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Attention Business/Financial Editors
Reitmans (Canada) Limited announces its results for the nine months ended October 31, 2009
MONTREAL, Dec. 8 /CNW Telbec/ - Sales for the nine months ended October
31, 2009 were virtually unchanged at $788,407,000 as compared with
$789,060,000 for the nine months ended November 1, 2008. In a challenging
retail environment, same store sales decreased 1.8%. Operating earnings before
depreciation and amortization (EBITDA(1)) for the period decreased 19.9% to
$121,171,000 as compared with $151,192,000 last year. Net earnings and diluted
earnings per share decreased to $53,148,000 or $0.77 per share as compared to
$76,825,000 or $1.08 per share for the same period last year. The Company had
981 stores in operation at the end of this period compared to 978 stores at
the same time last year.
Sales for the third quarter ended October 31, 2009 decreased 0.2% to
$270,684,000, as compared with $271,240,000 for the third quarter ended
November 1, 2008. Same store sales for the comparable 13 weeks decreased 2.2%.
EBITDA for the period decreased 12.1% to $42,098,000 as compared with
$47,873,000 last year. Net earnings and diluted earnings per share decreased
to $18,921,000 or $0.28 per share as compared to $23,004,000 or $0.32 per
share for the same period last year.
Sales for the month of November (four weeks ended November 28, 2009), as
a result of the continuing difficult retail environment, decreased 2.6% with
same store sales decreasing 4.0%.
During the third quarter, the Company opened 12 new stores comprised of 3
Reitmans, 3 Smart Set, 3 RW & CO., 1 Cassis, 1 Penningtons and 1 Addition
Elle; 2 stores were closed. Accordingly, at October 31, 2009, there were 981
stores in operation, consisting of 370 Reitmans, 167 Smart Set, 65 RW & CO.,
76 Thyme Maternity, 17 Cassis, 163 Penningtons and 123 Addition Elle. An
additional 3 stores are scheduled to open this year and 9 stores will be
closed.
At the Board of Directors meeting held on December 8, 2009, a quarterly
cash dividend (constituting eligible dividends) of $0.18 per share on all
outstanding Class A non-voting and Common shares of the Company was declared,
payable January 28, 2010 to shareholders of record on January 8, 2010.
As reported in the November 25, 2009 press release, the Company received
approval from the Toronto Stock Exchange to proceed with a normal course
issuer bid, under which the Corporation may purchase up to 2,728,972 Class A
non-voting shares, 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.
<<
Financial statements are attached.
Montreal, December 8, 2009
Jeremy H. Reitman, President
Tel: (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 Financial
Measures such as operating earnings before depreciation and
amortization and EBITDA, which are defined as earnings before
interest, taxes, depreciation and amortization and investment income.
The Company believes such measures provide meaningful information on
the Company's performance and operating results. However, readers
should know that such Non-GAAP financial measures have no
standardized meaning as prescribed by GAAP and may not be comparable
to similar measures presented by other companies. Accordingly, these
should not be considered in isolation.
STATEMENTS OF EARNINGS (Unaudited)
(in thousands For the nine months ended For the three months ended
except per share October 31, November 1, October 31, November 1,
amounts) 2009 2008 2009 2008
Sales $ 788,407 $ 789,060 $ 270,684 $ 271,240
Cost of goods
sold and selling,
general and
administrative
expenses (note 4) 667,236 637,868 228,586 223,367
------------- ------------- ------------- -------------
121,171 151,192 42,098 47,873
Depreciation and
amortization 45,181 43,297 15,022 14,515
------------- ------------- ------------- -------------
Operating earnings
before the
undernoted 75,990 107,895 27,076 33,358
Investment income
(note 9) 2,020 5,879 613 1,622
Interest on long-
term debt 642 697 209 228
------------- ------------- ------------- -------------
Earnings before
income taxes 77,368 113,077 27,480 34,752
Income taxes:
Current 26,643 38,569 9,929 12,710
Future (2,423) (2,317) (1,370) (962)
------------- ------------- ------------- -------------
24,220 36,252 8,559 11,748
------------- ------------- ------------- -------------
Net earnings $ 53,148 $ 76,825 $ 18,921 $ 23,004
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings per
share (note 8):
Basic $ 0.77 $ 1.09 $ 0.28 $ 0.33
Diluted 0.77 1.08 0.28 0.32
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF CASH FLOWS (Unaudited)
For the nine months ended For the three months ended
October 31, November 1, October 31, November 1,
(in thousands) 2009 2008 2009 2008
CASH FLOWS (USED
IN) FROM
OPERATING
ACTIVITIES
Net earnings $ 53,148 $ 76,825 $ 18,921 $ 23,004
Adjustments for:
Depreciation
and
amortization 45,181 43,297 15,022 14,515
Future income
taxes (2,423) (2,317) (1,370) (962)
Stock-based
compensation 810 519 511 150
Amortization
of deferred
lease credits (3,870) (3,930) (1,333) (1,368)
Deferred lease
credits 3,312 5,287 2,297 1,651
Pension
contribution (454) (1,280) (154) (1,101)
Pension expense 1,350 2,147 450 1,327
Loss on sale of
marketable
securities 61 - - -
Foreign
exchange
loss (gain) 722 (1,290) (135) (1,515)
Changes in non-
cash working
capital items
relating to
operations (16,035) (37,095) 8,201 3,371
------------- ------------- ------------- -------------
81,802 82,163 42,410 39,072
CASH FLOWS (USED
IN) FROM
INVESTING
ACTIVITIES
Purchases of
marketable
securities (1,843) - (70) -
Proceeds on sale
of marketable
securities 1,390 - - -
Additions to
capital assets (27,811) (45,507) (11,113) (18,624)
------------- ------------- ------------- -------------
(28,264) (45,507) (11,183) (18,624)
CASH FLOWS (USED
IN) FROM
FINANCING
ACTIVITIES
Dividends paid (37,101) (38,205) (12,244) (12,720)
Purchase of
Class A non-
voting shares
for cancellation (32,485) (4,073) (7,050) -
Repayment of long-
term debt (907) (852) (307) (288)
Proceeds from
issue of share
capital 1,904 178 1,052 -
------------- ------------- ------------- -------------
(68,589) (42,952) (18,549) (13,008)
FOREIGN EXCHANGE
(LOSS) GAIN ON
CASH HELD IN
FOREIGN CURRENCY (722) 1,290 135 1,515
------------- ------------- ------------- -------------
NET (DECREASE)
INCREASE IN CASH
AND CASH
EQUIVALENTS (15,773) (5,006) 12,813 8,955
CASH AND CASH
EQUIVALENTS,
BEGINNING OF THE
PERIOD 214,054 214,301 185,468 200,340
------------- ------------- ------------- -------------
CASH AND CASH
EQUIVALENTS, END
OF THE PERIOD $ 198,281 $ 209,295 $ 198,281 $ 209,295
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental disclosure of cash flow information (note 9)
Cash and cash equivalents consist of cash balances with banks and
investments in short-term deposits.
