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Second Cup says it has established a special committee to review its strategic options.

J.P. MOCZULSKI/The Globe and Mail

Struggling Second Cup Ltd. has formed a special committee to review its strategic options – a move that can lead to the sale of a company – while acknowledging the café chain won't be able to meet its three-year business goals.

Cara Operations Ltd., which owns Swiss Chalet, Harveys and other chains, is believed to have recently considered a Second Cup takeover, industry sources said. But a deal may be unlikely; Vaughan, Ont.-based Cara tends to buy restaurant chains that are in better shape than the current state of Second Cup, said Douglas Fisher of food services consultancy FGH International.

MTY Food Group Inc., whose banners include Thai Express and Country Style, is a more likely suitor because it tends to take over troubled chains, he said. But the Montreal-based restaurant operator may want to wait until Second Cup is an even cheaper acquisition, he said. MTY and Cara executives couldn't be reached.

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"Second Cup may have some challenges finding a buyer," added Jeff Dover, principal at food service consultancy fsStrategy.

Under new leadership since early 2014, Second Cup has pinned its revival on a more upscale café revamping funded mostly by franchisees, along with new food and coffee offerings, despite resistance from some of its restaurant operators.

And while Second Cup released improved third-quarter results, it still grapples with losses and falling sales at existing restaurants amid intense café competition and an ailing Alberta economy.

The company said it has withdrawn its three-year plan, which was released last year and was to have run until 2018.

The key assumption underlying Second Cup's goal of increasing system-wide sales to more than $250-million was adding 75 to 85 new cafés over the three years. But by the end of 2016, the company will have added only five new stores and does not anticipate 70 to 80 more by 2018, it said. "As a result, the company no longer expects to achieve its previously forecasted targets by 2018 and withdraws its previously disclosed forward-looking information."

The three-year plan called for annual same-store sales gains of between 5 per cent and 9.5 per cent. So far this year, those sales have fallen 1.2 per cent, while last year they dropped 1.4 per cent.

Second Cup has a $6-million credit facility that is due on Jan. 1, and, based on expected cash flows from operations, "the company will not generate funds from other sources as well as continue to comply with required bank covenants for the existing debt on a quarterly basis," it warned.

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As a result, Mississauga-based Second Cup is looking at various options to repay the debt, including talking with its current lender; finding other lenders or financing from significant shareholders; a private placement with some shareholders by year end; or "other strategic alternatives," it said.

Second Cup reported a third-quarter loss of $75,000 or 1 cent a share, compared with a $1.1-million loss or 9 cents a year earlier. Revenue of almost $7.7-million dropped from close to $9.3-million. Sales at existing stores, a key retail measure, slipped 1.2 per cent but would have gained 0.1 per cent if Alberta had been excluded.

Jean-Pierre Lacroix of consultancy Shikatani Lacroix said any firm looking for a coffee-chain acquisition would consider Second Cup, especially because it's "a bargain." He said another potential buyer is British-based chain Costa Coffee, which launched roughly 150 Costa Express self-serve coffee bars in Shell gas stations in Canada this year, with another 550 sites possible by 2020.

Mr. Fisher said a number of parties are "sniffing around" Second Cup, considering a takeover. "Someone is going to buy it and get rid of the Second Cup name or someone is going to buy it at a rock-bottom price and turn it around."

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