RNS Number : 2717C
Coffee Republic PLC
29 August 2008
Coffee Republic PLC
29 August 2008
FOR IMMEDIATE RELEASE
29 August 2008
Coffee Republic PLC
PRELIMINARY RESULTS
Coffee Republic PLC, the independent coffeehouse franchisor and operator, announces its preliminary results for the year to 30 March
2008
Key Points:
* The number of total outlets has more than quadrupled, to 193 since the beginning of the 2008 financial year (26 march 2007) driven
by a large growth in concession outlets.
* The number of franchise units has doubled, to 53, in the same period. There are now 69 full service stores, including company
owned, in the UK.
* There are ten international stores now open, principally in the Middle East and Eastern Europe with roll out commitments for more
than 200 stores over the next 5 years.
* CEO to move to vice - chairman and maintains major shareholding as the business enters a phase of consolidation and refinement.
* Like for like sales for the total network for the quarter ended 29 June 2008 are 2.5% positive driven by a strong performance from
the franchise bar portfolio.
Preliminary Results- Financial
* Financial results show a net loss of �2.50 million (2007: �2.42million) with �0.7m of fixed asset impairments and loss on
disposal.
* Reported sales down 39.8% to �5.8 million following the conversion to franchising. Total network sales grew 9.0%, based on UK
franchises and Company stores.
* A further �620,000 repaid to the bank during the year.
* Operating losses stable at �1.6m with the company absorbing unexpected costs of circa �200,000 and taking a bad debt impairment of
�191,000.
Commenting Peter Breach, Chairman, said:
"This has been a year of significant change with the brand now represented across the UK and in twelve countries overseas.
We are still in a turnaround period and our costs have continued to outpace our income as we vigorously invest in the future of this
global brand.
I continue to be impressed by the strength of the brand and I am convinced that our focus on Company owned bars, UK and International
franchising and concessions is the most effective way to deliver profits to our shareholders in the medium term."
For further information:
Coffee Republic:
Peter Breach, Executive Chairman 020 7033 0600
James Muirhead, Finance Director 020 7033 0639
Landsbanki Securities (UK) Limited 020 7426 9000
Nominated Adviser & Broker
Jeff Keating
Simon Brown
Chairman's statement
For the 53 week period ended 30 March 2008
Introduction
In this first full year since Steven Bartlett and I took control, Coffee Republic has experienced a period of substantial change. The
identity of the brand has been strengthened and there are many more outlets bearing the Coffee Republic name. The visual appearance of the
stores has been re-modelled making them vibrant, youthful and readily recognisable. Both the drinks offer and the food offer have been
substantially enhanced with the introduction, inter alia, of Tea Republic, Chocolate Republic, shakes and smoothies.
This brand strength, evidenced by the number of approaches received for franchise agreements from both the United Kingdom and
Internationally, provided the opportunity for growth and it was decided to take good advantage from this; as a consequence the number of
outlets in Britain rose from 43 to 193 through franchises and licensing. The number of countries for which International Franchise
Agreements have been signed by the year-end was twelve; there were none signed two years ago.
The performance of Company owned stores, as shown in tables below, has, however, been disappointingly weak and this is now being
forcefully addressed. The original plan to reduce operating costs did not take place because of our decision to respond actively to the
opportunities for growth and this required staff and expertise. The ratio of head office staff member to outlets open has fallen
dramatically. To have evolved and grown slowly was not an option available to your Board.
It is disappointing, but hardly a surprise, that despite the major turnaround in the Company's business, operating results, excluding
non-trading items as required to be published under current IFRS accounting standards, shows only a small improvement. In my view, the
effect of these standards is that the financial implications of the much increased level of business transacted are not adequately
expressed. I comment on this later in my report.
Additionally, the deficit for the year includes several substantial items relating to unpredicted additional expenditure which is not
expected to recur. Having laid the groundwork for growth in the UK and overseas we have now turned to refining and improving our head office
procedures, store operations and brand standards in readiness for expansion.
As you are aware Steven Bartlett is stepping down as Chief Executive at this year's AGM. Steven will remain on the Board in a
non-executive capacity and I intend to propose his appointment as Vice-Chairman at that meeting. Coffee Republic will continue to benefit
from his expertise and his enthusiasm for the brand, whilst allowing him to dedicate more of his time to his businesses and family in
Plymouth. He will continue to hold his substantial shareholding. The Board wishes to recognise his achievements notably the business
turnaround whereby he established Coffee Republic as a major coffeehouse brand in the UK whilst also establishing the foundations for strong
international expansion.
