Tim Hortons future profit depends on getting customers to buy more

Tim Hortons is looking to increase profits by convincing customers that it's not only a coffee stop to pick up a double-double but also a restaurant for breakfast and lunch.

The key to doing that is by adding innovative items to its menu, including side dishes, to encourage customers to buy a food-and-beverage combo during the rush meal times, president and CEO Marc Caira told analysts during a conference call Wednesday.

"We want our guests who currently purchase one item from us to buy two, and those who buy two items to buy three," he said. "In order to accomplish this goal, we first need the right menu items."

Caira pointed to the restaurant chain's new hash browns and hot kettle chips as innovative meal add-ons that have helped drive up the amount each customer spends.

Same-store sales up 2.6%

In its latest quarter, the coffee-and-doughnut chain saw sales rise 2.6 per cent at its Canadian locations opened for 13 months or more; a bump it now expects to boost the outlook for the rest of the year.

The sales were driven by customers spending more money during each visit on higher-priced food items such as the crispy chicken sandwich and the turkey sausage breakfast sandwich.

The restaurant chain's U.S. stores also saw an improvement, with sales growing by 5.9 per cent year over year, due to increased sales of frozen beverages such as frozen hot chocolate and iced cappuccino drinks.

Caira said it's the best sales growth the company has reported since 2012.

The positive news from Tim Hortons appealed to investors, driving the restaurant chain's shares to a record high of $64.73. The stock ended the day up more than seven per cent, or $4.44, to $64.52 on the Toronto Stock Exchange.

The company said it will continue to focus on its five-year strategic plan, which was launched in February, to transform the coffee chain into a full-fledged international restaurant chain.

"It is encouraging to see momentum in our business in an environment that remains very competitive," said Caira.

"We knew we had to work hard to establish additional traction in the business, especially in this new era of low growth, competitive intensity, evolving consumer demand and changing technology."

Caira said it is concentrating on adding more food options that contain bold flavours but are made with fresh ingredients. The food also needs to be simple enough for its restaurants to prepare, like its recently introduced frozen green tea, Greek yogurt parfaits and fruit smoothies.

Looking at new coffee blend

It's also experimenting with a dark roast in some of is Quebec locations, to gauge demand for another coffee blend.

Despite the sales boost, Tim Hortons said its earnings were partially offset by a decline in same-store transactions at its Canadian locations for the ninth consecutive quarter.

Canaccord Genuity analyst Derek Dley said the continued drop was a cause for concern.

"Although Q2/14 represented a strong quarter for the company, we remain cautious over continued traffic declines in Canada," he wrote in a note to clients.

'"We believe the growth opportunities for the company are slowing and the shares are fully valued at current levels."

On Wednesday, Tim Hortons reported flat profits of $123.8 million versus $123.7 million a year earlier for the three months ended June 29. On a per-share basis, the results grew to 92 cents from 81 cents in the comparable period, benefiting from a share repurchase program announced last summer.

Revenue up 9.3%

Analysts on average were expecting earnings of 87 cents per share, according to Thomson Reuters.

Tim Hortons said it now expects its earnings per share to be near the higher end or slightly above current target range of $3.17 to $3.27 earnings per share for the year.

Revenues increased 9.3 per cent to $874.3 million, compared with $800.1 million year over year.

The chain has been faced with intense competition in recent years by U.S. rivals Starbucks Corp. and McDonalds Corp., which both serve coffee and tea drinks, along with food.

Last month, it teamed up with CIBC to create the "Double Double Visa Card," which acts as both a Tim Hortons loyalty card and a traditional Visa card. The company said it was too early to release any of the preliminary data on the card.

As of June 29, Tim Hortons operated 4,546 restaurants, including 3,630 in Canada, 866 in the United States and 50 in the Middle East.