MONTREAL, Sept. 3 /CNW Telbec/ - Sales for the six months ended August 1, 2009 were virtually unchanged at $517,723,000 as compared with $517,820,000 for the six months ended August 2, 2008. Same store sales remained relatively stable, decreasing slightly by 1.6%. The continuing recession resulted in weaker sales due to consumers cutting back on discretionary spending. Rising unemployment rates in a number of key markets, most notably southern Ontario and Alberta and a cool summer throughout most of Canada, negatively impacted sales.
Operating earnings before depreciation and amortization (EBITDA(1)) for the period decreased 23.5% to $79,073,000 as compared with $103,319,000 last year. The Company's gross margin decreased in the first six months of fiscal 2010 primarily due to the impact of the decline of the Canadian dollar vis-ŕ-vis the US dollar. The average rate for a US dollar in the first six months of fiscal 2010 was $1.19 Canadian as compared to $1.01 Canadian in fiscal 2009.
Net earnings decreased 36.4% to $34,227,000 or $0.49 per share (diluted), as compared with $53,821,000 or $0.76 earnings per share (diluted) last year.
Sales for the second quarter ended August 1, 2009 decreased 1.2% to $286,071,000, as compared with $289,502,000 for the second quarter ended August 2, 2008. Same store sales for the comparable 13 weeks decreased 2.2%. Operating earnings before depreciation and amortization (EBITDA(1)) for the period decreased 16.2% to $53,613,000 as compared with $63,982,000 last year. Net earnings and diluted earnings per share decreased to $26,426,000 or $0.38 per share as compared to $35,385,000 or $0.50 per share for the same period last year.
Sales for the month of August (four weeks ended August 29, 2009), as a result of the continuing difficult retail environment, decreased 3.8% with same store sales decreasing 5.8%.
During the second quarter, the Company opened 2 new stores comprised of 1 RW & CO. and 1 Thyme Maternity; 5 stores were closed. Accordingly, at August 1, 2009, there were 971 stores in operation, consisting of 368 Reitmans, 164 Smart Set, 62 RW & CO., 76 Thyme Maternity, 16 Cassis, 162 Penningtons and 123 Addition Elle. We plan to open 14 new stores, close 12 stores and remodel 14 stores during the last half of the year.
At the Board of Directors meeting held on September 3, 2009, a quarterly cash dividend (constituting eligible dividends) of $0.18 per share on all outstanding Class A non-voting and Common shares of the Company was declared, payable October 29, 2009 to shareholders of record on October 15, 2009.
Financial statements are attached.
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Montreal, September 3, 2009
Jeremy H. Reitman, President
Tel: (514) 385-2630
Corporate Website: www.reitmans.ca
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All of the statements contained herein, other than statements of fact that are independently verifiable at the date hereof, are forward-looking statements. Such statements, based as they are on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown, many of which are beyond the Company's control. Such risks include but are not limited to: the impact of general economic conditions, general conditions in the retail industry, seasonality, weather and other risks included in public filings of the Company. Consequently, actual future results may differ materially from the anticipated results expressed in forward-looking statements. The reader should not place undue reliance on the forward-looking statements included herein. These statements speak only as of the date made and the Company is under no obligation and disavows any intention to update or revise such statements as a result of any event, circumstances or otherwise, except to the extent required under applicable securities law.
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(1) This release includes reference to certain Non-GAAP Financial
Measures such as operating earnings before depreciation and
amortization and EBITDA, which are defined as earnings before
interest, taxes, depreciation and amortization and investment income.
The Company believes such measures provide meaningful information on
the Company's performance and operating results. However, readers
should know that such Non-GAAP financial measures have no
standardized meaning as prescribed by GAAP and may not be comparable
to similar measures presented by other companies. Accordingly, these
should not be considered in isolation.
STATEMENTS OF EARNINGS (Unaudited)
For the six For the three
months ended months ended
(in thousands except per August 1, August 2, August 1, August 2,
share amounts) 2009 2008 2009 2008
Sales $ 517,723 $ 517,820 $ 286,071 $ 289,502
Cost of goods sold and
selling, general and
administrative expenses
(note 4) 438,650 414,501 232,458 225,520
----------- ----------- ----------- -----------
79,073 103,319 53,613 63,982
Depreciation and
amortization 30,159 28,782 15,513 14,817
----------- ----------- ----------- -----------
Operating earnings before
the undernoted 48,914 74,537 38,100 49,165
Investment income (note 9) 1,407 4,257 680 2,066
Interest on long-term debt 433 469 214 232
----------- ----------- ----------- -----------
Earnings before income
taxes 49,888 78,325 38,566 50,999
Income taxes:
Current 16,714 25,859 11,868 16,862
Future (1,053) (1,355) 272 (1,248)
----------- ----------- ----------- -----------
15,661 24,504 12,140 15,614
---------- ---------- ---------- -----------
Net earnings $ 34,227 $ 53,821 $ 26,426 $ 35,385
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share
(note 8):
Basic $ 0.49 $ 0.76 $ 0.38 $ 0.50
Diluted 0.49 0.76 0.38 0.50
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF CASH FLOWS (Unaudited)
For the six For the three
months ended months ended
August 1, August 2, August 1, August 2,
(in thousands) 2009 2008 2009 2008
CASH FLOWS (USED IN) FROM
OPERATING ACTIVITIES
Net earnings $ 34,227 $ 53,821 $ 26,426 $ 35,385
Adjustments for:
Depreciation and
amortization 30,159 28,782 15,513 14,817
Future income taxes (1,053) (1,355) 272 (1,248)
Stock-based
compensation 299 369 202 195
Amortization of
deferred lease
credits (2,537) (2,562) (1,259) (1,283)
Deferred lease credits 1,015 3,636 283 1,742
Pension contribution (300) (179) (172) (89)
Pension expense 900 820 450 410
Loss (gain) on sale of
marketable securities 61 - (8) -
Foreign exchange loss 857 225 839 480
Changes in non-cash
working capital items
relating to operations (24,236) (40,466) 27,006 4,447
----------- ----------- ----------- -----------
39,392 43,091 69,552 54,856
CASH FLOWS (USED IN) FROM
INVESTING ACTIVITIES
Purchases of marketable
securities (1,773) - (1,773) -
Proceeds on sale of
marketable securities 1,390 - 265 -
Additions to capital
assets (16,698) (26,883) (6,914) (13,809)
----------- ----------- ----------- -----------
(17,081) (26,883) (8,422) (13,809)
CASH FLOWS (USED IN) FROM
FINANCING ACTIVITIES
Dividends paid (24,857) (25,485) (12,307) (12,720)
Purchase of Class A
non-voting shares for
cancellation (25,435) (4,073) (13,261) (4,073)
Repayment of long-term
debt (600) (564) (302) (284)
Proceeds from issue of
share capital 852 178 652 54
----------- ----------- ----------- -----------
(50,040) (29,944) (25,218) (17,023)
FOREIGN EXCHANGE LOSS ON
CASH HELD IN FOREIGN
CURRENCY (857) (225) (839) (480)
----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (28,586) (13,961) 35,073 23,544
CASH AND CASH EQUIVALENTS,
BEGINNING OF THE PERIOD 214,054 214,301 150,395 176,796
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF THE PERIOD $ 185,468 $ 200,340 $ 185,468 $ 200,340
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental disclosure of cash flow information (note 9)
Cash and cash equivalents consist of cash balances with banks and
investments in short-term deposits.
