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<< Highlights - Same Café Sales growth of 0.9% in the quarter, the 14th consecutive quarter of positive same café sales growth since the inception of the Fund, and 1.1% year to date - Distributable cash per unit of $0.2902 for the quarter, compared to $0.2771 in 2007, an increase of 4.7% - Distributions declared in the quarter were $0.2820 per unit compared to $0.2730 in 2007, an increase of 3.3% - Basic earnings per unit were $0.2951 for the quarter, compared to a loss of $0.2236 for the comparable quarter a year ago - Basic earnings per unit, excluding non-cash movement in the fair value of the derivative interest rate swap, non-cash amortization and non-cash future income taxes were $0.2874 per unit for the quarter from $0.2869 for the comparable period in 2007 >>
"While modest, we are encouraged by the continuance of positive same café sales growth in what appears to be a challenging economic environment. This quarter represented the 14th consecutive quarter for the Fund and 19th consecutive quarter of same café sales growth for Second Cup," commented Stacey Mowbray, President of The Second Cup Ltd. ("Second Cup"). "We are confident that with the selective price increases we have implemented thus far and the strength of both our planned promotional programs and other sales building initiatives we will be able to continue this trend of positive sales growth for the balance of the year. As always, I would like to thank our franchise partners and café operators for their continued efforts and support in making Second Cup a Second Home for our guests."
Second Quarter Analysis
The source of revenue for the Fund is through its 100% ownership in Second Cup Trade-Marks Limited Partnership ("MarksLP") and prior to the reorganization on April 2, 2007, Second Cup Trade-Marks Inc. ("MarksCo"), which, in turn, receives royalty income from Second Cup under a Royalty and Licence Agreement (the "Agreement"). The earnings of MarksLP (including MarksCo for two days of the second quarter of 2007), are recorded on an equity accounted basis in the Fund's consolidated financial statements.
System sales for the second quarter were $49,130, compared to $48,149 for the comparable period in 2007, representing an increase of $981 or 2.0%. Year to date, System sales increased 2.5% from $94,146 to $96,463 in 2008. The increase was the result of same café sales growth in the quarter of 0.9% (1.1% year to date), and the net additional sales from the cafés added on the January 1, 2008 adjustment date, net of the sales lost due to café closures in the year. Same café sales were positively impacted by a continuing shift in the sales mix of Second Cup cafés to higher priced espresso-based beverages, food and merchandise offerings, which, in turn, resulted in higher average cheque amounts compared to 2007. Second Cup also implemented some minor price increases on its whole beans and ready-to-serve beverage category (i.e., bottled water, bottled juices, etc.) in early January, and in mid-March increased the prices of many of its espresso-based beverages nationwide as well as its brewed coffee offering in its Alberta market. Annualized, these price increases are expected to increase average transaction size by approximately 1.0% to 1.5%. Sales in the quarter were positively impacted by a shift in the Easter holiday to the first quarter in 2008 from the second quarter in 2007. Second Cup recognized a softening of café sales across its major markets, which management of Second Cup believes is similar to the trend being experienced in retail in general and reflective of the current Canadian economy. System sales for the year to date were also positively impacted by the additional day in February as a result of the leap year.
For the quarter, MarksLP earned total royalty revenue of $3,210 (2007 - $3,147), representing an increase of 2.0% compared to 2007. Total general and administrative expenses incurred by the Fund and MarksLP were $197 (2007 - $212). Net interest expense for the Fund and MarksLP amounted to $172 in the quarter (2007 - $150). The Fund also incurred a non-cash gain of $88 relating to the movement in the fair value of its derivative interest rate swap (2007 - $55) which fixes the interest rate on the term loan. Non-cash amortization of deferred financing charges amounted to $12 (2007 - $5, and $129 in MarksCo). As a result of the reorganization on April 2, 2007, current tax expense was $nil in the second quarter of 2008 and 2007. During the Period, the Fund did not have any future income tax expense. In 2007, as a result of the Reorganization, a net future income tax liability of $10,668 was reversed and resulted in an increase to the income of the equity accounted investment in MarksCo on April 2, 2007. In addition, on June 12, 2007 new tax legislation was enacted that changed the rules applicable to publicly traded income trusts in 2011. In 2011, income taxes payable will reduce net earnings of the Fund. Prior to June 12, 2007, the Fund's financial statements did not include provisions for Canadian income taxes. As the new trust tax legislation was substantively enacted, the Fund was required to give accounting recognition to these new rules. Future income taxes were recorded on the difference between the accounting values of balance sheet assets and liabilities and the tax cost basis of these assets and liabilities based on substantively enacted tax laws and rates for differences that are expected to reverse after January 1, 2011. As the Fund will not be liable for taxes until January 1, 2011, on June 12, 2007 the Fund recognized a non-cash future income tax expense amounting to $15,545 arising from those temporary tax differences expected to reverse after January 1, 2011.
