The name MTY Food Group MTY-T may lack familiarity among some investors but many of its restaurants are likely household names.
The company has expanded from its roots as a Canadian food-court operator to a global franchiser with a diversified portfolio of fast-food and casual-dining restaurants. MTY has more than 7,100 locations with approximately 90 brands including Mr. Sub, Thai Express, Manchu Wok, Baton Rouge, South Street Burger, Toujours Mikes and Papa Murphy’s.
A key milestone for the company occurred in 2013 when MTY entered the U.S. market. Now, more than 4,100 of its locations are in the United States.
The stock has delivered strong gains to long-term investors with MTY’s share price closing at a record high in February driven by its robust earnings growth. Before the pandemic, for the fiscal year ending Nov. 30, 2019, normalized adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) totalled $152-million. For the fiscal year ending Nov. 30, 2022, normalized EBITDA stood at $187-million.
For the first half of fiscal 2023, the company reported normalized EBITDA of $139-million and the consensus estimate for the fiscal year, according to Refinitiv, is $271-million.
The Globe and Mail recently spoke with MTY chief executive officer Eric Lefebvre on the company’s growth opportunities and challenges.
Among the headwinds the company has faced, supply chain challenges are perhaps the most impactful to franchisees. They need goods to generate sales. Is the supply chain still facing challenges?
I would say, in general, it’s stabilized both in terms of availability and in terms of pricing.
We’re experiencing some issues with distribution, for example, where some goods might be available but distributors are out of work force for some reason. They might be missing a driver, they might be missing someone in a warehouse. But other than that, it’s not perfect, but it’s getting much better.
What are your thoughts on food inflation?
Food inflation is getting better. But prices haven’t come down and they’re probably not going to go down – but at least they’ve stopped going up exponentially.
So, have we seen a peak in menu prices?
For a while the consumer was ready to accept price increases but the consumer is getting a little bit more sensitive, so we need to be extremely careful where we take prices. We’ve probably reached maturity on price increases at least in the short and medium term.
Acquisition growth has always been one of management’s key objectives. Recent acquisitions have increased your leverage ratio. Is it fair to assume that large acquisition announcements may be on hold until 2024?
Probably. I mean, I never close the door on some situations that might come up because we were always very opportunistic when it comes to acquisitions.
But we do need to decrease the leverage and build a treasure chest a little bit before we can think of larger acquisitions. So, for now, especially with the cost of money that has gone up quite significantly in the past year and a half, we need to pay down some debt, make sure that we’re financially sound and ready to make another acquisition without jeopardizing the base business that we have.
What does your acquisition pipeline look like? Are you seeing more opportunities than normal given concerns of a looming recession – perhaps there are more people wanting to sell?
The market is active. There’s a little bit of everything on the market, all different types of food chains, small, big, corporate or franchise. Is it more active than normal? I wouldn’t say that. It’s probably a normal market in terms of the volume.
In terms of the valuations and the number of buyers, that’s probably a little bit lower than normal. I think people, especially private equity firms in the U.S. that are super active in the market, they are a little bit more careful at the moment, a little bit more conservative with the cost of money and with some people talking about a recession.
What is the competitive environment like? Is it rational or are you experiencing rising competitive pressures?
In general, it’s reasonable competition where you compete on product and experience. It’s based on good business fundamentals, which is a lot better than just price.
Are you exploring opportunities in your distribution and retail segment?
We have two small distribution centres. We don’t necessarily want to expand them and we’re happy with what they’re doing now and we don’t necessarily have growth plans for it.
In terms of retail, this is a very big opportunity. We have a number of products at Costco COST-Q, Walmart WMT-N and Sobeys, Loblaws and others. We are looking to deepen the portfolio a little bit, try to go coast to coast with more products.
We’re scratching the surface. We started retail in 2018 so it’s still fairly recent. Where we are now is impressive but we have much bigger ambitions. I think there’s very big potential.
I believe on average, two per cent of your franchisees at any given time have financial challenges. Given the spike in interest rates, have you seen an uptick in the number of franchisees that are having problems? If so, where is that number now?
Two per cent was the historical average that we had. Now we’re probably lower than two per cent in terms of financial difficulties.
Are applications from potential new franchisees dwindling because of concerns of a recession and higher borrowing costs?
People still want to invest in restaurants. Obviously with the cost of money being a little higher, we need to adjust the business model and make sure it still makes sense and franchisees have that profitability that they’re looking for. But we haven’t seen a decline. The pipeline is still very healthy. For a lot of our brands, we have a long list of franchisees who would like to have stores and we just need to find the proper real estate for them to be successful.
Is it hard to find the real estate?
Finding the right real estate is getting a little bit more challenging because of the price of real estate. And the cost of money is having an impact on our landlords as well, especially the newer landlords that had acquired properties recently so they need to charge higher rent to make ends meet.
Why not eliminate underperforming locations in class B and class C shopping malls and certain office towers?
It’s all a matter of making the economics work. If the rent is really affordable, you don’t need that many sales to make a good profit.
B and C malls are not at the level they were in 2019. I don’t know if they will ever be but as long as the economics of the store is adjusted accordingly, then it doesn’t mean it’s going to be a bad store. It just means it’s going be a store that’s going to have slightly lower volume but the profitability can still be there.
When I see approximately 16 per cent of your portfolio at these locations, I wonder why do you need to be there?
Well, we also have franchise agreements and leases that are typically 10-year agreements. So, if we have a franchisee that’s on the lease and that has some term left and even in a more difficult location, we need to try our best to help them turn a profit and we need to try to assist them.
Franchisees, they’re investors, they invest in the store and they’re expecting a return against that investment. And our goal as a franchiser is to help them, the best we can, try to achieve that return and that profitability objective, regardless of where they are and regardless of how demographics might change in an area and how different locations might be overperforming or underperforming.
Can you briefly identify a couple of strategic initiatives aimed at driving organic growth?
There’s a lot on the go and the different brands will have maybe a list of 10 to 15 major initiatives that they want to tackle in the next two or three years.
Operational excellence has been a key component for us, whether it’s store design, cleanliness, the food, customer service, but also everything digital. And the digital experience is not only buying our food online or through the aggregators, it’s also our websites. It’s also how we interact with customers through social media or via e-mail or text. The digital experience is very big.
Consumers spend a lot more time now on our website than they spend in our stores. So, all the efforts to have good store designs, we need to replicate that and have a good website experience. For example, being there when customers are looking for us. So, if they do a restaurant near me search, I need to make sure our restaurants come up and they have good ratings on Yelp or on Google.
So, that’s a pretty big project for everyone and it’s not a project that has a beginning and an end. It’s just a project that keeps evolving. It is a very big priority for us.
You have said that along with employment, weather has one of the highest correlations with same-store sales. Have you seen a negative impact to sales given the hot weather and active wildfire season?
Well, some brands benefit and some brands are being punished by it. So if you look at a brand like Cold Stone Creamery, for example, we sell ice cream. So, heat is good for us, people will consume more ice cream.
That’s the beauty of our diversified portfolio. We can pretty much go into any situation and at least one brand will do better and compensate for the one brand that might be suffering a little bit more.