Stock Name: SCU
Amount: CAD 0.15
Announcement Date: 04/11/2011
Record Date: 14/11/2011
Dividend Detail:
MISSISSAUGA, ON, Nov. 4, 2011 /CNW/ - The Second Cup Ltd. ("Second Cup"
or the "Company") reported today financial results for the third
quarter ended October 1, 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
System sales increased $786 or 1.7% in the quarter.
EBITDA of $2,590 for the quarter, down from $3,063 in the comparable
quarter a year ago.
Same caf sales decline of 0.1% in the quarter.
Declared third quarter dividend of $0.15 per share.
10 new cafs opened in the quarter.
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 and therefore, the results of 2011 will not be
directly comparable to 2010.
Stacey Mowbray, President & CEO of Second Cup commented, "Same caf
sales have remained relatively flat given the continued intense
competition in the category and the recent effects of the economy.In
terms of our caf development we are pleased that we have opened 15 new
cafs up to the end of the third quarter.We are also proud of our
continued leadership and commitment to sustainability through third
party certification. Earlier this year we announced that 80% of our
coffees and 100% of our espresso beverages are now Rainforest Alliance
certified.In October, we launched a new line of high quality, full
leaf teas in silken pyramid bags and are proud to say that all of our
teas and tisanes are also Rain Forest Alliance certified.This
commitment to quality and certification supports Second Cup's unique
position in the market as The Coffee Company that Cares."
FINANCIAL HIGHLIGHTS
The 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 13 and 39
weeks ended October 1, 2011, which are expected to be released on or
before November 4, 2011.
(in thousands of Canadian dollars, except number of cafs and per unit amounts) | 13 weeks ended Oct. 1, 2011 | Three months ended Sept. 30, 2010 | 39 weeks ended Oct. 1, 2011 | Nine months ended Sept. 30, 2010 | |
| | | | | |
System sales of cafs 1 | $46,369 | $45,583 | $139,256 | $137,276 | |
| | | | | |
Number of cafs end of period | 359 | 345 | 359 | 345 | |
| | | | | |
Same caf sales growth1 | (0.1%) | 0.3% | (0.6%) | 0.7% | |
| | | | | |
Total revenue | $6,138 | $6,687 | $17,638 | $18,681 | |
| | | | | |
Gross profit | $5,564 | $5,942 | $16,175 | $16,629 | |
| | | | | |
Operating expenses | $3,193 | $3,000 | $9,767 | $8,875 | |
| | | | | |
Operating income | $2,371 | $2,942 | $6,408 | $7,754 | |
| amortization of property and equipment and intangible assets | 219 | 121 | 545 | 361 |
Income before interest, tax, depreciation & amortization ("EBITDA")1 | $2,590 | $3,063 | $6,953 | $8,115 | |
| | | | | |
Income before income taxes | $2,095 | $2,642 | $5,771 | $6,577 | |
| Current income tax (charge) recovery | (511) | - | (633) | 83 |
| Deferred income tax (charge) recovery excluding Conversion | 32 | (37) | (896) | 39 |
| Deferred income tax recovery due to Conversion | 36 | - | 6,707 | - |
Net income for the period | $1,652 | $2,605 | $10,949 | $6,699 | |
| Deferred income tax recovery due to Conversion | (36) | - | (6,707) | - |
| Conversion costs | - | 3 | - | 315 |
Adjusted net income1 | $1,616 | $2,608 | $4,242 | $7,014 | |
| | | | | |
Basic and diluted earnings per share/unit as reported | $0.17 | $0.26 | $1.11 | $0.68 | |
| | | | | |
Adjusted basic and diluted earnings per share/unit1 | $0.16 | $0.26 | $0.43 | $0.71 | |
| | | | | |
| | | | | |
1 "System sales of cafs", "Same caf sales growth", "EBITDA", "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. | |||||
Change of accounting quarter end
In 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 third quarter of 2011
consisted of 91 days compared to 92 days in the comparable quarter in
2010. Year to date, 2011 and 2010 are comparable.
Analysis of System Sales and Same Caf Sales Growth
System sales for the 13 weeks ended October 1, 2011 were $46,369
compared to $45,583 for the three months ended September 30, 2010,
representing an increase of $786 or 1.7%. The total number of cafs at
the end of the quarter was 359 compared to 345 cafs at the end of the
third quarter of 2010. During the quarter the Company opened 10 new
cafs and closed one underperforming caf. Same caf sales declined by
0.1% in the quarter.
Year to date system sales for the 39 weeks ended October 1, 2011 were
$139,256, compared to $137,276 for the nine months ended September 30,
2010, representing an increase of $1,980 or 1.4%. The year to date same
caf sales decline was 0.6%. The Company closed five underperforming
cafs and opened 15 new cafs to date.
