Canada-based coffee chain Tim Hortons Inc. (THI) reported strong second-quarter results, as both earnings per share and revenues increased year over year driven by higher comps. The company’s share price rose almost 8% as investors were particularly bullish on the robust comps growth in both Canada and the U.S.
Tim Hortons’ second-quarter 2014 adjusted earnings per share of 92 Canadian cents (84 cents), increased 13.6% year over year, due to strong operating performance, as well as the recent recapitalization and the resultant expanded share repurchase program. The Zacks Consensus Estimate for earnings is 81 cents.
Tim Hortons’ total revenue increased 9.3% year over year to C$874.3 million ($801.4 million), owing to higher system-wide sales and franchise fee revenues. The Zacks Consensus Estimate for revenues was $772.0 million.
Higher system-wide sales drove growth in both distribution sales, and rents and royalties revenues. Franchise fee revenues were significantly higher due to increased levels of restaurant renovation and development in Canada.
Comps Discussion
Comps in Tim Hortons’ Canadian segment increased 2.6%, higher than prior-year quarter comps growth of 1.5%. The comps growth was driven by higher average check resulting from favorable product mix and pricing, partially offset by a decline in same-store transactions. System-wide transactions grew as a result of the new restaurants and average check benefited from increased sales in the lunch as well as breakfast day-part due to menu innovation.
Similarly in the U.S., comps increased 5.9%, much higher than prior-year quarter comps growth of 1.4%, due to growth in average check, from favorable product mix and pricing. Continued growth in the breakfast day-part also contributed to the same-store sales growth.
Margins and Expenses
Operating income increased 8.9% to C$192.4 million ($176.4), primarily due to higher revenues. Operating income in the Canadian segment grew 8.1% year over year to C$188.9 million ($173.1 million). Operating income in the U.S. segment was C$9.3 million ($8.5 million), a substantial year-over-year increase.
Cost of sales increased 7.8% to C$527.1 million ($483.1 million), primarily attributable to growth in distribution cost of sales. Operating expenses also increased 9.6% to C$84.4 million ($77.4 million), due to higher rent and depreciation costs related to restaurant openings and increased depreciation related to renovations.
G&A expenses grew 5.8% to C$40.2 million ($36.8 million), due to increased salaries and benefits resulting primarily from fewer vacancies in the organization and higher professional fees.
Guidance
In view of the company’s substantial year-to-date revenue growth compared with the last year, management expects same-store sales growth in the U.S. for 2014 at the higher end, or slightly above its targeted range of 2% to 4%.
Our Take
We believe Tim Hortons is poised to post solid comps in the quarters ahead backed by its strategic menu innovation and sales initiatives. Additionally, the company remains essentially a Canadian chain, but expansion in the U.S., which is on the cards, might boost comps.
However, we remain aware of the escalating commodity costs — especially increase in coffee prices due to a drought in Brazil — which might hurt the company’s margin in the upcoming quarters. This adds to the woes because the company’s strategic initiatives, like mobile payment and a digital programming network along with new restaurant openings and renovations will increase expenses.
Tim Hortons currently carries a Zacks Rank #3 (Hold). Better ranked stocks in the same sector include BJ's Restaurants, Inc. (BJRI), Chipotle Mexican Grill, Inc. (CMG) and Jamba, Inc. (JMBA). All these stocks sport a Zacks Rank #1 (Strong Buy).
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