Second Cup announces second quarter results and quarterly dividend

MISSISSAUGA, ON, Aug. 3, 2012 /CNW/ - The Second Cup Ltd. ("Second Cup" or the "Company") reported financial results today for second quarter ended June 30, 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 0.2% to $47,382 in the Quarter and by 1.7% year to date.
• Basic and diluted earnings per share of $0.09 for the Quarter includes a deferred taxation charge of $0.05 per share arising from the 2012 Ontario budget. Earnings in the comparable quarter a year ago were $0.16.
• Same café sales decline of 1.5% in the Quarter.
• Declared dividend of $0.15 per share.

Stacey Mowbray, President & CEO of Second Cup commented, "We continue to feel the increasing competitive pressure on our same café sales through Q2. This has affected our profitability. During the Quarter we invested in research and development on test concepts and new initiatives. We opened five cafés in the Quarter, bringing the total to seven year to date and will open approximately 25 cafés in 2012, giving us three consecutive years of net new growth. As per our plan, we closed four cafés during the Quarter (10 cafés year to date), the majority of which were underperforming cafés at the end of their lease term. This fall, we will enter the growing single serve market through a partnership with Kraft Canada Inc. Starting in late September, we will be selling a variety of Second Cup branded TASSIMO T Discs in café and in grocery. This fall will also mark the activation of our partnership with Free the Children, starting with We Day and following with in store activity. With these exciting new partnerships, an investment in innovation, a calendar of promotions, product news and local café marketing and with the enthusiasm of our franchise partners, we are confident in moving our brand back to positive same café sales."

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 26 weeks ended June 30, 2012.

	13 weeks ended			26 weeks ended
(in thousands of Canadian dollars, except number of cafés and per share amounts)	June 30, 2012	July 2, 2011		June 30, 2012	July 2, 2011
System sales of cafés^1	$47,382	$47,294		$94,483	$92,887
Number of cafés - end of period	356	350		356	350
Same café sales growth^1	(1.5%)	0.3%		(0.5%)	(0.9%)
Total revenue	$6,175	$6,072		$12,183	$11,500
Gross profit	$5,446	$5,607		$10,778	$10,611
Operating expenses	$3,383	$3,101		$7,173	$6,581
Operating income	$2,063	$2,506		$3,605	$4,030
Amortization of property and equipment and intangible assets	271	185		537	326
(Gain) loss on disposal of property and equipment	-	-		(1)	7
Impairment of property and equipment	-	-		7	-
Income before interest, tax, depreciation and amortization ("EBITDA")^1	$2,334	$2,691		$4,148	$4,363
Income before income taxes	$1,920	$2,283		$3,346	$3,676
Current income tax charge	422	122		773	122
Deferred income tax charge (recovery)	656	616		699	(5,743)
Net income	$842	$1,545		$1,874	$9,297
Deferred income tax recovery due to Conversion^2	-	-		-	(6,756)
Adjusted net income^1	$842	$1,545		$1,874	$2,541
Basic and diluted earnings per share as reported	$0.09	$0.16		$0.19	$0.94
Adjusted basic and diluted earnings per share^1	$0.09	$0.16		$0.19	$0.26

^1	"System sales of cafés", "Same café sales growth", "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 June 30, 2012 were $47,382, compared to $47,294 for the 13 weeks ended July 2, 2011, representing an increase of $88 or 0.2%. The total number of cafés at the end of the Quarter was 356 compared to 350 cafés at the end of the second quarter of 2011.

Year to date system sales for the 26 weeks ended June 30, 2012 were $94,483, compared to $92,887 for the 26 weeks ended July 2, 2011, representing an increase of $1,596 or 1.7%.

Same café sales decreased 1.5% in the Quarter, compared to an increase of 0.3% in the comparable quarter of 2011. The year to date same café sales decline was 0.5% (2011 - 0.9% decline).

