Le Château reports third quarter results

MONTREAL, Dec. 10 /CNW Telbec/ - Le Château Inc. (TSX: CTU.A) today reported that sales for the third quarter ended October 31, 2009 decreased 10.1% to $75.3 million from $83.8 million for the third quarter ended October 25, 2008. Comparable store sales decreased 13.1% versus the same period a year ago.

Net earnings for the third quarter ended October 31, 2009 were $5.6 million compared to $10.0 million for the third quarter ended October 25, 2008. Earnings per share (diluted) for the third quarter were $0.23 per share versus $0.40 per share the previous year. Earnings before interest, income taxes, depreciation and amortization (EBITDA) for the third quarter amounted to $12.8 million or 17.0% of sales, compared to $19.6 million or 23.4% of sales last year.

Nine-month Results

Net earnings for the nine-month period were $18.4 million or $0.76 per share (diluted) compared to $25.4 million or $1.01 per share the previous year. Earnings before interest, income taxes, depreciation and amortization (EBITDA) for the first nine months amounted to $41.1 million or 18.0% of sales, compared to $50.6 million or 20.8% of sales last year.

Sales decreased 6.0% to $228.5 million for the nine months ended October 31, 2009, compared to $243.1 million last year. Comparable store sales decreased 9.2% versus the same period a year ago.

During the first nine months of the year, the Company opened 10 stores, closed 2 and expanded 8 existing locations, resulting in the addition of 87,000 square feet or 8.3% to the Le Château network, bringing the total floor space at end of period to 1,135,000 square feet.

In June 2009, the Toronto Stock Exchange approved the Company's previously announced normal course issuer bid to purchase up to 987,173 Class A subordinate voting shares. Since June 19, 2009, no Class A subordinate voting shares have been purchased by the Company.

Dividend declaration

The Board of Directors has declared a quarterly dividend (constituting eligible dividends for income tax purposes) of $0.175 per Class A subordinate voting share and Class B voting share. This is the 65th consecutive dividend declared by Le Château, and is payable on February 16, 2010 to the shareholders of record at the close of business on January 29, 2010.

Online Shopping Launch

Le Château will be launching an online shopping initiative for Autumn-Winter 2010 targeted at further broadening its customer base to online shoppers in both Canada and the United States. The E-Commerce website will provide an important new vehicle for attracting new customers, and will extend the Company's reach well beyond its network of stores.

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 synonymous with ageless fashion at accessible prices and is sold exclusively through the Company's 231 retail locations, of which 227 are located in Canada and 4 in the New York City area. The Company's outlets are primarily found in major urban shopping malls, complemented with high pedestrian-traffic, street-front locations. In addition, the Company has 9 stores under license in the Middle East.

The Company's 50-year tradition of vertical integration, a design and manufacturing approach to retailing, makes it unique among Canadian fashion merchants.

Non-GAAP Measures

In addition to discussing earnings measures in accordance with Canadian generally accepted accounting principles ("GAAP"), this press release provides earnings before interest, income taxes, depreciation and amortization ("EBITDA") as a supplementary earnings measure. Depreciation and amortization include the write-off of fixed assets. 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 opened for at least one year.

The above measures do not have a standardized meaning prescribed by GAAP 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 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; customer preferences towards product offerings; seasonal weather patterns; fluctuations in foreign currency exchange rates; changes in the Company's relationship with its suppliers; interest rate fluctuations and other changes in borrowing costs; and changes in laws, rules and regulations applicable to the Company.

    
    -------------------------------------------------------------------------
    FINANCIAL HIGHLIGHTS
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    (Unaudited)                                      October 31,  October 25,
    (In units except where otherwise stated)               2009         2008
    -------------------------------------------------------------------------
    Working capital ($'000)                         $    84,814  $    78,411
    Current ratio                                          3.07         2.63
    Quick ratio                                            1.54         1.44
    Long-term debt to equity*                            0.24         0.23
    Capital expenditures ($'000)                    $    16,403  $    19,856
    Number of stores at end of quarter                      229          220
    Total number of square feet ('000)                    1,135        1,037
    Book value per share                            $      6.10  $      5.62
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    * Including capital lease obligations


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    CONSOLIDATED BALANCE SHEETS
    -------------------------------------------------------------------------

