Reitmans (Canada) Limited Press Announcement

MONTREAL, June 2 /CNW Telbec/ - Sales for the first quarter ended May 1, 2010 increased 3.2% to $238,978,000 as compared with $231,652,000 for the first quarter ended May 2, 2009. Same store sales increased by 1.7%. Operating earnings before depreciation and amortization (EBITDA(1)) for the period increased 47.5% to $37,560,000 as compared with $25,460,000 last year. The Company's gross margin increased from 63.7% to 68.2% in the first quarter of fiscal 2011 primarily due to the strengthening of the Canadian dollar vis-à-vis the US dollar and sales growth generated from new and existing stores. The average rate for a US dollar in the first quarter of fiscal 2011 was $1.03 Canadian as compared to $1.24 Canadian in the first quarter of fiscal 2010.

Net earnings increased 111.1% to $16,471,000 or $0.24 diluted earnings per share, as compared with $7,801,000 or $0.11 diluted earnings per share last year.

During the first quarter, the Company opened 11 new stores comprised of 5 Reitmans, 2 Cassis, 3 Penningtons and 1 Addition Elle; 6 stores were closed. Accordingly, at May 1, 2010, there were 982 stores in operation, consisting of 369 Reitmans, 163 Smart Set, 66 RW & CO., 76 Thyme Maternity, 19 Cassis, 165 Penningtons and 124 Addition Elle, as compared with a total of 974 stores last year. During the year, we plan to open 30 new stores, close 11 stores and remodel 30 stores.

Sales for the month of May increased 7.3% with same store sales increasing 5.4%.

At the Board of Directors meeting held on June 2, 2010, a quarterly cash dividend (constituting eligible dividends) of $0.20 per share on all outstanding Class A non-voting and Common shares of the Company was declared, payable July 29, 2010 to shareholders of record on July 15, 2010. This is an increase of 11.1% over the previous quarterly rate of $0.18 per share resulting in an annual dividend rate of $0.80 per share.

Financial statements are attached. For management's commentary on the first quarter results, please refer to the attached Management's Discussion and Analysis of Financial Conditions and Results of Operations for the three months ended May 1, 2010.

    
    Montreal, June 2, 2010

    Jeremy H. Reitman, President

    Telephone: (514) 385-2630
    Corporate Website: www.reitmans.ca
    

All of the statements contained herein, other than statements of fact that are independently verifiable at the date hereof, are forward-looking statements. Such statements, based as they are on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown, many of which are beyond the Company's control. Such risks include but are not limited to: the impact of general economic conditions, general conditions in the retail industry, seasonality, weather and other risks included in public filings of the Company. Consequently, actual future results may differ materially from the anticipated results expressed in forward-looking statements. The reader should not place undue reliance on the forward-looking statements included herein. These statements speak only as of the date made and the Company is under no obligation and disavows any intention to update or revise such statements as a result of any event, circumstances or otherwise, except to the extent required under applicable securities law.

    
    (1) This release includes reference to certain Non-GAAP measures such as
        operating earnings before depreciation and amortization (EBITDA),
        which is defined as earnings before interest, taxes, depreciation and
        amortization and investment income, and same store sales, which is
        defined as sales generated by stores that have been opened for at
        least one year. The Company believes such measures provide
        meaningful information on the Company's performance and operating
        results. However, readers should know that such Non-GAAP measures
        have no standardized meaning as prescribed by GAAP and may not be
        comparable to similar measures presented by other companies.
        Accordingly, they should not be considered in isolation.


    STATEMENTS OF EARNINGS (Unaudited)
    (in thousands except per share amounts)

                                                  For the three months ended
                                                   May 1, 2010   May 2, 2009

    Sales                                         $    238,978  $    231,652
    Cost of goods sold and selling, general and
     administrative expenses (note 4)                  201,418       206,192
                                                  ------------- -------------
                                                        37,560        25,460
    Depreciation and amortization                       14,780        14,646
                                                  ------------- -------------
    Operating earnings before the undernoted            22,780        10,814

    Investment income (note 9)                             810           727
    Interest on long-term debt                             199           219
                                                  ------------- -------------
    Earnings before income taxes                        23,391        11,322

    Income taxes:
      Current                                            7,695         4,846
      Future                                              (775)       (1,325)
                                                  ------------- -------------
                                                         6,920         3,521
                                                  ------------- -------------

    Net earnings                                  $     16,471  $      7,801
                                                  ------------- -------------
                                                  ------------- -------------

    Earnings per share (note 8):
      Basic                                       $       0.24  $       0.11
      Diluted                                             0.24          0.11

    The accompanying notes are an integral part of these financial
    statements.


    STATEMENTS OF CASH FLOWS (Unaudited)
    (in thousands)

                                                  For the three months ended
                                                   May 1, 2010   May 2, 2009

    CASH FLOWS (USED IN) FROM OPERATING
     ACTIVITIES
      Net earnings                                $     16,471  $      7,801
      Adjustments for:
        Depreciation and amortization                   14,780        14,646
        Future income taxes                               (775)       (1,325)
        Stock-based compensation                           454            97
        Amortization of deferred lease credits          (1,269)       (1,278)
        Deferred lease credits                             905           732
        Pension contribution                              (155)         (128)
        Pension expense                                    471           450
        Loss on sale of marketable securities                -            69
        Foreign exchange loss                              490            18
      Changes in non-cash working capital
       relating to operations                          (25,959)      (51,242)
                                                  ------------- -------------
                                                         5,413       (30,160)

    CASH FLOWS (USED IN) FROM INVESTING
     ACTIVITIES
      Purchases of marketable securities                   (70)            -
      Proceeds on sale of marketable securities              -         1,125
      Additions to capital assets                      (13,091)       (9,784)
                                                  ------------- -------------
                                                       (13,161)       (8,659)

    CASH FLOWS (USED IN) FROM FINANCING
     ACTIVITIES
      Dividends paid                                   (12,187)      (12,550)
      Purchase of Class A non-voting shares for
       cancellation                                          -       (12,174)
      Repayment of long-term debt                         (318)         (298)
      Proceeds from issue of share capital               1,314           200
                                                  ------------- -------------
                                                       (11,191)      (24,822)

    FOREIGN EXCHANGE LOSS ON CASH HELD IN FOREIGN
     CURRENCY                                             (490)          (18)
                                                  ------------- -------------

    NET DECREASE IN CASH AND CASH EQUIVALENTS          (19,429)      (63,659)

    CASH AND CASH EQUIVALENTS, BEGINNING OF THE
     PERIOD                                            228,577       214,054
                                                  ------------- -------------

    CASH AND CASH EQUIVALENTS, END OF THE PERIOD  $    209,148  $    150,395
                                                  ------------- -------------
                                                  ------------- -------------

    Supplemental disclosure of cash flow information (note 9)

    The accompanying notes are an integral part of these financial
    statements.


    BALANCE SHEETS (Unaudited)
    (in thousands)
                                                                     Audited
                                                                  January 30,
                                     May 1, 2010   May 2, 2009          2010
    ASSETS
    CURRENT ASSETS
      Cash and cash equivalents
       (note 9)                     $    209,148  $    150,395  $    228,577
      Marketable securities
       (note 9)                           48,783        32,216        48,026
      Accounts receivable                  3,765         4,561         2,926
      Income taxes recoverable             8,540         9,495             -
      Merchandise inventories             81,858        99,751        63,127
      Prepaid expenses                    12,808        25,572        11,873
      Future income taxes                  2,552         3,810         2,395
                                    ------------- ------------- -------------
        Total Current Assets             367,454       325,800       356,924

    CAPITAL ASSETS
      Property and equipment             209,517       230,827       210,612
      Intangibles                          8,455        11,793         9,964
                                    ------------- ------------- -------------
        Total Capital Assets             217,972       242,620       220,576

    GOODWILL                              42,426        42,426        42,426

    FUTURE INCOME TAXES                   11,995         9,428        11,466
                                    ------------- ------------- -------------
                                    $    639,847  $    620,274  $    631,392
                                    ------------- ------------- -------------
                                    ------------- ------------- -------------

