The mass exodus of customers brewing coffee at home has finally hit Tim Hortons
Growth for the quarter was lackluster when compared to McDonald's
While the company is looking to ramp up its expansion, signing an agreement with Tops Friendly Markets to add 80 Tim Hortons locations in Tops stores, growth for the rest of this year looks like it will fall short of management's expectations. The company was looking for 2% to 4% comparable-store sales growth, but after posting just 1.2% growth this year, it looks unlikely that the company will reach its goal.
All is not lost for Tim Hortons' investors, though. The company has been shifting to a franchise-owned and -operated model, and the effects are already being realized. The operating margin this quarter expanded 190 basis points, which helped generate a 17% bottom-line increase on a 3.8% rise in sales. Earnings-per-share gains were enhanced by the company's continued stock repurchase program, which resulted in 2.8% fewer outstanding shares this quarter. Management has repurchased 4.5 million shares throughout the year, and it plans to continue the program through 2009.
I was excited to pull a Peter Lynch while visiting Canada last month and take a taste-test of Tim Horton's strong brew. Surprisingly, prices weren't much different than they were since I had last visited Canada three years ago, and the coffee and donuts were as good as expected. I visited my first U.S. Tim Hortons store on the drive up to Ontario, and I have to say the coffee just didn't taste as good as it did in the mother country. As an investor, I hope that this is just an anomaly.
On my visit to Canada, I was also surprised to hear that Canada expects its economic decline to be less aggressive than what we are feeling here in the United States, which could help Tim Hortons make it through the downturn. At a trailing-12-month P/E of 16, Tim Hortons is still cheaper than Starbucks and in my opinion, it sports higher growth potential. I still think that the company's relatively inexpensive offerings position it well in this economy, and I'm optimistic that Tim Hortons will serve up its "always fresh" products for a growing consumer base.
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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 the Motley Fool's newsletters a try via the 30-day free trial.