Second Cup Announces 2011 Results

Published In: Business, Financial, Ontario 
Friday, March 2, 2012 4:07 PM
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Second Cup Announces 2011 Results

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Second Cup Announces 2011 Results
PR Newswire
MISSISSAUGA, ON, March 2, 2012




MISSISSAUGA, ON, March 2, 2012 /PRNewswire/ - The Second Cup Ltd. ("Second Cup"
or the "Company") reported financial results today for the 13 weeks
ended December 31, 2011 (the "Quarter") and year ended December 31,
2011 (the "Full Year"). 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 2.8% in the Quarter and increased 1.8% for the
Full Year.


Same café sales increased 1.2% in the Quarter and decreased 0.1% for the
Full Year.


EBITDA of $3,647 for the Quarter, up 27% from $2,881 in the comparable
quarter a year ago.


Fourth quarter earnings per share $0.23 for the current year vs. $0.26
in the comparable quarter last year.


Earnings per share $1.34 for the current year vs. $0.94 last year.


Declared dividend of $0.15 per share.


Net growth of 10 cafés.



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 and CEO of Second Cup commented, "Given the
continued intense competition in our category, the growth in same café
sales of 1.2% in the fourth quarter and 1.8% system sales growth for
the year was a satisfactory result. I am pleased with the opening of 22
new cafés during the year, giving us net growth of 10 cafés to the
system. Earlier this year I announced that 80% of our Second Cup
coffees and 100% of our espresso beverages have been Rainforest
Alliance certified. We are proud of our continued leadership and
commitment to sustainability through third party certifications. With
our recent innovation in our tea offerings, I am proud to report that
all of our teas and tisanes have also received Rainforest Alliance
certification. This commitment to quality and sustainability in our
beverage products coupled with the commitment and passion of our
franchise partners supports Second Cup's unique position in the market
as The Coffee Company that Cares."


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 audited financial statements
of the Company for the 13 and 52 weeks ended December 31, 2011, which
are expected to be released on or before March 9, 2012.




(in thousands of Canadian dollars, except number of
cafés and per unit amounts)

 
 
 

13 weeks
ended
Dec. 31,
2011

 
 
 

Three months
ended
Dec. 31,
2010

 
 
 

52 weeks
ended
Dec. 31,
2011

 
 
 

12 months
ended
Dec. 31,
2010




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




System sales of cafés 1

 
 
 

$54,404

 
 
 

$52,921

 
 
 

$193,660

 
 
 

$190,197




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Number of cafés end of period

 
 
 

359

 
 
 

349

 
 
 

359

 
 
 

349




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Same café sales growth1

 
 
 

1.2%

 
 
 

(1.5%)

 
 
 

(0.1%)

 
 
 

0.0%




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Total revenue

 
 
 

$7,363

 
 
 

$6,490

 
 
 

$25,001

 
 
 

$25,171




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Gross profit

 
 
 

$6,603

 
 
 

$5,918

 
 
 

$22,778

 
 
 

$22,547




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Operating expenses

 
 
 

$3,393

 
 
 

$3,228

 
 
 

$13,176

 
 
 

$12,446




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Operating income

 
 
 

$3,210

 
 
 

$2,690

 
 
 

$9,602

 
 
 

$10,101



 

amortization of property and equipment and intangible assets

 
 
 

336

 
 
 

127

 
 
 

881

 
 
 

488



 

loss on disposal of property and equipment

 
 
 

20

 
 
 

64

 
 
 

36

 
 
 

92



 

impairment of property and equipment

 
 
 

81

 
 
 

-

 
 
 

81

 
 
 

-




Income before interest, tax, depreciation & amortization
("EBITDA")1

 
 
 

$3,647

 
 
 

$2,881

 
 
 

$10,600

 
 
 

$10,681




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Income before income taxes

 
 
 

$3,116

 
 
 

$2,583

 
 
 

$8,887

 
 
 

$9,160



 

Current income tax (charge) recovery

 
 
 

(894)

 
 
 

-

 
 
 

(1,527)

 
 
 

83



 

Deferred income tax (charge) recovery excluding Conversion

 
 
 

(106)

 
 
 

(28)

 
 
 

(1,002)

 
 
 

67



 

Deferred income tax recovery due to Conversion

 
 
 

236

 
 
 

-

 
 
 

6,943

 
 
 

-




Net income for the period

 
 
 

$2,352

 
 
 

$2,611

 
 
 

$13,301

 
 
 

$9,310



 

Deferred income tax recovery due to Conversion

 
 
 

(236)

 
 
 

-

 
 
 

(6,943)

 
 
 

-



 

Conversion costs

 
 
 

-

 
 
 

248

 
 
 

-

 
 
 

