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TORONTO (Reuters) - Tim Hortons Inc's quarterly profit rose less than expected as the coffee shop chain spent heavily on promotions, while snowy weather held back Canadian sales growth, sending its shares tumbling.
Tim Hortons, whose brand is virtually synonymous with coffee in its home market, said on Thursday it gave away more prizes than usual in its annual Roll Up The Rim contest, increasing its costs and crimping earnings.
Sales at stores open at least a year, a key measure for retailers, slowed to 2 percent in Canada from 5.2 percent a year-earlier period, as severe winter weather kept some customers away from the country's No.1 restaurant chain.
The Oakville, Ontario-based company is having trouble keeping up the pace after several years of strong same-store growth, said Edward Jones analyst Brian Yarbrough. He said same-store sales have risen for the past 12 years.
"Eventually those comparisons just get tough," he said. "Year on year on year, at some point it just gets very difficult to continue to put up 4 or 5 percent same-store sales growth."
First-quarter same-store sales rose 4.9 percent in the United States, a much smaller market for Tim Hortons. Much of the increase there reflected higher prices for the coffee and baked goods it sells. The company is investing in marketing and advertising to boost brand awareness south of the border.
Tim Hortons, the fourth-largest publicly traded restaurant chain in North America, competes with McDonald's Corp and Dunkin' Donuts, as well as with Starbucks and Second Cup, a Canadian coffee shop chain
First-quarter earnings rose to C$80.7 million ($83.2 million), or 48 Canadian cents a share, from C$78.9 million, or 45 Canadian cents, in the year-before quarter. Analysts, on average, were looking for 51 Canadian cents, according to Thomson Reuters I/B/E/S.
Revenue rose 10.4 percent to C$643.5 million, topping the average analyst forecast of C$613.8 million.
Tim Hortons restaurants boosted menu prices by an average of 3 percent after the end of the first quarter to offset rising commodity prices.
The company has made commodity purchases required until the end of the year, hedging against further rises in raw material costs, Chief Executive Donald Schroeder told analysts on a conference call.
"The unknown right now is what's happening with gasoline," he said. Higher gas prices will mean consumers have fewer discretionary spending, he added. "That's a concern."
The stock was down 5 percent to C$45.68 on Thursday afternoon on the Toronto Stock Exchange and down 5 percent at $47.45 on the New York Stock Exchange. The stock has risen about 17 percent in the last three months ahead of Thursday's report.
Reporting by S. John Tilak, editing by Frank McGurty