                                             As at        As at        As at
    (Unaudited)                         October 31,  October 25,  January 31,
    (In thousands of dollars)                 2009         2008         2009
    -------------------------------------------------------------------------
    ASSETS
    Current
    Cash and cash equivalents          $    23,510  $     2,405  $    10,034
    Short-term investments (note 3)         30,000       56,643       56,643
    Accounts receivable and other
     assets                                  2,638        3,506        4,791
    Income taxes receivable                  5,278            -            -
    Derivative financial instruments           254        5,060        1,530
    Inventories (note 4)                    62,750       57,233       54,012
    Prepaid expenses                         1,396        1,696          778
    -------------------------------------------------------------------------
    Total current assets                   125,826      126,543      127,788
    Long-term investments (note 3)          10,000            -            -
    Fixed assets                            91,836       91,666       88,643
    -------------------------------------------------------------------------
                                       $   227,662  $   218,209  $   216,431
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current
    Accounts payable and accrued
     liabilities                       $    24,859  $    30,681  $    25,403
    Dividend payable                         4,269        4,278        4,239
    Income taxes payable                         -          824        2,285
    Current portion of capital lease
     obligations                                 -        1,443        1,008
    Current portion of long-term
     debt (note 5)                          11,803        9,297        8,746
    Future income taxes                         81        1,609          487
    -------------------------------------------------------------------------
    Total current liabilities               41,012       48,132       42,168
    Long-term debt (note 5)                 24,060       20,863       18,982
    Future income taxes                      3,176        2,891        3,176
    Deferred lease inducements              10,491        9,316        9,691
    -------------------------------------------------------------------------
    Total liabilities                       78,739       81,202       74,017
    -------------------------------------------------------------------------

    Shareholders' equity
    Capital stock (note 6)                  32,683       31,266       30,997
    Contributed surplus (note 6)             2,475        2,270        2,460
    Retained earnings                      113,592      100,020      107,914
    Accumulated other comprehensive
     income (note 7)                           173        3,451        1,043
    -------------------------------------------------------------------------
    Total shareholders' equity             148,923      137,007      142,414
    -------------------------------------------------------------------------
                                       $   227,662  $   218,209  $   216,431
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
    -------------------------------------------------------------------------

                                For the three              For the nine
    (Unaudited)                  months ended              months ended
    (In thousands of       October 31,  October 25,  October 31,  October 25,
     dollars)                    2009         2008         2009         2008
    -------------------------------------------------------------------------
    Balance, beginning
     of period             $  112,263   $   99,373   $  107,914   $   99,884
    Excess of cost over
     stated value of
     Class A subordinate
     voting shares
     purchased and
     cancelled                      -       (5,063)           -       (7,955)
    Net earnings                5,599        9,988       18,449       25,454
    -------------------------------------------------------------------------
                              117,862      104,298      126,363      117,383
    Dividends declared          4,270        4,278       12,771       17,363
    -------------------------------------------------------------------------
    Balance, end of
     period                $  113,592   $  100,020   $  113,592   $  100,020
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    CONSOLIDATED STATEMENT OF EARNINGS
    -------------------------------------------------------------------------

    (Unaudited)                 For the three              For the nine
    (In thousands of             months ended              months ended
     dollars, except per   October 31,  October 25,  October 31,  October 25,
     share data)                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Sales                  $   75,305   $   83,763   $  228,517   $  243,059
    -------------------------------------------------------------------------
    Cost of sales and
     expenses
    Cost of sales and
     selling, general
     and administrative        62,509       64,187      187,457      192,471
    Depreciation and
     amortization               4,256        4,267       13,043       12,472
    Write-off of fixed
     assets                        78           11          167          184
    Interest on long-term
     debt and capital lease
     obligations                  298          444        1,001        1,372
    Interest income              (170)        (484)        (605)      (1,794)
    -------------------------------------------------------------------------
                               66,971       68,425      201,063      204,705
    -------------------------------------------------------------------------
    Earnings before income
     taxes                      8,334       15,338       27,454       38,354
    Provision for income
     taxes                      2,735        5,350        9,005       12,900
    -------------------------------------------------------------------------
    Net earnings           $    5,599   $    9,988   $   18,449   $   25,454
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Net earnings per share
     (note 8)
      Basic                $     0.23   $     0.40   $     0.76   $     1.02
      Diluted                    0.23         0.40         0.76         1.01

    Weighted average
     number of shares
     outstanding ('000)        24,365       24,752       24,300       24,954


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    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
    -------------------------------------------------------------------------

                                For the three              For the nine
    (Unaudited)                  months ended              months ended
    (In thousands of       October 31,  October 25,  October 31,  October 25,
      dollars)                   2009         2008         2009         2008
    -------------------------------------------------------------------------
    Net earnings           $    5,599   $    9,988   $   18,449   $   25,454
    -------------------------------------------------------------------------
    Other comprehensive
     income
    Change in fair value
     of forward exchange
     contracts                    329        4,962       (1,374)       5,454
    Realized forward
     exchange contracts
     reclassified to
     net earnings               1,202         (242)          98         (644)
    Income tax recovery
     (expense)                   (487)      (1,501)         406       (1,525)
    -------------------------------------------------------------------------
                                1,044        3,219         (870)       3,285
    -------------------------------------------------------------------------
    Comprehensive income   $    6,643   $   13,207   $   17,579   $   28,739
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    -------------------------------------------------------------------------

