• Adjusted Corporate EBITDA Profitability: Achieved for the second consecutive quarter.
• Store Contribution Margin: Highest ever at 13.3%, with a year-over-year margin expansion of 5.8 percentage points.
• Revenue: Total revenue of RMB 7.6 million in Q3 2024.
• Cash and Cash Equivalents: RMB 203.7 million (USD 29.1 million) as of September 30, 2024.
• Monthly Average Transacting Customers: 3.3 million in Q3 2024, a 2.4% increase from Q3 2023.
• Digital Orders: Increased to 86.6% of total orders in Q3 2024, up from 82.6% in Q3 2023.
• Food and Packaging Costs: Reduced by 6.1 percentage points as a percentage of revenues from company-owned and operated stores year-over-year.
• Labor Costs: Reduced by 3.0 percentage points as a percentage of revenues from company-owned and operated stores year-over-year.
• Marketing Expenses: Decreased by 2.3 percentage points as a percentage of total revenues year-over-year.
• General and Administrative Expenses: Reduced by 2.7 percentage points as a percentage of total revenues year-over-year.
• Store Network Expansion: 539 stores renovated for made-to-order food preparation by the end of October 2024.
• Franchising Growth: 43 new stores opened and 94 additional signed since the program launch.
• Registered Members: 22.8 million globally, reflecting a 35.3% year-over-year growth.

• Warning! GuruFocus has detected 6 Warning Signs with THCH.

Release Date: November 12, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• TH International Ltd (NASDAQ:THCH) achieved its highest ever quarterly company-owned and operated store contribution margin of 13.3%, indicating improved operational efficiencies.
• The company maintained Adjusted corporate EBITDA profitability for the second consecutive quarter, showcasing financial stability.
• TH International Ltd (NASDAQ:THCH) has successfully launched a sub-franchising program, receiving over 5,000 applications and opening 43 new stores, which supports its expansion strategy.
• The loyalty program has grown significantly, with 22.8 million registered members, reflecting a 35.3% year-over-year increase, enhancing customer retention.
• The introduction of innovative products, such as low-calorie bagels and plant-based options, aligns with consumer health trends and has been well-received, boosting brand visibility.

Negative Points

• The ongoing price competition in the Chinese coffee market poses a challenge, potentially impacting profit margins.
• Despite the growth in digital orders, the company faces pressure to continually enhance its digital capabilities to meet rising consumer expectations.
• The capital required for company-owned stores remains significant, with a payback period of 2 to 3 years, which could strain financial resources.
• The expansion into new cities requires careful selection of partners and locations, which may slow down the pace of growth.
• Marketing expenses, although reduced, still represent a considerable portion of total revenues, necessitating efficient allocation to maintain profitability.

Q & A Highlights

Q: How much room do you see for continuing expense leverage moving forward? A: Yongchen Lu, CEO and Director, explained that major cost items include food and paper, rent, and labor. While food and paper costs have been reduced by over 6% year-over-year, labor and rent are mostly fixed. As revenue increases, these fixed costs will be better allocated, leading to margin improvements.

Q: Is there a timeline for converting subfranchise applications to operating status? A: Yongchen Lu stated that while there are timelines, the focus is on selecting the right partners and locations. Despite receiving over 5,000 applications, a strict vetting process is in place, including background checks and interviews. The company has opened 43 stores and signed an additional 94, with faster progress expected in the coming quarters.

Q: What impact does the loyalty program have on repeat customers and transaction size? A: Yongchen Lu noted that loyalty members have a higher purchase frequency than non-members. The "B" card, which offers discounts, has driven a 4.6 times increase in purchase frequency among cardholders compared to average members.

Q: Can you provide an update on the pricing competition in the coffee market and the bundling strategy? A: Yongchen Lu mentioned that price competition is ongoing, but Tims China differentiates itself with coffee plus freshly prepared warm food at affordable prices. The company uses competitive pricing strategies, such as breakfast and lunch combos, and the "B" card to enhance purchase frequency.

Q: How important are the renovated open kitchens for Tim's franchises? A: Yongchen Lu emphasized that open kitchens are crucial as they allow guests to watch staff prepare fresh meals, which differentiates Tims China from competitors. This strategy helps expand into more day parts, such as lunch and dinner, driving sales growth.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.