TH International tastes success with bagels in donut-averse China

The operator of the Tim Hortons chain in China sold 22 million bagel-based products last year, and said it is aiming to return to revenue and same-store sales growth in 2025

Key Takeaways:

• TH International’s revenue fell 12% in the fourth quarter, moderating from a 17% decline in the previous quarter
• The company is targeting a return to revenue growth and achieving breakeven on an EBITDA basis this year

By Doug Young

The Tim Hortons chain was historically known for donuts, founded in 1964 by its namesake former ice hockey star who also presumably loved the sugary snack. But after yanking the company’s core product from most of its menus, the company’s China iteration, Tims China, has found better results with bagels, which look similar but lack the sweetness.

Tims China operator TH International Ltd. (THCH.US) has had it rough lately, struggling to differentiate itself from a crowded and fiercely competitive field of premium coffee sellers including everyone from Starbucks (SBUX.US) to local sensations Luckin (LKCNY.US) and Cotti. But the company may have finally found its answer in bagels, based on its latest financial report that mentions the bread-based Western staple numerous times and shows that Tims China may have finally turned a corner in the fourth quarter.

The company said it sold 22 million bagel and bagel sandwich products last year, which averages more than 60 sales per day for each of its roughly 950 stores during the year – not bad for this relatively new differentiator.

Investors seemed to like the chain’s new China flavor, sending the company’s embattled stock up 18% in three trading days after the announcement this week. Still, the stock has lost about half of its value over the last year and currently trades at a watered-down price-to-sales (P/S) ratio of just 0.45. By comparison, Luckin and Yum China (YUMC.US; 9987.HK), which is also moving aggressively into premium coffee, trade at much higher multiples of 2.08 and 1.52, respectively.

In addition to finding success in bagels, which it serves not only with traditional toppings like cream cheese, but also as a bread substitute for various sandwich-type products, TH International has also found better results with franchising than self-operated stores. That’s different from most other restaurant operators, whose self-operated stores are typically more profitable, but choose to also use franchising to expand more quickly and conserve capital.

CFO Li Dong said TH International’s franchise business currently contributes “steady cash flows and profitability,” even as the company’s self-operated stores continue to lose money, resulting in overall operating losses.

As its situation improves, the company is also holding out big hopes for 2025. It is targeting a return to same-store sales and revenue growth, after the important metrics turned negative in early 2024 and remained that way for the rest of the year. It is also aiming to achieve breakeven on an earnings before interest, taxes, depreciation and amortization (EBITDA) basis for all of 2025, which would represent the first time a major profit metric wasn’t negative.

“Moving into the spring of 2025, we look forward to regaining growth on our top line and to continue our expansion with plans to open at least 200 stores this year, the majority of which will be through our successful subfranchise (business) while maintaining our focus on operational excellence and profitability,” said CEO Lu Yongchen.

Third-quarter bottom

Broadly speaking, TH International’s latest results show the company’s recent downturn bottomed out in last year’s third quarter and it began recovering at the end of the year as it completed some major adjustments to its self-operated stores and its franchise business gained momentum. Its revenue fell 12% to 333 million yuan ($45.6 million) during the quarter from 378 million yuan a year earlier, improving from a 17% decline in the previous quarter.

The story was similar for the company’s same-store sales, whose 13.3% decline in the fourth quarter represented an improvement from the 21.7% decline in the third quarter.

The company passed a symbolic milestone during the fourth quarter as it opened its 1,000^th store in Shanghai, bringing its total to 1,022 by the end of last year. Six years after coming to China, TH International has a relatively large footprint in the country, with stores in 82 cities.

A deeper dive into the overall store count figure shows the company was aggressively closing underperforming self-operated stores during the first three quarters of last year, with the figure dropping from 619 at the end of 2023 to 564 at the end of last September. But the trend returned to a positive direction in the fourth quarter, as its self-operated store count rose to 576 at the end of last year.

Meantime, the company’s franchised store count has grown steadily without pause, rising from 283 at the end of 2023 to 446 at the end of last year, making up 44% of its total. And as we’ve previously noted, CEO Lu said a majority of the new store openings this year will come from the franchised business, though he wasn’t more specific.

While the franchised business is more profitable and looks on track to overtake the company’s self-operated stores in terms of store count, the former contributes far less revenue than the latter. TH International said its self-operated stores generated 270 million yuan in the fourth quarter, down 17.7% year-on-year, but still making up 81% of its total. By comparison, its “other revenue,” which comes mostly from the franchised store business, rose 25.8% year-on-year during the fourth quarter to 62.5 million yuan, even though it made up just 19% of its total.

The company has also been relatively strong in terms of cost controls, with store costs and expenses down 18.8% year-on-year in the fourth quarter, and marketing expenses down by an even larger 35%.

The combination of cost controls, closure of underperforming stores and new success with its bagel-based formula helped TH International narrow its operating loss to 117 million yuan from 218 million yuan a year earlier, and reduce its net loss to 132 million yuan from 311 million yuan over that time. CFO Li also noted the company is “no longer cash burning like in the past years,” and that it has ample funds after receiving new financing from its founding shareholders.

All those signals seem to show that TH International may be emerging from a difficult period as a more focused company that can operate profitably in the not-too-distant future. Now, it just needs to show it can maintain its recent positive momentum in the face of fierce competition and headwinds created by China’s slowing economy.

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