Second Cup Announces Second Quarter Results and Suspension of Dividend

MISSISSAUGA, ON, Aug. 5, 2014 /CNW/ - The Second Cup Ltd. (TSX:SCU) ("Second Cup" or the "company") reported financial results today for the 13 weeks (the "quarter") and 26 weeks (the "year to date") ended June 28, 2014. In order to focus on growth and maximize long-term shareholder value, the company announced it is suspending its quarterly dividend effective immediately.

Quarterly Highlights

• Completed the reorganization of its Coffee Central support office resulting in $1.6 million of one-time restructuring costs and estimated annual savings of $2.3 million.
• Restructuring savings will be redeployed to franchisees primarily via reduced royalties.
• System sales of cafés decreased by 3.9% to $45.8 million compared to a year ago. Same café sales decreased 5.0%.
• Adjusted basic and diluted earnings per share of $0.08 compared to $0.14 a year ago.
• Adjusted EBITDA of $1.5 million compared to $2.1 million a year ago.
• Announced the August launch of single-serve Keurig® K-Cup® compatible coffee capsules.

Alix Box, President and CEO commented, "As I previously communicated, we have embarked on a journey to restore Second Cup to a leadership position with growth in sales and profitability.  Already we have completed a number of important steps including the downsizing and restructuring of our Coffee Central team, improving franchisee profitability, and assembling a talented new leadership team.  We are all passionately dedicated to delivering the best specialty coffee experience for our customers.

We are in the early stages of Second Cup's transformation and I am proud of our progress to date. We are developing a "store of the future" which will introduce exciting new levels of innovation and excellence for Second Cup and the Canadian coffee lover.  Later this year, we will unveil a new and very different Second Cup store in downtown Toronto.  It is our plan to roll out its best attributes across the country in the coming years. Together with my team, we are crafting a detailed strategic plan for Second Cup's future.

When I commenced as CEO a few months ago, I was very excited about Second Cup's prospects for the future.  I understood that this would be a journey filled with challenges.  Today, I am even more excited about our company's potential. There is much work to do and it will take time, but I am confident that we can build a brighter future for the Second Cup brand, for our valued franchisees, and for our shareholders."

Dividend

As Second Cup transforms towards a new era of growth in sales and profitability, the company is seeing the emergence of attractive opportunities to invest capital. Accordingly the company believes it is prudent to retain available cash resources for redeployment into investments that will maximize long-term growth in share value. Given this renewed focus on growth, the Board of Directors decided to discontinue the dividend payout.

FINANCIAL HIGHLIGHTS

The following table sets out selected IFRS and certain non-GAAP financial measures 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 28, 2014.

	13 weeks ended			26 weeks ended
(in thousands of Canadian dollars, except same café sales, number of cafés, per share amounts, and number of common shares.)	June 28, 2014	June 29, 2013		June 28, 2014	June 29, 2013
System sales of cafés^1	$45,829	$47,688		$89,759	$94,642
Same café sales^1	(5.0%)	(2.2%)		(5.9%)	(2.8%)
Number of cafés - end of period	357	362		357	362
Total revenue	$6,498	$6,636		$14,110	$12,882
Gross profit	$5,326	$5,680		$11,060	$10,959
Operating expenses	$4,107	$3,828		$9,056	$8,080
Restructuring charges	$1,607	-		$2,166	-
Impairment charges	-	$13,253		-	$13,253
Operating loss^1	($388)	($11,401)		($162)	($10,374)
Adjusted EBITDA^1	$1,516	$2,122		$2,457	$3,456
Net loss and comprehensive loss	($390)	($10,152)		($334)	($9,464)
Basic and diluted loss per share as reported	($0.04)	($1.03)		($0.03)	($0.96)
Adjusted basic and diluted earnings per share^1	$0.08	$0.14		$0.13	$0.21
Total assets - end of period	$74,434	$74,452		$74,434	$74,452
Number of common shares issued and outstanding - end of period	9,903,045	9,903,045		9,903,045	9,903,045

¹See the section "Definitions and discussion on certain non-GAAP financial measures" for further analysis.

OPERATIONAL REVIEW
(expressed in thousands of Canadian dollars unless otherwise indicated.)

