Tim Hortons faces slowdown in customer traffic, stronger third-quarter profit

TORONTO – Heightened competition in the coffee and snacks market added pressure to Tim Hortons during the third quarter as the company squeezed out an improved profit, even though fewer customers visited its restaurants.

President and chief executive Paul House said Thursday that Tim Hortons is dealing with numerous entrants into the coffee market who are stepping up their promotional campaigns, all while consumers are spending cautiously in a tough economy.

“Everyone’s trying to crowd into the coffee category so the competition has intensified from many positions,” House said in a conference call, pointing towards McDonalds and Subway as competitors.

“Given that the economic conditions aren’t great, everyone’s trying to find some share from somebody else.”

Those factors kept some of Tim Hortons’ customers from visiting its stores, or at least coming as frequently as they have in the past. The company, which doesn’t provide specific traffic numbers, said same-store sales transactions were lower in both the U.S. and Canada.

Earnings at the Oakville, Ont.-based coffee, doughnut and fast food chain grew to $105.7 million, or 68 cents per diluted share, in the three months ended Sept. 30. That fell short of the 72 cents per share expected by analysts, according to a poll by Thomson Reuters.

The profits were up from $103.6 million or 65 cents per diluted share in the same period a year earlier.

Total revenues increased 10.3 per cent to $802 million from $726.9 million.

Same-store sales, a key metric measuring results from stores open at least a year, rose 1.9 per cent in Canada and 2.3 per cent in the United States.

Tim Hortons (TSX:THI) has launched a wider array of lunch options and specialty drinks in an effort to keep coffee fans coming through their doors after the morning rush, but House said the company is also facing challenges with its capacity as some new products take longer to prepare.

Edward Jones analyst Brian Yarbrough said capacity constraint could become a major challenge for fast food operators as they try to expand beyond their traditional offerings.

“The volumes are just so high in some of these stores that you can’t get more out of them,” he said in a phone interview from St. Louis.

“When you drive by a Hortons in the morning and there’s 13 people in line, how many customers are you going to lose if you don’t want to wait in that line?”

Yarbrough said according to his own records, this is the first time in more than 15 years that the company has had same-store sales remain below two per cent for consecutive quarters.

House said the recent introduction of the grilled panini is encouraging for the company, and that Tim Hortons will focus on growing its hot food business even further next year, expanding beyond its hot soups and cups of chili and lasagna.

“You’re going to see a lot of emphasis on food,” he said.

“We understand that whatever you are today you need to be something different five years from now. You have to be constantly evolving the business.”

Shares of the company fell about five per cent on Thursday, declining $2.48 to end at $47.03 on the Toronto Stock Exchange.

This year, competitors have launched several promotions to get customers back in their stores more than once a day, including a discount at Starbucks that encourages customers to upgrade their coffee orders to include food items. At McDonalds, the company has continued to offer occasional free coffee giveaways to drive interest in its McCafe brand.

“We have not been a heavy discounter in the past and we will not be a heavy discounter as we go forward,” House said, noting that the company will occasionally make exceptions with offers like the $1 special on certain drinks.

“We will do selective discounting with certain products that we want to trial with our consumer.”

Tim Hortons is Canada’s biggest restaurant chain and the fourth-biggest in North America with more than 4,100 restaurants on the continent.

Since opening its first U.S. store in Buffalo, N.Y., in 1985, it has expanded to more than 750 stores in a dozen states — including Michigan, Ohio, Kentucky and West Virginia — and plans to open another 300 locations over the next three years.

The company has recently been changing its approach in some markets, including a licence agreement with Dubai-based Apparel Group to open up to 120 restaurants in the United Arab Emirates, Qatar, Bahrain, Kuwait and Oman over the next five years.

Last month, Tim Hortons joined other Canadian retailers in adding Interac Flash cards to the number of ways customers can make cashless payments at the counter.

Rather than adding to a credit card balance, the Interac cards draw down the funds from the customer’s bank account.