In my opinion, Tim Hortons (NYSE: THI ) slings some of the best doughnuts in the world. KrispyKreme (NYSE: KKD ) ? Dunkin' Donuts? No contest. So it's no surprise that I was so excited to see the company spin off from Wendy's (NYSE: WEN ) earlier this year.
While the stock never quite reached my $22 target, I did receive quite a few offers from Foolish readers to send me my beloved Timbits. While I am eternally grateful to those kind readers, I was suffering through one of the most brutal heat waves of the summer, and it would have been a crying shame to receive melted Timbits in the mailbox.
Shareholders have to be pleased with this third quarter. Revenues were up 7.1% to $413 million, and same-store sales rose 5.9% in Canada and 9.2% in the U.S. year over year. Net income, however, declined to $51.8 million, from $66.3 million last year. Keep in mind that there were a few penalties from the Wendy's spinoff, including some truly unexpected one-time expenses -- unlike many "one-time expenses" that seem to reoccur quarter after quarter -- as well as a substantially higher tax rate this quarter, at 41%. Going forward, operating margins should normalize, and the tax rate should be a substantially lower 34%.
Numbers aside, management is continuing to execute on an ambitious expansion plan in both store count and menu offerings. The company opened 29 stores in the quarter, and 86 stores year to date, and expects to open 180-200 for all of 2006. New menu offerings included a chunky chicken salad wrap, various flavored coffees, and a hot breakfast sandwich in the U.S. Management expects the hot sandwich to drive U.S sales in the fourth quarter. Furthermore, the company announced more shareholder-friendly initiatives, including its second consecutive quarterly dividend of $0.07 a share, along with $200 million for share buybacks, enough to purchase 5% of the shares outstanding.
For this doughnut lover, it looked to be a solid quarter. The delay in the ramp-up of the company's Guelph distribution facility seems to be a continuing headache for now, but the financial impact is relatively small, and the costs should drop further in the fourth quarter. The more pressing issue for this value investor is that Tim Hortons' premium-priced shares are still too high for my sugary blood. The shares continue to trade at a substantial premium to fast food giant McDonald's (NYSE: MCD ) , with a P/E in the high 20s. While I can eat Timbits all day -- well, maybe not all day -- I just can't stomach these richly priced shares just yet.
More sugar highs:
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