Liquor Stores' Defense of Status Quo Confirms It Is Time For a Change

  • Board nominees and New Strategy show Liquor Stores can do better and improve value for shareholders

CALGARY, May 19, 2017 /CNW/ - PointNorth Capital Inc., together with certain affiliates and associates (collectively, "PointNorth"), appreciates the support from other large shareholders and remains committed to the facts with respect to the need for new Board nominees and the New Strategy which will lead to a better performing Liquor Stores N.A. Ltd. ("Liquor Stores" or the "Company") for all shareholders.     

PointNorth remains resolute in its belief that Liquor Stores can be a better performing company and has been clear about the real results shareholders should expect with the New Strategy. The Liquor Stores Board's defense of the status quo demonstrates that they do not believe it is possible to improve the performance of the Company and that shareholders should be prepared to continue to accept a declining share price, underperforming financial performance and a shrinking dividend. The incumbent Board cannot make the changes required. The new Board can and will.

SHAREHOLDERS AGREE: IT IS TIME FOR A CHANGE

Liquor Stores Can Do Better Than Government-Owned Peers. PointNorth and the shareholders who support them believe the New Strategy can increase profits, reduce debt, increase cash flow and perform better than government-owned peers. Liquor Stores has argued that the operational metrics of government-owned alcohol beverage retailers in Canada and the experience of successfully leading those organizations is not relevant. Government-owned alcohol beverage retailers are not able to acquire market share through acquisitions and must run efficient businesses to produce growth exclusively through organic same-store sales. Liquor Stores should not be dismissive of higher efficiency benchmarks and its track record of organic sales growth is dismal.

Despite the restrictions that government-owned alcohol beverage retailers face, all of them outperform Liquor Stores on key retail operating metrics and produce results comparable to the private sector retail peer group. Liquor Stores' latest news release ignores the fact that Liquor Stores competes directly against a government-run alcohol beverage retailer in British Columbia and is losing market share to B.C. Liquor Stores ("BCLS"). A comparison between Liquor Stores and BCLS clearly illustrates the Company's underperformance:


BCLS*

Liquor Stores

Operating Expenses as a % of Revenue

15.4%

20.4%

Inventory Turnover

12.0x

3.9x

Days on Hand Inventory

30

94

 

*B.C. Liquor Stores competes in a fully competitive market

Liquor Stores Can Do Better on Inventory Management. The New Strategy advocated by PointNorth will shift the Company's merchandising strategy from stockpiling nearly 100 days of inventory to a "just-in-time" system, which we expect will improve the cash position of the Company by $80 million which will be available for reinvestment into the core Canadian business by renovating all Canadian stores and completing the ERP system.

While stockpiling inventory is common practice in the regional U.S. chains that management is emulating, it offers no advantage in the alcohol beverage retail sector of B.C. and Alberta where the government owns the warehouse distribution system. To continually buy nearly 100 days of inventory, Liquor Stores does so by borrowing money at an approximate 4.6% interest rate. Liquor Stores claims that their strategy of "bridge buying" provides a "significant competitive advantage". Yet, the market-leading alcohol manufacturers discount as follows:

  • Spirits: a maximum 5% wholesale discount on select products in Alberta;
  • Wine: several of the largest wine producers in the Canadian market do not provide any wholesale discounting for their brands in Alberta;
  • Beer: Canadian commercial beer producers which make up 90% of beer sales in Canada limit their discounts to, on average, 8% on select products

Combining Liquor Stores' interest payments for holding excess inventory with the costs of a duplicated supply chain, it is clear that current buying practices likely cost the Company more for the wholesale product than its price to begin with.

Liquor Stores Can Do Better on its Operating Expense Ratio.  The New Strategy is expected to return Liquor Stores' operating expense ratio to levels it realized five years ago, and which are higher still than the industry norm of 15%. One of the two largest operating expenses for a retail business is rent. In Liquor Stores' letter to PointNorth dated February 21, 2017, the incumbent board stated that rising Liquor Stores' rents are the primary cause of Liquor Stores' operating expenses growing faster than sales. This is true. The incumbent Board has overseen an escalation of Liquor Stores' rent and premise expenses of 71% over the five years between 2011 and 2016. During the same period, the Company:

  • Grew its store count by only 5%;
  • Established an additional executive office in Louisville, Kentucky;
  • Added warehouses in order to stockpile nearly 100 days of inventory;
  • Reduced adjusted operating profits by 9%;
  • Increased operating expenses by 66% from $100 million to $167 million
  • Diminished shareholder value by over 50% (from over $20.00 in 2012 to $9.55)

The incumbent Board and management continue to excuse the Company's underperformance on the economic conditions in the Alberta market, yet accept a 71% increase in rent payments in that same environment. These rent escalations are not commercial and require further investigation from a Board and management team that know how to deal with landlords.