The accompanying notes are an integral part of these financial
statements.
BALANCE SHEETS (Unaudited)
Audited
October 31, November 1, January 31,
(in thousands) 2009 2008 2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents
(note 9) $ 198,281 $ 209,295 $ 214,054
Marketable securities (note 9) 37,254 26,455 32,818
Accounts receivable 3,311 4,389 2,689
Income taxes recoverable 5,429 1,233 3,826
Merchandise inventories 91,791 96,839 64,061
Prepaid expenses 11,083 25,410 11,402
Future income taxes 2,735 1,239 3,598
------------- ------------- -------------
Total Current Assets 349,884 364,860 332,448
CAPITAL ASSETS 230,102 251,752 249,891
GOODWILL 42,426 42,426 42,426
FUTURE INCOME TAXES 11,129 7,930 8,474
------------- ------------- -------------
$ 633,541 $ 666,968 $ 633,239
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
items $ 81,814 $ 92,531 $ 70,632
Current portion of long-term
debt (note 7) 1,279 1,201 1,220
------------- ------------- -------------
Total Current Liabilities 83,093 93,732 71,852
DEFERRED LEASE CREDITS 21,567 22,823 22,125
LONG-TERM DEBT (note 7) 11,765 13,044 12,731
FUTURE INCOME TAXES - - 74
ACCRUED PENSION LIABILITY 4,814 3,388 3,918
SHAREHOLDERS' EQUITY
Share capital 25,370 23,892 23,830
Contributed surplus 4,715 4,476 4,538
Retained earnings 486,920 509,753 502,361
Accumulated other
comprehensive loss (4,703) (4,140) (8,190)
------------- ------------- -------------
482,217 505,613 494,171
------------- ------------- -------------
Total Shareholders' Equity 512,302 533,981 522,539
------------- ------------- -------------
$ 633,541 $ 666,968 $ 633,239
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the nine months ended For the three months ended
October 31, November 1, October 31, November 1,
(in thousands) 2009 2008 2009 2008
SHARE CAPITAL
Balance, beginning
of the period $ 23,830 $ 23,777 $ 24,430 $ 23,892
Cash considera-
tion on
exercise of
stock options 1,904 178 1,052 -
Ascribed value
credited to
share capital
from exercise
of stock
options 633 44 71 -
Cancellation of
shares pursuant
to stock
repurchase
program
(note 5) (997) (107) (183) -
------------- ------------- ------------- -------------
Balance, end of
the period 25,370 23,892 25,370 23,892
------------- ------------- ------------- -------------
CONTRIBUTED SURPLUS
Balance, beginning
of the period 4,538 4,001 4,275 4,326
Stock-based
compensation 810 519 511 150
Ascribed value
credited to
share capital
from exercise
of stock
options (633) (44) (71) -
------------- ------------- ------------- -------------
Balance, end of
the period 4,715 4,476 4,715 4,476
------------- ------------- ------------- -------------
RETAINED EARNINGS
Balance, beginning
of the period 502,361 468,374 487,110 499,469
Adjustment to
opening retained
earnings due to
adoption of new
accounting
standard (net of
tax of $3,121) - 6,725 - -
Net earnings 53,148 76,825 18,921 23,004
Dividends (37,101) (38,205) (12,244) (12,720)
Premium on
repurchase of
Class A non-
voting (note 5) (31,488) (3,966) (6,867) -
------------- ------------- ------------- -------------
Balance, end of
the period 486,920 509,753 486,920 509,753
------------- ------------- ------------- -------------
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
Balance, beginning
of the period (8,190) (1,033) (3,815) (609)
Net unrealized
gain (loss) on
available-for-
sale financial
assets arising
during the
period (net of
tax of $549 for
the nine months
and $424 for
the three
months ended
October 31,
2009; $491 for
the nine months
and $425 for
the three
months ended
November 1,
2008) 3,434 (3,107) (888) (3,531)
Reclassification
of losses on
available-for-
sale financial
assets to net
earnings (net
of tax of $8
for the nine
months ended
October 31,
2009) 53 - - -
------------- ------------- ------------- -------------
Balance, end of
the period(1) (4,703) (4,140) (4,703) (4,140)
------------- ------------- ------------- -------------
Total Share-
holders' Equity $ 512,302 $ 533,981 $ 512,302 $ 533,981
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
(1) Available-for-sale financial investments constitute the sole item in
accumulated other comprehensive income (loss).
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the nine months ended For the three months ended
October 31, November 1, October 31, November 1,
(in thousands) 2009 2008 2009 2008
Net earnings $ 53,148 $ 76,825 $ 18,921 $ 23,004
Other comprehen-
sive income:
Net unrealized
gain (loss) on
available-for-
sale financial
assets arising
during the
period (net of
tax of $549 for
the nine months
and $424 for
the three
months ended
October 31,
2009; $491 for
the nine months
and $425 for
the three
months ended
November 1,
2008) 3,434 (3,107) (888) (3,531)
Reclassification
of losses on
available-for-
sale financial
assets to net
earnings (net
of tax of $8
for the nine
months ended
October 31,
2009) 53 - - -
------------- ------------- ------------- -------------
3,487 (3,107) (888) (3,531)
------------- ------------- ------------- -------------
Comprehensive
income $ 56,635 $ 73,718 $ 18,033 $ 19,473
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial
statements.
NOTES TO THE INTERIM FINANCIAL STATEMENTS (Unaudited)
(all amounts in thousands except per share amounts)
1. BASIS OF PRESENTATION
>>
These unaudited interim financial statements (the "financial statements")
have been prepared in accordance with Canadian generally accepted accounting
principles for interim financial information and include all normal and
recurring entries that are necessary for a fair presentation of the
statements. Accordingly, they do not include all of the information and
footnotes required by Canadian generally accepted accounting principles for
annual financial statements. These financial statements should be read in
conjunction with the most recently prepared annual financial statements for
the 52 week period ended January 31, 2009. The Company applied the same
accounting policies in the preparation of the financial statements as
disclosed in note 4 of its annual financial statements in the Company's fiscal
2009 Annual Report except as described below in note 2 - Adoption of New
Accounting Standard.
