Monday, 12 November 2012

Tim Hortons - 2012 Third Quarter Update

Tim Hortons recently reported a rather soft third quarter, at least by its usual standards.  Sales were up 10.3% year-over-year, and adjusted operating income increased a modest 6.2%.  On a per share basis, the results were better, up by 11.8% (excluding a one-time charge) thanks to a lower share count as a result of the company's ongoing buyback program.  Same store sales growth eked out a 1.9% gain in Canada, and 2.3% in the US, over the prior year, far less than the usual 5% or more increments that shareholders have grown to expect.  Of note, the number of transactions actually fell, but were more than offset by increased prices and cheques.  Affirming the company's business model, however, corporate revenues grew significantly faster than system wide sales, which grew by only 5.9%.  Such a discrepancy cannot continue indefinitely, of course, but it highlights the fact the store operators absorb pressure more than - or at least before - shareholders do.  For example, when commodity prices increase, it tends to squeeze owners, while remaining about neutral for corporate.

Management explained the so-so performance by pointing to a sluggish Canadian economy, capacity constraints at Tim Hortons stores, and aggressive promotions by competitors.  The first problem will, hopefully, solve itself.  Too much demand is a high-class problem, and expanding capacity is a relatively straightforward and low-risk opportunity for the company: higher throughput drive-thrus, rearranged counters in stores, and adding stores near locations that are currently overflowing with business.  The last and most serious problem is increasingly intense competition, notably from McDonalds and Subway, particularly in coffee.  When one of your chief competitors is offering coffee free of charge, it can be difficult to match them; instead, Tim Hortons will respond by fighting on other turf, especially in food, especially the lunch menu.    

There is little reason for shareholders to panic.  Tim Hortons still outperformed most of its competition; its results were mediocre only compared to its own stellar past performance.  The company stood by its annual EPS guidance of $2.65-2.75 (excluding charges), and set out a clear and attainable path to increased sales and earnings.  Shares were hit after results were released, and if prices continue to fall, it could offer investors the chance to buy a stake in a very fine company for a reasonable price.
My original analysis of Tim Hortons is here.
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