Second Cup Announces First Quarter Results and Quarterly Dividend

MISSISSAUGA, ON, May 9, 2014 /CNW/ - The Second Cup Ltd. (TSX:SCU) reported financial results today for the 13 weeks ended March 29, 2014 (the "Quarter"). All amounts in this news release are presented in thousands of Canadian dollars, unless otherwise indicated.

Highlights

• National launch of Second Cup coffee (whole bean and roast & ground) in grocery channel.
• System sales of cafés decreased by 6.4% to $43.9M for the Quarter compared to a year ago. Same café sales decreased 6.9% in the Quarter.
• Adjusted basic and diluted earnings per share of $0.05 for the Quarter compared to $0.07 in the comparable Quarter a year ago.
• Adjusted EBITDA of $0.9M for the Quarter compared to $1.3M in the comparable Quarter a year ago.
• Declared a quarterly dividend of $0.085 per share.

"The coming year will be focused on establishing the foundation for Second Cup to be a best in class, speciality coffee company," says Alix Box, President and CEO, The Second Cup Ltd.  "A comprehensive strategic review is underway in all aspects of the company. Our ultimate goal is to create material gains and sustainable long-term value for our cafés, our franchisees and our shareholders. Our priorities include improving the company infrastructure, best in class talent, improving store and franchisee profitability, developing a store of the future that is world class in all respects and building trust and partnerships with our franchisees. While our objectives are aggressive and will take time, we are confident our goals are achievable."

FINANCIAL HIGHLIGHTS

The following table sets out selected IFRS and certain non-GAAP financial measures of Second Cup (the "Company") and should be read in conjunction with the Unaudited Condensed Interim Financial Statements of the Company for the 13 weeks ended March 29, 2014.

OPERATIONAL REVIEW

First Quarter

System sales of cafés
System sales of cafés for the 13 weeks ended March 29, 2014 were $43,930 compared to $46,954 for the 13 weeks ended March 30, 2013, representing a decrease of $3,024 or 6.4%.  The decrease is attributable to decreased Same café sales and to the marginally smaller store network.

Same café sales
During the Quarter, Second Cup continued to be impacted by a competitive environment resulting in a Same café sales decline of 6.9%, compared to a decline of 3.3% in the comparable Quarter of 2013. As with other retailers, Second Cup's customer traffic was negatively impacted by the poor weather.

Analysis of revenue

Total revenue for the Quarter was $7,612 (2013 - $6,246) and consisted of royalty revenue, revenue from sale of goods, and services and other revenue.

Royalty revenue for the Quarter was $3,195 (2013 - $3,497).  The reduction in royalty revenue of $302 is primarily a result of overall lower System sales of cafés, and to a lesser extent, the mix of cafés with varying royalty rates.

Revenue from the sale of goods, which consists of revenue from Company-operated cafés and wholesale revenue, was $2,789 (2013 - $1,289) for the Quarter. The increase of $1,500 in revenue from the sale of goods was mainly due to sales pertaining to the partnership with Kraft Canada Inc. to produce, market, and sell Second Cup branded whole bean and roast & ground coffee in retail channels. The aforementioned revenue stream initiated in January 2014. There were 11 Company-operated cafés at March 29, 2014 (2013 - ten).

Services and other revenue for the Quarter was $1,628 (2013 - $1,460).  Services and other 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 (such as IT support and training fees).  The $168 increase in services and other revenue was primarily due to sales pertaining to the Second Cup branded TASSIMO T-Discs.

Cost of goods sold
Cost of goods sold represents the product cost of goods sold in Company-operated cafés and through the wholesale channel, plus the cost of direct labour to prepare and deliver the goods to the customers in the Company-operated cafés.  Cost of goods sold was $1,878 (2013 - $967).

Operating expenses
Operating expenses include head office ("Coffee Central") expenses and the overhead expenses of Company-operated cafés. Total operating expenses for the Quarter were $5,508 (2013 - $4,252), an increase of $1,256.

Coffee Central
Coffee Central expenses for the Quarter were $5,151 (2013 - $3,782), an increase of $1,369 or 36%.  During the Quarter, the Company recorded $559 of restructuring charges pertaining to the change in chief executive officers and other fundamental reorganizations that have a material effect on the nature and focus of the entity's operations.  The Company recorded retail listing fees of $988 in the Quarter related to launch of the new wholesale revenue stream of whole bean and roast & ground coffees sold in retail channels.

Company-operated cafés
Company-operated café expenses for the Quarter were $357 (2013 - $470), a decrease of $113 or 24%.  The decrease is due to gains on disposal of capital related items as a result of the POS software upgrades in advance of the anticipated launch of the loyalty program.

