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What it does
Tim Hortons franchises quick-service restaurants in Canada and the United States. Its restaurants sell premium coffee, teas, soups, sandwiches, wraps, and fresh baked goods, including its trademark doughnuts. Historically, the company has grown primarily by adding new restaurants, and this year is no different. The company's plan is to grow in Canadian markets (Quebec, western Canada, Ontario, and major cities) and in major regional areas in the U.S. (such as New York, Ohio, and Michigan). There are also plans to test a new concept restaurant in the U.S. to differentiate the brand and customer offerings as a cafe and bake shop destination.
Where does that name come from?
The company was started by an NHL All-Star (his name? Tim Horton) in 1964. He partnered with an initial franchisee, who took over after Tim's death in 1974. Wendy's bought the business in 1995, but in 2006, Wendy's took Tim Hortons public again and spun it off.
How it stacks up
Tim Hortons is the fourth-largest publicly traded quick service restaurant chain in North America. It is the largest in Canada, where it has 3,015 restaurants. It has 563 restaurants in the U.S. and an additional 291 locations in the U.K. and Ireland. More than 99% of restaurants are franchised, and it is management's plan to continue that strategy.
The company commands 40% market share in the Canadian quick service restaurant segment and 83% of the sector management defines as "coffee/donut/gourmet coffee/tea." In the U.S., however, Tim Hortons faces stiffer competition from the likes of Starbucks
What to watch out for
The company has an established brand and business in Canada with definite room for growth in that market. Other markets, including the U.S., offer the potential for even greater growth, but management's ability to capitalize on the strength of the Tim Hortons name outside of Canada is as yet unproven. The demand for breakfast foods, sandwiches, and coffee cannot be expected to drop off a cliff anytime soon; however, the company's ability to earn strong margins on these products in a competitive market is uncertain.
Also, adding new stores has been an effective path to growth to date, but eventually the company will begin to run out of green pastures—especially in the likely scenario that the brand name fails to achieve traction in the United States. In that case, management will be forced to turn to boosting same-restaurant sales or increasing operating margins for continued long-term growth, and we simply do not know how well management can pull that off.
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Fool analyst Alex Pape does not own shares in any company mentioned. Starbucks is a Motley Fool Stock Advisor recommendation. Tim Hortons is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.