Tim Hortons Inc. Announces 2014 Second Quarter Results

2014-08-06
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  • Tim Hortons Significant top-line momentum in both Canada and the U.S. and strong operating performance contributes to 13.6% EPS increase

    Significant top-line momentum in both Canada and the U.S. and strong operating performance contributes to 13.6% EPS increase

    (Unaudited.  All amounts in Canadian dollars and presented in accordance with U.S. GAAP.)

    Financial & Sales Highlights

                                               
    Performance           Q2 2014       Q2 2013       %

    Change

        YTD 2014  
    Total revenues           $ 874.3       $ 800.1       9.3%     $ 1,640.7  
    Operating income           $ 192.4       $ 176.6       8.9%     $ 337.7  
    Effective tax rate             28.3 %       26.1 %           28.5 %
    Net income attributable to THI           $ 123.8       $ 123.7       0.0%     $ 214.7  
    Diluted earnings per share attributable to THI

    ("EPS")

              $ 0.92       $ 0.81       13.6%     $ 1.57  
    Fully diluted shares (weighted average)             134.4         152.6       (12.0)%       136.5  
    (All numbers in millions, except EPS and effective tax rate.  All numbers rounded.)

     

                             
    Same-Store Sales(1)           Q2 2014     Q2 2013     YTD 2014
    Canada           2.6%     1.5%     2.1%
    U.S.           5.9%     1.4%     3.9%
    (1) Includes average same-store sales at franchised

    and Company-operated locations open for 13

    months or more.  Substantially all of our

    restaurants are franchised.

    Highlights

    • Acceleration in same-store sales growth contributed to strong operating performance
    • Successful product innovation and launches, including the Crispy Chicken Sandwich in Canada and Frozen Hot Chocolate in the U.S., resulted in strong sales growth
    • Significant advancements made in mobile technology introduced in the quarter, including new mobile payment capabilities
    • Company expects 2014 EPS and U.S. same-store sales growth to be at the high end or slightly above target ranges 

       

    Tim Hortons Inc. (TSX: THI, NYSE: THI) today announced results for the second quarter ended June 29, 2014.

    "Guests have been responding favourably to our menu and technology innovation, resulting in good momentum in our business.  Our second quarter results reflect strong organizational alignment and execution of our Winning in the New Era strategic plan," said Marc Caira, president and CEO.

    Consolidated Results

    All percentage increases and decreases represent year-over-year changes for the second quarter of 2014 compared to the second quarter of 2013, unless otherwise noted.

    Systemwide sales(2) increased 6.5% on a constant currency basis.  This growth resulted from new restaurant development in Canada and the U.S., and from same-store sales growth of 2.6% in Canada and 5.9% in the U.S.

    Total revenues grew 9.3% to $874.3 million compared to $800.1 million last year.  Systemwide sales growth was the primary driver of both a 9.2% increase in distribution sales and a 7.5% increase in rents and royalties revenue.  Franchise fee revenues were significantly higher due to increased levels of restaurant renovations and development in Canada, which also resulted in a significant increase in associated franchise fee costs.

    Cost of sales increased by 7.8%, due primarily to growth in distribution cost of sales.  Operating expenses increased by 9.6%, due to higher rent and depreciation costs related to new restaurant openings and increased depreciation related to renovations.  G&A expenses grew by 5.8% due to increased salaries and benefits resulting primarily from fewer vacancies in the organization this year, and higher professional fees related to initiatives to support the execution of our strategic plan.  The comparable quarter of 2013 included $0.6 million of corporate reorganization expenses which did not recur this quarter.

    Operating income increased 8.9% to $192.4 million, compared to $176.6 million a year earlier.

    Net income attributable to Tim Hortons Inc. was flat at $123.8 million, as growth in operating income was offset by the effects of our recent recapitalization, which resulted in increased interest expense and a higher effective tax rate.  The effective tax rate in the second quarter of 2013 was also favourably impacted by a change in reserve balances.