    LIABILITIES AND SHAREHOLDERS'
     EQUITY
    CURRENT LIABILITIES
      Accounts payable and accrued
       items                        $     84,614  $     74,382  $     77,766
      Income taxes payable                     -             -         4,677
      Current portion of long-term
       debt (note 7)                       1,320         1,240         1,300
                                    ------------- ------------- -------------
        Total Current Liabilities         85,934        75,622        83,743

    DEFERRED LEASE CREDITS                20,245        21,579        20,609

    LONG-TERM DEBT (note 7)               11,093        12,413        11,431

    ACCRUED PENSION LIABILITY              5,759         4,240         5,443

    SHAREHOLDERS' EQUITY
      Share capital (note 5)              27,524        23,807        25,888
      Contributed surplus                  5,296         4,426         5,164

      Retained earnings                  484,906       485,870       480,622
      Accumulated other
       comprehensive loss                   (910)       (7,683)       (1,508)
                                    ------------- ------------- -------------
                                         483,996       478,187       479,114
                                    ------------- ------------- -------------
        Total Shareholders' Equity       516,816       506,420       510,166
                                    ------------- ------------- -------------

                                    $    639,847  $    620,274  $    631,392
                                    ------------- ------------- -------------
                                    ------------- ------------- -------------

    The accompanying notes are an integral part of these financial
    statements.


    STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
    (in thousands)
                                                  For the three months ended
                                                   May 1, 2010   May 2, 2009

    SHARE CAPITAL
    Balance, beginning of the period              $     25,888  $     23,830
      Cash consideration on exercise of stock
       options                                           1,314           200
      Ascribed value credited to share capital
       from exercise of stock options                      322           209
      Cancellation of shares pursuant to stock
       repurchase program                                    -          (432)
                                                  ------------- -------------
    Balance, end of the period                          27,524        23,807
                                                  ------------- -------------

    CONTRIBUTED SURPLUS
    Balance, beginning of the period                     5,164         4,538
      Stock option compensation costs                      454            97
      Ascribed value credited to share capital
       from exercise of stock options                     (322)         (209)
                                                  ------------- -------------
    Balance, end of the period                           5,296         4,426
                                                  ------------- -------------

    RETAINED EARNINGS
    Balance, beginning of the period                   480,622       502,361
      Net earnings                                      16,471         7,801
      Dividends                                        (12,187)      (12,550)
      Premium on repurchase of Class A non-voting
       shares (note 5)                                       -       (11,742)
                                                  ------------- -------------
    Balance, end of the period                         484,906       485,870
                                                  ------------- -------------

    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
    Balance, beginning of the period                    (1,508)       (8,190)
      Net unrealized gain on available-for-sale
       financial assets arising during the period
       (net of tax of $89; for the three months
       ended May 2, 2009 - $76)                            598           447
      Reclassification of losses on
       available-for-sale financial assets to net
       earnings (net of tax of $9 for the three
       months ended May 2, 2009)                             -            60
                                                  ------------- -------------
    Balance, end of the period(1)                         (910)       (7,683)
                                                  ------------- -------------

    Total Shareholders' Equity                    $    516,816  $    506,420
                                                  ------------- -------------
                                                  ------------- -------------

    (1)Marketable securities are classified as available-for-sale financial
       investments and constitute the sole item in accumulated other
       comprehensive income (loss).

    The accompanying notes are an integral part of these financial
    statements.


    STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
    (in thousands)
                                                  For the three months ended
                                                   May 1, 2010   May 2, 2009

    Net earnings                                  $     16,471  $      7,801
    Other comprehensive income:
      Net unrealized gain on available-for-sale
       financial assets arising during the period
       (net of tax of $89; for the three months
       ended May 2, 2009 - $76)                            598           447
      Reclassification of losses on
       available-for-sale financial assets to net
       earnings (net of tax of $9 for the three
       months ended May 2, 2009)                             -            60
                                                  ------------- -------------
                                                           598           507
                                                  ------------- -------------

    Comprehensive income                          $     17,069  $      8,308
                                                  ------------- -------------
                                                  ------------- -------------

    The accompanying notes are an integral part of these financial
    statements.


    NOTES TO THE INTERIM FINANCIAL STATEMENTS (Unaudited)
    (all amounts in thousands except per share amounts)
    

1. BASIS OF PRESENTATION

These unaudited interim financial statements (the "financial statements") have been prepared in accordance with Canadian generally accepted accounting principles for interim financial information and include all normal and recurring entries that are necessary for a fair presentation of the statements. Accordingly, they do not include all of the information and footnotes required by Canadian generally accepted accounting principles for annual financial statements. These financial statements should be read in conjunction with the most recently prepared annual financial statements for the 52 week period ended January 30, 2010. The Company applied the same accounting policies in the preparation of the financial statements as disclosed in note 4 of its annual financial statements in the Company's fiscal 2010 Annual Report except as described below in note 2 - Adoption of New Accounting Standards.

The Company's business is seasonal and due to the geographical spread of the Company's stores and range of products it offers, the Company has experienced quarterly fluctuations in operating results. The business seasonality results in performance for the 13 weeks ended May 1, 2010, which is not necessarily indicative of performance for the balance of the year.

All amounts in the attached footnotes are unaudited unless specifically identified.

2. ADOPTION OF NEW ACCOUNTING STANDARDS

a) Goodwill and Intangible Assets

In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section 3064, Goodwill and Intangible Assets, which replaced Section 3062, Goodwill and Other Intangible Assets, and amended Section 1000, Financial Statement Concepts. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and other intangible assets. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. This new standard is applicable to fiscal years beginning on or after October 1, 2008. The impact of adopting this standard was to reclassify the net book value of software of $9,964 as at January 30, 2010 from property and equipment to intangible assets on the balance sheet. For comparative purposes, as at May 2, 2009 $11,793 representing the net book value of software was reclassified from property and equipment to intangible assets.

b) Financial Instruments - Disclosures

In June 2009, the CICA amended Handbook Section 3862, Financial Instruments - Disclosures, to enhance disclosures about fair value measurements and liquidity risk of financial instruments. The amendment applied to annual financial statements with fiscal years ending after September 30, 2009. The purpose of this amendment is to provide further convergence with IFRS. Financial instruments recognized at fair value on the balance sheet must be classified in fair value hierarchy levels as follows:

Level 1 - valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - valuation techniques based on inputs that are other than quoted prices included in Level 1 that are observable for the asset or liability , either directly (prices) or indirectly (derived from prices);

Level 3 - valuation techniques with unobservable market inputs (involves assumptions and estimates by management of how market participants would price the assets or liabilities).

The amended section relates to disclosure only and did not impact the financial results of the Company. As at May 1, 2010, May 2, 2009 and January 30, 2010, the Company held no significant assets or liabilities required to be measured at fair value, except for cash and cash equivalents and marketable securities, which were measured using Level 1 inputs in the fair value hierarchy.

3. RECENT ACCOUNTING PRONOUNCEMENTS

The Canadian Accounting Standards Board has confirmed that the use of International Financial Reporting Standards ("IFRS") will be required for publicly accountable profit-oriented enterprises. IFRS will replace Canada's current GAAP for those enterprises. These new standards are applicable to fiscal years beginning on or after January 1, 2011. Companies will be required to provide comparative IFRS information for the previous fiscal year. The Company will implement this standard in its first quarter of fiscal year ending January 28, 2012 and is currently evaluating the impact of the transition to IFRS and will continue to invest in training and resources throughout the transition to facilitate a timely conversion.

4. INVENTORY

The cost of inventory recognized as an expense and included in cost of goods sold and selling, general and administrative expenses for the three months ended May 1, 2010 was $75,972 (May 2, 2009 - $84,042). During the quarter, the Company recorded $1,510 (May 2, 2009 - $1,626) of write-downs of inventory as a result of net realizable value being lower than cost and no inventory write-downs recognized in previous periods were reversed.

5. SHARE CAPITAL

a) The Class A non-voting shares and the Common shares of the Company rank equally and pari passu with respect to the right to receive dividends and upon any distribution of the assets of the Company. However, in the case of stock dividends, the holders of Class A non-voting shares shall have the right to receive Class A non-voting shares and the holders of Common shares shall have the right to receive Common shares.

b) The Company has authorized an unlimited number of Class A non-voting shares.

