Executives of Tim Hortons Inc., the Canadian bakery-café concept, expressed optimism for the brand’s growth plans in Canada and the United States after first-quarter earnings and same-store sales grew despite the ongoing, patchy economic recovery in North America.
During the company’s earnings conference call, executives said they were pleased with sales in the U.S., especially in core Tim Hortons markets like Buffalo, N.Y., and Columbus, Ohio. Those markets will continue to get the majority of development dollars over the next few years, they said, to ensure market density and advertising efficiencies.
“We don’t see anything that would indicate that we would slow down the growth of new stores in Canada or in the United States,” said Paul House, president and chief executive, during the call. “We still think there’s a lot of room for growth in the Canadian marketplace, and in the United States, we’re still really happy with our core markets and the same-store sales growth we’re getting.”
The brand's more mature markets will continue to remodel their stores to a prototype aimed at positioning Tim Hortons as a bakery-café rather than a doughnut and coffee chain. All new builds will have components of that look and others will be co-branded with Cold Stone Creamery to expand dayparts and menus.
The Cold Stone co-branded locations would be the brand’s first choice for future expansion in the U.S., chief financial officer Cynthia Devine said. “If you go in with [the co-brand] in a new build, it’s a lot less costly for the restaurant owner and for us rather than to add it to an existing restaurant,” she said. “It’s definitely the preferred growth vehicle at this time.”
Tim Hortons opened seven restaurants in the first quarter in the U.S., making 721 total units, and opened another 22 locations in Canada, for a total of 3,315 units in its home market.
For the April 1-ended first quarter, Tim Hortons’ net income rose 10 percent to $88.8 million Canadian, or 56 cents per share, compared with $80.7 million Canadian, or 48 cents per share, a year earlier. Revenue increased 12.1 percent to $721.3 million Canadian, compared with $643.5 million Canadian a year earlier.
Same-store sales rose 8.5 percent in the United States and 5.2 percent in Canada, the company reported.
The same-store sales increase in the United States included a menu price increase of slightly more than 3 percent in the first quarter, officials said. New menu items like Panini sandwiches also drove incremental guest counts and gains in the average check.
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Traffic fell slightly in several areas of Canada hit with manufacturing job losses, so all of Tim Hortons’ 5.2-percent increase in same-store sales in Canada came from gains in the average check, executives said.
“Quite frankly, we don’t think consumers have stopped coming to us, but in some cases they’re just not coming as often as they’d like,” House said. “On the contrary to that is the average check continues to rise with real growth, and that’s come from a lot of our product innovation.”
The chain’s recently introduced 24-ounce coffee, as well as new lattes, espresso drinks and smoothies, which are at higher price points than traditional coffee offerings, contributed to that menu mix, he added.
Devine also noted that specialty bagels and egg white sandwiches at breakfast, as well as larger sizes of chili and lasagna at lunch, also were accretive to average check.
The company’s cost of goods sold increased 15.7 percent compared with the first quarter of 2011, primarily due to commodity cost inflation and a negative impact from the opening of more consolidated non-owned restaurants, which replaces franchisees’ rents and royalties with a portion of restaurant sales.
House and Devine said commodity pressures are expected to ease later this year.
“We have seen some price declines recently in the coffee market, which had been at historic highs for some time,” House said. “We currently expect our restaurant owners to begin seeing some relief in the price of coffee in the back half of 2012.”
The company expects wheat prices to ease this year as well, though sugar and cooking oil prices remain high, he added.
The consolidated non-owned restaurants would be a growth initiative for Tim Hortons to build out new markets, House said. He called the format the “80-20” model, because a franchisee pays 20 percent of sales to Tim Hortons to cover royalties, advertising contributions, and rental of company-owned equipment and buildings.
The arrangement allows operators to enter the brand with less up-front capital, and typically they are able to buy their buildings and equipment from Tim Hortons after a period of five years.
“As we develop the U.S. and expand into new markets, we certainly plan to use the 80-20 vehicle to bring new people into the system and to grow new markets,” House said. “New markets need good, young people with lots of vigor, and quite often they don’t have the necessary capital to purchase the store, but a great desire to own their own business. That’s been the backbone of our success.”
Oakville, Ontario-based Tim Hortons operates or franchises 4,042 restaurants, including six locations outside North America.