Key Takeaways for Restaurant Brands International:
- The Tim Hortons segment at RBI seems to have made a turnaround after three years of decline preceding covid-19.
- RBI reported a 30% increase in Tim Hortons sales in 2023 on the back of a series of initiatives to increase transaction capacity and appeal to a broader market.
- Coffee shops remain number one in Canadian fast food, while burger joints like RBI’s Burger King are falling behind as they compete with the likes of wide-moat McDonald’s and no-moat Wendy's.
Andrew Willis: After clocking in one of the worst Canadian stock performances in May, Tim Hortons’ parent company, Restaurant Brands International, is recovering with a strong start to July.
Perhaps the start of the summer and road trip season has investors thinking about coffees-to-go or an increase in traffic with the new flatbread pizzas on offer at Tim Hortons. Those inklings aren’t incorrect, as the Tim Hortons segment does appear to be turning a corner after a turbulent 30% decline in franchisee unit-level earnings (EBITDA) from 2018-22.
The Tim Hortons brand has emerged stronger because of recent initiatives, says senior equity analyst Sean Dunlop, citing ongoing efforts aimed at improving peak transaction capacity, bolstering the specialty beverage business, and investing in the afternoon—or as Tim’s calls it “happy hour”—and evening dayparts as likely to render investor day targets for 2%-3% average annual ongoing comparable-store sales growth achievable.
Tim Hortons Serves Up a Turnaround
Now while 2%-3% store sales growth may not astound investors, Dunlop puts them in perspective, noting that they mark a sharp uptick from the negative clip seen in the years before Covid, which suggests the Canadian coffee mainstay has finally turned a corner.
When looking at growth projections for Tim Hortons it is also worth considering what it means in the context of the broader Canadian market. The coffee and bakery segment remains the number-one fast-food format in Canada and now represents nearly a quarter of its parent company’s Canadian sales.
RBI has also been looking for a turnaround in its Burger King brand, with a “Reclaim the Flame” initiative that we’re a little lukewarm on. Still, with the new CEO at RBI heralding from Dominoes, maybe we’ll see the return of the Pizza Burger.
For Morningstar, I’m Andrew Willis.
RBI Bulls Say
- Improvements in profitability across brands in 2023 set the stage for a stronger development appetite in 2024 and beyond.
- The Tim Hortons turnaround should generate stable, low-single-digit growth in Canada after years of declining comparable-store sales before covid-19.
- Growth abroad is increasingly diversified, with 45% of international net unit growth now coming from Tim Hortons and Popeyes, a material increase from 10% just a few years ago.
RBI Bears Say
- Challenging turnaround efforts at QSR competitors (Pizza Hut, KFC) suggest that RBI's Reclaim the Flame initiatives at Burger King US may not bear fruit despite hefty investment.
- The presence of larger global category competitors in many of RBI's key brand and country combinations could weigh on international development prospects in the long run.
- Pressure on consumer discretionary spending from elevated inflation and economic uncertainty could weigh on near-term comparable-sales growth and drive a further uptick in industry promotional activity in 2024.
The author or authors do not own shares in any securities mentioned in this article.
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