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Warming up to Tim Hortons CEO’s strategy

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Marc Caira hasn't wasted any time in his five weeks as CEO of Tim Hortons Inc., judging by news Thursday that the company will borrow $900-million for a big stock buyback, add two directors with impressive pedigrees and look for more effective ways to grow its anemic U.S. business. The veteran food industry executive is clearly aware that impatient shareholders, including two activist funds, expect immediate steps to improve the company's performance and set a better path for growth. But they will be lining up a bit longer for answers to two key questions: Does Canada's favourite coffee-and-donuts chain have a real future south of the border, and how much growth is left at home?

A big share buyback is ripe-and-ready fruit: the company is a solid cash-generating operation (in Canada, anyway) and underlevered at a time of low interest rates, so the added borrowings will keep Tims well within investment grade territory while boosting its earnings potential: RBC analyst Irene Nattel recently calculated that a buyback of 12.5 million shares would give a lift of 320 basis points to earnings in 2014 and more than twice that level in 2015; with a planned buyback of 15.2 million shares, or 10 per cent of the float, in the next year, those numbers will likely be higher.

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That likely won't satisfy the hedge funds, including Scout Capital Management LLC, which has called for Tim Hortons to pile on more debt and buy back much more stock. The company's double-digit earnings growth in the quarter should be taken with a grain of salt, as the increase was due in part to a drop in costs that will rise again as the company staffs up many unfilled positions in the coming months. Any disappointments in subsequent quarters will bolster the activists' case among shareholders.

I've argued Mr. Caira should have the benefit of time to craft a convincing long-term strategy for the U.S., which accounted for barely 1 per cent of consolidated operating income in the second quarter. But that plan needs to come together sooner rather than later: sales growth at restaurants open at least a year in both the U.S. and Canada in the quarter hovered meekly at around one and a half per cent, and the company now admits it will fall short of what were already mediocre same-store growth targets for 2013. Other quick-service restaurant chains in North America have delivered mixed results, ranging from Starbucks' strong showing to McDonald's' disappointing quarter, so while Tims' middling results are arguably excusable, neither are they especially encouraging.

That said, Mr. Caira discussed beverage express lines as one way to boost same-store sales, which will also be welcome news to those loyal customers who need little more than a double-double fix. He also promised that faster service, a streamlined menu and newer, healthier products are in store. And the hedge funds should be content that Mr. Caira agrees the company invest less of its own money in the U.S. (more than $600-million to date, with little to show for it) and rely more on those few franchisees who have been successful there to invest their own capital and lead a more profitable expansion.

Meanwhile, despite the impending the arrival of Encana Corp CFO Sherri Brillon and BMO invesment banking heavyweight Tom Milroy, the company's board will still be lacking for the one thing needs most: executives with hands-on experience successfully growing fast-food chains in the U.S. It would be nice to see someone like that join the board.

A little more clarity from Mr. Caira as to just how much expansion is left in Canada, which already has 3,468 stores, and how Tims can keep sales at existing stores growing there, would be nice as well. But the new CEO is off to a good start.

Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow Sean on Twitter at @seansilcoff .

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More

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