Second Cup Announces First Quarter Results and Quarterly Dividend

MISSISSAUGA, ON, May 3, 2012 /CNW/ - The Second Cup Ltd. ("Second Cup" or the "Company") reported financial results today for the 13 weeks ended March 31, 2012 (the "Quarter"). 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 increased by 3.3% to $47,101 in the Quarter.
• Same café sales increased 0.4% in the Quarter.
• EBITDA of $1,814 for the Quarter, up 8.5% from $1,672 in the comparable quarter a year ago.
• Adjusted basic and diluted net earnings per share of $0.10 for the Quarter, compared to $0.10 in the comparable quarter a year ago.
• Declared dividend of $0.15 per share.

Stacey Mowbray, President and CEO of Second Cup commented, "We continue to feel the competitive pressure in our same café sales and are disappointed in the 0.4% growth for the Quarter. We are seeing growth in system sales as a result of the net new growth in cafés from last year. We opened two cafés during the Quarter and are targeting to open 30 new cafés in 2012.

We are delighted to announce Second Cup's official entry into the single serve market through a new partnership with Kraft Canada Inc for one of the fastest growing single serve coffee brands in the world - TASSIMO. The partnership enables us to offer our signature coffees and lattes across Canada using the TASSIMO T Disc beverage system. Starting this fall, Second Cup branded T Discs will be available in our cafés and in grocery stores - a new channel for the Second Cup brand. All of the products will be Rainforest Alliance certified. 

We have also just partnered with Free the Children to connect, engage and provide a space for Canadians to create positive change, domestically and internationally. Free the Children has one of the highest Facebook followings of any global charity, and presence in school boards across the country, giving Second Cup a connection to youth and our local communities, through this genuine and caring Canadian based charity co-founded by brothers Marc and Craig Kielburger.  We are excited about these partnership announcements, which demonstrate the strength of the Second Cup brand and together with the passion and commitment to quality of our franchise partners, will deliver 'a little love in every cup' to our valued guests."

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 financial statements of the Company for the 13 weeks ended March 31, 2012, which are expected to be released on or before May  7, 2012.

First Quarter Analysis

Analysis of System Sales and Same Café Sales Growth

System sales for the thirteen weeks ended March 31, 2012 were $47,101, compared to $45,593 for the thirteen weeks ended April 2, 2011, representing an increase of $1,508 or 3.3%. The total number of cafés at the end of the Quarter was 355 compared to 352 cafés at the end of the first quarter of 2011.

Same café sales growth represents growth, 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. Same café sales increased 0.4% in the first Quarter of 2012 compared to a decline of 2.3% in 2011.

Analysis of Revenues
Total revenues for the Quarter were $6,008 (2011 - $5,428) and consisted of royalties, revenue from sale of goods and services revenue.

Royalties for the Quarter were $3,678 (2011 - $3,720). The reduction in royalty revenue of $42 was mainly due to a reduction in the effective royalty rate (excluding sales from Company-operated cafés) from 8.3% in 2011 to 8.0% in the Quarter 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 $900 (2011 - $586) for the Quarter. The increase in revenue from the sale of goods was mainly due to operating seven Company-operated cafés in 2012, compared to five in 2011.

Services revenue for the Quarter was $1,430 (2011 - $1,122). Services revenue includes initial franchise fees, renewal fees, transfer fees earned on the sale of cafés from one franchise partner to another, purchasing coordination fees and other ancillary fees (IT support and training fees). The $308 increase in services revenue is mainly due to an increase in purchasing coordination fees and other ancillary fees offset by reductions in initial franchise fees, renewal fees and transfer fees due to timing of café openings, renewals and transfers.

Cost of Goods Sold
Cost of goods sold represents the product cost of goods sold in corporate cafés and through retail and wholesale channels 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 was 75% compared to 72% for the quarter ended April 2, 2011. The increase is due to a higher food sales mix as well as higher food costs.

Operating Expenses
Operating expenses include the head office expenses of Second Cup and the overhead expenses of Company-operated cafés. Total operating expenses were $3,790 (2011 - $3,480).

Head Office Operating Expenses
Head office expenses of Second Cup increased by $173 (5.2%) from $3,300 in 2011 to $3,473. Salaries, wages and benefits increased by $32. Head office overhead expenses increased $46 due to increases in IT costs related to new point of sale systems ("POS") implemented in 2011. Travel and franchise partner meetings decreased by $170 due to the timing of the annual franchise partner convention in the second quarter of 2012 (2011 - Q1). Professional fees increased $59 due to the use of external consultants. Amortization of property, equipment and intangible assets increased $120 primarily due to the purchase of POS hardware and software. Advertising and franchise development expenses increased by $40.

