MTY Food Group (TSE:MTY)

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MTY Food Group (TSE:MTY) is a top 5 Canada-based fast food restaurant franchisor and operator with about 17% of the Canadian market in terms of locations (2251 out of over 12,500 food court eateries). Headquartered in Montreal (since its founding) it has acquired the rights to 18 brand names while launching 10 others, the largest of which are Country Style, Yogen Fruz Canada and Mr. Sub (Mr. Sub $23 million takeover to be completed in October 2011, brings locations up to 2070, after Koryo acquisition complete beginning of 2012 total units up to 2251).^[1][2] The number of locations it oversees doubled in the 3 years leading up to June 2010 when it joined the TSX as a debt free company. About 3/4 of its 1741 locations are in Ontario and Quebec (which comprise about 2/3rds of the Canadian market) and 3% are outside Canada (none in the USA though). Because of the diversity of its brands it is able to operate more than a couple locations within the same area, usually food courts but also convenience stores. For example at one of Canada's largest malls the Eaton Centre in Montreal MTY oversees 12 of 29 eateries. Its investments have been frugal, for example its largest acquisition Country Style donuts,

For fiscal 2010 MTY Food Group gave shareholders 23c per share in profit a 15% increases versus 2009 (20c) (the company had about half a million more shares in 2010); profits rose 19% during the 4th quarter alone. The bottom line was driven by a 26% increase in revenue from franchisee run locations. The company aims to add 85 more stores (net) in 2011. MTY reported revenue (from franchise fees/royalties) of Cdn$19.3 million in 2010 Cdn$3.8 million more than 2009.^[5] Total system wide revenue (sales at all franchised and owned locations) was $461.9 million in 2010 a 17.5% increase when compared to 2009 ($393.5 million).^[6]

Just how big is Canada's fast food industry? $19 billion per year.^[7]

Company Overview

MTY owns and operates 1,893 locations as of August 2011 up from 1741 (1710 franchised/ 31 owned including 9 Groupe Valentine locations) in the first quarter of 2011 (not including Mr. Sub's 335 locations to be acquired in October 2011).^[8][9][1] The change in locations for the third quarter reflects the closure of the acquisition of Jugo Juice (136 stores) and a net gain of about 30 opened locations (90 opened and 60 closed).^[10] In addition to Canada, it does business in Dubai, Jordan, and Morocco.^[11] 95 new locations were added to the company's royalty stream in the third quarter of 2010 when it took over Groupe Valentine, a casual dining restaurant franchise operating only in Quebec.

Though direct income (royalties) from franchised locations represents only 5% of sales (comparable to other franchises like Tim Hortons), indirectly MTY raises that to over 10% by requiring the frachisee use certain products supplied only through the parent company.

In 2010 MTY opened 191 new locations 67.5% more than in 2009 (114). $1.4 million in additional royalties were generated by the new locations (doesn't include Country Style or Valentine). In 2010 exactly 13.0% (Cdn$8.7 million down 7% from $9.4 million the year before) in revenue was from non franchise locations (parent operated). Of the $66.9 million in revenue $7.5 million is attributable to the Country Style brand, 2.0 million to Quebec's Valentine chain of restaurants. $4.0 million was from stores considered franchise turnkeys. The lower revenue from corporate owned stores is due to a reduction in the number of locations (although the acquisition of Valentine added nine more).^[6]

Though debt free at the time it joined Toronto's main stock index it has since added long term debt beginning the fourth quarter of 2010 ($930,000 which represented 1/3rd of total debt); That number has since grown to $3.93 million (78.3% of total debt).

Financial results

The food company used its increasing cash flow to not only acquire more brands but also launch new ones. Its debt has gradually decreased ever since it began reducing its dependence on revenue from corporately owned stores (started out owning almost as many stores as it franchised but eventually funneled all extra money into acquiring more brands and promoting those already associated with the mty banner while gradually divesting owned locations). The last couple years have each recorded record revenue attributable to less debt and more revenue coming from franchise fees (more locations and higher fees which are at about 5% of sales). As a result growth averaged 30% between 2004 and 2009.^[11] In 2009 due to acquisitions (Country Style) and strong organic growth (67 more locations than those closed) net income rose 24%, revenue rose 51% (67% for franchise locations in the year, 106% higher in the 4th quarter than the last) and total system wide sales increased 55 %.^[12] Although same stores sales are 1.14% lower in the first half of 2010 total system wide sales are up because of additional locations.

Total assets surpassed $100 million in value by the end of the first quarter of 2011, that represents a 94.3% increase since the end of 2007.

2011 Fourth Quarter

Total locations upped to 2251 after the 20 unit strong (19/20 locations franchised) Koryo Korean BBQ acquisition was completed on November 11, 2011 - Koryo annual sales $8M, acquisition cost MTY Tiki Ming Enterprises $1.8M cash (deal passed no debt on to MTY).^[2] That means that since August 18, 2011 MTY Food Group has added 181 net locations under its banners besides the 335 unit Mr. Sub chain (2070-->2251 in November). Number of franchises now at 28 including two Korean (Kim Chi and Koryo).

