Tim Hortons, Canadian Tire Announce Interesting Corporate Developments

Sound strategies or signs of desperation?

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Two of this country’s most recognized brands reported their second quarter results this morning and both included more than just the usual financial information.

Something brewing

It’s not clear if the activist investors that are dogging Tim Horton’s (TSX:THI, NYSE:THI) have already made an impact, but along with this morning’s release the company announced that it plans to buy back an extra $900 million of its own stock over the next 12 months.  This, in addition to the $100 million it has remaining on its existing buy-back plan.

The company is going to generate this $900 million by taking on debt.

If you’re scratching your head as to why any company would do this, RBC estimates that if the full $1 billion is deployed it will bump 2014 and 2015 EPS by 7.5% and 14% respectively.

And growth through more traditional means is something this company is sorely lacking.  Although the quarter’s EPS of $0.81 beat the consensus estimate of $0.75 and was 17% higher than the second quarter last year, same store sales (SSS) at Timmies appeared rather anemic.  Canadian and U.S. SSS checked in at 1.5% and 1.4% respectively.  These figures were well below the respective 2.3% and 2.7% that was expected.

Given the stock is relatively flat on the day, investors are seemingly ruminating on this move to financially engineer their way to a higher future growth rate.

Selling more than just every day goods

Speaking of financial engineering.  Sort of.  Along with its quarterly numbers, Canadian Tire (TSX:CTC.A) announced that the company is seeking a financial partner for its credit card assets and would follow through with a sale if the appropriate terms were met.

This move follows the company’s first quarter news that it plans to spin its real estate assets into a REIT.

Similar to Tim Hortons, Canadian Tire is using somewhat non-traditional means to give its stock a bit of a kick.  Given the 7% move thus far today, market participants appear to favour the potential credit card sale over Tim Hortons debt fueled buyback.

Today’s move higher by Canadian Tire is also being driven by the reported $1.91 in quarterly earnings that exceeded the expectations of $1.81, as well as some favourable same store sales growth figures.  The company’s FGL sports division was particularly strong in this regard, posting same store sales growth of 7.2%.  The flagship banner, Sportchek in fact achieved 10% SSS growth.

The Foolish Bottom Line

Long-term, both of these companies face challenges.  Namely, growth.  Tim Hortons has a market saturation issue, while Canadian Tire’s competitive landscape just keeps getting more crowded.  In the meantime, both are seemingly trying to pull rabbits out of the hat to keep shareholders content.  Eventually however, these rabbits will be depleted and company fundamentals will once again come into focus.  Investors may not like what they see when this occurs.

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Fool contributor Iain Butler does not own shares in any company mentioned at this time.  The Motley Fool doesn’t own shares in any of the companies mentioned.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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