Performance Overview
I have stated previously that a focus on expanding the brand is central to our strategy and I am pleased to say that we are fulfilling
that promise as shown by the recent expansion. The table below provides an overview of the level of activity undertaken.
NUMBER OF OUTLETS TRADING:
At 25 March 2007 At 30 March 2008 At 28 August 2008
Company Operated Bars 16 7 16
Franchise Operated Bars 25 53 53
Co-branded CR locations/"CR 2 109 114
Served Here"
Total CR locations in the UK 43 169 183
International Bars - 5 10
Total CR Locations Worldwide 43 174 193
Regional Development 6 10 4
Franchises
International Master 2 10 12
Franchises
Franchise Progress
Individual Bars
Twenty-eight bars were franchised in the year and nine subsequent to the year-end including both those bars previously owned and bars at
new locations. Post year-end we have repossessed a number of franchised bars including some where the franchisee has become incapacitated or
otherwise asked us to take over the running of the bar. It is our intention to re-franchise most of these bars and one has already been
resold. We anticipate exchanging contracts on a second bar shortly and there is considerable interest being shown in others.
Our pipeline of new franchise business remains strong notwithstanding that we have tightened both our franchisee and property selection
processes.
Regional Development Franchises ('RDFs')
The Company appointed a number of RDFs with the intention of accelerating the opening of new outlets and this has been successful in
some, but not all, areas. Post year-end the Board decided, by agreement with the RDFs concerned, to set aside a number of these
agreements and the settlements were funded by the issue of loan notes.
All the re-negotiated RDFs continue to, or plan to, operate Coffee Republic franchises. The RDF agreements with CR Direct Ltd have also
been terminated.
International Master Franchises ('IMFs')
Six IMFs were completed in the year with a further two after the year end. IMF agreements signed to date contain commitments to open
over 200 stores within the next five years and we expect this figure to be exceeded. Our experience has confirmed that the careful selection
of partners for these international agreements is important for long-term success and we are ensuring that our due diligence reflects the
opportunity and risk posed by these agreements.
There are ten international stores now operating and on current plans we expect this number to double over the next year.
Co-Branding/"Coffee Republic Served Here"
The Company has opened 74 Cineworld concessions and 32 Greene King concessions and a number of other trials are taking place.
Negotiations are under way with a number of large organisations and we anticipate that some of these will convert into contracts in the
coming months.
Final Results and Current Trading
Reported turnover has decreased to �5.8m (2007: �9.7m) caused in large part by the policy of converting company owned bars to
franchises; thus gross sales are replaced by royalty income. The two tables below show the total network sales, the gross sales less VAT,
and the performance throughout the year of company operated and franchised bars. Total network sales are also shown as the directors
consider that the combined sales give a better indication of the brand's overall sales performance. By this measure, the Group has recorded
an increase in total network sales of 9.0% to �14.9m because of the growth of franchised bars, including international and co-branded
locations. A significant portion of the increase was the result of twenty-two new franchised bars opening in new locations, bringing the
Group's total network of bars to sixty at the year-end. Three Company bars came to the end of their lease terms since my last report; one
prior to year end and two immediately post year end. These leases will not be renewed.
VALUE OF TOTAL NETWORK SALES:
Year Ended Year Ended
30 March 25 March
2008 2007
�'000 �'000
Company Operated Bars 4,378 9,121
Franchise Operated Bars 10,518 4,547
Total Network 14,897 13,668
An improvement in like for like sales in the second half of the year, driven by franchised bars, resulted in a full year like for like
performance of 0.8% positive. The relative performance of Company operated and franchise operated bars reaffirms our confidence in the
franchising strategy. A like for like sales growth of 2.5% for the first quarter of the new financial year is encouraging and is, once
again, driven by a strong contribution from the franchised bars.