The following table summarizes Class A non-voting shares issued for each of the periods listed:

    
                                                                     Audited
                                                                  January 30,
                                     May 1, 2010   May 2, 2009          2010

    Balance at beginning of period        54,160        56,864        56,864
    Shares issued pursuant to
     exercise of stock options               107            47           277
    Shares purchased under issuer
     bid                                       -        (1,098)       (2,981)
                                    ------------- ------------- -------------
    Balance at end of period              54,267        55,813        54,160
                                    ------------- ------------- -------------
                                    ------------- ------------- -------------
    

The Company has authorized an unlimited number of Common shares. At May 1, 2010, there were 13,440 common shares issued (May 2, 2009 - 13,440; January 30, 2010 - 13,440) with a value of $482 (May 2, 2009 - $482; January 30, 2010 - $482).

The Company received, in November 2009, approval from the Toronto Stock Exchange to proceed with a normal course issuer bid. Under the bid, the Company may purchase up to 2,729 Class A non-voting shares of the Company, representing 5% of the issued and outstanding Class A non-voting shares as at November 23, 2009. The bid commenced on November 28, 2009 and may continue to November 27, 2010. No shares were purchased during the three months ended May 1, 2010.

6. STOCK-BASED COMPENSATION

The Company has a share option plan as described in note 11 c) to the financial statements contained in the 2010 Annual Report.

Changes in outstanding stock options were as follows:

    
                                May 1, 2010                May 2, 2009
                      -------------------------------------------------------
                                        Weighted                    Weighted
                                         Average                     Average
                                        Exercise                    Exercise
                           Options         Price       Options         Price
                      -------------------------------------------------------
    Outstanding, at
     beginning of period     3,207  $      14.14         1,594  $      12.84
    Granted                    100         18.00             -             -
    Exercised                 (107)        12.23           (47)         4.25
    Forfeited                    -             -           (18)        12.23
                      -------------------------------------------------------

    Outstanding, at
     end of period           3,200  $      14.32         1,529  $      13.11
                      -------------------------------------------------------
                      -------------------------------------------------------

    Options
     exercisable,
     at end of period        1,064  $      13.22         1,080  $      12.51
                      -------------------------------------------------------
                      -------------------------------------------------------
    

Compensation cost related to stock option awards granted during the quarter under the fair value based approach was calculated using the following assumptions:

    
    Expected option life                                           6.5 years
    Risk-free interest rate                                            3.59%
    Expected stock price volatility                                   47.18%
    Average dividend yield                                             4.00%
    Weighted average fair value of options granted                    $6.22
    

7. LONG-TERM DEBT

    
                                                                     Audited
                                                                  January 30,
                                     May 1, 2010   May 2, 2009          2010

    Mortgage bearing interest at
     6.40%, payable in monthly
     instalments of principal and
     interest of $172, due
     November 2017 and secured by
     the Company's distribution
     centre                         $     12,413  $     13,653  $     12,731
    Less current portion                   1,320         1,240         1,300
                                    ------------- ------------- -------------
                                    $     11,093  $     12,413  $     11,431
                                    ------------- ------------- -------------
                                    ------------- ------------- -------------
    

8. EARNINGS PER SHARE

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

    
                                                   May 1, 2010   May 2, 2009

    Weighted average number of shares for basic
     earnings per share calculations                    67,631        70,124
    Effect of dilutive options outstanding                 277            33
                                                  ------------- -------------

    Weighted average number of shares for diluted
     earnings per share calculations                    67,908        70,157
                                                  ------------- -------------
                                                  ------------- -------------
    

As at May 1, 2010, 2,243 (May 2, 2009 - 1,477) stock options were excluded from the calculation of diluted earnings per share as these were deemed to be anti-dilutive.

9. OTHER INFORMATION

a) Included in determination of the Company's net earnings is a foreign exchange loss of $1,192 (May 2, 2009 - loss of $225).

b) Supplementary cash flow information:

    
                                                                     Audited
                                                                  January 30,
                                     May 1, 2010   May 2, 2009          2010

    Balance with banks              $     13,472  $      5,119  $      4,677
    Short-term deposits, bearing
     interest at 0.3% (May 2, 2009
     - 0.3%; January 30, 2010 -
     0.3%)                               195,676       145,276       223,900
                                    ------------- ------------- -------------
    Cash and cash equivalents       $    209,148  $    150,395  $    228,577
                                    ------------- ------------- -------------
                                    ------------- ------------- -------------

    Marketable securities:
      Fair value                    $     48,783  $     32,216  $     48,026
      Cost                                49,193        40,466        49,123

    Non-cash transactions:
      Capital asset additions
       included in accounts payable
       and accrued items            $        493  $        880  $      1,408
      Ascribed value credited to
       share capital from exercise
       of stock options                      322           209           655

    Cash paid during the period
     for:
      Income taxes                  $     20,912  $     10,907  $     31,164
      Interest                               199           219           850

    Investment income:
      Available-for-sale financial
       assets:
        Dividends                   $        671  $        510  $      2,109
        Realized loss on disposal              -           (69)         (794)
      Held-for-trading financial
       assets:
        Interest income                      139           286           677
                                    ------------- ------------- -------------
                                    $        810  $        727  $      1,992
                                    ------------- ------------- -------------
                                    ------------- ------------- -------------
    

10. FINANCIAL INSTRUMENTS

a) Fair Value Disclosure

Fair value estimates are made at a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision.

The Company has determined that the carrying value of its short-term financial assets and liabilities approximates fair value at the period-end dates due to the short-term maturity of these instruments. The fair values of the marketable securities are based on published market prices at period-end, which are considered Level 1 inputs in the fair value hierarchy.

The fair value of long-term debt is $12,711 (May 2, 2009 - $12,507; January 30, 2010 - $13,045) compared to its carrying value of $12,413 (May 2, 2009 - $13,653; January 30, 2010 - $12,731).

The fair value of the Company's long-term debt bearing interest at a fixed rate was calculated using the present value of future payments of principal and interest discounted at the current market rates of interest available to the Company for the same or similar debt instruments with the same remaining maturities.

b) Risk Management

Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk were provided in the January 30, 2010 financial statements contained in the 2010 Annual Report and there have been no significant changes in the Company's risk exposures in the first three months of fiscal 2011 with the exception of foreign currency risk as described below.

Foreign Currency Risk

The Company purchases a significant amount of its merchandise with US dollars. The Company considers a combination of foreign exchange option contracts and spot purchases to manage its foreign exchange exposure on cash flows related to these purchases. These option contracts generally do not exceed three months. A foreign exchange option contract represents an option to buy a foreign currency from a counterparty to meet its obligations. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally major Canadian financial institutions. For the first quarter of fiscal 2011, the Company satisfied its US dollar requirements through spot rate purchases.

As at May 1, 2010, May 2, 2009 and January 30, 2010, there were no outstanding foreign exchange option contracts.

The Company has performed a sensitivity analysis on its US dollar denominated financial instruments, which consist principally of cash and cash equivalents of $28,652 and accounts payable of $3,309 to determine how a change in the US dollar exchange rate would impact net earnings. On May 1, 2010, a 10% rise or fall in the Canadian dollar against the US dollar, assuming that all other variables, in particular interest rates, had remained the same, would have resulted in a $1,812 decrease or increase, respectively, in the Company's net earnings for the three months ended May 1, 2010.

    
    MANAGEMENT'S DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    FOR THE PERIOD ENDED MAY 1, 2010
    

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of Reitmans (Canada) Limited ("Reitmans" or the "Company") should be read in conjunction with the unaudited financial statements for the period ended May 1, 2010 and the audited financial statements of Reitmans for the fiscal year ended January 30, 2010 and the notes thereto which are available at www.sedar.com. This MD&A is dated June 2, 2010.

All financial information contained in this MD&A and Reitmans' financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), except for certain information referred to as Non-GAAP measures discussed below. All amounts in this report are in Canadian dollars, unless otherwise noted. The financial statements and this MD&A were reviewed by Reitmans' Audit Committee and were approved by its Board of Directors on June 2, 2010.