2011 Third Quarter (ended August 2011)

As compared to the third quarter of 2010, revenue was up 21% (net increase of $3.4M) owing to new revenue streams ($3.0M added from distribution ($1.4M) & food processing ($1.6M)) and a 29% rise in revenue coming from corporately run locations ($2.3M) due to the 9 corporate stores added because of the acquisition of Groupe Valintine. 25 of the 60 stores that closed were Country Style locations. Revenue from food processing and distribution began the first quarter of 2011 fiscal year (December 2010).

Even though the company received $0.3M more in royalties as well as $0.8M more from Valentine stores, there was a $1.2M decrease in sales of materials/rent (versus the 3rd qtr of 2010) that means revenue from franchised stores was steady at $14M. More revenue from higher margin items (royalties and others) boosted ebitda by 6% (excluding restructuring costs). Ebitda from corporately run stores was down to $0.1M (75% decline); The reason for the decline is two fold 1. Stores with lower than average margins were acquired 2. The company sold profitable locations three months ago.^[8]

Total company revenue was $19.3M (up from $15.9M the year before). Total system wide sales were $135.2M (up 13% from $120M). System wide revenue in the first nine months was $377.8M (up 12% from $337M). Half of the system wide sales increase is attributable to Groupe Valentines while the other half came almost entirely from new locations opened (organic growth (same store sales growth) actually fell 0.05% in the first nine months, a lot of that is due to intense competition for Country Style. In the third quarter alone though, same store sales grew 0.6%.^[8]

2011 First Quarter (ended February 28, 2011)

System-wide sales were up 12.1% to $117.7 million on account of the additional revenue from Valentine Groupe (acquired within the last 12 months). Revenue increased 22% while earnings rose 16.7%. Net income per share was 12.5% higher (16c to 18c) but lower than than over the entire 2010 fiscal period. MTY Food Group established a new source of cash flow: Food processing and distributing which generated $2.2 million in new revenue (combined) during the quarter. $700,000 was made from the sale of a corporate store (net realized); 17% rise in earnings before taxes (ebitda) due to new royalties coming from new stores (organic growth was flat). EBITDA from corporately owned stores was $0 due to newly acquired locations. Groupe Valentine contributed $800,000 in additional royalty revenue for MTY (company total up 4.07% from $12.3 million to $12.8 million). Groupe Valentine was also responsible for the 25% increase in revenue from corporately owned locations ($2.5 million from $2.0 million.^[13]

Fiscal 2010 (ended November 2010)

For fiscal 2010 MTY Food Group gave shareholders 23c per share in profit a 15% increases versus 2009 (20c) (the company had about half a million more shares in 2010); profits rose 19% during the 4th quarter alone. The bottom line was driven by a 26% increase in revenue from franchisee run locations. The company aims to add 85 more stores (net) in 2011. MTY reported net income (from franchise fees/royalties) of Cdn$19.3 million in the fourth quarter Cdn$3.8 million more than the last quarter of 2009.^[5] 2010 revenue increased 29.8% to Cdn$66.9 million (approx Cdn$66,886,441 million) on system-wide sales of $461.9 million (up from $393.1 million in 2009). Generic growth pushed net income higher by 26% (to 15.4 million from 12.3 million). Earnings per diluted share rose to 0.81 from 0.64.^[6] In the fourth quarter revenue from corporate owned locations was $2.5 million 16% higher than in the fourth quarter of 2009 ($2.2 million) which is notable since year to date revenue was down 12%.

EBITDA as a percentage of revenue is significantly higher for franchisee run stores compared to corporate owned (43.3% compared to 10.7% in November 2009) while that for corporate doubled year on year (10.7% from 5.8% in 2009, franchisee run down to 43.3% from 49.8% in 2009). Overall it fell to 39.1% from 41.9% in 2009 due to increases in labour costs ($2.0 million directly caused by the additions of Country Style and Valentine); other operating expenses amounted to $33.4 million in 2010 56% higher than in 2009 ($21.3 million) attributable to the higher number of stores.^[6] Franchised locations cost of sales rose by $7.8 million in 2010.

2009 First Quarter

Ended the quarter with only $525,297 in cash (down from $3,184,555 at the beginning of 2008). Net income was $2,199,526 (up from $2,053,723 in 2008). Ammortization was up 44.84% to $857,470. Shareholders equity was steady at $61.584 million. There was $200,000 in long term debt (steady). Current assets were up 11.61% to $22,719,890 due to higher temporary investments (up $1.6M) and income taxes receivable (up by 3.3X to $609,865). Income per share: 12 cents versus 11 cents in 2008 (fully diluted and basic are identical). Ebit up 5.9% to $3,194,937 even though expenses were up 35.87% to $6,663,580. Operating expenses increases came from intangible assets ammortization ($690,506 versus $379,005) and other operating expenses ($3,874,119 versus $2,106,551). 80.12% of revenue ($7,833,306) came from franchise locations down sharply from 67.22% in 2008 ($5,092,585). Total revenue up 29.1% even though revenue from corporate run stores was down 21.73% (to $1,943,927). Total number of shares steady at 19,120,567 on February 28, 2009.^[14]