Like for Like Network Sales
Full Year Ended Half Year Half Year Ended Full Year Ended Quarter Ended
25 March 2007 Ended 30 March 2008 30 March 2008 29 June 2008
23 September 2007
Company Operated Bars (5.2) % (7.8)% (11.7)% (10.3)% (11.0)%
Franchise Operated Bars 12.1% 10.9% 6.6% 8.6% 8.0%
Total Network 0.8% 4.2% 0.0% 1.7% 2.5%
NOTE: Bars are excluded for the relevant period of an external event that makes the data incomparable. For example, for the period that
a bar is closed for refurbishment, such as Richmond and Reading or where a bar has been repossessed as there is necessarily a period of
disturbance.
Now that the estate of company owned bars has grown, staff have been recruited with the skills necessary to drive sales at these
outlets. New marketing initiatives and sales related incentive schemes have been installed for our operational staff.
Operating losses, excluding non-trading items are unchanged at �1.6 million (2007: �1.6 million). Within the �1.6 million the Company
has borne a number of unexpected property costs; �100,000 relating to a lease assigned some years ago where the tenant failed and over
�100,000 relating to late billings of property and utility costs which were therefore higher than anticipated at the last year end. In
addition, a charge of �191,000 has been made for doubtful debts.
The published net loss for this year has remained substantially unaltered at �2.50 million (2007: �2.42 million). This includes an
impairment charge of �439,000 which arose from a review of the carrying value of company owned bars. Also included is a loss on disposal of
�272,000 caused mainly by the transfer of company owned bars to franchise. These adjustments to value do not, of course, have cash-flow
implications.
The Company's debt management procedures have been significantly improved and legal procedures are in place, and being exercised, where
franchisees have been in serious default on payments to us. Nonetheless, every effort is made to assist any franchisee who is experiencing
difficulty before legal action is considered.
The deficit this year is unquestionably a disappointment but, as mentioned, it has been a year of change and turnaround when unusual
costs and write-offs are to be expected. Perhaps I could observe that had the Company been a newly formed start-up business, these results
would not be unusual or come as a surprise. Also the earnings benefits from the significant quantity of new business written have not come
into full flow.
I should also point out that the royalty earnings from the significant quantity of new business written only commence when franchisees
stores are fitted-out and trading; hence the full-year effect of this business will only be received in subsequent years.
The board of directors have considered carefully the matter of the incentive scheme for Steven Bartlett and myself. You will remember
that I said in previous reports that we will receive no salary from the company and that we be rewarded by a share incentive Scheme. It has
been decided that the most practical way forward is for Steven Bartlett and myself to be included in the standard executive share option
schemes at a level to be decided by the remuneration committee. I can confirm that we have not received any salary from the company, nor is
it intended that we should do. Further we have decided that is it appropriate for us to waive remuneration for the financial year 2008.
Cash Flow and Financing
There was a cash inflow from operating activities of �363,000 (2006: �1.44 million outflow). This arises from upfront fees received from
selling franchises (see below) and a professional approach to controlling working capital.
.
In March 2007 the Company raised approximately �900,000 after expenses in a placing. During this year the Company raised approximately
�1.38 million after expenses in an open offer and a further placing. Post year-end a further �510,000 of cash was raised by the issue of a
convertible loan note. In addition to this �270,000 of the loan notes were issues and used as consideration to cancel the RDF agreements
mentioned above. In addition, the Company invested over �71,000, of a once-only cost, to acquire rights over the Coffee Republic brand name
and associated symbols and designs in all major countries of the world.
During the year the Group repaid �620,000 to their bankers.
Net Asset Position
Our net asset position at the year-end stood at a deficit of �1,819,000 (2007 deficit: �722,000). Clearly this is not satisfactory.
However, as I have pointed out previously this does not take into account the value of the brand which may be considered to have a very
substantial value, or the value of tax losses (Circa �9.8 million at the end of 2007).
A resolution will be put at the forthcoming Annual General Meeting for shareholders to address the issue of the deficit.
International Accounting Standards
I do not seek to criticise these standards but I should point out material factors affecting the accounts.
Under these standards, where term contracts are written such as, in the case of Coffee Republic with franchise agreements, then any sums
received at the start of the agreements are only allowed to be credited as earnings equally over the life of the agreement which may be
fifteen years although the funds received are contracted as non-returnable under any circumstances.
Correspondingly, the effect of the cash received appears on the balance sheet but a counterbalancing item shown as 'Deferred Revenue'
also appears on the balance sheet with the effect that the value of this receipt is only recognised as an asset over the life of the
franchise contract concerned.