Additional information about Reitmans, including the Company's 2010 Annual Information Form, is available on the Company's website at www.reitmans.ca or on the SEDAR website at www.sedar.com.

FORWARD-LOOKING STATEMENTS

All of the statements contained herein, other than statements of fact that are independently verifiable at the date hereof, are forward-looking statements. Such statements, based as they are on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown, many of which are beyond the Company's control. Such risks include but are not limited to: the impact of general economic conditions, general conditions in the retail industry, seasonality, weather and other risks included in public filings of the Company. Consequently, actual future results may differ materially from the anticipated results expressed in forward-looking statements. The reader should not place undue reliance on the forward-looking statements included herein. These statements speak only as of the date made and the Company is under no obligation and disavows any intention to update or revise such statements as a result of any event, circumstances or otherwise, except to the extent required under applicable securities law.

NON-GAAP MEASURES

In addition to discussing earnings measures in accordance with Canadian generally accepted accounting principles ("GAAP"), this MD&A provides earnings before interest, taxes, depreciation and amortization and investment income ("EBITDA") as a supplementary earnings measure. Depreciation and amortization includes the write-off of capital assets. The Company believes this measure provides meaningful information on the Company's performance and operating results. However, readers should know that this Non-GAAP financial measure has no standardized meaning as prescribed by GAAP and may not be comparable to similar measures presented by other companies. Accordingly, it should not be considered in isolation.

The following table reconciles EBITDA to GAAP measures disclosed in the statements of earnings for the three months ended May 1, 2010 and May 2, 2009:

    
                                                  ---------------------------
                                                   May 1, 2010   May 2, 2009
                                                  ---------------------------
    Earnings before income taxes                  $ 23,391,000  $ 11,322,000
    Interest on long-term debt                         199,000       219,000
    Investment income                                 (810,000)     (727,000)
    Depreciation and amortization                   14,780,000    14,646,000
                                                  ---------------------------
    EBITDA                                        $ 37,560,000  $ 25,460,000
                                                  ---------------------------
                                                  ---------------------------
    

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

Same store sales is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, same store sales as discussed in this MD&A may not be comparable to similar measures presented by other companies.

CORPORATE OVERVIEW

Reitmans is a Canadian ladies' wear specialty apparel retailer. The Company has seven banners: Reitmans, Smart Set, RW & CO., Thyme Maternity, Cassis, Penningtons and Addition Elle. Each banner is focused on a particular niche in the retail marketplace. Each banner has a distinct marketing program as well as a specific website thereby allowing the Company to continue to enhance its brands and strengthen customer loyalty. The Company has several competitors in each niche, including local, regional and national chains of specialty stores and department stores as well as foreign-based competitors. The Company's stores are located in malls, strip plazas, retail power centres and on major shopping streets across Canada. The Company continues to grow all areas of its business by investing in stores, technology and people. The Company's growth has been driven by continuing to offer Canadian consumers affordable fashions and accessories at the best value reflecting price and quality.

The Company offers e-commerce website shopping in its plus-size banners (Penningtons and Addition Elle). This online channel offers customers convenience, selection and ease of purchase, while enhancing customer loyalty and continuing to build the brands.

OPERATING RESULTS FOR THE THREE MONTHS ENDED MAY 1, 2010 ("first quarter of fiscal 2011") AND COMPARISON TO OPERATING RESULTS FOR THREE MONTHS ENDED MAY 2, 2009 ("first quarter of fiscal 2010")

In the first quarter of fiscal 2011, the Company experienced modest sales improvement offering some signs of an economic recovery. Sales for the first quarter of fiscal 2011 increased 3.2% to $238,978,000 as compared with $231,652,000 for the first quarter of fiscal 2010. Same store sales increased by 1.7%. Improved sales in the clothing sector were reported by Statistics Canada for the fourth consecutive month to March 2010. Geographically, the Company experienced most improved sales in eastern Canada, including Quebec and Ontario with western Canada lagging, consistent with seasonally adjusted retail sales by province reported by Statistics Canada in its March 2010 retail trade report.

For the first quarter of fiscal 2011, EBITDA increased by $12,100,000 or 47.5% to $37,560,000 as compared with $25,460,000 for the first quarter of fiscal 2010. The Company's gross margin of 68.2% for the first quarter of fiscal 2011 rose significantly compared to 63.7% for the first quarter of fiscal 2010, driven primarily by the strengthened Canadian dollar. As the Company purchases the majority of its merchandise with US dollars, a significant fluctuation of the Canadian dollar vis-à-vis the US dollar impacts earnings. The average rate for a US dollar in the first quarter of fiscal 2011 was $1.03 Canadian as compared to $1.24 Canadian in the first quarter of fiscal 2010. Spot prices for $1.00 US for the first quarter of fiscal 2011 ranged between a high of $1.07 and a low of $1.00 Canadian ($1.30 and $1.19 respectively for the first quarter of fiscal 2010). Significant components of store operating costs that impacted EBITDA included rent and occupancy costs, which increased by 10 basis points as a percentage of sales.

Depreciation and amortization expense for the first quarter of fiscal 2011 was $14,780,000 compared to $14,646,000 for the first quarter of fiscal 2010. Included is $425,000 of write-offs as a result of closed and renovated stores, compared to $154,000 for the first quarter of fiscal 2010.

Investment income for the first quarter of fiscal 2011 increased 11.4% to $810,000 as compared to $727,000 for the first quarter of fiscal 2010. Dividend income for the first quarter of fiscal 2011 was $671,000 as compared to $510,000 for the first quarter of fiscal 2010. There were no net capital gains or losses for the first quarter of fiscal 2011 as compared to $69,000 of net capital losses for the first quarter of fiscal 2010. Interest income decreased for the first quarter of fiscal 2011 to $139,000 as compared to $286,000 for the first quarter of fiscal 2010 due to lower rates of interest.

Interest expense on long-term debt decreased to $199,000 for the first quarter of fiscal 2011 from $219,000 for the first quarter of fiscal 2010. This decrease reflects the continued repayment of the mortgage on the Company's distribution centre.

Income tax expense for the first quarter of fiscal 2011 amounted to $6,920,000, for an effective tax rate of 29.6% as compared to $3,521,000 for the first quarter of fiscal 2010, for an effective tax rate of 31.1%. The reduction in the effective tax rate reflects the impact of changes in substantively enacted tax rates in various tax jurisdictions.

Net earnings for the first quarter of fiscal 2011 increased 111.1% to $16,471,000 ($0.24 diluted earnings per share) as compared with $7,801,000 ($0.11 diluted earnings per share) for the first quarter of fiscal 2010.

The Company in its normal course of business makes long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. In the first quarter, these merchandise purchases, which are payable in US dollars, approximated $60,000,000 US (May 2, 2009 - $60,000,000 US). The Canadian dollar continued to experience volatility against the US dollar into the first quarter. The Company considers a variety of strategies designed to fix the cost of its continuing US dollar long-term commitments, including foreign exchange option contracts with maturities not exceeding three months. For the first quarter of fiscal 2011, the Company satisfied its US dollar requirements through spot rate purchases.

During the first quarter of fiscal 2011, the Company opened 11 stores comprised of 5 Reitmans, 2 Cassis, 3 Penningtons and 1 Addition Elle; 6 stores were closed. Accordingly, at May 1, 2010, there were 982 stores in operation, consisting of 369 Reitmans, 163 Smart Set, 66 RW & CO., 76 Thyme Maternity, 19 Cassis, 165 Penningtons and 124 Addition Elle, as compared with a total of 974 stores as at May 2, 2009.

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.

    
    -------------------------------------------------------------------------
    (in thousands,
     except per share                                     Earnings per Share
     amounts)                                                   ("EPS")
                                             Net
                             Sales      Earnings         Basic       Diluted
                      -------------------------------------------------------
    May 1, 2010       $    238,978  $     16,471  $       0.24  $       0.24

    January 30, 2010       268,120        14,088          0.21          0.21

    October 31, 2009       270,684        18,921          0.28          0.28

    August 1, 2009         286,071        26,426          0.38          0.38

    May 2, 2009            231,652         7,801          0.11          0.11

    January 31, 2009       261,801         8,981          0.13          0.13

    November 1, 2008       271,240        23,004          0.33          0.32

    August 2, 2008         289,502        35,385          0.50          0.50
    -------------------------------------------------------------------------
    

The retail business is seasonal and results of operations for any interim period are not necessarily indicative of the results of operations for the full fiscal year or any future period.

