Second Cup seeks turnaround as coffee wars heat up

Second Cup Ltd. had a $26.2 million loss in the third quarter, as the embattled specialty coffee company booked provisions for cafe closures and the impairment of its asset values.

On an adjusted basis, Second Cup's operations had a reduced profit of four cents per share — down about 64 per cent from last year's third quarter when adjusted earnings were 11 cents per share..

Second Cup also announced Monday that it plans to raise up to $5 million this month through a private placement of its stock, as part of a three-year plan to revitalize its network of cafes and its brand.

• Tim Hortons ramps up coffee chain wars
• McDonald's gives rivals a wake-up call by offering customers free coffee

At the end of the third quarter there were 349 Second Cup cafes, two less than a year earlier and eight fewer than at the beginning of the quarter.

Second Cup sales drop

Systemwide sales for the 13 weeks ended Sept. 27 fell about $1.3 million from a year earlier, dropping to $43.6 million from $44.9 million, but Second Cup's own revenue increased to nearly $6.7 million from just under $6.3 million.

Second Cup has been faced with increased competition in recent years from high-end coffee retailers such as Seattle-based Starbucks and major restaurant chains such as Tim Hortons and McDonald's.

“It’s going to be a very difficult challenge for Second Cup to grow in this market,” says Robert Carver, executive director, foodservices at the NPD Group.

It’s the fourth attempt at a turnaround at the company, he said, recommending the company improve beverage innovation, expand its menu and adopt new technology.

"Their key is going to be attracting consumers. They’ve got to focus on millennials, the younger generation," he told CBC News.

The Mississauga-based franchise company has been working for months to recover its position in the Canadian market, hiring Alix Box — who has held senior positions at Holt Renfrew and Starbucks — as its chief executive in February.

"Fiscal 2014 has been a year of transition," Box said in a statement Monday. "While much remains to be done, we are now fully engaged in the process of transformation to restore Second Cup to a place of leadership and greater profitability."

Following the end of the quarter, Second Cup announced its intention to acquire 17 cafes in Toronto locations from Debbie and Bob Riche, two long-time franchisees.

Designing 'cafe of the future'

The company says it plans to open a new "cafe of the future" in Toronto and a flagship cafe in Montreal in the coming weeks.

In a related announcement Monday, the company said it's aiming to grow annualized system sales by about $50 million to $234 million in 2017, turn same-store sales positive by late 2015, and have earnings exceeding 50 to 60 cents per share by 2017.

"Our plan for the future is ambitious," said Michael Bregman, Second Cup's chairman. "While there are no assurances, our Board of Directors is highly confident that Second Cup will be restored to a position of leadership with significant potential for value creation."

All the directors intend to participate in a stock iss

ue, and collectively acquire between 40 and 60 per cent of the $5 million worth of equity that Second Cup plans to offer.