Tim Hortons Inc. ran into some difficulties when expanding into the United States. In the fourth quarter, it shuttered 36 money-losing restaurants and 18 kiosks, taking a $50-million (U.S.) charge in the process. More U.S. closings could be on the way.
But rather than shy away from international expansion, Canada-based Tims is now picking a different location to peddle its double-doubles and timbits: Last week, it announced plans to open up to 120 locations in the Gulf states of United Arab Emirates, Qatar, Bahrain, Kuwait and Oman. Should investors be worried?
Tim Hortons is taking a different approach this time, partnering with Dubai-based Apparel Group, which operates 50 brands including Tommy Hilfiger, Kenneth Cole and Cold Stone Creamery. Under the terms of the agreement, the Apparel Group will own and operate the locations, which implies no capital cost to Tim Hortons.
According to Michael Van Aelst, an analyst at TD Newcrest, this translates into a low-risk venture: "We were initially concerned when Tim Hortons announced that it was considering expansion beyond North America despite not yet producing acceptable returns in the U.S. But the announced strategy involves very little risk in our view. If unsuccessful, then the two parties can simply sever ties."
At the same time, there is upside potential here, in that Tim Hortons will collect royalties and distribution fees if the brand catches on. However, Mr. Van Aelst believes that it is far too early to determine whether the expansion will make a meaningful contribution to Tim Hortons' earnings. He has maintained a "hold" recommendation on the stock, with a price target of $43 (Canadian).
Kenric Tyghe, an analyst at Raymond James, also maintained a "market perform" recommendation on the stock, with a slightly higher target of $45.
"In our opinion a capital-light, royalty-based expansion is low-risk and improves the visibility on the form of Tims' international expansion plans," he said in a note. "A number of key questions remain unanswered and as such we are inclined to wait on further details."
David Berman