BALANCE SHEET

COMPARISON OF FINANCIAL POSITION AS AT MAY 1, 2010 WITH THE FINANCIAL POSITION AS AT JANUARY 30, 2010

Cash and cash equivalents amounted to $209,148,000 or 8.5% lower than $228,577,000 as at January 30, 2010. The reduction in cash of $19,429,000 was mainly attributable to capital asset additions of $13,091,000, payment of dividends of $12,187,000, along with an increased investment in inventory due to the normal build-up of inventory for the spring and summer selling seasons. Marketable securities held by the Company consist primarily of preferred shares of Canadian public companies. At May 1, 2010, marketable securities (reported at fair value) amounted to $48,783,000 as compared with $48,026,000 as at January 30, 2010. The Company's investment portfolio is subject to stock market volatility. Continued market improvement in the first quarter of fiscal 2011 resulted in an increase in the Company's investment portfolio of approximately 1.5%. The Company is highly liquid with its cash and cash equivalents being invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1.

Accounts receivable were $3,765,000 or $839,000 higher than as at January 30, 2010. The Company's accounts receivable are essentially the credit card sales from the last few days of the fiscal quarter. Income taxes recoverable were $8,540,000 as compared to income taxes payable of $4,677,000 as at January 30, 2010, primarily due to final tax instalments resulting in taxes recoverable for the prior taxation year along with instalments paid in excess of the estimated tax liability for the current year. Merchandise inventories were $81,858,000 or $18,731,000 higher than as at January 30, 2010 which is primarily due to the normal build-up of inventory for the spring and summer selling seasons, despite a reduction in the cost of merchandise due to the strengthened Canadian dollar. Traditionally, the highest levels of inventory on a quarterly basis occur at the end of the first quarter and the third quarter of any given fiscal year in preparation for the summer and the holiday selling seasons, respectively. Prepaid expenses were $12,808,000 as compared to $11,873,000 as at January 30, 2010, consisting principally of the timing of payment of various prepaid items such as insurance and maintenance contracts.

Future income taxes are attributable to differences between the carrying values of assets and liabilities and their respective income tax bases and are recognized at enacted or substantively enacted tax rates for the future income tax consequences. The future income tax assets are primarily attributable to differences relating to capital assets.

The Company invested $13,091,000 in additions to capital assets in the first quarter of fiscal 2011. This included $11,104,000 in new store construction and existing store renovation costs and $1,987,000 to the Sauvé Street office and Henri-Bourassa Boulevard distribution centre.

Accounts payable and accrued items were $84,614,000, or $6,848,000 higher than as at January 30, 2010. The Company's accounts payable consist largely of trade payables, sales and withholding taxes and liabilities for unredeemed gift cards. The increase is consistent with the normal build-up of inventory in the quarter.

COMPARISON OF FINANCIAL POSITION AS AT MAY 1, 2010 WITH THE FINANCIAL POSITION AS AT MAY 2, 2009

Cash and cash equivalents amounted to $209,148,000 or 39.1% higher than $150,395,000 last year. The increase of $58,753,000 was mainly attributable to improved cash flows from operations. Marketable securities held by the Company consist primarily of preferred shares of Canadian public companies. At May 1, 2010, marketable securities (reported at fair value) amounted to $48,783,000 as compared with $32,216,000 last year. The increase in marketable securities was a result of the purchase of securities combined with a significant improvement in the market value of the portfolio over the prior year. The Company's investment portfolio is subject to stock market volatility. Due to market improvement, the market value of the Company's investment portfolio, for shares held continuously for the 12 months ended May 1, 2010, has recovered by approximately 120%. The Company is highly liquid with its cash and cash equivalents being invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1.

Accounts receivable are $3,765,000 or $796,000 lower than last year due to an outstanding insurance claim and an outstanding loan with an executive officer in the prior year, both of which have been settled. The Company's accounts receivable are essentially the credit card sales from the last few days of the fiscal quarter. Income taxes recoverable are $8,540,000 (May 2, 2009 - $9,495,000) consisting primarily of taxes recoverable for the prior taxation year along with instalments paid in excess of the estimated tax liability for the current year. Merchandise inventories this year were $81,858,000 or $17,893,000 lower than last year, due mainly to the strengthened Canadian dollar, vis-à-vis the US dollar, for purchases remaining in inventory at the end of the quarter. Prepaid expenses are $12,764,000 lower than last year, principally due to the timing of May 2010 rent payments.

The Company invested $13,091,000 in additions to property and equipment in the first quarter of fiscal 2011 compared to $9,784,000 in the first quarter of fiscal 2010. This included $11,104,000 (May 2, 2009 - $9,377,000) in new store construction and existing store renovation costs and $1,987,000 (May 2, 2009 - $407,000) to the Sauvé Street office and Henri-Bourassa Boulevard distribution centre. In the fiscal year ending January 29, 2011, the Company plans to invest approximately $30,000,000 in capital expenditures related to new stores and renovations.

Accounts payable and accrued items are $84,614,000, or $10,232,000 higher than last year. This increase is in part due to an increase in the amount of the remittance of withholding taxes relating to payments made under the Company's performance incentive plan and an increase in sales tax liabilities. The Company's accounts payable consist largely of trade payables, sales and withholding taxes and liabilities for unredeemed gift cards.

The Company maintains a defined benefit pension plan ("PLAN"). An actuarial valuation was performed as at December 31, 2007 and was extrapolated to January 30, 2010 to determine the estimated liability the Company incurred with respect to the provisions of the PLAN. The Company also sponsors a Supplemental Executive Retirement Plan ("SERP") for certain senior executives. The SERP is unfunded and when the obligation arises to make any payment called for under the SERP (e.g. when an eligible plan member retires and begins receiving payments under the SERP), the payments reduce the accrual amount as the payments are actually made. An amount of $471,000 (May 2, 2009 - $450,000) was expensed in the first quarter of fiscal 2011 with respect to both plans.

OPERATING RISK MANAGEMENT

Economic Environment

Recent improvements in the economic outlook have begun to emerge, albeit at a slow pace. Employment levels have begun to show improvement with April 2010 showing the largest monthly gain in percentage terms since August 2002 as reported by Statistics Canada. The Company closely monitors economic conditions in order to react to consumer spending habits and constraints in developing both its short-term and long-term operating decisions. Additionally, despite the impact of reduced access to credit for many businesses, the Company is in a strong financial position with significant liquidity available and ample financial credit resources to draw upon as deemed necessary.

Competitive Environment

The apparel business in Canada is highly competitive with competitors including department stores, specialty apparel chains and independent retailers. There is no effective barrier to entry into the Canadian apparel retailing marketplace by any potential competitor, foreign or domestic, and the Company has witnessed the arrival over the past few years of a number of foreign-based competitors now operating in virtually all of the Company's Canadian retail sectors. The Company believes that it is well positioned to compete with any competitors. The Company operates under seven banners and our product offerings are diversified as each banner is directed to and focused on a different niche in the Canadian women's apparel market. Our stores, located throughout Canada, offer affordable fashions to consumers. Additionally, Canadian women have a significant number of e-commerce shopping alternatives available to them on a global basis.

Seasonality

The Company is principally engaged in the sale of women's apparel through 982 leased retail outlets operating under seven banners located across Canada. The Company's business is seasonal and is also subject to a number of factors, which directly impact retail sales of apparel over which it has no control, namely fluctuations in weather patterns, swings in consumer confidence and buying habits, and the potential of rapid changes in fashion preferences.

Distribution and Supply Chain

The Company depends on the efficient operation of its sole distribution centre, such that any significant disruption in the operation thereof (e.g. natural disaster, system failures, destruction or major damage by fire), could materially delay or impair its ability to replenish its stores on a timely basis causing a loss of future sales, which could have a significant effect on the Company's results of operations.

