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Tickers in this Article: THI, KKD, MCD, WEN, SBUX
It seems everyone has the recession blues. It's noted daily that the entire auto industry is suffering, the housing industry has severely slumped and consumers are struggling. So what then will turn this struggling economy around? The recent earnings reports of Kohl's, Macy's and other department stores show it's unclear whether the consumer will have the strength to lead the economy out of the recession, as has often been the case in the past. Although industrial and infrastructure may show more promise, no one industry or segment of the economy is showing leadership in pulling the economy up. So why not coffee and donuts?

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Tim Hortons Inc. (NYSE:THI), originally founded by late hockey star Miles Gilbert "Tim" Horton, is the largest Canadian-based fast food restaurant. The restaurant chain, known especially for its tasty coffee and donuts, reported an increase in year over year first-quarter earnings of 37 cents Canadian (US $0.32) per share against 33 cents Canadian (US $0.28) per share in 2008. The company cited strong same store sales growth increases of 3.4% in the face of the challenging economy and said that sales began to accelerate after a slow January. The company announced it will continue its growth and expansion plans. Are there positive signs for the economy we can glean out of Tim Hortons's direction?

Krispy Doesn't Get Creamed
Krispy Kreme Doughnuts (NYSE:KKD), another big player in the donut space, reported its recent fourth quarter at less than a 1 cent per share loss, compared with a 50 cents per share loss a year earlier. The company, which has experienced a myriad of troubles since going public in 2001, recorded a loss for the year but its same store sales gained slightly this quarter (0.9%). While these are hardly robust numbers, other fast food enterprises, including pack leader McDonald's Corp. (NYSE:MCD), have run into headwinds. Even on the coffee side of the coffee-and-donut world, there has been stress. Starbucks (Nasdaq:SBUX) has had sales decline that are only now improving slightly, and the company has had to close stores and take restructuring charges. Starbucks continues with a comprehensive cost-cutting program but are finding competition with McDonald's McCafe espresso a challenge.

The Wendy's/Arby's Group (NYSE:WEN), once a contender in the breakfast ring with its Wendy's stores, has seen Wendy's (a former owner of Tim Hortons) exit that arena. So the going is rough in the coffee competition, not to mention the overlapping breakfast and donut space. Both Krispy Kreme and Tim Hortons also compete with strong privately held Dunkin' Donuts for the coffee and donut trade as well. (For more, see our related article Using Consumer Spending As A Market Indicator.)

Is Tim Hortons an Anomaly?

With the troubles Starbucks and Krispy Kreme have had, it becomes clearer that the fragmented coffee and donut segment of fast food is not surging ahead as one. Tim Hortons, with 85% of its North American restaurants in Canada and 15% in the US, have obviously forged a successful place. The chain is the fourth largest fast-food restaurant in North America in terms of market cap, and their product line of sandwiches and baked goods goes far beyond coffee and donuts only. They also are powering up with innovative alliances such as the co-branding shared retail space with Coldstone Creamery, which makes fuller use of their stores in the traditionally slower business hours. Also, Tim Hortons has made use of "small space" stores, another strategy which has served them well in their growth.

Wall Street's view is mixed on Tim Hortons. Analyst Vishal Shreedhar of UBS sees a continuation of Tim Hortons's positive momentum through the recession and out into recovery, while Stephen Kron of Goldman Sachs doesn't feel the chain can maintain its three to five percent growth rate in 2009.

A Stock to Savor

Okay, so maybe suggesting coffee and donuts might lead us out of this recession is overstating things, but business at Tim Hortons through the recession has at least fought a decline seen by other fast food and closely related coffee and donut places, so that's a positive. Turning to potential economic recovery, the chain is well managed and positioned to grow, maybe not spectacularly, but growth on the horizon in this environment is not to be sneered at. The stock is trading near its 52-week low at a reasonable P/E of 18. Near term future prospects might make this a moderate-grower so the stock can be considered on that basis, and while you wait for shares to rise in value you might enjoy one of Tim Hortons's exquisite BLTs, sip a double-double coffee and enjoy. (For more, see Sinking Your Teeth Into Restaurant Stocks.)

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