The Company has wound up its wholly-owned subsidiaries effectively
eliminating the preparation of consolidated financial statements. There was no
impact in the comparative financial statements as at and for the periods ended
November 1, 2008 and January 31, 2009.
The Company's business is seasonal and due to the geographical spread of
the Company's stores and range of products it offers, the Company has
experienced quarterly fluctuations in operating results. The business
seasonality results in performance for the 39 weeks ended October 31, 2009,
which is not necessarily indicative of performance for the balance of the
year.
All amounts in the attached footnotes are unaudited unless specifically
identified.
2. ADOPTION OF NEW ACCOUNTING STANDARD
In February 2008, the Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 3064, Goodwill and Intangible Assets, which
replaces Section 3062, Goodwill and Other Intangible Assets, and amends
Section 1000, Financial Statement Concepts. The new section establishes
standards for the recognition, measurement, presentation and disclosure of
goodwill and other intangible assets. Standards concerning goodwill are
unchanged from the standards included in the previous Section 3062. This new
standard is applicable to fiscal years beginning on or after October 1, 2008.
The Company has determined that there is no impact of its adoption on its
financial statements.
3. RECENT ACCOUNTING PRONOUNCEMENTS
The Canadian Accounting Standards Board has confirmed that the use of
International Financial Reporting Standards ("IFRS") will be required for
publicly accountable profit-oriented enterprises. IFRS will replace Canada's
current GAAP for those enterprises. These new standards are applicable to
fiscal years beginning on or after January 1, 2011. Companies will be required
to provide comparative IFRS information for the previous fiscal year. The
Company will implement this standard in its first quarter of fiscal year
ending January 28, 2012 and is currently evaluating the impact of the
transition to IFRS and will continue to invest in training and resources
throughout the transition to facilitate a timely conversion.
4. INVENTORY
The cost of inventory recognized as an expense and included in cost of
goods sold and selling, general and administrative expenses for the nine
months ended October 31, 2009 was $284,442 (November 1, 2008 - $260,065).
During the quarter, the Company recorded $3,912 (November 1, 2008 - $4,359) of
write-downs of inventory as a result of net realizable value being lower than
cost and no inventory write-downs recognized in previous periods were
reversed.
5. SHARE CAPITAL
The Company has authorized an unlimited number of Class A non-voting
shares.
The following table summarizes Class A non-voting shares issued for each
of the quarters listed:
<<
For the For the
nine months ended three months ended Audited
October November October November January
31, 2009 1, 2008 31, 2009 1, 2008 31, 2009
Balance at
beginning of the
period 56,864 57,473 54,934 57,228 57,473
Shares issued
pursuant to
exercise of stock
options 197 30 89 - 46
Shares purchased
under issuer bid (2,481) (275) (443) - (655)
---------- ---------- ---------- ---------- ----------
Balance at end of
the period 54,580 57,228 54,580 57,228 56,864
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
>>
The Company has authorized an unlimited number of Common shares. At
October 31, 2009, there were 13,440 common shares issued (November 1, 2008 -
13,440; January 31, 2009 - 13,440) with a value of $482 (November 1, 2008 -
$482; January 31, 2009 - $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. For the nine months ended October 31, 2009, 2,481 Class A
non-voting shares having a book value of $997 have been purchased for a total
cash consideration of $32,485. The excess of the purchase price over book
value of the shares in the amount of $31,488 was charged to retained earnings.
6. STOCK-BASED COMPENSATION
The Company has a share option plan as described in note 10 c) to the
financial statements contained in the 2009 Annual Report. Following approval
by the shareholders and the Toronto Stock Exchange in June 2009, the Company
amended its stock option plan to provide that up to 10% of the Class A
non-voting shares outstanding from time to time may be issued pursuant to the
exercise of options granted under the plan. There were no options granted or
cancelled in the three months ended October 31, 2009, while for the nine
months ended October 31, 2009, 1,920 options were granted and 12 options were
cancelled.
7. LONG-TERM DEBT
<<
Audited
October 31, November 1, January 31,
2009 2008 2009
Mortgage bearing interest at
6.40%, payable in monthly
instalments of principal and
interest of $172, due November
2017 and secured by the
Company's distribution centre $ 13,044 $ 14,245 $ 13,951
Less current portion 1,279 1,201 1,220
------------- ------------- -------------
$ 11,765 $ 13,044 $ 12,731
------------- ------------- -------------
------------- ------------- -------------
8. EARNINGS PER SHARE
The number of shares used in the earnings per share calculation is as
follows:
For the nine months ended For the three months ended
October 31, November 1, October 31, November 1,
2009 2008 2009 2008
Weighted average
number of shares
per basic
earnings per
share calculations 69,061 70,803 68,200 70,668
Effect of dilutive
options out-
standing 148 356 265 314
------------- ------------- ------------- -------------
Weighted average
number of shares
per diluted
earnings per
share calcula-
tions 69,209 71,159 68,465 70,982
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
As at October 31, 2009, a total of 2,193 stock options were excluded from
the calculation of diluted earnings per share as these were deemed to be
anti-dilutive, because the exercise prices were greater than the average
market price of the shares during the quarter.
9. OTHER INFORMATION
a) Included in the determination of the Company's net earnings for the
three months and nine months ended October 31, 2009 are foreign
exchange gains and losses of $1,073 and $293 respectively (gains of
$1,323 and $1,736 for the three months and nine months ended November
1, 2008 respectively).
b) Supplementary cash flow information:
Audited
October November January
31, 2009 1, 2008 31, 2009
Balance with
banks $ 3,909 $ 4,923 $ 1,069
Short-term
deposits, bearing
interest at 0.3%
(November 1, 2008
- 3.2%; January
31, 2009 - 1.0%) 194,372 204,372 212,985
---------- ---------- ----------
Cash and cash
equivalents $ 198,281 $ 209,295 $ 214,054
---------- ---------- ----------
---------- ---------- ----------
Marketable
securities:
Fair value $ 37,254 $ 26,455 $ 32,818
Cost 42,052 31,249 41,660
Non-cash
transactions:
Capital asset
additions
included
in accounts
payable and
accrued items $ 870 $ 2,908 $ 3,289
Ascribed value
credited to
share capital
from exercise
of stock
options 633 44 63
For the For the
nine months ended three months ended Audited
October November October November January
31, 2009 1, 2008 31, 2009 1, 2008 31, 2009
Cash paid during
the period for:
Income taxes $ 28,663 $ 59,504 $ 7,737 $ 13,920 $ 70,886
Interest 642 705 209 230 975
Investment income:
Available-for-
sale financial
assets:
Interest
income $ - $ 36 $ - $ 14 $ 42
Dividends 1,562 1,224 490 401 1,719
Realized loss
on disposal (61) - - - (2,350)
Held-for-trading
financial assets:
Interest income 519 4,619 123 1,207 5,940
---------- ---------- ---------- ---------- ----------
$ 2,020 $ 5,879 $ 613 $ 1,622 $ 5,351
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
>>
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.