Information Technology

The Company depends on information systems to manage its operations, including a full range of retail, financial, merchandising and inventory control, planning, forecasting, reporting and distribution systems. The Company regularly invests to upgrade, enhance, maintain and replace these systems. Any significant disruptions in the performance of these systems could have a material adverse impact on the Company's operations and financial results.

Government Regulation

The Company is structured in a manner that management considers to be most effective to conduct its business in every Canadian province and territory. The Company is therefore subject to all manner of material and adverse changes that can take place in any one or more of these jurisdictions as they might impact income and sales, taxation, duties, quota impositions or re-impositions and other legislated or government regulated matters.

Merchandise Sourcing

Virtually all of the Company's merchandise is private label. In the first quarter of fiscal 2011, no supplier represented more than 10% of the Company's purchases (in dollars and/or units) and there are a variety of alternative sources (both domestic and offshore) for virtually all of the Company's merchandise. The Company has good relationships with its suppliers and has no reason to believe that it is exposed to any material risk that would operate to prevent the Company from acquiring, distributing and/or selling merchandise on an ongoing basis.

FINANCIAL RISK MANAGEMENT

Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk were provided in the Company's 2010 Annual Report and there have been no significant changes in the Company's risk exposures in the three months ended May 1, 2010 with the exception of foreign currency risk as described below.

Foreign Currency Risk

The Company purchases a significant amount of its merchandise with US dollars. The Company considers a combination of foreign exchange option contracts and spot purchases to manage its foreign exchange exposure on cash flows related to these purchases. These option contracts generally do not exceed three months. A foreign exchange option contract represents an option to buy a foreign currency from a counterparty. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally major Canadian financial institutions. For the first quarter of fiscal 2011, the Company satisfied its US dollar requirements through spot rate purchases.

As at May 1, 2010, May 2, 2009 and January 30, 2010, there were no outstanding foreign exchange option contracts.

The Company has performed a sensitivity analysis on its US dollar denominated financial instruments, which consist principally of cash and cash equivalents of $28,652,000 and accounts payable of $3,309,000 to determine how a change in the US dollar exchange rate would impact net earnings. On May 1, 2010, a 10% rise or fall in the Canadian dollar against the US dollar, assuming that all other variables, in particular interest rates, had remained the same, would have resulted in a $1,812,000 decrease or increase, respectively, in the Company's net earnings for the three months ended May 1, 2010.

LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES

Shareholders' equity at May 1, 2010 amounted to $516,816,000 or $7.63 per share as compared to $506,420,000 or $7.31 per share last year (January 30, 2010 - $510,166,000 or $7.55 per share). The impact of the recession on the Canadian equity markets resulted in a significant drop in the Toronto Stock Exchange composite index, however, the Company by virtue of its holdings in cash and cash equivalents, sustained minimal loss in value in its liquid assets. Due to market improvement, the market value of the Company's investment portfolio, for shares held continuously for the 12 months ended May 1, 2010, has recovered by approximately 120%. The Company continues to be in a strong financial position. The Company's principal sources of liquidity are its cash, cash equivalents and investments in marketable securities (reported at fair value) of $257,931,000 as compared with $182,611,000 last year (January 30, 2010 - $276,603,000). Cash is conservatively invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1. The Company closely monitors its risk with respect to short-term cash investments. The Company has borrowing and working capital credit facilities (unsecured) available of $125,000,000. As at May 1, 2010, $44,310,000 (May 2, 2009 - $42,034,000; January 30, 2010 - $53,624,000) of the operating line of credit was committed for documentary and standby letters of credit. These credit facilities are used principally for US dollar letters of credit to satisfy offshore third-party vendors, which require such backing before confirming purchase orders issued by the Company. The Company rarely uses such credit facilities for other purposes.

The Company has granted standby letters of credit, issued by highly-rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at May 1, 2010, the maximum potential liability under these guarantees was $5,138,000. The standby letters of credit mature at various dates during fiscal 2011. The Company has recorded no liability with respect to these guarantees, as the Company does not expect to make any payments for these items.

The Company is self-insured on a limited basis with respect to certain property risks and also purchases excess insurance coverage from financially stable third-party insurance companies. The Company maintains comprehensive internal security and loss prevention programs aimed at mitigating the financial impact of operational risks.

The Company continued repayment on its long-term debt, relating to the mortgage on the distribution centre, paying down $318,000 in the first quarter of fiscal 2011. The Company paid dividends amounting to $12,187,000 in the first quarter of fiscal 2011 compared to $12,550,000 in the first quarter of fiscal 2010, the reduction being attributed to a lower number of shares outstanding due to the normal course issuer bid share purchases.

In the first quarter of fiscal 2011, the Company invested $13,091,000 on new and renovated stores, the Sauvé Street office and Henri-Bourassa Boulevard distribution centre. In the fiscal year ending January 29, 2011, the Company plans to invest approximately $30,000,000 in capital expenditures related to new stores and renovations. These expenditures, together with the payment of cash dividends and the repayments related to the Company's bank credit facility and long-term debt obligations, are expected to be funded by the Company's existing financial resources and funds derived from its operations.

FINANCIAL COMMITMENTS

The following table sets forth the Company's financial commitments, excluding accounts payable and accrued items, as at May 1, 2010, the details of which are described in the previous commentary.

    
                      -------------------------------------------------------
    Contractual                           Within        2 to 4       5 years
     Obligations             Total        1 year         years      and over
                      -------------------------------------------------------
    Store & office
     operating
     leases(1)        $472,575,000  $100,285,000  $217,644,000  $154,646,000
    Other operating
     leases(2)          17,400,000     4,090,000     9,888,000     3,422,000
    Long-term debt      12,413,000     1,320,000     4,498,000     6,595,000
    Interest on
     long-term debt      3,236,000       746,000     1,701,000       789,000
                      -------------------------------------------------------
    Total contractual
     obligations      $505,624,000  $106,441,000  $233,731,000  $165,452,000
                      -------------------------------------------------------
                      -------------------------------------------------------

    (1) Represents the minimum lease payments under long-term leases for
        store locations and office space as at May 1, 2010.

    (2) Includes lease payments for computer equipment, automobiles and
        office equipment.
    

OFF-BALANCE SHEET ARRANGEMENTS

Derivative Financial Instruments

The Company in its normal course of business must make long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. Most of these purchases must be paid for in US dollars. The Company considers a variety of strategies, designed to fix the cost of its continuing US dollar long-term commitments, including foreign exchange option contracts. For the year to date, the Company satisfied its US dollar requirements through spot rate purchases.

A foreign exchange option contract represents an option to buy a foreign currency from a counterparty at a predetermined date and amount. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally Canadian chartered banks.

The Company does not use derivative financial instruments for speculative purposes. Foreign exchange option contracts are considered with maturities not exceeding three months. As at May 1, 2010, May 2, 2009 and January 30, 2010, the Company had no outstanding foreign exchange option contracts.

Included in the determination of the Company's net earnings for the first quarter of fiscal 2011 is a foreign exchange loss of $1,192,000 (May 2, 2009 - loss of $225,000).

RELATED PARTY TRANSACTIONS

The Company leases two retail locations which are owned by a related party. The leases for such premises were entered into on commercial terms similar to those for leases entered into with third parties for similar premises. In the first quarter of fiscal 2011, the rent expense under these leases was, in the aggregate, approximately $45,000 (May 2, 2009 - $48,000).

The Company incurred $142,000 in the first quarter of fiscal 2011 (May 2, 2009 - $135,000) with a firm connected to outside directors of the Company for fees in conjunction with general legal advice. The Company believes that such remuneration was based on normal terms for business transactions between unrelated parties.

These transactions are recorded at the amount of consideration paid, as established and agreed to by the related parties.

