Arcos Dorados (ARCO): A High-Conviction Growth Story in Latin America's Fast Food Dominance

Arcos Dorados Holdings Inc. (ARCO), the leading McDonald's franchisee in Latin America, has emerged as a compelling investment opportunity, driven by its resilient performance, strategic digital transformation, and sustainable earnings growth. With a footprint spanning 22 countries and over 2,000 restaurants, Arcos Dorados is leveraging digital innovation and operational efficiency to solidify its dominance in one of the world's fastest-growing fast-food markets.

EBITDA Resilience Amid Macroeconomic Headwinds

Arcos Dorados' third-quarter 2025 financial results underscore its ability to navigate inflationary pressures while maintaining strong cash flow generation. , . , from a federal tax credit in Brazil related to the 2016–2023 period. Excluding this one-time boost, , primarily due to elevated food and paper costs, .

Despite these challenges, Arcos Dorados' financial discipline remains a cornerstone of its strategy. The company's , 2025, ensuring robust liquidity and flexibility to fund growth initiatives. Looking ahead, the tax credit is expected to provide a recurring cash flow tailwind starting in 2026, offsetting federal tax obligations and enhancing long-term visibility.

Digital Transformation: Fueling Growth and Efficiency

Arcos Dorados' digital transformation has been a key driver of its competitive edge. In Q3 2025, digital channel sales accounted for 61% of systemwide sales, . This shift reflects the company's aggressive modernization efforts, a modernized guest experience by the end of the quarter.

Central to this strategy is the expansion of the Loyalty Program, , which enhances customer retention and data-driven marketing. Additionally, the proliferation of self-order kiosks has streamlined operations, reducing labor costs and improving order accuracy. While specific cost savings from automation remain undisclosed, the integration of these technologies aligns with global trends in AI and cloud adoption, which are projected to boost operational efficiency across the fast-food sector.

Sustainable Earnings Growth Through Strategic Expansion

Arcos Dorados' growth story is further bolstered by its disciplined expansion strategy. , . This expansion, coupled with the modernization of existing units, positions Arcos Dorados to capitalize on Latin America's growing middle class and rising demand for quick-service dining.

The company's focus on digital innovation also mitigates long-term risks. By investing in cloud infrastructure and AI-driven analytics, Arcos Dorados is optimizing supply chain management, inventory control, and customer personalization. These initiatives not only enhance margins but also future-proof the business against volatility in commodity prices and labor costs.

A High-Conviction Investment Thesis

Arcos Dorados' combination of EBITDA resilience, digital-first strategy, and disciplined capital allocation makes it a standout in the fast-food sector. While near-term challenges such as inflation persist, the company's proactive approach to automation, digital engagement, and tax optimization provides a clear path to sustainable earnings growth. With a strong balance sheet, a modernized restaurant base, and a loyal customer ecosystem, Arcos Dorados is well-positioned to deliver outsized returns for investors seeking exposure to Latin America's dynamic market.