Le Château reports second quarter results

MONTREAL, Sept. 5, 2014 /CNW Telbec/ - Le Château Inc. (TSX: CTU.A), a leading Canadian brand in specialty retailing, offering a broad array of contemporary fashion apparel, accessories and footwear for style-conscious women and men, today reported its results for the second quarter ended July 26, 2014.

Sales for the second quarter ended July 26, 2014 amounted to $68.3 million, a decrease of 9.7% from $75.7 million for the second quarter ended July 27, 2013. Sales were negatively impacted in the second quarter of 2014 by reduced store traffic and increased promotional activity throughout the quarter. Comparable store sales decreased 8.6% for the second quarter versus the same period a year ago. Included in comparable store sales are online sales which increased 7% for the second quarter. While the contribution from online sales remains a small percentage of overall sales, the e-commerce business continues to gain traction and is expanding customer reach.

Earnings before interest, income taxes, depreciation, amortization, write-off and/or impairment of property and equipment and intangible assets ("Adjusted EBITDA") (see non-GAAP measures below) for the second quarter amounted to $2.9 million, compared to $7.9 million last year. The decrease of $5.0 million in adjusted EBITDA for the second quarter was primarily attributable to the decrease of $6.8 million in gross margin dollars, offset by a decrease in selling, general and administrative expenses of $1.8 million. The Company's gross margin for the second quarter of 2014 decreased to 64.2% from 66.9% in 2013, due to increased promotional activity.

Net loss for the second quarter amounted to $3.0 million or $(0.10) per share (diluted) compared to a net earnings of $1.1 million or $0.04 per share (diluted) the previous year, mainly as a result of the decrease in the gross margin as mentioned above. In addition, $800,000 of the net loss is attributed to the unrecognized tax benefit of non-capital losses of $2.8 million for Canadian income tax purposes generated in the second quarter, for which a full valuation allowance has been taken against the related deferred tax asset.

"Despite lower sales in the second quarter, gross margin increased to 64.2% when compared to 60.7% for the first quarter of 2014. As a result, the Company returned to a positive adjusted EBITDA of $2.9 million in the second quarter. Efforts to reduce inventories have resulted in a 6% decline over last year. Finally, we remain focused on cost control initiatives which yielded savings of $1.8 million for the three months ended July 26, 2014," said Jane Silverstone Segal, Chairman and CEO, Le Château.

Credit Facility
On June 5, 2014, the Company renewed its asset based credit facility with GE Capital Canada for a three year term ending on June 5, 2017 with an increased limit of $80.0 million. The revolving credit facility is collateralized by the Company's cash, cash equivalents, marketable securities, credit card accounts receivable and inventories.

Six-month Results
Sales for the six months ended July 26, 2014 decreased 8.3% to $121.6 million from $132.6 million last year. Comparable store sales decreased 7.2% versus the same period a year ago. Included in comparable store sales are online sales which increased 24% for the six months ended July 26, 2014.

Loss before interest, income taxes, depreciation, amortization, write-off and/or impairment of property and equipment and intangible assets for the six months ended July 26, 2014 amounted to $6.4 million, compared to earnings before interest, income taxes, depreciation, amortization, write-off and/or impairment of property and equipment and intangible assets of $3.1 million last year. The decrease of $9.5 million in adjusted EBITDA for the first six months was primarily attributable to a decline of $11.6 million in gross margin dollars, offset by a decrease in selling, general and administrative expenses of $2.1 million. The reduction in gross margin dollars was the result of the decrease in the Company's gross margin percentage to 62.7% from 66.3%, due to increased promotional activity.

Net loss for the six-month period ended July 26, 2014 amounted to $16.0 million or $(0.57) per share (diluted) compared to a net loss of $7.1 million or $(0.26) per share (diluted) the previous year, mainly as a result of the decrease in the gross margin as mentioned above. In addition, $2.9 million of the increase in the net loss is attributed to the unrecognized tax benefit of non-capital losses of $10.8 million for Canadian income tax purposes generated in the six-month period ended July 26, 2014, for which a full valuation allowance has been taken against the related deferred tax asset.

During the first six months of 2014, the Company opened one store, closed two stores and renovated five existing locations. Total square footage for the Le Château network as at July 26, 2014 amounted to 1,237,000 square feet, compared to 1,267,000 square feet as at July 27, 2013.

Third Quarter of Fiscal 2014
For the first five weeks ended August 30, 2014, total retail sales decreased 10.7% and comparable store sales decreased 9.4% compared to the same period last year.

New Initiative with Actress, Lauren Holly
Le Château is proud to team up with Actress Lauren Holly to bring "Lauren's Closet", a sophisticated collection, designed by Le Château and curated by Lauren Holly. The collection is available in Le Château locations across Canada and online at lechateau.com.