The accompanying notes are an integral part of these financial
statements.
BALANCE SHEETS (Unaudited)
Audited
January
August 1, August 2, 31,
(in thousands) 2009 2008 2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 9) $ 185,468 $ 200,340 $ 214,054
Marketable securities (note 9) 37,648 30,543 32,818
Accounts receivable 2,742 3,536 2,689
Income taxes recoverable 7,647 45 3,826
Merchandise inventories 76,822 73,512 64,061
Prepaid expenses 13,459 26,812 11,402
Future income taxes 2,604 420 3,598
----------- ----------- -----------
Total Current Assets 326,390 335,208 332,448
CAPITAL ASSETS 234,113 246,297 249,891
GOODWILL 42,426 42,426 42,426
FUTURE INCOME TAXES 10,314 7,230 8,474
----------- ----------- -----------
$ 613,243 $ 631,161 $ 633,239
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued items $ 62,771 $ 63,848 $ 70,632
Current portion of long-term debt
(note 7) 1,259 1,182 1,220
----------- ----------- -----------
Total Current Liabilities 64,030 65,030 71,852
DEFERRED LEASE CREDITS 20,603 22,540 22,125
LONG-TERM DEBT (note 7) 12,092 13,351 12,731
FUTURE INCOME TAXES - - 74
ACCRUED PENSION LIABILITY 4,518 3,162 3,918
SHAREHOLDERS' EQUITY
Share capital 24,430 23,892 23,830
Contributed surplus 4,275 4,326 4,538
Retained earnings 487,110 499,469 502,361
Accumulated other comprehensive loss (3,815) (609) (8,190)
----------- ----------- -----------
483,295 498,860 494,171
----------- ----------- -----------
Total Shareholders' Equity 512,000 527,078 522,539
----------- ----------- -----------
$ 613,243 $ 631,161 $ 633,239
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the six For the three
months ended months ended
August 1, August 2, August 1, August 2,
(in thousands) 2009 2008 2009 2008
SHARE CAPITAL
Balance, beginning of the
period $ 23,830 $ 23,777 $ 23,807 $ 23,932
Cash consideration on
exercise of stock
options 852 178 652 54
Ascribed value credited
to share capital from
exercise of stock options 562 44 353 13
Cancellation of shares
pursuant to stock
repurchase program
(note 5) (814) (107) (382) (107)
----------- ----------- ----------- -----------
Balance, end of the period 24,430 23,892 24,430 23,892
----------- ----------- ----------- -----------
CONTRIBUTED SURPLUS
Balance, beginning of the
period 4,538 4,001 4,426 4,144
Stock-based compensation 299 369 202 195
Ascribed value credited
to share capital from
exercise of stock
options (562) (44) (353) (13)
----------- ----------- ----------- -----------
Balance, end of the period 4,275 4,326 4,275 4,326
----------- ----------- ----------- -----------
RETAINED EARNINGS
Balance, beginning of the
period 502,361 468,374 485,870 480,770
Adjustment to opening
retained earnings due
to adoption of new
accounting standard
(net of tax of $3,121) - 6,725 - -
Net earnings 34,227 53,821 26,426 35,385
Dividends (24,857) (25,485) (12,307) (12,720)
Premium on repurchase
of Class A non-voting
(note 5) (24,621) (3,966) (12,879) (3,966)
----------- ----------- ----------- -----------
Balance, end of the period 487,110 499,469 487,110 499,469
----------- ----------- ----------- -----------
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
Balance, beginning of
the period (8,190) (1,033) (7,683) (597)
Net unrealized gain
(loss) on available-
for-sale financial
assets arising during
the period (net of tax
of $125 for the six
months and $49 for the
three months ended
August 1, 2009; $66
for the six months
and $(4) for the three
months ended August 2,
2008) 4,322 424 3,875 (12)
Reclassification of
losses (gains) on
available-for-sale
financial assets to net
earnings (net of tax of
$8 for the six months
and $(1) for the three
months ended August 1,
2009) 53 - (7) -
----------- ----------- ----------- -----------
Balance, end of the
period(1) (3,815) (609) (3,815) (609)
----------- ----------- ----------- -----------
Total Shareholders'
Equity $ 512,000 $ 527,078 $ 512,000 $ 527,078
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
(1) Available-for-sale financial investments constitute the sole item in
accumulated other comprehensive income (loss).
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the six For the three
months ended months ended
August 1, August 2, August 1, August 2,
(in thousands) 2009 2008 2009 2008
Net earnings $ 34,227 $ 53,821 $ 26,426 $ 35,385
Other comprehensive
income:
Net unrealized gain
(loss) on available-
for-sale financial
assets arising during
the period (net of tax
of $125 for the six
months and $49 for the
three months ended
August 1, 2009; $66
for the six months and
$(4) for the three
months ended August 2,
2008) 4,322 424 3,875 (12)
Reclassification of
losses (gains) on
available-for-sale
financial assets to net
earnings (net of tax
of $8 for the six
months and $(1) for
the three months
ended August 1, 2009) 53 - (7) -
----------- ----------- ----------- -----------
4,375 424 3,868 (12)
----------- ----------- ----------- -----------
Comprehensive income $ 38,602 $ 54,245 $ 30,294 $ 35,373
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial
statements.
NOTES TO THE INTERIM FINANCIAL STATEMENTS (Unaudited)
(all amounts in thousands except per share amounts)
1. BASIS OF PRESENTATION
>>
These unaudited interim financial statements (the "financial statements") have been prepared in accordance with Canadian generally accepted accounting principles for interim financial information and include all normal and recurring entries that are necessary for a fair presentation of the statements. Accordingly, they do not include all of the information and footnotes required by Canadian generally accepted accounting principles for annual financial statements. These financial statements should be read in conjunction with the most recently prepared annual financial statements for the 52 week period ended January 31, 2009. The Company applied the same accounting policies in the preparation of the financial statements as disclosed in note 4 of its annual financial statements in the Company's fiscal 2009 Annual Report except as described below in note 2 - Adoption of New Accounting Standard.
The Company has wound up its wholly-owned subsidiaries effectively eliminating the preparation of consolidated financial statements. There was no impact in the comparative financial statements as at and for the periods ended August 2, 2008 and January 31, 2009.
The Company's business is seasonal and due to the geographical spread of the Company's stores and range of products it offers, the Company has experienced quarterly fluctuations in operating results. The business seasonality results in performance for the 26 weeks ended August 1, 2009, which is not necessarily indicative of performance for the balance of the year.
All amounts in the attached footnotes are unaudited unless specifically identified.
2. ADOPTION OF NEW ACCOUNTING STANDARD
In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section 3064, Goodwill and Intangible Assets, which replaces Section 3062, Goodwill and Other Intangible Assets, and amends Section 1000, Financial Statement Concepts. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and other intangible assets. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. This new standard is applicable to fiscal years beginning on or after October 1, 2008. The Company has determined that there is no impact of its adoption on its financial statements.
3. RECENT ACCOUNTING PRONOUNCEMENTS
The Canadian Accounting Standards Board has confirmed that the use of International Financial Reporting Standards ("IFRS") will be required for publicly accountable profit-oriented enterprises. IFRS will replace Canada's current GAAP for those enterprises. These new standards are applicable to fiscal years beginning on or after January 1, 2011. Companies will be required to provide comparative IFRS information for the previous fiscal year. The Company will implement this standard in its first quarter of fiscal year ending January 28, 2012 and is currently evaluating the impact of the transition to IFRS and will continue to invest in training and resources throughout the transition to facilitate a timely conversion.
