A pedestrian walk past a Tim Hortons coffee shop in downtown Toronto on June 29, 2016.Eduardo Lima/The Canadian Press
Prominent shareholder activist and investor Bill Ackman has criticized Tim Hortons and its public spat with its franchisees, which he suggests has hurt the café chain's business.
Tim Hortons' battle with its franchisees has helped push down Tim Hortons' sales over recent quarters along with a cool response to its new espresso-based coffee and lunch offerings, says Mr. Ackman, founder of New York hedge fund Pershing Square Capital Management LP and an investor in Restaurant Brands International Inc., which is the parent of Tim Hortons.
"We believe sales in recent quarters have also been negatively impacted by the recent public dispute with a group of franchisees," Mr. Ackman says in a letter Wednesday to shareholders.
Mr. Ackman's Pershing Square this week cut its sole share stake in RBI by 32.3 per cent to 26.5 million shares, according to a Reuters report, pointing to a Securities Exchange Commission filing. (The change in holdings was as of Sept 30, 2017 and compared with the previous quarter ended as of June 30, 2017.)
Read more: Inside the brutal transformation of Tim Hortons
On Wednesday, RBI's stock slipped 2.16 per cent or $1.40 (U.S.) to $63.41 on the New York Stock Exchange.
On Thursday, its stock has rebounded so far and was north of $65 shortly after noon.
RBI, controlled by the Brazilian private equity firm 3G Capital, has been grappling with a growing wave of discontent among some Tim Hortons franchisees who say the parent company is squeezing them by pushing up their costs while the chain faces steeper minimum wages in Ontario and Alberta and possibly elsewhere.
In March, The Globe and Mail revealed that the franchisees had formed the Great White North Franchisee Association to fight RBI and what they consider its strong-arm tactics to cut costs to the bone at the expense of the restaurant owners.
RBI is also facing two attempts by Canadian Tim Hortons franchisees to seek class-action status to sue the company, alleging it is pinching their profits and interfering with their right to organize.
Mr. Ackman says in his letter that Tim Hortons management has tried to improve relationships with Tim Hortons's franchisees by reducing the price the company charges its restaurant owners for their supplies, which has increased corporate costs.
"While these items depressed earnings in the current quarter, they represent an investment in improving relationships with Tim Hortons' franchisees," Mr. Ackman says.
Parent RBI, which also owns the Burger King and Popeyes Louisiana Kitchen chains, last month posted a third-quarter profit that beat analysts' expectations, driven by higher sales at Burger King.
At Tim Hortons, which RBI acquired in late 2014, overall sales at restaurants open a year or more were relatively flat, rising just 0.3 per cent. Sales gained 0.6 per cent in Canada following three consecutive quarters of declines, but U.S. performance was weaker.
Earnings before interest, tax, depreciation and amortization dropped 1 per cent at Tim Hortons while growing 16 per cent at Burger King and 40 per cent at Popeyes, resulting in an overall 8 per cent EBITDA increase.
"The slight decline at Tim Hortons was due primarily to a price reduction on supplies sold to its franchisees and an increase in costs," Mr. Ackman says. Those initiatives were aimed at appeasing franchisees but hurt the bottom line, he says.
Still, overall he says RBI's franchised business model is a "high-quality, capital-light, growing annuity that generates high-margin brand royalty fees from its three brands … "The company has an extremely capable management team, is backed by an owner-oriented sponsor (3G), and has a large unit growth opportunity that requires virtually no incremental capital.
"The company's operating strategy is highly scalable and replicable, which should provide opportunities for additional value-creating acquisitions over time."