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Press release from CNW Group

SECOND CUP ANNOUNCES FIRST QUARTER RESULTS

Friday, May 13, 2011

SECOND CUP ANNOUNCES FIRST QUARTER RESULTS08:16 EDT Friday, May 13, 2011MISSISSAUGA, ON, May 13 /CNW/ - The Second Cup Ltd. ("Second Cup" or the "Company") reported today financial results for the 13 weeks ended April 2, 2011 (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 - Basic and diluted net earnings per share of $0.78 for the quarter, including a non-cash deferred tax credit of $0.68, compared to $0.21 in the comparable quarter a year ago. - EBITDA of $1,672 for the quarter, down from $2,227 in the comparable quarter a year ago. - Same café sales were down 2.3% in the quarter. - Opened five new cafés. - Declared first quarterly dividend of $0.15 per share. >>On January 1, 2011 the Second Cup Income Fund (the "Fund") converted from an income trust structure to a public corporation (the "Conversion"). As a result of the Conversion, Second Cup is now subject to corporate income tax, whereas in the comparable quarter last year, the Fund was not subject to current income tax. Excluding the impact of the Conversion, the deferred tax charge for the first quarter of 2011 was $397 (2010 recovery of $113) and therefore, the net earnings for 2011 will not be directly comparable to the results of 2010.International Financial Reporting Standards ("IFRS") became effective on January 1, 2011, and therefore the Company's interim financial statements for the first quarter of 2011 will be its first financial statements prepared using IFRS. One of the key differences between Canadian GAAP and IFRS for the Fund in 2010 resulted in changes to the calculation of deferred tax, which resulted in an increase in the deferred tax liability at January 1, 2010 (the "IFRS transition date") of $7,495 and a corresponding decrease in equity. After the Conversion to a corporation on January 1, 2011, the deferred tax liability was reduced resulting in a non-cash credit to income of $6,756 in the quarter.Stacey Mowbray, President & CEO of Second Cup commented, "Same café sales were largely impacted by the long harsh winter which adversely affected street front locations, as well as, increased competitive activity. In response, we have introduced a number of initiatives, including the extension of the Tuesday $2.75 latte promotion, which has gained momentum over the past few months. As well, we have implemented pricing of approximately 2% in April, in response to the significant increases in commodity prices. Consistent with our growth strategy, we opened five new cafes in the first quarter to give us 352 cafes, an increase of 10 from the first quarter a year ago.During the first quarter we commenced the implementation of our new café technology platform, which includes new point of sale systems in the café. The implementation is expected to be completed in all cafés by the end of 2011 and will provide improved management information, improved customer service and will simplify administration.We are confident in the Second Cup brand. We have the unique position as the coffee company that cares - best exemplified recently by the announcement that 80% of our coffees and 100% of our espresso beverages are now RainForest Alliance certified. We are proud of Second Cup's leadership role in certification and our position as Canada's largest specialty coffee franchisor".FINANCIAL HIGHLIGHTSThe following table sets out selected IFRS financial information and other data of the Company and should be read in conjunction with the unaudited interim financial statements of the Company for the thirteen weeks ended April 2, 2011, which are expected to be released on or before June 15, 2011. << ------------------------------------------------------------------------- Thirteen Three (in thousands of dollars, except weeks ended months ended number of cafés and per unit April 2, March 31, amounts) 2011 2010 ------------------------------------------------------------------------- System sales of cafés(2) $45,593 $45,340 Number of cafés end of period(2) 352 342 Same café sales growth(2) (2.3%) 1.1% Total revenue $5,428 $5,929 Gross profit $5,004 $5,237 Operating expenses $3,473 $3,131 Operating income $1,531 $2,106 amortization of property, equipment and intangibles 141 121 ---------------------------- Earnings before interest, tax, depreciation & amortization ("EBITDA")(1),(2) $1,672 $2,227 ---------------------------- ---------------------------- Net income before income taxes $1,393 $1,915 deferred income tax (charge)/recovery, excl. Conversion (397) 113 deferred income tax recovery due to Conversion 6,756 - ---------------------------- Net income for the period $7,752 $2,028 deferred income tax recovery due to Conversion (6,756) - ---------------------------- Adjusted net income(2) $996 $2,028 ---------------------------- ---------------------------- Basic and diluted earnings per share / unit as reported $0.78 $0.21 ---------------------------- Adjusted basic and diluted earnings per share / unit(2) $0.10 $0.21 ---------------------------- (1) "EBITDA" is a non-IFRS measure and represents operating income before amortization of property and equipment and amortization of intangibles. (2) "System sales of cafés", "Same café sales growth", "Adjusted net income" and "Adjusted basic and diluted earnings per share / unit" are not recognized performance measures under IFRS and accordingly may not be comparable to similar computations as reported by other issuers. >>First Quarter AnalysisConversion to a CorporationAt the annual and special meeting of unitholders held on June 2, 2010, the unitholders approved the Conversion. The Conversion was completed on January 1, 2011, when unitholders of the Fund received, for each unit of the Fund held, one common share of Second Cup. Upon Conversion, the Fund was dissolved with its assets and liabilities assumed by Second Cup. The common shares of Second Cup commenced trading on the Toronto Stock Exchange on January 4, 2011 under the symbol "SCU".As a result of the Conversion, Second Cup will be subject to corporate income tax in 2011 and therefore, the results of 2011 will not be directly comparable to 2010.Change of accounting quarter endIn 2010 the Fund's quarter and year end followed the calendar method. In 2011 Second Cup implemented the method followed by many retail entities, such that each quarter will consist of 13 weeks and will end on the Saturday closest to the calendar quarter end. The effect of this change in the current quarter is that the first quarter of 2011 consisted of 92 days