4. INVENTORY
The cost of inventory recognized as an expense and included in cost of goods sold and selling, general and administrative expenses for the six months ended August 1, 2009 was $190,250 (August 2, 2008 - $164,948). During the quarter, the Company recorded $3,111 (August 2, 2008 - $3,170) of write-downs of inventory as a result of net realizable value being lower than cost and no inventory write-downs recognized in previous periods were reversed.
5. SHARE CAPITAL
The Company has authorized an unlimited number of Class A non-voting shares.
The following table summarizes Class A non-voting shares issued for each of the quarters listed:
<<
For the six For the three
months ended months ended Audited
August 1, August 2, August 1, August 2, January
2009 2008 2009 2008 31, 2009
Balance at
beginning of the
period 56,864 57,473 55,813 57,491 57,473
Shares issued
pursuant to
exercise of stock
options 108 30 61 12 46
Shares purchased
under issuer bid (2,038) (275) (940) (275) (655)
---------- ---------- ---------- ---------- ----------
Balance at end of
the period 54,934 57,228 54,934 57,228 56,864
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
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The Company has authorized an unlimited number of Common shares. At August 1, 2009, there were 13,440 common shares issued (August 2, 2008 - 13,440; January 31, 2009 - 13,440) with a value of $482 (August 2, 2008 - $482; January 31, 2009 - $482).
The Company received, in November 2008, approval from the Toronto Stock Exchange to proceed with a normal course issuer bid. Under the bid, the Company may purchase up to 2,861 Class A non-voting shares of the Company, representing 5% of the issued and outstanding Class A non-voting shares as at November 1, 2008. The bid commenced on November 28, 2008 and may continue to November 27, 2009. For the six months ended August 1, 2009, 2,038 Class A non-voting shares having a book value of $814 have been purchased for a total cash consideration of $25,435. The excess of the purchase price over book value of the shares in the amount of $24,621 was charged to retained earnings.
6. STOCK-BASED COMPENSATION
The Company has a share option plan as described in note 10 c) to the financial statements contained in the 2009 Annual Report. During the quarter ended August 1, 2009, a total of 1,920 options were granted and 12 options were cancelled. Following approval by the shareholders and the Toronto Stock Exchange in June 2009, the Company amended its stock option plan to provide that up to 10% of the Class A non-voting shares outstanding from time to time may be issued pursuant to the exercise of options granted under the plan.
Compensation cost related to stock option awards granted during the quarter under the fair value based approach was calculated using the following assumptions:
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Expected option life 5.9 years
Risk-free interest rate 3.12%
Expected stock price volatility 35.09%
Average dividend yield 4.97%
Weighted average fair value of options granted $3.17
7. LONG-TERM DEBT
Audited
August 1, August 2, January 31,
2009 2008 2009
Mortgage bearing interest at 6.40%,
payable in monthly instalments of
principal and interest of $172,
due November 2017 and secured by
the Company's distribution centre $ 13,351 $ 14,533 $ 13,951
Less current portion 1,259 1,182 1,220
----------- ----------- -----------
$ 12,092 $ 13,351 $ 12,731
----------- ----------- -----------
----------- ----------- -----------
8. EARNINGS PER SHARE
The number of shares used in the earnings per share calculation is as
follows:
For the six For the three
months ended months ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
Weighted average number
of shares per basic
earnings per share
calculations 69,492 70,871 68,860 70,825
Effect of dilutive options
outstanding 89 376 145 353
----------- ----------- ----------- -----------
Weighted average number
of shares per diluted
earnings per share
calculations 69,581 71,247 69,005 71,178
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
As at August 1, 2009, a total of 2,193 stock options were excluded from
the calculation of diluted earnings per share as these were deemed to be
anti-dilutive, because the exercise prices were greater than the average
market price of the shares during the quarter.
9. OTHER INFORMATION
a) Included in the determination of the Company's net earnings for the
three months and six months ended August 1, 2009 are foreign exchange
losses of $1,141 and $1,366 respectively (gains of $134 and $413 for
the three months and six months ended August 2, 2008 respectively).
b) Supplementary cash flow information:
Audited
August 1, August 2, January
2009 2008 31, 2009
Balance with banks
(overdraft) $ 1,350 $ (3,851) $ 1,069
Short-term deposits,
bearing interest
at 0.3% (August 2,
2008 - 3.0%;
January 31, 2009 -
1.0%) 184,118 204,191 212,985
---------- ---------- ----------
Cash and cash
equivalents $ 185,468 $ 200,340 $ 214,054
---------- ---------- ----------
---------- ---------- ----------
Marketable
securities:
Fair value $ 37,648 $ 30,543 $ 32,818
Cost 41,982 31,249 41,660
Non-cash
transactions:
Capital asset
additions
included in
accounts
payable and
accrued items $ 972 $ 1,562 $ 3,289
Ascribed value
credited to
share capital
from exercise
of stock options 562 44 63
For the six For the three
months ended months ended Audited
August 1, August 2, August 1, August 2, January
2009 2008 2009 2008 31, 2009
Cash paid during
the period for:
Income taxes $ 20,926 $ 45,584 $ 10,019 $ 15,217 $ 70,886
Interest 433 475 214 236 975
Investment income:
Available-for-
sale financial
assets:
Interest
income $ - $ 22 $ - $ 11 $ 42
Dividends 1,072 823 562 404 1,719
Realized (loss)
gain on
disposal (61) - 8 - (2,350)
Held-for-trading
financial
assets:
Interest income 396 3,412 110 1,651 5,940
---------- ---------- ---------- ---------- ----------
$ 1,407 $ 4,257 $ 680 $ 2,066 $ 5,351
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
10. FINANCIAL INSTRUMENTS
a) Fair Value Disclosure
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Fair value estimates are made at a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision.
The Company has determined that the carrying value of its short-term financial assets and liabilities approximates fair value at the period-end dates due to the short-term maturity of these instruments. The fair values of the marketable securities are based on published market prices at period-end.
The fair value of long-term debt is $12,258 (August 2, 2008 - $14,583; January 31, 2009 - $12,751) compared to its carrying value of $13,351 (August 2, 2008 - $14,533; January 31, 2009 - $13,951).
The fair value of the Company's long-term debt bearing interest at a fixed rate was calculated using the present value of future payments of principal and interest discounted at the current market rates of interest available to the Company for the same or similar debt instruments with the same remaining maturities.
b) Risk Management
Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk were provided at January 31, 2009 and there have been no significant changes in the Company's risk exposures in the first six months of fiscal 2010 with the exception of foreign currency risk as described below.
Foreign Currency Risk
The Company purchases a significant amount of its merchandise with US dollars. The Company uses a combination of foreign exchange option contracts and spot purchases to manage its foreign exchange exposure on cash flows related to these purchases. These option contracts generally do not exceed three months. A foreign exchange option contract represents an option to buy a foreign currency from a counterparty to meet its obligations. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally major Canadian financial institutions.
As at August 1, 2009, August 2, 2008 and January 31, 2009, there were no outstanding foreign exchange option contracts.