The fair value of long-term debt is $12,003 (November 1, 2008 - $14,293;
January 31, 2009 - $12,751) compared to its carrying value of $13,044
(November 1, 2008 - $14,245; January 31, 2009 - $13,951).
The fair value of the Company's long-term debt bearing interest at a
fixed rate was calculated using the present value of future payments of
principal and interest discounted at the current market rates of interest
available to the Company for the same or similar debt instruments with the
same remaining maturities.
b) Risk Management
Disclosures relating to exposure to risks, in particular credit risk,
liquidity risk, foreign currency risk, interest rate risk and equity price
risk were provided at January 31, 2009 and there have been no significant
changes in the Company's risk exposures in the first nine months of fiscal
2010 with the exception of foreign currency risk as described below.
Foreign Currency Risk
The Company purchases a significant amount of its merchandise with US
dollars. The Company uses a combination of foreign exchange option contracts
and spot purchases to manage its foreign exchange exposure on cash flows
related to these purchases. These option contracts generally do not exceed
three months. A foreign exchange option contract represents an option to buy a
foreign currency from a counterparty to meet its obligations. Credit risks
exist in the event of failure by a counterparty to fulfill its obligations.
The Company reduces this risk by dealing only with highly-rated
counterparties, normally major Canadian financial institutions.
As at October 31, 2009, November 1, 2008 and January 31, 2009, there were
no outstanding foreign exchange option contracts.
The Company has performed a sensitivity analysis on its US dollar
denominated financial instruments, which consist principally of cash and cash
equivalents of $23,995 and accounts payable of $5,942 to determine how a
change in the US dollar exchange rate would impact net earnings. On October
31, 2009, a 10% rise or fall in the Canadian dollar against the US dollar,
assuming that all other variables, in particular interest rates, had remained
the same, would have resulted in a $1,375 decrease or increase, respectively,
in the Company's net earnings for the nine months ended October 31, 2009.
<<
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIODS ENDED OCTOBER 31, 2009
>>
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") of Reitmans (Canada) Limited ("Reitmans" or
the "Company") should be read in conjunction with the unaudited financial
statements for the periods ended October 31, 2009 and the audited financial
statements of Reitmans for the fiscal year ended January 31, 2009 and the
notes thereto which are available at www.sedar.com. This MD&A is dated
December 8, 2009.
All financial information contained in this MD&A and Reitmans' financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP"), except for certain information referred to as
Non-GAAP financial measures discussed below. All amounts in this report are in
Canadian dollars, unless otherwise noted. The financial statements and this
MD&A were reviewed by Reitmans' Audit Committee and were approved by its Board
of Directors on December 8, 2009.
The Company has wound up its wholly-owned subsidiaries, eliminating the
preparation of consolidated financial statements. There was no impact on the
comparative financial statements as at and for the periods ended November 1,
2008 and January 31, 2009.
Additional information about Reitmans, including the Company's 2009
Annual Information Form, is available on the Company's website at
www.reitmans.ca or on the SEDAR website at www.sedar.com.
FORWARD-LOOKING STATEMENTS
All of the statements contained herein, other than statements of fact
that are independently verifiable at the date hereof, are forward-looking
statements. Such statements, based as they are on the current expectations of
management, inherently involve numerous risks and uncertainties, known and
unknown, many of which are beyond the Company's control. Such risks include
but are not limited to: the impact of general economic conditions, general
conditions in the retail industry, seasonality, weather and other risks
included in public filings of the Company. Consequently, actual future results
may differ materially from the anticipated results expressed in
forward-looking statements. The reader should not place undue reliance on the
forward-looking statements included herein. These statements speak only as of
the date made and the Company is under no obligation and disavows any
intention to update or revise such statements as a result of any event,
circumstances or otherwise, except to the extent required under applicable
securities law.
NON-GAAP FINANCIAL MEASURES
This MD&A includes references to certain Non-GAAP financial measures such
as operating earnings before depreciation and amortization ("EBITDA"), which
is defined as earnings before interest, taxes, depreciation and amortization
and investment income and adjusted net earnings and adjusted earnings per
share, which are defined in the section entitled 'Summary of Quarterly
Results'. The Company believes such measures provide meaningful information on
the Company's performance and operating results. However, readers should know
that such Non-GAAP financial measures have no standardized meaning as
prescribed by GAAP and may not be comparable to similar measures presented by
other companies. Accordingly, these should not be considered in isolation.
CORPORATE OVERVIEW
Reitmans is a Canadian ladies' wear specialty apparel retailer. The
Company has seven banners: Reitmans, Smart Set, RW & CO., Thyme Maternity,
Cassis, Penningtons and Addition Elle. Each banner is focused on a particular
niche in the retail marketplace. Each banner has a distinct marketing program
as well as a specific website thereby allowing the Company to continue to
enhance its brands and strengthen customer loyalty. The Company has several
competitors in each niche, including local, regional and national chains of
specialty stores and department stores as well as foreign-based competitors.
The Company's stores are located in malls, strip plazas, retail power centres
and on major shopping streets across Canada. The Company continues to grow all
areas of its business by investing in stores, technology and people. The
Company's growth has been driven by continuing to offer Canadian consumers
affordable fashions and accessories at the best value reflecting price and
quality.
The Company offers e-commerce website shopping in its plus-size banners
(Penningtons and Addition Elle). This online channel offers customers
convenience, selection and ease of purchase, while enhancing customer loyalty
and continuing to build the brands.
