Tim Hortons' owner is 'not happy' with the brand, eyes major turnaround

Key Points
  • Restaurant Brands International tells investors it's about to make major changes at Tim Hortons.
  • CEO Daniel Schwartz blames increased competition in the coffee space as well as negative media coverage of Tim Hortons for the slip in sales.
  • Schwartz outlines steps the company plans, including menu changes, upgrading its mobile app and restaurant renovations.
Tim Hortons signage is displayed in the window of a restaurant in downtown Vancouver, British Columbia, Canada.
Ben Nelms | Bloomberg | Getty Images

Tim Hortons' owner is not happy with its performance.

Traditionally tight-lipped Restaurant Brands International, which also owns Burger King and Popeye's, told investors Tuesday it's about to make major changes at its Canadian-based coffee chain.

"We're not happy with sales growth and overall results at Tim Hortons," CEO Daniel Schwartz said during an earnings conference call.

Shares of Restaurant Brands were up more than 4 percent Tuesday.

While the company reported better-than-expected earnings Tuesday because more diners visited its fast-food restaurants, sales at its coffee chain lagged.

Same-store sales at Tim Hortons fell 0.3 percent during the first quarter. Analysts had expected the brand to post same-store sales growth of 0.7 percent, according to StreetAccount.

Schwartz blamed increased competition in the coffee space as well as negative media coverage of Tim Hortons' reported tensions with some franchisees in Canada over management practices for the slip. The coffee brand has shown softness for several quarters, raising red flags for investors.

Restaurant Brands is facing steep competition from McDonald's, which has been aggressively adding to its dollar menu and offering discounted coffee beverages. Dunkin' Donuts has also doubled down on its value offers, including $2 drinks in the afternoon, and Starbucks has been innovative in its beverage line up in an attempt to lure in customers.

Not to mention, Restaurant Brands has been notoriously media shy.

"We have not historically dedicated much time to media relations to tell our story," Schwartz said on the call. "Unfortunately, this has resulted in the publication of several articles particularly related to Tim Hortons in Canada that mischaracterize our intentions, that often cite inaccurate information and that usually reflect a purposely negative tone dictated by a group of dissident franchisees."

Restaurant Brands has been feuding with some Tim Hortons' franchisees over cost-cutting measures, cash register outages and a 700 million Canadian dollar ($546 million) plan to revamp its restaurants, according to several media reports. The news has hurt guests' perception of the brand, weakening sales, Schwartz said.

To combat this narrative, Schwartz said the company will be looking to be more proactive with its marketing and media relations.

It also hopes to boost sales by improving its mobile app and the quality of its lunch offerings, revamp some locations, and bring in new management.

In December, Restaurant Brands appointed Alex Macedo to the post of president of Tim Hortons. Macedo previously was Burger King's North America president, helping to lead a turnaround of the chain's business.

Burger King reported same-store sales growth of 3.8 percent for the first quarter, higher than the 3.5 percent analysts surveyed by Thomson Reuters had expected.

During Macedo's stint with BK, the brand was known for delivering quirky menu items, like mac 'n cheese bites and a variety of flavored chicken fries. Schwartz said Tim Hortons plans to introduce new espresso-based beverages and sandwiches. It recently revamped its turkey bacon club and added an artisan grilled cheese sandwich.

Over the next four years, Restaurant Brands will roll out a new restaurant design at Tim Hortons to provide a more natural and modern feel, with Canadian maple tables and new artwork. The company has already opened 10 of these restaurants in Canada.

Schwartz said that response to the new design has been positive, with 75 percent of customers who visited one saying they would be more likely to become repeat visitors.

"I want to re-emphasize that we don't think the current challenges at Tim Hortons can be addressed with a series of short easy fixes," Schwartz said on the call.

Despite Tim Hortons, Restaurant Brands topped analysts' estimates, thanks in part to strength at Burger King and continued growth at Popeye's, which it acquired in February 2017.

Restaurant Brands said it changed its accounting standards at the start of the year to reflect a change in the timing of franchise fee revenue and other items. Under the new standards, the company's net income was $147.8 million, or 59 cents a share, for the three months ended March 31.

Excluding items, Restaurant Brands earned 66 cents per share, beating analysts' average estimate of 56 cents in a Thomson Reuters survey.