Tim Hortons
Inc. (NYSE:THI) (TSX:THI) recently posted its results for
the second quarter ended July 1, 2007.
Second Quarter
Highlights
- Same-store sales grow 6.5% and 3.8% in Canada and the U.S., respectively
- 18 new restaurants opened in the second quarter of 2007
- Revenues up 14.4%, operating income up 8.0%
- Net income impacted by higher effective tax rate in the second quarter of 2007
- Company declares fifth consecutive $0.07 quarterly dividend
- $45.0 million spent to repurchase 1.3 million shares in the
second quarter of 2007
Second quarter same-store sales increased 6.5% in Canada (6.1% in
Q2 2006) and increased 3.8% in the U.S. (8.4% in Q2 2006). Tim
Hortons(R) opened a total of 18 restaurants in the quarter compared
to 30 restaurants in the second quarter last year. System wide
sales growth(1) was 10.9% in the second quarter. System wide sales
growth includes all franchised and Company-operated restaurants
sales.
Featured promotions during the second quarter were the Triple
Chocolate Donut, Iced Capp Supreme, Chicken Salad and Egg Salad
Wrap sandwiches and, in the U.S., the introduction of Iced Coffee
in late June. Pricing contributed approximately 1% of the
same-store sales growth in both Canada and the U.S.
"Same-store sales performance in Canada through the second quarter
of this year has continued to exceed our expectations, driven by
our strong promotional calendar, product innovation, store level
operations, and some price increases," said Chairman and Chief
Executive Officer Paul House. "Although U.S. same-store sales fell
below our long-term targeted growth, we are executing on our plan
of developing selected markets and growing our brand in the U.S. We
feel positive about our second quarter U.S. segment operating
results, which improved significantly over the first quarter of
2007, to a slightly positive contribution."
Total revenues were $465.3 million in the second quarter, up 14.4%
compared to $406.8 million in the second quarter of 2006. Revenues
from our distribution business grew 19.6%, primarily as a result of
system wide sales growth and our continued roll out of
three-channel delivery from our Guelph facility in Ontario. Rent
and royalty revenues increased 10.5%, consistent with system wide
sales growth.
Cost of sales grew 17.7% in the second quarter of 2007 compared to
the second quarter of 2006, which was reflective of the growth in
system wide sales and higher costs associated with frozen and
refrigerated distribution. In the second quarter of 2007, operating
expenses increased 14.5%, at a rate higher than our system wide
sales growth, in part due to a higher number of properties being
leased and subleased and costs associated with research and
development in the area of new store design incurred.
Operating income in the second quarter was $106.3 million compared
to $98.5 million for the same period in 2006. The $7.8 million
year-over-year improvement in operating income was primarily due to
the higher revenues. Operating gains in the second quarter of 2007
were offset, in part, by the factors discussed above and higher
general and administrative expenses. General and administrative
costs increased due primarily to costs associated with restricted
stock units (RSUs) and higher public company costs. The Company
made its RSU grant to officers and certain employees in May 2007
versus the third quarter of 2006.
Operating income growth of 8.0% was lower than revenue growth, in
part, as a result of the change in business mix, with distribution
contributing a higher proportion of the revenue and cost growth.
Distribution operating margins are generally lower than margins
from other areas of our business, but remain a critical element of
our overall strategy and are contributing positively to our
operating income.
Net interest expense in the second quarter of 2007 was $4.8 million
compared to $3.3 million in the same period last year primarily due
to lower cash balances on-hand throughout this quarter.
The effective tax rate in the second quarter of 2007 was 33.8%
compared to 19.8% in 2006. The low 2006 rate reflected certain
benefits that did not recur in 2007.
Second quarter net income was $67.2 million compared to $76.3
million last year. Reported diluted earnings per share (EPS) were
$0.36 compared to $0.39 in the second quarter of 2006. The primary
factor contributing to reductions in net income and EPS for the
quarter was the higher effective tax rate in 2007.
Diluted weighted average shares outstanding in the second quarter
of 2007 were 189.3 million compared to 193.3 million in the same
period last year. The 2.1% lower share count was due to the
Company's share repurchase program.
"In addition to the continued same-store sales momentum, we are
pleased with the top-line revenue growth and operating results
achieved through the end of the second quarter," said Cynthia
Devine, Executive Vice President and Chief Financial Officer. "Our
operating income is ahead of our expectations for the first six
months of 2007, and if that trend continues, we would expect to
meet or exceed our 2007 operating income growth target of 10%."
MasterCard Implementation
As previously announced, Tim Hortons continues to aggressively
install MasterCard payment terminals in Tim Hortons locations
across Canada. Adding the option of MasterCard payment gives our
customers more choice and flexibility and is a great way to enhance
our customer experience. As of July 20th, approximately 1,000
restaurant locations have been installed and are accepting
MasterCard. We anticipate that all participating stores will be up
and running with MasterCard by late 2007.
Camp Day
On June 6, all of our system wide restaurants participated in "Camp
Day." Over 3,000 Tim Hortons stores in North America donated their
entire coffee sales and funds raised through Camp Day events and
activities to the Tim Horton Children's Foundation, raising $8.3
million. This amount is a new record, exceeding last year's total
of $7.2 million. These contributions will give over 12,000
deserving kids the opportunity to experience a camping adventure of
a lifetime this year at one of the six Tim Horton Children's
Foundation camps.
Share repurchase program in the second quarter
In the second quarter, the Company purchased 1.3 million shares at
an average cost of $34.45 for a total cost of $45.0 million. The
Company has now completed $155 million of the previously-announced
$200 million share repurchase program.
Board declares quarterly dividend
The Board of Directors has approved a $0.07 quarterly dividend. The
dividend is payable on August 27, 2007, to shareholders of record
as of August 15, 2007. The payment of future dividends remains
subject to the discretion of the Company's Board of Directors.
Tim Hortons dividend is paid in Canadian dollars to all
shareholders with Canadian resident addresses whose shares are
registered with Computershare (the Company's transfer agent). For
all other shareholders, including all shareholders who hold their
shares indirectly (i.e. through their broker) and regardless of
country of residence, the dividend will be converted to U.S.
dollars on August 20, 2007 at the daily noon rate established by
the Bank of Canada and paid in U.S. dollars on August 27,
2007.