compared to 90 days in the comparable quarter in 2010.Analysis of System Sales and Same Café Sales GrowthSystem sales for the thirteen weeks ended April 2, 2011 were $45,593, compared to $45,340 for the three months ended March 31, 2010, representing an increase of $253 or 0.6%, which was mainly due to the two additional days in the first quarter of 2011. The total number of cafés at the end of the quarter was 352 compared to 342 cafés at the end of the first quarter of 2010, which positively impacted system sales, however, this was offset by a decline in same café sales of 2.3% for the first quarter of 2011.Analysis of RevenuesTotal revenues for the quarter were $5,428 (2010 - $5,929) and consisted of royalties, revenue from sale of goods and services revenue.Royalties for the quarter were $3,720 (2010 - $3,779). The reduction in royalty revenue of $59 was mainly due to a reduction in the effective royalty rate (excluding sales from Company operated cafés) from 8.5% in 2010 to 8.3% in the current quarter. The reduction in the effective royalty rate was partly due to the introduction of a new royalty structure for cafés that opened in 2011.Revenue from the sale of goods, which includes revenue from Company operated cafés and the sale of coffee through wholesale and retail channels, was $586 compared to $914 for the three months ended March 31, 2010. The reduction in revenue from the sale of goods was mainly due to a reduction in the number of Company operated cafés from six in 2010 to five at the end of the current quarter.Services revenue for the quarter was $1,122 (2010 - $1,236). Services revenue includes initial franchise fees, renewal fees, transfer fees earned on the sale of cafés from one franchise partner to another; and purchasing coordination fees. The $114 reduction in services revenue is mainly due to lower purchasing co-ordination fees.Income TaxesThe deferred tax recovery of $6,359 (2010 - $113 recovery) in the quarter consists of: << - recovery of $6,756 due to the Conversion; and - deferred tax expense of $397 (2010 - $113 recovery), excluding impact of the Conversion. >>Prior to the Conversion, 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, the Fund would have paid tax on distributions declared subsequent to January 1, 2011. As a result of this change, 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 entity ("SIFT") tax rates under Canadian GAAP. Under IFRS the taxation rate to apply to temporary differences of the Fund that were expected to reverse after 2010 was the highest personal 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 tax liability and a corresponding decrease to equity. As a Corporation, the deferred tax liability is measured using the corporate tax rate of 28.25% and resulted in a reduction in the deferred tax liability of $6,756 and a corresponding non-cash credit to income in the first quarter.EBITDAEBITDA for the quarter was $1,672 (2010 - $2,227). The decline in EBITDA was due to a decline in gross profit of $233, as well as, an increase in operating expenses of $342, mainly due to severance costs incurred in the quarter.Net IncomeThe Company's net income for the quarter was $7,752 or $0.78 per share, compared to $2,028 or $0.21 per unit in 2010. Excluding the deferred income tax recovery of $6,756 referred to above, net income for the quarter was $996 (2010 - $2,028). The reduction in adjusted net income of $1,032 was mainly due to a decline in gross profit of $233, an increase in operating expenses of $342 as well as the fact that Second Cup is now subject to corporate income tax, which resulted in a deferred tax expense of $397, excluding the impact of the Conversion for the quarter, compared to a deferred tax recovery of $113 in 2010.Café NetworkIn order to promote the opening of new cafés, Second Cup introduced a revised royalty structure for new cafés that will open in 2011. In terms of the new royalty structure, cafés that open in 2011 are permitted to pay a lower royalty rate of 3% in the first year, followed by a rate of 6% in the second year and then a rate of 9% in the third and following years.During the quarter, four cafés were renovated (2010 - five), there were five café openings (2010 - two) and two café closures (2010 - four). The Company ended the quarter with 352 cafés open as at April 2, 2011, compared to 342 cafés at the end of the comparable quarter in 2010.IFRSAs noted earlier, IFRS became effective January 1, 2011, and therefore, the Company's interim financial statements for the first quarter of 2011 will be its first financial statements prepared using IFRS. The Canadian Securities Administrators have extended the filing deadline by 30 days for a company's first IFRS interim financial reports to assist management in meeting their continuous disclosure requirements under IFRS and to provide directors and audit committees time to review and approve the first interim filing under IFRS. Therefore, the Company's unaudited interim financial statements and management discussion and analysis for the first quarter are expected to be available at www.sedar.com and on the Company's website at www.secondcup.com on or before June 15, 2011.Prior to the Conversion, the consolidated financial statements included the accounts of the Fund and its wholly owned subsidiaries Second Cup Trade-Marks Limited Partnership, Second Cup GP Trust, Second Cup GP Inc. and Second Cup. After the Conversion, the financial statements will only consist of Second Cup's financial statements.1st Quarter DividendOn April 28, 2011 the board of directors of Second Cup approved a quarterly dividend of $0.15 per common share for the quarter ended April 2, 2011, payable on May 30, 2011 to shareholders of record at the close of business on May 16, 2011.OUTLOOKThe 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 market place and a challenging consumer environment. For 2011, 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 as the Trusted Coffee Experts(TM).In terms of 2011 network expansion, Second Cup expects: (1) to open 25 to 30 new cafés; (2) to close five to 10 cafés, the majority of which have sales below the average performance of its cafés; and (3) approximately 30 cafés will be renovated.Forward Looking InformationCertain 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.About Second Cup(R)Founded in 1975, Second Cup(R) 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(TM) who sell 1,000,000 coffee and tea beverages every week. For more information, please visit www.secondcup.com.For further information: Robert Masson, Chief Financial Officer, (905) 362-1824 or investor@secondcup.com