Oakville, ON, Aug. 6 - Tim Hortons Inc. today announced its results for the second quarter ended June 28th, 2009.
"We overcame anticipated challenges in the second quarter and delivered positive sales and earnings growth, demonstrating the strength and resilience of our business," said Don Schroeder, president and CEO. "We were particularly pleased with growth in transactions in our Canadian business and the operational and earnings improvement in our U.S. business," added Schroeder.
Consolidated Results
Second quarter systemwide sales(3) grew 5.0% on a constant currency basis, supported by new restaurants open in the system and continued same-store sales growth both in Canada and the U.S. In the second quarter total revenues increased 8.9% to $556.1 million compared to $510.7 million in same period of 2008. Systemwide sales growth drove higher rents, royalties and distribution revenues. Total revenues also benefited from higher distribution sales. Foreign exchange translation increased revenues by approximately 1.4%. Continued progress was made during the quarter in transitioning Company-operated restaurants to owner-operated restaurants. While this process provides important longer-term benefits, it tends to offset shorter-term revenue growth as was the case in the second quarter. Revenue growth was also impacted by lower revenues from FIN 46R restaurants, and lower franchise fees.
Sales, consisting primarily of distribution sales, were up 10.8% compared to the same quarter last year. Consistent with the first quarter, Sales growth benefited from new products managed through the supply chain including expansion in the grocery store channel, continued systemwide sales growth, and higher prices on coffee and other commodities as a result of higher underlying costs. Sales were positively impacted by approximately 1.4% due to foreign exchange translation.
In the second quarter rents and royalties increased 7.3%. This rate of growth is generally consistent with systemwide sales. Franchise fees decreased 9.3%. The year over year decline in franchise fees was due primarily to fewer new restaurant openings, lower resales, and fewer renovations, offset in part by the timing of revenue recognition in our U.S. franchise incentive program.
Same-store sales increased 1.7% in Canada and 3.3% in the U.S. Transaction growth and a slight increase in average check, due to minimal levels of previous price increases remaining in the system, helped overcome a shift in product mix, the anticipated timing impact of the Easter holiday reversing, and generally challenging macro economic conditions that continued to persist during the quarter.
Positive same-store sales were driven by continued menu and marketing initiatives that included the launch of Chicken Wrap Snackers immediately prior to the quarter, and the national introduction of Iced Coffee in the Canadian market, supported by a free sample day. In addition to product introductions, Iced Cappuccino, breakfast sandwiches and strawberry bloom donuts were promoted. In the U.S., the sausage and a biscuit product offering, first successfully offered in February, was also promoted during the quarter at an attractive price point.
Foreign exchange translation increased individual cost structure line items on average by about 1.7% in the second quarter.
In the second quarter cost of sales increased by 12.0%. The increase was due mostly to higher product costs associated with new products managed through the supply chain, increased costs of underlying commodities, and systemwide sales growth. Foreign exchange translation contributed approximately 1.4% to the increase in cost of sales. Lower cost of sales from Company-operated and FIN 46R restaurants partially offset these factors.
Operating expenses grew 8.8% in the second quarter. Most of the increase is attributable to the increase in restaurants in the system compared to the same period last year, percentage rent increases on variable rents, and foreign currency translation, which contributed 2.0% of the increased expenses.
During the second quarter franchise fee costs were 1.5% lower than the comparable quarter last year, mostly due to fewer new restaurant openings, lower resales and fewer renovations, offset by the timing of cost recognition related to our U.S. franchise incentive program.
General and administrative expense declined 1.2% compared to the same period last year, and incorporates spending of approximately $2.7 million on professional advisory and filing fees associated with the proposed public company reorganization. Foreign currency translation increased general and administrative costs by 2.0%. The largest factor for the year-over-year improvement in general and administrative expenses was management restructuring costs of approximately $3.1 million incurred in the second quarter of 2008, which did not recur.
Second quarter equity income declined 13.1% compared to the same period last year. In the second quarter of 2008, certain joint ventures benefited from items that did not recur this quarter. In addition, the decline in equity income reflects certain underlying commodity cost increases absorbed by our joint venture bakery and not passed on to franchisees.
