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TORONTO (Reuters) - Tim Hortons Inc THI.TO THI.N reported a 10 percent rise in quarterly profit on Wednesday on strong sales growth at its coffee shops in Canada and the United States, but the result fell short of analyst expectations and its shares dropped.
Canada's dominant coffee and doughnut chain earned 56 Canadian cents a share in the quarter ended April 1. Analysts, on average, had expected earnings of 58 Canadian cents, according to Thomson Reuters I/B/E/S.
The company also said Paul House would stay on as chief executive until December 2013 or until the appointment of a new CEO, whichever comes first.
Sales for the quarter ended April 1 at outlets open at least 13 months rose 5.2 percent in Canada and 8.5 percent in the United States. In Canada, all of that growth came from customers spending more during each visit.
The Oakville, Ontario-based company said a mild winter in Canada and "robust product introductions" helped boost sales at established stores. It has launched a number of new products over the past year, including espresso beverages, a beef lasagna casserole and a 24-ounce cup size.
In the United States, the number of transactions also rose in the quarter.
Canaccord Genuity analyst Derek Dley noted that transaction growth has been fairly flat in Canada for several quarters as competition in the breakfast market heats up.
"We're seeing a more saturated market. I think their future growth opportunities in Canada are definitely slowing," he said.
Dley pointed to McDonald's Corp's (MCD.N) $1 billion store revamp, announced in September. In March, McDonald's Canadian chief told Reuters that its Canadian market share was at a 15-year high, and the chain has been promoting its coffee offerings heavily.
Asked on a conference call whether Tim's might re-evaluate its plans to expand in Canada to at least 4,000 stores from about 3,300 now, House said there is still plenty of room for growth, particularly in Quebec, Western Canada and major urban areas.
"The major cities, still, you can put a location on every corner if you can find the proper real estate deal," he said. "We still think there's a lot of ramp, room for growth, in the Canadian marketplace."
Tim's, one of Canada's most recognized brands, reported net income of C$88.8 million ($88.7 million), or 56 Canadian cents a share, for the first quarter, up from C$80.7 million, or 48 Canadian cents, a year earlier. Total revenue rose 12 percent to C$721.3 million.
House first served as CEO from 2005 to 2008. When his successor Don Schroeder left abruptly, Tim Hortons said House would take over on a temporary basis while it looked for a new top executive.
"I am fully committed to a successful leadership transition, and until that time, my energy is focused on building on our momentum," House said in a statement.
House said on the call that Tim's board is running a "highly selective" global search.
Dley said the extended search is a concern, and he is surprised it is taking so long.
"Mr. House has done a great job the second time around ... but I think investors are still going to look at it with some uncertainty," he said. "We're waiting for a new CEO, and until we have an idea of who that's going to be, I think strategic initiatives are going to remain uncertain."
Shares of Tim Hortons were down 2.0 percent to C$55.96 on the Toronto Stock Exchange on late on Wednesday afternoon.
Additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Frank McGurty; and Peter Galloway