TH International Ltd. Q1 FY2025 earnings call

• Launched Light & Fit Lunch Box and related combo products to boost lunch sales and offer healthy lunch options.
• Opened 20 made-to-order stores in Q1 and pruned underperforming stores.
• Achieved supply chain optimizations and cost controls, reducing food and packaging costs, labor costs, and other store operating expenses as a percentage of revenue.
• Franchisee program successful with over 7,000 applications and nearly 200 stores converted by end of March.
• Registered loyalty club members grew by 25.7% YOY.
• Implemented marketing initiatives like co-branded collaborations and brand birthday campaign to drive traffic and increase average transaction value.

Company-owned and operated store revenue dropped 14.0% year-over-year, primarily due to closure of underperforming stores and 6.5% decrease in same-store sales growth. Revenue from franchised and retail business increased by 28.6% year-over-year. System sales increased by 3.5% year-over-year. Company-owned and operated store contribution margin improved by 5.9 percentage points year-over-year. Adjusted corporate EBITDA margin improved by 6.1 percentage points year-over-year. Registered loyalty club members reached 25.1 million as of March 31, 2025, reflecting a 25.7% year-over-year growth.

• Aim to open around 200 made-to-order stores in 2025.
• Intend to further enhance operational efficiencies, roll out made-to-order fresh and healthy food preparation model.
• Focus on accelerating sub-franchising.
• Strive for positive same-store sales growth in 2025, especially in the second half.

• Macro economic volatility.
• Intense market competition, particularly in price wars.
• Uncertainties in Chinese consumer sentiment post Chinese New Year.
• Potential impact of government policies on consumer spending.

Q: Given that there were just a few net store openings in Q1, curious as to what your current thoughts are on the outlook for new store count for the full year as well as the pace at which the company plans to work through the significantly growing number of franchise applications?

A: Yes, and as you know, Q1 usually is kind of the slowest quarter for the company, usually for the industry, as we all know. And also, we continue to strategically prune certain nonperforming stores, both company-owned and franchisee stores during the first quarter. And also, as you know, we launched the made-to-order model from last year, which has been proving very successful in China [Technical Difficulty] in quarter, actually, we closed 10 -- no, in total, we closed 18, but among them 10 are not made-to-order stores, those were express stores, very small, cannot offer the made-to-order to our guests. So intentionally, we closed those stores. And we actually opened 20 made-to-order stores in Q1. And this will accelerate in the second quarter and especially in the second half as usual how most of the stores will be opened in the second half, especially in Q4, as usual. So we continue to aim to open around 200 made-to-order stores this year.

Q: There's been quite a lot of activity announced from the Chinese government related to stimulus aimed at spurring consumer activity. I'm curious as to your thoughts about the current state of the Chinese consumer and how you're viewing that as it relates to the Tims business?

A: I mean -- yes, I mean, the government is doing something, but not in a large scale yet. And after Chinese New Year, the consumers [indiscernible] didn't improve a lot given the launch of DeepSeek, as you know, the AI platform and also [Technical Difficulty] in China. So the sentiment of consumers didn't improve. But the economy remains, okay, a bit struggling. So I mean the government is still contemplating what policy can be very effective in China. So we are still waiting to see the policy to come out and to see the effect on the consumption side.

Q: As you think about the competition and the continued growth in the overall market in China, I'm curious as to just how you think about right now competing in a more intense value competition given the market?

A: Yes. I mean, I think the market has become actually more rational, especially on the coffee side. I mean the last year or the year before, the competition was really driven by the 2 companies, Luckin and Cotti. And so as you know, both companies have been founded by the same person, and so they are so similar. So they are really competing on a price point. So I mean, for us, we're not intent on getting to the pricing war. We try to differentiate our play. That's why we really focus on our differentiation point, the coffee plus fresh prepared food combos. And from last year, we converted most of the stores into made-to-order, further not differentiating our food offerings. And we are very strong in breakfast, as we all know. And this year, we launched the Light & Fit Lunch Box for the lunch daypart, which has been successful so far. So we try to differentiate our place, and we try to make our combos really competitive. So for breakfast items, one coffee plus one bagel priced at RMB 19.99, USD 3. For the lunch, we price around RMB 30 with Chibaobao 40%. The lowest can be RMB 34, nearly about USD 3.5. So the combo itself is very competitive in China, and we have seen continuous momentum on the combo growth here in China.

Q: Could you please give us an update, is what [ John Norwood ] is asking, on same-store sales and margin trends since the end of March?

A: Sure. Yes, I mean same-store sales is a very important operating metrics that we closely monitor. I mean the fluctuations in the same-store sales growth over the past year reflects the short-term uncertainties in China's economic and consumption sentiment and the intense industrial competition, as I mentioned earlier, it's really between Luckin and Cotti, which really draw the whole industry into the pricing war a bit. But in the mid to long term, with increasing customer demand in coffee consumption from both expanding coffee population penetration rate in the rising frequencies [Technical Difficulty] significant room for the growth in coffee sector. We have seen an improving trend in the same-store sales growth since October 2024, and our strategic goal remains unchanged to achieve positive same-store sales growth in 2025, especially in the second half of the year, we have seen strong momentum here right now. Another improvement we have seen is that the comparable transactions on a store level has regained growth since April. And we have seen part of same-store sales in recent weeks. So that's why we are very optimistic about our second half same-store sales growth. And as I mentioned again and again, Tims China is not solely focused on the coffee market, we continue to see strong and growing demand for our fresh prepared healthy food products. For example, our latest lunch of Light & fit Lunch Box series of products have been really welcomed by the market, achieving an average of 20-plus incremental daily transactions per store setting a very good foundation for continued growth in Q2 and beyond.