TIM HORTONS INC. $62 (Toronto symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 138.2 million; Market cap: $8.6 billion; Price-to-sales ratio: 2.8; Dividend yield: 2.1%; TSINetwork Rating: Average; www.timhortons.com) operates 3,588 coffee-and-donut stores in Canada, 859 in the U.S. and 38 in the Persian Gulf. Franchisees operate 99.6% of these outlets.
The company’s sales jumped 33.0%, from $1.7 billion in 2009 to $2.3 billion in 2013. That’s largely because it opened 573 new locations in Canada (up 19.0%) and 296 in the U.S. (up 52.6%). New menu items, like soups and panini sandwiches, also spurred sales.
Serving more customers faster
Earnings jumped 110.5%, from $296.4 million in 2009 to $624.0 million in 2010, mainly due to a $361.1-million gain on the sale of a bakery joint venture. Per-share earnings rose 118.3%, from $1.64 to $3.58, on fewer shares outstanding. Earnings then fell to $2.35 a share (or a total of $382.8 million) in 2011 but turned around and rose to $2.82 a share (or $424.4 million) in 2013.
Under a new strategic plan, Tim Hortons will stop selling Cold Stone Creamery ice cream in its Canadian stores, though it will keep doing so in the U.S. It is also closing some less profitable U.S. outlets. If you exclude costs related to these moves and other unusual items, the company earned $2.98 a share in 2013.
Other parts of the plan include a simpler menu, which should shorten checkout times and encourage repeat visits. The company is also installing technology that lets customers pay with their smartphones, which will further cut waiting times.
Focused on lower-risk expansion
In addition, the company plans to open 800 new outlets (500 in Canada and 300 in the U.S.) over the next five years. Franchisees will build and operate these locations, which cuts Tim Hortons’ risk. The company has a similar arrangement with Dubaibased Apparel Group to open up to 220 outlets in the Persian Gulf over the next few years.
During 2014, Tim Hortons plans to spend $180 million to $220 million to build new outlets and renovate existing locations. That’s down from $221.0 million in 2013.
The company’s strong balance sheet will support these investments. Its long-term debt of $964.1 million is a low 11% of its market cap. It also holds cash of $50.4 million, or $0.36 a share.
Tim Hortons recently raised its dividend by 23.1%. The new annual rate of $1.28 yields 2.1%. The company also plans to buy back up to $440 million worth of its shares over the next year.
Steady profit growth ahead
Earnings should rise 9.4% in 2014, to $3.26 a share, and the stock trades at a still reasonable 19.0 times that estimate. The company’s new growth plan should increase its annual earnings per share by 11% to 13% between 2015 and 2018.
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