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Explanations are not always fresh at Tim Hortons

More than a week after Canada's beloved coffee and donut chain announced it had a hole in its executive suite, analysts are still wondering what happened to former CEO Don Schroeder.

On May 12, Tim Hortons held a conference call with financial analysts who had plenty of questions for Don Schroeder, a long time executive who everybody assumed held the confidence of the board as company CEO at the time.

The market watchers wanted to know how much of the coffee chain’s lackluster first quarter results was related to bad weather. They asked about how the business was being impacted by inflation, not to mention a recent Hortons price hike. They wanted to know about franchises payouts related to last year’s move to defrosting, rather than baking, its donuts. And they wondered about brand benefits associated with tie-ins to the Cold Stone ice crème products now sold at company locations.

Above all, the analysts were interested in the future of the Roll Up the Rim customer loyalty program, which cut into sales this year after odds for prize payouts were increased to 1 in 6 to celebrate the promotion’s 25th anniversary. What nobody asked about was whether they should be addressing all of the above to someone else. After all, Schroeder also had a milestone anniversary in 2011, which marked his 20th year as a company executive, third as CEO. And since he did a good job leading the company through the recent downturn, analysts say there was no reason to suspect he had anything other than a good and loyal relationship with other company directors.

Nevertheless, less than two weeks after Schroeder outlined how Tim Hortons would pursue new avenues for growth, he was gone.

On May 25, Tim’s board announced it was starting an “active search for a new chief executive officer (CEO) following an extended succession planning process undertaken in connection with the Company’s strategic plans.” The day before, Paul House, executive chairman and former CEO, took the helm on an interim basis after Schroeder, who is still listed as a board member, unceremoniously left the management team.

In a press release, Frank Iacobucci, the company’s lead director, said that succession and strategic planning had led the board to “the determination that the current timing under all circumstances is best-suited to transition CEO leadership.” Since then, the company has issued no further clarification to the market.

A top-tier money manager with a significant investment in the company, who requested anonymity, says insiders have indicated to his firm that the leadership change stems from the simple fact that Schroeder is 64. But the analyst community was blindsided, despite being well aware of the former CEO’s age. “Nobody can claim that Don Schroeder’s sudden departure as CEO of Tim Hortons was not a surprise,” insists CIBC World Markets analyst Perry Caicco.

Another analyst, who doesn’t think the board simply decided that now was the right time to change leaders because Schroeder was 64, noted House, who is older than Schroeder, never enjoyed the top job when he was CEO in the past. Meanwhile, Schroeder was doing a good job and showed no signs of wishing to slow down. He leaves the company with what Scotia Capital analyst Patricia Baker calls strong fundamentals and a solid growth profile.

Brian Yarbrough, who follows the stock for Edward Jones, says this could indeed simply be a matter of Schroeder deciding not to stick around after being informed his best-before date was coming due. But thanks to the way the departure has played out and the poor communications involved, he is prepared to eventually learn something far more embarrassing played a role. “Typically,” he says, “a press release in these situations says the CEO resigned or retired or decided to pursue other career opportunities. Never before have I ever seen one that simply says the CEO is no longer here.”

Attempts to get Tim Hortons to better explain Schroeder’s sudden and unexpected exit have fallen on deaf ears. Ron Joyce, a company co-founder and chairman emeritus of the Tim Horton Children’s Foundation, declined to comment. However, after Canadian Business informed company executives that some industry watchers can’t help but wonder if another shoe will drop, this magazine was emailed the following statement. “Please let me be absolutely clear,” wrote Alexandra Cygal, manager of public affairs, “there is no other issue between Don and the Board beyond the CEO succession planning.”

What happens now is anybody’s guess. The company is considered to have decent bench strength, which is why at least one observer thinks Schroeder might have been pushed to leave early to “accommodate a strong internal candidate who would otherwise leave the company rather than wait.”

But CIBC’s Caicco isn’t so sure. “Perhaps the bigger surprise,” he said in a commentary, “is that one of the company’s able lieutenants was not immediately promoted to the position.” That, he thinks, should be taken as the most important signal concerning the company’s future. With the core Canadian business being “an almost flawless machine, capable of throwing off buckets of cash for years to come without requiring significant attention or resources,” he sees a seismic shift in culture in the works along with a move toward rapid growth in the U.S.

“That no internal manager was promoted to CEO suggests that none fit that bill,” Caicco says, speculating internal candidates are either too tied to the legacy culture, not quite ready to embrace the future or experienced enough in uncharted waters.       

In a research note, TD Securities analyst stated the obvious by noting the optics surrounding this transition are “not ideal.” Past performance isn’t the issue, he added. The board, he said, “appears to have decided that it required a new CEO to lead the company to the next leg of growth.” In other words, Hortons other directors clearly want a new leader for unclear strategic reasons.