Profile
Le Château is a leading Canadian brand in specialty retailing, offering a broad array of contemporary fashion apparel, accessories and footwear for style-conscious women and men. The Le Château brand is sold exclusively through the Company's 227 retail locations, of which 226 are located in Canada. The Company's retail locations are primarily found in major urban shopping malls, as well as street-front locations with high pedestrian traffic. In addition, the Company has 5 stores under license in the Middle East. Le Château's web-based marketing is further broadening the Company's customer base among internet shoppers in both Canada and the United States. With its 54-year tradition of vertical integration, emphasizing a design and manufacturing approach to retailing, Le Château is unique among Canadian fashion merchants. 

Non-GAAP Measures
In addition to discussing earnings measures in accordance with IFRS, this press release provides adjusted EBITDA as a supplementary earnings measure, which is defined as earnings (loss) before interest, income taxes, depreciation, amortization, write-off and/or impairment of property and equipment and intangible assets. Adjusted EBITDA is provided to assist readers in determining the ability of the Company to generate cash from operations and to cover financial charges. It is also widely used for valuation purposes for public companies in our industry.

The Company also discloses comparable store sales which are defined as sales generated by stores that have been open for at least one year.

The above measures do not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.

Forward-Looking Statements
This news release may contain forward-looking statements relating to the Company and/or the environment in which it operates that are based on the Company's expectations, estimates and forecasts. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and/or are beyond the Company's control. A number of factors may cause actual outcomes and results to differ materially from those expressed. These factors also include those set forth in other public filings of the Company. Therefore, readers should not place undue reliance on these forward-looking statements. In addition, these forward-looking statements speak only as of the date made and the Company disavows any intention or obligation to update or revise any such statements as a result of any event, circumstance or otherwise except to the extent required under applicable securities law.

Factors which could cause actual results or events to differ materially from current expectations include, among other things: the ability of the Company to successfully implement its business initiatives and whether such business initiatives will yield the expected benefits; competitive conditions in the businesses in which the Company participates; changes in consumer spending; general economic conditions and normal business uncertainty; seasonality and weather patterns; changes in the Company's relationship with its suppliers; lease renewals; information technology security and loss of customer data; fluctuations in foreign currency exchange rates; interest rate fluctuations; liquidity risk and changes in laws, rules and regulations applicable to the Company. The foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results.

The Company's unaudited interim condensed consolidated financial statements and Management's Discussion and Analysis for the second quarter ended July 26, 2014 are available online at www.sedar.com.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of Canadian dollars)
As at
July 26, 2014
As at
July 27, 2013
As at
January 25, 2014
ASSETS            
Current assets            
Cash $ 2,468 $ 1,507 $ 1,446
Accounts receivable   1,691   1,638   1,476
Income taxes refundable   1,319   5,715   6,663
Derivative financial instruments   -   4   418
Inventories   122,996   131,199   124,878
Prepaid expenses   2,671   2,460   2,292
Total current assets   131,145   142,523   137,173
Property and equipment   66,851   76,716   69,870
Intangible assets   3,557   4,453   3,815
  $ 201,553 $ 223,692 $ 210,858
             
LIABILITIES AND SHAREHOLDERS' EQUITY            
Current liabilities            
Current portion of bank indebtedness $ 22,052 $ 29,752 $ 30,767
Trade and other payables   16,723   20,353   19,553
Deferred revenue   3,135   3,041   3,712
Current portion of provisions   332   246   265
Derivative financial instruments   372   -   -
Current portion of long-term debt    5,169   8,145   7,987
Total current liabilities   47,783   61,537   62,284
Bank indebtedness   20,400   -   -
Long-term debt   6,543   11,712   7,843
Provisions   481   474   391
Deferred income taxes   -   2,239   1,829
Deferred lease credits   12,373   14,678   13,412
Total liabilities   87,580   90,640   85,759
             
Shareholders' equity            
Share capital   47,967   42,876   42,960
Contributed surplus   4,140   3,044   3,581
Retained earnings   62,238   87,129   78,253
Accumulated other comprehensive income (loss)   (372)   3   305
Total shareholders' equity   113,973   133,052   125,099
  $ 201,553 $ 223,692 $ 210,858



CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(Unaudited) For the three months ended For the six months ended
(In thousands of Canadian dollars, except per share information) July 26, 2014 July 27, 2013 July 26, 2014 July 27, 2013
Sales $ 68,304 $ 75,680 $ 121,609 $ 132,562
Cost of sales and expenses                
Cost of sales   24,453   25,036   45,406   44,716
Selling   37,469   39,408   74,656   78,012
General and administrative   8,634   8,864   17,876   17,892
    70,556   73,308   137,938   140,620
                 
Results from operating activities   (2,252)   2,372   (16,329)   (8,058)
Finance costs   726   670   1,413   1,360
Finance income   (8)   (5)   (11)   (8)
Earnings (loss) before income taxes   (2,970)   1,707   (17,731)   (9,410)
Income tax expense (recovery)   -   630   (1,716)   (2,300)
Net earnings (loss) $ (2,970) $ 1,077 $ (16,015) $ (7,110)
                 