At the balance sheet date the Company had received a total of �1,475,000 of fees in cash which remain to be recognised as income in
subsequent revenue accounts (2007:�785,000). Had this non-returnable income been allowed as a contribution to published revenue the loss on
core business would have been reported in broad terms, as �890,000 and the net asset position reported as a shortfall of �344,000.
Outlook
I sympathise with shareholders who may struggle to interpret the complexity of these accounts. After a phase of substantial change the
Company is now entering a period of consolidation and refinement of processes and procedures to provide the platform for the business to
benefit from the foundations laid over the past two years.
The business of the Company, being the provision through franchisees or directly, of coffee and related consumables in a friendly and
enjoyable environment does not appear from evidence to date to have suffered noticeably from the effects of the serious economic downturn in
the UK.
I have no doubt the Company has a brand with world-wide potential and that a sound base, with able staff, has been established from
which to grow the Company.
The task of turn-around has been more onerous than first anticipated but I believe the Company is now in a position to grow successfully
and I trust this will justify shareholder confidence in the future.
Peter Breach
Chairman
29 August 2008
Consolidated income statement
For the 53 week period ended 30 March 2008
Note 2008 2007
�'000 �'000
Revenue 5,849 9,719
Cost of sales (6,539) (10,731)
-------- --------
Gross loss (690) (1,012)
Administrative expenses (1,601) (1,213)
Operating loss excluding non-trading items (1,580) (1,604)
Impairment of property, plant & equipment (439) -
Loss on disposal of property, plant & equipment (272) (621)
Operating loss (2,291) (2,225)
Finance income - 14
Finance expense (206) (212)
-------- --------
Loss before tax (2,497) (2,423)
Tax expense - -
-------- --------
Loss for the period attributable to equity holders of (2,497) (2,423)
the parent
-------- --------
Earnings per share attributable to equity holders of
the parent:
Basic and diluted 2 (0.40)p (0.47)p
-------- --------
All amounts relate to continuing operations.
Consolidated balance sheet
As at 30 March 2008
2008 2007
�*000 �*000
Assets
Non-current
Intangibles 152 133
Property, plant and equipment 1,547 2,311
Prepaid operating lease expenses 264 322
******** ********
1,963 2,766
Current
Inventories 19 47
Prepaid operating lease expenses 321 551
Trade and other receivables 1,247 1,054
Cash and cash equivalents 9 25
Assets classified as held for sale 190 -
******** ********
1,786 1,677
******** ********
Total assets 3,749 4,443
******** ********
Equity
Equity attributable to equity holders of the parent
Share capital 626 566
Share premium reserve 7,014 5,696
Share option reserve 22 43
Retained losses (9,481) (7,027)
******** ********
Total equity (1,819) (722)
******** ********
Liabilities
Non-current
Trade and other payables 1,230 699
Loans and borrowings 902 1,527
Provisions and other liabilities 14 33
******** ********
2,146 2,259
Current
Trade and other payables 2,727 1,895
Loans and borrowings 674 938
Provisions and other liabilities 21 73
******** ********
3,422 2,906
******** ********
Total liabilities 5,568 5,165
******** ********
Total equity and liabilities 3,749 4,443
******** ********
Consolidated cash flow statement
For the 53 week period ended 30 March 2008
2008 2007
�'000 �'000
Cash flows from operating
activities
Loss for the period (2,497) (2,423)
attributable to equity holders
of the parent
Finance income - (14)
Finance expense 206 212
Loss on disposal of fixed 272 621
assets
Impairment of property, plant 439 -
and equipment
Depreciation of property, 454 585
plant and equipment
Non-cash share option charge 22 43
Amortisation of intangibles 60 58
and lease premiums
-------- --------
Operating loss before change (1,044) (918)
in working capital and
provisions
-------- --------
Movements in working capital
Decrease/(increase) in trade 87 (322)
and other receivables
Decrease in inventories 28 30
Increase/(decrease) in trade 1,363 (86)
and other payables
Decrease in provision (71) (147)
--------
--------
Net cash received/(used) in 363 (1,443)
operations
--------
--------
Cash flows from investing
activities
Finance income - 14
Payments for property, plant (628) (330)
and equipment
Proceeds from disposal of 90 707
property plant and equipment
Payments for intangible assets -
(71)
--------
--------
Net cash (used)/received from (609) 391
investing activities
--------
--------
Cash flows from financing
activities
Loan proceeds received 100 -
Repayment of secured loan (620) (200)
Proceeds from issue of 1,428 1,167
ordinary shares (gross)
Payment for share issue costs (50) (34)
Payments of capital element of (40) (10)
finance leases
Finance expense (206) (212)
--------
--------
Net cash received from 612 711
financing activities
--------
--------
Increase/(decrease) in cash 366 (341)
and cash equivalents in the
period
--------
--------
Net cash and cash equivalents (395) (54)
at the beginning of the period
--------
--------
Net cash and cash equivalents (29) (395)
at the end of the period
-------- --------
* Basis of preparation
The results, cashflows and balance sheets are extracted from the audited financial statements of Coffee Republic PLC and all of its
subsidiary undertakings made up to 30 March 2008.