Second quarter

System sales of cafés
System sales of cafés for the 13 weeks ended June 28, 2014 were $45,829 compared to $47,688 for the 13 weeks ended June 29, 2013, representing a decrease of $1,859 or 3.9%.  The decrease is attributable to decreased same café sales and to the marginally reduced store count. 

Same café sales
During the quarter, Second Cup same café sales declined by 5.0%, compared to a decline of 2.2% in the comparable quarter of 2013. The decrease in sales is predominantly due to lower customer counts.

Analysis of revenue

Total revenue for the quarter was $6,498 (2013 - $6,636) and consisted of royalty revenue, revenue from the sale of goods, and services and other revenue.

Royalty revenue for the quarter was $3,283 (2013 - $3,519).  The reduction in royalty revenue of $236 is primarily a result of lower café sales, and to a lesser extent, the mix of cafés. 

Quarterly revenue from the sale of goods, which consists of revenue from company-operated cafés and wholesale revenue was $1,533 (2013 - $1,328). The increase of $205 was due to the increased number of company-operated cafés and due to sales of Second Cup coffee in grocery channels. The latter revenue stream commenced in January 2014.

Services and other revenue for the quarter was $1,682 (2013 - $1,789).  The $107 decrease in services and other revenue was primarily due to reduced levels of new store openings and store ownership changes. The decrease was partially offset with increased licensing revenue from the sale of 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 wholesale channels, plus the cost of direct labour in the company-operated cafés.  Cost of goods sold was $1,172 (2013 - $956).  This increase is due to the higher number of company-operated cafés and the costs associated with wholesale coffee that did not exist in the prior year.

Operating expenses
Operating expenses include Coffee Central expenses and the overhead expenses of company-operated cafés. Total operating expenses for the quarter were $4,107 (2013 - $3,828).

Coffee Central
Coffee Central expenses for the quarter were $3,498 (2013 - $3,394). The $104 increase was mainly due to retail listing fees related to the launch of the new wholesale coffee sold in the grocery channel. 

Company-operated cafés
Company-operated café expenses for the quarter were $609 (2013 - $434).  The $175 increase is due to the larger number of company-operated cafés in comparison to the prior period.

Restructuring charges
Restructuring charges of $1,607 (2013 - $nil) were primarily related to severance costs.

Impairment charges
Impairment charges were $nil (2013 - $13,253). In the prior year, during the quarter ended June 29, 2013, the company recognized an impairment charge of $13,253 to its trademark assets. The impairment charge had no impact on the company's liquidity, cash flow, borrowing capability or operations.

Interest and financing
The company incurred interest and financing expenses of $100 (2013 - $95).  

Income tax recovery
Current income tax recovery of $138 (2013 - expense $415) and deferred income tax expense of $40 (2013 - recovery $1,759) were recorded in the quarter. Current income taxes decreased as a result of nil taxable income primarily driven by restructuring charges. The change in deferred income taxes was driven by the impairment charges in the year ago quarter.

Adjusted EBITDA
Adjusted EBITDA for the quarter was $1,516 (2013 - $2,122). The decrease of $606 in adjusted EBITDA was primarily due to reduced revenue, higher cost of goods sold, and higher operating expenses.

Net loss
The company's net loss for the quarter was $390 or $0.04 loss per share, compared to a loss of $10,152 or $1.03 loss per share in 2013.  The reduced loss of $9,762 or $0.99 per share was mainly due to the impairment charges discussed above.

A reconciliation of net loss to adjusted EBITDA is provided in the section "Definitions and discussion of certain non-GAAP financial measures".

Year to date

System sales of cafés
System sales of cafés for the 26 weeks ended June 28, 2014 were $89,759 compared to $94,642 for the 26 weeks ended June 29, 2013, representing a decrease of $4,883 or 5.1%.  The decrease is attributable to decreased same café sales and to the marginally smaller store network. 

Same café sales
For the year to date, there was a decline of 5.9% compared to a decline of 2.8% in the comparable period ended June 29, 2013. The nature of the decrease is consistent to what was discussed above in the quarter.

Analysis of revenue
Total revenue for the year to date was $14,110 (2013 - $12,882).