<<
OPERATING RESULTS FOR THE NINE MONTHS ENDED OCTOBER 31, 2009 ("year to
date") AND COMPARISON TO OPERATING RESULTS FOR NINE MONTHS ENDED NOVEMBER
1, 2008 ("year to date fiscal 2009")
>>
Sales for the year to date remained virtually unchanged at $788,407,000
as compared with $789,060,000 for the year to date fiscal 2009. Same store
sales decreased by 1.8%. Reduced consumer spending continued to impact sales
as consumers cut back on discretionary spending. Statistics Canada reported in
their October 2009 labour force survey that from October 2008 through to
October 2009 total employment declined by 2.3%, while the unemployment rate
rose from 6.3% to 8.6% nationally, with the steepest declines in employment
being in the manufacturing, natural resources and construction industries.
These industries impact a number of key retail markets where sales continued
to be soft due to the economic downturn. Unseasonable weather conditions
continued to impact certain areas of the country resulting in consumers
delaying and in some cases foregoing purchases of summer merchandise thereby
further negatively impacting sales.
For the year to date, EBITDA decreased by $30,021,000 or 19.9% to
$121,171,000 as compared with $151,192,000 for the year to date fiscal 2009.
The Company's gross margin of 64.0% for the year to date decreased as compared
to 67.0% in the year to date fiscal 2009 primarily due to the impact of the
Canadian dollar vis-à-vis the US 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 decrease in gross margin
was primarily attributable to the impact of the higher cost of merchandise
sold due to the weak Canadian dollar, with respect to related purchases,
during the fourth quarter of fiscal 2009 and into fiscal 2010. The average
rate for a US dollar in the year to date was $1.15 Canadian as compared to
$1.04 Canadian in the year to date fiscal 2009. Spot prices for $1.00 US for
the year to date ranged between a high of $1.30 and a low of $1.03 Canadian
($1.29 and $0.97 respectively for the year to date fiscal 2009). Significant
components of store operating costs that impacted EBITDA included advertising
costs which increased by 17 basis points as a percentage of sales due to
increased promotional activity, rent and occupancy costs, which increased by
43 basis points as a percentage of sales, while store wage costs were
unchanged as a percentage of sales. Additionally, the Company has an employee
performance incentive plan that is based on operating performance targets and
the related expense is recorded in relation to the attainment of such targets.
The related expense for the year to date has increased by $3,000,000 as
compared with the year to date fiscal 2009.
Depreciation and amortization expense for the year to date was
$45,181,000 compared to $43,297,000 for the year to date fiscal 2009. This
increase reflects the increased new store construction and store renovation
activities of the Company in prior years. As well, it includes $1,197,000 of
write-offs as a result of closed and renovated stores, compared to $2,386,000
in the year to date fiscal 2009.
Investment income for the year to date decreased 65.6% to $2,020,000 as
compared to $5,879,000 in the year to date fiscal 2009. Dividend income for
the year to date was $1,562,000 as compared to $1,224,000 for the year to date
fiscal 2009. There was $61,000 of net capital losses for the year to date,
while there were no net capital gains or losses in the year to date fiscal
2009. Interest income decreased for the year to date to $519,000 as compared
to $4,655,000 for the year to date fiscal 2009 due to lower cash balances and
significantly lower rates of interest.
Interest expense on long-term debt decreased to $642,000 for the year to
date from $697,000 in the year to date fiscal 2009. This decrease reflects the
continued repayment of the mortgage on the Company's distribution centre.
Income tax expense for the year to date amounted to $24,220,000, for an
effective tax rate of 31.3% as compared to $36,252,000 for the year to date
fiscal 2009, for an effective tax rate of 32.0%.
Net earnings for the year to date decreased 30.8% to $53,148,000 ($0.77
diluted earnings per share) as compared with $76,825,000 ($1.08 diluted
earnings per share) for the year to date fiscal 2009. The decrease was
primarily attributable to the impact of the higher cost of merchandise sold
due to the weak Canadian dollar, with respect to related purchases, during the
fourth quarter of fiscal 2009 and into fiscal 2010.
The Company in its normal course of business makes long lead time
commitments for a significant portion of its merchandise purchases, in some
cases as long as eight months. In the year to date, these merchandise
purchases, which are payable in US dollars, exceeded $169,000,000 US (November
1, 2008 - $170,000,000 US). The Canadian dollar continued to experience
volatility against the US dollar in the year to date. The Company considers a
variety of strategies designed to fix the cost of its continuing US dollar
long-term commitments, including foreign exchange option contracts with
maturities not exceeding three months.
During the year to date, the Company opened 21 stores comprised of 5
Reitmans, 3 Smart Set, 6 RW & CO., 1 Thyme Maternity, 2 Cassis, 3 Penningtons
and 1 Addition Elle; 13 stores were closed. Accordingly, at October 31, 2009,
there were 981 stores in operation, consisting of 370 Reitmans, 167 Smart Set,
65 RW & CO., 76 Thyme Maternity, 17 Cassis, 163 Penningtons and 123 Addition
Elle, as compared with a total of 978 stores as at November 1, 2008.
Store closings take place for a variety of reasons as the viability of
each store and its location is constantly monitored and assessed for
continuing profitability. In most cases when a store is closed, merchandise at
that location is sold off in the normal course of business and any unsold
merchandise remaining at the closing date is generally transferred to other
stores operating under the same banner for sale in the normal course of
business.
<<
OPERATING RESULTS FOR THE THREE MONTHS ENDED OCTOBER 31, 2009 ("third
quarter") AND COMPARISON TO OPERATING RESULTS FOR THREE MONTHS ENDED
NOVEMBER 1, 2008 ("third quarter of fiscal 2009")
>>
Sales for the third quarter decreased 0.2% to $270,684,000 as compared
with $271,240,000 for the third quarter of fiscal 2009. Same store sales
decreased by 2.2%. In the third quarter, the Company continued to experience
softer sales due to consumers cutting back on discretionary spending. High
unemployment rates in a number of key markets, most notably southern Ontario
and Alberta, impacted sales as households reduced spending on apparel due to
credit and personal liquidity constraints.
For the third quarter, EBITDA decreased by $5,775,000 or 12.1% to
$42,098,000 as compared with $47,873,000 for the third quarter of fiscal 2009.
The Company's gross margin of 65.0% for the third quarter remained flat as
compared to the third quarter of fiscal 2009. 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 third quarter was $1.07 Canadian as compared to $1.10
Canadian in the third quarter of fiscal 2009. Spot prices for $1.00 US for the
third quarter ranged between a high of $1.11 and a low of $1.03 Canadian
($1.29 and $1.03 respectively for the third quarter of fiscal 2009).