563




Adjusted net income1

 
 
 

$2,116

 
 
 

$2,859

 
 
 

$6,358

 
 
 

$9,873




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Basic and diluted earnings per share/unit as reported

 
 
 

$0.23

 
 
 

$0.26

 
 
 

$1.34

 
 
 

$0.94




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Adjusted basic and diluted earnings per share/unit1

 
 
 

$0.21

 
 
 

$0.26

 
 
 

$0.64

 
 
 

$1.00




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




Total assets

 
 
 

$105,554

 
 
 

$104,014

 
 
 

$105,554

 
 
 

$104,014




 

 
 
 

 

 
 
 

 

 
 
 

 

 
 
 

 




1 "System sales of cafés", "Same café 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.


Analysis of System Sales and Same Café Sales Growth
System sales for the 13 weeks ended December 31, 2011 were $54,404
compared to $52,921 for the three months ended December 31, 2010,
representing an increase of $1,483 or 2.8%. The total number of cafés
at the end of the Quarter was 359 compared to 349 cafés at the end of
the fourth quarter of 2010. Same café sales increased by 1.2% in the
Quarter.


System sales for the 52 weeks ended December 31, 2011 were $193,660,
compared to $190,197 for the twelve months ended December 31, 2010,
representing an increase of $3,463 or 1.8%, primarily due to the net
growth in the number of cafés from 349 to 359 at the end of 2011. For
the Full Year same café sales declined by 0.1%.


Fourth Quarter Analysis


Analysis of Revenues
Total revenues for the Quarter were $7,363 (2010 - $6,490) and consisted
of royalty revenue, revenue from sale of goods and services revenue.


Royalty revenue for the Quarter was $4,346 (2010 - $4,397). The
reduction in royalty revenue of $51 was mainly due to a reduction in
the effective royalty rate (excluding sales from Company-operated
cafés) from 8.4% in 2010 to 8.1% in the Quarter 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 $1,042, compared to $782 for the three months
ended December 31, 2010. The increase in revenue from the sale of goods
was mainly due to operating five Company-operated cafés in 2010
compared to nine for most of the fourth quarter in 2011. The Company
franchised two cafés late in the Quarter, ending the Quarter with seven
Company-operated cafés.


Services revenue for the Quarter was $1,975 (2010 - $1,311). 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 $664 increase in services revenue is mainly due to
an increase in purchasing coordination fees, initial franchise fees and
other ancillary fees.


Cost of Goods Sold
Cost of goods sold represents the product cost of goods sold in
corporate cafés and through retail and wholesale channels plus the cost
of direct labour to prepare and deliver the goods to the customers in
the cafés. Cost of goods sold as a percentage of revenue from the sale
of goods was 73% in the Quarter, unchanged from the three months ended
December 31, 2010.


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 $3,393 (2010 - $3,228), an increase of $165. Head
office expenses of Second Cup decreased by $124 (4.2%) from $2,981 in
2010 to $2,857. In 2010 the Fund expensed $248 in conversion costs
relating to the Conversion discussed above. The overhead expenses of
Company-operated cafés increased by $289 from $247 in 2010 to $536,
mainly due to operating five Company-operated cafés in 2010 compared to
nine for most of the fourth quarter in 2011.


Other Income and Expenses
The Company incurred interest expense of $177 (2010 - $180), and $18
(2010 - $48) in amortization of financing charges relating to the term
loan. The Company also recorded a non-cash credit of $86 (2010 - $118)
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 $20 (2010 - $10) primarily due to
interest earned from short-term highly liquid bank investments with
original maturities of three months or less and from notes receivable.


Income Taxes
Current income taxes of $894 (2010 - $nil) were recorded in the Quarter.
A deferred tax recovery of $130 (2010 - $28) was recorded in the
Quarter. As previously stated, Second Cup is subject to corporate
income tax as of January 1, 2011.


EBITDA
EBITDA for the Quarter was $3,647 (2010 - $2,881). The increase in
EBITDA was due to an increase in gross profit of $685 offset by an
increase in operating expenses of $165.


Net Income
The Company's net income for the Quarter was $2,352 or $0.23 per share,
compared to $2,611 or $0.26 per unit in 2010. The reduction in net
income of $259 was mainly due to income taxes of $764 in 2011 offset by
an increase in operating income.


Full Year


Analysis of Revenues
Revenues were $25,001 compared to $25,171 in 2010 and consisted of
royalty revenue, revenue from sale of goods and services revenue.


Royalty revenue was $15,631 (2010 - $15,874). The reduction in royalty
revenue of $243 was mainly due to a reduction in the effective royalty
rate (excluding sales from Company-operated cafés) from 8.5% in 2010 to
8.2% as a result of the revised royalty structure for new cafés as well
as café specific arrangements in place during the year.