    EPS of $0.92 grew by 13.6% due to our strong operating performance, as well as the recent recapitalization and resulting expanded share repurchase program, which led to a decrease of 18.3 million shares outstanding, on average, compared to the second quarter of 2013.

    Given our strong sales progression and momentum going into the second half of the year, we expect our EPS for fiscal 2014 to be at the high end, or slightly above, our targeted range of $3.17 to $3.27.

    Segmented Performance Commentary

    Same-store sales growth rates strengthened considerably in comparison to recent quarters including the second quarter of 2013.

    Canada

    Canadian same-store sales growth of 2.6% was driven by gains in average cheque resulting from favourable product mix and pricing, partially offset by a decline in same-store transactions.  Systemwide transactions grew as a result of new restaurants added to our system.  Average cheque benefited from increased sales in the lunch daypart, led by the recent successful introduction of our Crispy Chicken Sandwich, as well as increased sales in the breakfast daypart, driven by new product introductions such as the Turkey Sausage Hot Breakfast Sandwich and our enhanced Hash Brown.

    Operating income in the Canadian segment grew 8.1% to $188.9 million.  Systemwide sales growth of 5.8% resulted in increased rents and royalties income and a higher allocation of supply chain income.  The Canadian segment also benefited from increased franchise fee income.  We opened 29 restaurants in Canada in the second quarter.

    United States

    U.S. same-store sales grew considerably year-over-year, up 5.9% in the quarter, driven by gains in average cheque resulting from favourable product mix and pricing.  Cold beverage sales made a positive contribution due to successful new product introductions such as Frozen Hot Chocolate and ongoing innovation around our Iced Capp platform.  Continued growth in the breakfast daypart also contributed to same-store sales growth.

    On the basis of our significant sales progression year-to-date, we expect that same-store sales growth in the U.S. for 2014 will be at the high end, or slightly above, our targeted range of 2% to 4%.

    Operating income in the U.S. segment was $9.3 million, an increase of $6.7 million compared to the second quarter of 2013.  Systemwide sales growth of 12.3% resulted in growth in rents and royalties income and a higher allocation of supply chain income.  U.S. operating income also benefited from the favourable timing of certain expenses.  Our operating momentum in the U.S. has resulted in increasing operating income and continued cash flow contributions from that segment over the first half of 2014.

    We opened one restaurant in the U.S. in the second quarter.  Subsequent to the quarter, we signed a development agreement with a new partner to add 25 Tim Hortons locations in Richmond County, New York, and Middlesex County, New Jersey over the next 10 years.  We have now completed six development agreements in the U.S. representing approximately 135 new restaurants over 10 years.

    Corporate services

    The Corporate services segment had an operating loss of $8.0 million, compared to a loss of $1.4 million in the second quarter of 2013.  The increased loss was driven by increased corporate costs, and unfavourable product margins in our supply chain recognized in the second quarter of 2014 compared to favourable product margins recognized a year earlier.  We expect product margin variability to generally reverse within the fiscal year.

    Our international partner, Apparel FZCO, opened six restaurants in the Gulf Cooperation Council in the quarter.

    Significant Developments & Initiatives

    Board declares dividend payment of $0.32 per common share 

    The Board of Directors has declared a quarterly dividend of $0.32 per common share, payable on September 3, 2014, to shareholders of record as of the close of business on August 18, 2014.  Dividends declared will be paid in Canadian dollars to all shareholders with Canadian resident addresses. For U.S. shareholders, dividends paid will be converted to U.S. dollars based on prevailing exchange rates at the time of conversion by Tim Hortons for registered shareholders and by CDS Clearing and Depository Services Inc. for beneficial shareholders.

