Rising food prices and economic instability in Western Canada have prompted one analyst to revise his estimates for restaurant company Cara Operations.
In Cara’s third-quarter results reported in November, the owner of Kelsey’s, Milestones, Swiss Chalet and Harvey’s posted same-restaurant sales development of 1.9 percent due in part to weaker sales within the western provinces, underneath the estimate of 2.8 per cent from Peter Sklar of BMO Capital Markets.
At the time, Sklar noted, Cara’s management offered a cautious outlook to analysts and investors due to a continued oil-related economic slowdown in Western Canada and an rise in Alberta’s minimum wage, effective Oct. 1.
“Since then, energy and commodity markets have remained challenging, and that we believe this presents continued headwinds for Cara’s Western Canada operations in particular,” the analyst wrote in a note to clients this week, although Western Canada only makes up about 10 per cent of Cara’s system-wide restaurants, he added.
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Gross margins in Cara’s corporate segment and franchisee store economics may also be pressured in the year ahead as food prices rise in tandem with a weakening Canadian dollar, the analyst said.
“We expect restaurant operators will find it more challenging to pass through rising food prices,” Sklar said.
BMO’s recent grocery basket pricing survey revealed retail grocery prices at both conventional and discount banners were notably higher in the fourth quarter of 2015 in contrast to the same period of 2014, Sklar said, with prices increasing an average of about 4 per cent annually, suggesting “there is important cost of grocery inflation.”
The analyst lowered his target price to on the shares, which he rates at market perform, to $28 from $35.
He also revised his 2016 earnings estimates, to $1.54 for that twelve month from the prior estimate of $1.67. Sklar’s fourth quarter and full-year per share earnings estimates for 2015 stay the same, at 35 and $1.24, respectively.