The Company has performed a sensitivity analysis on its US dollar denominated financial instruments, which consist principally of cash and cash equivalents of $14,650 and accounts payable of $1,741 to determine how a change in the US dollar exchange rate would impact net earnings. On August 1, 2009, a 10% rise or fall in the Canadian dollar against the US dollar, assuming that all other variables, in particular interest rates, had remained the same, would have resulted in a $954 decrease or increase, respectively, in the Company's net earnings for the six months ended August 1, 2009.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIODS ENDED AUGUST 1, 2009
>>
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of Reitmans (Canada) Limited ("Reitmans" or the "Company") should be read in conjunction with the unaudited financial statements for the periods ended August 1, 2009 and the audited financial statements of Reitmans for the fiscal year ended January 31, 2009 and the notes thereto which are available at www.sedar.com. This MD&A is dated September 3, 2009.
All financial information contained in this MD&A and Reitmans' financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), except for certain information referred to as Non-GAAP financial measures discussed below. All amounts in this report are in Canadian dollars, unless otherwise noted. The financial statements and this MD&A were reviewed by Reitmans' Audit Committee and were approved by its Board of Directors on September 3, 2009.
The Company has wound up its wholly-owned subsidiaries, eliminating the preparation of consolidated financial statements. There was no impact on the comparative financial statements as at and for the periods ended August 2, 2008 and January 31, 2009.
Additional information about Reitmans, including the Company's 2009 Annual Information Form, is available on the Company's website at www.reitmans.ca or on the SEDAR website at www.sedar.com.
FORWARD-LOOKING STATEMENTS
All of the statements contained herein, other than statements of fact that are independently verifiable at the date hereof, are forward-looking statements. Such statements, based as they are on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown, many of which are beyond the Company's control. Such risks include but are not limited to: the impact of general economic conditions, general conditions in the retail industry, seasonality, weather and other risks included in public filings of the Company. Consequently, actual future results may differ materially from the anticipated results expressed in forward-looking statements. The reader should not place undue reliance on the forward-looking statements included herein. These statements speak only as of the date made and the Company is under no obligation and disavows any intention to update or revise such statements as a result of any event, circumstances or otherwise, except to the extent required under applicable securities law.
NON-GAAP FINANCIAL MEASURES
This MD&A includes references to certain Non-GAAP financial measures such as operating earnings before depreciation and amortization ("EBITDA"), which is defined as earnings before interest, taxes, depreciation and amortization and investment income and adjusted net earnings and adjusted earnings per share, which are defined in the section entitled 'Summary of Quarterly Results'. The Company believes such measures provide meaningful information on the Company's performance and operating results. However, readers should know that such Non-GAAP financial measures have no standardized meaning as prescribed by GAAP and may not be comparable to similar measures presented by other companies. Accordingly, these should not be considered in isolation.
CORPORATE OVERVIEW
Reitmans is a Canadian ladies' wear specialty apparel retailer. The Company has seven banners: Reitmans, Smart Set, RW & CO., Thyme Maternity, Cassis, Penningtons and Addition Elle. Each banner is focused on a particular niche in the retail marketplace. Each banner has a distinct marketing program as well as a specific website thereby allowing the Company to continue to enhance its brands and strengthen customer loyalty. The Company has several competitors in each niche, including local, regional and national chains of specialty stores and department stores as well as foreign-based competitors. The Company's stores are located in malls, strip plazas, retail power centres and on major shopping streets across Canada. The Company continues to grow all areas of its business by investing in stores, technology and people. The Company's growth has been driven by continuing to offer Canadian consumers affordable fashions and accessories at the best value reflecting price and quality.
The Company offers e-commerce website shopping in its plus-size banners (Penningtons and Addition Elle). This online channel offers customers convenience, selection and ease of purchase, while enhancing customer loyalty and continuing to build the brands.
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OPERATING RESULTS FOR THE SIX MONTHS ENDED AUGUST 1, 2009 ("year to
date") AND COMPARISON TO OPERATING RESULTS FOR SIX MONTHS ENDED AUGUST 2,
2008 ("year to date fiscal 2009")
>>
Sales for the year to date remained virtually unchanged at $517,723,000 as compared with $517,820,000 for the year to date fiscal 2009. Same store sales decreased by 1.6%. Reduced consumer spending continued to impact sales as consumers cut back on discretionary spending. Statistics Canada reported in their July 2009 labour force survey that from October 2008 through to July 2009 total employment fell by 2.4% and during the same period the unemployment rate increased 2.3 percentage points to 8.6% nationally, the highest in 11 years. Rising unemployment rates in a number of key markets, most notably southern Ontario and Alberta, impacted sales as households reduced spending on apparel due to credit and personal liquidity constraints. Additionally, Environment Canada reported that the national average temperature for the spring of 2009 was below normal, ranking it as the eighteenth coolest since nationwide records began in 1948. Although British Columbia experienced record heat, the rest of Canada had less than favourable conditions resulting in consumers delaying and in some cases foregoing purchases of summer merchandise thereby further negatively impacting sales.
For the year to date, EBITDA decreased by $24,246,000 or 23.5% to $79,073,000 as compared with $103,319,000 for the year to date fiscal 2009. The Company's gross margin of 63.0% for the year to date decreased as compared to 68.0% in the year to date fiscal 2009 primarily due to the impact of the Canadian dollar vis-ŕ-vis the US dollar. As the Company purchases the majority of its merchandise with US dollars, a significant fluctuation of the Canadian dollar vis-ŕ-vis the US dollar impacts earnings. The decrease in gross margin was primarily attributable to the impact of higher cost of merchandise sold due to the weakening of the Canadian dollar during the fourth quarter of fiscal 2009 and into fiscal 2010. The average rate for a US dollar in the year to date was $1.19 Canadian as compared to $1.01 Canadian in the year to date fiscal 2009. Spot prices for $1.00 US for the year to date ranged between a high of $1.30 and a low of $1.08 Canadian ($1.03 and $0.97 respectively for the year to date fiscal 2009). Significant components of store operating costs that impacted EBITDA included rent and occupancy costs, which increased by 54 basis points as a percentage of sales, while store wage costs were unchanged as a percentage of sales.
Depreciation and amortization expense for the year to date was $30,159,000 compared to $28,782,000 for the year to date fiscal 2009. This increase reflects the increased new store construction and store renovation activities of the Company. As well, it includes $1,090,000 of write-offs as a result of closed and renovated stores, compared to $2,074,000 in the year to date fiscal 2009.
Investment income for the year to date decreased 66.9% to $1,407,000 as compared to $4,257,000 in the year to date fiscal 2009. Dividend income for the year to date was $1,072,000 as compared to $823,000 for the year to date fiscal 2009. There was $61,000 of net capital losses for the year to date, while there were no net capital gains or losses in the year to date fiscal 2009. Interest income decreased for the year to date to $396,000 as compared to $3,434,000 for the year to date fiscal 2009 due to lower cash balances and significantly lower rates of interest.
Interest expense on long-term debt decreased to $433,000 for the year to date from $469,000 in the year to date fiscal 2009. This decrease reflects the continued repayment of the mortgage on the Company's distribution centre.
Income tax expense for the year to date amounted to $15,661,000, for an effective tax rate of 31.4% as compared to $24,504,000 for the year to date fiscal 2009, for an effective tax rate of 31.3%.
Net earnings for the year to date decreased 36.4% to $34,227,000 ($0.49 diluted earnings per share) as compared with $53,821,000 ($0.76 diluted earnings per share) for the year to date fiscal 2009. The decrease was primarily attributable to the impact of higher cost of merchandise sold due to the weakening of the Canadian dollar during the fourth quarter of fiscal 2009 and into fiscal 2010.
