MTY Food Group Inc. (OTCPK:MTYFF) Q1 2022 Earnings Conference Call April 8, 2022 8:30 AM ET
Company Participants
Eric Lefebvre – Chief Executive Officer
Renee St-Onge – Chief Financial Officer
Conference Call Participants
John Zamparo – CIBC
Vishal Shreedhar – National Bank Financial
Michael Glen – Raymond James
Sabahat Khan – RBC Capital Markets
Derek Lessard – TD Securities
George Doumet – Scotiabank
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to MTY Food Group Inc.’s Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]
Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I’d like to remind everyone that this conference call is being recorded on Friday, April 8, 2022.
I would now like to turn the call over to Eric Lefebvre, Chief Executive Officer. Please go ahead.
Eric Lefebvre
Good morning, everyone. Thank you for joining us for MTY’s first quarter conference call for fiscal 2022. The press release and the MD&A with complete financial statements and related notes were issued earlier this morning and are available on our website, as well as on SEDAR.
During the call, we will be referring to forward-looking statements and to certain numbers that are non-IFRS measures. You can refer to our MD&A for more details. I also remind you that all figures presented on today’s call are in Canadian dollars unless otherwise stated.
Our network demonstrated great resilience once again in the first quarter of 2022. Although, we faced stringent public health measures in Canada and had to close our dining rooms for the better part of the quarter, we are pleased with our overall financial results.
Net income attributable to owners increased 24% year-over-year to $16.6 million in the first quarter of 2022. While cash flows from operations and adjusted EBITDA improved 27% and 9%, respectively.
Although, the recovery was slowed down by those public health measures, our system sales grew 16% to $885.7 million in the first quarter of 2022, mainly due to momentum in the recovery from the COVID-19 pandemic.
Canadian sales continued to recover with 46% growth in system sales year-over-year. U.S. system sales improved 4% in the first quarter of 2022 and International sales increased 12% during the same period.
Despite the new lockdown that affected the segment in the first quarter, casual dining concepts added $44 million to overall system sales growth in the first quarter, representing an increase of 86% year-over-year. The sales from our casual dining locations were still up from pre-pandemic base by 53% during the first quarter and we hope the lifting of COVID-related restrictions in Q2 will help us close that gap in the coming quarters.
Mall and office tower locations have also shown a promising trend in the first quarter, with sales increases of 63% and 73%, respectively, over the same period last year. Similar to casual dining locations, they are still lagging the first quarter of 2020 by 34% and 71%, respectively, so there’s room to improve as customers return to normal habits, and workers and tourists return to urban areas.
Of note, nine of our top 10 brands have shown positive system sales growth in the quarter, growing by an average of 5.4% over the first quarter of last year. Those brands combined represent 71% of the network’s total sales.
Given the relative strength of Canada and incremental growth in the United States in Q1 of 2022, the geographical split change somewhat year-over-year, the U.S. represented 60% of system sales this quarter versus 67% last year, Canada increased to 36% from 29% and International remain stable at 4%.
Digital sales declined slightly in the first quarter of 2022 to $210.8 million or 24% of total sales, reflecting the impact of the reopening of more traditional sales channels. The Canadian segment, however, delivered solid results with a year-over-year improvement of $9.5 million.
Digital sales and the digital experience as a whole remain a key area of focus for our brands, and we believe there’s significant growth potential if we take the right actions and make our platforms relevant to customers. Accordingly, we will keep investing time, efforts and resources in digital to make sure we harvest the potential of those sales channels.
Turning to our network, we ended the first quarter with a total of 6,704 locations. We opened 75 new locations, an all-time high for first quarter and acquired another 31 through the Küto Comptoir à Tartares transaction for total addition of 106 locations. However, we permanently closed 121 locations including 23 from an insolvent International partner.
Although, this slightly erode our location count, we are highly encouraged by the opening of 75 new locations throughout MTY’s network in the first quarter, compared to 41 in the same period last year. These new openings bode well for further openings in the future.
Inflationary pressure and supply chain disruptions are issues our teams are coping with on a daily basis. Our teams have done a phenomenal job keeping our store stocked and making sure we don’t have to compromise on the food we offer to our guests.
