Tim Hortons plans renos, refreshed drive-thrus as economy pressures sales growth

Growth slows in Q4.

TORONTO – Tim Hortons hopes a refreshed look for many of its stores and a new leader atop its executive team this summer will boost the brand as it endures an underwhelming economy and heavy competition from other coffee restaurants.

On Thursday, the Oakville, Ont.-based company delivered a cautious outlook for the year and fourth-quarter results which showed notably weaker transaction growth at stores that have been open for more than a year.

“A challenging economic climate and the resulting intensified environment continues to pose challenges for everyone in our industry,” said Paul House, interim chief executive in a conference call with analysts.

“In uncertain times, consumers can become more hesitant to spend money and in the restaurant sector we continue to see competitors relying more heavily than usual on promotions and discounts, and we too have been somewhat more promotional in a low-growth environment.”

The coffee, doughnut and fast food company plans to renovate about 300 of its franchised stores this year, or roughly double the amount it has most other years. Each store is refreshed about once a decade, the company said.

Some stores will also have their drive-thru lines revamped to process more vehicle traffic in less time.

For 2013, the company is targeting diluted earnings per share in a range of $2.87 to $2.97. Same-store sales growth, a key industry metric of locations open for at least a year, is targeted at two to four per cent in Canada and three to five per cent in the United States.

Tim Hortons also announced it would increase its quarterly dividend by 23.8 per cent. Starting with the March payout, the quarterly dividend will rise to 26 cents per share.

The company plans to buy back up to $250 million of its shares, a move that tends to push up per share earnings over time.

“We expect to continue to grow the chain in a healthy manner despite the current headwinds,” said chief financial officer Cynthia Devine.

“We have strategies in place designed to expand and enhance our system, strengthen our relationship with our guests and deliver high-quality, solid value menu items.”

In its outlook, Tim Hortons (TSX:THI) did not account for a $9-million charge it expects to take in the first quarter, and other expenses it will face when ushering in a new CEO this year, it said.

“The board has made significant progress in its external CEO search,” the company said in a release.

“Although the process is not yet complete, the board currently anticipates appointing a new CEO by early summer.”

House has held the top position at Tim Hortons since May 2011 when Don Schroeder made a surprise exit from the CEO position.

In the fourth quarter, net income dropped 2.5 per cent to $100.3 million or 65 cents per share. That compared with $103 million or 65 cents per share a year earlier.

Average analyst expectations had been for earnings of 72 cents per share, according to a survey by Thomson Reuters.

Revenue for the three months ended Dec. 31 was up 4.1 per cent at $811.6 million, with much of the increase tied to higher-priced products like the introduction of its panini sandwiches and single-serve Tassimo coffee line.

House said both products contributed “significantly” to the sales results in the period, though when analysts pressed him for specifics, he declined to disclose the details.

“We won’t qualify that,” he said of the new product sales.

But higher priced items certainly were a major contributor during the period, since overall sale-store sales growth showed that customers were making fewer transactions in the period.

Same-store sales growth was halved from a year earlier growing at 2.6 per cent from 5.5 per cent at the same time last year.

The company said the profit was five cents per share lower than it would have been without $9 million of reorganization expenses recorded in the quarter tied to both termination costs and professional fees.

Part of the costs were also related to the hunt for a replacement for House, who held the interim CEO job for nearly two years.

For the full year, Tim Hortons net income was up 5.2 per cent to $402.9 million or $2.59 per share — below the company’s 2012 guidance.

Shares of Tim Hortons fell 2.95 per cent, or $1.50, to close at $49.30 Thursday on the Toronto Stock Exchange.