Management explained the so-so performance by pointing to a sluggish Canadian economy, capacity constraints at Tim Hortons stores, and aggressive promotions by competitors. The first problem will, hopefully, solve itself. Too much demand is a high-class problem, and expanding capacity is a relatively straightforward and low-risk opportunity for the company: higher throughput drive-thrus, rearranged counters in stores, and adding stores near locations that are currently overflowing with business. The last and most serious problem is increasingly intense competition, notably from McDonalds and Subway, particularly in coffee. When one of your chief competitors is offering coffee free of charge, it can be difficult to match them; instead, Tim Hortons will respond by fighting on other turf, especially in food, especially the lunch menu.
There is little reason for shareholders to panic. Tim Hortons still outperformed most of its competition; its results were mediocre only compared to its own stellar past performance. The company stood by its annual EPS guidance of $2.65-2.75 (excluding charges), and set out a clear and attainable path to increased sales and earnings. Shares were hit after results were released, and if prices continue to fall, it could offer investors the chance to buy a stake in a very fine company for a reasonable price.
My original analysis of Tim Hortons is here.
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