Significant components of store operating costs that impacted EBITDA included
advertising costs which increased by 100 basis points as a percentage of sales
due to increased promotional activity, rent and occupancy costs, which
increased by 45 basis points as a percentage of sales, while store wage costs
were unchanged as a percentage of sales. Additionally, the Company has an
employee performance incentive plan that is based on operating performance
targets and the related expense is recorded in relation to the attainment of
such targets. The related expense for the third quarter has increased by
$2,250,000 as compared with the third quarter of fiscal 2009.
Depreciation and amortization expense for the third quarter was
$15,022,000 compared to $14,515,000 for the third quarter of fiscal 2009. This
increase reflects the increased new store construction and store renovation
activities of the Company in prior years. As well, it includes $107,000 of
write-offs as a result of closed and renovated stores, compared to $312,000 in
the third quarter of fiscal 2009.
Investment income for the third quarter decreased 62.2% to $613,000 as
compared to $1,622,000 in the third quarter of fiscal 2009. Dividend income
for the third quarter was $490,000 as compared to $401,000 for the third
quarter of fiscal 2009. There were no net capital gains or losses for the
third quarter or the third quarter of fiscal 2009. Interest income decreased
for the third quarter to $123,000 as compared to $1,221,000 for the third
quarter of fiscal 2009 due to lower cash balances and significantly lower
rates of interest.
Interest expense on long-term debt decreased to $209,000 for the third
quarter from $228,000 in the third quarter of fiscal 2009. This decrease
reflects the continued repayment of the mortgage on the Company's distribution
centre.
Income tax expense for the third quarter amounted to $8,559,000, for an
effective tax rate of 31.1% as compared to $11,748,000 for the third quarter
of fiscal 2009, for an effective tax rate of 33.8%.
Net earnings for the third quarter decreased 17.7% to $18,921,000 ($0.28
diluted earnings per share) as compared with $23,004,000 ($0.32 diluted
earnings per share) for the third quarter of fiscal 2009.
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 third quarter, these merchandise
purchases, which are payable in US dollars, exceeded $65,000,000 US (November
1, 2008 - $68,000,000 US). The Canadian dollar continued to experience
volatility against the US dollar into the third quarter. The Company considers
a variety of strategies designed to fix the cost of its continuing US dollar
long-term commitments, including foreign exchange option contracts with
maturities not exceeding three months.
During the third quarter, the Company opened 12 stores comprised of 3
Reitmans, 3 Smart Set, 3 RW & CO., 1 Cassis, 1 Penningtons and 1 Addition
Elle; 2 stores were closed.
SUMMARY OF QUARTERLY RESULTS
The table below sets forth selected financial data for the eight most
recently completed quarters. This unaudited quarterly information has been
prepared on the same basis as the annual financial statements. The operating
results for any quarter are not necessarily indicative of the results to be
expected for any future period.
To measure the Company's performance from one period to the next without
the variations caused by the impact of retroactive Québec income tax
reassessments for the fiscal year ended February 2, 2008, the Company uses
adjusted net earnings and adjusted earnings per share (basic and diluted),
which are calculated as net earnings and earnings per share (basic and
diluted) excluding this item. While the inclusion of this item is required by
Canadian GAAP, the Company believes that the exclusion of this item allows for
better comparability of its financial results and understanding of trends in
business performance.
<<
-------------------------------------------------------------------------
(in thousands, Adjusted
except per Earnings per Earnings per
share Share ("EPS") Share ("EPS")
amounts) Adjusted
Net Net
Sales Earnings Basic Diluted Earnings Basic Diluted
---------------------------------------------------------------
October 31,
2009 $ 270,684 $ 18,921 $ 0.28 $ 0.28 $ 18,921 $ 0.28 $ 0.28
August 1,
2009 286,071 26,426 0.38 0.38 26,426 0.38 0.38
May 2,
2009 231,652 7,801 0.11 0.11 7,801 0.11 0.11
January 31,
2009 261,801 8,981 0.13 0.13 8,981 0.13 0.13
November 1,
2008 271,240 23,004 0.33 0.32 23,004 0.33 0.32
August 2,
2008 289,502 35,385 0.50 0.50 35,385 0.50 0.50
May 3,
2008 228,318 18,436 0.26 0.26 18,436 0.26 0.26
February 2,
2008 269,618 37,047 0.52 0.52 28,506 0.40 0.40
-------------------------------------------------------------------------
>>
The retail business is seasonal and results of operations for any interim
period are not necessarily indicative of the results of operations for the
full fiscal year.
BALANCE SHEET
Cash and cash equivalents amounted to $198,281,000 or 5.3% lower than
$209,295,000 last year. The reduction in cash of $11,014,000 was mainly
attributable to the use of cash to purchase Class A non-voting shares for
cancellation, offset by reduced capital asset additions. Marketable securities
held by the Company consist primarily of preferred shares of Canadian public
companies. At October 31, 2009, marketable securities (reported at fair value)
amounted to $37,254,000 as compared with $26,455,000 last year. The increase
in marketable securities was primarily a result of purchases that occurred in
the fourth quarter of the fiscal year ended January 31, 2009 of $17,403,000.
In the nine months ended October 31, 2009 the Company purchased marketable
securities at a cost of $1,843,000 and received proceeds on the sale of
marketable securities of $1,390,000. The Company's investment portfolio is
subject to stock market volatility. Due to market improvement since January
31, 2009, the market value of the Company's investment portfolio has recovered
by approximately 13%. 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 $3,311,000 or $1,078,000 lower than last year.
The Company's accounts receivable are essentially the credit card sales from
the last few days of the fiscal quarter. Income taxes recoverable are
$5,429,000 as compared to $1,233,000 last year, primarily due to instalments
paid in excess of the estimated current tax liability. Merchandise inventories
this year were $91,791,000 or $5,048,000 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
$14,327,000 lower than last year, principally due to the timing of November
2008 rent payments.
The Company invested $27,811,000 in additions to capital assets in the
year to date compared to $45,507,000 last year. This included $26,453,000
(November 1, 2008 - $41,736,000) in new store construction and existing store
renovation costs and $1,358,000 (November 1, 2008 - $3,771,000) to the Sauvé
Street office and Henri-Bourassa Boulevard distribution centre. In the fiscal
year ending January 30, 2010, the Company plans to invest approximately
$30,000,000 in capital expenditures related to new stores and renovations.
Accounts payable and accrued items are $81,814,000, or $10,717,000 lower
than last year. The Company's accounts payable consist largely of trade
payables and liabilities for unredeemed gift cards.
