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Second Cup announces third quarter results and quarterly dividend
By: PR Newswire
Nov. 5, 2012 09:03 AM
MISSISSAUGA, ON, Nov. 5, 2012 /CNW/ - The Second Cup Ltd. ("Second Cup" or the "Company") reported financial results today for the third quarter ended September 29, 2012 (the "Quarter" or "Q3"). The Company's shares are traded on the Toronto Stock Exchange under the symbol "SCU". All amounts in this news release are presented in thousands of Canadian dollars, unless otherwise indicated.
Stacey Mowbray, President & CEO of Second Cup commented, "We and our Franchise Partners continue to experience the increasing competitive pressure on our same café sales through Q3. Our net profit in Q3 was adversely affected by the same café sales decline, provisions on two leases we plan to sublet as well as research and innovation expenditures for future growth initiatives and brand enhancements. We have started and will continue to invest in our loyalty and customer communications capability, fully convinced that we will see the benefits of both in future sales and profitability. We have also started to invest in a new café design to further differentiate the brand, impacting on this year's profitability. We plan to make further strategic payments towards these upgrades in the near future.
In late September, we started selling Second Cup branded TASSIMO T-Discs in café and in select grocery chains through a newly formed partnership with Kraft Canada Inc. This important partnership enables our Franchise Partners to participate in the growing single serve category to further drive in-café sales. As well, the distribution and sale of Second Cup branded T-Discs in grocery and mass merchandise channels provide a new revenue stream for Second Cup."
Management has, after extensive analyses and research, recommended continued and expanded investment in the Second Cup brand to rebuild sales, revenues and profitability for the Company and its Franchise Partners. During the prior two years and to date in 2012, Second Cup invested approximately $6.2 million in capital assets and software. Approximately one-half of this investment was for the system wide POS system, which is now producing valuable information for the Company and its Franchise Partners. Second Cup has maintained a steady stream of distributions and dividends while making these investments. To strengthen the Second Cup brand and to enhance the profitability and viability of its Franchise Partners in the increased competitive marketplace, additional expenditures are being pursued to develop and implement new initiatives and leverage new and growing commercial opportunities. To finance this strategy the Board of Directors approved a reduced quarterly dividend of $0.085 per common share, payable on November 30, 2012 to shareholders of record at the close of business on November 16, 2012. The previous quarterly dividend declared and paid over the previous five quarters since the Conversion was $0.15 per common share. The dividend will be considered an eligible dividend for income tax purposes.
The following table sets out selected International Financial Reporting Standards ("IFRS") financial information and other data of the Company and should be read in conjunction with the unaudited condensed interim financial statements of the Company for the 13 and 39 weeks ended September 29, 2012.
Analysis of System Sales and Same Café Sales Growth
Year to date system sales for the 39 weeks ended September 29, 2012 were $140,872, compared to $139,256 for the 39 weeks ended October 1, 2011, representing an increase of $1,616 or 1.2%.
Same café sales decreased 2.8% in the Quarter, compared to a decrease of 0.1% in the comparable quarter of 2011. The year to date same café sales decline was 1.2% (2011 - 0.6% decline).
Third Quarter Analysis
Analysis of Revenue
Royalty revenue for the Quarter was $3,532 (2011 - $3,741). The reduction in royalty revenue of $209 was mainly due to a reduction in the effective royalty rate (excluding sales from Company-operated cafés) from 8.2% in 2011 to 7.8% in the current quarter, as a result of the revised royalty structure for new cafés, as well as café specific arrangements in place during the Quarter.
Revenue from the sale of goods, which includes revenue from Company-operated cafés and the sale of coffee through wholesale and retail channels, was $1,235 (2011 - $750) for the Quarter. The increase in revenue from the sale of goods was mainly due to an increase in the number of Company-operated cafés from eight in 2011 (two of which became corporate at the end of the quarter) to ten at the end of the current quarter.
Services revenue for the Quarter was $1,611 (2011 - $1,647). Services revenue includes initial franchise fees, renewal fees, transfer fees earned on the sale of cafés from one franchise partner to another, construction administration fees, product licensing revenue, purchasing coordination fees and other ancillary fees (IT support and training fees). The $36 decrease in services revenue is mainly due to a decrease in initial franchise fees, renewal fees and construction administration fees offset by increases in transfer fees, product licensing revenue and other ancillary fees. Second Cup entered into a new partnership with Kraft Canada Inc. to produce, market and sell Second Cup signature blend coffees and lattes across Canada using the TASSIMO T-Disc on-demand beverage system. The partnership marks Second Cup's official entry into the at home single serve coffee market. Product licensing revenue is recognized when goods are shipped from the distributor.
Year to Date
Analysis of Revenue
Royalty revenue was $10,910 (2011 - $11,285). The reduction in royalty revenue of $375 was mainly due to a reduction in the effective royalty rate (excluding sales from Company-operated cafés) from 8.2% in 2011 to 7.9% as a result of the revised royalty structure for new cafés, as well as, café specific arrangements in place during the period.
