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Tim Hortons delivers modest profit
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Toronto Star- Tim Hortons pleased investors Thursday by reporting a 1.5 per cent increase in quarterly profits despite having to wrestle with rising commodity costs for its iconic coffee and doughnuts.
The Oakville-based company reported a jump in revenue of nearly 10 per cent in its second-quarter results, due in large part to an increase in prices as well as the launch of popular new products like fruit smoothies.
Profits rose from $94.1 million in the same period last year to $95.5 million this year, while net earnings rose from 54 cents per share to 58 cents per share.
Factoring out a three cent per share charge related to the departure of president and CEO Don Schroeder, the company earned 61 cents per share, in line with analyst estimates. According to company, a “separation agreement” with Schroeder cost the company $6.3 million.
“Overall, while the operating environment in the second quarter was somewhat fragile, we had strong underlying growth and performance that we were very pleased with,” said chief financial officer Cynthia Devine.
Tim Hortons is the fourth-largest restaurant chain in North America, with 3,700 locations. Growth was strong on both sides of the border, with same-store sales up 3.8 per cent in Canada and an impressive 6.6 per cent in the United States where the company has had its problems.
“If it isn’t the best for second-quarter among (quick service) restaurants in the U.S., it would be one of the best,” said Edward Jones analyst Brian Yarbrough, chalking the success up to the company’s “very strong brand.”
The surprisingly strong U.S. same-store sales, which refer to locations open for a year or more, are being attributed to successful marketing campaigns aimed at raising the store’s brand. That follows the closure of 54 locations in New England last December, in the face of strong competition from locally-headquartered Dunkin Donuts.
In April, Hortons raised prices to offset the soaring costs of commodity ingredients like wheat, corn, sugar and vegetable oil, which have gone up as much as 50 to 100 per cent over the last year. But Yarbrough said the price increases – about 4.5 per cent on a large cup of coffee – aren’t enough to drive customers away.
“At the end of the day, it’s still a pretty cheap product. If you raise prices 4 or 5 per cent, does the consumer really notice the difference?” he said. “Obviously you wonder if they can continue to increase prices but they’ve done it basically year in and year out for many years… I think it’s just the nature of the business.”
On a conference call with analysts, president and CEO Paul House said he doesn’t believe costumers are reacting negatively to the price increases.
“We’ve always been very respectful with price increases,” he said. “History has indicated that when you’re straightforward with pricing, the consumer reacts to that.”
House added that despite “profound” challenges in the U.S. economy and uncertainty at home, there doesn’t appear to be a change in consumer behaviour.
“I think our business has historically done fairly well through tough times and we continue to see it that way,” said House.
Shares in Tim Hortons rose by $2.10 and closed at $45.71 cents in trading on the Toronto Stock Exchange.
“We upgraded it to a buy. We do think longer term there’s some good value here,” Yarbrough said.
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