Second Cup Announces First Quarter Results and Quarterly Dividend

MISSISSAUGA, Ontario, May 2, 2013 – The Second Cup Ltd. (“Second Cup” or the “Company”) reported financial results today for the thirteen weeks ended March 30, 2013 (the “Quarter” or  “Q1”). 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.

Summary

• Declared a quarterly dividend of $0.085 per share.

• System sales decreased by 0.3% to $46,954 in the Quarter.

• Same café sales declined 3.3% in the Quarter compared to a 0.4% increase in the comparable quarter a year ago..

• Adjusted basic and diluted earnings per share of $0.42 for the Full Year vs. $0.64 last year.
• Basic and diluted earnings per share of $0.07 for the Quarter compared to $0.10 in the comparable quarter a year ago, largely due to investments to drive future growth
  
   

  Stacey Mowbray, President & CEO of Second Cup commented, “The Quarterly results reflect the planned investment in new initiatives combined with intense competitive activity in the coffee category. The  investment in new initiatives include a loyalty program which will go into test in May, a new café design with the prototype opening in the summer and  the reinforcement of our gold standard coffee credentials. Second Cup buys the best beans in the world, is the leader in certified sustainable coffee in Canada and in our cafés, we have a fresh grind and brew process that assures the highest quality coffee experience. We will be communicating these attributes and celebrating them in café with new visuals, new packaging and new coffees to add to our already impressive portfolio. We believe these investments, as well as, our continued focus on Tassimo growth will be transformational for the brand.

In the first quarter, we opened four new cafés and closed three cafés, of which two were store-in-store kiosks and are part of a plan to exit these locations.

As the second largest specialty coffee retailer in Canada and largest franchisor, we are confident in the strength of the Second Cup brand. Care, quality and our Franchise Partners set us apart from the competition."

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 weeks ended March 30, 2013, which are expected to be released on or before May 7, 2013.

First Quarter Analysis

Analysis of System Sales and Same Café Sales Growth
System sales for the 13 weeks ended March 30, 2013 were $46,954 compared to $47,101 for the 13 weeks ended March 31, 2012, representing a decrease of $147 or 0.3%. The total number of cafés at the end of the Quarter was 361 compared to 355 cafés at the end of the first quarter of 2012.

Same café sales represents the percentage change, on average, in retail sales at cafés (franchised and Company-operated) operating system wide that have been open for 15 or more months. It is one of the key metrics the Company uses to assess its performance and provides a useful comparison between quarters. The two principal factors that affect same café sales growth are changes in customer traffic and changes in average check. These factors are dependent upon existing cafés maintaining operational excellence within each Second Cup café, general market conditions, pricing and marketing programs undertaken by Second Cup.

During the Quarter, Second Cup continued to be impacted by increased competitive activity resulting in a same café sales decline of 3.3%, compared to an increase of 0.4% in the comparable quarter of 2012.

Analysis of Revenues
Total revenues for the Quarter were $6,246 (2012 - $6,008) and consisted of royalty revenue, revenue from sale of goods and services revenue.

Royalty revenue for the Quarter was $3,497 (2012 - $3,678). The reduction in royalty revenue of $181 was mainly due to a decrease in system sales and a reduction in the effective royalty rate (excluding sales from Company-operated cafés) from 8.0% in 2012 to 7.7% in the Quarter as a result of the revised royalty structure for new cafés. New cafés that opened in 2011 and 2012 pay a royalty rate of 3% in the first year, a rate of 6% in the second year and, thereafter, a rate of 9%. In addition the effective royalty rate was impacted by 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 $1,289, compared to $900 for the 13 weeks ended March 31, 2012. The increase in revenue from the sale of goods was mainly due to ten Company-operated cafés in the Quarter compared to seven in 2012.  

Services revenue for the Quarter was $1,460 (2012 - $1,430). 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 licencing revenue, purchasing coordination fees and other ancillary fees (IT support, tuition and construction black line drawings). The $30 increase in services revenue is mainly due to an increase in product licencing revenue, initial franchise fees, renewal fees and other ancillary fees offset by decreases in transfer fees and purchasing coordination fees. The increase in product licence revenue was as a result of the 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.

