Arcos Dorados reported third-quarter earnings of $0.15 per share, above the $0.13 consensus but short of the $0.18 Earnings Whisper number, a 16.7% miss against the expectation that mattered most. Revenue of $1.328 billion rose 11.3% year over year and edged past the $1.32 billion consensus by 0.6%, while earnings grew 25.0%. The central tension is that the quarter was solid in absolute terms but slower than investors had grown used to, and management responded by shifting attention from the margin rebound to capital return.
The headline comparisons need context. GAAP net income fell to $31.2 million from $150.4 million, and Adjusted EBITDA dropped 37.4% to $125.9 million, because last year's quarter included an $85.6 million net federal tax credit in Brazil. Excluding that credit, Adjusted EBITDA rose 9.0% and EPS improved from $0.12 to $0.15. The release puts net income margin at 2.3%, up 20 basis points. The call summary cites 2.8%, a discrepancy investors should note. More telling is that underlying Adjusted EBITDA margin slipped 20 basis points to 9.5%. Food and paper improved 90 basis points for a third straight quarter, and G&A leverage held, but higher payroll and occupancy costs absorbed those gains.
The deceleration is clear across the year. Dollar revenue growth eased to just over 11% from more than 14% in the second quarter and about 13% in the first. Underlying EBITDA growth slowed to roughly 9% from more than 20% in Q2 and about 30% in Q1, and absolute EBITDA of $125.9 million was slightly below Q2's $126.8 million. The 15.5% systemwide comp also flatters demand. It was driven by SLAD's 45.8% inflation-heavy gain, while Brazil comps rose just 3.5% and NOLAD declined 0.4%. Brazil's EBITDA margin, excluding the credit, contracted about 60 basis points after expanding 180 basis points in Q2. Management attributed the decline to non-recurring outside services, restaurant costs and labor, though Brazil's year-to-date margin is still up 50 basis points. The offset was NOLAD, where EBITDA grew nearly 10% with margin expansion after two quarters of compression. Digital remains a genuine strength. Digital sales grew about 22% to two-thirds of systemwide sales, and loyalty membership rose roughly 60% to nearly 38 million.
The forward story is about cash and capital allocation. LTM adjusted free cash flow reached $156.3 million versus $52.6 million a year earlier and about $110 million disclosed in Q1. The board authorized the company's first share repurchase, up to $25 million over six months, and management called the stock undervalued on the call. The program adds to a dividend already raised to $0.28. At current prices the buyback is modest relative to the company's market value, but it signals confidence.
The long-term targets come from the October Investor Day and include 550-600 openings and $1.3-1.5 billion of capex from 2027 to 2030. There is a wording discrepancy here. The release describes the revenue target as mid- to high-single-digit growth, while the call summary characterizes it as high-single-digit. The more conservative release language is the safer anchor. Either way, both readings imply slower growth than this year's double-digit pace. Separately, unit growth trails plan, with 70 openings year to date against a 105-115 target for 2026.
Bears have legitimate ammunition on costs. Management flagged Brazil labor reform that could pressure 2027 payroll and Brazil VAT changes that cannot yet be quantified. It also cited Mexican minimum-wage, workweek and tax changes, Brazilian beef inflation running above general inflation, election uncertainty, and cautious consumers, with Mexican industry traffic slightly down. On the positive side, management said the fourth quarter started solidly and that Brazilian QSR traffic is recovering. Potential upside could also come if Brazil's online-betting ban becomes permanent and household spending on eating out recovers.
The market has treated the stock harshly. Shares closed at $6.94 ahead of the report, down 17.9% from the $8.45 opening after the August release, which marked the inter-earnings high. They hit a 52-week low of $6.67 on October 1, the day of the Investor Day, and sit only 4% above it and 15.1% below the 200-day moving average. Investor sentiment slipped from slightly positive (0.036) to slightly negative (-0.011), a modest drift rather than a capitulation. The Earnings Whispers trend readings are mixed: sequential growth and momentum are positive, while price and AVWAP remain negative.
The bottom line is that Arcos Dorados delivered a respectable quarter that beat consensus but fell short of a higher whisper, and it confirmed that both revenue and underlying EBITDA growth are cooling. Strong cash generation and a first buyback give management a credible capital-return narrative. However, with Brazil margins wobbling and regulatory cost pressures building for 2027, the stock's slide toward its lows suggests investors need evidence that growth can stabilize.