                                For the three              For the nine
    (Unaudited)                  months ended              months ended
    (In thousands of       October 31,  October 25,  October 31,  October 25,
     dollars)                    2009         2008         2009         2008
    -------------------------------------------------------------------------
    OPERATING ACTIVITIES
    Net earnings           $    5,599   $    9,988   $   18,449   $   25,454
    Adjustments to
     determine net cash
     from operating
     activities
      Depreciation and
       amortization             4,256        4,267       13,043       12,472
      Write-off of
       fixed assets                78           11          167          184
      Amortization of
       deferred lease
       inducements               (392)        (372)      (1,121)      (1,056)
      Stock-based
       compensation (note 6)      160          193          323          646
      Future income taxes           -            -            -         (927)
    -------------------------------------------------------------------------
                                9,701       14,087       30,861       36,773
    Net change in non-cash
     working capital items
     related to operations       (610)      (5,923)     (15,310)     (14,439)
    Deferred lease
     inducements                  745          373        1,921        1,799
    -------------------------------------------------------------------------
    Cash flows related to
     operating activities       9,836        8,537       17,472       24,133
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Repayment of capital
     lease obligations           (341)        (321)      (1,008)        (949)
    Proceeds of long-
     term debt                 15,000            -       15,000       18,000
    Repayment of long-
     term debt                 (2,231)      (2,507)      (6,865)      (7,642)
    Issue of capital stock
     upon exercise of
     options                      368          212        1,378          614
    Purchase of Class A
     subordinate voting
     shares for
     cancellation                   -       (6,239)           -       (9,234)
    Dividends paid             (4,263)      (9,952)     (12,741)     (16,218)
    -------------------------------------------------------------------------
    Cash flows related to
     financing activities       8,533      (18,807)      (4,236)     (15,429)
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Decrease (increase)
     in short-term
     investments              (10,000)      (2,915)      26,643        9,711
    Increase in long-
     term investments               -            -      (10,000)           -
    Additions to fixed
     assets                    (4,485)      (4,626)     (16,403)     (19,856)
    -------------------------------------------------------------------------
    Cash flows related
     to investing
     activities               (14,485)      (7,541)         240      (10,145)
    -------------------------------------------------------------------------

    Increase (decrease)
     in cash and cash
     equivalents                3,884      (17,811)      13,476       (1,441)
    Cash and cash
     equivalents,
     beginning of period       19,626       20,216       10,034        3,846
    -------------------------------------------------------------------------
    Cash and cash
     equivalents,
     end of period         $   23,510   $    2,405   $   23,510   $    2,405
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary information:
    Interest paid during
     the period            $      298   $      444   $    1,001   $    1,372
    Income taxes paid
     during the period          4,675        4,652       16,019       17,803
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Notes to the Interim Consolidated Financial Statements
    ------------------------------------------------------
    

(Unaudited - Tabular figures in thousands of dollars except share information)

1. Disclosure

The unaudited interim consolidated financial statements (the "financial statements") have been prepared in accordance with Canadian generally accepted accounting principles with the exception that they do not include all disclosure required for annual financial statements. The financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes contained in the Company's 2008 Annual Report.

The Company's business is seasonal in nature. As the Company executes its strategy of broadening its customer base, the Company expects that its business will become less seasonal. However, retail sales are traditionally higher in the fourth quarter due to the holiday season. In addition, fourth quarter earnings results are usually reduced by post holiday sale promotions.

2. Accounting policies

These financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements for the 53-week period ended January 31, 2009.

3. Investments

Short-term investments amount to $30.0 million and include investments with original maturity terms between 90 and 365 days. As at October 31, 2009, the weighted average effective interest rate was 0.92% and their maturity dates vary over periods ending up to September 25, 2010. Long-term investments amount to $10.0 million and include an investment with an original maturity term of more than 365 days. As at October 31, 2009 its effective interest rate was 3.00% and its maturity date is March 11, 2011. Short and long-term investments are invested in guaranteed investment certificates with major Canadian chartered banks.

4. Inventories

    
                                                     October 31,  October 25,
                                                           2009         2008
    -------------------------------------------------------------------------
    Raw materials                                   $     6,047  $     5,434
    Work-in-process                                       1,199        1,493
    Finished goods                                       53,115       44,674
    Finished goods in transit                             2,389        5,632
    -------------------------------------------------------------------------
                                                    $    62,750  $    57,233
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

The cost of inventory recognized as an expense and included in cost of sales and selling, general and administrative expenses for the three and nine-month periods ended October 31, 2009 is $21.9 million and $67.4 million, respectively (2008 - $24.4 million and $75.3 million, respectively). There were no write-downs to net realizable value in the third quarter of 2009 (2008 - NIL) and no inventory write-downs recognized in prior periods were reversed.

5. Long-Term Debt

On October 30, 2009, the Company borrowed $15.0 million to finance the renovation and re-fixturing of various stores throughout Canada. Drawdowns under this facility are repayable over 36 months and bear interest at a rate of 5.89%. This facility is collateralized by the store fixtures and equipment financed.

