Key Points

Arcos Dorados has exclusive franchise rights to McDonald's locations in Latin America and the Caribbean. It grew sales by 11% on a constant currency basis in Q1, but saw profitability plummet. However, its quickly growing loyalty program and store count expansion potential offer plenty of appeal. 10 stocks we like better than Arcos Dorados ›

Arcos Dorados(NYSE: ARCO) is the largest independent McDonald'sfranchisee with 2,400 locations across Latin America and the Caribbean. Its shares were down 7% as of 1 p.m. ET Wednesday, according to data provided by S&P Global Market Intelligence.

The sub-franchisee reported first-quarter earnings Wednesday and delivered 11% sales growth on a constant currency basis while taking market share in a challenging consumer spending environment.

However, Arcos Dorados' adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and net income slid 16% and 51%, prompting today's drop in price.

An underwhelming Q1

Arcos Dorados announced a new 20-year Master Franchise Agreement (MFA) with McDonald's in January this year. While management believes the new MFA will be a net positive to the company's adjusted EBITDA in 2025, the declining profitability in Q1 isn't an auspicious start.

However, it is too early to judge the new 20-year MFA after only 90 days, and investors should give Arcos Dorados a few quarters to see how things stabilize with time.Image source: McDonald's.

And that goes for the company's burgeoning loyalty program as well.

Arcos Dorados' loyalty program has 18.8 million members as of Q1. This count has grown by 19% from January, and these identified accounts equal one-fourth of the company's sales, providing valuable insights and marketing potential.

Now six countries strong, the loyalty program launched in Argentina and Colombia in Q1, as well as Ecuador in April.

Should Arcos Dorados see success with this loyalty program, its growth story could be massive, considering its 2,400 stores pale in comparison to the 13,000 in the U.S.

Trading at just 11 times earnings, Arcos Dorados and its 3.2% dividend yield look enticing, but I'd rather see a couple more quarters' worth of data.

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Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Why Arcos Dorados Stock Is Sinking Today was originally published by The Motley Fool

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