Accordingly, net earnings of the Fund were $2,917 or $0.2951 per unit for the quarter, compared to a loss of $2,171, or a loss of $0.2236 per unit in the second quarter of 2007. Excluding the non-cash future income tax of $nil (2007 - a charge of $15,545 and a credit of $10,668 relating to the release of future income tax liability as a result of the reorganization); non-cash amortization of $12 (2007 - $134); and the non-cash gain on the movement in the fair value of the derivative interest rate swap of $88 (2007 - $55), net earnings for the quarter were $2,841 or $0.2874 per unit compared to $2,785 or $0.2869 per unit in 2007, an increase of 0.2% on a per unit basis. This increase in adjusted net earnings from $2,785 to $2,841 is due to an additional $63 in royalty revenues earned by MarksLP on increased sales of cafés in the Royalty Pool; a reduction of $15 in general and administrative expenses of the Fund and its wholly-owned subsidiaries compared to 2007; net of $22 in additional net interest expense relating primarily to the term loan.
On a year-to-date basis, net earnings of the Fund were $5,399 or $0.5462 per unit, compared to $100, or $0.0103 per unit in 2007. Excluding the non-cash future income tax charge of $71 (2007 - $4,877 in the Fund and $29 in MarksCo); reorganization costs of $nil (2007 - $301); non-cash amortization of $25 (2007 - $147); and the non-cash charge relating to the movements in the fair value of the interest rate swap of $83 (2007 - gain of $55), net earnings year to date were $5,578 or $0.5643 per unit compared to $5,399 or $0.5561 per unit in 2007, an increase of 1.5% on a per unit basis. This increase in adjusted net earnings from $5,399 to $5,578 is due to an additional $145 in royalty revenues earned by MarksLP on increased sales of cafés in the Royalty Pool, the elimination of current income tax expenses as a result of the reorganization which amounted to $56 in 2007, a reduction of $22 in general and administrative expenses of the Fund and its wholly owned subsidiaries compared to 2007, net of $44 in additional net interest expense relating primarily to the term loan.
Distributable cash is not an earnings measure recognized by generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures presented by other issuers. Distributable cash is based on cash flows from the combined operating activities of the Fund, MarksLP and MarksCo. Distributable cash for the quarter was $2,869, or $0.2902 per unit, as compared to $2,690, or $0.2771 per unit in the second quarter of 2007 representing an increase of 4.7% per unit. Non-cash working capital of the Fund for the quarter increased by $20 and non-cash working capital of MarksLP decreased by $47 compared to a decrease of $345 in the Fund and an increase of $441 in MarksLP for the comparable period. Changes in non-cash working capital are primarily due to the timing of payments. Excluding the impact of changes in non-cash working capital, distributable cash would have been $0.2874 per unit, compared to $0.2869 per unit for the second quarter of 2007, an increase of 0.2%.
On a year-to-date basis, distributable cash was $5,650, or $0.5716 per unit, as compared to $5,384, or $0.5546 per unit in 2007, representing an increase of 3.1% per unit. Non-cash working capital of the Fund year to date decreased by $57 and non-cash working capital of MarksLP decreased by $14 compared to a decrease of $608 in the Fund and an increase of $323 in MarksCo for the comparable period. Changes in non-cash working capital are primarily due to the timing of payments. Excluding the impact of changes in non-cash working capital and the reorganization costs of $nil (2007 - $301), distributable cash would have been $0.5643 per unit, compared to $0.5561 per unit for 2007, an increase of 1.5%.
July Distribution Announcement
The Fund also announced that its Board of Trustees approved a cash distribution of $0.0940 per unit for the month of July, 2008 to be paid on August 29, 2008 to Unitholders of record at the close of business on August 27, 2008.
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 Fund's "top line" structure means that its success and growth depend primarily on Second Cup's ability to maintain and increase the overall system sales of cafés in the Royalty Pool. Growth in overall system sales is dependent on same café sales growth and adding new cafés to the café network.
The second quarter of 2008 represented the 14th consecutive quarter of same café sales growth since the Fund's inception in December of 2004. Second Cup has now achieved 19 consecutive quarters of positive same café sales dating back to the fourth quarter of 2003. As a result of the sales performance of its cafés to date and the current retail and economic conditions across Canada, Second Cup has lowered its same café sales growth target to 1% to 2% for the 2008 fiscal year from its previous range of 2% to 4%.
Second Cup has a number of key initiatives in 2008 designed to build sales and increase traffic, which include continuing to expand the successful roll-out of both its regular and grilled sandwich program, introducing a new hot breakfast sandwich program and launching an exciting new media based advertising campaign promoting several of its premium priced low fat blender beverages.
On the development front, management of Second Cup has revised its forecast and is now calling for renovations of approximately 30 existing cafes and continues to expect to open 12 to 18 new cafes. The challenge, as it relates to the café network in 2008, will be the number of closures. Under normal circumstances Second Cup anticipates closures ranging from 10 to 14. An added dynamic this year revolves around the higher number of cafés that are at the end of their lease terms. The potential exists for landlords to redevelop these locations as they look to rejuvenate their properties and change their tenant portfolios, which in some cases may adversely affect the number of closures. Second Cup now anticipates closing between 18 and 22 locations in 2008. Distributable cash is not impacted by café closures due to the obligation that Second Cup has to make make-whole payments to the Fund, which offset the lost royalty revenue on cafés permanently closed during the year.