The Company has historically prepared its accounts under UK Generally Accepted Accounting Practice ("UK GAAP"). However, for the 53 week
period ended 30 March 2008 it has prepared its financial statements in accordance with International Financial Reporting Standards ("IFRSs")
and its interpretations adopted by the International Accounting Standards Board ("IASB") and as endorsed for use by companies listed on an
EU regulated exchange
The directors consider that it is appropriate for the accounts to be prepared on a going concern basis. At 30 March 2008, the Group had
net liabilities of �1.8m and net current liabilities of �1.6m although since the year end the Group has raised �510,000 cash through the
issue of convertible loan Notes. The Group is dependent on the continued support of the Group's bank. Overdraft facilities were reviewed in
May 2008 and continue to be repayable on demand. The directors have prepared forecasts for the business which indicate the Group can
continue to meet its liabilities as they fall due. These forecasts assume that the rollout of the franchising programme continues in
accordance with the Group's plan. Although the Group has a significant number of potential franchisees in its pipeline, the pace of rollout
of the franchise programme is,by its nature , uncertain. A number of franchises have been terminated since the year end, in order to protect
the Group's best interests. The resale of these stores has begun. Other than this, the programme has been in line with the plan and in the opinion of the directors, it will continue to be so. Having
carefully reviewed all material factors, the directors consider the forecasts are soundly based and believe on this basis that the financial
facilities will continue to be available to the Group. The directors also wish to draw attention to the continued attraction of the brand in
the UK and overseas and as a co-brand partner in the UK.
2. Loss per ordinary share
The basic loss per ordinary share is based on losses after taxation of �2,497,000 (2006 - loss �2,423,000) and a weighted average number
of shares in issue of 623.5m (2007 - 517.6m). There was no difference between basic and diluted earnings per share in 2008 and 2007. Details
of share options which could potentially dilute basic earnings per share in the future, but which were not included in the calculation of
diluted earnings per share because they are antidilutive for the period presented are included in the Group's financial statements.
3. Post Balance Sheet Events
In May and July 2008, the Group issued �780,000 worth of convertible loan notes at par (being �1 per loan note).
�510,000 of this was cash while �270,000 were used as consideration to cancel RDF agreements as mentioned in the Chairman's report.
The loan notes will be convertible (in whole or in part) at 3p per ordinary share on any conversion date (being 31 March in 2009, 2010,
2011 and 2012).
On 11 April 2008, Mr Breach (Chairman) and Mr Bartlett (CEO, now retired) each provided a further �50,000 in interest free loans to
Coffee Republic PLC. As at 11 April 2008, and at 28 August 2008, the total amount of interest free loans provided by each director to Coffee
Republic was �100,000. The directors have provided assurance that the loans will not be recalled within the next 12 months.
4. Financial Information
The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 March 2008 or 25
March 2007, but is derived from those accounts. Statutory accounts for 2007 have been delivered to the Registrar of Companies and those for
2008 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were
unqualified, did not contain statements under the Companies Act 1985, s 237(2) or (3), but did include references to matters to which the
auditors drew attention by way of emphasis without qualifying their reports. The matter of emphasis refers to going concern, and refers the
readers of the 2008 accounts to the information contained within note 1 of this announcement.
Copies of the Annual Report and Accounts will be available at the Group's head office at Ground Floor 109-123 Clifton Street, London
EC2A 4LD and the registered office at 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ as soon as copies are posted to the shareholders.
In addition, copies of the Annual Report and Accounts will be available for download from our website address:
www.coffeerepublic .com
This information is provided by RNS
The company news service from the London Stock Exchange
END
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