Tim Hortons: Canada's Most Loved Company

Ranked No. 61 on consulting firm APCO Insight's "The 100 Most Loved Companies," the Ontario-based Tim Hortons (THI.DL) -- the only Canadian company to make the list -- is likely the most iconic brand you have never heard of. Mostly unknown this side of the U.S.-Canadian border, this coffee-and-doughnuts restaurant chain is the only real game in town when it comes to Canadian fast food. If the company's management has its way, we in the U.S. might soon come to love this brand as well.

Canada's most loved

Source: Tim Hortons.

Named after its NHL hockey-playing founder, Tim Hortons is an institution of Canadian fast-food retail. With about 2,100 more Canadian restaurants than McDonald's (MCD -0.05%) and more cups of coffee sold in Canada than Starbucks (SBUX 1.00%), Tim Hortons accounts for about 42% of all Canadian fast-food restaurant traffic and about 80% -- 2 billion cups -- of the coffee sold. Canada is home to 3,500 of the company's 4,350 worldwide Tim Hortons locations, which equates to about one Tim Hortons restaurant for every 9,965 Canadian citizens.

Despite such a large number of restaurants for a country of just 35 million people -- McDonald's in the U.S. only has one restaurant for about every 22,000 Americans-- Tim Hortons is not finished growing in Canada. Management believes that the company can grow to at least 4,000 Canadian restaurants, although there are some worries that the company has already reached market saturation. Earlier this year, it reported its first negative quarter of Canadian same-store sales since going public in 2006. Even if the company is correct in its Canadian growth targets, the real growth opportunity for Tim Hortons is obviously away from Canada, taking this beloved Canadian brand and introducing it to the rest of the world.

American international expansion
Typically when we hear the term "international expansion," the image that comes to mind is that of a dominant American brand looking for growth opportunities in some far-flung regions of the world. For the Canadian Tim Hortons, however, international expansion simply means looking to its southern border and the 314 million people with whom it shares a common language, culture, and love of coffee and doughnuts: the United States.

Although Tim Hortons opened its first U.S. restaurant 29 years ago -- about four miles from the Canadian border -- it has only been in recent years that the company has gotten serious about actual U.S. expansion efforts. It took the company about 23 years to go from one U.S. location to 300, but in just the last six years it has grown from those 300 U.S. locations to 817 in 11 states. Clearly there is a tremendous growth opportunity available to Tim Hortons in the United States.

Not everybody feels the love
Thus far, however, this U.S. growth opportunity has not performed as well as management had initially hoped. As the company continues to expand south of the Canadian border, Tim Hortons is finding itself competing with the likes of McDonald's and Starbucks on their home turf. To make it more difficult, McDonald's has recently began expanding its burger-centric menu to include more premium coffee options, while Starbucks has similarly started expanding its coffee-centric menu to include more food options, shown by its acquisition of the La Boulange bakery last year and its recently announced partnership with the yogurt maker Danone.

Although Tim Hortons' U.S. systemwide sales grew a respectable 10.8% last quarter, Tim Hortons' management has acknowledged that the same strategy that worked so well in Canada needs to be reworked for the U.S. market's homegrown competition.http://blogs.wsj.com/canadarealtime/2013/09/17/interview-tim-hortons-ceo-talks-expansion-activist-investors-and-coffee/

Because of that, Tim Hortons has recently come under pressure from activist hedge fund investors, calling for the company to scale back its U.S. expansion and institute a large share buyback funded by debt. Tim Hortons' new CEO had been adamant that the U.S. market was a "must-win" for the company, but he has been much more receptive to the idea of buying back company shares. So in August, this $9 billion Canadian dollar market-cap company announced a share buyback targeting CA$1 billion, which would be funded with CA$900 million of new debt.

Foolish take
With the stock up 21% year to date, investors have loved the share price performance of Tim Hortons. While this gain slightly trails that of the U.S. S&P 500 Index, it easily trounced the 9% gain of the Canadian benchmark S&P/TSX Composite Index. Tim Hortons recently had negative comparable-sales growth in Canada, and U.S growth could be better. However, if the company is able to use its absolutely dominant market position in Canada to successfully break into the U.S. fast food market, this Canadian brand could be the next U.S. fast-food success story.