ANALYSIS-Tim Hortons share price may hinge U.S. plans

Eight of 14 analysts who have filed recent reports on the company have "hold" ratings on the stock…"The U.S. market is such a tough market and every (Canadian) retailer has had their head handed to them. I think they would be better to stick to Canada,…"

http://www.forbes.com
December 11, 2009

ANALYSIS-Tim Hortons share price may hinge U.S. plans
Scott Anderson

reuters.jpg
  • U.S. same store sales less than 1 pct in 2008
  • Company has some 500 stores in U.S.
  • Stock off 12 pct in 2009

TORONTO (Reuters) - Shares of Canada's Tim Hortons Inc ( THI - news - people ) will likely stagnate until the coffee and doughnut chain gains traction south of the border, even as it opens hundreds of stores a year on its home turf.

Analysts want the company to define its U.S. strategy more sharply, including spelling out the number of stores which it could open in the country. The company, whose brand name is one of the most recognized in Canada, must also figure out how to better translate its appeal for American tastes.

The company is running out of time to make a decisive move. Many estimate it has fewer than five years of growth left in Canada before it has fully exhausted the market.

"There is nowhere left to go in Canada, so everyone wants to know how they are going to go into the United States," said Brian Yarbrough, a retail analyst at Edward Jones in St. Louis, Missouri.

"There's a huge opportunity in the United States, but the stores are not as near productive as they are in Canada. Until they figure out the U.S., I just don't think the stock has a huge upside."

This uncertainty has prompted a number of analysts, including Yarbrough, to slap "hold" or "neutral" ratings on the stock until it maps out a more convincing strategy.

Eight of 14 analysts who have filed recent reports on the company have "hold" ratings on the stock, according to Thomson Reuters I/B/E/S/.

Shares of Tim Hortons are down about 12 percent from an early January high of C$35.23 partly on worries over sales growth.

Figuring out the United States might be easier said than done, however.

Yarbrough questions whether the company should take the brand from 500 U.S. units to 5,000 or 6,000 or opt instead to be a little fish in a big pond with 800 to 1,000 units in a concentrated region of the country.

That would make it a bit player against the likes of Starbucks ( SBUX - news - people ) with more than 11,000 stores across the country or closely held Dunkin' Donuts with 6,400 stores.

The coffee chain, founded in 1964 by National Hockey League star Tim Horton, has more than 3,500 locations mostly in Canada. Its 500 U.S. stores are concentrated in Michigan, Connecticut, Ohio, Massachusetts and New York.

It recently opened a store in the U.S. Army's Fort Knox in Kentucky and made an aggressive push into New York City with 12 locations, including a store in Times Square.

But its U.S. performance has proved spotty. U.S. same-store sales, tracking the performance of outlets open for at least a year, grew less than 1 percent in 2008. That was well under its 2 to 4 percent target, and 4.4 percent growth in Canada.

Indeed, U.S. same-store sales in the third quarter of this year rose 4.3 percent, with operating revenue at $1.1 million, but analysts credit much of the growth to its partnership with Cold Stone Creamery, an ice cream vendor. As a result, Tim's sales growth is expected to fall off as the winter months set in.

"There's no question that the company is making some steps, but people are very concerned about where it's going in the United States and how it is going to expand its franchise and until they work out their strategy, it's definitely going to remain range bound," said Conor Bill, managing director at Mt. Auburn Capital.

Brand recognition plays a part in the slow ramp-up. While the stores in the border states are successful as border-hopping Canadians seek a familiar place, the name is not as well-known deeper into the country.

"The U.S. taste in coffee is different than the Canadian taste in coffee, and I also think that there is an iconic element to Tim Hortons which does not exist in the U.S. marketplace," Bill said.

Many say the chain would have to spend millions on advertising in America — a move that would weigh on profitability — if it wanted to make any real impact.

Meanwhile, some think the company should learn from the mistakes of others and stay away from the U.S. market, which has proven to be a graveyard for some Canadian companies.

"The U.S. market is such a tough market and every (Canadian) retailer has had their head handed to them. I think they would be better to stick to Canada," said John Kinsey, a portfolio manager at Caldwell Securities in Toronto. ($1=$1.05 Canadian) (Reporting by Scott Anderson; Editing by Frank McGurty)

Copyright 2009 Reuters

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