At the bell

Leadership at Shoppers and Tim Hortons is the big issue

The Globe and Mail

A cup of Tim Hortons coffee is poured in Toronto on May 14 2010. The popular chain is brewing up something new using outlets in Kingston and Sudbury as test markets. Tim Hortons spokesman Nick Javor says the company is introducing a new extra-large cup size which will hold 24 ounces. (Chris Young/The Canadian Press/Chris Young/The Canadian Press)

Both Shoppers Drug Mart Corp and Tim Hortons Inc. are expected to show growth in the face of stiffer competition when each reports third-quarter numbers this week. For investors, however, issues of leadership will be top of mind.

In the case of Shoppers, chief executive officer Dominic Pilla will hold his maiden earnings conference call Wednesday, barely a week after joining the company. Mr. Pilla was plucked from the president’s seat at drug distributor McKesson Canada, leading some to assume that Shoppers will make strengthening its pharmaceutical business a top priority.

Story continues below ad

The company has seen its profitability squeezed by provincial efforts to lower health care costs by reducing the price pharmacies and drugstore chains can charge for generic drugs. Shoppers has responded by introducing its own private label generic drugs in B.C., Alberta and Quebec under the Sanis brand. But it is still fighting Ontario, which considers the move a conflict of interest.

Vishal Shreedhar, an analyst with National Bank Financial, estimates that getting Sanis into its Ontario stores would boost Shoppers’ profit by 28 cents a share a year. In the meantime, Canada’s biggest drugstore chain has been driving growth by expanding its offerings of food, health and beauty products, while at the same time cutting costs and lowering capital spending. The result should be significantly higher free cash flow that would enable share buybacks and dividend growth, Mr. Shreedhar noted.

Candice Williams, of Canaccord Genuity, forecasts that Shoppers suffered a 0.5 per cent decline in prescription same-store sales in the quarter. But that decline should be more than offset by a 2 per cent increase in food, health and beauty items, she wrote in a recent research note.

For the third quarter, analysts are expecting Shoppers to post an 8 per cent rise in per share profit, to 73 cents a share, and a 2 per cent gain in revenue, to $3.16-billion.

At Tim Hortons, which reports results on Thursday, investors are still waiting to hear who will replace the departed CEO, Don Schroeder, on a full-time basis. There is a growing sense that the company needs to pick a leader who can come up with innovative ways to fight encroaching rivals.

For the third quarter, the Street expects solid gains in both sales and profit. But Canada's biggest restaurant chain has come up short of analyst expectations in recent quarters.

The misses haven’t alienated investors, who have flocked to Tims as a defensive move in unsettled markets. The share price is up 21 per cent this year, with the stock still trading at a discount – on a price-to-earnings basis – to major competitors such as Starbucks Corp., McDonalds Corp. and Wendy’s Co.

What’s even more impressive is that the shares have climbed 8 per cent since May, when Mr. Schroeder abruptly departed. The sudden move left analysts speculating that there might be conflicting strategic views within the senior ranks. The company has been looking for a new leader ever since. Interim CEO Paul House made clear in August that the board would not be rushed into making a new hire.

Management has consoled investors by buying back more than 8 per cent of the firm’s shares over the past year. But at some point the market is going to want to see a new leader in place to tackle challenges that include slowing domestic growth and intensifying competition. McDonald’s, for instance, is fighting back against Tims’ market share gains over the past two years by adding more coffee offerings to its restaurants.

Analysts are expecting Tims to post a 40 per cent jump in profit, to $103.3-million, and a 9 per cent increase in revenue, to $730.3-million. Profit in last year’s third quarter was hurt by a charge related to closing some U.S. stores.