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Tim Hortons' Success Less Certain In U.S.
Quick service restaurant operator Tim Hortons (NYSE:THI) may be an institution in Canada, but it has much lower brand awareness in the United States. Struggles in a couple of markets in the Northeast, as announced along with the firm's third-quarter results on Wednesday, illustrate its expansion prospects are less certain south of the border.
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Third-Quarter Review
Total revenues increased 9.8% to C$670.5 as same-store sales improved 4.3% in Canada and 3.3% in the U.S. As of quarter end, a vast majority of system-wide stores (83.2%) were in Canada, with the rest in the U.S. More than 99% of stores are franchised, with the rest being company-owned. Collectively, they account for the entire system of stores. (To learn more, see Analyzing Retail Stocks.)
Tim Hortons stores are an undeniable hit in their home market and can be counted on for consistent and robust cash flow. The U.S. store base is less so, as evidenced by a decision to close 34 stores in Providence and Hartford, Rhode Island. This resulted in a charge, but it was offset from proceeds related to the sale of a joint venture ownership of Maidstone Bakeries, which makes donuts for both store regions and is reportedly owned by Swiss food manufacturing firm ARYZTA AG.
Total costs rose 13.4%, but included the store closings impairment charge. This dented operating income slightly to $133 million, which management detailed would have been almost $145 million without the one-time charge. Lower income taxes pushed reported net income growth well into positive territory at just under 21%. Net income reached $73.8 million, or 42 cents per diluted share.
Outlook
For the full year, analysts project sales growth of more than 13% and total sales of more than $2.5 billion. They are currently calling for earnings of $2.08 per share.
Future Growth and Alternatives
Tim Hortons plans to expand its store base in the Northeast and Midwest. Despite the setback in a couple of Northeast markets, this makes sense as brand awareness is likely highest and expansion has higher chances of success in markets closer to Canada.
Growth in the U.S. won't be as easy as in Canada, where Tim Hortons has managed to control an estimated 40% of the quick-service market. Those interested in compelling growth in the U.S. should focus on Chipotle Mexican Grill (NYSE:CMG), though the lofty valuation is a definite drawback from an investment standpoint.
Bottom Line
Tim Hortons' multiple also isn't in the bargain bin at nearly 19. However, the stock does represent an interesting twist in the industry since it is a foreign firm trying to expand in the U.S. In contrast, Yum! Brands (NYSE:YUM) is focusing on overseas growth, as is rival Papa John's (Nasdaq:PZZA). And though not directly comparable to Tim Hortons like Krispy Kreme Doughnuts (NYSE:KKD) or privately-held Dunkin Donuts may be, restaurant concepts have similar drivers as a group and growth away from the core market does have higher risks.
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Third-Quarter Review
Total revenues increased 9.8% to C$670.5 as same-store sales improved 4.3% in Canada and 3.3% in the U.S. As of quarter end, a vast majority of system-wide stores (83.2%) were in Canada, with the rest in the U.S. More than 99% of stores are franchised, with the rest being company-owned. Collectively, they account for the entire system of stores. (To learn more, see Analyzing Retail Stocks.)
Tim Hortons stores are an undeniable hit in their home market and can be counted on for consistent and robust cash flow. The U.S. store base is less so, as evidenced by a decision to close 34 stores in Providence and Hartford, Rhode Island. This resulted in a charge, but it was offset from proceeds related to the sale of a joint venture ownership of Maidstone Bakeries, which makes donuts for both store regions and is reportedly owned by Swiss food manufacturing firm ARYZTA AG.
Total costs rose 13.4%, but included the store closings impairment charge. This dented operating income slightly to $133 million, which management detailed would have been almost $145 million without the one-time charge. Lower income taxes pushed reported net income growth well into positive territory at just under 21%. Net income reached $73.8 million, or 42 cents per diluted share.
For the full year, analysts project sales growth of more than 13% and total sales of more than $2.5 billion. They are currently calling for earnings of $2.08 per share.
Future Growth and Alternatives
Tim Hortons plans to expand its store base in the Northeast and Midwest. Despite the setback in a couple of Northeast markets, this makes sense as brand awareness is likely highest and expansion has higher chances of success in markets closer to Canada.
Growth in the U.S. won't be as easy as in Canada, where Tim Hortons has managed to control an estimated 40% of the quick-service market. Those interested in compelling growth in the U.S. should focus on Chipotle Mexican Grill (NYSE:CMG), though the lofty valuation is a definite drawback from an investment standpoint.
Bottom Line
Tim Hortons' multiple also isn't in the bargain bin at nearly 19. However, the stock does represent an interesting twist in the industry since it is a foreign firm trying to expand in the U.S. In contrast, Yum! Brands (NYSE:YUM) is focusing on overseas growth, as is rival Papa John's (Nasdaq:PZZA). And though not directly comparable to Tim Hortons like Krispy Kreme Doughnuts (NYSE:KKD) or privately-held Dunkin Donuts may be, restaurant concepts have similar drivers as a group and growth away from the core market does have higher risks.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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