Cara’s acquisition spree paying off
Shares jump 12% on annual, quarterly results
TORON TO • Cara Operations Ltd.’ s drive to scoop up and refurbish some of Canada’s biggest chains is giving the restaurant giant a much- needed boost in a moribund casual dining sector.
Shares of the country’s biggest restaurant company jumped more than 12 per cent in Toronto trading Monday after reporting improved traffic and higherthan- expected fourth- quarter and annual sales at its 1,272 restaurants across the country. Chief executive Bill Gregson also noted improvements in Western Canada and continued strength in Ontario since the start of the year when a minimum-wage increase took effect in the province.
“In 2016, we went into negative same- store sales, and we realized at that time after a few months that although we had transformed ( profitability) and our balance sheet, we needed to transform some of our processes as well to grow longterm sustainable same-store sales,” Gregson told analysts Monday on a conference call to discuss financial results.
Same-restaurant sales, an important measure of business viability that strips out the effects of year- over- year square- footage increases to the business, grew 2.5 per cent in the period ended Dec. 31 and 0.7 per cent for the year. That compared with a year-ago period when samerestaurant sales fell 2.8 per cent. Full- year sales by the same measure fell 1.7 per cent in 2016.
The owner of Swiss Chalet, Milestones and The Keg has been scaling up aggressively in an industry mired in a decade- l ong slump, outpaced by its fast- food counterparts and f acing competition from meal- kit providers and grocery stores offering hot meals.
Cara has been closing down or renovating older outlets and opening new ones while it pursues growth through a range of digital marketing strategies, including targeted social media efforts, restaurant ordering apps and partnerships with online delivery aggregators such as UberEats. The Swiss Chalet mobile app is now the top-rated iOS restaurant app in Canada, Gregson said, and the company is set to launch similar applications for brands including Montana’s, East Side Mario’s and Kelsey’s.
As such, Cara has been bucking the trend in its overall dining category: Traffic at full-service dining establishments in Canada fell four per cent last year, according to market research firm NPD, and sales dipped two per cent to $21 billion. At quickservice businesses like McDonald’s, overall sales rose three per cent to $ 27 billion and traffic rose by two per cent.
Overall system sales grew 13.5 per cent in the fourth quarter to $ 774.9 million, and the year ended with system sales of close to $ 2.8 billion due to the company’s acquisitions of St- Hubert in September 2016, Original Joe’s in November 2016 and Pickle Barrel in December 2017. Cara opened 56 new restaurants, renovated 92 others, and closed 44.
The Keg purchase will add $ 612 million in annual sales to the business and take the company sales to a predicted $ 3.4 billion in system sales this year — a target the company had envisioned in 2016 to hit within the 2020- to2022 time frame, a range of $2.9 billion to $3.7 billion.
Net earnings were $ 27.3 million for the quarter, or 45 cents per share, up from $ 19.7 million ( 32 cents) in the same quarter last year. Adjusted earnings were 59 cents, compared with 42 cents in 2016. Cara also raised its dividend by five per cent to 10.68 cents per share.
“We are well- positioned to pursue additional acquisitions and at the same time explore alternatives to return more capital to our shareholders,” Gregson said. The restaurant chain bought back close to 1.5 million of its shares in 2017.
“After a year of soft samerestaurant sales and earnings, the company appears to be in the early stages of a turnaround amidst operational improvements and a more favourable macroeconomic backdrop,” Peter Sklar, analyst at BMO Capital Markets, said in a research note, upgrading the shares to outperform from market perform.
He expects higher sales to continue over the next several quarters, particularly with The Keg’s positive contribution, whose same-restaurant sales have been growing in the three- to four- per- cent range. A stronger economy in Western Canada will also give a boost to business, he said: “There should be notable upside for Cara’s restaurants in the region.”
Marketing expert Tony Chapman, chief executive of Toronto- based Tony Chapman Reactions, said Cara has become adept at using its size to its advantage.
“Data, gift cards, loyalty, procurement — they are starting to realize there is real strength in numbers and using the analytics in their business to drive traffic and increase the guest cheque,” he said. “They have also been reinvesting in very intelligent use of smart marketing, in particular using digital to enhance the business.”