Tim Hortons Plots Its Southern Strategy

Tim Hortons (NYSE: THI  ) plans to expand its brand throughout the US. The company is Canada's largest franchise outfit of quick-service restaurants. The menu features coffee, specialty drinks, an array of baked goods, sandwiches, and other munchies

Chief executive officer Marc Caira -- who took the reins of Tim Hortons in July – said recently that he believes continued success depends on growing the company's brand in the US market. "The U.S. for me is what I call a must-win battle," Caira said. 

Tim Hortons' Southern expansion
While the Canadian doughnut king believes growth potential exists in the United States, one has to wonder how successful this push will be. There are currently 4,300 Tim Hortons franchises, with a bit more than 800 in the US. A successful move into the US market means competing with snack-standard bearers like Dunkin' Brands  (NASDAQ: DNKN  ) and Starbucks (NASDAQ: SBUX  ) .

Tim Hortons has had great success in Canada. The company's second-quarter report shows revenue is garnered from franchised-restaurant sales. The franchise model reins in costs and ties profits to its supply chain. In this regard, the company operates five distribution centers, so the capital required is minimized.

Overall sales increased 5% year-over-year mostly because of 18 new stores opening. In the first half of 2013, sales were up by 4.1%. The company's share price continues to hover at $58, which is the 52-week high.

Beyond the Southern strategy, Tim Hortons hopes to grow its brand by offering more single-serve products, enhancing its menu, adding drive-through locations, and selling a line of its products in other retail grocers.

It is unclear how successful the company will be against marquee players like Dunkin Donuts and Starbucks, however.

Tim Hortons' US rivals
Tim Hortons' main rival in the US is Dunkin' Brands. The company is a well-established franchise outfit and already has brand recognition. This business model allows for quick expansion without the usual start-up costs. Moreover, Dunkin' is currently expanding its brand across the US -- especially in the West, as well as in Texas.

In fact, by the end of last year, there were more than 10,500 Dunkin' Donuts shops as well as 7,500 Baskin-Robbins ice cream stores under the Dunkin' Brands umbrella. But the company is not stopping there--it plans to take a leap across the pond, so to speak.

Dunkin' Brands recently announced it has signed agreements with two franchise groups to develop 50 Dunkin' Donuts shops in greater London over the next five years. Moreover, with additional strategic alliances, the company hopes to develop a total of 150 Dunkin' Donuts franchise shops in the UK over the next five years. 

Finally, a consensus of analysts anticipate that the company will earn $1.53 per share in 2013, and the expectations for 2014 are higher -- $1.81 per share. This means earnings are expected to grow by about 20%. Most importantly, Dunkin' Brands pays a dividend of 1.8%. 

These earnings expectations and dividend payouts are tasty treats for investors.

Starbucks, on the other hand, operates on another level than both Tim Hortons and Dunkin' Donuts. Starbucks caters to more upscale java lovers. The company also sells its lattes, snacks, and merchandise in 60 countries, so it has a much broader base. Meanwhile, Starbucks also has bold expansion plans as it makes a push into China with its "ready-to-drink" line of products.

As for earnings results, Starbucks expects full-year earnings in 2013 of $2.12 to $2.18 a share -- higher than its earlier forecast of $2.06 to $2.15 a share.

Starbucks' share price has been percolating for much of 2013 and currently flirts with $77 per share, so taking some money off of the table might be a good play at this juncture. Going forward, future earnings and share-price growth depend in part on how well its products are received in Beijing and beyond.

The last drop
In sum, Tim Hortons faces a stiff challenge with Dunkin' Brands and to a lesser extent Starbucks. Moreover, the Southern strategy must also contend with a weak consumer in a highly competitive US market (that also includes an outfit like Panera Bread). While Tim Hortons has been a long-term player north of the border, it remains to be seen how successful the Southern strategy will be. And in this bake off, my donuts are on Dunkin' Brands.

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