Tim Hortons Inc.'s move five years ago from fresh-made to frozen doughnuts was a public relations debacle. Now, as the company struggles to open a new distribution centre for the frozen treats, it's also proving to be a profit headache.
The prebaked doughnut issue resurfaced this month when co-founder Ron Joyce, who originally confirmed rumours that the company was baking doughnuts at a central factory then shipping them to stores frozen, brought out a book in which he says he was "disappointed" about the decision to stop baking doughnuts fresh in stores.
Mr. Joyce said he wouldn't do it if he still owned the company, and more importantly, the company, whose motto is "Always Fresh," should not have been so secretive about the move.
Yesterday, the company said the slower-than-expected startup of the new distribution centre, located an hour west of Toronto in Guelph, Ont., is hampering profits. The facility is supposed to be the hub for shipments of the frozen doughnuts to most of the company's stores in its home base of Ontario, but so far is operating far below its planned capacity.
"There are some teething problems at Guelph, and it's not going as quickly as they would have liked, but they seem confident that the problems will get fixed," said Peter Holden, an analyst who follows Tim Hortons for Veritas Investment Research. "The bottom line is certainly not as strong as one would have liked, but there's nothing here that points to systemic problems."
The issues at Guelph alone lopped $3-million off third-quarter profit, which declined 22 per cent from last year's tally.
The company also had one-time costs related to its March initial public offering and the subsequent spinoff by Wendy's International Inc. of its majority stake. All told, the effect was that the company's share profit of 27 cents fell short of the consensus analyst estimate of 30 cents, according to Thomson Financial.
Investors initially pounded Tims shares after the release of the financial results, but the stock rebounded to finish the day up 35 cents at $31.65 on the Toronto Stock Exchange.
The Guelph distribution centre, planned as a 150,000-square-foot facility, should be distributing frozen products to more of the company's 2,942 stores by the end of the year, the company said, which should help buoy profits.
Investors will also be watching the pace of new store openings, which slowed in the quarter to 29 shops from 48 a year ago. The company has committed to ratcheting up openings to 100 in the final three months of the year.
"We're confident the stores are under construction and that barring some unusual event we will hit that target in the fourth quarter," chief financial officer Cynthia Devine said on a conference call with analysts.
Chief executive officer Paul House said the company is also sticking to its plan to open 500 stores in the United States by 2008, which some observers have questioned as too slow now that U.S. rival Dunkin' Donuts Inc., with backing from flush new private equity owners, is throwing more resources into its growth and revamping existing stores.
"It's difficult moving into new markets," said Mr. Holden, who reckons Tim Hortons is worth $37 a share just based on its growth prospects in Canada. "I like the way Tim Hortons is moving cautiously and incrementally in exploring New England."
Tim Hortons Inc.
SOURCE: COMPANY REPORTS
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