Key Nuggets from the Earnings Call:
- TH International, the operator of Tim Hortons in China, is hindered in its expansion plans due to the lack of sufficient capital commitment
- According to recent company data, TH International fell short of its target with 909 Tim Hortons stores in China compared to the 1,000 stores previously aimed for by the end of 2023
By Doug Young
Ever since Tim Hortons set up shop in China, the menu has been undergoing a makeover, but fate had a sharp twist in store. Now, it seems that money itself is becoming an endangered species on the menu for TH International Ltd., the company behind Tim Hortons in China. The corporation’s effervescent expansion goals for the market are losing their fizz.
This is no apathy for donuts; it’s a cautionary tale about the rapidly slumping fortunes of TH International, part-owned by Restaurant Brands International (RBI). During RBI’s latest earnings call, CEO Josh Kobza hinted at an unexpected deceleration for Tim Hortons in China.
The company has yet to unveil its own fourth-quarter results, and has kept mum on Kobza’s comments. Nevertheless, this lid of silence did not contain the boiling disdain of investors. TH International’s New York-listed shares plummeted 5.6% on the day RBI released its Q4 results and made its remarks regarding China. The stock is now down 22% year-to-date, slashing more than 80% from its value since its merger with a special purpose acquisition company (SPAC) in September 2022.
The latest sell-off dropped TH International’s price-to-sales (P/S) ratio below the psychologically critical level of 1, dragging it to 0.97 by the end of last week. In stark contrast, Yum China, the operator of KFC and Pizza Hut in China, trades at a P/S of 1.54, while DPC Dash, Domino’s operator in China, trades at 3.75.
Suspicions were initially aroused last month when new store-count data revealed that TH International was deviating from its ambitious new store-opening targets for the Tim Hortons chain in China. The data pointed to 909 Tim Hortons restaurants in China in early January, well below the 1,000 targeted by the end of the previous year.
The primary culprits behind this stagnation are likely a compound of China’s crippled economy and Tim Hortons’ lackluster performance in China. While the decelerating economy has been a widespread pestilence, the Tim Hortons chain is clearly still trying to find its feet after setting foot in China in 2018 and then launching an audacious expansion a few years later.
Kobza hinted at the issue by pointing to the “softening performance in China” as a factor that dented RBI’s overall comparable-store sales in Q4. There was no explicit mention of the Tim Hortons chain in China, and it’s worth noting that Burger King, another major RBI brand, has a significant presence in China through a different partner.
Wobbly Global Performance
Nevertheless, we zero in on some of Kobza’s words that allude to a funding shortfall, causing Tim Hortons to miss its mark. “On the Tims business, we believe our partner is going to need to commit more capital to grow that business in an exciting way, and we believe it’s critical that they do so,” voiced Kobza.
“We also do believe that there needs to be some more capital put into that business to really realize its potential,” he added. This clearly reveals TH International’s hesitation in injecting funds into the Tim Hortons chain in China as ambitiously as intended. The company may also be grappling with difficulty in accessing capital, given the nerves among banks and other funders about the stalling economy and consequent geopolitical risks.
As a result of the snoozing expansion in China, RBI downgraded its global forecast for restaurant count growth from 5% to the mid-4% range this year.
The “softening performance” alluded to by Kobza is reflected in the comparable-store sales data for Tim Hortons’ international business. These sales shriveled by 6.3% in Q4, escalating from a 4.3% slump a year before, even while Burger King’s international operation posted growth in comparable-store sales.
Simultaneously, RBI unveiled a five-year strategy, aiming for 7,000 Tim Hortons restaurants across the globe by 2028, signaling a 50% surge from the 4,525 at the close of the previous year. The China wing is pivotal in this expansion, given that the 909 stores in China in January represented roughly 70% of the brand’s total of 1,308 international stores at the end of the preceding year.
In addition to the missed 1,000-store target by the close of the prior year, TH International had previously set its sights on having 3,000 Tim Hortons outlets in China by 2026. These plans mirrored similar zealous expansions by Yum China, aiming for 20,000 China stores by 2026, and DPC Dash, which aims for 1,500 stores in the market by that year.
TH International’s revenue climbed 42.7% year-on-year in the third quarter of last year to 436 million yuan ($61 million). However, the majority—if not all—of this growth likely stemmed from new store openings, which skyrocketed by an even higher 57% over the same period. These data cement the headwinds that TH International confronts in its China expansion plans, compelling it to potentially scale back or beseech RBI for further support.
This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