Royalty revenue for the year to date was $6,478 (2013 - $7,016).  The reduction in royalty revenue of $538 is primarily a result of lower café sales, and to a lesser extent, the mix of cafés.  

Revenue from the sale of goods was $4,322 (2013 - $2,617). The increase of $1,705 in revenue from the sale of goods was mainly due to sales of Second Cup coffee in grocery channels. The increase was also due to having an increased number of company-operated cafés.

Services and other revenue for the year to date was $3,310 (2013 - $3,249).  The $61 increase in services and other revenue was primarily due to higher co-ordination fees offset by lower revenues from store network activity as discussed above in the quarter. 

Cost of goods sold
Cost of goods sold for year to date was $3,050 (2013 - $1,923).  The increase is due to the product costs pertaining to wholesale coffee sold in the grocery channel and the larger number of company-operated cafés active during the period.

Operating expenses
Total operating expenses for the year to date were $9,056 (2013 - $8,080).

Coffee Central
Coffee Central expenses for the year to date were $8,090 (2013 - $7,176).  The company incurred retail listing fees of $1,050 in the period related as discussed above.  There were no listing fees incurred in the prior year to date period.

Company-operated cafés
Company-operated café expenses for the year to date were $966 (2013 - $904).  The increase is due to the larger number of company-operated cafés active during the period as discussed above

Restructuring charges
Restructuring charges of $2,166 (2013 - $nil) were primarily related to severance costs as discussed above in the quarter.

Impairment charges
Impairment charges were discussed above in the quarter.

Interest and financing
The company incurred interest and financing expenses of $256 (2013 - $172).  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 tax recovery
Current income tax recovery of $138 (2013 - expense $637) and deferred income taxes of $54 (2013 - recovery $1,719) were recorded in the year to date period. 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 impairment charges incurred in the prior year to date period as discussed above.

Adjusted EBITDA
Adjusted EBITDA for the year to date was $2,457 (2013 - $3,456). The decrease of $999 in adjusted EBITDA was primarily due to the retail listing fees as discussed above.

Net loss
The company's net loss for the year to date was $334 or $0.03 loss per share, compared to a loss of $9,464 or $0.96 loss per share in 2013. The reduced net loss of $9,130 or $0.93 per share was mainly due to the impairment charges incurred in the prior year to date period and by the margin realized in the current year to date period pertaining to the wholesaling of coffee in the grocery channel. This was offset by reduced revenue, restructuring charges, and retail listing fees incurred in the current year to date period as discussed above.

A reconciliation of net loss to adjusted EBITDA is provided in the section "Definitions and discussion of certain non-GAAP financial measures".

Café network

	13 weeks ended			26 weeks ended
	June 28, 2014	June 29, 2013		June 28, 2014	June 29, 2013
Number of cafés - beginning of period	357	361		356	360
Cafés opened	2	4		7	8
Cafés closed	(2)	(3)		(6)	(6)
Number of cafés - end of period	357	362		357	362
The company ended the quarter with 14 (2013 - ten) company-operated cafés.

SELECTED QUARTERLY INFORMATION

(in thousands of Canadian dollars, except number of cafés, same café sales, and per share amounts)	Q2 2014	Q1 2014	Q4 2013^2	Q3 2013
System sales of cafés^1	$45,829	$43,930	$51,898	$44,894
Same café sales^1	(5.0%)	(6.9%)	(4.3%)	(3.7%)
Number of cafés - end of period	357	357	356	351
Total revenue	$6,498	$7,612	$8,038	$6,268
Operating (loss) income^1	($388)	$226	$1,891	$1,361
Adjusted EBITDA^1	$1,516	$941	$2,868	$1,246
Net (loss) income for the period	($390)	$56	$1,177	$918
Basic/diluted (loss) earnings per share	($0.04)	$0.01	$0.12	$0.09
Dividends declared per share	-	$0.085	$0.085	$0.085
	Q2 2013	Q1 2013	Q4 2012^2	Q3 2012
System sales of cafés^1	$47,688	$46,954	$53,515	$46,389
Same café sales^1	(2.2%)	(3.3%)	(4.2%)	(2.8%)
Number of cafés - end of period	362	361	360	358
Total revenue	$6,636	$6,246	$7,785	$6,378
Operating (loss) income^1	($11,401)	$1,027	($12,988)	$1,133
Adjusted EBITDA^1	$2,122	$1,334	$3,027	$1,468
Net (loss) income for the period	($10,152)	$688	($12,024)	$746
Basic/diluted (loss) earnings per share	($1.03)	$0.07	($1.21)	$0.08
Dividends declared per share	$0.085	$0.085	$0.085	$0.15
^1See the section "Definitions and discussion on certain non-GAAP financial measures" for further analysis.
^2The company's fourth quarter system sales of cafés are higher than other quarters due to the seasonality of the business.

