TORONTO - Tim Hortons has been downgraded to a "sell" rating at Goldman Sachs over concerns that moderation in same-store sales could be harbinger of more pressure in the hyper-competitive coffee market.
A note from analyst Michael Kelter at the Wall Street investment firm says he is concerned about early indications of "impending Canadian saturation" that could reflect increased pressure.
"We see a five per cent downside in Tim Hortons shares versus a seven per cent average upside across the sector," he wrote.
He also expects the company might report a miss on same-store sales when it reports second-quarter earnings next month.
Earnings per share estimates were reduced to $2.72 from $2.77 for 2012, he said. Other reductions were made for 2013, with EPS down to $3.06 from $3.13, and to $3.34 from $3.48 in 2014.
The Canadian coffee market has faced a growing number of new entrants, including an expansion by Seattle coffee chain Starbucks and low-priced coffee and specialty drinks at McDonalds.
Tim Hortons has responded by expanding its menu to include a broader array of lunch offerings, including hot food, and new specialty drinks like frozen lemonade.
"Tim Hortons derives over 95 per cent of its operating profit in Canada, and growth into new geographies is coming at a somewhat moderate pace," he wrote.
Kelter said he would consider re-evaluating his rating if there were signs of a sustained rebound in Canada, or if Tim Hortons escalated the timeline of its rollout in other countries.
"There is the potential for a step up in growth from other areas that could serve to offset the more moderate Canadian SSS trajectory," he said.
"These include single serve (or K-Cups), an area that Tim Hortons does not participate in today, but could turn out to be meaningfully accretive in the future."
Shares of Tim Hortons (TSX:THI) closed down two per cent, or $1.15, to $52.53 on Monday at the Toronto Stock Exchange.
24 Oz. Cup
Tim Hortons' <a href="http://www.huffingtonpost.ca/2012/01/16/tim-hortons-releases-larger-cup-coffee_n_1208677.html" target="_hplink">extra-large 24 oz. cup of coffee</a> might be enough for the amateur coffee drinkers, but we're holding our breath until they roll out a keg. <em>Photo credit: Tim Hortons Inc. </em>
Tim Hortons went head-to-head with Starbucks for coffee market domination when it started <a href="http://www.thestar.com/business/article/1079694--tim-hortons-to-offer-real-espresso-at-2-a-cup" target="_hplink">serving up espresso-based coffees</a>, including lattes, mocha lattes and cappuccinos for around $2 or less. <a href="http://www.torontolife.com/daily/daily-dish/caffeine-high/2011/11/16/tim-hortons-espresso-stuart-ross/" target="_hplink">How do they taste</a>? Well, they cost $2. <em>Photo credit: Tim Hortons Inc. </em>
"Would you like some lasagna with your coffee?" we <a href="http://www.huffingtonpost.ca/2011/10/17/tim-hortons-lasagna_n_1016236.html" target="_hplink">asked</a> back in October. Overwhelmingly, the answer was "No," followed by "ewwww." <em>Photo credit: Lisa Yeung</em>
Real Fruit Smoothies
The health craze is lost on some of us, and according to <a href="http://www2.macleans.ca/2011/05/02/smoothie-operator/" target="_hplink">many</a> <a href="http://www.avivaallen.com/General/tim-hortons-real-fruit-smoothies-buyer-beware.html" target="_hplink">many reviews</a>, Tim Hortons didn't quite get it right either when it introduced its Real Fruit Smoothies.
Double Double Ice Cream
"I'll take two creams and two sugars. And hurry, before it melts!" Timmies teamed up with Cold Stone Creamery to concoct the <a href="http://www.huffingtonpost.ca/2011/08/30/tim-hortons-double-double_n_941875.html" target="_hplink">Double Double ice cream flavour</a> back in August, effectively combining one addiction with another.