One of Canada's largest restaurant chains, Tim Hortons, Inc. (NYSE:THI), posted a strong quarter with profits boosted by strong same-store sales. This culturally iconic company parlayed its formidable breakfast trade with its notable coffee and baked goods, along with its strong-selling lineup of lunch sandwiches, into the fast-food winner's circle. (To learn more, see Sinking Your Teeth Into Restaurant Stocks.)
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Canada Dominant, U.S. Strong
Total revenue climbed to C$639.9 from C$605.5 in the second quarter last year, a 5.7% increase. (Note: all dollar figures in Canadian dollars, at exchange rate of US$1 = C$1.04). Same store sales rose strongly in Canada, by 6.4%, but were also up in the US by 3.1%. System wide sales on a constant currency basis increased by 9.2%. Net income rose to C$94.1 million, up from C$77.8 million in the same quarter last year. The earnings per share was C$0.54 versus C$0.43 in Q2 2009.
Beyond the Earnings
Higher rents, royalties and distribution income contributed to the higher operating income. The company also benefited from a lower year-over-year tax rate after its public company reorganization last year. Menu initiatives and promotions helped drive Canadian store sales, while U.S. stores featured value promotions and menu innovation. The U.S. stores did well in the face of the weakened U.S. economy. Tim Hortons also announced it's selling its 50% interest in Maidstone Bakeries to its partner Aryzta AG for C$475 million.
Star in a Crowded Field
Tim Hortons competes not only in the fast-food space, but in the ultra-competitive breakfast niche. Krispy Kreme Doughnuts (NYSE:KKD), for example, has struggled to find solid footing in the last few years, showing what a difficult sector this can be. Even redoubtable Starbucks (Nasdaq:SBUX) finds its coffee brand under attack by once-upstart players such as Green Mountain Coffee Roasters (Nasdaq:GMCR). Breakfast diners and other patrons can also choose tasty offerings from Panera Bread (Nasdaq:PNRA) which, for investors, also serves up copious cash flow and low debt. So Tim Hortons' performance in the field should be given its due, which in the market's case it has, as the stock was propelled higher on the news of the earnings report and bakery sale.
The Future for Tim Hortons
What The Street is waiting for, and has wanted to see, is more growth into the U.S. market. Tim Hortons is full-on in its native Canada, with 3,000 stores, so it has little expansion room left there. But the extremely competitive U.S. market (with only 600 stores) has always been seen by investment observers as a necessary growth venue.
Little has been said about the potential of international expansion, however. Just how far flung Tim Hortons may go in the international direction eventually isn't clear. The company has been prudent with its resources so far, and its expansion has been controlled rather than hasty, so this bodes well. The challenge will be to translate its brand while continuing its operational efficiencies as the company expands.
The Bottom Line
Many U.S. investors are unaware (or seem uninterested) in Canadian-based companies. That's too bad, as they are missing out on some great opportunities. Tim Hortons is one of these (not just the stock, but the food, too). Unfortunately for those interested in buying the stock, enough investors in the market have taken noticed and driven it to near its 52-week high. You'll want to wait for a significant pullback before you buy it.
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