6. Capital Stock

a) Issued and outstanding

    
                                                           October 31, 2009
                                                 ----------------------------
                                                         Number
                                                      of shares            $
    -------------------------------------------------------------------------
    Class A subordinate voting shares
      Balance, beginning of period                   19,663,464       30,595
      Issuance of subordinate voting shares
       upon exercise of options                         171,200        1,378
      Reclassification from contributed
       surplus due to exercise of share options               -          308
    -------------------------------------------------------------------------
    Balance, end of period                           19,834,664       32,281
    -------------------------------------------------------------------------

    Class B multiple voting shares                    4,560,000          402
    -------------------------------------------------------------------------
                                                     24,394,664       32,683
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

b) Stock option plan

The status of the Company's stock option plan is summarized as follows:

    
                                                           October 31, 2009
                                                 ----------------------------
                                                                    Weighted
                                                                     average
                                                         Number     exercise
                                                     of options      price $
    -------------------------------------------------------------------------
    Outstanding at beginning of period                1,172,800        12.64
    Granted                                             215,500         9.40
    Exercised                                          (171,200)        8.05
    Cancelled/Expired                                    (4,000)       10.75
    -------------------------------------------------------------------------
    Outstanding at end of period                      1,213,100        12.72
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Options exercisable at end of period                402,000        13.64
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

During the second quarter ended August 1, 2009, modifications were made to 160,000 options granted to a former director. Of these options, 80,000 were not vested at the time of the modification which resulted in a reversal of previously recognized stock based compensation expense amounting to $212,000. The modification to vested options was expensed in the second quarter and the modifications to the unvested options will be expensed over their revised vesting period. These modifications are reflected in the table above.

c) Contributed surplus

The changes in contributed surplus are summarized as follows:

    
                                For the three              For the nine
                                 months ended              months ended
                           October 31,  October 25,  October 31,  October 25,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Contributed surplus,
     beginning of period  $     2,389  $     2,116  $     2,460  $     1,761
    Stock-based
     compensation expense         160          193          323          646
    Exercise of share
     options                      (74)         (39)        (308)        (137)
    -------------------------------------------------------------------------
    Contributed surplus,
     end of period        $     2,475  $     2,270  $     2,475  $     2,270
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

d) Normal course issuer bid

The Company announced on June 11, 2009 that it intended to proceed with a normal course issuer bid which was subsequently approved by the Toronto Stock Exchange. Under the bid, the Company may purchase up to 987,173 Class A subordinate voting shares of the Company, representing 5% of the issued shares of such class as at June 11, 2009. The bid commenced on June 19, 2009 and may continue to June 18, 2010. The average daily trading volume for the 6-month period preceding June 1, 2009 was 26,815 shares. In accordance with TSX requirements, a maximum daily repurchase of 25% of this average may be made, representing 6,703 shares. 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. All shares purchased by the Company will be cancelled. Since June 19, 2009, no Class A subordinate voting shares have been purchased by the Company.

7. Accumulated other comprehensive income (loss)

Changes in accumulated other comprehensive income was as follows:

    
                                For the three              For the nine
                                 months ended              months ended
                           October 31,  October 25,  October 31,  October 25,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Balance, beginning of
     period                  $   (871)  $      232   $    1,043   $      166
    Other comprehensive
     income (loss) for
     the period                 1,044        3,219         (870)       3,285
    -------------------------------------------------------------------------
    Balance, end of period   $    173   $    3,451   $      173   $    3,451
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

8. Earnings per share

The numbers of shares used in the earnings per share calculation is as follows:

    
                                For the three              For the nine
                                 months ended              months ended
                           October 31,  October 25,  October 31,  October 25,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Weighted average
     number of shares
     outstanding
     - basic               24,364,510   24,751,977   24,300,113   24,953,677
    Dilutive effect of
     stock options             92,473      124,619       59,594      147,234
    -------------------------------------------------------------------------
    Weighted average
     number of shares
     outstanding
     - diluted             24,456,983   24,876,596   24,359,707   25,100,911
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

As at October 31, 2009, a total of 642,000 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. Segmented information

    
                                For the three              For the nine
                                 months ended              months ended
                           October 31,  October 25,  October 31,  October 25,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Sales by country
    Canada                 $   74,425   $   82,396   $  224,943   $  238,678
    United States                 880        1,367        3,574        4,381
    -------------------------------------------------------------------------
                           $   75,305   $   83,763   $  228,517   $  243,059
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Sales by division
    Ladies' Clothing       $   42,118   $   46,535   $  128,690   $  137,127
    Men's Clothing             12,088       13,576       37,507       39,385
    Footwear                    9,055       10,033       25,767       27,843
    Accessories                12,044       13,619       36,553       38,704
    -------------------------------------------------------------------------
                           $   75,305   $   83,763   $  228,517   $  243,059
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings (loss)
    Canada                 $    6,158   $   10,165   $   19,585   $   25,736
    United States                (559)        (177)      (1,136)        (282)
    -------------------------------------------------------------------------
                           $    5,599   $    9,988   $   18,449   $   25,454
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Fixed assets
    Canada                 $   91,037   $   90,628   $   91,037   $   90,628
    United States                 799        1,038          799        1,038
    -------------------------------------------------------------------------
                           $   91,836   $   91,666   $   91,836   $   91,666
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