The Company in its normal course of business makes long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. In the year to date, these merchandise purchases, which are payable in US dollars, exceeded $104,000,000 US (August 2, 2008 - $103,000,000 US). The Canadian dollar continued to experience volatility against the US dollar in the year to date. The Company considers a variety of strategies designed to fix the cost of its continuing US dollar long-term commitments, including foreign exchange option contracts with maturities not exceeding three months.
During the year to date, the Company opened 9 stores comprised of 2 Reitmans, 3 RW & CO., 1 Thyme Maternity, 1 Cassis and 2 Penningtons; 11 stores were closed. Accordingly, at August 1, 2009, there were 971 stores in operation, consisting of 368 Reitmans, 164 Smart Set, 62 RW & CO., 76 Thyme Maternity, 16 Cassis, 162 Penningtons and 123 Addition Elle, as compared with a total of 970 stores as at August 2, 2008.
Store closings take place for a variety of reasons as the viability of each store and its location is constantly monitored and assessed for continuing profitability. In most cases when a store is closed, merchandise at that location is sold off in the normal course of business and any unsold merchandise remaining at the closing date is generally transferred to other stores operating under the same banner for sale in the normal course of business.
<<
OPERATING RESULTS FOR THE THREE MONTHS ENDED AUGUST 1, 2009 ("second
quarter") AND COMPARISON TO OPERATING RESULTS FOR THREE MONTHS ENDED
AUGUST 2, 2008 ("second quarter of fiscal 2009")
>>
Sales for the second quarter decreased 1.2% to $286,071,000 as compared with $289,502,000 for the second quarter of fiscal 2009. Same store sales decreased by 2.2%. In the second quarter the Company continued to experience softer sales due to consumers cutting back on discretionary spending. Rising unemployment rates in a number of key markets, most notably southern Ontario and Alberta, impacted sales as households reduced spending on apparel due to credit and personal liquidity constraints.
For the second quarter, EBITDA decreased by $10,369,000 or 16.2% to $53,613,000 as compared with $63,982,000 for the second quarter of fiscal 2009. The Company's gross margin of 63.0% for the second quarter decreased as compared to 66.0% in the second quarter of fiscal 2009 primarily due to the impact of the Canadian dollar vis-ŕ-vis the US dollar. As the Company purchases the majority of its merchandise with US dollars, a significant fluctuation of the Canadian dollar vis-ŕ-vis the US dollar impacts earnings. The average rate for a US dollar in the second quarter was $1.13 Canadian as compared to $1.01 Canadian in the second quarter of fiscal 2009. Spot prices for $1.00 US for the second quarter ranged between a high of $1.18 and a low of $1.08 Canadian ($1.03 and $0.98 respectively for the second quarter of fiscal 2009). Significant components of store operating costs that impacted EBITDA included rent and occupancy costs, which increased by 61 basis points as a percentage of sales, while store wage costs were unchanged as a percentage of sales.
Depreciation and amortization expense for the second quarter was $15,513,000 compared to $14,817,000 for the second quarter of fiscal 2009. This increase reflects the increased new store construction and store renovation activities of the Company. As well, it includes $936,000 of write-offs as a result of closed and renovated stores, compared to $1,278,000 in the second quarter of fiscal 2009.
Investment income for the second quarter decreased 67.1% to $680,000 as compared to $2,066,000 in the second quarter of fiscal 2009. Dividend income for the second quarter was $562,000 as compared to $404,000 for the second quarter of fiscal 2009. There was $8,000 of net capital gains for the second quarter, while there were no net capital gains or losses in the second quarter of fiscal 2009. Interest income decreased for the second quarter to $110,000 as compared to $1,662,000 for the second quarter of fiscal 2009 due to lower cash balances and significantly lower rates of interest.
Interest expense on long-term debt decreased to $214,000 for the second quarter from $232,000 in the second quarter of fiscal 2009. This decrease reflects the continued repayment of the mortgage on the Company's distribution centre.
Income tax expense for the second quarter amounted to $12,140,000, for an effective tax rate of 31.5% as compared to $15,614,000 for the second quarter of fiscal 2009, for an effective tax rate of 30.6%.
Net earnings for the second quarter decreased 25.3% to $26,426,000 ($0.38 diluted earnings per share) as compared with $35,385,000 ($0.50 diluted earnings per share) for the second quarter of fiscal 2009. The decrease was primarily attributable to the impact of higher cost of merchandise sold due to the weakening of the Canadian dollar during the year to date.
The Company in its normal course of business makes long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. In the second quarter, these merchandise purchases, which are payable in US dollars, exceeded $42,000,000 US (August 2, 2008 - $44,000,000 US). The Canadian dollar continued to experience volatility against the US dollar into the second quarter. The Company considers a variety of strategies designed to fix the cost of its continuing US dollar long-term commitments, including foreign exchange option contracts with maturities not exceeding three months.
During the second quarter, the Company opened 2 stores comprised of 1 RW & CO. and 1 Thyme Maternity; 5 stores were closed.
SUMMARY OF QUARTERLY RESULTS
The table below sets forth selected financial data for the eight most recently completed quarters. This unaudited quarterly information has been prepared on the same basis as the annual financial statements. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
To measure the Company's performance from one period to the next without the variations caused by the impact of retroactive Québec income tax reassessments for the fiscal year ended February 2, 2008, the Company uses adjusted net earnings and adjusted earnings per share (basic and diluted), which are calculated as net earnings and earnings per share (basic and diluted) excluding this item. While the inclusion of this item is required by Canadian GAAP, the Company believes that the exclusion of this item allows for better comparability of its financial results and understanding of trends in business performance.
<<
-------------------------------------------------------------------------
(in thousands,
except per Adjusted
share Earnings per Earnings per
amounts) Share ("EPS") Share ("EPS")
Adjusted
Net Net
Sales Earnings Basic Diluted Earnings Basic Diluted
----------------------------------------------------------------
August 1,
2009 $ 286,071 $ 26,426 $ 0.38 $ 0.38 $ 26,426 $ 0.38 $ 0.38
May 2,
2009 231,652 7,801 0.11 0.11 7,801 0.11 0.11
January
31, 2009 261,801 8,981 0.13 0.13 8,981 0.13 0.13
November
1, 2008 271,240 23,004 0.33 0.32 23,004 0.33 0.32
August 2,
2008 289,502 35,385 0.50 0.50 35,385 0.50 0.50
May 3,
2008 228,318 18,436 0.26 0.26 18,436 0.26 0.26
February
2, 2008 269,618 37,047 0.52 0.52 28,506 0.40 0.40
November
3, 2007 265,465 27,394 0.39 0.38 27,869 0.40 0.39
-------------------------------------------------------------------------
>>
The retail business is seasonal and results of operations for any interim period are not necessarily indicative of the results of operations for the full fiscal year.
BALANCE SHEET
Cash and cash equivalents amounted to $185,468,000 or 7.4% lower than $200,340,000 last year. Marketable securities held by the Company consist primarily of preferred shares of Canadian public companies. At August 1, 2009, marketable securities (reported at fair value) amounted to $37,648,000 as compared with $30,543,000 last year, $7,105,000 higher. The Company's investment portfolio is subject to stock market volatility. The Company is highly liquid with its cash and cash equivalents being invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1.
