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Tim Hortons says frugal customers cutting back on snacks, eating into sales

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TORONTO - While Tim Hortons Inc. (TSX:THI) profits and sales continue to improve, Canada's biggest coffee chain says growth may be constrained as frugal consumers — while not prepared to give up their morning java — are cutting back on afternoon snacks.

The chain's 13 per cent improvement in second-quarter earnings may not suggest that Tims is taking a hit from weaker consumer confidence, but it noted that a modest 1.8 per cent increase in Canadian same-store sales reflected "a challenging macro-environment.

"When a local economy is impacted, we certainly feel it in our stores," said Tim Hortons' CEO Paul House on a conference call Thursday.

Results may have been even better if consumer confidence was stronger, as negative sentiment about the economy has hit companies across the restaurant industry, noted CFO Cynthia Devine.

"The economic environment in both Canada and the U.S. remains volatile and the continued uncertainty appears to be impacting consumer confidence," she said.

"We too noticed that some of the more moderated growth in the second quarter that carried through into July."

Devine said that while sales during the morning remain robust, Tims has noticed some softness in sales during the afternoon, a trend that appears to be consistent with a consumer looking to trim spending.

"The consumer, if they've got to cut back a little bit during some of these challenging times, then quite likely it's that snacking day part."

Devine also noted that an unseasonably warm spring may have eaten into afternoon sales.

"You're not coming back in the afternoon for that hot coffee when the climate was what it was."

Tims ever-expanding line of cold beverages — which include iced coffees, smoothies and now frozen lemonade — have helped to offset declining coffee sales in warm months, but only partially, she said.

House noted that along with unfavourable weather and economic conditions, the chain is also "not hiding" from the fact that the coffee and breakfast market is getting more competitive as McDonald's and Starbucks increase their offerings.

"Everybody's trying to get into the coffee business and the coffee business as a whole is flat, and so there's more people chasing the same dollar," said House, who stepped in as interim CEO after the abrupt departure of Don Schroeder last May.

For the three months ended July 1, Tims earned $108.1 million or 69 cents per share, up from $95.5 million or 58 cents per share in the same year-earlier period and in line with analysts estimates.

Revenue rose 11.8 per cent to $785.6 million from $702.8 million.

The increased revenue included a six per cent increase in system-wide sales, boosted in particular by a 4.9 per cent jump in same-store sales in the competitive U.S. market.

BMO analyst Peter Sklar noted that same-store sales in both Canada and the U.S. were below expectations, but added that U.S. growth compared favourably with competitors McDonald's and Dunkin' Donuts.

"Although (same-store sales) for both segments were below our expectation, revenues exceeded our forecast due to strong distribution sales and an increase in the number of restaurants consolidated as opposed to accounted for on a royalty basis as franchisees."

The chain also announced Thursday a revamp of its executive ranks — a move it says will better align its management structure with its growing market presence.

Among the appointments, David Clanachan was named chief operating officer, while Roland Walton has named president of Tim Hortons Canada. Meanwhile, Mike Meilleur was named executive vice-president for Tim Hortons U.S., with accountability for the U.S. business.

The company said it wants the new structure in place as a support system upon the appointment of a new CEO, a search that has taken more than a year. The company has said it is focused on external candidates for the position.

Tims also announced Thursday it has reached a North American agreement with Kraft Foods to enter the single-serve coffee market. Under the terms of the agreement, the company's coffee will be available in Tassimo T-Disc coffee pods.

Single-serve coffee machines are becoming increasingly popular, eating into sales at Tims and its competitors. Starbucks and Timothy's coffees are already available in that format.

Tims shares closed down 2.75 per cent or $1.44 to $50.84 Thursday on the Toronto Stock Exchange.

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