Tim Hortons buoyed by U.S. operations

by Eric Schroeder
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OAKVILLE, ONT. — Another solid few months of transaction gains helped spark a 3% increase in same-store sales in the United States for Tim Hortons, Inc. during the third quarter of fiscal 2013. The gain followed a 1.4% increase in U.S. same-store sales in the second quarter ended June 30.

Marc Caira, president and chief executive officer, attributed the continued growth in the United States to Tim Hortons’ focus on developing “a successful, thriving and profitable business that can be scaled aggressively to become our longer term growth engine.”

“Our focus in the U.S. will be on the priority markets already identified, where we plan to drive average unit volumes, or A.U.V.s, to improve returns from existing restaurants,” Mr. Caira said during a Nov. 7 conference call with analysts. “Our business is highly responsive to A.U.V. lift, and by focusing on the core and driving sales and unit economics across those markets, we have an opportunity to deliver meaningful increases in profitability.”

He said research suggests guests believe Tim Hortons has become more convenient and achieved greater brand awareness in many of its core priority markets. As a result, Mr. Caira said the company’s thinking needs to shift to driving traffic and loyalty across day parts beyond breakfast.

“This is a great foundation to work with to capture incremental visits and to build sales volumes from a large pool of U.S. consumers who already find us convenient,” he said. “We will accomplish this within a reduced capital scenario by primarily leveraging our current asset infrastructure. We will consider entry into new markets with partners that are well capitalized, but more importantly, partners with strengths such as an understanding of the local food service market and access to market resources, including supply chain, labor, media and real estate that we would not normally have access to. We plan to win with the U.S. consumers by developing distinct and differentiated products that recognize the difference of the American consumer and that what has worked well in Canada may not necessarily be applicable to the U.S. consumer.”

While Canada and the United States remain top priorities for Tim Hortons, the company also has its sights set on longer-term international opportunities. Specifically, Mr. Caira mentioned the Middle East.

“Our focus in the short term is on continuing to grow and learn in this part of the world before embarking on further expansions internationally,” he said. “We believe our approach to the opportunities in Canada, the U.S. and international is both pragmatic and responsible. In this new reality, we cannot do everything. We will need to make choices.”

Net income at Tim Hortons Inc. in the third quarter ended Sept. 29 was C$113,863,000 ($109,028,000), equal to C$0.76 per share on the common stock, up 8% from C$105,698,000, or C$0.68 per share, in the third quarter of fiscal 2012. The company said the increase reflected higher operating income, partially offset by a higher effective tax rate.

Net revenues rose 3% to C$825,353,000 ($790,109,000) from C$802,040,000. Same-store sales increased 1.7% in Canada and 3% in the United States.

“In both markets, the rate of same-stores sales increase has improved on a sequential basis in each of the last two quarters,” Mr. Caira said. “We are particularly pleased with strong transaction growth in our U.S. business, which contributed significantly to the solid same-store sales performance. Our U.S. team focused on driving traffic during the quarter in the face of a sluggish operating environment in a continued intensive competitive landscape.”

Operating income in the third quarter of fiscal 2013 rose 10% to C$168,828,000 from C$153,659,000.

During the quarter the company launched its K-Cup compatible single-serve platform. Mr. Caira acknowledged that while single-serve is a relatively small part of the coffee market, it is fast-growing, and the company is taking advantage of the strength of the Tim Hortons brand to capture share of the growing category. Tim Hortons has offered Tassimo products in its restaurants in Canada and the United States for the past year.

“The addition of the K-Cup compatible offering significantly expands our reach in both markets,” he said. “We are also pursuing increased distribution of our single-serve products in the U.S. through additional channels. These initiatives demonstrate our focus on coffee leadership.

“We believe ongoing innovation is key in our business. In addition to these coffee initiatives, in the past two weeks, we have introduced a pilot for a new dark roast blend in both the Canadian and the U.S. market. We know that our premium blend has been Canada’s preferred coffee for many years and continues to be enjoyed by millions of Canadians every day. However, a smaller percentage of consumers either has an out-right preference for darker roasts or would like to have it as an occasional alternative. As coffee leaders, we have the responsibility to bring our consumers the innovations they are seeking.”

For the nine months ended Sept. 29, net income was C$323,770,000, or C$2.12 per share, up from C$302,544,000, or C$1.94 per share, in the same period a year ago. Net revenues were C$2,357,029,000, up from C$2,308,905,000.
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