The Company maintains a defined benefit pension plan ("PLAN"). An
actuarial valuation was performed as at December 31, 2007 and was updated to
January 31, 2009 to determine the estimated liability the Company incurred
with respect to the provisions of the PLAN. The Company also sponsors a
Supplemental Executive Retirement Plan ("SERP") for certain senior executives.
The SERP is unfunded and when the obligation arises to make any payment called
for under the SERP (e.g. when an eligible plan member retires and begins
receiving payments under the SERP), the payments reduce the accrual amount as
the payments are actually made. An amount of $1,350,000 (November 1, 2008 -
$2,147,000) was expensed in the year to date with respect to both plans.
COMPARISON OF FINANCIAL POSITION AS AT OCTOBER 31, 2009 WITH THE
FINANCIAL POSITION AS AT JANUARY 31, 2009
Cash and cash equivalents amounted to $198,281,000 or 7.4% lower than
$214,054,000 as at January 31, 2009. The reduction in cash of $15,773,000 was
mainly attributable to $32,485,000 of cash that was used to purchase Class A
non-voting shares for cancellation in the first nine months of fiscal 2010,
offset by reduced capital asset additions. Marketable securities held by the
Company consist primarily of preferred shares of Canadian public companies. At
October 31, 2009, marketable securities (reported at fair value) amounted to
$37,254,000 as compared with $32,818,000 as at January 31, 2009. The Company's
investment portfolio is subject to stock market volatility. However, due to
market improvement since January 31, 2009, the market value of the Company's
investment portfolio has recovered by approximately 13%. 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 $3,311,000 or $622,000 higher than as at January 31, 2009. The
Company's accounts receivable are essentially the credit card sales from the
last few days of the fiscal quarter. Income taxes recoverable are $5,429,000
as compared to $3,826,000 as at January 31, 2009, primarily due to instalments
paid in excess of the estimated current tax liability. Merchandise inventories
are $91,791,000 or $27,730,000 higher than at January 31, 2009 which is
primarily due to the normal build-up of inventory for the holiday selling
season. 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.
Accounts payable and accrued items are $81,814,000, or $11,182,000 higher
than as at January 31, 2009. The Company's accounts payable consist largely of
trade payables and liabilities for unredeemed gift cards.
OPERATING RISK MANAGEMENT
Economic Environment
The prolonged economic recession continues to negatively impact the
retail environment. Rising unemployment levels and consumer concern over
erosion of their wealth due to declines in equity markets and house prices
have impacted consumer discretionary spending, most notably apparel. Reduced
access to credit, interest rates, personal debt levels and unemployment rates
impact consumer spending and ultimately have a financial impact on the
Company. The Company closely monitors economic conditions in order to react to
consumer spending habits and constraints in developing both its short-term and
long-term operating decisions. Additionally, despite the impact of reduced
access to credit for many businesses, the Company is in a strong financial
position with significant liquidity available and ample financial credit
resources to draw upon as deemed necessary.
Competitive Environment
The apparel business in Canada is highly competitive with competitors
including department stores, specialty apparel chains and independent
retailers. There is no effective barrier to entry into the Canadian apparel
retailing marketplace by any potential competitor, foreign or domestic, and
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
981 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
nine months of fiscal 2010, 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 at January 31, 2009 and there have been no significant
changes in the Company's risk exposures in the nine months ended October 31,
2009 with the exception of foreign currency risk as described below.
Foreign Currency Risk
The Company purchases a significant amount of its merchandise with US
dollars. The Company uses a combination of foreign exchange option contracts
and spot purchases to manage its foreign exchange exposure on cash flows
related to these purchases. These option contracts generally do not exceed
three months. A foreign exchange option contract represents an option to buy a
foreign currency from a counterparty. 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 third quarter of fiscal 2010, the Company
satisfied its US dollar requirements through spot rate purchases.
As at October 31, 2009, November 1, 2008 and January 31, 2009, there were
no outstanding foreign exchange option contracts.
The Company has performed a sensitivity analysis on its US dollar
denominated financial instruments, which consist principally of cash and cash
equivalents of $23,995,000 and accounts payable of $5,942,000 to determine how
a change in the US dollar exchange rate would impact net earnings. On October
31, 2009, a 10% rise or fall in the Canadian dollar against the US dollar,
assuming that all other variables, in particular interest rates, had remained
the same, would have resulted in a $1,375,000 decrease or increase,
respectively, in the Company's net earnings for the nine months ended October
31, 2009.
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES
During the year to date, a total of 2,481,000 Class A non-voting shares
were purchased in the market under a normal course issuer bid for $32,485,000
and dividends of $37,101,000 were paid, both of which reduced shareholders'
equity. The Company has concluded that the purchase of issued and outstanding
Class A non-voting shares is an appropriate and desirable use of the Company's
available funds given the current investment yields. Shareholders' equity at
October 31, 2009 amounted to $512,302,000 or $7.53 per share as compared to
$533,981,000 or $7.56 per share last year (January 31, 2009 - $522,539,000 or
$7.43 per share). Despite the impact of the recession on the Canadian equity
markets which resulted in a significant drop in the Toronto Stock Exchange
composite index, the Company, by virtue of its holdings in cash and cash
equivalents, has sustained minimal loss in value in its liquid assets. The
Company continues to be in a strong financial position. The Company's
principal sources of liquidity are its cash, cash equivalents and investments
in marketable securities (reported at fair value) of $235,535,000 as compared
with $235,750,000 last year (January 31, 2009 - $246,872,000). Cash is
conservatively invested on a short-term basis in bank bearer deposit notes and
bank term deposits with major Canadian chartered banks and commercial paper
rated not less than R1. The Company closely monitors its risk with respect to
short-term cash investments. The Company has borrowing and working capital
credit facilities (unsecured) available of $125,000,000. As at October 31,
2009, $35,928,000 (November 1, 2008 - $37,375,000; January 31, 2009 -
$61,759,000) of the operating line of credit was committed for documentary and
standby letters of credit. These credit facilities are used principally for US
dollar letters of credit to satisfy offshore third-party vendors, which
require such backing before confirming purchase orders issued by the Company.
The Company rarely uses such credit facilities for other purposes.
The Company has granted standby letters of credit, issued by highly-rated
financial institutions, to third parties to indemnify them in the event the
Company does not perform its contractual obligations. As at October 31, 2009,
the maximum potential liability under these guarantees was $5,154,000. The
standby letters of credit mature at various dates during fiscal 2010. The
Company has recorded no liability with respect to these guarantees, as the
Company does not expect to make any payments for these items.
