Digital Adoption And Urban Demand Will Drive Future Success

Key Takeaways

• Digital initiatives, operational upgrades, and menu innovation are strengthening customer engagement, brand preference, and margins, supporting sustained revenue and profit growth.
  
• Favorable demographics and prudent pricing strategies are expected to boost demand, stabilize volumes, and position the company for long-term earnings expansion.
  
• Weak consumer demand, rising costs, and competitive pressures in core markets risk squeezing margins, hindering revenue growth, and threatening earnings stability if unaddressed.

Catalysts

Operates as a franchisee of McDonald’s restaurants.

• Continued digital adoption-including loyalty program rollouts, app engagement, and digital ordering-are driving higher visit frequency, stronger customer retention, and higher identified sales, which is likely to support future revenue growth and improve gross margins as digital channels scale.
  
• Ongoing expansion and modernization of Experience of the Future (EOTF) restaurants, combined with investments in operational efficiency and cost control measures, are expected to drive higher average ticket size, increased throughput, and EBITDA margin expansion over time.
  
• Young and growing urban populations in Latin America, alongside rising middle-class discretionary spending, are poised to boost out-of-home dining demand, providing sustained top-line growth for Arcos Dorados as the leading QSR operator in the region.
  
• Menu innovation (localized flavors, health/value offerings, limited-time partnerships like Minecraft and Formula 1) and targeted marketing campaigns are strengthening brand preference and helping to protect or grow market share in competitive environments, positively impacting both revenue and gross margins.
  
• Prudent pricing strategies-raising prices in line with inflation while prioritizing affordability and value-should support volume stability and future margin recovery, positioning the company for earnings growth as macroeconomic conditions improve.

Arcos Dorados Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arcos Dorados Holdings's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 3.2% in 3 years time.
• Analysts expect earnings to reach $184.6 million (and earnings per share of $0.89) by about August 2028, up from $130.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $210.3 million in earnings, and the most bearish expecting $154 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, up from 11.7x today. This future PE is lower than the current PE for the US Hospitality industry at 23.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.71%, as per the Simply Wall St company report.

Arcos Dorados Holdings Future Earnings Per Share Growth

Risks

• Persistent macroeconomic volatility and weakening consumer confidence in key markets like Brazil are causing subdued sales and reduced guest traffic, leading to a heavier reliance on price increases over volume growth; this dynamic is likely to constrain top-line revenue growth and could pressure same-store sales if consumer conditions remain sluggish or worsen.
  
• Intensifying competition, particularly within Brazil and in the dessert center segment, is prompting more aggressive pricing and promotional activities across the industry, which may erode market share and compress profit margins if Arcos Dorados is forced to match these strategies over the long term.
  
• Elevated input costs, especially due to a 30% increase in beef prices in Brazil over the past 12 months and ongoing FX volatility affecting imported goods, have resulted in gross margin pressure; if these cost headwinds persist or intensify, net margins and EBITDA could deteriorate further.
  
• Growing dependence on digital channels and loyalty programs is a double-edged sword-while driving identified sales growth, failure to continuously innovate and modernize digital platforms could result in lower customer engagement, falling behind competitors and negatively impacting revenue and same-store sales momentum.
  
• Vulnerability to adverse currency movements (e.g., Brazilian real and Mexican peso) and exposure to regulatory risks (such as potential new fast-food regulations or taxes in Latin America) could reduce reported earnings in USD, increase compliance costs, and squeeze free cash flow, undermining long-term earnings stability.

Valuation

• The analysts have a consensus price target of $10.4 for Arcos Dorados Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $8.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.7 billion, earnings will come to $184.6 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 15.7%.
• Given the current share price of $7.25, the analyst price target of $10.4 is 30.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.