Preserving our franchisees profitability is of tremendous importance for us and we are trying to help as much as we can with various initiatives that involve menu adjustments, innovation, marketing and promotions on lower food cost items, efficiency improvements, training, price increases, et cetera. Inflation is something we have had to deal with in the past and so far customers have been accepting the price increases without material impact on traffic.
Labor challenges represent another ongoing issue that affect our operating hours, quality of service and the overall experience for customers. We recently implemented a scholarship program in the U.S. to help franchise partners attract and retain quality employees.
MTY will provide grants to certain qualifying employees to help them pay for the cost of studies. It’s a classic win-win situation for all parties involved. The program is in the startup phase, and if it works as anticipated, it could expand rapidly.
During the last quarter, MTY has continued to produce strong cash flows, despite the lingering impact of COVID-related restrictions. It is now eight full quarters of pandemic ups and downs during which we have repaid $213 million of long-term debt, positioning MTY advantageously for future merger and acquisition opportunities.
We are continuing to seek accretive acquisitions aggressively, but as always, we will remain disciplined in our approach and we will focus on transactions we believe can create the most shareholder value.
I will now turn it to Renee, who will discuss MTY’s financial results in greater details.
Renee St-Onge
Thank you, Eric, and good morning, everyone. As previously mentioned, we are pleased with our financial results in the first quarter of 2022, considering that public health measures were strengthened in Canada during parts of the quarter.
Total revenue for the quarter increased 18% to $140.5 million. The increase may be attributed to growing recurring revenue streams from franchise locations in Canada. Altogether, revenue from franchise locations and candidates surged 54% year-over-year.
Food processing, distribution and retail revenue in Canada also contributed to growth, improving 27% year-over-year on the strength of new listings in retail and expansion into new territories. Revenue from franchise locations in the U.S. and International meanwhile grew 6% year-over-year in the first quarter of 2022.
As mentioned by Eric, a large portion of the growth in our Canadian and U.S. franchise division came from improvements in system sales in a casual dining segment, which grew by 86% year-over-year. The growth in the casual dining segment has the largest impact on our street fund location sales, which represents 80% of total system sales. As for the decrease of $5.7 million in revenues in the U.S. corporate owned location segments, the decrease was primarily due to the sale of several Papa Murphy’s locations that were converted into franchises.
MTY opened the first quarter with 82 locations temporarily closed due to the pandemic, 69 of these locations were still shutdown as at February 28, 2022. Altogether, 225 locations were closed for one or more days during the quarter. Today 67 remain shut. These being predominantly located in non-traditional locations, such as cinemas, hospitals and gyms or locations have closed out due to an outbreak of COVID on-premise. These locations usually reopened quickly however. These data points are significant improvement over last year when 321 locations were closed at the end of the first quarter.
Adjusted EBITDA improved 9% year-over-year to $35.6 million in the first quarter of 2022. Canadian segments contributed 41% of total adjusted EBITDA, representing a year-over-year increase of $4.4 million. The U.S. and International segments contributed 59% of total adjusted EBITDA accounting for a year-over-year decrease of $1.4 million or 6%.
Our franchising segment margin saw a slight decrease from 50% to 47%. This is partially due to the company no longer qualifying for the government wage subsidy, as well as an inflation impact on wages that was slightly more elevated compared to the same quarter last year. Our processing, distributing and retail segments had a strong performance, however, was — and was impacted by the rising cost of supply on the market.
Net income attributable to owners reached $16.6 million or $0.68 per share — per diluted share in the first quarter of 2022, compared to $13.4 million or $0.54 per diluted share in the same period last year.
Now turning to liquidity and capital resources, cash flows from operations amounted to $39.7 million in the first quarter of 2022, compared to $31.3 million in the first quarter of 2021 or a 27% year-over-year improvement. Excluding the variation and non-cash working capital item, income taxes, interest paid and other, operations generated $36.9 million of cash flows in the first quarter of 2022, compared to $34.4 million in the same period in 2021.
