior-year tax credit, its margin contracted 60 basis points, which Tannenbaum attributed mainly to the timing of some nonrecurring operating expenses and slightly higher payroll costs as a percentage of revenue. He said the company was cautiously optimistic about Brazil’s margin outlook for the fourth quarter and the beginning of next year.

In NOLA, comparable sales were approximately flat, an improvement from the second quarter. Revenue rose almost 8% in U.S. dollars, helped by a stronger Mexican peso. Raganato said Mexico’s operating environment remained challenging, but the company gained market share and recorded positive comparable volume.

In SLAD, Argentina and Venezuela continued to drive comparable sales growth, while Colombia, Peru and Uruguay also posted solid top-line performance, Raganato said.

Digital Sales and Longer-Term Goals

Digital channel sales grew about 22% year over year and accounted for roughly two-thirds of system-wide sales. Loyalty membership increased 60% to almost 38 million registered users, while identified sales reached 29% of total sales.

Management reiterated long-term objectives for mid- to high-single-digit annual revenue growth and high-single- to low-double-digit annual adjusted EBITDA growth. It also targets 550 to 600 restaurant openings and $1.3 billion to $1.5 billion in capital expenditures from 2027 through 2030.

Tannenbaum said the growth objectives reflect an average long-term trend rather than guidance for any individual year and do not assume a specific economic or political scenario.

About Arcos Dorados (NYSE:ARCO)

Arcos Dorados Holdings operates McDonald's restaurants in Latin America and the Caribbean under a master franchise agreement. It is the largest independent McDonald's franchisee in the world by restaurant count, with operations across 20 countries and territories in the region. The company's restaurants serve McDonald's menu items, including burgers, fries, chicken, breakfast foods, desserts and beverages. Its services also include McCafé offerings, delivery and digital ordering through channels such as mobile apps and kiosks.

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