A&W’s Q1 2025 Earnings: Structural Shifts Overshadow Operational Resilience

The first quarter of 2025 marked a pivotal yet challenging period for A&W Food Services of Canada (TSX: AW), with its earnings per share (EPS) dropping to CA$0.37 from CA$0.50 in Q1 2024. While the decline may raise eyebrows, the story behind it reveals a complex interplay of strategic restructuring, external headwinds, and the company’s efforts to position itself for long-term growth.

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The Structural Culprit: Share Dilution from the Transaction

The most significant factor behind the EPS decline was the October 17, 2024 Transaction, which saw A&W acquire the remaining units of the A&W Revenue Royalties Income Fund (the “Fund”). This move eliminated recurring royalty payments to the Fund but came at a cost: the weighted average number of shares outstanding tripled, rising from 9.5 million in Q1 2024 to 24.0 million in Q1 2025. While net income grew by 24% to CA$9.3 million, the surge in shares diluted EPS by over 26% compared to the prior year.

Ask Aime: Why A&W Food Services' EPS Plunged to CA$0.37 in Q1 2025?

The Transaction’s impact was structural, not operational. It removed a recurring cash outflow (royalties) and consolidated control over A&W’s trademarks, but it also made year-over-year comparisons challenging. Management emphasized that this restructuring was a “one-time” adjustment, not a sign of underlying weakness.

Ask Aime: How did A&W Food's stock perform after the transaction that tripled shares?

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Operational Resilience Amid External Challenges

Despite the EPS decline, A&W demonstrated resilience in its core operations:
- System Sales rose 2% to CA$396.9 million, driven by new restaurant openings and inflation-driven average check increases.
- Restaurant Expansion accelerated, with 7 new locations bringing net annual unit growth to 1.8%, up from 1.3% in Q1 2024. Management now projects 1,085–1,100 total restaurants by year-end, a 1% increase over 2024’s total.

Ask Aime: "Which stocks rebounded after A&W's decline?"

However, external factors tested this resilience:
- Severe Weather: Unusually harsh winter conditions in Ontario reduced guest counts, particularly at corporate-owned restaurants.
- Trade Tariffs: U.S. tariffs on Canadian goods, followed by retaliatory measures, introduced economic uncertainty that dampened consumer spending and labor costs.

The Tax Factor: A New Burden

The EPS decline was also magnified by a CA$1.2 million increase in income tax expense. In Q1 2024, non-taxable items like the amortization of deferred gains and income from associates had reduced the effective tax rate. Post-Transaction, these items vanished, and higher taxable income (from eliminated royalty expenses) pushed tax payments upward.

Strategic Moves to Counter the Headwinds

A&W is doubling down on initiatives to drive long-term growth:
1. A&W Rewards Loyalty Program: Launched in April 2025, this program aims to boost repeat visits and digital engagement—a critical lever for quick-service restaurants.
2. Value-Oriented Menu Strategy: In response to economic slowdowns, A&W introduced budget-friendly options to retain price-sensitive customers.
3. Franchisee Profitability: Management reiterated its goal to improve franchisee profitability by 30% by 2028, supported by restaurant modernizations and operational efficiencies.

Revised Outlook: Caution Amid Uncertainty

The company revised its 2025 outlook downward due to tariffs and economic pressures:
- Adjusted EBITDA: Now projected at CA$96–101 million (vs. CA$93.5 million in 2024).
- System Sales Growth: Trimmed to 1.5%–4.5% (from 0.8% in 2024).
- Same-Store Sales: Reduced to 0.0%–3.0% (vs. -0.6% in 2024).

Conclusion: A Structural Dip Masks Strategic Momentum

A&W’s Q1 2025 results were shaped more by structural changes than operational failure. The Transaction’s share dilution and tax impacts were the primary culprits behind the EPS decline, not weak performance. Underlying metrics like flat Adjusted EBITDA (CA$19.4 million), new restaurant growth, and the launch of A&W Rewards suggest the company is weathering external storms while executing its long-term strategy.

Investors should focus on two key data points:
1. Franchise Expansion: The target of 1,085–1,100 restaurants by year-end reflects confidence in franchisee growth, a key driver of recurring revenue.
2. Adjusted EBITDA Stability: Despite rising costs and tariffs, the metric held steady, indicating operational discipline.

While the EPS decline is a short-term concern, A&W’s moves to bolster its digital footprint, control costs, and expand its footprint suggest it is positioning itself for sustained growth. The revised outlook, though cautious, aligns with macroeconomic realities, and the dividend commitment of CA$0.48 per share underscores management’s confidence in cash flow. For investors, this is a story of resilience—a brand leveraging its Canadian identity and strategic initiatives to navigate choppy waters.

In the end, A&W’s Q1 results are a reminder that structural shifts can cloud near-term metrics, but the company’s fundamentals and adaptive strategy remain intact.