A Closer Look At The Impact Of Tim Hortons Franchised Segment On Restaurant Brands International’s Valuation
Restaurant Brands International’s (NYSE: QSR) troubles with its Tim Hortons franchisees are not showing any signs of respite. After RBI acquired Tim Hortons in 2014, franchisees are unhappy with several measures taken by the new owners to improve profitability which are impacting franchisee’s margins. Tim Hortons’ Canada franchisees are organized in an association which has constantly raised its concerns with the management of RBI. Disputes between the company and the Tim Hortons franchisees led to the delay in the launch of its mobile order and pay system for the coffee chain earlier this year. Recently a U.S. Tim Hortons franchisee closed two restaurants and sued Tim Hortons USA Inc for not meeting its obligations. While Restaurant Brands International appointed a new CEO for this segment in June of this year to ensure that challenges with franchisees are resolved, this issue seems to be persisting. Comparable sales growth of the Tim Horton’s segment has remained soft for the past 4 quarters. In Q3 2016, Tim Hortons had registered a 2% comparable sales growth, however in the first 2 quarters of 2017 this number has become negative and it was 0.3% for Q3 2017.
Tim Hortons’ franchised restaurants are a crucial segment for the company’s valuation and according to our estimates, this segment accounts for nearly 30% of the company’s valuation. We expect a steady increase in the number of franchised restaurants and the average revenue per restaurant. Further, we expect the EBITDA (earnings before interest, tax, depreciation and amortization) margin from this segment to increase steadily over our forecast period. Below is a summary of our forecasts for these key metrics for the Tim Hortons franchisee restaurants segment:
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However, slower growth of Tim Hortons franchised restaurants and lower EBITDA margin from this segment can impact our price estimate for the company. Below is a scenario illustrating the impact of slower growth in these metrics on the price estimate of the company.
A steady pace of growth of the Tim Hortons segment is crucial for Restaurant Brands International. While the company is taking several measures to resolve the issues of franchisees, it appears that a more streamlined effort is needed to ensure that this segment continues to drive sales and profitability for the company.
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