Second Quarter Analysis

Analysis of Revenues
Total revenues for the Quarter were $6,175 (2011 - $6,072) and consisted of royalty revenue, revenue from sale of goods and services revenue.

Royalty revenue for the Quarter was $3,700 (2011 - $3,824). The reduction in royalty revenue of $124 was mainly due to a reduction in the effective royalty rate (excluding sales from Company-operated cafés) from 8.2% in 2011 to 8.0% 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 $966 (2011 - $628) 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 six in 2011 to seven at the end of the current quarter.

Services revenue for the Quarter was $1,509 (2011 - $1,620). 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 $111 decrease in services revenue is mainly due to a decrease in purchasing coordination fees, transfer fees and construction administration fees offset by increases in initial franchise fees and renewal fees.

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 $3,383 (2011 - $3,101). Included in operating expenses for the Quarter were research and innovation costs totaling $221 (2011 - $nil) related to test concepts and new initiatives.

Net Income
The Company's net income for the Quarter was $842 or $0.09 per share, compared to $1,545 or $0.16 per share in 2011. The reduction in net income of $703 was mainly due to the $357 decline in EBITDA and a deferred income tax expense of $458 as a result of an increase in the future tax rates. 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.

Year to Date

Analysis of Revenues
Revenues were $12,183 compared to $11,500 in 2011 and consisted of royalty revenue, revenue from sale of goods and services revenue.

Royalty revenue was $7,378 (2011 - $7,544). The reduction in royalty revenue of $166 was mainly due to a reduction in the effective royalty rate (excluding sales from Company-operated cafés) from 8.2% in 2011 to 8.0% 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 $1,866 (2011 - $1,214). The increase in revenue from the sale of goods was mainly due to an increase in the number of Company-operated cafés from six in 2011 to seven at the end of the Quarter.

Services revenue was $2,939 (2011 - $2,742). Services revenue includes initial franchise fees, renewal fees, transfer fees earned on the sale of cafés from one franchise partner to another, construction project management fees, purchasing coordination fees and other ancillary fees (IT support, tuition and construction black line drawings). The $197 increase in services revenue is due to an increase in purchasing coordination fees, increases in other ancillary fees and increases in initial franchise fees offset by a decrease in construction project management fees and a decrease in transfer 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 $7,173 (2011 - $6,581), an increase of $592 including research and innovation costs of $221 as discussed above.

Net Income
The Company's net income was $1,874 or $0.19 per share, compared to $9,297 or $0.94 per share in 2011. Excluding the deferred income tax recovery of $6,756 in 2011 as a result of the Conversion referred to above, adjusted net income for 2011 was $2,541. Adjusted net income for 2012 is the same as reported net income and was $1,874. The reduction in adjusted net income of $667 was mainly due to an increase in operating expenses of $592, 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 $167 and a decrease in interest expense of $95.

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%.

	13 weeks ended			26 weeks ended
	June 30, 2012	July 2, 2011		June 30, 2012	July 2, 2011
Number of cafés - beginning of period	355	352		359	349
Cafés opened	5	-		7	5
Cafés closed	(4)	(2)		(10)	(4)
Number of cafés - end of period	356	350		356	350
Number of cafés renovated	3	9		7	13

During the quarter, according to the plan, four cafés were closed (2011 - two), the majority of which were underperforming cafés at the end of their lease term. On a year to date basis, 10 cafés were closed (2011 - four).

Dividend

On August 2, 2012, the Board of Directors of Second Cup approved a quarterly dividend of $0.15 per common share, payable on August 31, 2012 to shareholders of record at the close of business on August 17, 2012. The dividend will be considered an eligible dividend for income tax purposes.

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. 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 will open approximately 25 new cafés and will renovate approximately 20 of its cafés. In addition, Second Cup will 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.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. 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.

SOURCE: The Second Cup Ltd.

please contact Robert Masson, Chief Financial Officer, [phone] ext. 1824 or [email protected].