Financial Highlights
The following table sets out selected financial information and other data of the Fund and its wholly owned subsidiary, MarksLP (and MarksCo through April 2, 2007), and should be read in conjunction with the audited consolidated financial statements of the Fund.
<< ------------------------------------------------------------------------- (in thousands of dollars, Three months ended Six months ended except number of cafés and June 30, June 30, June 30, June 30, per unit amounts) 2008 2007 2008 2007 ------------------------------------------------------------------------- Number of cafés in Royalty Pool 357 351 357 351 Number of active cafés - end of period 350 348 350 348 Same café sales growth(3) 0.9% 4.4% 1.1% 5.2% System sales of cafés in the Royalty Pool(3) $49,130 $48,149 $96,463 $94,146 Royalty revenues earned by MarksLP and MarksCo(1) $3,210 $3,147 $6,291 $6,146 Earnings before reorganization expense, non-cash movement in fair value of derivative interest rate swap, non-cash amortization and non-cash future income taxes(2) $2,841 $2,785 $5,578 $5,399 Reorganization expense - - - $301 Amortization of deferred financing(1) $12 $134 $25 $147 Non-cash (gain) loss relating to movement in fair value of derivative interest rate swap(1) ($88) ($55) $83 ($55) Non-cash future income tax expense(1) - $15,545 $71 $15,574 Release of future income tax liability on reorganization - ($10,668) - ($10,668) Net earnings (loss) for the period $2,917 ($2,171) $5,399 $100 Earnings per unit excluding reorganization costs, non-cash movement in fair value of derivative interest rate swap, non-cash amortization and non-cash future income taxes and release of future income tax liability on reorganization(3) $0.2874 $0.2869 $0.5643 $0.5561 Basic earnings (loss) per unit $0.2951 ($0.2236) $0.5462 $0.0103 Diluted earnings (loss) per unit $0.2946 ($0.2236) $0.5452 $0.0103 Distributable cash per unit excluding reorganization costs and changes in non-cash working capital(3) $0.2874 $0.2869 $0.5643 $0.5561 Distributable cash per unit(3) $0.2902 $0.2771 $0.5716 $0.5546 Distributions declared per unit $0.2820 $0.2730 $0.5610 $0.5417 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) "Royalty revenues earned by MarksLP and MarksCo", "Amortization of deferred financing", "Non-cash (gain) loss relating to movement in fair value of derivative interest rate swap", and "Non-cash future income tax expense" represent the combined amounts of the consolidated Fund and its wholly owned subsidiary, MarksLP (and MarksCo for the first quarter of 2007), which are consolidated with the statements of Second Cup for reporting purposes in accordance with GAAP. The Fund accounts for the earnings of MarksLP and MarksCo on an equity accounted basis in its interim consolidated financial statements, in accordance with GAAP. (2) "Earnings before reorganization expense, non-cash movement in fair value of derivative interest rate swap, non-cash amortization and non-cash future income taxes" is a non-GAAP measure and represents the earnings, before reorganization costs, non-cash movement in fair value of derivative interest rate swap, non-cash amortization and non-cash future income taxes, of the consolidated Fund and its wholly owned subsidiary, MarksLP (and MarksCo for the first quarter of 2007), which are consolidated with the statements of Second Cup for reporting purposes in accordance with GAAP. (3) "Same café sales growth", "System sales of cafés in the Royalty Pool", "Earnings per unit excluding reorganization costs, non-cash movement in fair value of derivative interest rate swap, non-cash amortization and non-cash future income taxes and release of future income tax liability on reorganization", "Distributable cash per unit excluding reorganization costs and changes in non-cash working capital" and "Distributable cash per unit" are non-GAAP measures. >>
The unaudited interim consolidated financial statements of the Fund, together with its Management's Discussion and Analysis, are expected to be available at www.sedar.com and on the Fund's website at www.secondcupincomefund.com on or before August 11, 2008.
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 the Fund'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 the Fund
The Fund is an open-ended trust established under the laws of the Province of Ontario. It holds, through an indirect wholly-owned limited partnership, the Canadian trade-marks and other intellectual property and associated rights used by Second Cup in connection with the operation of Second Cup cafés in Canada. For more information on the Second Cup Royalty Income Fund please visit www.secondcupincomefund.com.
About Second Cup
Second Cup is Canada's largest specialty coffee café franchisor and second largest retailer of specialty coffee, as measured by number of cafés. For the ultimate on-line coffee experience, visit www.secondcup.com.
%SEDAR: 00021352E
SOURCE: Second Cup Royalty Income Fund
Stephen Devito, Chief Financial Officer, (905) 362-1824 or investor@secondcup.com
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