3 Reasons Tim Hortons Is a Buy

The latest earnings release was a bit disappointing, but also showed a lot of promise.

| More on:
The Motley Fool

On Wednesday Tim Hortons (TSX: THI)(NYSE: THI) posted earnings results for the first quarter of 2014. Unfortunately, the company fell just short of expectations, with earnings per share of 66 cents. Analysts were expecting EPS of 68 cents. The miss was largely attributable to the cold weather.

The latest earnings release also served as another reminder of Tim Hortons’ growth challenges. In Canada, same store sales grew by 1.6%, and that number was only 1.9% in the United States. Shares fell following the news, but there were also some promising signs.

On that note, below are the top three reasons to buy shares of Tim Hortons.

1. Menu changes

Everyone knows that Tim Hortons dominates the coffee market, but if the company really wants to grow same-store sales, especially in Canada, it will have to sell more food too. And in the first quarter, Tims introduced a Crispy Chicken Sandwich to complement the Panini line. The sandwich has not only gotten a great response from customers, but also compares favourably with competitors on a nutritional value basis.

Other new menu items are Warm Kettle Chips, frozen green tea, and a new kind of hash brown. Both are being offered as sides in combos, helping to encourage customers to order more food per visit. And it’s not just menu additions that Tims is focusing on; the company is 75% of the way through its delisting efforts, which will simplify the menu and make for speedier lineups. For example, Canadian stores will no longer be selling ice cream.

2. The U.S. strategy

Again, it is no secret that the United States has always been a struggle for Tim Hortons, where the company does not have the brand power it has in Canada. But Tims is starting to gain at least some traction in the country, with operating income increasing to $4.4 million in the first quarter, up from $900,000 year over year. The company is also scoring much better in areas like convenience and customer awareness, both good signs.

Interestingly, CEO Mark Caira is focusing more on developing menu items specifically for American consumers, such as the Meatball Panini and Spinach and Egg White Pie. As he put it, “this is something that’s a little different because in the past we may have tried to perhaps use Canadian products a bit too often.” Time will tell how successful this strategy shift is, but so far so good.

3. An embrace of technology

Technology innovation is absolutely imperative in the industry today, and Tim Hortons is determined not to be left behind. The biggest initiative is the Double-Double Card, a co-branded Visa credit card with CIBC, which will launch this summer. Tims will also soon allow customers to order and pay for goods straight from their smartphones. And finally, the company is in the process of upgrading its point of sale system, which will make ordering more efficient.

Will this all be enough?

There is still no denying that Tim Hortons is operating in a much more competitive industry than it was a few years ago. Companies like McDonald’s (NYSE: MCD) and Starbucks (Nasdaq: SBUX) are competing fiercely in the coffee market, currently Tims’ home turf. But with the initiatives outlined above, at least Tim Hortons is showing it can play on offence too.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article. David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of McDonald's and Starbucks.

More on Investing

Redwood trees stretch up to the sunlight.
Dividend Stocks

2 TSX Growth Stocks Set Up for Outsized Gains in 2024

Considering the growth prospects that these two TSX stocks offer, I would keep a very close eye on them as…

Read more »

movies, theatre, popcorn

3 Things You Need to Know if You Own CGX Stock Today

Cineplex stock remains in the doghouse, trading at 2.6 times earnings, but there are clear signs of an upcoming rebound.

Read more »

Growing plant shoots on coins
Dividend Stocks

3 Strong Dividend Stocks I’d Add to My Portfolio Right Now

Given their solid underlying businesses, stable cash flows, and high yields, these three dividend stocks are an excellent addition to…

Read more »

Bank Stocks

1 Dividend Stock Down 20% to Buy Right Now

This dividend stock provides investors with more growth towards all-time highs, as well as a superior dividend yield over 6%.

Read more »

ETF chart stocks
Dividend Stocks

Got $500 to Invest in Stocks? Put It in This Index Fund

This ETF is one of the best options for those with a bit of cash, who don't want to worry…

Read more »

Tech Stocks

Nvidia Stock Is Making History: Will It Make New Investors Any Money?

Nvidia stock (NASDAQ:NVDA) continues to surge past all-time highs, with shares up 265% in the last year alone! But can…

Read more »

data analyze research
Stocks for Beginners

3 Reasons to Buy Dollarama Stock Like There’s No Tomorrow

Dollarama (TSX:DOL) stock has seen massive growth this last year, but more could be on the way -- not just…

Read more »

warning or alert
Dividend Stocks

Help! How Do I Get Rid of My Stock Duds?

Stock duds can prevent you from making really big returns and using that cash to fund future investments. How do…

Read more »