Tim Hortons shares soar on profit, bakery sale

* Q2 EPS C$0.54 vs C$0.43 yr ago

* U.S. same-store sales up 3.1 percent

* Canadian same-store sales up 6.4 percent

* Shares surge nearly 8 percent

(Adds conference call details)

By Solarina Ho

TORONTO (Reuters) - Tim Hortons Inc, Canada's largest restaurant chain, posted a 21 percent rise in net income on Thursday and said it is selling its 50 percent interest in Maidstone Bakeries to its European joint venture partner Aryzta AG.

Tim Hortons' stock jumped almost 8 percent to two-year highs, following the announcements.

Maidstone Bakeries, located in Brantford, Ontario, southwest of Toronto, was built about eight years ago specifically to supply Tim Hortons franchisees with partially baked, or "par-baked", flash-frozen doughnuts and breads.

"The C$475 million that it's worth was much higher than we thought. We thought it was probably worth about half that, so that's pretty impressive," said analyst Brian Yarbrough of Edward Jones, who said he was not surprised by the sale.

"They'll probably utilize that for shareholders. I don't know if it'll be in the form of a big buyback, or a dividend," he added.

"We are considering possible options for the use of the net proceeds, including potential avenues that can return value to shareholders," said Chief Financial Officer Cynthia Devine during a conference call with analysts.

Yarbrough said the company generates a lot of cash and collects royalties and rent from its franchisees, so it is unlikely the sale was intended to raise money to accelerate its investment in its U.S. operations.

Under the terms of the deal, Tim Hortons will continue to use the bakery for its doughnuts until early 2016.

"Given the ability to potentially leverage the facility for other channels such as grocery ... and the international nature of their tax structure, this facility clearly has more economic value to Aryzta than to Tim Hortons," said Chief Executive Don Schroeder during the call.

A COMPETITIVE U.S. MARKET

Tim Hortons, which specializes in coffee, baked goods and home-style lunches, also said on Thursday that its second-quarter earnings climbed to C$94.1 million ($90 million), or 54 Canadian cents a share, from C$77.8 million, or 43 Canadian cents, in the same period a year earlier.

Analysts had forecast earnings of 50 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose 5.7 percent to C$639.9 million, driven primarily by systemwide sales growth of 9.2 percent on a constant currency basis.

U.S. same-store sales, or sales at stores open for more than a year, grew by 3.1 percent in the quarter and grew by 6.4 percent in Canada.

Tim Hortons, which has grown to become a Canadian cultural fixture, and even operates a franchise at the Canadian Forces base in Kandahar, Afghanistan, operates more than 3,000 outlets in Canada and nearly 600 in United States.

With analysts projecting only a few years of growth left in its domestic market, investors have been keen to see its growth prospects elsewhere.

"Longer term, that's where all the growth is going to come from. They only have enough growth in Canada for probably three to four years," said Yarbrough, noting the company's U.S. operating income is small compared with Canada's.

"They really have to ramp (U.S.) profitability up," Yarbrough said. "The U.S. market offers huge opportunity, but it's just a lot more competitive ... it's a lot tougher for them in the U.S."

CEO Schroeder noted that the U.S. economic recovery still has "a long way to go."

The company said it will make an announcement later this year about their international investment plans.

"The playing field is littered with people that have moved too quickly, so we continue to do in-depth analysis of the options available to us," Schroeder said.

The company's shares were up C$2.27, or 6.41 percent, at C$37.71 on the Toronto Stock Exchange by late afternoon Thursday, after rising as high as C$38.22.

($1=$1.04 Canadian)