TORONTO - Tim Hortons Inc. (TSX:THI) is doing what it can to avoid charging more for a coffee or a doughnut but some price increases are inevitable because of higher costs, says CEO Don Schroeder.
"We continue to look at that with our store owners because there are a lot of cost pressures," Schroeder said Friday after the company's annual shareholder meeting.
"Our stores owners are very conscious of the fact that many of their good, loyal customers are feeling the crunch of the economic times, and they're trying very hard not to have to take price (increases) at this time, but at some point it'll have to happen."
Analysts agree that a new round of higher prices is on the horizon at Canada's largest coffee and doughnut chain, adding to other recent increases driven largely by food and coffee costs.
"We are projecting more price increases in the back part of the year as the impact of the weak Canadian dollar drives Tim's coffee costs up," CIBC World Markets analyst Perry Caicco wrote in a note to clients.
Schroeder said restaurant owners have been asked to cut non-value-adding costs, "so that we can absorb and protect our store owners' profitability without having to take a lot of excessive price to our customers." He added that simple steps like asking employees to re-use hairnets can save thousands of dollars.
Despite cost pressures, Tim Hortons is embarking on an ambitious expansion plan that will grow its store base by more than five per cent this year.
The company plans 150 to 180 new stores, with 30 to 40 in the United States and the rest in Canada, chief financial office Cynthia Devine told shareholders.
Currently, the chain has about 3,400 locations, including 500 in the U.S.
Schroeder said Tim Hortons plans to move primarily into smaller markets by focusing on small stores and kiosks.
"In some of the developing markets it makes more sense to get a smaller restaurant," he said. "There's less capital investment and it also reduces operating costs for the operator, gives them a chance to get to the break-even level much faster."
Devine said the company is forecasting operating profit growth of 11 to 13 per cent this year, and expects its U.S. operations to achieve break-even for the first time.
Same-store sales are expected to grow by three to five per cent in Canada and zero to two per cent in the United States.
However, CIBC's Caicco cautioned that fierce competition, such as McDonald's free-coffee promotion for two weeks in April, will hurt Tim Hortons' results for the second quarter.
"The fact is, when it comes to down-and-dirty promotional fights and low-ticket offers, Tim's is in uncharted waters," Caicco wrote.
Schroeder said Tim Hortons sees competition as a good thing that pushes it to improve, and he said the company will likely come up with new promotions of its own for the remainder of the year.
Tim Hortons reported Thursday that its first-quarter net income rose by 7.5 per cent from a year ago to $66.4 million. Earnings per share of 37 cents, up from 33 cents, thinly beat analyst expectations.
Revenue grew 10.2 per cent to $507.2 million, as same-store sales were up 3.4 per cent in Canada and 3.2 per cent in the United States, driven by higher prices.
Tim Hortons shares were down 55 cents to $28.50 Friday afternoon on the Toronto Stock Exchange.
