News
Tim Hortons continues strong results in Q1
May 13, 2010
Tim Hortons Inc. has reported its robust same-store sales growth contributed to strong consolidated earnings performance for the first quarter ended April 4.
Canadian same-store sales experienced strong growth of 5.2 percent. Same-store sales growth benefited from successful menu, marketing and operational programs, which led to continued transaction growth and from previous pricing in place in the system in certain Canadian markets which benefited average check.
The same-store sales performance incorporates the slight negative impact of a partial timing shift of the Easter holiday into the first quarter of this year, from the second quarter of 2009.
The U.S. segment increased same-store sales by 3.0 percent in the first quarter. Significant contributions from co-branded locations featuring Cold Stone Creamery, and effective marketing programs and menu initiatives, benefited the company's performance in economic conditions that continued to be challenging.
As in Canada, the partial timing shift of Easter compared to last year had a slight negative impact on same-store sales growth.
"Our business achieved strong sales and earnings performance this quarter. Our competitive advantages continue to position our business among the leading companies in our sector, and we look forward to further building upon that position," said Don Schroeder, THI president and CEO.
For the quarter total revenues were up 4.8 percent at $582.6 million (Canadian), compared to $555.7 million in the same period last year. Higher distribution revenues, and higher rents and royalties due to strong underlying product demand, were partially offset by lower year-over-year revenues from consolidated variable interest entities (VIE) and lower revenues from company-operated restaurants as the company continues to re-franchise.
Lower franchise fees also impacted total revenues during the quarter, primarily due to timing of resales, replacements and renovations versus last year, and fewer new standard restaurants compared to the first quarter of 2009. The effects of foreign exchange translation negatively impacted revenue growth this quarter by approximately 1.6 percent.
Net income attributable to Tim Hortons, which excludes the impact of noncontrolling interests, was $78.9 million in the first quarter, up 18.7 percent compared to $66.4 million in the same quarter last year. Higher operating income, and a lower year-over-year tax rate due primarily to the company's 2009 public company reorganization, contributed to this positive performance.
Segmented performance
Canada: Operating income in the segment was $132.4 million, up 14.3 percent compared to $115.8 million in the first quarter of last year, benefiting from higher systemwide sales and solid 5.2 same-store sales growth that drove rents, royalties and distribution income.
A total of 20 restaurants were opened in the first quarter. At the end of the first quarter, Tim Hortons had 18 restaurants in Canada co-branded as Cold Stone Creamery locations.
United States: The U.S. segment had a small operating loss of $0.3 million, an improvement compared to the $0.6 million operating loss from the same period last year. The first quarter is typically the most challenging for Tim Horton's business.
U.S. systemwide sales benefited from continued restaurant development and from continued same-store sales growth. Higher sales led to increased rents and royalties, offset in part by higher general and administrative costs and lower distribution contributions in the segment.
A total of four restaurants were opened in the first quarter. At the end of the first quarter, we had 66 Tim Hortons restaurants in the U.S. co-branded as Cold Stone Creamery locations.
The overall rate of growth in relief the company provides to franchisees in the U.S. slowed compared to historical levels, and while slightly higher in the first quarter of 2010 compared to the same period last year, the increase in relief is primarily related to either restaurants that were previously company-operated locations or those opened for less than 12 months.
Corporate developments
After analyzing its variable interests, including its equity investments and certain operator arrangements, the company has determined that it is the primary beneficiary of its 50-50 bakery joint venture and has consolidated this operation. This bakery joint venture produces and supplies for its restaurant system with par-baked donuts, Timbits, some bread products and pastries. As a result, the revenues, costs and the remaining 50 percent of operating income of this joint venture and from approximately 150 additional non-owned restaurants — 100 of which are in the U.S. and 50 in Canada — have also been consolidated as a result of the new standard.
The company received notice from IAWS Group Ltd., a subsidiary of Aryzta AG, the company's 50-50 partner under the Maidstone Bakeries joint venture, invoking the buy/sell provisions of the joint venture. As a result, the company has the option to either sell its interest or acquire IAWS' interest in the joint venture. Aryzta believes that the business of the joint venture will be better served under an alternative ownership structure rather than under the existing joint venture arrangement. The parties have agreed to an extended negotiation period to consider amendments to the ownership structure and the underlying arrangements.
The existing joint venture documentation provides that the company's supply rights for products extend for seven years after either party's exit from the joint venture, and sourcing commitments extend until early 2016 for donuts and Timbits, allowing the company sufficient flexibility to secure alternative means of supply, if desired. The existing agreements also have protections regarding intellectual property rights and dealing with competitors, as well as terms relating to price determination, that remain in effect after the closing of the transaction. Given that the discussions regarding the transaction are in the preliminary stages, the resolution of these matters may change as the ultimate ownership structure is determined. The parties expect to reach final agreement by year-end 2010.
Subject to market conditions, in the second quarter of 2010 the company expects to complete a private bond offering in Canada of between $200 million and $250 million. The proceeds of this anticipated offering are expected to be used to refinance a portion of its $300 million term loan and for general corporate purposes.
Construction of new distribution center
The board has approved construction of a replacement distribution center in Kingston, Ontario, to provide greater supply capacity for dry goods and to expand into frozen and refrigerated product distribution from this location for our restaurant owners. Total planned capital expenditures on this facility are estimated to be approximately $45 million, with approximately $20 million to be incurred in 2010.
When fully operational in the second half of 2011, the facility is expected to serve more than 650 restaurants in eastern Ontario, and Quebec, responding to continued projected growth in that market. As with other vertical integration initiatives, we expect this new facility will deliver important system benefits, including improved efficiency and cost-effective service for our restaurant owners, as well as provide a reasonable return to the company.
A replay of the company's conference call will be available until May 20 and can be accessed at (416) 626-4100 or (800) 558-5253. The call replay reservation number is 21466458. The call and presentation material will also be archived for a period of one-year in the Events and Presentations section of the company's website.
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