Oakville / CA. (thi) Tim Hortons Inc. (THI) announced its results for the first quarter ended April 04th, 2010. «Our business achieved strong sales and earnings performance this quarter. Our competitive advantages continue to position our business among the leading companies in our sector, and we look forward to further building upon that position», said Don Schroeder, president and CEO.
Consolidated Results
All percentage increases and decreases represent year-over-year changes for the first quarter of 2010 compared to the first quarter of 2009, unless otherwise noted.
The Company has retroactively adopted new accounting standard SFAS # 167 which has impacted prior year reported results, and 2010 actual results, for revenues and cost line items. The new standard pertains to the consolidation of variable interest entities (VIE). Under the accounting standard, if the Company is determined to be the primary beneficiary of a VIE, the company is required to consolidate the VIE assets, liabilities, results of operations and cash flows.
The Company analyzed its variable interests, including its equity investments and certain operator arrangements. The Company has determined that it is the primary beneficiary of the 50-50 bakery joint venture and has consolidated this operation. This bakery joint venture produces and supplies the restaurant system with par-baked donuts, Timbits(TM), some bread products, and pastries. As a result, the revenues, costs and the remaining 50 percent of operating income of this joint venture and from approximately 150 additional non-owned restaurants, 100 of which are in the U.S. and 50 in Canada, have also been consolidated as a result of the new standard. The Company has no equity interest in any of its franchisees and none of the Company´s assets serve as collateral for the consolidated restaurants.
Systemwide sales increased 10,0 percent on a constant currency basis. During the quarter total revenues were 582,6 million CAD, an increase of 4,8 percent compared to 555,7 million CAD last year. Higher distribution revenues, and higher rents and royalties due to strong underlying product demand, were partially offset by lower year-over-year revenues from consolidated VIE´s and lower revenues from Company-operated restaurants as we continue to convert these locations to the franchise and owner-operator model. Lower franchise fees also impacted total revenues during the quarter, primarily due to timing of resales, replacements and renovations versus last year, and fewer new standard restaurants compared to the first quarter of 2009. The effects of foreign exchange translation negatively impacted revenue growth this quarter by approximately 1,6 percent.
First quarter operating income grew 14,9 percent to 127,7 million CAD compared to 111,2 million CAD last year. Solid same-store sales and continued restaurant development, which contributed to higher rents, royalties and distribution income, contributed most to this performance. Costs continued to be well managed during the quarter, with growth in all cost line items below the rate of systemwide sales growth, even considering the approximate 2,0 percent benefit to costs this quarter from foreign exchange translation. Changes in foreign exchange did not have a significant impact on operating income.
Net income attributable to Tim Hortons, which excludes the impact of noncontrolling interests, was 78,9 million CAD in the first quarter, up 18,7 percent compared to 66,4 million CAD in the same quarter last year. Higher operating income, and a lower year-over-year tax rate due primarily to the Company´s 2009 public company reorganization, contributed to this positive performance. Adoption of the new SFAS # 167 accounting standard did not have a significant impact on net income attributable to Tim Hortons or earnings per share.
First quarter diluted earnings per share (EPS) was 0,45 CAD, growing 21,9 percent compared to 0,37 CAD per share last year. In addition to the factors benefiting net income, 2,6 percent fewer outstanding shares due to our share repurchase programs contributed to our EPS growth rate. In the first quarter, both operating segments had improved same-store sales and earnings compared to the same period last year.
Canada
Canadian same-store sales experienced strong growth of 5,2 percent over the comparable period of 2009. Same-store sales growth benefited from successful menu, marketing and operational programs which led to continued transaction growth, and from previous pricing in place in the system in certain Canadian markets which benefited average cheque.
The strong same-store sales performance incorporates the slight negative impact of a partial timing shift of the Easter holiday into the first quarter of this year, from the second quarter of 2009. A total of 20 restaurants were opened in the first quarter. At the end of the first quarter, we had 18 restaurants in Canada co-branded as Cold Stone Creamery(C) locations.
Operating income in the Canadian segment was 132,4 million CAD, up 14,3 percent compared to 115,8 million CAD in the first quarter of last year. The strong operating income performance in the Canadian segment benefited from higher systemwide sales, including the solid 5,2 percent same-store sales growth noted previously, which drove rents, royalties and distribution income.
United States
The U.S. segment increased same-store sales by 3,0 percent in the first quarter. Significant contributions from co-branded locations featuring Cold Stone Creamery(C), and effective marketing programs and menu initiatives, benefited the performance in economic conditions that continued to be challenging. As in Canada, the partial timing shift of Easter compared to last year had a slight negative impact on same-store sales growth. A total of four restaurants were opened in the first quarter. At the end of the first quarter, the company had 66 Tim Hortons restaurants in the U.S. co-branded as Cold Stone Creamery(C) locations.
The U.S. segment had a small operating loss of 0,3 million CAD, an improvement compared to the 0,6 million CAD operating loss from the same period last year. The first quarter is typically the most challenging for our business. The systemwide sales in the U.S. benefited from continued restaurant development, and from continued same-store sales growth. Higher sales led to increased rents and royalties, offset in part by higher general and administrative costs and lower distribution contributions in the segment.
The overall rate of growth in relief the company provides to franchisees in the U.S. slowed compared to historical levels, and while slightly higher in the first quarter of 2010 compared to the same period last year, the increase in relief is primarily related to either restaurants that were previously Company-operated locations or those opened for less than twelve months.
Company receives notice invoking buy
The Company received notice from IAWS Group Limited, a subsidiary of Aryzta AG, the Company´s 50-50 partner under the Maidstone Bakeries joint venture, invoking the buy/sell provisions of the joint venture. As a result, the Company has the option to either sell its interest or acquire IAWS´ interest in the joint venture. Aryzta believes that the business of the joint venture will be better served under an alternative ownership structure rather than under the existing joint venture arrangement. The parties have agreed to an extended negotiation period to consider amendments to the ownership structure and the underlying arrangements.
The existing joint venture documentation provides that the Company´s supply rights for products extend for seven years after either party´s exit from the joint venture, and sourcing commitments extend until early 2016 for donuts and Timbits, allowing the Company sufficient flexibility to secure alternative means of supply, if desired. The existing agreements also have protections regarding intellectual property rights and dealing with competitors, as well as terms relating to price determination, that remain in effect after the closing of the transaction. Given that the discussions regarding the transaction are in the preliminary stages, the resolution of these matters may change as the ultimate ownership structure is determined. The parties expect to reach final agreement by year-end 2010.
