It seems Tim Hortons Inc. (THI, Financial), A.K.A. The King of Canadian coffeehouses, has been recently caught in the middle of some speculations. This quick-service restaurant chain serves hot and cold beverages, baked goods, sandwiches, soups and other food products. With currently 3,500 Tim Hortons in Canada, and more than 850 units in the U.S., the franchise system provides the company an annuity like stream of revenues through royalties and rent payment.
Expand and Compete
The restaurant industry, as we know, is constantly testing companies with its highly competitive environment. Expansion and store-sales growth is essential for companies to keep on the run, battling the same market with their peers. Tim Hortons has indeed a dominant presence in Canada, but a strategic initiative such as an expansion through the U.S. market is essential. However, this strategy implies competing with dominant brads, such as Starbucks (SBUX, Financial) and Dunkin Brands Group (DNKN, Financial).
With a slow pace, Tim Hortons opened 13 new stores in the U.S. as of September 2013. That quarter closed pretty well for the coffee maker, reporting a sales growth of 5.3%, partly due to the new restaurant development. Nevertheless, the economists are regarding the company’s growth with caution, as this expansion means an "intensified competitive environment." And not only will Tim Hortons have to face a strong competition by moving south, but will also feel it in their homeland Canada.
Starbucks, teaming with Target, is planning to open 150 new coffee stores in every new Target Store, especially into Canada. In the last quarter Starbucks’ revenue rose 12%, same-store sales hopped 5%, and EPS reached a record of $0.71. In the meantime, Dunkin Brands has started to move west, with already more than 10,500 stores in the U.S., and planning as well to develop 150 shops in the UK in alliance with London-based franchise groups over the next five years. Dunkin's last quarter was challenging, but stable, with a revenue jump of 13%.
Therefore, Tim Hortons will have to take a close look into the southern market in order to sustain growth, developing an expansion strategy that responds to the consumer’s volatility and intense competition of the U.S. Still, the industry peers are growing, and this might reveal an opportunity for Tim coffee maker to develop a good strategic plan and take advantage of the global market growth.
Future Plans
Indeed Tim Hortons lack the brand recognition Starbucks or Dunkin Brands has, but they are still to explore all the southern markets, even with its harsh competition. In the last conference call, CEO Marc Caira said, "Turning to our U.S. business. Our goal is to focus on the core to develop a successful, thriving and profitable business that can be scaled aggressively to become our longer-term growth engine."
Some of the innovations the brand will be introducing are the single-serve product distribution, available both in grocery stores and Tim Hortons locations, a new menu structure that steps out of the traditional breakfast-lunch standards, and introducing new technology such as mobile payments. Tim Hortons is starting to move forward and fortifying the brand’s intangible asset. The recent launch of a loyalty program might provide a more sustained growth expectation. Partnering with Canadian Imperial Bank of Commerce (CM) to introduce a Visa card, Tim Hortons expects a significant difference in the sales.
But, is this strategy intense enough for the U.S. market? There is no doubt the new CEO Marc Caira is not afraid to make tough decisions, as the debranding of Cold Stone Creamery from Canada locations proved. A long-term strategy is on focus for Tim Hortons, but a more aggressive price war should be expected for the years to come.
For the time being, Tim’s dividend growth has been quite good. The last dividend increase was from 0.21 to 0.26, and their most recent EPS was $2.87, increasing 7.27% over the previous year. The company's shares yield 1.9%, and the ROE, 36.4% is 10 points above the industry average. The stock is cheaper than other coffee-bakery companies, but should still be regarded carefully as most of its development strategy isn’t quite proved yet. The limited brand awareness and well-capitalized rivals won’t make it easy for Tim Hortons.
Bottom Line
Some analysts, feeling bullish about this stock, say that the strong presence in Canada, the innovative management and the compelling value position are worth a buy. Nevertheless, others suggest a closer look at Tim Hortons, wondering whether the company will be ready to face the fierce competition the U.S. market has and is increasing year after year in the quick-service restaurant industry. Peers such as Dunkin Brands, Starbucks or McDonald’s are growing, and expanding. So even though this stock’s price is lower than others, it seems its strategy is still not solid enough as to assure mid-term growth.
Disclosure: Damian Illia holds no position in any stocks mentioned.
