Tim Hortons Inc. (THI), the Canadian coffee and doughnut chain under pressure from activist investors over its U.S. expansion, said starting in 2014 it will reduce the capital it deploys in the country.
The company is looking for “new ways” to grow in the U.S., a market it says will contribute to long-term earnings growth. The Oakville, Ontario-based chain will accelerate an “initiative to partner with well-capitalized franchisees in the U.S.,” as one approach, according to a statement. The company also plans to raise debt to buy back C$900 million ($868 million) in stock.
Tim Hortons Chief Executive Officer Marc Caira announced the measures as part of the chain’s first quarterly results since he took over on July 2. Scout Capital Management, which held a 5.5 percent stake on June 25, has said investment over the past decade in the U.S. has brought little return.
“Most of the announcements made today seemed to align pretty well with suggestions made by the two activists,” said Bobby Hagedorn, an analyst with Edward Jones & Co., referring to Scout and Highfields Capital Management, which has also pushed for change. “It’s not quite to the level that they were looking for, so it will be interesting to see how they’ll respond,” said Hagedorn, who recommends buying the stock.
Josh Pekarsky, president of Vancouver-based Longview Communications Inc. and a Scout spokesman, said he didn’t have a comment. A telephone message left with Highfields wasn’t returned.
About 23 percent of the company’s more than 3,400 stores are in the U.S.
The coffee chain also reported second-quarter earnings that topped analyst estimates. Net income rose 14 percent to C$123.7 million, or 81 cents a share, from C$108.1 million, or 69 cents, a year earlier. Analysts anticipated 74 cents a share, the average of estimates compiled by Bloomberg.
Sales rose 1.9 percent to C$800.1 million, falling short of the C$818 million average of analysts’ estimates. Growth in Canadian same-store sales was 1.5 percent, and 1.4 percent in the U.S.
Same-store sales in the quarter advanced 1.5 percent in Canada, down from 1.8 percent a year earlier. Such sales rose 1.4 percent in the U.S. during the period, compared with a 4.9 percent jump in 2012’s second quarter. Tim Hortons said growth in same-store sales, which exclude new locations, will be lower than it predicted this year. The chain maintained its earnings forecast for 2013.
Tim Hortons rose 0.7 percent to C$59.90 at the close in Toronto. The shares have jumped 23 percent this year.
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