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Second Cup announces third quarter results and quarterly dividend

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.

Highlights

  • System sales relatively flat at $46.4 million in the Quarter and up by 1.2% year to date.
  • Same café sales decline of 2.8% in the Quarter and 1.2% year to date.
  • Basic and diluted earnings per share of $0.08 for the Quarter compared to $0.17 in the comparable quarter a year ago.
  • Declared a quarterly dividend of $0.085 per share.

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."

Dividend

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.

FINANCIAL HIGHLIGHTS

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.

      13 weeks ended     39 weeks ended
(in thousands of dollars, except number of cafés and per share amounts)     Sept. 29,
2012
    Oct. 1,
2011
    Sept. 29,
2012
    Oct. 1,
2011
                         
System sales of cafés1     $46,389     $46,369     $140,872     $139,256
                         
Number of cafés - end of period     358     359     358     359
                         
Same café sales1     (2.8%)     (0.1%)     (1.2%)     (0.6%)
                         
Total revenue     $6,378     $6,138     $18,561     $17,638
                         
Gross profit     $5,407     $5,564     $16,185     $16,175
                         
Operating expenses     $4,274     $3,202     $11,447     $9,783
                         
Operating income     $1,133     $2,362     $4,738     $6,392
Amortization of property and equipment and intangible assets     306     219     843     545
Loss on disposal of property and equipment     29     9     28     16
Impairment of property and equipment     -     -     7     -
Earnings before interest, tax, depreciation and amortization ("EBITDA")1     $1,468     $2,590     $5,616     $6,953
                         
Income before income taxes     $1,017     $2,095     $4,363     $5,771
  Current income tax charge     275     511     1,048     633
  Deferred income tax (recovery) charge     (4)     (68)     695     (5,811)
Net income     $746     $1,652     $2,620     $10,949
Deferred income tax recovery due to Conversion2     -     (36)     -     (6,707)
Adjusted net income1     $746     $1,616     $2,620     $4,242
                         
Basic and diluted earnings per share as reported     $0.08     $0.17     $0.26     $1.11
                         
Adjusted basic and diluted earnings per share1     $0.08     $0.16     $0.26     $0.43
                         
 
1   "System sales of cafés", "Same café sales", "EBITDA", "Adjusted net income" and "Adjusted basic and diluted earnings per share" are not recognized performance measures under IFRS and, accordingly, may not be comparable to similar computations as reported by other issuers.
2   At the annual and special meeting of unitholders held on June 10, 2010, the unitholders approved the proposed conversion from an income trust structure to a public corporation ("Conversion"). The Conversion was completed on January 1, 2011.

Analysis of System Sales and Same Café Sales Growth
System sales for the 13 weeks ended September 29, 2012 were $46,389, compared to $46,369 for the 13 weeks ended October 1, 2011, representing an increase of $20. The total number of cafés at the end of the Quarter was 358 compared to 359 cafés at the end of the third quarter of 2011.

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
Total revenue for the Quarter was $6,378 (2011 - $6,138) consisting of royalty revenue, revenue from sale of goods and services 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.

Operating Expenses
Operating expenses include the head office expenses of Second Cup and the overhead expenses of Company-operated cafés. Total operating expenses amounted to $4,274 (2011 - $3,202). Salaries, wages and benefits decreased by $142, primarily due to a reduction in incentives earned to date. Occupancy and lease costs increased $524, largely due to accruing lease costs for two cafés closed during the Quarter, a lease termination fee and an increased provision for vacant properties. Bad debt expense increased by $127 as a result of an increase in the allowance for doubtful accounts and a provision for a promissory note. Research and innovation costs during the Quarter were $140 (2011 - $nil) and are related to test concepts and new initiatives to build the brand and drive growth. A markdown of inventory of $113 (2011 - $nil) was recorded in the Quarter. Corporate café lease costs increased $108 primarily due to an increase in the number of Company-operated cafés and a reduction in the amortization of lease liabilities arising from an acquisition in 2009.

EBITDA
EBITDA for the Quarter was $1,468 (2011 - $2,590).The decline of $1,122 in EBITDA was due to a decrease in gross profit of $157 and an increase in operating expenses of $985 (excluding amortization), as discussed above.

Net Income
The Company's net income for the Quarter was $746 or $0.08 per share, compared to $1,652 or $0.17 per share in 2011. The reduction in net income of $906 was mainly due to the decline in EBITDA and the increased amortization expense of $87, offset by a reduction in net interest expense of $151 and a reduction of $172 in total income taxes.

Year to Date

Analysis of Revenue
Revenue was $18,561 compared to $17,638 in 2011 and consisted of royalty revenue, revenue from sale of goods and services 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.

Operating Expenses
Operating expenses include the head office expenses of Second Cup and the overhead expenses of Company-operated cafés. Operating expenses amounted to $11,447 (2011 - $9,783), an increase of $1,664 including research and innovation costs of $361, head office occupancy and lease costs of $472, corporate café lease costs of $277 and a markdown of inventory of $241.

Income Taxes
Income tax expense of $1,743 (2011 - recovery $5,178) consists of:

  • current income tax expense of $1,048 (2011 - $633);
  • deferred income tax expense of $458 (2011 - $nil), due to the income tax rate change discussed below;
  • deferred income tax recovery of $nil (2011 - $6,707), due to the Conversion; and
  • deferred income tax expense of $2237 (2011 - $896), excluding the impact of the Conversion.

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.

EBITDA
EBITDA was $5,616 (2011 - $6,953). The decline in EBITDA of $1,337 was due to an increase in operating expenses of $1,366 (excluding amortization), partially offset by an increase in gross profit of $10.

Net Income
The Company's net income was $2,620 or $0.26 per share, compared to $10,949 or $1.11 per share in 2011. Excluding the deferred income tax recovery of $6,707 in 2011, as a result of the Conversion referred to above, adjusted net income for 2011 was $4,242 or $0.43 per share. Adjusted net income for 2012 is the same as reported net income of $2,620 or $0.26 per share. The reduction in adjusted net income of $1,622 was mainly due to an increase in operating expenses of $1,664, an increase in deferred income tax expense of $458 due to the income tax rate change discussed above, offset by an increase in gross profit of $10 and a decrease in net interest expense of $246.

CAFÉ NETWORK

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%.

    13 weeks ended   39 weeks ended
    Sept. 29,
2012
  Oct. 1,
2011
  Sept. 29,
2012
  Oct. 1,
2011
                 
Number of cafés - beginning of period    356   350   359   349
Cafés opened    7   10   14   15
Cafés closed    (5)   (1)   (15)   (5)
                   
Number of cafés - end of period    358   359   358   359
                 
Number of cafés renovated    6   6   13   19

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%).

OUTLOOK

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.

NON-IFRS TERMS

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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