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Café giant Tim Hortons Inc. 's core Canadian business is weakening as it grapples with mounting competition and cautious consumer spending.

The softening business comes as rival fast-food operator McDonald's Corp. rapidly adds more coffee offerings to its restaurants along with new McCafé outlets, while penny-pinching consumers increasingly search for bargains.

The slumping Canadian sales are in contrast to Tims' stronger sales results in its smaller but long-troubled U.S. division, which in the past has underperformed the domestic business.

With the shifting dynamics comes the uncertainty at Tims of searching for a new leader after the abrupt departure of chief executive officer Donald Schroeder in May. At the same time, Tims is locked in a heated battle with titan McDonald's and Dunkin' Donuts, which is preparing to expand its already formidable U.S. operations following its recent initial public offering.

"It's increasingly a tough espresso to swallow," Kenric Tyghe, an analyst at Raymond James, said in an interview about Tims' sales results in Canada. "It's a bit of a bitter one."

Tims now is betting it can find a CEO who can help the chain take on the burgeoning competition in a shaky economic landscape that interim CEO Paul House referred to as "very challenging."

Despite the challenges, Tims made gains over all in its second quarter, although its same-store sales lift was weaker in Canada than in the United States. Same-store sales – an important measure of a retailer's health – rose 3.8 per cent in Canada and 6.6 per cent in its U.S. outlets. (They are sales at outlets open a year or more.) However, most of the same-store sales gains were the result of the chain raising prices, rather than the stores drawing more customers, Mr. Tyghe said.

In Canada, same-store transactions, or purchases, dropped in the second quarter, analysts were told on a conference call.

Mr. Tyghe said Tims needs to find a leader who can come up with innovative ways to fight the encroaching rivals. "Tims is going to find itself in an increasingly difficult position," he said. "We need somebody [to lead it] who does not think that Roll Up the Rim to Win is the be-all and end-all of commercial programs."

Still, Mr. House said he didn't have the sense that McCafés are pinching Tims' business, although he added that his chain doesn't actually measure the impact. "We're watching it," Mr. House said. "We're going to vigorously protect our leadership role in coffee."

He hinted that it may be a while before the company chooses a new CEO. "Although we want to conclude the internal review and external search process as soon as practical, we will not do so with undue haste nor will we rush into a decision. It is difficult therefore to put a definitive timeline on the process, so I won't offer one other than to say we continue to make progress."

In its second quarter, Tims profit rose to $95.5-million or 58 cents a share from $94.1-million or 54 cents a year ago. The results included a 3-cent charge tied to the package for the former CEO.

Excluding the charge, the company would have met market estimates of 61 Canadian cents a share. Revenue rose 10 per cent to $702.8-million, missing the average analyst estimate of $708.5-million.

In the past, Tims has struggled to replicate its Canadian success in the U.S., where it has had to pull back and shut stores. It is now primarily focused on nine states, including New York, Michigan and Pennsylvania.

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