10. Financial instruments

Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost. The disclosures in the "Financial Instruments - Recognition and Measurement" section of note 1 to the Company's 2008 consolidated financial statements describe how the categories of financial instruments are measured and how income and expenses, including fair value gains and losses, are recognized. As at October 31, 2009, the classification of the financial instruments, as well as their carrying values and fair values are shown in the table below:

    
                                               Other
                       Avail-   Held   Loans   finan-          Total
                        able-    for     and    cial             car-
                         for-    tra-  recei-  liabi- Deriva-  rying    Fair
                        sale    ding  vables  lities   tives   value   value
                           $       $       $       $       $       $       $
    -------------------------------------------------------------------------
    October 31, 2009
    Financial assets
    Cash and cash
     equivalents           -  23,510       -       -       -  23,510  23,510
    Short-term
     investments      30,000       -       -       -       -  30,000  30,000
    Accounts
     receivable and
     other assets          -       -   2,638       -       -   2,638   2,638
    Derivative
     financial
     instruments           -       -       -       -     254     254     254
    Long-term
     investments      10,000       -       -       -       -  10,000  10,000
    -------------------------------------------------------------------------
    Total             40,000  23,510   2,638       -     254  66,402  66,402
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financial
     liabilities
    Accounts payable
     and accrued
     liabilities(1)        -       -       -  20,310       -  20,310  20,310
    Dividend payable       -       -       -   4,269       -   4,269   4,269
    Long-term debt         -       -       -  35,863       -  35,863  35,661
    -------------------------------------------------------------------------
    Total                  -       -       -  60,442       -  60,442  60,240
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    October 25, 2008
    Financial assets
    Cash and cash
     equivalents           -   2,405       -       -       -   2,405   2,405
    Short-term
     investments      56,643       -       -       -       -  56,643  56,643
    Accounts
     receivable and
     other assets          -       -   3,506       -       -   3,506   3,506
    Derivative
     financial
     instruments           -       -       -       -   5,060   5,060   5,060
    -------------------------------------------------------------------------
    Total             56,643   2,405   3,506       -   5,060  67,614  67,614
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financial
     liabilities
    Accounts payable
     and accrued
     liabilities(1)        -       -       -  25,204       -  25,204  25,204
    Dividend payable       -       -       -   4,278       -   4,278   4,278
    Long-term debt         -       -       -  30,160       -  30,160  29,704
    Capital lease
     obligations           -       -       -   1,443       -   1,443   1,443
    -------------------------------------------------------------------------
    Total                  -       -       -  61,085       -  61,085  60,629
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Excludes commodity taxes and other provisions
    

Fair values

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. Accordingly, the estimated fair values are not necessarily indicative of the amounts the Company could realize in a current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. The methods and assumptions used to estimate the fair value of financial instruments are described below:

    
    -   The fair values of the short and long-term investments have been
        determined by reference to published price quotation.

    -   Given their short-term maturity, the fair value of cash and cash
        equivalents, accounts receivable and other assets, accounts payable
        and accrued liabilities and dividend payable approximates their
        carrying value.

    -   The estimated fair value of long-term debt was determined by
        discounting expected cash flows at rates currently offered to the
        Company for similar debt, and is approximately $202,000 lower than
        the carrying value as noted in the table above.
    

Financial instrument risk management

There has been no change with respect to the Company's overall risk exposure during the three and nine-month periods ended October 31, 2009. Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign exchange risk and interest rate risk are provided below.

Credit risk

Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company's financial instruments that are exposed to concentrations of credit risk are primarily cash and cash equivalents, short and long-term investments and foreign exchange contracts. The Company limits its exposure to credit risk with respect to cash, cash equivalents, short and long-term investments by investing available cash in guaranteed investment certificates with major Canadian chartered banks. The Company enters into foreign exchange contracts only with Canadian chartered banks to minimize credit risk.

The Company's cash is not subject to any external restrictions. The Company has an investment policy that monitors the safety and preservation of principal and investments, which limits the amount invested by issuer.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. The Company has a high level of liquidity, more than sufficient to cover its operating requirements, as well as a strong financial position. The Company's liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. As at October 31, 2009, the Company had a high degree of liquidity with $53.5 million in cash and cash equivalents and short-term investments. In addition, the Company has an operating line of credit totalling $16.0 million of which $5.6 million is currently used due to outstanding letters of credit. The letters of credit represent guarantees for payment of purchases from foreign suppliers and reduce available credit under this facility. Aside from the outstanding letters of credit, no other amounts were drawn under this facility as at October 31, 2009. The Company finances its store expansion and renovation program through cash flows from operations and long-term debt. The Company expects that its accounts payable and accrued liabilities and dividends payable will be discharged within 90 days and its long-term debt and capital lease obligations discharged as contractually agreed and as disclosed elsewhere in these financial statements or as disclosed in its annual financial statements.