FINANCIAL INSTRUMENTS

The Company's significant financial instruments consist of cash and cash equivalents along with marketable securities. The Company uses its cash resources to fund ongoing store construction and renovations along with working capital needs. Financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company reduces its credit risks by investing available cash in bank bearer deposit notes and bank term deposits with major Canadian chartered banks. The Company closely monitors its risk with respect to short-term cash investments. Marketable securities consist primarily of preferred shares of Canadian public companies. The Company's investment portfolio is subject to stock market volatility and widespread declines in the stock market due to the economic recession resulted in a reduction in the market value of these securities. Due to market improvement, the market value of the Company's investment portfolio, for shares held continuously for the 12 months ended May 1, 2010, has recovered by approximately 120%. The Company is highly liquid with its cash and cash equivalents being invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1.

The volatility of the Canadian dollar impacts earnings and while the Company considers a variety of strategies designed to fix the cost of its continuing US dollar commitments, such as foreign exchange option contracts, this unpredictability can result in exposure to risk.

CRITICAL ACCOUNTING ESTIMATES

Inventory Valuation

The Company uses the retail inventory method in arriving at cost. Merchandise inventories are valued at the lower of cost and net realizable value. Excess or slow moving items are identified and a provision is taken using management's best estimate. In addition, a provision for shrinkage and sales returns are also recorded using historical rates experienced. Given that inventory and cost of sales are significant components of the financial statements, any changes in assumptions and estimates could have a material impact on the Company's financial position and results of operations.

Stock-Based Compensation

The Company accounts for stock-based compensation and other stock-based payments using the fair value method. Stock options granted result in an expense over their vesting period based on their estimated fair values on the date of grant, determined using the Black-Scholes option pricing model. In computing the compensation cost related to stock option awards granted during the year under the fair value approach, various assumptions are used to determine the expected option life, risk-free interest rate, expected stock price volatility and average dividend yield. The use of different assumptions could result in a stock compensation expense that differs from that which the Company has recorded.

Pension

The Company maintains a contributory, defined benefit pension plan and sponsors a SERP. The costs of the defined benefit pension plan and SERP are determined periodically by independent actuaries. Pension expense is included in the results of operations. Assumptions used in developing the pension expense and projected benefit obligation include a discount rate, rate of increase in salary levels and expected long-term rate of return on plan assets. Effective the beginning of the fiscal year ended January 30, 2010, due to the performance in the equity markets in North America, the Company reduced the expected long-term rate of return on plan assets from 7.5% to 7.0%. The use of different assumptions could result in a pension expense that differs from that which the Company has recorded. The defined benefit pension plan is fully funded and solvent, based on the actuarial valuation as at December 31, 2007 which was extrapolated to January 30, 2010, and the SERP is an unfunded pay as you go plan.

Goodwill

Goodwill is not amortized but rather is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the Company determines in the future that impairment has occurred, the Company would be required to write off the impaired portion of goodwill.

Gift Cards

Gift cards sold are recorded as a liability and revenue is recognized when the gift card is redeemed. The Company, for each reporting period, reviews the gift card liability and assesses its adequacy. In its review, the Company estimates expected usages and evaluates specific trends and patterns, which can result in an adjustment to the liability for unredeemed gift cards.

ADOPTION OF NEW ACCOUNTING STANDARDS

Goodwill and Intangible Assets

In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section 3064, Goodwill and Intangible Assets, which replaces Section 3062, Goodwill and Other Intangible Assets, and amends Section 1000, Financial Statement Concepts. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and other intangible assets. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. This new standard is applicable to fiscal years beginning on or after October 1, 2008. The impact of adopting this standard was to reclassify the net book value of software of $9,964,000 as at January 30, 2010 from property and equipment to intangible assets on the balance sheet. For comparative purposes, as at May 2, 2009 $11,793,000 representing the net book value of software was reclassified from property and equipment to intangible assets.

Financial Instruments - Disclosures

In June 2009, the CICA amended Handbook Section 3862, Financial Instruments - Disclosures, to enhance disclosures about fair value measurements and liquidity risk of financial instruments. The amendment applied to annual financial statements with fiscal years ending after September 30, 2009. The purpose of this amendment is to provide further convergence with IFRS. Financial instruments recognized at fair value on the balance sheet must be classified in fair value hierarchy levels as follows:

Level 1 - valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - valuation techniques based on inputs that are other than quoted prices included in Level 1 that are observable for the asset or liability , either directly (prices) or indirectly (derived from prices);

Level 3 - valuation techniques with unobservable market inputs (involves assumptions and estimates by management of how market participants would price the assets or liabilities).

The amended section relates to disclosure only and did not impact the financial results of the Company. As at May 1, 2010, May 2, 2009 and January 30, 2010, the Company held no significant assets or liabilities required to be measured at fair value, except for cash and cash equivalents, and marketable securities, which were measured using Level 1 inputs in the fair value hierarchy.

TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Canadian Accounting Standards Board confirmed that publicly accountable enterprises will be required to adopt IFRS, for interim and annual reporting purposes, beginning on or after January 1, 2011, which for the Company will be the fiscal year ending January 28, 2012. The Company will be required to begin reporting under IFRS for the quarter ending April 30, 2011 and will be required to prepare an opening balance sheet and provide information that conforms to IFRS for comparative periods presented.

The Company began planning the transition from current Canadian GAAP to IFRS in 2008 by establishing a project plan and a project team. The project team is led by senior finance executives that provide overall project governance, management and support. Members also include representatives from various areas of the organization as necessary and external advisors that have been engaged to assist in the IFRS conversion project. The project team reports quarterly to the Audit Committee of the Company.

The project plan consists of three phases - the initial assessment, detailed assessment and design, and implementation for which details are outlined below:

    
    -------------------------------------------------------------------------
    Phase 1:
    Initial Assessment Phase
    -------------------------------------------------------------------------
    Actions                  - High-level review of the major differences
                               between current Canadian GAAP and IFRS.
                             - Initial evaluation of the different IFRS 1
                               exemptions available at date of transition.
                             - High-level assessment of potential
                               consequences on financial reporting, business
                               processes, internal controls and information
                               systems.
                             - Training sessions on IFRS for the various
                               members of the IFRS project team.
    -------------------------------------------------------------------------
    Timetable                Third quarter of fiscal 2009
    -------------------------------------------------------------------------
    Progress                 Completed
    -------------------------------------------------------------------------
    Phase 2:
    Detailed Assessment and
    Design Phase
    -------------------------------------------------------------------------
    Actions                  - Each area of accounting differences between
                               Canadian GAAP and IFRS identified in the
                               initial phase is assessed and an IFRS project
                               team member dedicated to review these
                               differences.
                             - This review includes the changes required to
                               existing accounting policies, information
                               systems, and business processes, together with
                               an analysis of policy alternatives allowed
                               under IFRS and impacts on drafting of
                               financial statements under IFRS.
                             - The analysis on these differences are
                               discussed by the Company's IFRS project team
                               and decisions made, including the Company's
                               selection of IFRS 1 exemptions at the date of
                               transition, are included in IFRS memos and
                               approved by the external auditors.
                             - Developing draft IFRS financial statements and
                               notes.
                             - Presentation of major differences and impact
                               to the Audit Committee on a quarterly basis.
    -------------------------------------------------------------------------
    Timetable                Second quarter of fiscal 2011
    -------------------------------------------------------------------------
    Progress                 - A majority of the differences were analyzed
                               and concluded on for accounting policy
                               choices, changes to processes and selection of
                               one-time transition choices.
                             - The review of the remaining variances will be
                               completed by the end of July 2010.
                             - The Company is currently working on
                               preliminary IFRS financial statements in
                               accordance with IAS 1 Presentation of
                               Financial Statements.
                             - Periodic project status updates and
                               information sessions are presented to Senior
                               management and to the Audit Committee.
    -------------------------------------------------------------------------
    Phase 3:
    Implementation
    -------------------------------------------------------------------------
    Actions                  - Embedding changes to systems, business
                               processes and internal controls, as required.
                             - Parallel accounting under Canadian GAAP and
                               IFRS.
                             - Preparation of detailed reconciliations of
                               Canadian GAAP to IFRS financial statements.
                             - Training programs for the Company's finance
                               and other staff, as necessary.
                             - Audit Committee approval of IFRS consolidated
                               financial statements.
    -------------------------------------------------------------------------
    Timetable                Third and fourth quarters of fiscal 2011
    -------------------------------------------------------------------------
    Progress                 In progress
    -------------------------------------------------------------------------
    

The Company's progress-to-date has resulted in the following conclusions:

First-Time Adoption (IFRS 1)

IFRS 1 provides the framework for the first-time adoption of IFRS and outlines that, in general, an entity shall apply the principles under IFRS retrospectively and that adjustments arising on conversion to IFRS shall be directly recognized in retained earnings. IFRS 1 provides a number of optional and mandatory exemptions. The Company currently expects to apply the following exemptions:

    
    -------------------------------------------------------------------------
    Exemption                Application of exemption
    -------------------------------------------------------------------------
    Business combinations    The Company will not restate the accounting of
                             past business combinations.
    -------------------------------------------------------------------------
    Employee benefits        The Company will elect to recognize all
                             cumulative actuarial gains and losses arising
                             from its defined benefit plan in opening
                             retained earnings.
    -------------------------------------------------------------------------
    

The remaining elective exemptions have limited or no applicability to the Company.