Corporate Café Operating Expenses
The overhead expenses in Company-operated cafés increased by $137 from $180 in 2011 to $317. Lease costs increased $96 primarily due to an increase in the number of Company-operated cafés and a reduction in the amortization of lease liabilities arising from the 2009 acquisition of the Company by the Fund. Other operating costs, advertising and local marketing costs and amortization increased by $27, $10 and $5, respectively, also due to an increase in the number of Company-operated cafés. The Company recorded a loss of $7 on the impairment of a Company-operated café which was sold in the second quarter of 2012.

Other Income and Expenses
The Company incurred interest expense of $179 (2011 - $181) and  $18 (2011 - $18) in amortization of financing charges relating to the term loan. The Company also recorded a non-cash credit of $65 (2011 - $58) due to 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 $22 (2011 - $16) primarily due to interest earned from short-term highly liquid bank investments with original maturities of three months or less and from notes and leases receivable.

Income Taxes
Current income taxes of $351 (2011 - $nil) and deferred income taxes of $43 (2011 - recovery $6,359) were recorded in the Quarter.

The deferred income tax recovery of $6,359 in 2011 consists of:

• recovery of $6,756 due to the Conversion; and
• deferred tax expense of $397 excluding the impact of the Conversion.

Prior to its Conversion in 2011, the Fund was an unincorporated open-ended trust and was not subject to income tax to the extent that its taxable income was distributed to unitholders. As a result of new tax legislation substantively enacted on June 12, 2007, the Fund would have paid tax on distributions declared subsequent to January 1, 2011. As a result of this legislation, the Fund had provided for the future tax effect of existing temporary differences between the accounting and tax bases of assets and liabilities that were expected to reverse subsequent to January 1, 2011 at the specified investment flow through ("SIFT") entity tax rates under Canadian generally accepted accounting principles ("GAAP"). Under IFRS, the taxation rate to apply to temporary differences of the Fund that were expected to reverse after 2010 was the highest marginal tax rate of 46.41% rather than the lower SIFT tax rate used previously of 28.25%. On the IFRS transition date, this IFRS adjustment resulted in an increase of $7,495 to the deferred income tax liability and a corresponding decrease to equity. As a corporation, the deferred income tax liability is measured using the corporate tax rate of 28.25% and resulted in a reduction in the deferred income tax liability of $6,756 and a corresponding non-cash credit to income in the first quarter of 2011.

EBITDA
EBITDA for the Quarter was $1,814 (2011 - $1,672). The increase in EBITDA was due to an increase in gross profit of $328 offset by an increase in operating expenses excluding amortization and depreciation of $185.

Net Income
The Company's net income for the Quarter was $1,032 or $0.10 per share, compared to $7,752 or $0.78 per share in 2011. Adjusted net income for the first quarter of 2011 was $996, excluding the deferred income tax recovery of $6,756 as a result of the Conversion referred to above, and therefore the net income for the Quarter reflects an increase of $36 or 3.6% over the adjusted net income for 2011.

Café Network
To accelerate the growth of new cafés, Second Cup introduced a revised royalty structure for new cafés that opened in 2011. 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%.

Dividend
On May 3, 2012 the board of directors of Second Cup approved a quarterly dividend of $0.15 per common share, payable on May 31, 2012 to shareholders of record at the close of business on May 17, 2012. The dividend will be considered an eligible dividend for income tax purposes.

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. For 2012, management is targeting to regain growth with positive same café sales, and the addition of net new cafés.  The focus will be on driving traffic into cafés through external messaging, sampling and product news. 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".

In terms of 2012 network expansion, Second Cup has targeted to open 30 new cafés and to renovate approximately 20 of its cafés. In addition, Second Cup expects to close approximately 15 cafés, the majority of which have sales below the average performance of its 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.sedar.com.

About Second Cup®

Founded in 1975, Second Cup® is Canada's largest specialty coffee franchisor, operating more than 350 cafés across the country. As a proudly Canadian company, Second Cup celebrates its franchisees' local ownership, and prioritizes the support of local businesses through daily deliveries from neighbourhood partners. Committed to caring for every guest, all 5,000 associates of Second Cup are Trusted Coffee Experts™ who sell 1,000,000 coffee and tea beverages every week. For more information, please visit www.secondcup.com.