Latin American Digital Shift Will Revive Quick Dining

Key Takeaways

• Growth in digital channels, convenience-focused formats, and modernization efforts is boosting operational efficiency, resilience, and positioning for expanded market share.
  
• Enhanced supply chain management and local sourcing initiatives are expected to control costs, protect margins, and sustain long-term earnings growth.
  
• Ongoing macroeconomic instability, input cost inflation, industry volume declines, regulatory pressures, and moderating digital growth are straining profitability and threatening long-term revenue expansion.

Catalysts

Operates as a franchisee of McDonald’s restaurants.

• Arcos Dorados is positioned to benefit from sustained growth in the Latin American middle class and rising disposable incomes, which are expected to accelerate demand for branded quick-service restaurants and drive higher traffic and same-store sales growth over the coming years, supporting top-line revenue expansion.
  
• Widespread adoption of digital sales channels—including mobile ordering, self-order kiosks, loyalty programs, and Own Delivery—continues to transform operational efficiency and customer engagement, leading to increased sales conversion, higher customer frequency, and improved EBITDA margins as digital penetration nears 60% of systemwide sales.
  
• Ongoing restaurant expansion and aggressive modernization efforts, with accelerated openings planned for the remainder of the year and 68% of the footprint already converted to the Experience of the Future format, are expected to capture incremental market share and unlock growth in both established and underpenetrated urban markets, enhancing both absolute revenue and operating leverage.
  
• The shift toward convenience-led dining, including delivery, drive-thru, and off-premise channels, has made Arcos Dorados’ business more resilient to consumption volatility, with delivery sales growing more than 20% in constant currency and off-premise now contributing over 40% of systemwide sales, providing a structural tailwind to revenue and sales mix even during macro headwinds.
  
• Implementation of advanced supply chain management, local sourcing initiatives, and digital workforce scheduling is expected to deliver continued cost control, offset wage and input inflation, and expand margins, contributing to sustainable earnings growth and supporting a stronger free cash flow trajectory over the long-term.

Arcos Dorados Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Arcos Dorados Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Arcos Dorados Holdings's revenue will grow by 12.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.0% today to 3.5% in 3 years time.
• The bullish analysts expect earnings to reach $223.9 million (and earnings per share of $1.07) by about August 2028, up from $134.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, up from 11.0x today. This future PE is lower than the current PE for the US Hospitality industry at 22.2x.
• 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 16.22%, as per the Simply Wall St company report.

Arcos Dorados Holdings Future Earnings Per Share Growth

Risks

• Persistent volatility in key Latin American markets, including currency devaluations and inflationary pressures, is limiting Arcos Dorados’ ability to raise menu prices in line with rising input costs, which has resulted in tighter net margins and may weigh on earnings if macroeconomic instability continues.
  
• The rising cost of food inputs, particularly beef, along with higher packaging and occupancy expenses, have already led to margin pressure in Brazil, and ongoing climate change as well as resource constraints may further increase these costs and erode overall profitability.
  
• Weakness in guest traffic and lower QSR industry volumes, particularly in Brazil, Mexico, Panama, and Costa Rica, indicate that economic pressure on consumers and increasing income inequality are depressing discretionary spending, threatening top-line revenue growth.
  
• Despite progress in digitalization and delivery channels, the company acknowledges that growth rates are moderating from already high digital adoption, and slower-than-expected innovation or lagging competitiveness in mobile, delivery, and off-premise offerings could limit future sales growth versus more agile industry rivals.
  
• New and tightening regulations around environmental practices—including sustainability, plastics, waste management, and labor—are increasing operating and capital costs sector-wide, which could squeeze net margins and require ongoing investments that may dampen free cash flow and earnings growth over time.

Valuation

• The assumed bullish price target for Arcos Dorados Holdings is $13.5, which represents two standard deviations above the consensus price target of $10.46. This valuation is based on what can be assumed as the expectations of Arcos Dorados Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $6.4 billion, earnings will come to $223.9 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 16.2%.
• Given the current share price of $6.98, the bullish analyst price target of $13.5 is 48.3% 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.