Monday, May 29, 2017

Brief Review A&W Income Fund Quarter Results

     There is a lot of variety in Canada when it comes to fast food chains.  These restaurants included Burger King, McDonald's, A&W and Wendy's.

      The Fund is a limited purpose trust established to invest in A&W Trade Marks Inc. (Trade Marks), which indirectly owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The trade-marks comprise some of the best-known brand names in the Canadian foodservice industry. Trade Marks licences these trade-marks to A&W Food Services of Canada Inc. in exchange for a royalty of 3 per cent of the sales of 861 A&W restaurants in Canada. Source: A&W Income Fund website  )                           
       This structure makes the A&W Revenue Royalties Income Fund a "top-line" fund because income is based solely on the sales of A&W restaurants minus the Fund's and Trade Marks' minimal operating expenses, interest on Trade Marks' term debt and income taxes. The Fund is not subject to the variability of earnings or expenses associated with an operating business. (Source: A&W Income Fund website )
A&W has changed their menu in the last 3-5 years to such as can be found in this list of facts.  I will highlight some of those here:
  • In 2013. A&W started to use beef that is raise without the use of hormones or steroids.
  • In Sept 2014, A&W started using chicken that was raised without the use of antibiotics and fed  a grain-based, vegetarian diet without the use of animal by products.
  • In Feb 2016, A&W started to use pork raised without the use of antibiotics.

    With these changes over the last several years, this has increased the prices on the menu up besides increases due to inflation.  A&W also has a lot of restaurants in Alberta and Saskatchewan, which have seen there economies struggle over the last 3 years with falling oil prices.

      The number of restaurants in the royalty pool increased from 838 to 861, which is updated every January.  This represents a increase of 2.67% in the restaurants in the royalty pool.

      A&W saw a decrease of 0.3% in Same Store Sales growth from the period between January 1 2017 to March 26 2017.  For the same period in 2016, there was an increase of 8.6% in same stores sales growth.

       The royalty income increased from $7314000 for Q1 2016 to $7355000 for Q1 2017, which represents an increase of  just 0.56% .  This small increase in royalty income and increase in expenses for administration of the fund and an increased distribution as pushed the payout ratio higher. Since this is an income fund, A&W must pay out 90% or more of their profits as distributions to unitholders.

      The income fund has fallen over the last month by 10.94% and 3.03% on May 29. The fund pays monthly distributions. 

Disclosure:  I own 38 units of AW.UN in my TFSA and 115 units of AW.UN in my trading account.

EDIT (May 30 2018) - This stock has had a rough start to the trading day once again. We have also had lots of things happen recently.  The Green party is British Columbia holds the balance in power.  They now have a agreement in place with the NDP, in which the current government will lose power. If this gets approved then I believe the NDP will form the government.  The NDP has said they will increase corporate taxes.  

   The premier of Ontario has announced that the minimum wage in Ontario will change dramatically. It is already set to go increase from $11.40 to $11.60 this October. In her announcement, Premier Wynne stated the minimum wage will increase to $14 on Jan 1, 2018 and to $15 the following year.  I personally think this will have dramatic effects. People of all income levels are not happy with the prices in stores now. Businesses have to raise their prices in order to increase wages.  

    The minimum wage in Alberta is supposed to be raised by $1.40 on October 1, 2017 and then raised to another $1.40 on October 1, 2018.  A&W has lots of restaurants in Alberta.  With the state of the economy in Alberta, these stores are going to struggle financially.

    I wish I would of set a stop loss in the trading account.  This position has a purchase price of $36.65.

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

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