Free cash flows reached $37 million or $1.51 per diluted share in the first quarter of 2022, compared to $30.3 million or $1.23 per diluted share in the same quarter last year.
In terms of capital allocation during the first quarter of 2022, we use cash to reduce our debt by $10.1 million. A particular note, interest on long-term debt is down $1.9 million year-over-year due to our discipline debt reduction, as well as the utilization of interest rate swap instruments.
We also paid out dividends totaling $5.1 million in the first quarter and repurchased 256,400 shares for a total consideration of $14.6 million under our NCIB program. At the end of the quarter, long-term debt mainly in the form of bank facilities and holdbacks on acquisition stood at $362.2 million.
We also closed the quarter with $52.5 million on cash — of cash on hand, leaving us in a healthy cash flow position. Between our available credit facility and our cash, we have approximately $350 million in liquidity at our disposal.
And with that, I thank you for your time and we will now open the lines for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question will come from John Zamparo from CIBC. Please go ahead. Your line is open.
John Zamparo
Thanks. Good morning, I wanted to start on the restaurant openings number you referenced, it was quite strong relative to key ones in the past. My question is, when you look at this quarter and say the past quarter or two, and also your development pipeline, what are the two or three brands that are driving most of that growth?
Eric Lefebvre
Yeah. Well, it’s not one brand or two brands, it’s multiple brands that are driving the growth. Obviously, we have some larger brands like Cold Stone that tend to open more stores than the others, just because of the sheer number of locations. But we have other really good brands that are performing well in terms of their pipeline and in terms of opening new stores.
So, yeah, it’s — I mean, we are pushing on certain brands to develop faster to take markets and it’s working out, so those efforts have started before the pandemic and continued during the pandemic and we are seeing now that the results of the efforts we have put in and now that the environment seems to be a little bit more favorable for investors to put money into restaurants. It’s starting to open more in line with what we expected.
John Zamparo
Okay. And then as a follow up on that, you would mentioned in the past, I think, it was the last call, Eric that you would seen delays in opening restaurants, whether it was equipment shortages or construction permits. Is that contributing to the increase in openings or do you get a sense it’s more a function of franchisee profitability?
Eric Lefebvre
Well, yeah, the problems with the supply chain and construction are still very real. We are facing significant delays and our construction groups are working with suppliers to try to secure the necessary equipment to be able to open stores effectively. But right now the delays are still pretty important and even when it comes to the base building that the landlords are building even that suffers some significant delays.
So the number — with the number we opened is certainly not a function of the delays or the removal of those delays. So it’s still a factor for us at the moment and for the future. It takes a lot longer to open stores.
John Zamparo
Okay. That’s helpful. And then on the digital side, you would mentioned last call that you re-launched digital in much of Canada in November. I know you are operating with some restrictions in the quarter. But can you talk about the progress of the rollout so far and what you are seeing?
Eric Lefebvre
Yeah. Well, in November, what happened is really, we were able to undo and basically detangle everything in Canada, because if you remember, everything was on common platform and it took us some time to get there. So the first step was to be able to get the brands on individual brand platforms. So we have done that now.
We are still ironing out some kinks, when it comes to digital, especially for the online ordering, the loyalty platforms, even the websites need to be a little bit better for a lot of our brands. So we are still working on that.
But we are happy with the progress. We are seeing some real good progress with the brands that are — that were a little bit farther down the road in terms of how the process was going to work. We are seeing the basket size improve. We are seeing the customer experience improve. And now we are tracking some really important metrics to see how we progress not only in terms of the amount of sales, but also in terms of customer satisfaction and how seamless the experience needs to be for our customers.
Because when you look at digital, it’s not only the online sale that you want to generate, but it’s an entire experience and for as much as we worked for the last 42 years on the in-store experience, I think, now the online experience is becoming almost as important as the in-store experience.
So you need to provide customers with the proper website, with the proper digital marketing, social media, content and everything, to create that experience and create that emotional connection to your brand outside of the store, because a lot of your interaction with your customers doesn’t happen in the store anymore, it happens before they visit the stores or it happened between visits. So we need to really put a lot of emphasis on that and this is what we are doing at the moment.
