(Reuters) - Tim Hortons Inc THI.TO, the Canadian coffee and doughnut chain that has been facing pressure by shareholders, said on Thursday it was expanding its share buyback plan by C$900 million ($863.4 million) as it cut its growth forecast even though quarterly profit topped estimates.
The company, led since July 2 by long-time Nestle executive Marc Caira, also announced plans for its business in the United States that are in line with demands of activist investors who have urged the company to cut back on the investment of its own cash in the United States and turn to franchisees.
Hedge funds Scout Capital Management and Highfields Capital, owners of almost 10 percent of Tim Hortons stock, have been urging the company to increase debt levels to fund a share buyback, address concerns about the U.S. expansion, and name directors to the board who have more financial expertise.
Tim Hortons on Thursday said sales in its newer U.S. markets were not generating a strong return and said it was accelerating plans to partner with well-capitalized franchisees in the United States as it expands there.
The company also named two new directors to its board: Sherri Brillon, chief financial officer at Encana Corporation, and Thomas Milroy, chief executive of BMO Capital Markets.
Shares of Tims, which says it sells eight of every 10 cups of coffee sold in Canada, have risen about 10 percent since the activist pressure was revealed more than three months ago. Shares were up 55 Canadian cents at C$60.04 on the Toronto Stock Exchange.
Former chief executive Paul House had said the company would wait for its new CEO to take the reins before implementing any strategy changes. He hinted that while the company would likely raise debt levels and buy back shares, it would not be the extent Highfields had asked.
The company said it was targeting a total of C$1 billion in share buybacks over the next 12 months, funded by bank debt and/or newly issued bonds.
WEAKER SAME-STORE SALES GROWTH
Tim Hortons reported a 14 percent rise in second-quarter profit but said it now expects same-store sales growth for the year to come in below its earlier targeted ranges of 2 percent to 4 percent in Canada, and 3 percent to 5 percent in the United States.
It said a weak economy has dampened consumer confidence and discretionary spending in Canada and the United States, and competition was rising.
Net income rose to C$123.7 million, or 81 Canadian cents per share in the quarter, from C$108.1 million, or 69 Canadian cents per share, a year earlier.
Analysts had expected earnings of 75 Canadian cents a share, according to Thomson Reuters I/B/E/S.
Total revenue rose 2 percent to C$800.1 million ($767.5 million).
Same-store sales grew 1.5 percent in Canada and 1.4 percent in the United States.
Reporting by Solarina Ho in Toronto and Bhaswati Mukhopadhyay in Bangalore; Editing Janet Guttsman and Leslie Adler