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Why Franchises Are Good for Investors

Tim Hortons (THI)
Company Profile: Tim Hortons develops and franchises quick-service restaurants that serve food, including coffee and other hot and cold beverages, baked goods, sandwiches and soups. Earlier this week, Tim Hortons abruptly announced that CEO Donald Schroeder is leaving after three years. Executive Chairman Paul House was named interim CEO while the company conducts a search for a permanent replacement.
Share price return: 10.6% this year
Franchise locations: As of April 3, Tim Hortons counted 3,169 restaurants in Canada and 613 in the U.S. Almost all of the company's restaurants are franchised. The company also has 274 self-serve licensed locations in Ireland and the U.K.
Revenue from franchises: Franchise-related revenue accounted for about 29% of Tim Horton's $643.5 million in total revenue last quarter. Franchise revenue totaled $189 million, with nearly $168 million from rents and royalties and $21 million from franchise fees. That compares with $454.5 million from company-owned locations.
Franchise costs: Tim Hortons estimates that the total initial investment for a U.S. franchise will vary between $337,000 to $439,800 for the equipment cost; $2,400 to $34,000 for real property cost; and a franchise fee of $35,000. There are also required pre-opening expenses that range between $47,000 to $88,400. Tim Hortons says there are also several ongoing fees, including a weekly royalty of 4.5% of a restaurant's gross sales, a rent fee equal to 8.5% of monthly gross sales and a monthly advertising fee of 4% of gross sales.
Analyst view: Scotia Capital is one of five research firms with a "buy" rating on Tim Hortons. Thirteen firms, including Canaccord Genuity and RBC Capital, say investors should hold the stock. No analyst has a "sell" rating on Tim Hortons.

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