Must-read: Analyzing Tim Hortons’ cost of operations in 2Q14
An overview of Tim Hortons' 2Q14 earnings and Burger King merger (Part 7 of 11)
Costs of doing business
Tim Hortons’ (THI) revenues increased due to an increase in system-wide sales. However, this also led to an increase in costs. Let’s see why and how its costs were affected.
Costs of operations and operating income
System-wide sales increased the cost of sales, which includes food and beverage costs, by 7.8% to $483 million year-over-year.
Operating expenses increased by 9.6% to $625 million due to higher depreciation and rent expenses. These were a result of renovations of existing restaurants and additions of new restaurants.
General and administrative expenses (G&A) increased 5.8% to $37 million year-over-year. The increase in G&A was due to higher professional fees connected to Tim Hortons’ execution of its strategic plan.
Despite increases in the above costs, the company’s operating income increased by 8.9% to $176 million year-over-year.
Management guidance
Management stated that it anticipates an increase in rents and depreciation expenses due to its efforts to increase new restaurant locations and renovate existing locations.
To read about costs of operations for restaurant chains like Starbucks (SBUX), Burger King (BKW), and Wendy’s (WEN), click on their respective names. An investor looking to gain wider exposure to the restaurant industry may consider exchange-traded funds (or ETFs) like the Consumer Discretionary Select Sector SPDR Fund (XLY).
The Burger King deal
We recently discussed Burger King and Tim Hortons’ acquisition announcement. The deal will be structured as tax inversion deal under which Burger King will relocate to Canada. In a tax inversion deal, a company relocates to a region with lower tax rates.
So let’s see, in the next part of this series, the effective tax rate for Tim Hortons.
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