So it’s a work in progress. I don’t think it’s ever going to end. I think that’s something that we are always going to be working on going forward. But there’s certainly a ramp up that we need to do now and I am pretty happy with where we are at the moment.
John Zamparo
All right. That’s helpful color. Thanks for that. And then one last one, I will get back in the queue.
Eric Lefebvre
Yeah.
John Zamparo
The financial statements made reference to a change in control of a JV. Can you just add some color there?
Eric Lefebvre
Yeah. That’s — yeah, really nothing happened and business wise nothing happens. It’s purely the result of interesting accounting standards, I will call it that. But business wise nothing happened. This is related to the transaction with the Turtle, Jack’s and COOP.
So, I mean, the business is continuing and nothing happened there. It’s just after we met the two-year mark, there were some wording in the agreement that triggered some accounting. But other than that, I mean, business wise, nothing changed.
John Zamparo
Okay. Understood. That’s great. Thank you very much.
Operator
Our next question comes from Vishal Shreedhar from National Bank Financial. Please go ahead. Your line is open.
Vishal Shreedhar
Hi. Thanks for taking my questions. Just given the pervasive market concerns regarding the consumer backdrop, I was hoping if you could provide us with your insight on what you are seeing with the consumer. Are you seeing trade down, any price sensitivity, and if so, maybe you can characterize that by market?
Eric Lefebvre
Yeah. Well, obviously, it’s we are walking a very fine line with what’s happening in the world in general with a lot of different factors at stake for us. I mean, there’s a number of different factors we need to work on. Pricing is one of them. Customer experience is another.
But ultimately, if we are better than our competitors, our customers will continue to come. So, we need to continue to work on being better than the rest of the market. We need to provide that experience to the customers. We need to give customers value, because everything is relative.
So, if you increase your prices, but your perception of value is still superior, your customers will continue to come because they perceive that value. So we need to work on a number of different factors.
But so far, I mean, we haven’t seen declines in traffic and customers are still loyal to MTY. We are acquiring new customers with a lot of new initiatives in Canada and the U.S. I am seeing a lot of creative stuff being done by our team.
So far the customer is there for us. We don’t take the customer for granted, because there’s a lot going on. So our teams just need to continue to work really hard to be better than everyone and our franchises need to continue in that same way.
Vishal Shreedhar
Okay. Obviously, the public market has reflected declines in the stocks of many discretionary type names and I am wondering if you are seeing that lower valuation percolate into the acquisition market? And maybe on that topic as well, given where valuation stands, is management more keen to acquire or buyback stock?
Eric Lefebvre
Yeah. Well, I can’t necessarily comment on what the public market is doing, because the markets are still a mystery to me. But as far as the acquisition pipeline is, for us the valuation is still high, but given the volume of deal flow that’s coming back now, we — I think, ultimately, we will find good targets at attractive prices.
So we have been disciplined in the past and now we are — we have had periods in the past where there were no acquisitions and we were patient and then all acquisitions came in the flurry at the same time.
So I am not saying this is what’s going to happen this time, but we are confident that valuation is going in the right direction. I think the number of deals that are available on the market is increasing and that will help with the pricing and it’s up to us to be able to find the right targets and find common ground with the sellers to be able to acquire a good quality concept.
So there’s no magic formula there. But as always we are patient, we are disciplined and we are waiting for the market to be there for us and we are not going to force transactions just for the sake of forcing transactions.
Vishal Shreedhar
Okay. And what’s your point of view on share repurchases given your balance sheet strength and your cash flow generation?
Eric Lefebvre
Yeah. Well, in terms of capital allocation in general is a discussion we have at the Board every time we meet and even sometimes between meetings. So our priority remains to acquire good quality businesses to add them to our network.
So we are — I mean, we have repurchase shares as you have seen in the statements. We are still open to repurchasing shares. But our priority remains to find good M&A targets and if we do, we will allocate more capital towards that. Then if we don’t then we will buyback MTY. The valuation is, I think, attractive on our stock and the execution risk is non-existent. So it’s not a bad offer for us, but as I said, our priority remains M&A.
