Sector financial performance:

This company, who is primarily a franchisor of Tim Hortons, Burger King, and Popeyes restaurants, has been grouped into restaurants-coffee, tea &snacks sector in foodservice industry.

It seems that the slowing down traffic is the major reason contributing to slowing down increase in comparable sales for those coffee and baked food restaurants in the past several years. Data indicates that the average increase in comparable sales all across this sector went down from around 4.7% of 2015 to around 0.8% of 2018.  Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015.  However, companies in this sector present strong ability to expand its business by opening new stores (both company-owned or franchised) and it seems, in terms of margin of new store, the demand in the newly developed market for their new stores is strong. In addition, still strong demand allowed companies in this sector to adjust menu/sale mix to generate more spending per customer to offset the decreasing traffic. This is probably why we are seeing that for most companies they have been able to present positive growth in their comparable sales while decrease in traffic.

For many companies in this industry, franchising their company-operated restaurants obviously has been the focus of their business strategies in dealing with unfavourable climate of this industry. It seems it is easy, due to high margins and strong market demand, to find franchisees for their restaurant expansion.

Our data indicate that, while slowing down comparable sales, there are general improvements in franchising companies’ gross margins (went up to 63% in 2017)  in the past several years benefiting from shifting of revenue to re-franchising and rising menu price. With an average of 22% SG&A percentage of sales, the average franchising companies’ operating reaches 44% in 2018. For companies with owned stores, the margin decreased as traffic slowed down (increasing check size was offset by promotions as estimated). The typical gross margin for non-franchising company is about 23% with 7% SG&A percentage of sales and 16% operating margin.

The average cash flow per share of companies in this sector increased slightly in 2017 and 2018 probably as a reflection of combination of decreasing margins and store &re-franchising expansion.

According to our analysis, the current companies’ enterprise price/EBI ratio is average 31with an interest/EBITDA ratio of 15%.

Generally, impacts of unfavourable climate of restaurants industry to traffic since 2015 seem to be less significant to this sector than to other restaurants.

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Company performance:

It seems that the growth in demand for its service/products from Tim Hortons has been declining in the past several years as indicted by the declining comparable sales.

For the first six months of the fiscal 2018 compared with same period of 2017(20180630) 

Tim Hortons                 Burger King            Popeyes

Comparable sale:                    -0.1%(0% for 2Q)        2.8%(1.8%)             3.1%(2.9% for 2q)

 The fiscal 2017 compared with the 2016

Tim Hortons                 Burger King            Popeyes

Comparable sale:                    -0.1%                           3.1%                        -1.5%

Fiscal 2016 compared with 2015

                                                Tim Hortons                 Burger King            Popeyes

Comparable sale:                    2.5%                           2.3%                        1.7%

Fiscal 2015 compared with 2014 

                                                Tim Hortons                 Burger King            Popeyes

Comparable sale:                    5.6%                           5.4%                         5.9%

Its gross margin (including costs of sales and franchises costs) went up from about 40% to about 47% since 2015 primarily due to re-franchising of Tim Hortons restaurants offset by deleveraging of Popeyes consolidation. As its SG&A as percentage of sales went up by about 200 basis points primarily due to deleveraging of sales increase, its operating margin has gone up to about 38% in 2017 from 29% of 2015. Operating margin went down to about 37.5% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 34. We think that its stock is being relatively fairly valued considering that the slowing down traffic in its TH segment and strong growth in burger segment.

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