Interest and financing
The Company incurred interest and financing expenses of $156 (2013 - $77).  The increase in interest and financing expenses is due to the fair value adjustments of the interest rate swap which captures an interest rate premium to fix the effective interest rate on the Long-term debt.

Income taxes
Current income taxes of $nil (2013 - $222) and deferred income taxes of $14 (2013 - $40) were recorded in the Quarter. Current income taxes decreased as a result of nil taxable income primarily driven by restructuring charges and retail listing fees. The change in deferred income taxes was driven by the temporary timing differences of capital expenditures, general reserves and the timing difference of the nil taxable income incurred in the Quarter that is likely to be utilized in a future period.

Adjusted EBITDA
Adjusted EBITDA for the Quarter was $941 (2013 - $1,334). The decrease of $393 in Adjusted EBITDA was primarily due to decreased royalty revenue.

Net income
The Company's Net income for the Quarter was $56 or $0.01 per share, compared to net income of $688 or $0.07 per share in 2013.  The decrease in net income of $632 or $0.06 per share was mainly due to decreased royalties, restructuring charges, and retail listing fees incurred, offset partially by the margin realized on the new wholesale revenue stream of whole bean and roast & ground coffee through the retail channel.

A reconciliation of Net income to Adjusted EBITDA is provided in the section "Definitions and discussion of certain non-GAAP financial measures".

Dividend
On May 8, 2014 the Board of Directors of Second Cup approved a quarterly dividend of $0.085 per common share, payable on June 6, 2014 to shareholders of record at the close of business on May 23, 2014.

The Company's dividend policy is to continue to pay a portion of earnings while retaining funds for organic initiatives. The determination to declare and make payable dividends from Second Cup is at the discretion of the Board of Directors of Second Cup and until declared payable, Second Cup has no requirement to pay cash dividends to shareholders. Taking into account current economic conditions and their impact on the profitability of Second Cup, the Board of Directors will continually review the level of dividends paid by the Company and there can be no assurance the dividends will remain at the current level.

Café network

The Company ended the Quarter with 11 (2013 - ten) Company-operated cafés.

SELECTED QUARTERLY INFORMATION

OUTLOOK

This section is qualified by the section "Caution Regarding Forward-Looking Statements" onward in this news release.

The Second Cup business continues to operate in a competitive marketplace and a challenging consumer environment. In 2013, management continued to invest in the business, including investing in the development of a loyalty program which is being tested in 31 cafés, with positive initial results.  Second Cup intends to roll out the loyalty program nationally pending results from the refined pilot program in 2014.  Based on learnings from the initial pilot, the Company continues to refine particulars of the program including elements of the design which will make it more relevant to brewed coffee drinkers as well as specialty beverage customers.  Technology improvements are being made to improve speed of service at point of sale.

Second Cup will work on a detailed brand analysis to influence the design and development of the new store of the future. The Company plans on renovating one of its corporate café locations in the fall to assess its performance under the new design.  This will be a very different Second Cup from what we see today.  It should have a re-invigorated brand identity with much higher standards of excellence.

Under the new CEO's leadership, Second Cup will be going through a period of substantial change. As part of the change, the Company is completing a re-engineering of the infrastructure to both better support our franchise partners and rebalance the cost structure. The Company will incur further transitional and restructuring related charges onward in 2014 related to these changes.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this news release may constitute forward-looking statements within the meaning of applicable securities legislation. The terms the "Company", "Second Cup", "we", "us", or "our" refer to The Second Cup Ltd. 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 financial performance and speak only as of the date of this news release. It should not be read as a guarantee of future performance or results and will not necessarily be an accurate indication of whether or not those results will be achieved. Forward-looking statements are based on a number of assumptions and are subject to known and unknown risks, uncertainties and other factors, many of which are beyond Second Cup's control 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 such forward-looking statements. The foregoing list of factors is not exhaustive, and investors should refer to the risks described under "Risks and Uncertainties" in Second Cup's Management's Discussion and Analysis ("MD&A") and Annual Information Form, which is available at www.sedar.com.

Although the forward-looking statements contained in this news release are based on what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements and, as a result, the forward-looking statements may prove to be incorrect.

As these forward-looking statements are made as of the date of this news release, Second Cup does not undertake to update any such forward-looking statements whether as a result of new information, future events or otherwise. Additional information about these assumptions and risks and uncertainties is contained in the Company's filings with securities regulators. These filings are also available on the Company's website at www.secondcup.com.

DEFINITIONS AND DISCUSSION ON CERTAIN NON-GAAP FINANCIAL MEASURES

In this news release, the Company reports certain non-IFRS measures such as System sales of cafés, Same café sales, Operating income, EBITDA, Adjusted EBITDA, and Adjusted earnings per share.