Vishal Shreedhar
Okay. And drilling a little deeper into the banners and concepts that MTY employs, it looks like a QSR including Cold Stone and fast casual performed well despite some restrictions. Papa Murphy’s steady, while lapping tough year-over-year comps. Looking forward, is there any color you can provide on how we should think about the growth of these various buckets?
Eric Lefebvre
Yeah. Well, I think the bucket’s going to be separated a little bit differently. If you look at our casual dining segment, we were still under massive lockdown during Q1. We missed pretty much all of the quarter with our dining rooms.
Our casual dining are predominantly in Québec and Ontario, and even some in the rest of Canada were also affected. So if you compare our Q1 2020 sales to our Q1 2022 sales, pretty much all of the discrepancy that’s left for us to make up is coming from the casual dining segment.
So for me, it’s encouraging. We know casual dining is now operating at full capacity and it’s up to us to capture these customer dollars and make sure that customers continue to come to our stores in the coming months and we create that and tend to return and then sales will work for us.
So the other segments, I think, are doing well. They are doing what they need to do. As you said, Cold Stone is rocking and that’s really good for MTY and we hope it continues this way. But, yeah, there’s a lot of other concepts that are doing great. As I mentioned earlier, nine of our top 10 brands are comping positive in Q1 in terms of system sales, which is really good, because this is a large chunk of our revenues.
Vishal Shreedhar
Thank you for your color.
Operator
Our next question comes from Michael Glen from Raymond James. Please go ahead. Your line is open.
Michael Glen
Eric, can you just characterize the M&A environment, like how different is it in the U.S. and Canada right now and where is your preference, is it more in the U.S. or is it more in Canada right now?
Eric Lefebvre
Yeah. We are — yeah, the deal flow is coming back, which is good news. So, I mean, where we used to see a deal here and there, that was probably priced too expensive a few months ago. Now, we are seeing a regular deal flow that looks a lot more like what we had before the pandemic.
So there’s a number of deals out there in both countries in all segments, corporate franchise, QSR, fast casual, casual dining So it’s a little bit of everything. So we are pretty happy with that and we are optimistic with it. When it comes to preference in countries or geographies, we remain very opportunistic buyers. We will price everything according to the risk that’s involved with these acquisitions.
So, I mean, Canada, we are happy. U.S., we are happy. I think naturally the depth of the US market will make it that there’s more opportunities in the U.S. and they are probably larger, but we are totally agnostic when it comes to one country or the other.
Michael Glen
And if you are thinking of M&A, is there anything, like over time you do a number of tuck-ins, which tend to be quite nicely accretive to your EBITDA, is there anything — are you seeing some large transactions or do you think investors should be thinking about MTY doing something of the scale of a Papa Murphy’s or even bigger?
Eric Lefebvre
I am not going to close the doors on any possibilities. One of our mentors is known to make the small acquisitions, if they are strategically relevant and they also make the really, really big acquisitions when strategically it makes sense, so for us, to close the door on the size of a deal, not necessarily.
I think in general, average sized deals are probably more common on the market. There’s probably more of those available for us and they are probably priced a little bit more reasonably, but if we find a larger deal that’s attractive to us strategically and accretive for shareholders, we will go for it.
So I am not saying there’s going to be one or the other or there could be both big and small deals, there could be a combination of average sized deals, there could be any sorts of different combinations that happen, but I am not going to close the door on any types of deals.
Michael Glen
And in terms of real estate, what are you seeing in terms of rent levels and site availability? Are you able to make competition if a site comes available, are you able to — are you seeing a lot of interest in those sites and rents are — rents continue to move higher or just characterize the situation?
Eric Lefebvre
Yeah. It’s a competitive environment for real estate. There’s no question about that. One, because I think the economy in general is doing well. And two, there are important delays in construction of new sites.
But when you look at it from a different perspective, I don’t know that many companies in North America that opened the number of stores we have opened in North America in the last three months.
So I have to assume it makes us attractive for landlords, because they know we are serious, they know we open and they know we are going to open a lot more in the future. So I hope it gives us better access to sites. I think it does. MTY is not perfect and certainly sometimes, it can be frustrating working with us, because we have a certain set of standards.