Operating income for the second quarter was $121.9 million, up 3.7% from $117.6 million in the same period last year. Continued same-store sales growth, a higher number of restaurants in the system resulting in higher rents, royalties, and distribution income, and improvement in the operating performance of the U.S. segment contributed to the increase in operating income. The fundamentals of our business remained strong, however, the rate of operating income growth during the quarter was reduced in part by the $2.7 million in professional advisory and filing fees associated with the previously announced proposed transaction to reorganize as a Canadian public company, by a decline in franchise fee and equity income, and by lower other income.
Net income attributable to Tim Hortons was $77.8 million, an increase of 3.7% compared to $75.0 million last year, in line with operating income growth. The effective tax rate was relatively flat in the second quarter of 2009, at 33.2% versus 33.1% last year, as was net interest expense.
Diluted earnings per share attributable to Tim Hortons (EPS) were $0.43, increasing 5.6% compared to $0.41 in the second quarter of 2008. EPS benefited from 1.8% fewer shares outstanding in the quarter compared to the same time last year.
Segmented Performance Commentary
Canada
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Same-store sales in Canada increased 1.7%, progressively increasing throughout the quarter, compared to a strong growth rate of 5.7% in the second quarter of 2008. Active menu initiatives and promotions resulted in transaction growth in the quarter. Minimal levels of previous price increases remaining in the system helped offset the impact of product mix shift and promotions on average check, which increased slightly. As a result, the Canadian segment overcame general economic weakness and the impact of the timing reversal of Easter during the quarter, which negatively impacted same-store sales by approximately 0.4%. A total of 15 restaurants were opened in Canada during the quarter.
Canadian segment operating income was $131.0 million, increasing 0.4% from $130.4 million in the second quarter of 2008. Operating margin in the Canadian segment was impacted by higher underlying commodity costs, which reduced our distribution income growth and equity income in our joint venture bakery, as not all of the increased commodity costs were passed on to our franchisees. Lower income associated with franchise sales also impacted operating income.
By the end of the quarter, six co-branded Cold Stone Creamery(R) locations had been opened in Ontario, and the Company is expanding with an additional six sites in other Canadian markets this year.
United States
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For the second straight quarter, the U.S. segment had robust sales performance with a 3.3% increase in same-store sales. A strong menu promotional program and significant benefit from Cold Stone Creamery co-branded locations more than offset the timing shift of Easter in the quarter, which negatively impacted same-store sales by approximately 0.7%. By the end of the second quarter, 39 co-branded Tim Hortons - Cold Stone Creamery locations had been opened, including one co-branded Cold Stone Creamery site, experiencing positive consumer trial and sales contributions. The Company previously announced that it intends to co-brand three existing Cold Stone Creamery locations in Manhattan. Subsequent to the quarter, the Company also announced a significant push into New York City, with 12 franchised locations at key sites such as Penn Station, Times Square and Broadway. A total of 10 restaurants were opened in the U.S. during the quarter.
The U.S. segment had operating income of $3.1 million in the second quarter, a $3.3 million profit improvement over the prior year. Several factors contributed to the improved profitability this quarter, including systemwide and same-store sales growth, a benefit of $1.2 million from the 2008 restaurant closures and related asset impairment charge, lower general and administrative expenses, and contributions from vertical integration in the segment. Relief to Company-operated restaurants converted to owner-operator restaurants, and to restaurants in developing markets open for less than twelve months, were the largest offsetting factors to U.S. segment operating income.
Foreign currency translation raised both U.S. segment revenues and costs by approximately 14% during the quarter compared to the second quarter of 2008.
Internationally, in the Republic of Ireland and the United Kingdom, there are now 297 licensed locations primarily in the convenience store channel under the Tim Hortons brand. While not a material contributor to earnings or revenue at this time, the international business is part of a developing international strategy and potential platform for future growth.
Corporate Developments & Outlook
2009 Outlook & Targets
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Based on performance year to date, and Management's plans and outlook for the remainder of 2009, the Company expects to meet its previously announced operating income growth target, excluding the impact of $6 million to $7 million in transactional costs associated with the Company's proposed reorganization as a Canadian corporation. Approximately $4.1 million has been incurred year to date on this transaction. Absent these costs, the Company's operating income growth target is 11% to 13%, or 6% to 8% when factoring in the impact of asset impairment and related restaurant closure costs in the fourth quarter of 2008.
The Company also currently expects to meet its same-store sales growth target of 3% to 5% in Canada, and expects it may exceed its target of 0% to 2% same-store sales growth and break-even operating income in the U.S.