More cuts foreseen at Tims
Tim Hortons has already had its expenses dramatically slashed since its merger with Burger King, but analysts believe more cost-cutting lies ahead for the Canadian coffee and baked goods chain.
Corporate parent Restaurant Brands International Inc. in January cut 350 jobs from Tim Hortons’ headquarters in Oakville, Ont., and later offered voluntary buyouts to 15 per cent of the head office staff, which three per cent took.
“Very few people took it, but for those who weren’t engaged, we gave them a generous opportunity to move on,” Restaurant Brands chief executive Daniel Schwartz said this week after the company revealed higher-than-expected second-quarter sales and profit. “It’s not about a number or a cost, it’s about making sure that we have people who really want to be with us and striving for the Tim Hortons brand.”
Restaurant Brands reported adjusted profit of 30 cents per share, outpacing analyst estimates of 25 cents.
Tim Hortons’ sales, general and administrative expenses were reduced to US$23 million in the quarter from US$42 million a year ago.
“Restaurant Brands is probably not done with the costcutting at Tim Hortons,” CIBC analyst Perry Caicco said in a note to clients. “The next big step is probably the distribution system, which we expect to see Restaurant Brands make some move to restructure either later this year or in 2016 at the latest.”
He said the restructuring would probably result in the sale of all or a part of the distribution system to a thirdparty operator, “with the proceeds being used to pay down a still-lofty debt load.”
Caicco raised his price target on the shares to $50 from $48 and his per-share earnings estimates to 97 cents from 85 cents in 2015, and to $1.17 from $1.05 in 2016.
Similarly, analyst David Palmer at RBC Capital Markets is anticipating the company will make “dramatic” year-over-year cost reductions during the remainder of the year.
At Tim Hortons, Palmer is expecting that further “rapid” overhead reduction, more cuts to capital spending, streamlined logistics and new market development will spur significant value creation over the next three to four years at Restaurant Brands.
“We estimate these strategies will help enable (the company) to grow free cash flow over the next few years, and ultimately pursue additional acquisitions,” he said in a note to clients.
Palmer, who raised his target price on the stock to $48 from $46, believes the shares could be worth $56 in an upside scenario that sees the company secure master franchise agreements in the U.S. over the next year and accelerate annual unit growth to 10 per cent, double the fiveper-cent growth rate in fiscal 2014.
In a downside scenario where same-store sales growth slows, international growth remains the same, and the company finds it harder than anticipated to cut costs at Tim Hortons, the shares could be worth $37.