System sales of cafés
System sales of cafés comprise the net revenue reported to Second Cup by franchisees of Second Cup cafés and by Company-operated cafés. This measure is useful in assessing the operating performance of the entire Company network, such as capturing the net growth of the overall café network.  Sales are reported by franchisees to Second Cup on a weekly basis without audit or other form of independent assurance. Second Cup's substantiation of sales reported by its franchisees is through analytical and financial reviews performed by management, comparison to sales data on the POS, on-site visits, and analyses of raw materials purchased by the cafés as reported by authorized vendors.

Increases in System sales of cafés result from the addition of new cafés and Same café sales (as described below).  The primary factors influencing the Number of cafés added to the Second Cup café network include the availability and cost of high quality locations, competition from other specialty coffee retailers and other businesses for prime locations, and the availability of qualified franchisees.

System sales of cafés are also affected by the permanent closure of Second Cup cafés. Cafés are closed when they cease to be viable or, occasionally, when a renewal of a lease for a particular location is not available or when an alternative, preferable location is available.

Same café sales
Same café sales represents the percentage change, on average, in sales at cafés (franchised and Company-operated) operating system-wide that have been open for more than 12 months.  It is one of the key metrics the Company uses to assess its performance with specific focus on organic growth. Organic growth is an indicator on how the Company is impacted by operational effectiveness, the results of marketing efforts, pricing, and responsiveness to competition. Same café sales provides a useful comparison between periods while also encompassing other matters such as seasonality. The two principal factors that affect Same café sales are changes in customer traffic and changes in average sale.

Operating income (loss)
Operating income (loss) represents Revenue, less Cost of goods sold, less Operating expenses, and less Impairment charges. This measure is not defined under IFRS, although the measure is derived from input figures in accordance with IFRS.  Management views this as an indicator of financial performance that excludes costs pertaining to Interest and financing, and Income taxes.

EBITDA and Adjusted EBITDA
EBITDA represents earnings before interest, taxes, depreciation, and amortization.  As there is no generally accepted method of calculating EBITDA, the measure as calculated by the Company is likely not comparable to similarly titled measures reported by other issuers. EBITDA is presented as management believes it is a useful indicator of the Company's ability to meet debt service and capital expenditure requirements, and evaluate liquidity.  Management interprets trends in EBITDA as an indicator of relative financial performance.  EBITDA should not be considered by an investor as an alternative to net income or cash flows as determined in accordance with IFRS.

Impairment charges if incurred are a reconciling item in the calculation of Adjusted EBITDA as its nature is non-cash and management interprets this measure to be similar in substance to depreciation and amortization.  This interpretation by management is consistently applied regardless of whether impairment charges are or are expected to be recurring.

Restructuring charges are a reconciling item in the definition of Adjusted EBITDA as management believes such costs are non-recurring and not an indicative performance measure directly linked to the focus of the Company's business operations and strategic imperatives.  As there is no generally accepted method of calculating Adjusted EBITDA, the measure as calculated by the Company is likely not comparable to similarly titled measures reported by other issuers.  Adjusted EBITDA should not be considered by an investor as an alternative to net income or cash flows as determined in accordance with IFRS.

The change in estimate pertaining to the gift card breakage rate if incurred is captured as a reconciling item to Adjusted EBITDA as management believes this change in estimate was material and not an indicative performance measure used to evaluate the sustainable current and ongoing financial performance.

A reconciliation of net income to EBITDA and Adjusted EBITDA is provided below:

Adjusted basic and diluted earnings per share

Adjusted earnings per share represents earnings per share excluding any impairment charges, restructuring charges, and any change in estimate pertaining to the gift card breakage rate.  Impairment charges of trademarks and goodwill are non-cash, but material items that are adjusted as management concluded that this is not a direct measure of the Company's focus on day to day operations, is not indicative of future operating results, and thus better evaluates the underlying business of the Company.  Impairment charges of tangible assets are primarily related to leasehold improvements at Company-operated cafés. The Company typically operates such cafés for exploratory purposes or with the intention to improve underperformers and to subsequently refranchise the cafés.  Restructuring charges are a reconciling item as management believes these costs are non-recurring and not an indicative performance measure directly linked to the focus of the Company's business operations on a per share basis.  The change in estimate pertaining to the gift card breakage rate is captured as a reconciling item to Adjusted earnings per share as management believed this change in estimate is not an indicative performance measure used to evaluate the sustainable current and ongoing financial performance.

A reconciliation of Net income to Adjusted basic and diluted earnings per share is provided below:

About Second Cup®

Founded in 1975, Second Cup® is a Canadian specialty coffee retailer with more than 350 cafés across the country.  All of approximately 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.