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Tim Hortons Inc. Reports Operating Results (10-Q)

May 13, 2010 | About:

Tim Hortons Inc. (THI) filed Quarterly Report for the period ended 2010-04-04.

Tim Hortons Inc. has a market cap of $5.93 billion; its shares were traded at around $33.64 with a P/E ratio of 22.3 and P/S ratio of 2.6. The dividend yield of Tim Hortons Inc. stocks is 1.5%. Tim Hortons Inc. had an annual average earning growth of 13.3% over the past 5 years.THI is in the portfolios of Jeremy Grantham of GMO LLC, George Soros of Soros Fund Management LLC.

Highlight of Business Operations:

Our financial results are driven largely by changes in systemwide sales, which include restaurant-level sales at both franchise and Company-operated restaurants. As of April 4, 2010, 3,576 or 99.4% of our restaurants were franchised, representing 99.5% of the locations in Canada and 99.1% of the locations in the United States. The amount of systemwide sales affects our franchise royalties and rental income, as well as our distribution income. Changes in systemwide sales are driven by changes in average same-store sales and changes in the number of restaurants. Average same-store sales, one of the key metrics we use to assess our performance, provides information on total retail sales at restaurants, which have been open for thirteen or more months, operating systemwide and provides a useful comparison between periods. We believe systemwide sales and average same-store sales provide meaningful information to investors concerning the size of our system, the overall health and financial performance of the system, and the strength of our brand and franchisee base, which ultimately impacts our consolidated and segment financial performance. Franchise restaurant sales generally are not included in our Condensed Consolidated Financial Statements (except for certain non-owned restaurants consolidated in accordance with Accounting Standards Codification (ASC) 810Consolidation (ASC 810)); however, franchise restaurant sales result in royalties and rental income, which are included in our franchise revenues, and also generate distribution income.

Systemwide sales grew by 10.0% in the first quarter of 2010 (6.6% in the first quarter of 2009) as a result of new restaurant expansion and continued same-store sales growth in both Canada and the U.S. Systemwide sales include restaurant-level sales at both franchised and Company-operated restaurants. Total systemwide sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. U.S. dollar sales are converted into Canadian dollar amounts using the average exchange rate of the base year for the period covered.

In the first quarter of 2010, Canadian same-store sales growth was 5.2% (3.4% in Q1 2009) of which transaction growth and pricing in certain regions were the key drivers, with a slight negative impact from the partial timing shift of the Easter holiday into the first quarter of 2010, from the second quarter of 2009.

Our U.S. same-store sales growth was 3.0% in the first quarter of 2010 (3.2% in Q1 2009), including a slight negative impact of the partial timing shift of the Easter holiday into the first quarter of 2010, from the second quarter of 2009. U.S. sales gains related primarily to continued contributions from the Cold Stone Creamery® initiative and transaction growth through promotional activity, including menu innovation.

Operating income increased $16.5 million, or 14.9%, in the first quarter of 2010 compared to the first quarter of 2009 primarily as a result of strong same-store sales and new restaurant development, which were significant contributors to higher revenues, and higher distribution income, partially offset by higher general and administrative expenses. In addition, the adoption of a new accounting standard relating to the consolidation of certain variable interest entities during the first quarter of 2010, and retroactively applied to prior periods, negatively impacted our operating income growth rate by 0.6% (see below for the reconciliation of Operating income attributable to Tim Hortons Inc. to Operating income).

Net income attributable to Tim Hortons Inc. increased $12.4 million, or 18.7%, in the first quarter of 2010 as compared to the first quarter of 2009, resulting partially from higher operating income, offset by higher income tax expense. While the income tax expense was higher, commensurate with the earnings growth, our effective tax rate was 31.0% in the first quarter of 2010, which is lower than the 32.9% effective tax rate in the first quarter 2009. Our effective tax rate was lower primarily as a result of the lower tax rates in Canada which we now benefit from as a result of our reorganization as a Canadian public company in September 2009. Diluted earnings per share attributable to Tim Hortons Inc. (EPS) increased to $0.45 in the first quarter of 2010 from $0.37 in the first quarter of 2009. The diluted weighted average number of shares outstanding in the first quarter of 2010 was 176.6 million, or 2.6%, lower than the diluted weighted average share count in the first quarter of 2009, due primarily to our 2009 and 2010 share repurchase programs, which contributed 3.2% of total EPS growth of 21.9%.

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