Weak lunch sales aren't eating into Tim Hortons' confidence

A pedestrian walks past a Tim Hortons restaurant in Toronto October 26, 2007. REUTERS/Mark Blinch (CANADA)

The chief executive of Restaurant Brands International (QSR) says he is confident in the strategy being deployed at Tim Hortons, despite a “challenging quarter” that saw weaker lunch and beverage demand contribute to declining sales.

Sales at Tim Hortons were a weak spot amid otherwise stellar results for RBI, which also operates Burger King and Popeyes. Tim Hortons’ comparable sales, a key metric in the retail industry, fell 1.4 per cent in the three month period ending Sept. 30, while Burger King saw an increase of 4.8 per cent and Popeyes sales jumped 9.7 per cent.

RBI’s chief executive Jose Cil said on a conference call with analysts Monday that the declining sales were due in part to softness in both cold and hot beverage sales, as well as weak demand for Tim Hortons’ lunch offering, particularly when it came to sandwiches and wraps. He also said the third quarter featured a “tough year-over-year comparison,” given the chain launched its successful breakfast anytime program during the third quarter of 2018.

“Our results at Tim Hortons were not where we want them to be,” Cil said.

Shares of RBI fell 3.73 per cent to $85.98 as of 3:02 p.m. ET on Monday.

In an interview with Yahoo Finance Canada following RBI’s third-quarter earnings call, Cil added that the company is looking at several initiatives – including new product launches – that it hopes will improve the lunch offering at Tim Hortons.

“We’re working on new products and we’re looking at new technology and equipment to be able to ensure we have a great tasting, high-quality products that our guests are craving,” Cil said.

“We’re testing different initiatives that we’ll share more of as we get ready to deploy them in Canada.”

New product launches were part of the reason why Burger King and Popeyes posted such solid quarterly results. The plant-based Impossible Whopper at Burger King has become one of the most successful product launches in the company’s history, attracting new – and notably, young – guests to the fast food chain. The new Popeyes Chicken Sandwich not only took the internet by storm, but was an “important component” of the chain’s stunning 9.7 per cent comparable sales growth, Cil said.

Restaurant Brands International's stock (QSR) fell after the company reported third quarter results Monday. (Yahoo Finance Canada)

While Tim Hortons has been busy rolling out new menu items over the last several months – including Oreo Iced Capps, milkshake-style Creamy Chills, and Beyond Meat breakfast sandwiches and burgers – the launches have fallen flat with customers. Cil said sales of its Iced Capp products declined over the quarter – which coincides with the summer season – due to weak demand for the Oreo and Chocolate Chip limited-time offers.

“We felt there was an opportunity to expand our lunch offering with a burger product,” Cil said. “We felt it was consistent with how we were expanding the lunch offering so we tested it, we tried it for a limited time and it did as expected.”

However, performing as expected didn’t stop them from pulling the Beyond Meat plant-based burgers from its menu, just three months after it was introduced. It is still selling the Beyond Meat breakfast sandwiches, but only at locations in Ontario and British Columbia.

Still, Cil said the company is “extremely confident” in the strategy it is deploying at Tim Hortons, and doesn’t plan on changing it anytime soon. Tim Hortons is currently more than a year into its “Winning Together” plan, a strategy unveiled last April as part of an effort to counter negative attention over its relationship with some franchisee owners, as well as improve sales growth.

“We’re creating a strong foundation to drive sales growth over the long run,” Cil said.

”These things are not things that happen from one day to the next, or quarter over quarter. It takes time.”

Wells Fargo analyst Jon Tower wrote in a note to clients to “forget the burnt coffee, focus on burgers and chicken.”

“While there remains a lack of clarity on the root cause of the persistence of underwhelming same store sales in Tim Horton’s home market... and visibility into a quick remedy appears low, we believe there may be too much investor focus on top-line growth at the brand,” Tower wrote.

“So long as Tim Hortons’ cash flows remain relatively stable, we believe investors should focus on growth at Burger King and Popeyes, both of which posted double-digit system-wide sales growth in the quarter and have a better line of sight as a core value driver.”

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