Revenue from the sale of goods, which includes revenue from
Company-operated cafés and the sale of coffee through wholesale and
retail channels, was $3,006 compared to $3,489 for the 12 months ended
December 31, 2010. The reduction in revenue from the sale of goods was
mainly due to a reduction in the weighted average number of
Company-operated cafés from eight in 2010 to six for 2011. The Company
ended the year with seven (2010 - five) Company-operated cafés.


Services revenue was $6,364 (2010 - $5,808). 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 $556
increase in services revenue is due to an increase in initial franchise
fees of $285, increases in transfer fees of $128 and increases in other
ancillary fees of $405, a decrease in purchasing coordination fees of
$71 and a decrease in renewal fees of $197.


Cost of Goods Sold
Cost of goods sold as a percentage of revenue from the sale of goods was
74% compared to 75% for the twelve months ended December 31, 2010.


Operating Expenses
Operating expenses include the head office expenses of Second Cup and
overhead expenses of Company-operated cafés. Total operating expenses
amounted to $13,176 (2010 - $12,446), an increase of $730. Head office
expenses of Second Cup increased by $423 (3.7%) from $11,585 in 2010 to
$12,008. Overhead expenses of Company-operated cafés increased by $307
from $861 in 2010 to $1,168, mainly due to operating more
Company-operated cafés in 2011 compared to 2010.


Other Income and Expenses
The Company incurred interest expense of $717 (2010 - $718), and $72
(2010 - $185) in amortization of financing charges relating to the term
loan. The Company also recorded a non-cash credit of $29 (2010 - charge
of $33) 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 $67 (2010 - $26) primarily due
to interest earned from short-term, highly liquid bank investments with
original maturities of three months or less and from notes receivable.


Income Taxes
The income tax recovery of $4,414 (2010 - $150) consists of:



recovery of $6,943 due to the Conversion;


current tax expense of $1,527 (2010 - $83 recovery); and


deferred tax expense of $1,002 (2010 - $67 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 marginal 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 28.16% and resulted in a reduction in the
deferred tax liability of $6,943 and a corresponding non-cash credit to
income in the first quarter.


EBITDA
EBITDA was $10,600 (2010 - $10,681). The decline in EBITDA was due to an
increase in operating expenses of $730 offset by an increase in gross
profit of $231.


Net Income
The Company's net income was $13,301 or $1.34 per share, compared to
$9,310 or $0.94 per unit in 2010. Excluding the deferred income tax
recovery of $6,943 referred to above and Conversion costs of $563 in
2010, adjusted net income was $6,358 (2010 - $9,873). The reduction in
adjusted net income of $3,515 was mainly due to an increase in gross
profit of $231, an increase in operating expenses of $730 (including an
increase in severance costs of $426) as well as the fact that Second
Cup is now subject to corporate income tax, which resulted in a
deferred tax expense of $1,002, excluding the impact of the Conversion
(2010 - $563) and a current tax expense of $1,527 (2010 - $83
recovery).


Capital Expenditure
In January 2011, the board of directors approved capital expenditure of
$2,100 for the implementation of a new café technology platform, which
includes new point of sale systems ("POS") to be installed in
substantially all cafés. The implementation is expected to be completed
in early 2012 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.


Café Network
In order to accelerate the growth of new cafés, Second Cup introduced a
revised royalty structure for new cafés that opened in 2011. New cafés
that opened 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%.


During the Quarter, six cafés were renovated (2010 - six), there were
seven café openings (2010 - five) and seven café closures (2010 - one)
with 359 cafés open at December 31, 2011. For the Full Year, 25 cafés
(2010 - 33) were renovated; there were 22 café openings (2010 - 13) and
twelve café closures (2010 - eight).


Dividend


On March 1, 2012 the board of directors of Second Cup approved a
dividend of $0.15 per common share, payable on March 30, 2012 to
shareholders of record at the close of business on March 16, 2012. The
dividend will be considered an eligible dividend for income tax
purposes.


Annual General Meeting of Shareholders


The board of directors has set a record date of April 2, 2012 for the
Annual General Meeting of shareholders. The Annual General Meeting will
be held at 2:00 p.m. on Thursday, May 3, 2012 at the offices of
Stikeman Elliott LLP, 53rd Floor, 5300 Commerce Court West, 199 Bay
Street, Toronto, Ontario.


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 as The Coffee Company
that Cares.


In terms of 2012 network expansion Second Cup has targeted to open 30
new cafés. In addition, Second Cup expects to close approximately 15
cafés, the majority of which have sales below the average performance
of its cafés and to renovate approximately 20 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/unit". 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.sedar.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.








 
Friday, March 2, 2012 4:07 PM

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