Third Quarter Analysis
Analysis of Revenues
Total revenues for the quarter were $6,138 (2010 - $6,687) and consisted
of royalty revenue, revenue from sale of goods and services revenue.
Royalty revenue for the quarter was $3,741 (2010 - $3,828). The
reduction in royalty revenue of $87 was mainly due to a reduction in
the effective royalty rate (excluding sales from Company-operated
cafs) from 8.6% in 2010 to 8.2% in the current quarter as a result of
the 3,6,9 royalty structure for new cafs as well as caf specific
arrangements in place during the period.
Revenue from the sale of goods, which includes revenue from
Company-operated cafs and the sale of coffee through wholesale and
retail channels, was $750, compared to $963 for the three months ended
September 30, 2010. The reduction in revenue from the sale of goods was
mainly due to operating eight Company-operated cafs in 2010 compared
to six for most of the third quarter in 2011 with two additional cafs
becoming corporate at the end of the quarter. The Company opened a new
caf at the end of the quarter which is located in Metro Toronto
Convention Centre.This caf will be used as a training site.
Services revenue for the quarter was $1,647 (2010 - $1,896). Services
revenue includes initial franchise fees, renewal fees, transfer fees
earned on the sale of cafs 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 $249 decrease in services revenue is mainly due to a
decrease in purchasing coordination fees and renewal fees offset by
increases in initial franchise fees, project management fees, transfer
fees and other ancillary fees.
Cost of Goods Sold
Cost of goods sold represents the product cost of goods sold in
corporate cafs and through retail and wholesale channels plus the cost
of direct labour to prepare and deliver the goods to the customers in
the cafs. Cost of goods sold as a percentage of revenue from the sale
of goods was 77% in the current quarter, unchanged from the three
months ended September 30, 2010.
Operating Expenses
In January 2011, the Board of Directors approved capital expenditure of
$2,100 for the implementation of a new caf technology platform, which
includes new point of sale systems ("POS") to be distributed to the
majority of cafs. The implementation is expected to be completed by
the end of 2011 and will provide improved management information,
improved customer service and will simplify administration. The
franchise partners will pay a monthly fee to cover the support and
maintenance of the system.
Operating expenses include the general overhead expenses of Second Cup,
overhead expenses of corporate cafs and amortization. Operating
expenses amounted to $3,193 (2010 - $3,000), an increase of $193.
Salaries, wages and benefits increased $135 due to an inflationary
increase in salaries and additional headcount. Head office overheads
increased due to an increase in operating costs relating to POS
discussed above. Amortization increased by $98 compared to 2010 due to
the purchase of POS hardware and software.
Other Income and Expenses
The Company incurred interest expense of $179 (2010 - $184), and $18
(2010 - $49) in amortization of financing charges relating to the term
loan. The Company also recorded a non-cash charge of $82 (2010 - $36)
for 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 $17 (2010 - $6) primarily due to
interest earned from short-term highly liquid bank investments with
original maturities of three months or less and from notes receivable.
The Company recorded a loss of $9 (2010 - $29) on the disposal of
property and equipment. In the third quarter of 2010, the Fund expensed
$3 in conversion costs relating to the Conversion discussed above.
Income Taxes
Current income taxes of $511 (2010 - $nil) were recorded in the quarter.
A deferred tax recovery of $68 (2010 - expense of $37) was recorded in
the quarter. As previously stated, Second Cup is now subject to
corporate income tax as of January 1, 2011.
EBITDA
EBITDA for the quarter was $2,590 (2010 - $3,063). The decline in EBITDA
was due to a decrease in gross profit of $378 and an increase in
operating expenses of $95 (excluding amortization) as discussed above.
Net Income
The Company's net income for the quarter was $1,652 or $0.17 per share,
compared to $2,605 or $0.26 per unit in 2010. The reduction in net
income of $953 was mainly due to income taxes of $443 in 2011 and a
decrease of $378 in gross profit.
Year to Date
Analysis of Revenues
Revenues were $17,638 compared to $18,681 in 2010 and consisted of
royalty revenue, revenue from sale of goods and services revenue.
Royalties were $11,285 (2010 - $11,477). The reduction in royalty
revenue of $192 was mainly due to a reduction in the effective royalty
rate (excluding sales from Company-operated cafs) from 8.5% in 2010 to
8.2% as a result of the 3,6,9 royalty structure for new cafs as well
as caf specific arrangements in place during the period.
Revenue from the sale of goods, which includes revenue from
Company-operated cafs and the sale of coffee through wholesale and
retail channels, was $1,964 compared to $2,707 for the nine months
ended September 30, 2010. The reduction in revenue from the sale of
goods was mainly due to a reduction in the number of Company-operated
cafs from eight in 2010 to six for most of 2011 until two cafs were
added at the end of the third quarter as discussed above.