Accounting Policies

Set out below are selected key areas of accounting differences where changes in accounting policies in conversion to IFRS may impact the Company's financial statements. The list should not be interpreted as a comprehensive list of changes; it highlights those areas of accounting differences the Company currently believes are to be most significant upon conversion to IFRS.

    
    -------------------------------------------------------------------------
    Key accounting area      Differences with potential impact for the
                             Company
    -------------------------------------------------------------------------
    Presentation of          - Classification of the Statement of operations
    Financial Statements       by function or nature.
    (IAS 1)                  - Additional disclosures required in the notes
                               to the financial statements.
                             - The Company will address these presentation
                               differences as it prepares its draft IFRS
                               financial statements throughout Fiscal 2011.
    -------------------------------------------------------------------------
    Property, Plant and      - Componentization of buildings for separate
    Equipment (IAS 16)         amortization over different useful lives.
    -------------------------------------------------------------------------
    Impairment of Assets     - Grouping of assets in cash generating units
    (IAS 36)                   (CGU's) on the basis of independent cash
                               inflows for impairment testing purposes, using
                               a discounted cash flow method (DCF) in a
                               single-step approach.
                             - The Company has determined its cash generating
                               units to be used for the purpose of impairment
                               testing. Models are being developed, which
                               will be used for the impairment testing at the
                               date of transition to IFRS.
    -------------------------------------------------------------------------
    Customer loyalty         - Recognition of loyalty awards as a separate
    programmes (IFRIC 13)      component of revenue and deferral of this
                               revenue until the obligation towards the
                               customer is fulfilled.
    -------------------------------------------------------------------------
    Employee benefits        - Immediate recognition of liabilities and
                               expenses for vested past service costs under a
                               defined benefit plan, to opening retained
                               earnings at transition and to income
                               subsequent to transition.
                             - Recognition of actuarial gains and losses as
                               they occur in other comprehensive income,
                               with no impact on income.
    -------------------------------------------------------------------------
    

A number of other areas of IFRS will impact the Company to a lesser extent.

Impact on Information Systems and Technology

At this time, the transition is expected to have minimal impact on information systems used by the organization.

Impact on Internal Controls and Disclosure Controls and Procedures

The Company's internal controls will not be materially affected by the transition to IFRS. The IFRS differences may lead to presentation and process changes to report more detailed information in the notes to the financial statements, but it is not currently expected to lead to many differences in the accounting treatments used by the Company.

Disclosure controls and procedures may change due to the transition to IFRS, but the impact is expected to be minimal as well.

Impact on Financial Reporting Expertise

Training and education has been provided to all members of the finance team who are directly affected by the transition to IFRS. IFRS training to other financial staff will be done as deemed necessary. A review of the Audit Committee charter to reflect the requirements for IFRS financial expertise will be completed in the fourth quarter of fiscal 2011.

General

At this time, the comprehensive impact of the changeover on the Company's future financial position and results of operations is not yet determinable. Management has implemented a system for the parallel recording of financial information in accordance with IFRS at the transition date and for each of the fiscal 2011 financial periods to be presented as comparative figures in the fiscal 2012 IFRS financial statements.

The Company continues to monitor and assess the impact of evolving differences between Canadian GAAP and IFRS, since the International Accounting Standards Board ("IASB") is expected to continue issuing new accounting standards during the transition period.

The Company's IFRS conversion project is progressing according to schedule. As the project advances, the Company could alter its intentions and the milestones communicated at the time of reporting as a result of changes to international standards currently in development, or in light of new information or other external factors that could arise between now and when the changeover is completed.

OUTSTANDING SHARE DATA

At June 2, 2010, 13,440,000 Common shares of the Company and 54,267,206 Class A non-voting shares of the Company were issued and outstanding. Each Common share entitles the holder thereof to one vote at meetings of shareholders of the Company. The Company has 3,199,500 options outstanding at an average exercise price of $14.32. Each stock option entitles the holder to purchase one Class A non-voting share of the Company at an exercise price established based on the market price of the shares at the date the option was granted.

In November 2009, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid. Under the bid, the Company may purchase up to 2,728,972 Class A non-voting shares of the Company, representing 5% of the issued and outstanding Class A non-voting shares as at November 23, 2009. The average daily trading volume for the six-month period preceding November 1, 2009 was 84,048 shares. In accordance with the Toronto Stock Exchange rules, a maximum daily repurchase of 25% of this average may be made, representing 21,012 shares. The bid commenced on November 28, 2009 and may continue to November 27, 2010. The shares will be purchased on behalf of the Company by a registered broker through the facilities of the Toronto Stock Exchange. The price paid for the shares will be the market price at the time of acquisition, and the number of shares purchased and the timing of any such purchases will be determined by the Company's management. All shares purchased by the Company will be cancelled. In the first quarter of fiscal 2011, no shares were purchased by the Company.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Company has designed disclosure controls and procedures to provide reasonable assurance that material information related to the Company is included in the annual and quarterly filings. In addition, the Company evaluated the effectiveness of the disclosure controls and procedures as of January 30, 2010 and concluded that these controls were effective.

The Company, under the supervision of the Chief Executive Officer and Chief Financial Officer, has designed internal controls over financial reporting, as defined by National Instrument 52-109, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company evaluated the effectiveness of the internal controls over financial reporting as of January 30, 2010 and concluded that these controls were effective.

There have been no changes in the Company's internal controls over financial reporting during the first quarter ended May 1, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

OUTLOOK

Signs of an economic recovery are emerging as key economic indicators show improvements. Employment levels in Canada have shown gradual improvement, retail trade sales reports are more favorable while the inflation level has remained stable with projections that it will remain low. The strength of the Canadian dollar favours importers, however, it creates a drag on the economic activity of other sectors in Canada. The Bank of Canada, in its April 2010 Monetary Policy Report, has projected that the economy will grow by 3.7% in 2010 before slowing to 3.1% in 2011. The Bank expects the economy to return to full capacity in the second quarter of calendar 2011. However, the Company believes that consumer demand will remain weak into fiscal 2011 with modest improvement as consumers remain cautious. We are being guided by these expectations in conducting all facets of our business. On the positive side, we believe that we remain poised to strengthen the Company's market position in all of our market niches by offering a broad assortment of quality merchandise at affordable prices. The Company has virtually no debt and has liquid cash reserves which provide us with the ability to act when opportunities present themselves in whatever format including merchandising, store acquisition/construction, system replacements/upgrading or expansion by acquisition.

The Company's Hong Kong office continues to serve the Company well, with over 110 full-time employees dedicated to seeking out the highest quality, affordable and fashionable apparel for all our banners. On an annual basis, the Company directly imports approximately 80% of its merchandise, largely from China.

We believe that, in general, our merchandise offerings will continue to remain attractive values to the consumer, even in these difficult times. The Company has a strong balance sheet, with excellent liquidity and borrowing capacity. Its systems, including merchandise procurement, inventory control, planning, allocation and distribution, distribution centre management, point-of-sale, financial management and information technology are fully integrated. The Company is committed to continue to invest in training for all levels of its employees.

%SEDAR: 00002316EF

For further information: For further information: Jeremy H. Reitman, President, (514) 385-2630; www.reitmans.ca


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