But we are opening a lot of stores and I think a lot of our brands are attractive for landlords also and as they are for customers. So I am pretty — again I am pretty optimistic on the availability of real estate.
Now in terms of cost, there’s inflation there like and everything. So we need to — again we need to be disciplined on setting up our franchisees for success and not just getting any franchisee in any site for any brand, because sometimes the math doesn’t work and we need to be disciplined and say, what — we are going to need to pass on this really good site, because it’s just too expensive for that brand or it’s too expensive period. So, but there’s inflation. But again there’s so many different sites throughout North America that we can go to that we are always going to find good sites at reasonable prices that we can afford.
Michael Glen
Okay. And then in terms of, I am not sure if you said this, but in general, how much price are you putting through right now or recommending…
Eric Lefebvre
We can…
Michael Glen
… do you put? How much price are you putting through or recommending for your franchisees to put through?
Eric Lefebvre
Yeah. That’s a brand-by-brand discussion. There is price going on for sure for all of our brands. So that’s no secret. But it’s really a brand-by-brand discussion. Ultimately, our franchisees have the freedom to influence on price. So it’s a fine line we are walking again.
It’s — do we increase price to preserve margins but lose a bunch of customers, so we need to be cautious. We are benchmarking our competitors. We are looking at the market. We are trying to improve the value offer that we have for customers.
But price is something we just can’t avoid at the moment. So there was price done last year. There was price done this year. There’s going to be more prices done in the future, some brands have gone very light with almost no pricing at all and some brands have had to go 14%, 15% depending on the product mix and what they sell to customers.
Michael Glen
Okay. Thanks for taking the questions.
Operator
Our next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead. Your line is open.
Sabahat Khan
Great. Thanks and good morning. A while before the pandemic, I think, there was a bit of increased focus on maybe rolling out some common, POS overlays, just focus on kind of digging into some of the operational performance of the franchisees? And I guess, are we at the point of the pandemic where we have gone from focusing on a recovery to going back to some of those initiatives or are there anything you are more focused on, so I want to get an update on where you might be on that?
Eric Lefebvre
Yeah. The focus — yeah. We have never really lost focus on these things, but we are — given the pressures that we are coming from outside, we decided to lift the pedal a little bit. But, yeah, definitely the focus is still there. We want to have better data to be able to better assist our franchisees with their businesses. So we are trying to collect more and more.
It’s not an easy one. Franchisees are all short staffed. Franchisees are all fighting for every minute they have in their day. So it’s hard to implement these types of initiatives. But they are necessary.
So we are getting back at it, but we are also very sensitive to the individual situation of each franchisee and their ability to spend time on something that’s not directly related to the operations of their locations.
Sabahat Khan
Okay. And then, just one last one, I guess, as we are at this point in the recovery, are there any banner that you look across your network, that maybe didn’t perform even enough to get by? Are there any opportunities to rationalize the network as you look at M&A opportunities? Are you kind of comfortable with the mix of banners that you currently have in your portfolio?
Eric Lefebvre
Well, there are certainly some brands that are suffering more than others, but we owe it to those franchisees to do the best we can to bring their business back to where they thought it would be when they invest it to where — to the trajectory they had before the pandemic.
So we are not giving up on any of them. We love all our brands. We love all our franchisees. And we owe it to everyone to try to do as good as we can with each brand. So, we are not in the exit mode at the moment. There are brands that are struggling more. I think, for example, the brands that are predominantly in major urban areas that depend on office traffic, for example, are still struggling.
So, we need to try to push and try to make the brands better and try to make the brands more relevant and attract a bigger proportion of the customers that are available for us to increase our market share. But we are not in exit mode. We are not giving up on any of our brands and we are not giving up on our franchisees either.
Sabahat Khan
Okay. Great. Thanks so much for the color.
Operator
Our next question comes from Derek Lessard from TD Securities. Please go ahead. Your line is open.