Cost of Goods Sold
Cost of goods sold represents the product cost of goods sold in corporate cafés plus the cost of direct labour to prepare and deliver the goods to the customers in the cafés. Cost of goods sold as a percentage of revenue from the sale of goods in the Quarter was 75% (2012 - 75%).

Operating Expenses
Operating expenses include the head office expenses of Second Cup and the overhead expenses of Company-operated cafés. Total operating expenses were $4,252 (2012 - $3,790), an increase of $462.

Head office expenses of Second Cup increased by $309 (8.9%) in the Quarter to $3,782 from $3,473 in 2012. This increase was mainly due to increases in research and innovation costs of $287, increases in travel and franchise partner meetings of $155 (due to the annual franchise partner convention held in the first quarter versus the second quarter in 2012), and increases in occupancy lease costs of $123 (due to an increase in vacant properties). Offsetting the increases, were decreases in salaries, wages and benefits of $202, decreases in bad debt expense of $66 and a decrease in legal costs of $49.

The overhead expenses in Company-operated cafés for the Quarter increased by $153 to $470 from $317 in 2012 due to ten Company-operated cafés during the Quarter compared to seven in 2012.

Other Income and Expenses
The Company incurred interest expense of $159 (2012 - $179) on the term loan and derivative interest rate swap, and $22 (2012 - $18) in amortization of deferred financing charges relating to the term loan. The Company also recorded a non-cash credit of $95 (2012 - $65) for the movement in the fair value of the derivative interest rate swap that fixes the interest rate on the Company’s term loan. The Company earned other interest income of $13 (2012 - $22) primarily due to interest earned from short-term highly liquid bank investments with original maturities of three months or less and from notes receivable.

Income Taxes
Current income taxes of $222 (2012 - $351) and deferred income taxes of $40 (2012 - $43) were recorded in the Quarter.

EBITDA
EBITDA for the Quarter was $1,334 (2012 - $1,814). The decrease in EBITDA was due to a decrease in gross profit of $53 and an increase in operating expenses of $427 (excluding amortization, loss on disposal of property and equipment and impairment charges) as discussed above.

Net Income
The Company’s net income for the Quarter was $688 or $0.07 per share, compared to net income of $1,032 or $0.10 per share in 2012. The decline in net income of $344 or $0.03 was mainly due to the $462 increase in operating expenses, the $53 decrease in gross profit, offset by a $39 decrease in net interest expense and a $132 decrease in income taxes.

Café Network

During the Quarter, three cafés (2012 - four) were renovated, there were four café openings (2012 - two) and three café closures (2012 - six) with 361 cafés open at March 30, 2013.

Dividend
On May 2, 2013 the Board of Directors of Second Cup approved a quarterly dividend of $0.085 per common share, payable on May 31, 2013 to shareholders of record at the close of business on May 17, 2013. The dividend will be considered an eligible dividend for income tax purposes.

Annual General Meeting of Shareholders
The Board of Directors has set a record date of March 24, 2013 for the Annual General Meeting of shareholders. The Annual General Meeting will be held at 10:00 a.m. on Friday, May 3, 2013 at the offices of Stikeman Elliott LLP, 53rd Floor, 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario.

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 an increasingly competitive marketplace and a challenging consumer environment. For 2013, management will continue to re-invest in the business, specifically a loyalty and communications capability, a coffee revitalization plan, and a new café design. These initiatives will be in test in 2013 with expected roll-outs towards the end of the year. In addition, Second Cup will leverage new and growing commercial opportunities, including the expansion and support of the newly introduced Second Cup signature coffees and lattes using the TASSIMO T-Disc on demand beverage system and expects to increase its product licensing revenue. Although these investments have a short term impact on profits, we expect them to generate longer-term improved performance.

Second Cup will continue to improve the café network with the opening of cafés while closing below average performing 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.