Tim Hortons Comes Out With Guns Blazing

Make no mistake about it: The coffee and pastry industry is a blazing inferno. Even while the majority of the restaurant-chain space continues to struggle, players such as Starbucks (NASDAQ: SBUX  ) , Dunkin' Brands Group (NASDAQ: DNKN  ) , and Krispy Kreme Doughnuts (NYSE: KKD  ) are delivering jolts and sugar highs to investors like there is no tomorrow. Even Tim Hortons (NYSE: THI  ) , which had been seen as lagging behind the others, seems to have woken up and smelled the coffee.


Source:  Tim Hortons

The not-so-timid Timmy results
Tim Hortons reported fiscal fourth quarter results on Feb. 20. Revenue rose 4.3% to $898.5 million. Same-store sales popped 1.6% in Canada and 3.1% in the U.S. Earnings per share ticked up 6.2% to $0.69, or $2.56 per share on an annualized basis.

Going forward, Tim Hortons expects earnings per share of between $3.17 and $3.27 for 2014, which is decent growth over $2.82 for 2013. Contributing to the expected growth is the addition of new restaurants plus assumption of between 1% and 3% in same-store sales for Canada and between 2% and 4% in the U.S.

CEO Marc Caira credited the success and outlook with its enhanced "capital structure." Caira said that the company worked to "simplify [its] operations, strengthen [its] menu, and refresh [its] restaurants, all to provide the ultimate guest experience." He believes the transformation "will set the stage for continued long-term growth and profitability."

Show me the money
Tim Hortons is so confident in the sustainability of its improved results and outlook that it announced two measures with its earnings designed to enhance shareholder value. First, Tim Hortons declared a dividend of $0.32 per share, which is a 23.1% increase in the dividend. This is the seventh year in a row of a "meaningful increase" in the company's dividend.

Source: Tim Hortons

Second, Tim Hortons announced a new $440 million share buyback program, which represents potentially more than 5% of the shares outstanding. This is a significant sum especially since it plans to execute the buyback by August 2014 and adds to additional buyback programs already in place. Guidance and an optimistic outlook is one thing, but often when a company puts its money where its mouth is that speaks louder than any words do.

Expansion time
Tim Hortons is mostly a Canadian chain with around 80% of its locations in that country. With 859 locations in the U.S., it seems like there is potentially vast untapped territory for the chain to expand into. Caira has been previously quoted as stating, "Turning to our U.S. business. Our goal is to focus on the core to develop a successful, thriving and profitable business that can be scaled aggressively to become our longer-term growth engine."

While Tim Hortons plans to open more restaurants in Canada than in the U.S. in 2014, the percentage increase planned is around 6% in the U.S. and only 4% in Canada. Look for the U.S. to become an increasingly larger portion of its sales and profits.

Dunkin' Brands Group and Krispy Kreme Doughnuts are seeing expansion opportunities themselves while competitor Starbucks seems tapped out in many domestic areas. It got so bad for many Starbucks locations that they started cannibalizing each other, forcing Starbucks to close some of its locations back several years ago.

Dunkin' Brands Group and Krispy Kreme, like Tim Hortons, see vast untapped opportunity. For example, Dunkin' Donuts is only now making its way into California for the first time. When it opened locations in Denver, Colo., they were an instant smash hit with lines out the door and literally across the parking lot. Krispy Kreme is attempting a similar model to Dunkin' Donuts with small footprint stores.

With most of the United States is completely without a Tim Hortons location, management must be salivating at the potential opportunity.

Foolish final thoughts
Fools looking for a long-term growth opportunity should consider taking a closer look at Tim Hortons. While the company certainly competes with Starbucks, Dunkin' Brands Group, and Krispy Kreme, all four have offerings that are different enough from each other to support multiple competitors existing side by side in the same regions.

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