No Holes in Tim Hortons

Even after living in Canada for several years, I was somewhat surprised to learn that Tim Hortons (NYSE: THI  ) is the fourth-largest North American quick-serve restaurant based on market cap. Though the company is starting to expand in the U.S., Tim Hortons remains Canadian at heart, which its second-quarter earnings results certainly reflect.

Overall sales increased by 9.8%, but the percentage of revenue coming from the U.S. actually decreased by 0.6%. Tim Hortons has added 61 U.S. stores in the past year, increasing its U.S. store base by 18%, while introducing 116 stores in Canada (an increase of 4%). The Tim Hortons concept is still catching on in the States, with 3.1% U.S. same-store sales growth versus a 5.7% increase for Canadian stores.

With Canadian sales driving growth, operating income increased 10.1% (or 13% excluding restructuring costs). Tim Hortons continues to move toward a franchise-based operating model, with franchise fees increasing by 24% as 22 stores moved from corporate operation to franchisee ownership.

Cost of goods sold increased by 8.6%, which is pretty decent considering the increase in prices of staples like milk and cream. Some locations also moved to the franchise model, helping to improve this figure. Overall, Tim Hortons delivered a net income increase of 11.5% and EPS growth of 14.5%, the latter boosted by management's repurchase of $48.9 million in shares.

These results look absolutely delicious when you consider Starbucks' (Nasdaq: SBUX  ) first-quarter loss and dip in same-store sales. Caribou Coffee (Nasdaq: CBOU  ) has also experienced same-store sales declines, while Krispy Kreme (NYSE: KKD  ) continues to rebuild after its too-rapid store expansion.

Tim Hortons isn't just a coffee-and-doughnut joint, though. With a large variety of soups and sandwiches available around the clock in many locations, Tim Hortons might be better compared with McDonald's (NYSE: MCD  ) or its former parent, Wendy's (NYSE: WEN  ) .

As Tim Hortons noted in its earnings release, its value-priced menu is very tasty to inflation-plagued consumers. Perhaps the company learned from Krispy Kreme that fast expansion isn't the key to earnings growth; it's not rushing U.S. expansion efforts. Even though U.S. results are still lagging those of Canada, I'm excited for Tim Hortons to continue its cautious U.S. growth. Its "always fresh," value-priced products may be exactly what Americans are craving.

For related Foolishness:

Tim Hortons is a Motley Fool Global Gains pick, and Starbucks is a Stock Advisor and Inside Value recommendation. The Fool also owns shares of Starbucks. Hungry for more investing advice? Give any of The Motley Fool's market-beating newsletter services a try free for 30 days.

Fool contributor Colleen Paulson owns stock in Tim Hortons and is an avid fan of Timbits. The Fool's disclosure policy is always a yummy treat.

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  • Report this Comment On October 04, 2008, at 8:34 AM, SteveTheInvestor wrote:

    THI opened 4 stores in my town about a year ago. They were busy at first but this was apparently due to the novelty. These days, when I drive past, there are rarely more than a few cars in the lot. Quite frankly, I don't think their products are all that good. Their donuts in particular are just nasty. Canadians must have different tastes in donuts.

    In my office, when people bring in donuts, it's from someplace besides THI. If I had to make an investment based solely on what I see in my town, I would stay away from THI.

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