That free coffee or muffin you won at Tim Hortons isn't going down well with the company's shareholders.
For a quarter-century, the doughnut chain's annual Roll up the Rim to Win contest has been a hit with consumers, helping to drive customer traffic and spawning copy-cat promotions at competing chains.
But all those freebies finally caught up with the company in the first quarter, causing results to miss expectations and sending the stock to its biggest loss in more than two years.
Citing "significantly increased food and beverage prize redemptions" tied to the contest's 25th anniversary, Tim Hortons Inc. said the promotion shaved about one percentage point from its same-store sales growth, which was a tepid 2 per cent in Canada for the quarter ended April 3.
"It's definitely below what everyone was expecting," said Brian Yarbrough, an analyst with Edward Jones. "It would have had to be an awfully big surprise to drive [comparable sales] down by 1 per cent."
On the first-quarter conference call, chief executive officer Don Schroeder said the odds of winning a prize were one in six this year, up from one in nine last year. The increase mainly comprised food and beverage items, of which 47 million were available, meaning more people were redeeming winning cups instead of shelling out cash for coffee and food.
It was the slowest same-store sales growth for Tim Hortons' Canadian stores since the second quarter of 2009, Mr. Yarbrough said, and well below the 5.2-per-cent growth in the same quarter a year ago. Same-store sales include only stores open for at least 13 months.
Same-store sales rose a healthier 4.9 per cent at U.S. stores. Because of lower Roll Up the Rim redemptions south of the border, where the contest is not as well known, the company estimated that the contest shaved only about half a percentage point from U.S. growth.
First-quarter share profit of 48 cents was higher than last year's 45 cents, but missed the average analyst estimate of 51 cents. The chain's shares skidded $1.95, or 4.1 per cent, closing at $45.92 on the Toronto Stock Exchange.
The Roll Up the Rim contest, which lasted from the end of February through most of March, also overlapped with a week-long free coffee promotion by McDonald's, which has been aggressively pursuing breakfast customers. But Mr. Schroeder played down the impact on Tim Hortons' sales.
"The fact that a competitor was giving away coffee during that period, I'm sure, there is no question, that some people are going to try and take advantage of that," he said. "But did it negatively affect the success of the program? No. We were still very pleased with the outcome."
Heavy snowfall in January also hurt sales, the company said. But it stuck to its earnings guidance for the year and also reaffirmed its forecast of same-store sales growth of 3 per cent to 5 per cent for 2011.
In a bid to achieve its sales target and counter the impact of rising commodity costs, Tim Hortons pushed through price increases averaging 3 per cent in many regions after the end of the quarter.
John Heinzl