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TORONTO (Reuters) - Profits jumped at Tim Hortons Inc THI.TO in the third quarter despite increased competition in the company's core coffee business and declining traffic at some stores.
Canada's No. 1 restaurant chain reported a 40 percent rise in profit on Thursday on strong sales, but it said North American operating conditions were challenging.
Desjardins Securities analyst Keith Howlett said the company has made great strides in overcoming the 2010 sale of its bakery division.
"Tim Hortons has passed through the challenging period of being without the contribution of the divested Maidstone Bakeries," he wrote in a research note.
The company is facing tough competition from McDonald's Corp (MCD.N), which has been aggressively promoting its coffee, introducing espresso-based drinks, and renovating Canadian stores.
For its part, Tim Hortons has beefed up its menu with items such as lasagna casserole, and will roll out espresso drinks this month.
Howlett said he expects the new drinks to help same-store sales in 2012.
The company earned C$103.6 million, or 65 Canadian cents a share, in the third quarter, up from C$73.8 million, or 42 Canadian cents a share, a year earlier. Revenue rose more than 8 percent to C$726.9 million.
Excluding asset impairment charges and the impact of the Maidstone sale, adjusted earnings rose 10 percent.
Analysts on average had expected earnings of 64 Canadian cents a share on revenue of C$726.4 million.
Sales at stores open at least 13 months, a key measure for retailers, rose 6.3 percent in the United States and 4.7 percent in Canada, home to the bulk of its operations.
"Operating conditions in North America continued to be challenging and the strength of our sales performance is a great testament to our strong price-value brand position," said Chief Executive Paul House in a release.
Speaking on a conference call, Chief Financial Officer Cynthia Devine said the higher sales were mostly driven by customers spending more per visit. In Canada, the number of transactions at established stores declined.
"To put your finger on exactly why they are down is difficult, because we have markets where we have very little competition and we see a slight decline in transactions in those markets," said Devine. "I think it's reflective of the economy."
Devine said the company expects the trend to reverse.
Tim Hortons shares closed up 1.1 percent at C$50.09 on Thursday on the Toronto Stock Exchange.
Reporting by Allison Martell in Toronto and Bhaswati Mukhopadhyay in Bangalore; editing by Rob Wilson