What Do Tim Hortons Inc.’s Q2 Results Mean for Investors?

Tim Hortons Inc. (TSX:THI)(NYSE:THI) recently released its second-quarter results. What do investors need to know?

The Motley Fool

On Wednesday, Tim Hortons Inc. (TSX: THI)(NYSE: THI) released its second-quarter results, with earnings per share increasing 13.6% compared to a year earlier. As a result, shares rose 7.39% to $64.52.

What do investors need to know?

The strategic plan

In March, Tim Hortons identified that it lagged behind its quick service restaurant peers in average bill size in many categories, including a 45% difference in average bill size for evening snacks and 32% for afternoon snacks.

It identified these average bill gaps as opportunities for improvement.

Executing the plan

Management specifically highlighted three products launched in Q1 that drove a higher average bill size in Q2. They were the crispy chicken sandwich, the turkey sausage hot breakfast sandwich, and the improved hash browns.

While not wanting to get into specifics, management strongly hinted that the significant bundling of products at breakfast and lunch is driving more revenue.

Essentially, instead of a customer buying that one cup of coffee, Tim Hortons is having success in upselling customers on additional products.

Leveraging technology

As I wrote about previously and confirmed in this quarterly report, the Tim Hortons Double Double Visa Card, which the restaurant recently introduced, is about more than just loyalty. It will also enable the company to “leverage and aggregate consumer insights” to further understand its customers.

Good capital stewardship

Management continues to leverage a low interest rate, having issued $900 million of new debt while also having repurchased $1 billion worth of shares at an average price of more than $55 per share since August 2013.

Investors should note that, excluding stock buybacks, EPS would have been flat year over year. It just goes to show that stock buybacks remain a key element for shareholder total return.

Where is the volume?

While management has done a good job in upselling customers with additional products, Canadian operations showed lower same-store transactions. This may suggest that while new products have had an impact on existing customers, a more complex menu may have led to slower service, leading to turned off customers.

Ultimately, Wednesday’s rise in stock prices reflects enthusiasm in new products that may continuously drive existing customers to spend more in the morning and at lunch times. This, coupled with a good capital allocation policy, at current valuations, means that Tim Hortons should continue to outperform the market in the short term.

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.

Fool contributor Patrick Li has no position in any stocks mentioned.

More on Investing

money cash dividends
Stocks for Beginners

Where to Invest $10,000 in April 2024

If you've already created a diversified portfolio and are looking for more options from a windfall, here is where I…

Read more »

data analyze research
Investing

The Ultimate TSX Stock to Buy With $1,000 Right Now

Brookfield Asset Management (TSX:BAM) is one of the best Canadian stocks to buy for those looking to put capital to…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »