Can this Quick-Service Restaurant Keep Up with Competitors?

Don't let anyone fool you - the economy may not exactly be booming but coffee and finger foods are being scarfed down like there's no tomorrow. Proof of this can be found in the sales figures of Starbucks , Dunkin' Brands Group , and Krispy Kreme Doughnuts  which all continue to produce jaw-dropping growth. The one company that has not been participating in this growth has been Tim Hortons This of course leads Foolish investors to wonder if Tim Hortons can get its act together and join the party?

Tim Hortons' Results
Tim Hortons reported its fiscal third-quarter results on Nov. 7. Total revenue increased 2.9% to $825.4 million. Same-store sales improved 3% in the U.S. and 1.7% in Canada. Net income rose 7.7% to $113.9 million. Don't get me wrong. These are decent growth numbers, but they lag behind Tim Hortons' close competitors.

CEO Marc Caira blamed "a challenging operating environment." He indirectly seemed to acknowledge the company's shortcomings by stating, "We still have more work ahead of us as we position Tim Hortons for sustainable and profitable growth in today's competitive reality, and we continue to develop our comprehensive strategic roadmap."

During the conference call, he went on to state, "We are operating on low-growth environment with ongoing competitive intensity, where the value-conscious consumer is firmly in control of the choices available to her." While competitors are saying similar things, their growth numbers are still far better than those of Tim Hortons.

As an example of one of these challenges, Tim Hortons is improving wait times for its drive-thru locations by allowing customers to order from further back in the line with a goal of ultimately increasing the number of orders that each location can handle. Along similar lines, Tim Hortons is simplifying its menu to allow guests to order more quickly.

Caira rattled off a number of other vague strategies such as improving the guest experience, adding technology, driving more customers past the traditional breakfast and lunch times for the industry, etc. It's great that the management team seems to have a laundry list of items on its plate for improving growth, but how well they will work remains to be seen. The company plans to give more exact details early next year.

Comparison with Starbucks, Dunkin', and Krispy Kreme
Starbucks is showing Tim Hortons how to do it right. In Starbucks' last report, quarterly sales shot up 13% to $3.8 billion. Same-store sales leaped 7%. Earnings per share exploded 37% to $0.63. CEO Howard Shultz stated, "The fourth quarter of fiscal 2013 capped off by far the best year in Starbucks 42-year-history." It doesn't look like the economy is hurting Starbucks too much.

CFO Troy Alstead said the quarter gives them "further confidence in our robust outlook for fiscal 2014." Tim Hortons' decision to simplify its menu may show that it's paying attention, considering the small size of Starbucks' menu.

Meanwhile, Dunkin' Brands Group seems to be benefiting on the sales front as well. Last quarter, Dunkin' Brands Group reported a total revenue increase of 8.6% while same-store sales rose 4.2%. Not quite as good as the results from Starbucks, but much better than what Tim Hortons reported.

Though CEO Nigel Travis did note "a fairly difficult environment," it was the 14th quarter in a row of positive same-store sales gains for the company. Both the number of guests visiting its stores as well as the average dollars spent per guest increased. Clearly there is opportunity out there for better growth if Tim Hortons can figure out how to get it.

Krispy Kreme Doughnuts also knocked it out of the park. The company reported its 20th quarter in a row of positive same-store sales gains. Revenue popped 6.7% to $114.2 million and same-store sales surged 3.7%. While Krispy Kreme Doughnuts' same-store sales rise of 3.7% was less than the figures from Dunkin' Brands Group and Starbucks, this result came as a comparison with a quarter a year ago that saw a 7% jump so the gain was more impressive than it may look at first glance.

CEO James Morgan did say that there was a "tepid consumer spending environment," but he expects the next quarter to be the 21st in a row of positive same-store sales, and he continues to be optimistic about 2014. He stated, "We are positioning ourselves for accelerated growth domestically with our new small factory store model and internationally by signing new franchisees, as well as follow-on development agreements with existing partners." Accelerated growth is just what Tim Hortons needs.

Foolish final thoughts
Tim Hortons may very well join the Starbucks-Dunkin-Krispy party, but cautious Fools may want to be fashionably late for this one. It's very difficult to try to evaluate the strength of Tim Hortons' growth plans when many of the details won't be made public until next year. Until then stay tuned because Tim Horton's is definitely worth keeping a close eye on. 

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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