Market risk - foreign exchange risk

The Company's foreign exchange risk is primarily limited to currency fluctuations between the Canadian and U.S. dollar. In order to protect itself from the risk of losses should the value of the Canadian dollar decline compared to the foreign currency, the Company uses forward contracts to fix the exchange rate of a substantial portion of its expected U.S. dollar requirements. The contracts are matched with anticipated foreign currency purchases.

Their nominal values and contract values as at October 31, 2009 are as follows:

    
                                           Average      Nominal
                                       contractual      foreign
                                          exchange     currency     Contract
                                              rate        value        value
                                                              $            $
    -------------------------------------------------------------------------
                                                         (000's)      (000's)
    Purchase contracts
    U.S. dollars                            1.0660       16,000       17,056
    -------------------------------------------------------------------------
    

The range of maturity of these contracts is from November 2, 2009 to March 1, 2010. As at October 31, 2009, the fair value of these contracts amounted to an unrealized foreign exchange gain of $254,000 (2008 - unrealized foreign exchange gain of $5.0 million), all of which is expected to be reclassified to income within the next 12 months.

Market risk - interest rate risk

Financial assets and financial liabilities that bear interest at fixed rates are subject to fair value interest rate risk. The Company's short and long-term investments are the only financial assets bearing fixed interest rate, and the long-term debt and capital lease obligations are the only financial liabilities bearing a fixed interest rate. The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to fixed interest rates on the short and long-term investments, owing to their relative short-term nature. The long-term debt and capital lease obligations are other financial liabilities and are recorded at amortized cost.

To manage the interest rate risk, the Company's investments are made to achieve the highest rate of return while complying with the two primary objectives for its investment portfolio: liquidity and capital preservation.

11. Comparative figures

Certain comparative figures have been reclassified to conform to the presentation adopted in the current period.

Management's Discussion and Analysis

Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated financial statements for the nine months ended October 31, 2009 and the audited consolidated financial statements and MD&A for the year ended January 31, 2009. The risks and uncertainties faced by the Company are substantially the same as those outlined in the Company's 2008 Annual Information Form and in the annual MD&A contained in the 2008 Annual Report. The MD&A has been prepared as at December 10, 2009.

Results of Operations

Sales for the third quarter ended October 31, 2009 decreased 10.1% to $75.3 million from $83.8 million for the third quarter ended October 25, 2008, resulting primarily from a decline of 13.1% in comparable store sales. On a year-to-date basis, sales decreased 6.0% to $228.5 million as compared with $243.1 million last year. Comparable store sales decreased 9.2% for the first nine months versus the same period a year ago. For the first nine months of the year, comparable store sales were impacted by reduced traffic as consumers remained cautious on discretionary spending as a result of the weak Canadian economy. Despite the decrease in sales, the Company's inventory position is at a satisfactory level as compared to last year when square footage growth is taken into account (see Financial Position section for further details). As a result the Company was not required to take any additional markdowns in the third quarter as witnessed by its gross margin percentage remaining stable with the previous year at 70.9%.

Net earnings for the third quarter were $5.6 million or $0.23 per share (diluted) compared with $10.0 million or $0.40 per share last year. For the nine months ended October 31, 2009, net earnings amounted to $18.4 million or $0.76 per share (diluted) compared to $25.4 million or $1.01 per share the previous year. Net earnings for the three and nine-month periods ended October 31, 2009 were impacted by the decline in sales and by a decline in interest income of $314,000 and $1,189,000, respectively, as a result of lower interest rates on the Company's short and long-term investments.

Earnings before interest, income taxes, depreciation and amortization ("EBITDA") (see supplementary measures below) for the third quarter amounted to $12.8 million or 17.0% of sales, compared to $19.6 million or 23.4% of sales last year. The decrease of $6.8 million in EBITDA for the third quarter was primarily the result of a decrease of 10.1% in gross margin from $59.4 million to $53.4 million. The Company's gross margin percentage in the third quarter remained in line with the previous year at 70.9%. EBITDA for the first nine months decreased to $41.1 million or 18.0% of sales, compared to $50.6 million or 20.8% of sales last year.

Year-to-date, the Company opened 10 stores, closed 2 and expanded 8 existing locations, resulting in the addition of 87,000 square feet or 8.3% to the Le Château network, bringing the total floor space at end of period to 1,135,000 square feet. As at October 31, 2009, there were 229 stores (including 33 fashion outlets) in operation as compared with 220 stores (including 30 fashion outlets) and 1,037,000 square feet at the end of the same period last year.

Le Château will be launching an online shopping initiative for Autumn-Winter 2010 targeted at further broadening its customer base to online shoppers in both Canada and the United States. The E-Commerce website will provide an important new vehicle for attracting new customers, and will extend the Company's reach well beyond its network of stores.

