Oakville / CA. (thi) Tim Hortons Inc. (THI) announced its results for the fourth quarter and full-year ended January 02nd, 2011. «Our fourth quarter results include a number of significant items but our underlying business enjoyed strong same-store sales performance and we met or exceeded our key goals for the full-year. Our business performance provides the foundation for our investments in future growth that we believe will continue to result in long-term shareholder value», said Don Schroeder, president and CEO. «Our strategy execution is focused on continued growth in Canada, accelerated, targeted investments in our core U.S. markets to drive further progress and beginning to lay the seeds for longer-term international growth». Results in the fourth quarter of 2010 and for the full-year were significantly impacted by a number of items that have been adjusted. Both operating income attributable to THI and adjusted operating income attributable to THI are non-GAAP measures.
Reconciliation of adjusted operating income attributable to THI
Management believes that operating income attributable to Tim Hortons Inc. provides important information for comparison purposes to prior periods and for purposes of evaluating the Company´s operating income performance without the effects of a new accounting standard related to non-controlling interests. Adjusted operating income excludes items in the reconciliation table due to the disproportionate impact on the overall performance of our consolidated business and comparison of financial results year-over-year and the measurement of ongoing operational performance. Schroeder: «We present this information as it is more reflective of the way we manage our business and measure our performance internally. Therefore, these measures provide a more consistent view of management´s perspectives on underlying performance than the closest equivalent U.S. GAAP measure».
Consolidated Results
All percentage increases and decreases represent year-over-year changes for the fourth quarter of 2010 compared to the fourth quarter of 2009, unless otherwise noted. Fourth quarter and full-year results in 2010 include one less week of operations compared to 2009.
In the fourth quarter, system-wide sales declined 0,9 percent year-over-year on a constant currency basis, due to the extra week of sales in the comparable period of 2009. The one week less of operations in 2010 impacted system-wide sales by approximately 8,0 percent in the fourth quarter. Total revenues were 643,5 million CAD, a decrease of 3,5 percent compared to last year. The impact of the 53rd week in 2009 reduced year-over-year revenue growth by approximately 6,1 percent in the fourth quarter of 2010. Revenues in the quarter were further reduced by 30,0 million CAD allocated to restaurant owners related to the sale of our joint-venture interest in Maidstone Bakeries and from the loss of revenues from Maidstone Bakeries for the last two months of the quarter compared to the prior-year period.
Operating income in the fourth quarter was 461,6 million CAD. The substantial increase compared to last year was driven by a 361,1 million CAD gain from the sale of our joint-venture interest in Maidstone Bakeries. As noted above, a total of 30,0 million CAD from this gain was allocated to restaurant owners in connection to the sale.
One-less week of operations compared to last year had a significant impact on operating income growth in the fourth quarter, offsetting the contributions from strong same-store sales growth to rents, royalties and distribution income. In addition, increased franchise fees, due primarily to increased re-sales and higher manufacturing income, due mostly to our new coffee roasting facility, contributed to our operating income in the fourth quarter. Increased general and administrative costs, including 2,5 million CAD in professional fees related to strategic developments and the Maidstone Bakeries sale and higher compensation expense, driven by higher salaries, benefits and increased stock-based compensation due to higher share prices, offset some of these positive factors. A 2,4 million CAD gain in 2009 from the sale of a property that did not recur in the fourth quarter of 2010 also impacted year-over-year growth comparisons.
Several other items impacted the year-over-year operating income attributable to THI comparisons in the fourth quarter. These factors include 7,4 million CAD in net restaurant closure costs; 6,7 million CAD from one less week of operations compared to 2009; and the loss of operating income from Maidstone Bakeries for the two months of the quarter we did not own 50 percent of the business, which contributed 4,8 million CAD in the same two months of 2009. This was partially offset by 1,3 million CAD from the amortization of deferred income from the supply agreement with Maidstone Bakeries.
Fourth quarter net income attributable to THI increased to 377,1 million CAD. The significant year-over-year increase was driven by the after-tax gain from the sale of the joint-venture interest in Maidstone Bakeries, which also contributed to a significantly lower effective tax rate of 16,6 percent in the quarter. Net income was negatively impacted by 1,7 million CAD in higher net interest expense due to higher fixed interest on our debt and the settlement of interest rate swaps in connection with refinancing of our debt.
Diluted earnings per share (EPS) in the fourth quarter was 2,19 CAD compared to 0,51 CAD last year. In addition to the factors affecting net income, fourth quarter EPS benefited from 4,2 percent fewer shares outstanding in the quarter compared to the same period last year due to the Company´s share repurchase activities. The positive EPS impact of the gain from the Maidstone Bakeries sale in the quarter was 1,86 CAD, the negative EPS impact of the 30 million CAD from the gain allocated to restaurant owners was 0,14 CAD and the negative EPS impact of the asset impairment and restaurant closure costs in the fourth quarter was 0,04 CAD.
