The Financial Pressure Was Hidden…

MTY Food Group is one of the largest franchisors in the quick restaurant and casual dining food industry in North America. The company engages in the franchising and operation of corporate-owned locations as well as sales of various retail products.

MTY reaches out to millions of people every year with over 7,000 locations worldwide. It operates over 80 brands in nearly 39 countries. The company’s wide portfolio of brands includes Papa Murphy’s, Cold Stone, Thai express, Cafe Depot, Koryo, Ginger, Tandori, Wasabi, Valentine, etc. The company generated 49% of its total sales from the U.S. and International, and the remaining from Canada.

Franchise operations constituted 54% of total 2019 revenues, followed by revenues from corporate stores (~19%), retail, food processing, and distribution (~13%), and promotional funds (~15%). MTY Food operates a distribution center and food processing plant in Quebec.

Investment Data

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Revenue Growth & Market Exposure

With over 35 years of experience under its belt, MTY Food Group has diversified its operations by type of location, geography, and product lines. The company franchises and operates quick service and casual dining restaurants under popular banners. At the end of the year, nearly 98% of its restaurants were franchised or under operator agreements. These franchise locations generate revenue in the form of royalty fees, promotional funds revenue, franchise fees, rentals, program fees, etc. which significantly enhances the visibility of cash flow. MTY also operates several corporate-owned locations.

MTY Food Group has been transforming over the years. It is growing its focus on more street-front locations. Shopping malls and office tower food courts that earlier accounted for 49% of MTY’s network sales today constitute just ~17% while street-front locations and other non-traditional formats account for ~70% and ~10%, respectively. MTY’s retail, food processing, and distribution business have also grown to a $100 million business from just $10 million, five years ago. Its food processing business caters to restaurants, other food processing plants, and retail stores. The company enters into strategic alliances and makes acquisitions that have helped it grow year-on-year. It completed its largest acquisition of Papa Murphy’s in the last year.

MTY Food Group’s revenues grew at more than 40% CAGR in the last three years. But the company suffered to a great extent during the pandemic-induced lockdown as it had to close its restaurants across Canada. Quarterly revenues decreased by 16% YoY and recurring revenue streams also declined. However, pick up and home delivery services gained significant momentum during the period. MTY’s launched new products and expanded into new provinces which generated 20% higher revenues during the quarter. The company ended the quarter with 7,123 locations, opening 45 locations and permanently closing 157 locations.

Dividends

MTY Food temporarily suspended its dividend payments and share buybacks and used the cash generated to pay down debt. The company returned $16.7 million in dividends and $5.2 million in share repurchases to shareholders in 2019. It also increased dividends by ~12% in the last year and sports a dividend growth rate of 14% CAGR in the last five years. MTY Food has also undertaken various cost-cutting measures.

MTY Food is focusing on growth through acquisitions and has completed 11 transactions in the last two years including Imvescor Restaurants and Papa Murphy’s being amongst the largest in MTY’s history. The company has, however, reduced its pace of acquisitions in the current times and will focus on the integration of these businesses.

The current pandemic situation has been harsh on MTY Food as consumers prefer to stay indoors and avoid crowded areas such as malls and closed dining places. This has led to reduced cash flows for the company. Moreover, with large acquisitions in the past few years, MTY Food’s balance sheet is not in the best of its shape with a huge debt burden. The management is expecting weakness for the next two to three quarters. The operations might continue to remain affected due to changed consumer behavior even after the pandemic is over.

Competition

MTY Food faces competition in both Canadian and US markets. The competition has intensified over the years with new restaurants, retail stores, ghost kitchens gaining traction and growth of aggregators, and meal kit solutions. Food offerings under different innovative formats have also increased considerably in the last few years. Few of its competitors in Canada are Restaurant Brands International, which is a leading quick-service restaurant company in the world. Its Tim Hortons brand is one of the most loved restaurant brands in Canada.

Bottom Line

Consumers still prefer to eat at homes as the coronavirus situation prevails. Most of MTY Food’s restaurants are located in mall food courts and other densely populated locations which might not yet be conducive for customers to visit given the current conditions. If things improve, restaurants will reopen and consequently investor confidence will be restored in MTY Food. The stock has huge upside potential if the COVID-19 pandemic improves but if the situation worsens, it might get difficult for the company. MTY Food will continue to remain plagued with near-term challenges until conditions normalize.