Net earnings (loss) per share                
  Basic $ (0.10) $ 0.04 $ (0.57) $ (0.26)
  Diluted   (0.10)   0.04   (0.57)   (0.26)
                 
Weighted average number of shares outstanding ('000)   28,524   27,256   27,933   27,249



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) For the three months ended For the six months ended
(In thousands of Canadian dollars) July 26, 2014 July 27, 2013 July 26, 2014 July 27, 2013
Net earnings (loss) $ (2,970) $ 1,077 $ (16,015) $ (7,110)
                 
Other comprehensive income (loss) to be reclassified to profit or loss in subsequent periods                
Change in fair value of forward exchange contracts   (360)   4   (388)   1
Income tax expense   (8)   (1)   -   -
    (368)   3   (388)   1
Realized forward exchange contracts reclassified to net earnings (loss)   16   3   (402)   (212)
Income tax recovery (expense)   -   (1)   113   59
    16   2   (289)   (153)
Total other comprehensive income (loss)   (352)   5   (677)   (152)
Comprehensive income (loss) $ (3,322) $ 1,082 $ (16,692) $ (7,262)



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited) For the three months ended For the six months ended
(In thousands of Canadian dollars) July 26, 2014 July 27, 2013 July 26, 2014 July 27, 2013
                 
SHARE CAPITAL                
Balance, beginning of period $ 42,962 $ 42,740 $ 42,960 $ 42,740
Issuance of subordinate voting shares upon conversion of long-term debt   5,000   -   5,000   -
Issuance of subordinate voting shares upon exercise of options   3   125   5   125
Reclassification from contributed surplus due to exercise of share options   2   11   2   11
Balance, end of period $ 47,967 $ 42,876 $ 47,967 $ 42,876
                 
CONTRIBUTED SURPLUS                
Balance, beginning of period $ 3,871 $ 2,784 $ 3,581 $ 2,664
Stock-based compensation expense   271   271   561   391
Exercise of share options   (2)   (11)   (2)   (11)
Balance, end of period $ 4,140 $ 3,044 $ 4,140 $ 3,044
                 
RETAINED EARNINGS                
Balance, beginning of period $ 65,208 $ 86,052 $ 78,253 $ 94,239
Net earnings (loss)   (2,970)   1,077   (16,015)   (7,110)
Balance, end of period $ 62,238 $ 87,129 $ 62,238 $ 87,129
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                
Balance, beginning of period $ (20) $ (2) $ 305 $ 155
Other comprehensive income (loss) for the period   (352)   5   (677)   (152)
Balance, end of period $ (372) $ 3 $ (372) $ 3
                 
Total shareholders' equity $ 113,973 $ 133,052 $ 113,973 $ 133,052



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the three months ended For the six months ended
(In thousands of Canadian dollars) July 26, 2014 July 27, 2013 July 26, 2014 July 27, 2013
OPERATING ACTIVITIES                
Net earnings (loss) $ (2,970) $ 1,077 $ (16,015) $ (7,110)
Adjustments to determine net cash from operating activities                
  Depreciation and amortization   4,609   4,797   9,200   9,569
  Write-off and impairment of property and equipment   533   753   713   1,594
  Amortization of deferred lease credits   (589)   (841)   (1,173)   (1,273)
  Deferred lease credits   260   39   134   39
  Stock-based compensation   271   271   561   391
  Provisions   144   16   157   (38)
  Finance costs   726   670   1,413   1,360
  Interest paid   (686)   (658)   (1,261)   (1,228)
  Income tax expense (recovery)   -   630   (1,716)   (2,300)
    2,298   6,754   (7,987)   1,004
Net change in non-cash working capital items related to operations   4,425   527   (2,735)   (9,375)
Income taxes refunded   4,650   -   5,548   -
Cash flows related to operating activities   11,373   7,281   (5,174)   (8,371)
                 
FINANCING ACTIVITIES                
Increase (decrease) in bank indebtedness   (7,662)   (5,677)   11,945   16,592
Proceeds of long-term debt   -   -   5,000   -
Repayment of long-term debt   (2,065)   (1,980)   (4,118)   (4,277)
Issue of capital stock upon exercise of options   3   125   5   125
Cash flows related to financing activities   (9,724)   (7,532)   12,832   12,440
                 
INVESTING ACTIVITIES                
Additions to property and equipment and intangible assets   (1,515)   (1,097)   (6,636)   (4,345)
Cash flows related to investing activities   (1,515)   (1,097)   (6,636)   (4,345)
                 
Increase (decrease) in cash   134   (1,348)   1,022   (276)
Cash, beginning of period   2,334   2,855   1,446   1,783
Cash, end of period $ 2,468 $ 1,507 $ 2,468 $ 1,507

 

SOURCE: Le Château Inc.

For further information:

Emilia Di Raddo, CPA, CA, President (514) 738-7000
Johnny Del Ciancio, CPA, CA, Vice-President, Finance, (514) 738-7000
MaisonBrison:  Pierre Boucher, (514) 731-0000

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