MTY Food Group: Navigating U.S. Headwinds to Unlock Long-Term Value

The MTY Food Group's Q2 2025 results revealed a stark divergence between its U.S. and Canadian markets, with the former grappling with macroeconomic pressures and banner-specific struggles, while the latter thrived. This article argues that the U.S. setback is a catalyst for strategic restructuring, positioning MTY as a compelling contrarian buy at current levels.

The U.S. Challenge: A Catalyst for Restructuring

MTY's Q2 results underscored a 3.8% decline in U.S. same-store sales, driven by weaker consumer spending and margin contraction in two major banners. The Corporate segment's EBITDA fell 5% to $70.0 million, with margins collapsing to 9% from 13% as rising food and labor costs outpaced price adjustments. However, this downturn has forced management to act decisively:
- Strategic Re-evaluation: Accelerating franchising efforts to reduce reliance on corporate-owned stores, which typically carry higher operational risks and lower margins.
- Portfolio Pruning: Reacquiring underperforming Papa Murphy's locations (nearly 50 stores) to consolidate control and implement turnaround plans, despite short-term pressure.
- Cost Discipline: Controlling prime costs and accelerating the ERP rollout (phased in late 2025) to boost efficiency.

These moves signal a shift toward a leaner, franchise-focused model, which could stabilize margins and reduce capital intensity over time.

Canadian Strength: A Beacon of Resilience

While the U.S. market sputtered, Canada delivered a 1.4% same-store sales rise, with its casual dining segment performing strongly. This contrast highlights MTY's geographic diversification and the durability of its franchise model:
- Franchise Dominance: The Franchise segment's EBITDA rose 3% to $54.0 million, benefiting from lower operational risk and steady royalty streams.
- Brand Agility: Village Inn emerged as a standout, likely due to its value-oriented positioning and localized menu innovation.

Canada's performance underscores MTY's ability to thrive in stable markets, a positive sign for long-term recovery in the U.S.

Valuation: Undervalued Amid Restructuring

MTY's stock has declined 22% year-to-date, reflecting U.S. concerns. However, its valuation now appears compelling:
- EV/EBITDA Multiple: At 6.8x trailing EBITDA (vs. 8.5x in 2024), it trades at a discount to peers like Domino's Pizza (12.2x) and Chipotle (22.4x).
- Free Cash Flow: Despite the U.S. headwinds, MTY reduced net debt by $32.7 million since November . Share buybacks (297,000 shares in Q2) signal confidence in its capital structure.

The stock's dip creates an entry point for investors willing to bet on margin recovery and strategic execution.

Risks to Consider

• U.S. Macro Lingering: A prolonged consumer spending slump could delay the turnaround.
• Franchise Adoption: Accelerating franchising requires franchisee buy-in, which may slow in a weak economy.
• ERP Implementation: The phased U.S. rollout carries execution risks that could disrupt operations.

Investment Thesis: A Contrarian Buy

MTY's Q2 setback is a symptom of cyclical U.S. challenges, not structural portfolio weakness. The company's strategic pivots—franchising, cost discipline, and ERP-driven efficiency—position it to rebound. With a low valuation, a diversified brand portfolio, and a strong Canadian anchor, the stock offers asymmetric upside.

Recommendation: Buy MTY on dips below CA$15/share, with a 12–18-month price target of CA$22–CA$25, assuming margin stabilization and EBITDA recovery. Monitor U.S. same-store sales trends and franchise growth metrics closely.

In a market of volatility, MTY's current struggles mask a company primed for resurgence. For investors with a long-term horizon, this is a compelling contrarian opportunity.