* Nestle executive Marc Caira named CEO
* Company to consider new U.S. expansion plan, more debt
* First-quarter earnings drop 3 percent
* Same-store sales lower in both Canada and U.S.
* Shares fall on TSX and NYSE
By Euan Rocha and Susan Taylor
TORONTO, May 8 Tim Hortons Inc named a
long-time Nestle executive as its new chief on Wednesday, a job
that will be no easy task given drooping demand at the Canadian
coffee and doughnut chain and a push by a U.S. hedge fund for
Shares of Tim Hortons, which boasts that it sells eight of
every 10 cups of coffee sold in Canada, fell more than 2.5
percent after the company posted its first decline in
established store sales since its 2006 initial public offering.
The company, under pressure from hedge fund Highfields
Capital to boost shareholder returns, said it is
considering the Boston-based fund's key demands. But any change
will await its new CEO, Nestle veteran Marc Caira, a
Highfields wants the chain to take on new debt to buy back
shares and believes that Tim Hortons' U.S. returns do not
justify further investment there.
It also wants the company to enter into less
capital-intensive franchise deals in the United States or scrap
its U.S. expansion plans, according to documents seen by
Interim CEO Paul House said Tims won't pull back from the
U.S. market, but is studying a plan to work with well-funded
franchisees who could operate multiple locations there.
The chain also announced on Wednesday a franchise deal with
Apparel FZCO to open as many as 100 restaurants in Saudi Arabia
in the next five years. That follows a deal with Apparel to open
up to 120 locations in several Arab states, including Qatar and
"These are the type of deals they should be doing - these
royalty deals, where they don't take on any of the risk and get
all the reward," said Barry Schwartz, a portfolio manager at
Baskin Financial, which owns about 130,000 Tim Hortons shares.
"This is the type of structure they should follow in the U.S."
Tim Hortons said it will also consider taking on additional
debt and study what would be its "optimal" capital structure
considering historically low interest rates. Increased debt
could affect its tax rate and investment grade credit rating, it
But executives said they had already considered and rejected
a Highfields proposal to create a real estate investment trust
to house Tim Hortons property assets because it would not create
The company said tough conditions in the first quarter led
to heightened competition and drove sales down at established
stores by 0.5 percent in the United States and 0.3 percent in
Other restaurant operators also faced a difficult first
quarter, Schwartz said, given issues ranging from poor weather
to nervous consumers.
"That's not particular to Tim Hortons. Take a look at every
single food company that's reported over the past week."
Despite disappointing results for the first quarter, the
company has performed well since its IPO. But analysts now
question if the brand, as much a Canadian symbol as hockey and
the Maple Leaf flag, has room for further growth at home.
With some 3,400 company-owned and franchised stores in
Canada, it faces a tough fight for market share as rivals such
as McDonald's and Starbucks step up their presence.
Tim Hortons said it will roll out a number of plans to drive
same-store sales growth this year, including new menu items
along with marketing and promotional programs.
It also announced an agreement with RealCup to sell its
coffee in the form of capsules used in Keurig single-cup coffee
makers, starting in July. That follows its 2012 launch of pods
for Kraft's Tassimo coffee makers.
PLAN TO DRIVE SALES
Tim Hortons said Caira will take over from House on July 2.
The company had spent nearly two years searching for a new chief
House will become non-executive chairman of Tim Horton's
board when Caira takes over. Caira, most recently the global
head of Nestle Professional, will be nominated as a director at
Tim Hortons' annual meeting in Toronto on Thursday.
Caira has also worked a Nestle Canada and Parmalat Canada.
"Caira comes with an almost made-to-order resume - solid
international experience including the U.S. and in the food
services segment, specifically the hot beverage and food
sectors," said Scotiabank analyst Patricia Baker in a note.
"That he is also a Canadian with experience leading in a
Canadian company tops it off."
Tim Hortons also said it has retained a "highly regarded
search firm" to help it look for two replacement directors.
Highfields, among its other demands, wants the company to
bring in new directors with more financial expertise.
First-quarter results were soft, as expected, the company
said. Earnings declined despite a 1.4 percent rise in revenue to
C$731.5 million ($727.9 million).
Net income was C$86.2 million, or 56 Canadian cents per
share, down from C$88.8 million, or 56 Canadian cents per share,
a year earlier.
Excluding a one-time restructuring charge, earnings were 61
Canadian cents a share, in line with analysts' average forecast,
according to Thomson Reuters I/B/E/S.
Tim Hortons shares fell by C$1.51 to close at C$57.13 on the
Toronto Stock Exchange, while its New York-listed shares
declined $1.42 to end at $56.95. The stock was up 20 percent
year-to-date before the quarterly results were announced.