A&W burger chain to reward investors, plans big expansion in Ontario

By Brenda Bouw, The Canadian Press

VANCOUVER, B.C. - Investors with units of A&W Revenue Royalties Income Fund (TSX: AW-UN.TO) will be served a special distribution for the second time this year, a reward the company said due to strong sales and the launch of its Cheddar Bacon Uncle Burger.

The fund, which receives royalties from A&W restaurants across Canada, said sales rose to $180.2 million in the third quarter when it had 685 locations. That compares to $175.2 million in sales at the same last year, when there were nine fewer locations.

Same-store sales - which comes from restaurants open a year or more - grew 0.3 per cent in the quarter ended Sept. 6 compared to the same period last year.

Paul Hollands, president and chief executive of A&W Food Services of Canada Inc., said the plan is to keep expanding, particularly in the Ontario market.

"Ontario represents our fastest-growing market in the country ... where we have a lot of opportunity to grow," Hollands said during an investor conference call Thursday.

He said Ontario will represent about 50 per cent of the chain's new restaurant growth in the coming years.

About 400 of its restaurants are now in Western Canada, with about 150 in Ontario and the rest in other provinces to the east.

"We see growing quickly against that base," Hollands said.

Hollands said the company has been opening around 20 new restaurants each year.

"We'd like to accelerate that fairly dramatically over the next three to four years," he said.

The company has opened 12 new restaurants so far in 2009.

The fund announced Thursday it would pay a special distribution of 10 cents per unit to investors on Nov. 30. It's the second such distribution this year. The company also paid a special 10-cent distribution in May.

The fund's earnings for the quarter were flat at $2.69 million compared to last year. Earnings per unit were 32.4 cents compared to 32.3 cents last year. Royalty income rose 2.9 per cent to $5.4 million in the quarter.

For the first nine months of the year, same-store sales grew 2.5 per cent to $496 million.

Hollands said the company's revenues are strong considering the weakened economy and high unemployment.

"The launch of the Cheddar Bacon Uncle Burger in July enjoyed good success," he said.

He also cited the company's "Cruisin' the Dub" drive-in promotion, which appeals in particular to the Baby Boom generation, as having helped lift sales. Drive-in sales represent about 40 per cent of revenues at A&W restaurants, Hollands said.

Fast-food chains have seen a rise in sales since the recession hit, as consumers eating out turn to lower-cost meals.

Hollands said fast-food chains are usually less impacted by the recession than more expensive dining spots.

"We see less downside pressure, maybe we benefit a little bit, but when the market comes back we benefit on the upside like the rest of the market does," he said.

Citing Statistics Canada data, the Canadian Restaurant and Foodservices Association said sales at quick-service restaurants in Canada rose 5.2 per cent for the first seven months of 2009 compared to the same time last year.

Meantime, menu prices increased four per cent.

The association also said average unit volume for quick-service restaurants in Canada fell by 3.2 per cent. That compares to a 5.3 per cent drop for total commercial foodservice sales - which includes full-service restaurants, quick-service restaurants, caterers and pubs.

Hollands said the company has no plans to convert to a corporation, a move some funds are making as new taxes rules take effect in 2011. Those rules will see funds taxed similar to corporations.

"Moving to a corporation or any other structure really doesn't provide any greater benefit," Hollands said. "We continue to enjoy a very strong valuation under our current structure."