Accounts receivable are $2,742,000 or $794,000 lower than last year. The Company's accounts receivable are essentially the credit card sales from the last few days of the fiscal quarter. Income taxes recoverable are $7,647,000 as compared to $45,000 last year, primarily due to instalments paid in excess of the estimated current tax liability. Merchandise inventories this year were $76,822,000 or $3,310,000 higher than last year, due to the weakened Canadian dollar, vis-ŕ-vis the US dollar, for purchases remaining in inventory at the end of the quarter. Prepaid expenses are $13,353,000 lower than last year, principally due to the timing of August 2009 rent payments.
The Company invested $16,698,000 in additions to capital assets in the year to date compared to $26,883,000 last year. This included $15,817,000 (August 2, 2008 - $23,520,000) in new store construction and existing store renovation costs and $881,000 (August 2, 2008 - $3,363,000) to the Sauvé Street office and Henri-Bourassa Boulevard distribution centre. In the fiscal year ending January 30, 2010, the Company plans to invest approximately $30,000,000 in capital expenditures related to new stores and renovations.
Accounts payable and accrued items are $62,771,000, or $1,077,000 lower than last year. The Company's accounts payable consist largely of trade payables and liabilities for unredeemed gift cards.
The Company maintains a defined benefit pension plan ("plan"). An actuarial valuation was performed as at December 31, 2007 and was updated to January 31, 2009 to determine the estimated liability the Company incurred with respect to the provisions of the plan. The Company also sponsors a Supplemental Executive Retirement Plan ("SERP") for certain senior executives. The SERP is unfunded and when the obligation arises to make any payment called for under the SERP (e.g. when an eligible plan member retires and begins receiving payments under the SERP), the payments reduce the accrual amount as the payments are actually made. An amount of $900,000 (August 2, 2008 - $820,000) was expensed in the year to date with respect to both plans.
<<
COMPARISON OF FINANCIAL POSITION AS AT AUGUST 1, 2009 WITH THE FINANCIAL
POSITION AS AT JANUARY 31, 2009
>>
Cash and cash equivalents amounted to $185,468,000 or 13.4% lower than $214,054,000 as at January 31, 2009. The reduction in cash of $28,586,000 was mainly attributable to $25,435,000 of cash that was used to purchase Class A non-voting shares for cancellation in the first six months of fiscal 2010. Marketable securities held by the Company consist primarily of preferred shares of Canadian public companies. At August 1, 2009, marketable securities (reported at fair value) amounted to $37,648,000 as compared with $32,818,000 as at January 31, 2009. The Company's investment portfolio is subject to stock market volatility. However, due to market improvement since January 31, 2009, the Company's investment portfolio has recovered by approximately 14%. The Company is highly liquid with its cash and cash equivalents being invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1. Accounts receivable are $2,742,000 or $53,000 higher than as at January 31, 2009. The Company's accounts receivable are essentially the credit card sales from the last few days of the fiscal quarter. Income taxes recoverable are $7,647,000 as compared to $3,826,000 as at January 31, 2009, primarily due to instalments paid in excess of the estimated current tax liability. Merchandise inventories are $76,822,000 or $12,761,000 higher than as at January 31, 2009. This increase is primarily due to the build-up of inventory for the fall selling season in the second quarter coupled with the increased cost of merchandise purchases due to the weakened Canadian dollar.
Accounts payable and accrued items are $62,771,000, or $7,861,000 lower than as at January 31, 2009. The Company's accounts payable consist largely of trade payables and liabilities for unredeemed gift cards.
OPERATING RISK MANAGEMENT
Economic Environment
The prolonged economic recession continues to negatively impact the retail environment. Rising unemployment levels and consumer concern over erosion of their wealth due to declines in equity markets and house prices has impacted consumer discretionary spending, most notably apparel. Reduced access to credit, interest rates, personal debt levels and unemployment rates impact consumer spending and ultimately have a financial impact on the Company. The Company closely monitors economic conditions in order to react to consumer spending habits and constraints in developing both its short-term and long-term operating decisions. Additionally, despite the impact of reduced access to credit for many businesses, the Company is in a strong financial position with significant liquidity available and ample financial credit resources to draw upon as deemed necessary.
Competitive Environment
The apparel business in Canada is highly competitive with competitors including department stores, specialty apparel chains and independent retailers. There is no effective barrier to entry into the Canadian apparel retailing marketplace by any potential competitor, foreign or domestic, and in fact the Company has witnessed the arrival over the past few years of a number of foreign-based competitors now operating in virtually all of the Company's Canadian retail sectors. The Company believes that it is well positioned to compete with any competitors. The Company operates under seven banners and our product offerings are diversified as each banner is directed to and focused on a different niche in the Canadian women's apparel market. Our stores, located throughout Canada, offer affordable fashions to consumers. Additionally, Canadian women have a significant number of e-commerce shopping alternatives available to them on a global basis.
Seasonality
The Company is principally engaged in the sale of women's apparel through 971 leased retail outlets operating under seven banners located across Canada. The Company's business is seasonal and is also subject to a number of factors, which directly impact retail sales of apparel over which it has no control, namely fluctuations in weather patterns, swings in consumer confidence and buying habits and the potential of rapid changes in fashion preferences.
Distribution and Supply Chain
The Company depends on the efficient operation of its sole distribution centre, such that any significant disruption in the operation thereof (e.g. natural disaster, system failures, destruction or major damage by fire), could materially delay or impair its ability to replenish its stores on a timely basis causing a loss of future sales, which could have a significant effect on the Company's results of operations.
Information Technology
The Company depends on information systems to manage its operations, including a full range of retail, financial, merchandising and inventory control, planning, forecasting, reporting and distribution systems. The Company regularly invests to upgrade, enhance, maintain and replace these systems. Any significant disruptions in the performance of these systems could have a material adverse impact on the Company's operations and financial results.
Government Regulation
The Company is structured in a manner that management considers to be most effective to conduct its business in every Canadian province and territory. The Company is therefore subject to all manner of material and adverse changes that can take place in any one or more of these jurisdictions as they might impact income and sales, taxation, duties, quota impositions or re-impositions and other legislated or government regulated matters.
Merchandise Sourcing
Virtually all of the Company's merchandise is private label. In the first six months of fiscal 2010, no supplier represented more than 11% of the Company's purchases (in dollars and/or units) and there are a variety of alternative sources (both domestic and offshore) for virtually all of the Company's merchandise. The Company has good relationships with its suppliers and has no reason to believe that it is exposed to any material risk that would operate to prevent the Company from acquiring, distributing and/or selling merchandise on an ongoing basis.
FINANCIAL RISK MANAGEMENT
Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk were provided at January 31, 2009 and there have been no significant changes in the Company's risk exposures in the six months ended August 1, 2009 with the exception of foreign currency risk as described below.
Foreign Currency Risk
The Company purchases a significant amount of its merchandise with US dollars. The Company uses a combination of foreign exchange option contracts and spot purchases to manage its foreign exchange exposure on cash flows related to these purchases. These option contracts generally do not exceed three months. A foreign exchange option contract represents an option to buy a foreign currency from a counterparty to meet its obligations. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally major Canadian financial institutions. For the second quarter of fiscal 2010, the Company satisfied its US dollar requirements through spot rate purchases.
As at August 1, 2009, August 2, 2008 and January 31, 2009, there were no outstanding foreign exchange option contracts.
