UPDATE 2-Tim Hortons results fall short as company spends on growth

Wed May 7, 2014 11:00am EDT

* Costs rise on store openings, credit card launch

* Cold winter, tough competition pressure results

* Reports EPS C$0.66, revenue C$766.4 million

* Same-store sales rise 1.6 pct in Canada, 1.9 pct in U.S. (Adds shareholder and analyst comments, stock price, company background)

By Solarina Ho

TORONTO, May 7 (Reuters) - Tim Hortons Inc, Canada's biggest coffee and doughnut chain, posted first-quarter results that fell short of analysts' expectations, with fewer customers visiting established stores and the company spending more on growth.

Oakville, Ontario-based Tim Hortons, which serves an estimated 7.5 out of every 10 cups of coffee sold in Canada, reported higher expenses related to new store openings and the launch of its credit card, aimed at cultivating customer loyalty.

Shares, which have retreated nearly 4 percent since the start of the year, slipped more than 1 percent on Wednesday morning.

"It was a lousy winter, everybody knows it. The fact that they had better same-store sales growth than I was expecting is a big plus," said Barry Schwartz, vice president and portfolio manager at Baskin Financial Services, which owns some 150,000 Tim Hortons shares.

Schwartz, whose firm plans to be "long, long-term shareholders," said the profit miss was due to the company's efforts to win and keep customers and that it was doing the "right thing" for growth.

Chief Executive Officer Marc Caira, who joined the company last summer, had previously outlined the fast-food operator's strategy to fend off mounting pressure from heavyweights including McDonald's Corp and Starbucks Corp, and analysts have pegged 2014 as a transition year for Tim Hortons.

"It's a competitive, cut-throat environment ... That's just the way it's going to be," said Schwartz, who still expects double-digit earnings growth in the coming years.

"There's a lot of options for the Canadian consumer, but the U.S. numbers look pretty good in our opinion and I think it's going to be a good year."

Sales at stores open for 13 months or more grew by 1.6 percent in Canada and 1.9 percent in the United States, as customers spent more during each visit, but transactions in both countries fell.

The company has been testing new products including dark-roast coffee and expanding its breadth of food offerings to tempt customers into spending more during each visit.

The results come as McDonald's and other major U.S. restaurant operators said severe winter storms chilled results.

"In the context of very challenging (first quarter) weather conditions, reflected in the weak sales results of its peers, sales results were solid, in our view," analyst Keith Howlett of Desjardins Securities told clients in a note.

Net income for the first quarter ended March 30 was C$90.9 million, or 66 Canadian cents a share, compared with C$86.2 million or 56 Canadian cents a share a year ago.

The company said higher operating income was partially affected by interest expense and a higher tax rate, due mostly to its recapitalization.

Revenue climbed 4.8 percent to C$766.4 million.

Analysts, on average, had expected earnings of 68 cents per share on revenue of C$778.2 million, according to Thomson Reuters I/B/E/S.

Tim Hortons shares were down 1.4 percent at C$58.87 on Wednesday morning in Toronto. (Editing by Nick Zieminski and Matthew Lewis)

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