Revenue from the sale of goods, which includes revenue from Company-operated cafés and the sale of coffee through wholesale and retail channels, was $3,101 (2011 - $1,964). The increase in revenue from the sale of goods was mainly due to an increase in the number of Company-operated cafés from eight (two of which became corporate at the end of the quarter) in 2011 to ten at the end of the Quarter.
Services revenue of $4,550 (2011 - $4,389) includes initial franchise fees, renewal fees, transfer fees earned on the sale of cafés from one franchise partner to another, construction administration fees, product licensing revenue, purchasing coordination fees and other ancillary fees (IT support, tuition and construction black line drawings). The $161 increase in services revenue is due to an increase in product licensing revenue, purchasing coordination fees and increases in other ancillary fees, offset by decreases in initial franchise fees, renewal fees and construction administration fees.
The increase in current income tax expense in 2012 is a result of utilizing tax losses from prior years in 2011. The Ontario 2012 budget was substantively enacted on June 20, 2012, freezing corporate tax cuts with the effect that the income tax rate would remain at 11.5% until the province can achieve a balanced budget. Previously, the corporate income tax rate was slated to decrease to 10.0% by 2014. The impact of the income tax rate change is estimated to be a future income tax increase of $458.
To accelerate the growth of new cafés, Second Cup introduced a revised royalty structure for new cafés. New cafés that open in 2011 and 2012 are permitted to pay a royalty rate of 3% in the first year, a rate of 6% in the second year and, thereafter, an ongoing rate of 9%.
During the Quarter, according to plan, five cafés were closed (2011 - one), the majority of which were underperforming cafés at the end of their lease term. On a year to date basis, 15 cafés were closed (2011 - five).
Term Loan, Operating Credit Facility and Interest Rate Swap
On June 12, 2012, the Company renegotiated its term loan and operating credit facilities, including an extension of the maturity of the credit facilities to May 31, 2015 and a decrease in interest rates. The credit facilities bear interest at the bankers' acceptance rate plus 2.75% (December 31, 2011 - 3.50%). The Company has an interest rate swap agreement maturing on April 1, 2013, which fixes the interest rate on the Company's non-revolving term credit facility at 3.04% per annum plus the margin noted above, which results in a fixed effective interest rate of 5.79% (December 31, 2011 - 6.54%).
The information contained in this "Outlook" is forward-looking information. Please see "Forward-looking Information" below for a discussion of the risks and uncertainties in connection with forward-looking information.
The Second Cup business continues to operate in a highly competitive marketplace and a challenging consumer environment. Management expects lower net earnings in the fourth quarter compared to last year, based on this highly competitive environment, the need for continued and expanded re-investment in the business to develop new café initiatives and leverage new and growing commercial opportunities in 2012 and the near future. The focus in the future quarters will be on further developing these initiatives, while driving traffic into cafés through sampling, product news, and media support of the newly introduced Second Cup signature coffees and lattes using the TASSIMO T-Disc on demand beverage system. In café, the focus will be on operational excellence, training and promotion of the brand's quality credentials, to ensure the consistent delivery of "a little love in every cup". Second Cup expects to increase its product licencing revenue from the sale of Second Cup coffees and lattes using the TASSIMO T-Disc system, which are also available in broad distribution beyond the cafés.
The Company intends to improve the café network through opening new cafés and proactively closing underperforming cafés.
FORWARD LOOKING INFORMATION
Certain statements in this news release may constitute forward-looking statements. Forward-looking statements include words such as "may", "will", "should", "expect", "anticipate", "believe", "plan", "intend" and other similar words. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this release. These forward-looking statements should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not those results will be achieved. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause Second Cup's actual results, performance or achievements, or those of Second Cup cafés, or industry results to be materially different from any future results, performance or achievements expressed or implied by those forward-looking statements.
In addition to using financial measures prescribed by IFRS, non-IFRS financial measures and other terms are used in this press release. These terms include "system sales of cafés", "same café sales growth", "EBITDA", "adjusted net income" and "adjusted basic and diluted earnings per share". These terms are not financial measures recognized by IFRS and do not have any standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar terms and measures presented by other similar issuers. These non-IFRS measures and terms are intended to provide additional information on the Company's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
System sales of cafés and same café sales growth are presented in reference to the sales performance of all cafés in Canada. The Company believes they are useful measures as they provide an indication of the top-line sales on which the royalty that is Second Cup's direct source of income is based.
Additional information relating to the Company, including the Company's Annual Information Form, is on SEDAR at www.secondcup.com.
About Second Cup®
Founded in 1975, Second Cup® is Canada's largest specialty coffee franchisor operating more than 350 cafés across the country. All 4,000 Second Cup® associates are trained coffee experts who handcraft over 1,000,000 coffee and tea beverages every week, and are committed to ensuring "there's a little love in every cup.™" For more information, please visit www.secondcup.com or find us on Facebook and Twitter.
SOURCE The Second Cup Ltd.
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