The Company has performed a sensitivity analysis on its US dollar denominated financial instruments, which consist principally of cash and cash equivalents of $14,650,000 and accounts payable of $1,741,000 to determine how a change in the US dollar exchange rate would impact net earnings. On August 1, 2009, a 10% rise or fall in the Canadian dollar against the US dollar, assuming that all other variables, in particular interest rates, had remained the same, would have resulted in a $954,000 decrease or increase, respectively, in the Company's net earnings for the six months ended August 1, 2009.
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES
During the year to date, a total of 2,037,400 Class A non-voting shares were purchased in the market under a normal course issuer bid for $25,435,000 and dividends of $24,857,000 were paid, both of which reduced shareholders' equity. Shareholders' equity at August 1, 2009 amounted to $512,000,000 or $7.49 per share as compared to $527,078,000 or $7.46 per share last year (January 31, 2009 - $522,539,000 or $7.43 per share). Despite the impact of the recession on the Canadian equity markets which resulted in a significant drop in the Toronto Stock Exchange composite index, the Company, by virtue of its holdings in cash and cash equivalents, has sustained minimal loss in value in its liquid assets. The Company continues to be in a strong financial position. The Company's principal sources of liquidity are its cash, cash equivalents and investments in marketable securities (reported at fair value) of $223,116,000 as compared with $230,883,000 last year (January 31, 2009 - $246,872,000). Cash is conservatively invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1. The Company closely monitors its risk with respect to short-term cash investments. The Company has borrowing and working capital credit facilities (unsecured) available of $125,000,000. As at August 1, 2009, $55,742,000 (August 2, 2008 - $62,018,000; January 31, 2009 - $61,759,000) of the operating line of credit was committed for documentary and standby letters of credit. These credit facilities are used principally for US dollar letters of credit to satisfy offshore third-party vendors, which require such backing before confirming purchase orders issued by the Company. The Company rarely uses such credit facilities for other purposes.
The Company has granted standby letters of credit, issued by highly-rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at August 1, 2009, the maximum potential liability under these guarantees was $7,809,000. The standby letters of credit mature at various dates during fiscal 2010. The Company has recorded no liability with respect to these guarantees, as the Company does not expect to make any payments for these items.
The Company is self-insured on a limited basis with respect to certain property risks and also purchases excess insurance coverage from financially stable third-party insurance companies. The Company maintains comprehensive internal security and loss prevention programs aimed at mitigating the financial impact of operational risks.
The Company continued repayment on its long-term debt, relating to the mortgage on the distribution centre, paying down $600,000 in the year to date. The Company paid dividends amounting to $24,857,000 in the year to date compared to $25,485,000 in the year to date fiscal 2009.
In the year to date, the Company invested $16,698,000 on new and renovated stores, the Sauvé Street office and Henri-Bourassa Boulevard distribution centre. In the fiscal year ending January 30, 2010, the Company plans to invest approximately $30,000,000 in capital expenditures related to new stores and renovations. These expenditures, together with the payment of cash dividends and the repayments related to the Company's bank credit facility and long-term debt obligations, are expected to be funded by the Company's existing financial resources and funds derived from its operations.
FINANCIAL COMMITMENTS
The following table sets forth the Company's financial commitments as at August 1, 2009:
<<
Payments Due by Period
------------------------------------------------------------
Contractual Within 2 to 4 5 years
Obligations Total 1 year years and over
------------------------------------------------------------
Operating
leases(1) $ 445,640,000 $ 97,174,000 $ 206,513,000 $ 141,953,000
Long-term debt 13,351,000 1,259,000 4,291,000 7,801,000
Interest on
long-term
debt 3,849,000 807,000 1,908,000 1,134,000
Other 18,407,000 4,341,000 9,176,000 4,890,000
------------------------------------------------------------
Total
contractual
obligations $ 481,247,000 $ 103,581,000 $ 221,888,000 $ 155,778,000
------------------------------------------------------------
------------------------------------------------------------
(1) Represents the minimum lease payments under long-term leases for
store locations and office space as at August 1, 2009.
>>
OFF-BALANCE SHEET ARRANGEMENTS
Derivative Financial Instruments
The Company in its normal course of business must make long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. Most of these purchases must be paid for in US dollars. The Company uses a variety of strategies, such as foreign exchange option contracts, designed to fix the cost of its continuing US dollar commitments. For the year to date, the Company satisfied its US dollar requirements through spot rate purchases.
A foreign exchange option contract represents an option to buy a foreign currency from a counterparty at a predetermined date and amount. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally Canadian chartered banks.
The Company does not use derivative financial instruments for speculative purposes. Foreign exchange option contracts are entered into with maturities not exceeding three months. As at August 1, 2009, August 2, 2008 and January 31, 2009, the Company had no outstanding foreign exchange option contracts.
Included in the determination of the Company's net earnings for the three months and six months ended August 1, 2009 are foreign exchange losses of $1,141,000 and $1,366,000 respectively (gains of $134,000 and $413,000 for the three months and six months ended August 2, 2008 respectively).
RELATED PARTY TRANSACTIONS
The Company leases two retail locations which are owned by a related party. The leases for such premises were entered into on commercial terms similar to those for leases entered into with third parties for similar premises. In the year to date, the rent expense under these leases was, in the aggregate, approximately $95,000 (August 2, 2008 - $95,000).
The Company incurred $232,000 in the year to date (August 2, 2008 - $162,000) with a firm connected to outside directors of the Company for fees in conjunction with general legal advice. The Company believes that such remuneration was based on normal terms for business transactions between unrelated parties.
These transactions are recorded at the amount of consideration paid, as established and agreed to by the related parties.
FINANCIAL INSTRUMENTS
The Company's significant financial instruments consist of cash and cash equivalents along with marketable securities. The Company uses its cash resources to fund ongoing store construction and renovations along with working capital needs. Financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company reduces its credit risks by investing available cash in bank bearer deposit notes and bank term deposits with major Canadian chartered banks. The Company closely monitors its risk with respect to short-term cash investments. Marketable securities consist primarily of preferred shares of Canadian public companies. The Company's investment portfolio is subject to stock market volatility and widespread declines in the stock market due to the economic recession resulted in reduction in the market value of these securities. However, due to market improvement since January 31, 2009, the Company's investment portfolio has recovered by approximately 14%. The Company is highly liquid with its cash and cash equivalents being invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1.
The volatility of the Canadian dollar impacts earnings and while the Company considers a variety of strategies, such as foreign exchange option contracts, designed to fix the cost of its continuing US dollar commitments, this unpredictability can result in exposure to risk.
CRITICAL ACCOUNTING ESTIMATES
Inventory Valuation
The Company uses the retail inventory method in arriving at cost. Merchandise inventories are valued at the lower of cost and net realizable value. Excess or slow moving items are identified and a provision is taken using management's best estimate. In addition, a provision for shrinkage and sales returns are also recorded using historical rates experienced. Given that inventory and cost of sales are significant components of the financial statements, any changes in assumptions and estimates could have a material impact on the Company's financial position and results of operations.
Stock-Based Compensation
The Company accounts for stock-based compensation and other stock-based payments using the fair value method. Stock options granted result in an expense over their vesting period based on their estimated fair values on the date of grant, determined using the Black-Scholes option pricing model. In computing the compensation cost related to stock option awards granted during the year under the fair value approach, various assumptions are used to determine the expected option life, risk-free interest rate, expected stock price volatility and average dividend yield. The use of different assumptions could result in a stock compensation expense that differs from that which the Company has recorded.