Liquidity and Capital Resources

Cash flow from operating activities amounted to $9.8 million for the third quarter ended October 31, 2009, compared with $8.5 million for the same period last year. The increase of $1.3 million was mainly the result of positive changes in non-cash working capital items offset by lower net earnings of $4.4 million for the period. On a year-to-date basis, cash flow from operating activities decreased to $17.5 million from $24.1 million the previous year. The decrease of $6.6 million was primarily due to the decrease in net earnings.

The Company continues to be in a strong financial position with cash, cash equivalents, short and long-term investments of $63.5 million at the end of the third quarter, compared with $59.0 million as at October 25, 2008 and $66.7 million as at January 31, 2009. Short and long-term investments are conservatively invested in guaranteed investment certificates with major Canadian chartered banks. The Company closely monitors its short and long-term cash investments and does not hold any asset backed commercial paper.

Capital expenditures for the third quarter amounted to $4.5 million, compared to $4.6 million for the same period last year. Capital expenditures for the first nine months of 2009 totalled $16.4 million compared to $19.9 million for the same period last year and related primarily to the opening of ten new stores and the renovation and/or expansion of existing stores. Capital expenditures were financed with cash and cash equivalents as well as a long-term debt financing of $15.0 million in the third quarter.

Financial Position

Working capital stood at $84.8 million at the end of the third quarter of 2009, compared to $78.4 million as at October 25, 2008 and $85.6 million as at January 31, 2009.

Inventories increased 9.8% to $62.8 million at the end of the third quarter, from $57.2 million a year earlier. On a unit basis, finished goods inventories were up 7.4% at the end of the third quarter primarily attributable to a 9.5% increase in total square footage to 1,135,000 year over year. On a per square footage basis, inventory units decreased 1.9% year over year. The increase in inventory carrying value is attributable to the earlier receipts of fall collections and the higher foreign exchange component caused by the decline in the Canadian dollar versus the U.S. dollar resulting in higher unit costs.

Long-term debt and capital lease obligations, including the current portions, amounted to $35.9 million as at October 31, 2009, compared with $31.6 million as at October 25, 2008. The increase of $4.3 million is attributable to the additional long-term debt financing of $15.0 million in the third quarter of 2009, net of repayments made during the past 12 months. The long-term debt to equity ratio increased slightly to 0.24:1 as at October 31, 2009 from 0.23:1 the previous year.

Dividends

On September 10, 2009, the Board of Directors declared a quarterly dividend of $0.175 per Class A subordinate voting share and Class B voting share. The dividend was paid on November 17, 2009 to shareholders of record at the close of business on October 30, 2009.

On December 10, 2009, the Board of Directors declared a quarterly dividend of $0.175 per Class A subordinate voting share and Class B voting share. The dividend is payable on February 16, 2010 to shareholders of record at the close of business on January 29, 2010. This represents the 65th consecutive quarterly dividend declared by Le Château.

The Company designated the above dividends to be eligible dividends pursuant to the Income Tax Act (Canada) and its provincial equivalents.

Share Capital

As at December 10, 2009, there are 19,834,664 Class A subordinate voting shares and 4,560,000 Class B voting shares outstanding. Further, there are 1,213,100 stock options outstanding with exercise prices ranging from $7.56 to $15.14, of which 554,400 are exercisable.

The Company announced on June 11, 2009 that it intended to proceed with a normal course issuer bid which was subsequently approved by the Toronto Stock Exchange. Under the bid, the Company may purchase up to 987,173 Class A subordinate voting shares of the Company, representing 5% of the issued shares of such class as at June 11, 2009. The bid commenced on June 19, 2009 and may continue to June 18, 2010. The average daily trading volume for the 6-month period preceding June 1, 2009 was 26,815 shares. In accordance with TSX requirements, a maximum daily repurchase of 25% of this average may be made, representing 6,703 shares. 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. All shares purchased by the Company will be cancelled. Since June 19, 2009, no Class A subordinate voting shares have been purchased by the Company.

The directors of the Company have concluded that purchases of up to 987,173 of the issued and outstanding Class A subordinate voting shares are an appropriate and desirable use of the Company's available funds and, therefore, would be in the best interests of the Company. As a result of such purchases, the number of issued shares will be decreased and, consequently, the proportionate share interest of all remaining shareholders will be increased on a pro rata basis.

Accounting Policies

Critical Accounting Estimates:

The Company's critical accounting estimates are substantially the same as those disclosed in the Management's Discussion and Analysis section of its 2008 Annual Report.

Accounting Standards Implemented in 2009:

There were no new accounting standards implemented during the first nine months of 2009.

International Financial Reporting Standards

In February 2008, the Canadian Accounting Standards Board confirmed that publicly-accountable enterprises would be required to use International Financial Reporting Standards ("IFRS") in the preparation of interim and annual financial statements for fiscal years 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.

A project team has been formed and a detailed conversion plan has been created outlining the major phases of the transition to IFRS.

