* Q2 EPS C$0.43, matching estimate
* Sales rise during McDonald's coffee promotion
* Stock jumps 4 percent (New throughout, with CEO, analyst comments)
By Jeffrey Jones
CALGARY, Alberta, Aug 6 (Reuters) - Tim Hortons Inc THI.TO coffee and doughnut shops fought off a promotional offensive from McDonald's Corp (MCD.N) as well as a weak economy in the second quarter to lift profit 3.7 percent, the company said on Thursday.
Tim Hortons, whose stores are ubiquitous across Canada, also generated improved returns in its smaller U.S. business, where its entry into Manhattan made a splash last month.
The stock jumped C$1.17, or 4 percent, to C$31.07 on the Toronto Stock Exchange.
Investors were pleased with a 3.3 percent rise in same-store sales and a C$3.1 million ($2.9 million) operating profit -- up from a year-earlier loss -- in the United States, Edward Jones analyst Brian Yarbrough said.
Tim Hortons is starting to reap rewards from a recent initiative to pair its brand with that of ice cream purveyor Cold Stone Creamery at 40 U.S. locations, Yarbrough said.
"They've always had an issue with driving traffic into their stores and I think these are doing a really good job in the United States in helping them in the later-day, early-evening, when they typically don't get traffic," he said.
Canadian same-store sales rose 1.7 percent in the quarter, down from 5.7 percent a year earlier. Chief Executive Don Schroeder said the overall economy weighed on the business, especially in regions where large manufacturing industries have cut jobs.
Still, sales have strengthened every month this year, he told analysts.
Early in the quarter, McDonald's offered free morning coffee at locations in some regions across Canada to promote a new blend, leading some analysts to predict a drop in business at Tim Hortons.
The promotion did not lure away customers, 40 percent of whom visit at least four times a week, Schroeder said.
"The fact is that we actually grew transactions over the two weeks of this competitive activity, demonstrating the tremendous loyalty of our customers and the entrenchment of our competitive position in Canada," Schroeder said.
Tim Hortons launched promotions of its own, including some freebies, in the period. They included the introduction of iced coffee in the Canadian market with a free sample day.
The company said it is sticking with a 2009 target of boosting operating income by 11 percent to 13 percent, excluding the previously announced cost of about C$7 million to reorganize as a Canadian-chartered company.
It also expects a jump in Canadian same-store sales of 3 percent to 5 percent.
But it may beat its U.S. same-store sales goal of flat to 2 percent and break-even operating income, the company said.
In the second quarter, Tim Hortons earned C$77.8 million, or 43 Canadian cents a share, up from C$75 million, or 41 Canadian cents a share. The showing matched the average forecast among analysts surveyed by Reuters Estimates
Revenue increased 9 percent to C$556.1 million.
$1=$1.08 Canadian Additional reporting by Krishna Chaithanya in Bangalore; editing by Rob Wilson