Leadership

Company management is experienced and hasn't changed much since 2000. It remains headed by Stanley Ma who represents it as ceo and chairman. Stanley Ma started the business when he turned a 400,000 dollar investment in a Montreal restaurant into the cash flow and experience needed to begin the Tiki Ming concept, a brand that today has 57 locations. In 2009 the Conseil québécois de la franchise recognized MTY as franchisor of the year and awarded it another prize for marketing and communications.^[19]

Acquisitions

The company has made many acquisitions, about 7 more than the brands it launched on its own (10 versus 17). In 2011 for the first time MTY Foods cancelled an agreement it previously made to acquire a brand (Sushi Taxi); Sushi-Taxi is a chain of 12 sushi bars in Quebec (the deal announced in April cancelled in May was valued at Cdn$5.8 million). Jugo Juice was acquired around the same time for $15.5 million; the transaction gives MTY 133 more locations and adds approximately $36.4 million to annual sales (deal includes Jugo Juice's 1,250 square foot condo headquarters in Calgary). Both deals were made through subsidiary Tiki Ming Enterprises Inc.^[20][21]

Mr. Sub

MTY Food Group on August 18, 2011 said that it had reached a deal with the owners of Canadian fast food franchisor Mr. Submarine to purchase the brand rights used by 268 stores in Ontario and another 67 in six other provinces for a total of 335 locations in Canada.^[1] Some of the locations are corporately owned/run but most are franchised. The takeover cost MTY a cash amount of $23 million but will be a significant addition considering system-wide sales at Mr. Sub in 2010 totalled over $100 million or a little more than 1/5th of MTY Food Group's (C$ 461.9 million). The deal expands MTY's presence in the food industry two-fold 1) Boosts store-front business (75% of Mr. Sub locations are outside/on the street) whereas MTY runs mostly a food court business and 2) Expands market access by adding submarine sandwiches to a long list of specialty items which includes ethnic food/Mexican/Oriential, french fries/hamburgers, yogurt, donuts, coffee, pizza, pasta, sushi, tacos and others.

Competition

After recent acquisitions the only Canadian franchisors who can say they are larger than MTY Food Group are Tim Hortons, Cara Operations and Boston Pizza (all near or over $1 billion in system wide revenue (2010)). After the takeover of the Valentine brand in Quebec MTY's annual system wide revenue (what it's on track for) moved towards $450 to $500 million putting some distance between it and competitors Imvescor Restaurants ($324.8 million in 2009 about 18% less than MTY), Pizza Pizza ($250 to $300 million), Chairman's Brand Corporation.

References

1. ↑ ^{1.0 1.1 1.2} MTY Food swallows Mr. Submarine (August 18, 2011).
2. ↑ ^{2.0 2.1} MTY completes acquisition of Koryo Korean BBQ Franchise Corporation (November 11, 2011).
3. ↑ Montreal's MTY buys Country Style doughnut chain.
4. ↑ MTY Food Group headed to the TSX (2010-05-04).
5. ↑ ^{5.0 5.1 5.2} MTY Food Group reports 19 per cent boost in Q4 earnings, revenue rises (2011-02-16).
6. ↑ ^{6.0 6.1 6.2 6.3 6.4} MTY 2011 annual report sedar (2011-02-15).
7. ↑ McDonald's Canada to spend $1B to renovate stores (September 7, 2011).
8. ↑ ^{8.0 8.1 8.2 8.3} MTY Food Group 2011 Third Quarter Report (October 4, 2011).
9. ↑ MTY Food group, owner of Country Style, Cultures and Thai Express revenue up (2010-07-07).
10. ↑ MTY Food Group's Q3 Revenue Up 21% (October 4, 2011).
11. ↑ ^{11.0 11.1} MTY Food Group headed to the TSX (2010-05-04).
12. ↑ ^{12.0 12.1} 2009 end of year results (2010-02-22).
13. ↑ ^{13.0 13.1 13.2} MTY Food Group Reports A Strong First Quarter of 2011 (2011-04-07).
14. ↑ MTY Food Group Inc. 2009 Consolidated Financial Report (2009-02-28).
15. ↑ 2008 year end results (2009-02-2009).
16. ↑ second quarter 2010 results.
17. ↑ ^{17.0 17.1 17.2} MTY Food Group Inc. - Third Quarter 2010 Results (2010-10-05).
18. ↑ MTY Food Group Inc : First Quarter 2010 Results (April 6, 2010).
19. ↑ MTY Group: Franchisor of the Year (2009-12-30).
20. ↑ MTY Food acquires Jugo Juice for $15.5 million, Sushi-Taxi for $5.8 million (2011-04-27).
21. ↑ MTY Food Group Inc.'s MTY Tiki Ming Enterprises Inc. Announces Cancellation Of Agreement To Acquire Groupe Sushi-taxi (2011-05-25).