Tim Hortons pulls Cold Stone Creamery to simplify restaurants

Doughnuts and ice cream weren't the best combination for Tim Hortons, after all.

Several years after the unusual pairing first launched, the coffee chain is pulling the Cold Stone Creamery brand from its Canadian restaurants, as part of bigger changes that have included removing about 24 items from the menu since last fall.

Tim Hortons Inc. chief executive Marc Caira outlined the changes during the company's year-end financial results conference call on Thursday, while further details of its five-year strategy will be unveiled at an investor conference on Tuesday.

The chain is aiming to make its service faster and the customer experience easier -- a move that it hopes will also boost profits.

"We will continue to act decisively and make tough decisions where necessary to position our company for profitable growth," Caira said in a quarterly conference call with analysts.

He said removing the Cold Stone ice cream serving bars from Canadian stores will give many locations space to add express beverage lines.

A decision to wind down Cold Stone's presence in Canada cost Tim Hortons about $19 million in the fourth quarter. The partnership with the American dairy chain, which began in 2009, will continue in the Tim Hortons locations in the United States.

Other changes to its menu included reducing the mainstay list of sandwiches, doing away with less popular ones like tuna salad, and doing away with the raisin nut muffin, as well as doughnuts like the walnut crunch and blueberry fritter.

Fewer regular items on the menu leaves more space for new and limited-time items, Caira said.

On Thursday, Tim Hortons reported fourth-quarter profits grew marginally to $100.6 million from $100.3 million a year earlier.

Earnings increased by four cents per share to 69 cents, which fell below analyst estimates of 77 cents per share, according to Thomson Reuters.

The per share profit increase was stronger because the number of shares outstanding decreased by 5.6 per cent over the 12-month period as the company bought back its own shares.

The company said revenue grew 10.7 per cent to $898.5 million from $811.6 million.

Caira said the company remains in the middle of a highly competitive environment for food service items. Working against it are cheaper alternatives like McDonald's, and the wider range of coffee flavours offered by Starbucks and Second Cup (TSX:SCU).

"I don't see the climate changing," he said. "There is very little to no growth in this industry. We happen to be the biggest player in this industry."

Quarterly operating income fell 1.8 per cent to $147.8 million, in part because of the Cold Stone Creamery de-branding and also by the decision to close some underperforming U.S. restaurants, which cost $6.6 million.

During the quarter, same-store sales grew 1.6 per cent in Canada, as customers spent more money at registers. The number of transactions at stores open 13 months declined, though the overall transactions were propped up by new locations.

Operating income in the Canadian segment was down 2.3 per cent to $165.5 million, largely because of the Cold Stone Creamery decision.

Its U.S. segment saw a 3.1 per cent increase in same-store sales but produced an operating loss of $1.1 million, down from a year-earlier operating profit of $2.4 million.

Tim Hortons also announced a partnership with CIBC for a Visa credit card that accumulates Tim Hortons loyalty rewards points redeemable at its stores. The card will be available starting in May.

The company also plans to expand its single-serve Keurig K-Cups and Tassimo T-discs into grocery stores this year.

For investors, Tim Hortons said its dividend will increase six cents to 32 cents per share, payable March 18.

It also renewed its share buyback program, which gives the company the ability but not the obligation spend up to $440 million to buy back shares from the public market for cancellation.

Under its 2013 normal course issuer bid, the company bought back the maximum allowable 15,239,531 shares at an average price of $59.88 each -- about $912.5 million in total.

Tim Hortons shares gained nearly three per cent, or $1.72, to $59.66 on the Toronto Stock Exchange.