OUTLOOK

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

The company has completed a number of important steps in its transformation, including the downsizing and restructuring of Coffee Central, improving franchisee profitability, and assembling a new leadership team. The company believes the change in the franchise economic model will have a meaningful impact and will help strengthen franchisee trust and engagement, which will consequently spur future growth.

The company is developing the new Second Cup store of the future in downtown Toronto.  This will be a very different Second Cup from what exists today. There will be a re-invigorated brand identity with heightened standards of excellence.

In 2015, Second Cup intends to roll out a comprehensive loyalty program nationally.

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 change of the overall café network.

Changes in system sales of cafés result from the number of cafés and same café sales (as described below).  The primary factors influencing the number of cafés within the Second Cup café network include the availability of quality locations and the availability of qualified franchisees.

Same café sales
Same café sales represents the percentage change, on average, in sales at cafés 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 as an indicator of appeal to customers. 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 transaction size.

Operating income (loss)
Operating income (loss) represents revenue, less cost of goods sold, less operating expenses, less restructuring charges, 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 or recoveries.

EBITDA and Adjusted EBITDA
EBITDA represents earnings before interest, taxes, depreciation, and amortization.  As there is no generally accepted method of calculating EBITDA, this measure is not necessarily 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 company's business operations.  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.

A reconciliation of net loss to EBITDA and adjusted EBITDA is provided below:

		13 weeks ended				26 weeks ended
		June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Net loss	$	(390)	$	(10,152)	$	(334)	$	(9,464)
Interest and financing		100		95		256		172
Income tax recovery		(98)		(1,344)		(84)		(1,082)
Depreciation of property and equipment		196		173		391		356
Amortization of intangible assets		79		120		150		237
Loss (gain) on disposal of property and equipment		22		(23)		(88)		(16)
EBITDA		(91)		(11,131)		291		(9,797)
Impairment charges		-		13,253		-		13,253
Restructuring charges		1,607		-		2,166		-
Adjusted EBITDA	$	$1,516	$	$2,122	$	$2,457	$	$3,456

Adjusted basic and diluted earnings per share
Adjusted earnings per share represents earnings per share excluding any impairment charges, and restructuring charges.  Impairment charges 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.  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.

A reconciliation of net loss to adjusted basic and diluted earnings per share is provided below:

		13 weeks ended				26 weeks ended
		June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Net loss	$	(390)	$	(10,152)	$	(334)	$	(9,464)
Restructuring charges		1,607		-		2,166		-
Impairment charges		-		13,253		-		13,253
Tax effect of restructuring and impairment charges		(426)		(1,756)		(575)		(1,756)
Adjusted earnings		791		1,345		1,257		2,033
Weighted average number of shares issued and outstanding (unrounded)		9,903,045		9,903,045		9,903,045		9,903,045
Adjusted basic and diluted earnings per share	$	0.08	$	0.14	$	0.13	$	0.21

For the 13 and 26 weeks ended June 28, 2014, there were 500,000 outstanding share option awards (13 and 26 weeks ended June 29, 2013 - nil) that were not included in the determination of adjusted diluted earnings per share because they are non-dilutive for the periods presented.

About Second Cup®

Founded in 1975, The Second Cup Ltd. is a Canadian specialty coffee retailer operating more than 350 stores across the country. All of the approximately 4,000 Second Cup baristas are trained coffee experts who handcraft over 1 million coffee and tea beverages every week, and are committed to ensuring excellence in every cup and the very best customer experience possible. For more information, please visit www.secondcup.com or find the company on Facebook and Twitter.

SOURCE: The Second Cup Ltd.

Steve Boyack, Chief Financial Officer, [phone] or [email protected].