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A Tim Hortons employee grabs a doughnut for a customer.

© JP Moczulski / Reuters/REUTERS

Tim Hortons Inc. reported an increase in quarterly profit on Thursday, helped by higher sales and a lower effective tax rate, but warned that a weaker economic environment was holding back growth.

Sales at established stores rose 1.9 per cent in Canada and 2.3 per cent in the United States in the quarter as customers spent more during each visit. But same-store traffic was lower as "fragile" consumer confidence held back discretionary spending, the company said.

"The challenging economic conditions led to an intensified competitive environment, with companies working to reinforce value positioning and increasing promotional activities," it said in the earnings release.

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The comments recalled rival McDonald's Corp.'s last quarterly earnings report, when the U.S. chain's chief executive attributed weak sales growth to a tough battle for customers in a fragile economy.

But Tim Hortons grew both sales and profit in the quarter as it sold more products that carry premium prices, such as lattes and panini sandwiches.

Analysts have watched restaurant traffic in Canada closely in recent quarters to gauge whether the nation's dominant coffee chain can hold off competitors and keep growing its home market.

The chain is ubiquitous in Canada, claiming eight of every 10 cups of coffee sold. As it expands its food offerings, especially at lunch, it is increasingly going head to head with McDonald's.

McDonald's has been aggressively promoting its coffee in Canada, with giveaways and remodelled stores that are more cafe than burger joint, featuring soft seating and even fireplaces.

Tim Hortons' net income for the third quarter rose to $105.7-million, or 68 cents a share, from $103.6-million, or 65 cents, a year earlier. Analysts, on average, had been expecting 72 cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose 10.3 per cent to $802.0-million, compared with analysts' average forecast of $794.6-million.

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The company's effective tax rate fell to 26.7 per cent from 29.0 per cent in the year-earlier quarter.

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