* Q2 EPS C$0.69 vs C$0.58 year earlier
* System-wide sales up 6 percent
* Same-store sales rise 4.9 pct in the United States
By Allison Martell
TORONTO, Aug 9 (Reuters) - Tim Hortons Inc reported a slight decline in transactions and disappointing quarterly sales at established Canadian stores, sending its shares down on Thursday even as the restaurant chain posted impressive growth in the United States.
Canadian 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.
The concern over its Canadian prospects overshadowed a 6 percent rise in overall sales, thanks in part to the chain’s still-robust expansion program, and a solid overall profit gain during its second quarter ended July 1.
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. But Yarbrough said slight traffic declines did not concern him too much, given the company’s track record raising prices and introducing higher-priced products.
In its earnings release, Tim Hortons said global economic uncertainty seems to be hurting consumer confidence.
“This theme was echoed by many in the restaurant sector last quarter and into July, and likely had a moderating effect on rates of same-store sales growth in the industry,” it said.
“We noticed some of that impact of moderating sales in the second quarter which carried through into July.”
McDonald’s Corp reported flat global same-store sales in July, its worst performance in more than nine years, a possible sign that economic uncertainty is hurting discretionary spending.
In the United States, where Tim Hortons sees an big opportunity to grow, same-store sales rose 4.9 percent, helping overall earnings.
Shares fell 2.9 percent to C$50.77 on the Toronto Stock Exchange on Thursday.
Tim Hortons 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.
The company has been trying new products and, increasingly, butting heads with U.S. heavyweight McDonald’s in Canada.
Tims, as the chain is known across Canada, claims 8 of every ten cups of coffee sold in the country, but McDonald’s has been remodeling stores and heavily promoting its coffee, while Tims expands its food menu.
“It’s a more competitive market. We’re not hiding from that fact. Everybody is trying to get into the coffee business, and the coffee business as a whole is flat,” said Chief Executive Paul House on a conference call.
“But we’re growing overall transactions, and we’ve got a huge market share in the marketplace, and so we feel comfortable where we’re at.”
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. Tim Hortons said a lower effective tax rate also helped results.
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.
Separately on Thursday, Tim Hortons announced a deal with Kraft Foods Inc to sell its coffee in the form of “T discs,” pods used in Kraft’s Tassimo single-cup coffee makers.
Tim Hortons pods and brewers will be sold online and at Tim Hortons restaurants in the United States and Canada.
In the United States, the expanding market for single-cup brewing systems is dominated by Green Mountain Coffee Roasters Inc’s Keurig machines.
Tim Hortons said Tassimo is one of the fastest-growing brands in the single-cup market in North America, with more than 950,000 brewers sold in Canada. On the conference call, House said Tassimo is a major player in the Canadian market.