Despite Tim Hortons Inc. (USA) (NYSE:THI) being the biggest quick-service restaurant in the country, it’s possible that you have never heard of it before. That’s because the country being referred to is Canada, where Tim Hortons is an iconic brand. And it’s still looking to grow in new and existing markets, particularly Quebec, Western Canada, Ontario, and Canada’s major urban markets. But that’s just the tip of the iceberg. The real growth potential exists in the United States.
Of the 4,304 Tim Hortons Inc. (USA) (NYSE:THI) restaurants in existence, 3,468 of them are situated in Canada, and just 807 are located in the United States.
If you’re not familiar with Tim Hortons Inc. (USA) (NYSE:THI), it develops and franchises out quick-service restaurants in North America. It offers coffee, specialty drinks, cappuccino, fruit smoothies, soup, baked goods, grilled Paninis, traditional sandwiches, and more. Does that description sound familiar? It should — Tim Hortons is a direct competitor with Dunkin Brands Group Inc (NASDAQ:DNKN), and to a lesser extent, Starbucks Corporation (NASDAQ:SBUX).
Some investors believe that Tim Hortons Inc. (USA) (NYSE:THI) isn’t capable of competing with these brands if restaurants are in the same geographic area. We can eliminate Starbucks Corporation (NASDAQ:SBUX) as a major threat immediately, since Starbucks sells high-priced specialty coffee and caters to middle- to high-end consumers. Tim Hortons, on the other hand, is more of a value-oriented operation. For instance, one of its current promotions is $1 for iced coffee, frozen lemonade, or iced latte. Good luck finding anything for $1 at Starbucks.
Dunkin Brands Group Inc (NASDAQ:DNKN) presents more of a direct threat to Tim Hortons Inc. (USA) (NYSE:THI) as it continues to expand in the United States. However, Tim Hortons’ new CEO, Marc Cain, believes that Tim Hortons can compete by offering quality, value, convenience, innovative products, and customer service. Further U.S. expansion will no doubt be tricky in the face of competition from Dunkin’, but Tim Hortons clearly knows what it’s doing as it already has over 800 U.S. stores.
Recent results and expectations
Tim Hortons is a franchiser. It collects revenue from franchised restaurant sales. This keeps costs low, and a lot of the company’s potential profitability is tied to its supply chain. With five distribution centers in operation, required capital is kept to a minimum.
In the second quarter, systemwide sales increased 5% year over year. The addition of 18 net new stores played a role, but comps also grew by 1.5% in Canada and 1.4% in the United States. Looking at the bigger picture, systemwide sales in the first half of 2013 increased 4.1%, with comps growing by 0.6% in Canada and 0.5% in the United States.
In addition to international expansion, Tim Hortons will attempt to grow by offering more single-serve products, enhancing its menu, adding drive-through locations, and innovation. As an example of the kind of innovation Tim Hortons is generating, it recently introduced an Orange Tangerine Real Fruit Smoothie and an Apple Cobbler doughnut in Canada, as well as a Jalapeno Flatbread Breakfast Sandwich in the United States.
On a valuation basis, Tim Hortons is currently trading at 20 times earnings, giving it a stronger valuation proposition than Dunkin Brands Group Inc (NASDAQ:DNKN) (Dunkin’ Donuts) at 37 times earnings and Starbucks Corporation (NASDAQ:SBUX) at 35 times earnings. Tim Hortons also offers a dividend yield of 1.8%, which is slightly higher than Dunkin’ Brands at 1.7% and Starbucks at 1.2%. With a debt-to-equity ratio of 0.4, Tim Hortons’ dividend appears to be safe. Tim Hortons has also recently reiterated its full-year earnings-per-share guidance of $2.87-$2.97, which would be an improvement over the $2.54 number seen last year.