The Company has completed the initial scoping and diagnostic phase which included the review and identification of major differences between current Canadian generally accepted accounting principles ("GAAP") and IFRS as well as an initial evaluation of IFRS 1 transition exemptions. Activities in this phase also included the training of key employees.

The Company is currently working on the second phase of its conversion plan which entails a detailed analysis of the significant areas, as identified in the initial scoping and diagnostic phase, which will be impacted by the conversion to IFRS. This phase includes the identification, evaluation and selection of accounting policies required for the transition to IFRS. During this phase, the Company will also evaluate the implication of these changes on business processes, information systems and internal control over financial reporting. To date the Company has completed the majority of the detailed analysis of the significant areas and expects to compete the balance by year-end.

The final phase of the Company's IFRS changeover plan will entail the implementation of the changes identified in the second phase as well as the preparation of draft financial statements and related note disclosure.

As the conversion plan progresses, the Company will be able to provide a more detailed assessment of the financial impact of the transition to IFRS.

Supplementary Measures

In addition to discussing earnings measures in accordance with GAAP, this MD&A provides EBITDA as a supplementary earnings measure. Depreciation and amortization include the write-off of fixed assets. 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 following table reconciles EBITDA to GAAP measures disclosed in the unaudited interim consolidated statements of earnings for the three and nine-month periods ended October 31, 2009 and October 25, 2008:

    
                                For the three              For the nine
                                 months ended              months ended
    (in thousands of       October 31,  October 25,  October 31,  October 25,
     dollars)                    2009         2008         2009         2008
    -------------------------------------------------------------------------
    Earnings before
     income taxes         $     8,334   $   15,338   $   27,454   $   38,354
    Depreciation and
     amortization               4,256        4,267       13,043       12,472
    Write-off of fixed
     assets                        78           11          167          184
    Interest on long-
     term debt and capital
     lease obligations            298          444        1,001        1,372
    Interest income              (170)        (484)        (605)      (1,794)
    -------------------------------------------------------------------------
    EBITDA                $    12,796   $   19,576   $   41,060   $   50,588
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

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

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

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.

    
                                      Earnings
    (in thousands of dollars            before
     of dollars, except                 Income       Net  Earnings per Share
     per share amounts)        Sales     Taxes  Earnings     Basic   Diluted
    -------------------------------------------------------------------------
    Third quarter
     ended October 31,
     2009                   $ 75,305  $  8,334  $  5,599  $   0.23  $   0.23
    Second quarter
     ended August 1,
     2009                     81,437    11,550     7,780      0.32      0.32
    First quarter
     ended May 2,
     2009                     71,775     7,570     5,070      0.21      0.21
    Fourth quarter
     ended January 31,
     2009                    102,555    19,352    13,167      0.54      0.54
    Third quarter
     ended October 25,
     2008                     83,763    15,338     9,988      0.40      0.40
    Second quarter
     ended July 26,
     2008                     88,680    14,536     9,821      0.39      0.39
    First quarter
     ended April 26,
     2008                     70,616     8,480     5,645      0.23      0.22
    Fourth quarter
     ended January 26,
     2008(*)                99,973    19,026    12,359      0.49      0.49

    (*) Restated to reflect the change in the accounting policy affecting
          inventories as described in note 1 to the audited consolidated
          financial statements for 2008.
    

The Company's business is seasonal in nature. As the Company executes its strategy of broadening its customer base, the Company expects that its business will become less seasonal. However, retail sales are traditionally higher in the fourth quarter due to the holiday season. In addition, fourth quarter earnings results are usually reduced by post holiday sale promotions.

Controls and Procedures

Disclosure controls and procedures

The Chief Executive Officer ("CEO") and the Chief Financial officer ("CFO") have designed disclosure controls and procedures ("DC&P"), or have caused them to be designed under their supervision, to provide reasonable assurance that material information relating to the Company has been made known to them and has been properly disclosed in the annual and quarterly regulatory filings.

Internal controls over financial reporting

The CEO and CFO have designed internal controls over financial reporting ("ICFR"), or have caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with Canadian GAAP. The CEO and CFO have evaluated whether there were changes to its ICFR during the three and nine-month periods ended October 31, 2009 that have materially affected, or are reasonably likely to materially affect, its ICFR. No such changes were identified through their evaluation.

Forward-looking Statements

This "Management's Discussion and Analysis" 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 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; customer preferences towards product offerings; seasonal weather patterns; fluctuations in foreign currency exchange rates; changes in the Company's relationship with its suppliers; interest rate fluctuations and other changes in borrowing costs; and changes in laws, rules and regulations applicable to the Company.

%SEDAR: 00002941EF

SOURCE Le Château Inc.

For further information: For further information: Emilia Di Raddo, CA, President, (514) 738-7000; Johnny Del Ciancio, CA, Vice-President, Finance, (514) 738-7000; MaisonBrison: Rick Leckner, (514) 731-0000; Source: Le Château Inc.

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Le Château Inc.

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