Pension
The Company maintains a contributory, defined benefit plan and sponsors a SERP. The costs of the defined benefit plan and SERP are determined periodically by independent actuaries. Pension expense is included in operations. Assumptions used in developing the net pension expense and projected benefit obligation include a discount rate, rate of increase in salary levels and expected long-term rate of return on plan assets. Given the recent performance in the equity markets in North America, the Company reduced the expected long-term rate of return on plan assets from 7.5% to 7.0%. The use of different assumptions could result in a pension expense that differs from that which the Company has recorded. The defined benefit plan is fully funded and solvent and the SERP is an unfunded pay as you go plan.
Goodwill
Goodwill is not amortized but rather is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the Company determines in the future that impairment has occurred, the Company would be required to write off the impaired portion of goodwill.
Gift Cards
Gift cards sold are recorded as a liability and revenue is recognized when the gift card is redeemed. The Company, for each reporting period, reviews the gift card liability and assesses its adequacy. In its review, the Company estimates expected usages and evaluates specific trends and patterns, which can result in an adjustment to the liability for unredeemed gift cards.
ADOPTION OF NEW ACCOUNTING STANDARD
In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section 3064, Goodwill and Intangible Assets, which replaces Section 3062, Goodwill and Other Intangible Assets, and amends Section 1000, Financial Statement Concepts. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and other intangible assets. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. This new standard is applicable to fiscal years beginning on or after October 1, 2008. The Company has evaluated the new section and determined that there is no impact of its adoption on its financial statements.
CONVERGENCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS
In February 2008, the Canadian Accounting Standards Board confirmed that publicly accountable enterprises will be required to adopt International Financial Reporting Standards ("IFRS") for interim and annual reporting purposes, beginning on or after January 1, 2011. The Company will be required to begin reporting under IFRS for the quarter ending April 30, 2011 and will be required to prepare an opening balance sheet and provide information that conforms to IFRS for comparative periods presented.
The Company began planning the transition from current Canadian GAAP to IFRS in 2008 by establishing a project plan and a project team. The project team is led by senior finance executives that provide overall project governance, management and support. Members also include representatives from various areas of the organization as necessary and external advisors that have been engaged to assist in the IFRS conversion project. The project team reports quarterly to the Audit Committee of the Company.
The project plan consists of three phases: the initial assessment, detailed assessment and design, and implementation. The Company has completed the initial assessment phase, which included the completion of a high level review of the major differences between current Canadian GAAP and IFRS, and an initial evaluation of IFRS 1 transition exemptions. The initial assessment also included training sessions for project team members and discussions with the Company's external auditors and advisors.
The Company is now engaged in the detailed assessment and design phase. The detailed assessment and design phase involves completing a comprehensive analysis of the impact of the IFRS differences identified in the initial assessment phase. The design of solutions to resolve these IFRS differences is progressing according to plan and set out below are the main areas where changes to accounting policies are expected at this time:
<<
- Presentation of Financial Statements (IAS 1)
- Income Taxes (IAS 12)
- Property, Plant and Equipment (IAS 16)
- Impairment of Assets (IAS 36)
>>
During the implementation phase, the Company will implement the identified changes to business processes, financial systems, accounting policies, disclosure controls and internal controls over financial reporting.
The Company continues to assess the financial reporting impacts of converting to IFRS and, at this time, the impact on future financial position and results of operations is not reasonably determinable or estimable.
OUTSTANDING SHARE DATA
At September 3, 2009, 13,440,000 Common shares of the Company and 54,934,256 Class A non-voting shares of the Company were issued and outstanding. Each Common share entitles the holder thereof to one vote at meetings of shareholders of the Company. Following approval by the shareholders and the Toronto Stock Exchange in June 2009, the Company amended its stock option plan to provide that up to 10% of the Class A non-voting shares outstanding from time to time may be issued pursuant to the exercise of options granted under the plan. The Company has 3,376,250 options outstanding at an average exercise price of $13.95. Each stock option entitles the holder to purchase one Class A non-voting share of the Company at an exercise price established based on the market price of the shares at the date the option was granted.
In November 2008, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid. Under the bid, the Company may purchase up to 2,861,390 Class A non-voting shares of the Company, representing 5% of the issued and outstanding Class A non-voting shares as at November 1, 2008. The average daily trading volume for the six-month period preceding November 1, 2008 was 111,325 shares. In accordance with Toronto Stock Exchange requirements, until March 31, 2009, a maximum daily repurchase of 50% of this average could have been made, representing 55,662 shares. Thereafter, the maximum daily repurchase is 25% of the average, representing 27,831 shares. The bid commenced on November 28, 2008 and may continue to November 27, 2009. The shares will be purchased on behalf of the Company by a registered broker through the facilities of the Toronto Stock Exchange. The price paid for the shares will be the market price at the time of acquisition, and the number of shares purchased and the timing of any such purchases will be determined by the Company's management. All shares purchased by the Company will be cancelled. In the year to date, the Company purchased for cancellation 2,037,400 Class A non-voting shares, having a book value of $814,000, for a total cash consideration of $25,435,000. The excess of the purchase price over book value of the shares in the amount of $24,621,000 was charged to retained earnings.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Company has designed disclosure controls and procedures to provide reasonable assurance that material information related to the Company is included in the annual and quarterly filings. In addition, the Company evaluated the effectiveness of the disclosure controls and procedures as of January 31, 2009 and concluded that these controls were effective.
The Company, under the supervision of the Chief Executive Officer and Chief Financial Officer, has designed internal controls over financial reporting, as defined by National Instrument 52-109, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company evaluated the effectiveness of the internal controls over financial reporting as of January 31, 2009 and concluded that these controls were effective.
There have been no changes in the Company's internal controls over financial reporting during the six months ended August 1, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
OUTLOOK
The prolonged economic recession continues to negatively impact the retail environment. Rising unemployment levels and consumer concern over erosion of their wealth due to declines in equity markets and house prices has impacted consumer discretionary spending. The Company believes that it is well positioned for the future despite current economic conditions, offering a broad assortment of quality merchandise at affordable prices. Current projections by the Bank of Canada indicates that economic growth in Canada is expected to turn positive in the third quarter of calendar 2009. However, the Company believes that consumer demand will remain weak throughout much of the remainder of the Company's fiscal 2010 year with lower household spending due to labour market conditions and reduced disposable income. We are being guided by these expectations in conducting all facets of our business. On the positive side, we believe that we remain poised to strengthen the Company's market position in all of our market niches. The Company has virtually no debt and has liquid cash reserves which provide us with the ability to act when opportunities present themselves in whatever format including merchandising, store acquisition/construction, system replacements/upgrading or expansion by acquisition.
The Company's Hong Kong office continues to serve the Company well, with over 110 full-time employees dedicated to seeking out the highest quality, affordable and fashionable apparel for all our banners. On an annual basis, the Company directly imports approximately 80% of its merchandise, largely from China.
We believe that, in general, our merchandise offerings will continue to remain attractive values to the consumer, even in these difficult times. The Company has a strong balance sheet, with excellent liquidity and borrowing capacity. Its systems, including merchandise procurement, inventory control, planning, allocation and distribution, distribution centre management, point-of-sale, financial management and information technology are fully integrated. The Company is committed to continue to invest in training for all levels of its employees.
%SEDAR: 00002316EF
For further information: Jeremy H. Reitman, President, (514) 385-2630; Corporate Website: www.reitmans.ca
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