Tims China Q2 2024 Financial Report Analysis
Report Date: August 29, 2024
Financial Period: Second Quarter 2024 (Ending June 30, 2024)
Business Description
Core Operations: Tims China operates Tim Hortons coffee shops in China, holding exclusive rights in mainland China, Hong Kong, and Macau.
Business Segments: Primarily focuses on company-owned stores and franchised outlets. While company-owned stores generate a majority of revenue, the franchise network is expanding to strengthen profitability.
Geographic Footprint: Mainland China, with significant growth in the franchised store base.
Industry Position
Tims China competes within China’s growing coffee market, facing competitors like Luckin Coffee and Starbucks, which dominate market share. Tims China differentiates with a mix of fresh food and a loyalty-driven customer approach, though it still trails the major players in market presence.
Competitive Advantage: Leveraging localized offerings and customer loyalty programs (21.4 million members, a 45% year-over-year increase), Tims China works towards strengthening its sub-franchise pipeline and optimizing cost efficiencies.
Revenue Streams
- Company-owned stores: Declined 11.1% year-over-year to RMB322.3 million due to closures of underperforming stores.
- Franchise stores: Saw growth with 31 net new openings, now totaling 333, though revenue contribution specifics were limited.
Customer Base: Expanding loyalty membership and targeted customer retention via a consistent experience across outlets.
Supply Chain: Improved supply chain efficiency with reduced costs in food and packaging.
Financial Statements Analysis
Income Statement
- Revenue: Total revenue of RMB366.8 million, a 10.9% decline from Q2 2023, mainly attributed to decreased same-store sales growth and closures of underperforming company-owned stores.
- Adjusted Store EBITDA: Improved to RMB33.2 million, reflecting an 81.7% increase year-over-year, with a record EBITDA margin of 10.3%.
- Net Loss: Reduced to RMB46.4 million, compared to a loss of RMB227.7 million in Q2 2023, indicating improved cost control and reduced operational losses.
Balance Sheet
- Assets: Total assets decreased from RMB2.2 billion at year-end 2023 to RMB1.8 billion, reflecting the impact of cost-saving initiatives, including store closures and reduced headquarters expenses.
- Liabilities: Total liabilities also declined, driven by a decrease in short-term bank borrowings and optimized lease liabilities.
Cash Flow Statement
- Cash Flow from Operations: Positive at RMB31.7 million, showing improvement from minor operating cash flow generation in Q2 2023.
- Financing Activities: Cash decreased due to reduced financing support, marking a shift towards operational self-sufficiency.
Key Financial and Strategic Insights
-
Achieved Positive Adjusted Corporate EBITDA: For the first time, Tims China recorded an adjusted corporate EBITDA of RMB4.1 million, indicating a critical milestone toward profitability.
-
Cost Optimization Efforts: Significant reductions in food, rental, labor, and marketing costs, contributing to improved profit margins.
-
Franchise Expansion: Aggressive franchising has increased franchise stores to 333, aiming to reduce operational costs and scale profitably.
-
Revenue Decline and Same-store Sales Challenge: Despite overall cost improvements, revenue declined due to a 13.8% decrease in same-store sales for company-owned stores, signaling demand challenges.
-
Liquidity and Financing: Secured additional financing from shareholders, amounting to USD65 million, including convertible notes, ensuring cash reserves for near-term expansion and sustainability.
Investment Recommendation
For Current Investors: Hold
- Reason: Tims China is showing promising operational improvements and positive EBITDA for the first time, driven by cost controls and a focus on franchise expansion. Investors holding the stock should wait for potential stability and growth as the company strengthens its position in China.
For Potential Investors: Cautious Buy
- Reason: The company is making strides toward profitability, though revenue headwinds remain. New investors could consider entry if confident in management’s ability to sustain EBITDA improvements and accelerate same-store sales growth.
Disclaimer: This recommendation does not guarantee returns and reflects current financial results, which may vary with market and operational conditions.
Key Investor Action Points
- Monitor Same-store Sales Performance: Key for tracking demand and Tims China’s competitive position.
- Franchise Network Growth: Ensures a capital-efficient path to expansion if the franchise pipeline remains robust.
- Liquidity and Debt Management: Tims China’s success depends on prudent financial management to avoid excessive leverage.
