Tims stays the course on its U.S. expansion

Tims has about 2,700 stores in Canada but just 300 south of the border. Canadian stores contribute 91 per cent of company revenue and 98 per cent of Tims' pretax earnings, according to a research report from Merrill Lynch.

The Globe and Mail
September 21, 2006

Tims stays the course on its U.S. expansion
Strategy plagued by slow progress and a poor performance in New England
Andy Hoffman

Tim Hortons Inc. won't abandon its troubled U.S. expansion strategy, chief executive officer Paul House vowed yesterday, despite slow progress and a dismal performance in New England.

"We got our ass kicked in New England — that's plain English," Mr. House told investors at a Scotia Capital Markets conference in Toronto.

However, the executive promised the coffee and doughnut chain would continue to battle for market share in the U.S. Northeast in a "good old street fight" against other, more established food service operators. "It's who gets in the last kick," he said.

While the Tims brand enjoys an almost reverential status in Canada, it has failed to make a significant dent in the U.S. market.

Tims has about 2,700 stores in Canada but just 300 south of the border. Canadian stores contribute 91 per cent of company revenue and 98 per cent of Tims' pretax earnings, according to a research report from Merrill Lynch.

The U.S. locations are highly concentrated in New York, Michigan and Ohio. With much of the Canadian market saturated with Tim Hortons, analysts have said a successful U.S. expansion will be key to the company's success.

It hopes to have 500 locations in the United States by the end of 2008, but so far, the U.S. business has been largely unprofitable.

The company bought 42 stores from Bess Eaton Donut Flour Co. Inc. in 2004 for $60.9-million and converted them to Hortons outlets. The acquisition failed miserably and the company was forced to take a goodwill and impairment charge of $53.1-million related to the stores in Maine, Massachusetts and Rhode Island.

While operating income from Tims' Canadian operations increased 10.1 per cent to $379-million in 2005 from 2004, U.S. operations posted a loss of $4.2-million, according to the company's prospectus.

Tims U.S. same-store sales growth has outpaced Canada's, increasing 8.4 per cent during the company's second quarter compared with a 6.1-per-cent increase in Canada. But high margin items such as coffee continue to account for a smaller percentage of U.S. revenue compared with Canada.

Mr. House yesterday said Tims locations in border cities such as Buffalo and Detroit are doing very well. The stores in New England are moving in the right direction, he said, but not quickly enough.

However, he said the company has no plans to step back from its U.S. expansion strategy, in response to a money manager's question regarding the U.S. operations.

"We're not leaving that market," Mr. House said. "Get it out of your mind that we're leaving."

Mr. House likened Tims difficulties in establishing a U.S. presence with its experiences in Quebec where it has sparred with the strong Dunkin' Donuts chain.

"Dunkin' kicked us around in Quebec for a long time and now we're kicking them out of the province," he said.

Mr. House suggested that Tims shares are being valued without considering the American operations. "You've got the whole U.S. business for free, so get out there boys and buy the stock," he said.

Parent company Wendy's International Inc. will distribute the remaining 82.75 per cent of Tims to its shareholders in a special dividend Sept. 29.

Tim Hortons shares fell 25 cents to $28.63 on the Toronto Stock Exchange.


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