For the full year, 2010 system-wide sales increased 6,2 percent on a constant currency basis and 7,9 percent on a 52-week comparable basis. Total revenues were 2,54 billion CAD, increasing 4,0 percent or 5,7 percent on a 52-week basis. Operating income was 872,2 million CAD, again driven by the positive gain on the Maidstone Bakeries sale, offset by the one less week of operations, which affected full-year underlying growth by approximately 1,5 percent. Net income attributable to THI in 2010 was 624,0 million CAD. EPS for the full year in 2010 was 3,58 CAD compared to 1,64 CAD last year. Full-year diluted EPS includes a positive 1,84 CAD per share impact from the sale of Maidstone Bakeries, lower than the fourth quarter impact due to the higher weighted average shares outstanding for the full-year period versus the fourth quarter, a negative 0,16 CAD per share impact from asset impairment and restaurant closure costs and a negative 0,14 CAD per share impact from the allocation to restaurant owners described previously. The effective tax rate for the full year was 23,7 percent versus 36,8 percent last year.
Segmented Performance Commentary
Both of the company´s Canadian and U.S. segments had strong same-store sales growth during the quarter, growing transactions and average cheque.
Canada: The Canadian segment grew fourth quarter same-store sales by 3,9 percent, supported by strong product innovation, promotional activity, operational initiatives and, to a more limited extent, from pricing previously in the system. In the fourth quarter a total of 70 restaurants were opened, including seven non-standard and 17 self-serve kiosk locations. Fourth quarter Canadian segment operating income was 474,4 million CAD, reflecting the 361,1 million CAD gain from the sale of our joint-venture interest in Maidstone Bakeries, offset in part by 30,0 million CAD of the gain allocated to restaurant owners related to the sale. Operating income benefited from strong same-store sales growth, which contributed to rents and royalties and distribution income. Operating income also benefited from increased manufacturing income due primarily to the new coffee roasting facility and higher franchise fees. These factors were offset in part due to higher general and administrative costs and the loss of operating income from Maidstone Bakeries following the closing of the transaction and 2009 Canadian segment operating income also included a 2,4 million CAD gain from the sale of a property that did not contribute to earnings this year. Same-store sales in Canada increased 4,9 percent on a full-year basis, at the high end of our targeted range of three to five percent. A total of 149 restaurants opened in 2010, at the high end of our range of 130 to 150 locations. Operating income in the Canadian segment on a full-year basis was 904,8 million CAD.
United States: The U.S. segment had strong same-store sales in the fourth quarter, increasing 6,3 percent compared to the fourth quarter of last year. The U.S. segment experienced healthy transaction growth, driven by active promotional, marketing and menu initiatives and also grew average cheque, benefiting from previous pricing in the system. A total of 36 locations were opened in the fourth quarter, with slightly more than half represented by standard and non-standard full-serve restaurants and the remainder by self-serve kiosks. The U.S. segment had an operating loss of 4,2 million CAD in the fourth quarter, reflecting 7,4 million CAD in restaurant closure costs net of a 2,5 million CAD reversal from our third quarter estimate of asset impairment charges related to the New England region. Operating income in the segment increased by approximately 2,0 million CAD year-over-year absent these costs. Underlying performance was driven by higher same-store sales growth which benefited rents and royalties and also by higher franchise fees, more than offset by one less week of operations in 2010 versus 2009. In 2010, same-store sales growth in the U.S. was 3,9 percent, at the high end of our targeted range of 2 percent to 4 percent. A total of 96 units were opened in the U.S. in 2010, meeting our targeted range of 40 to 60 locations. Of these units, 44 were standard and non-standard full-serve locations and 52 were self-serve kiosks. The U.S. segment had an operating loss of 18,4 million CAD in 2010, reflecting 28,3 million CAD in asset impairment and related closure costs in the New England region. Absent these costs, U.S. segment operating income would have been 9,9 million CAD for the full year. In 2011 we plan to further prioritize U.S. restaurant development capital spending among our core growth markets which are most developed. Our strategy is designed to significantly increase our density in these core markets and to accelerate the process to reach critical mass for both customer convenience and advertising scale. While targeting a considerable increase in U.S. segment operating income contribution in 2011, we are also investing corporately in expanded brand development and marketing activities across our regions and in particular in these core growth markets during the upcoming year.
2011 Outlook
«We have a focused strategic roadmap designed to drive long-term shareholder value. In 2011 we plan to continue investing in future growth as we execute our operational strategies and we believe we are well-positioned for continued success», said Don Schroeder, president and CEO. The Company has established the following 2011 performance targets:
- Diluted earnings per share (EPS) of 2,30 CAD to 2,40 CAD
- U.S. segment operating income of 13 million USD to 16 million USD
- 2011 same-store sales growth of 3 percent to 5 percent in both Canada and the U.S.
- 160 to 180 restaurant openings in Canada
- In the U.S., 70 to 90 locations are planned, split nearly evenly between standard and non-standard full-serve locations
- Capital expenditures between 180 million CAD to 200 million CAD
- Effective tax rate of approximately 30 percent
These targets are for 2011 only, are forward-looking and are based on the company´s expectations and outlook and shall be effective only as of the date the targets were originally issued. The operational objectives and financial outlook (collectively «targets») established for 2011 are based on accounting, tax and other legislative rules in place at the time the targets were issued.