    TIM HORTONS INC. AND SUBSIDIARIES

    CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

    (in thousands of Canadian dollars, except share and per share data)

    (Unaudited)

                                           
            Second quarter ended                    
            June 29, 2014     June 30, 2013     $ Change     % Change
    Revenues                                      
      Sales        $ 613,829     $ 568,562     $   45,267       8.0 %
      Franchise revenues                                      
        Rents and royalties          224,953       209,289         15,664       7.5 %
        Franchise fees          35,565       22,288         13,277       59.6 %
              260,518       231,577         28,941       12.5 %
    Total revenues          874,347       800,139         74,208       9.3 %
    Costs and expenses                                      
      Cost of sales          527,132       489,092         38,040       7.8 %
      Operating expenses          84,411       76,986         7,425       9.6 %
      Franchise fee costs          34,906       23,326         11,580       49.6 %
      General and administrative expenses          40,241       38,038         2,203       5.8 %
      Equity (income)          (3,975)       (3,916)         (59)       1.5 %
      Corporate reorganization expenses                604         (604)     n/m
      Other (income) expense, net          (735)       (570)         (165)       28.9 %
    Total costs and expenses, net          681,980       623,560         58,420       9.4 %
    Operating income          192,367       176,579         15,788       8.9 %
      Interest (expense)          (18,648)       (8,922)         (9,726)     n/m
      Interest income          1,138       791         347       43.9 %
    Income before income taxes          174,857       168,448         6,409       3.8 %
    Income taxes          49,425       43,886         5,539       12.6 %
    Net income          125,432       124,562         870       0.7 %
    Net income attributable to noncontrolling interests         1,682       826         856     n/m
    Net income attributable to Tim Hortons Inc.        $ 123,750     $ 123,736     $   14       0.0 %
    Basic earnings per common share attributable to 

    Tim Hortons Inc. 

          $ 0.92     $ 0.81     $   0.11       13.6 %
    Diluted earnings per common share attributable 

    to Tim Hortons Inc. 

          $ 0.92     $ 0.81     $   0.11       13.6 %
    Weighted average number of common shares 

    outstanding (in thousands) - Basic 

            133,899       152,083         (18,184)       (12.0) %
    Weighted average number of common shares 

    outstanding (in thousands) - Diluted 

            134,367       152,637         (18,270)       (12.0) %
    Dividends per common share        $ 0.32     $ 0.26     $   0.06          
                                   

     

     

    TIM HORTONS INC. AND SUBSIDIARIES

    CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

    (in thousands of Canadian dollars, except share and per share data)

    (Unaudited)

                                           
            Year-to-date period ended                    
            June 29, 2014     June 30, 2013     $ Change     % Change
    Revenues                                      
      Sales        $ 1,154,859     $ 1,092,449     $   62,410       5.7 %
      Franchise revenues                                       
        Rents and royalties          424,462       396,743         27,719       7.0 %
        Franchise fees          61,428       42,484         18,944       44.6 %
              485,890       439,227         46,663       10.6 %
    Total revenues          1,640,749       1,531,676         109,073       7.1 %
    Costs and expenses                                      
      Cost of sales          1,000,715       950,446         50,269       5.3 %
      Operating expenses          165,669       152,719         12,950       8.5 %
      Franchise fee costs          62,589       45,878         16,711       36.4 %
      General and administrative expenses          79,460       76,706         2,754       3.6 %
      Equity (income)          (7,321)       (7,265)         (56)       0.8 %
      Corporate reorganization expenses                10,079         (10,079)       n/m
      Other (income) expense, net          1,983       (1,383)         3,366       n/m
    Total costs and expenses, net          1,303,095       1,227,180         75,915       6.2 %
    Operating income          337,654       304,496         33,158       10.9 %
      Interest (expense)          (35,324)       (17,585)         (17,739)       n/m
      Interest income          2,115       1,719         396       23.0 %
    Income before income taxes          304,445       288,630         15,815       5.5 %
    Income taxes          86,658       77,145         9,513       12.3 %
    Net income          217,787       211,485        



    Logos, product and company names mentioned are the property of their respective owners.

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