Derek Lessard
Yeah. Thanks, Eric. Good morning. I guess maybe just to hit back on the pricing trends or menu pricing. I think some of the overall data in Canada and the U.S. suggests that pricing is up 4% or 5% in some cases and 7% to 8% in the U.S. Is that sort of the magnitude of the overall price increases that you guys have been able to push through or is it lower than that?
Eric Lefebvre
Some brands are lower, some brands are higher. I would say on average, we are probably in that ballpark for the last 12 months. So, yeah, we are probably in that ballpark on average. But, yeah, some — like I said earlier, some brands have had to push prices a lot more just because of the mix we have and some brands have had to do less because, again, the products did not suffer the same amount of inflation.
Derek Lessard
Okay. And I think you would touched on it earlier, but I guess, are you able to add some color to the, I guess, the pull of the consumer between obviously things like higher groceries these days, spend on fuel and gas versus that having that discretionary spend on restaurants and if you are seeing any of that, I guess, those headwinds start to creep through into your sales numbers?
Eric Lefebvre
We are not seeing it yet. I am not saying it’s never going to happen. But right now we are not seeing declines in traffic related to all sorts of inflation. Customers are loyal. Discretionary income seems to be there at least when it comes to buying food in restaurants.
So, again, I am pretty optimistic about the future. I think we are doing a great job. I think our teams are really providing that that value offering that customers are looking for and value offering doesn’t necessarily mean cheap price. It just means that the perception of value is there in relation to the price we are asking.
So right now the consumers are there for us and we are not necessarily seeing a letdown. So, hopefully, it’s going to keep this way, but there’s certainly some pressure on price and we need to be very careful how far we go.
Derek Lessard
Okay. And one last one for me, you mentioned some client acquisition initiatives. Just wondering if you could point out a couple of them that you are working on now and maybe some of the success that you are seeing with those initiatives?
Eric Lefebvre
Yeah. Well, I will give you one example and there’s similar examples in every brand, so don’t take it as the one example. But we launched a dairy-free product with Cold Stone that’s called in partnership with Silk and that’s just the goldmine for us.
Not in terms of a super large proportion of our sales, but in terms of the proportion of customers that are coming from that dairy-free product with Silk, which is really well known that our customers that did not visit Cold Stone before. So that’s a good customer acquisition strategy for us.
And what we are seeing is that the average basket size is very high and seems to indicate that whenever one of these customers that buy Silk comes to our stores, they tend to bring two or three of their friends or their family with them. So the basket size is really high for customers that are almost exclusively new customers for us.
So this type of initiatives is going on across the network and attracting new customers to our brand is important. We want loyal customers to continue to come to our stores, but we also want to acquire new customers if we can and that’s an example of a successful customer acquisition campaign.
Derek Lessard
Okay. Thanks. That’s helpful. Thanks, Eric.
Operator
[Operator Instructions] Our next question comes from George Doumet from Scotiabank. Please go ahead. Your line is open.
George Doumet
Yeah. Thanks. Good morning, Eric. How does Papa Murphy’s do this quarter and how’s the comping compared to pre-pandemic levels? I also think last call you mentioned some initiatives that you guys were working on, can you maybe talk about that a little bit, too?
Eric Lefebvre
Yeah. Papa Murphy’s continued more or less on the trend it was for Q4, so slightly off. So, yeah, we are still working on a number of initiatives. I think these are still a very relevant market that, I think most of the major pizza players have suffered a little bit in the last few months. But we are still well above our 2019 or 2020 — pre-pandemic 2020 levels, which is good.
But we are working to try to preserve that volume that we have and we have a certain number of initiatives that are in place new — other new initiatives that are coming and we need to help our franchise partners generate more sales for their stores to be profitable in the long run.
So a lot going on. We are happy in general with the brand with Papa Murphy’s. We would like the sales to be comping positive, but we are confident we are going to get there with everything we are working on.
George Doumet
Okay. Thanks and congrats on the 75 openings. It’s a big number. I am just wondering maybe how sustainable that number is going forward and maybe switching to closures, do you think we have seen the worst of them or is that going to maybe trend going to, I guess, stay a little bit elevated given that we are seeing a lot of government aid coming off?