Services revenue was $4,389 (2010 - $4,497). Services revenue includes
initial franchise fees, renewal fees, transfer fees earned on the sale
of cafs 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 $108
decrease in services revenue is due to a decrease in purchasing
coordination fees of $489 primarily as a result of a coffee pricing
adjustment in 2010, a decrease in renewal fees of $385 which
corresponds to the timing of the actual renewal date of the lease
offset by increases in initial franchise fees of $178, increases in
project management fees of $176, increases in transfer fees of $123 and
increases in other ancillary fees of $319.
Cost of Goods Sold
Cost of goods sold as a percentage of revenue from the sale of goods was
74% compared to 76% for the nine months ended September 30, 2010.
Operating Expenses
Operating expenses amounted to $9,767 (2010 - $8,875), an increase of
$892. Salaries, wages and benefits increased $558 primarily due to an
increase in severance costs of $511, an increase of $113 in salaries
and benefits due to an inflationary increase in salaries and additional
headcount offset by a reduction in long term incentive plan. Head
office overheads increased $168 due to increases in IT costs related to
POS and increases in recruitment fees. Occupancy and lease costs
decreased by $164 from 2010 due to a reduction in lease costs
associated with cafs previously closed but not yet sublet. Bad debt
expense increased by $123 compared to 2010. Amortization increased by
$184 compared to 2010 due to POS hardware and software as discussed
above.
Other Income and Expenses
The Company incurred interest expense of $540 (2010 - $538), and $54
(2010 - $137) in amortization of financing charges relating to the term
loan. The Company also recorded a non-cash charge of $57 (2010 - $151)
for 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 $47 (2010 - $16) primarily due to
interest earned from short-term, highly liquid bank investments with
original maturities of three months or less and from notes receivable.
The Company recorded a loss of $16 (2010 - $28) on the disposal of
equipment. In 2010, the Fund expensed $315 in Conversion costs during
the quarter relating to the Conversion discussed above.
Income Taxes
The income tax recovery of $5,178 (2010 - $122) consists of:
recovery of $6,707 due to the Conversion;
current tax expense of $633 (2010 - $83 recovery); and
deferred tax expense of $896 (2010 - $39 recovery), excluding the impact
of the Conversion.
Prior to the Conversion in 2011, the Fund was an unincorporated
open-ended trust and was not subject to income taxes 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 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 $6,707 and a corresponding non-cash credit to
income in the first quarter.
EBITDA
EBITDA was $6,953 (2010 - $8,115). The decline in EBITDA was due to a
decrease in gross profit of $454, as well as, an increase in operating
expenses of $708 (excluding amortization) as discussed above.
Net Income
The Company's net income was $10,949 or $1.11 per share, compared to
$6,699 or $0.68 per unit in 2010. Excluding the deferred income tax
recovery of $6,707 referred to above and Conversion costs of $315 in
2010, net income was $4,242 (2010 - $7,014). The reduction in adjusted
net income of $2,772 was mainly due to a decline in gross profit of
$454, an increase in operating expenses of $892 (including an increase
in severance costs of $511) as well as the fact that Second Cup is now
subject to corporate income tax, which resulted in a deferred tax
expense of $896 excluding the impact of the Conversion (2010 - $39
recovery) and a current tax expense of $633 (2010 - $83 recovery).
Caf Network
In order to promote the opening of new cafs, Second Cup introduced a
revised royalty structure for new cafs that will open in 2011. In
terms of the revised royalty structure, cafs that open in 2011 are
permitted to pay a royalty rate of 3% in the first year, a rate of 6%
in the second year and thereafter a rate of 9% ongoing.
During the quarter, six cafs were renovated (2010 - 13), there were 10
caf openings (2010 - three) and one caf closure (2010 - nil) with 359
cafs open at October 1, 2011. Year to date, 19 cafs (2010 - 27) were
renovated; there were 15 caf openings (2010 - eight) and five caf
closures (2010 - seven).
Third Quarter Dividend
On November 3, 2011 the Board of Directors of Second Cup approved a
dividend of $0.15 per common share for the quarter ended October 1,
2011, payable on November 30, 2011 to shareholders of record at the
close of business on November 16, 2011. 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
market place and a challenging consumer environment. For 2011,
management is targeting to regain growth with positive same caf sales,
and the addition of net new cafs. The focus will be on driving
traffic into cafs through external messaging, sampling and product
news. In caf, the focus will be on operational excellence, training
and promotion of the brand's quality credentials as the Trusted Coffee
Experts.
In terms of 2011 network expansion, Second Cup expects: (1) to open
approximately 25 new cafs; (2) to close 10 to 15 cafs, the majority
of which have sales below the average performance of its cafs; and (3)
approximately 25 cafs will be renovated.
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
SecondCup cafs, 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
Founded in 1975, Second Cup is Canada's largest specialty coffee
franchisor, operating more than 350 cafs 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.
For further information:
please contact Robert Masson, Chief Financial Officer, (905) 362-1824 or investor@secondcup.com.
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