Liquor Stores Can Do Better Strategically. The New Strategy will focus on investing in Canada, where Liquor Stores' core assets are located. The incumbent Board's defense of the U.S. stores misses the point. First, they deliver operating margins 43% lower than the Canadian assets. Second, spread throughout the U.S. – Alaska, Kentucky, New Jersey and Connecticut – means there is little market impact, and an inefficient store operations management system for so few operators. Smart geographic expansion for any retail business is to do so contiguously in markets close to core markets. The southern U.S., with 15 stores in a market that the Company clearly has challenges competing in, is far away from the Company's Western Canadian and Alaska operations.  If continued expansion is critical to the success of the business, as management has reiterated to PointNorth, then acquisitions should be closer to the home market.

It is time for a change. Shareholders can do better. Vote the BLUE proxy form or BLUE voting instruction form for the six new director nominees before 5:00 p.m. (Toronto time) on June 15, 2017.

If you have questions or need help voting, contact Kingsdale Advisors at 1-877-657-5857 or at contactus@kingsdaleadvisors.com.

About PointNorth Capital

PointNorth, together with its affiliates and associates, is a private equity investment firm formed in Ontario. PointNorth invests, as did its predecessor, in equity and debt situations where it is able to influence operational, financial and strategic direction.

PointNorth targets companies that are experiencing financial or operational challenges, are in out-of-favour sectors or are otherwise in need of change to drive significant long-term value for stakeholders. PointNorth does not seek to appoint its founders and principals to the boards of directors of companies it invests in, but rather operates by identifying best-in-class independent candidates to nominate for board positions. This commitment to improvements benefits all shareholders, not just PointNorth.

PointNorth has developed the New Strategy for Liquor Stores with the input of third party alcohol retail industry experts. As at April 21, 2017, PointNorth beneficially owned or controlled or directed, directly or indirectly, an aggregate of 2,750,000 common shares, representing approximately 9.91% of the common shares in the capital of Liquor Stores.

Forward-Looking Statements and Information

Certain statements contained in this press release, constitute forward-looking statements. The words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect" and similar expressions as they relate to Liquor Stores or PointNorth are intended to identify forward-looking statements. Such statements reflect PointNorth's current views and intentions with respect to future events as well as assumptions made by and information currently available to PointNorth, and are subject to certain risks and uncertainties. Although PointNorth considers these assumptions to be reasonable based on the information currently available to it, many factors could cause the actual results, performance, actions or achievements of Liquor Stores or others that may be expressed or implied by such forward-looking statements to materially differ from those described herein should one or more of these risks or uncertainties materialize. Such factors include, but are not limited to, economic, business, competitive and regulatory factors. Readers are cautioned not to place undue reliance on forward-looking statements.

The forward-looking statements contained herein are expressly qualified by this cautionary statement and are made as of the date of this press release. Except as expressly required by law, PointNorth does not intend, and disclaims any intention or obligation to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Liquor Stores' registered office address is Suite 101, 17220 Stony Plain Road Edmonton, AB Canada T5S 1K6. A copy of this press release may be obtained on Liquor Stores' SEDAR profile at www.sedar.com.

Non-IFRS Measures

In this press releases, references are made to non-International Financial Reporting Standards ("IFRS") financial measures, including same-store sales and adjusted operating profit. These measures are not recognized by IFRS and do not have a standardized meaning. Shareholders are cautioned that these measures should not replace net earnings or loss (as determined in accordance with IFRS) as an indicator of the Company's performance, of its cash flows from operating, investing and financing activities or as a measure of its liquidity and cash flows. The method of calculating the aforementioned non‐IFRS measures may differ from the methods used by other issuers. Therefore, these measures may not be comparable to similar measures presented by other issuers.

Same-store sales include sales for stores that have been open twelve full months at the beginning of the reporting period. This is one of the key metrics that the Company's management uses to assess Liquor Stores' performance and provides a useful comparison between periods. Same-store sales exclude: (i) all sales to wholesale customers; (ii) stores where same-store sales have been negatively impacted due to sales being shifted to closely-located convenience-focused stores the Company has opened in the last twelve full months; (iii) stores where same-store sales have increased due to the closure of closely-located stores in the last twelve full months; and (iv) stores where sales have been suspended due to a fire, excavation, or natural disaster in the last twelve full months.

Adjusted operating profit represents operating profit before amortization, adjusted for unusual, non-recurring or non-operating factors on both a consolidated and segmented basis.

SOURCE PointNorth Capital Inc.

For further information: Ian Robertson, Executive Vice President, Communication Strategy, Direct: 416-867-2333, Cell: 647-621-2646, Email: irobertson@kingsdaleadvisors.com


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