Eric Lefebvre
Yeah. Well the — in terms — I will start with the openings. The 75 is a good number. We would have liked to be better than 75, to be honest with you, and we slipped a little bit because of the delays in construction. So normally openings tend to be a lot more predictable than closures. But in this environment, we know our pipeline, we know the number of stores we have ready for construction or under construction, but we don’t know how long it’s going to take.
So, is 75 an indication for the future? I think we can do better than that. But the key here is to be able to build them. So from one quarter to the next, there might be variations just based on the delays caused by construction. So we will see how the next quarters come, but we are pretty optimistic when it comes to the number of store openings.
As far as the closures are concerned, well, you saw there’s 23 related to one partner that became insolvent that also affected our Q4. They are now at zero. So, that 23 is not going to happen again, so that that leaves about 100 closures. It’s too high. So we need we need to work on that.
There are some closures that are happening for various reasons. Labor shortage is one of them. We have some partners that elected to not renew certain leases in certain territories where they had multiple stores to just concentrate their workforce in the remaining stores.
I think it’s a short-term decision that will have adverse consequences in the long term. So we are trying to work with our franchisees to prevent that from happening and we are trying to come up with new initiatives to attract workforce. So we don’t have to take drastic actions like these ones.
But closures are a little bit more unpredictable. So I wouldn’t necessarily say too much about closures. Although, I can say that we are not happy with the number we have now. We want to close fewer than that.
George Doumet
Okay. Thanks for that. And just one last one for me, on the labor situation as it relates to our franchisees, would you characterize any maybe as worse or better or the same since our last quarterly update?
Eric Lefebvre
I think it’s slightly better. I think we are starting to readjust. We had a scare when we locked down again in most of Canada, because it took us so long to rebuild our teams after the previous lockdown and we were worried that we would lose all our staff again. But for the most part the staff stayed. So I think we avoided a disaster there.
So I think we are getting slightly better in terms of staff. It’s certainly not perfect. We would like to have more people available to work in our stores. But it is what it is. We are not the only sector that’s suffering from labor shortage and it’s up to us to make our sector more attractive as restaurant owners, as franchisors, we need to make restaurants sexy again and it’s going to take some time.
Our industry has been seen as unstable because of all the pandemic’s ups and downs. But, again, we are not giving up on that and I think the restaurant industry is a great industry for people to work in and it’s up to us to promote it this way.
George Doumet
Great. Thanks for answers.
Operator
Our next question comes from Derek Lessard from TD Securities. Please go ahead. Your line is open.
Derek Lessard
Hey, Eric. Just a follow-up, I just wondering if you had a view internally maybe on the office mall locations and whether or not you might think that some of those maybe or some of those sales may be permanently impaired, especially if we don’t all get back to work as we were pre-pandemic?
Eric Lefebvre
Yeah. And, yeah, that’s definitely a good question there. There are definitely a certain amount of these sales that are not coming back. We have terminated some leases and some malls or some office towers where we feel traffic is not going to come back and we are going to have to make decisions in the future again on some of them.
What we are seeing now is that the really good malls are always going to be really good malls. So traffic is there. Traffic is back for the most part. The malls that are what I would call a B or C mall are struggling a little bit more to generate the traffic again. So this is where some decisions might need to be made.
And as far as office towers are concerned, we could look at it in two different ways. We can look at it as, well, maybe business traffic is never going to be where it was. It’s a possibility. But we can also look at it as an opportunity where maybe some operators will choose to vacate these premises and maybe this is an opportunity for MTY to bring in some concepts that we have adjusted to be relevant in this type of environment.
So I prefer to look at it as an opportunity for office towers and we are working with some of our teams to try to create that offer. That’s going to be interesting for our franchisees and that’s also going to be interesting for a landlord and that will be irrelevant in an environment where traffic is slightly reduced, but where there is traffic, that is looking for a certain service. So I like to look at office towers as an opportunity.
Derek Lessard
Okay. Thanks for that.
Operator
We have no further questions in queue. This will conclude today’s conference call. Thank you for your participation. You may now disconnect.
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