What Happened?
Shares of fast-food chain Arcos Dorados (NYSE:ARCO) jumped 7.4% in the morning session after the company reported mixed second-quarter results that saw profits beat expectations but revenue fall short. The master franchisee for McDonald's in Latin America and the Caribbean posted earnings of $0.11 per share, easily surpassing analyst estimates of $0.08. However, total revenue of $1.14 billion missed Wall Street's expectations, growing just 2.8% year-over-year. While same-store sales, which track performance at restaurants open for at least a year, grew a solid 12.1%, this represented a significant slowdown from previous periods. The company's operating margin also declined to 5.5% from 6.7% in the same quarter last year. Investors appeared to weigh the strong profit beat against the revenue miss and decelerating growth, leading to a muted reaction for the stock.
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What Is The Market Telling Us
Arcos Dorados’s shares are not very volatile and have only had 7 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.
The previous big move we wrote about was about 23 hours ago when the stock gained 4.2% as investors cheered a government report showing that inflation remained steady in July. The steady inflation figures have fueled expectations that the Federal Reserve may soon consider an interest rate cut to stimulate the economy, a move that would likely benefit consumer discretionary spending, including dining out.
The July Consumer Price Index (CPI) rose 2.7% from a year earlier, meeting the previous month's pace and coming in slightly below economists' expectations of a 2.8% increase. On a monthly basis, the CPI rose 0.2%, a slowdown from the 0.3% increase seen in June. While the cost of dining out continued to climb, rising 0.3% in July, this was offset by a 0.1% dip in grocery prices, contributing to the overall stable inflation picture. The market's positive reaction sent major stock indexes, including the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, soaring. This optimism spilled over into the restaurant sector, which has been grappling with a challenging macroeconomic environment marked by high costs and concerns over consumer traffic.
Arcos Dorados is up 0.7% since the beginning of the year, but at $7.56 per share, it is still trading 25.2% below its 52-week high of $10.10 from August 2024. Investors who bought $1,000 worth of Arcos Dorados’s shares 5 years ago would now be looking at an investment worth $1,583.
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