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TORONTO (Reuters) - Tim Hortons Inc THI.TO THI.N reported a slight decline in transactions and disappointing sales at established Canadian stores in its second quarter, sending its shares lower even as the restaurant chain posted solid growth in the United States.
Transaction count and same-store sales are closely watched metrics for Tim Hortons, as analysts try to gauge whether Canada's dominant coffee chain has any more room to grow in its home market.
Same-store sales rose 1.8 percent in Canada in the three months ended July 1, as customers spent more during each visit.
Edward Jones analyst Brian Yarbrough said the gain was disappointing. Combined with a decline in same-store transactions, it was likely weighing on the stock, he said.
"Restaurant and retail stocks are driven by same-store sales," he said. "It sells at a lofty premium compared to the group, and you need to continue to produce those positive same-store sales."
In July, Goldman Sachs analyst Michael Kelter downgraded Tim Hortons to "sell" in part over declining traffic, which he said could be a sign of market saturation or competitive pressure in Canada.
The company said average check rose even as it held prices steady, with customers sampling new espresso drinks and the chain rolling out new hot drink sizes, including a 24-ounce cup. Strong breakfast business also helped average check.
Tim Hortons said new restaurant development boosted system-wide sales, which rose 6.0 percent on a constant currency basis. As of July 1, it had 3,326 Canadian stores, an increase of 137 from a year earlier.
In the United States, where the company sees an big opportunity to grow, same-store sales rose 4.9 percent.
Tim Hortons said a lower effective tax rate also helped results for the quarter ended July 1.
Net income rose to C$108.1 million ($108.7 million), or 69 Canadian cents per share, from C$95.5 million, or 58 Canadian cents, a year earlier. A share repurchase program boosted earnings per share. Total revenue rose 11.8 percent to C$785.6 million.
Analysts, on average, had been expecting earnings of 69 Canadian cents a share, according to Thomson Reuters I/B/E/S.
Shares fell 2.5 percent to C$50.99 in early trading on the Toronto Stock Exchange on Thursday.
Reporting by Allison Martell in Toronto and Bhaswati Mukhopadhyay in Bangalore; Editing by Don Sebastian