The Company is self-insured on a limited basis with respect to certain
property risks and also purchases excess insurance coverage from financially
stable third-party insurance companies. The Company maintains comprehensive
internal security and loss prevention programs aimed at mitigating the
financial impact of operational risks.
The Company continued repayment on its long-term debt, relating to the
mortgage on the distribution centre, paying down $907,000 in the year to date.
The Company paid dividends amounting to $37,101,000 in the year to date
compared to $38,205,000 in the year to date fiscal 2009.
In the year to date, the Company invested $27,811,000 on new and
renovated stores, the Sauvé Street office and Henri-Bourassa Boulevard
distribution centre. In the fiscal year ending January 30, 2010, the Company
plans to invest approximately $30,000,000 in capital expenditures related to
new stores and renovations. These expenditures, together with the payment of
cash dividends and the repayments related to the Company's bank credit
facility and long-term debt obligations, are expected to be funded by the
Company's existing financial resources and funds derived from its operations.
FINANCIAL COMMITMENTS
The following table sets forth the Company's financial commitments as at
October 31, 2009:
<<
Payments Due by Period
-------------------------------------------------------
Contractual Within 2 to 4 5 years
Obligations Total 1 year years and over
-------------------------------------------------------
Operating
leases(1) $447,153,000 $ 97,634,000 $206,763,000 $142,756,000
Long-term debt 13,044,000 1,279,000 4,359,000 7,406,000
Interest on
long-term debt 3,640,000 787,000 1,840,000 1,013,000
Other 17,106,000 3,794,000 8,913,000 4,399,000
-------------------------------------------------------
Total contractual
obligations $480,943,000 $103,494,000 $221,875,000 $155,574,000
-------------------------------------------------------
-------------------------------------------------------
(1) Represents the minimum lease payments under long-term leases for
store locations and office space as at October 31, 2009.
>>
OFF-BALANCE SHEET ARRANGEMENTS
Derivative Financial Instruments
The Company in its normal course of business must make long lead time
commitments for a significant portion of its merchandise purchases, in some
cases as long as eight months. Most of these purchases must be paid for in US
dollars. The Company uses a variety of strategies, such as foreign exchange
option contracts, designed to fix the cost of its continuing US dollar
commitments. For the year to date, the Company satisfied its US dollar
requirements through spot rate purchases.
A foreign exchange option contract represents an option to buy a foreign
currency from a counterparty at a predetermined date and amount. Credit risks
exist in the event of failure by a counterparty to fulfill its obligations.
The Company reduces this risk by dealing only with highly-rated
counterparties, normally Canadian chartered banks.
The Company does not use derivative financial instruments for speculative
purposes. Foreign exchange option contracts are entered into with maturities
not exceeding three months. As at October 31, 2009, November 1, 2008 and
January 31, 2009, the Company had no outstanding foreign exchange option
contracts.
Included in the determination of the Company's net earnings for the three
months and nine months ended October 31, 2009 are foreign exchange gains of
$1,073,000 and losses of $293,000 respectively (gains of $1,323,000 and
$1,736,000 for the three months and nine months ended November 1, 2008
respectively).
RELATED PARTY TRANSACTIONS
The Company leases two retail locations which are owned by a related
party. The leases for such premises were entered into on commercial terms
similar to those for leases entered into with third parties for similar
premises. In the year to date, the rent expense under these leases was, in the
aggregate, approximately $149,000 (November 1, 2008 - $142,000).
The Company incurred $360,000 in the year to date (November 1, 2008 -
$277,000) 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. However, due to market improvement since January 31, 2009, the
Company's investment portfolio has recovered by approximately 13%. The Company
is highly liquid with its cash and cash equivalents being invested on a
short-term basis in bank bearer deposit notes and bank term deposits with
major Canadian chartered banks and commercial paper rated not less than R1.
The volatility of the Canadian dollar impacts earnings and while the
Company considers a variety of strategies, such as foreign exchange option
contracts, designed to fix the cost of its continuing US dollar commitments,
this unpredictability can result in exposure to risk.
CRITICAL ACCOUNTING ESTIMATES
Inventory Valuation
The Company uses the retail inventory method in arriving at cost.
Merchandise inventories are valued at the lower of cost and net realizable
value. Excess or slow moving items are identified and a provision is taken
using management's best estimate. In addition, a provision for shrinkage and
sales returns are also recorded using historical rates experienced. Given that
inventory and cost of sales are significant components of the financial
statements, any changes in assumptions and estimates could have a material
impact on the Company's financial position and results of operations.
Stock-Based Compensation
The Company accounts for stock-based compensation and other stock-based
payments using the fair value method. Stock options granted result in an
expense over their vesting period based on their estimated fair values on the
date of grant, determined using the Black-Scholes option pricing model. In
computing the compensation cost related to stock option awards granted during
the year under the fair value approach, various assumptions are used to
determine the expected option life, risk-free interest rate, expected stock
price volatility and average dividend yield. The use of different assumptions
could result in a stock compensation expense that differs from that which the
Company has recorded.
Pension
The Company maintains a contributory, defined benefit 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 operations. Assumptions used in developing the net pension expense and
projected benefit obligation include a discount rate, rate of increase in
salary levels and expected long-term rate of return on plan assets. Effective
the beginning of the fiscal year ending 2010, due to the recent performance in
the equity markets in North America, the Company reduced the expected
long-term rate of return on plan assets from 7.5% to 7.0%. The use of
different assumptions could result in a pension expense that differs from that
which the Company has recorded. The defined benefit pension plan is fully
funded and solvent and the SERP is an unfunded pay as you go plan.
Goodwill
Goodwill is not amortized but rather is tested for impairment annually or
more frequently if events or changes in circumstances indicate that the asset
might be impaired. If the Company determines in the future that impairment has
occurred, the Company would be required to write off the impaired portion of
goodwill.
Gift Cards
Gift cards sold are recorded as a liability and revenue is recognized
when the gift card is redeemed. The Company, for each reporting period,
reviews the gift card liability and assesses its adequacy. In its review, the
Company estimates expected usages and evaluates specific trends and patterns,
which can result in an adjustment to the liability for unredeemed gift cards.
ADOPTION OF NEW ACCOUNTING STANDARD
In February 2008, the Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 3064, Goodwill and Intangible Assets, which
replaces Section 3062, Goodwill and Other Intangible Assets, and amends
Section 1000, Financial Statement Concepts. The new section establishes
standards for the recognition, measurement, presentation and disclosure of
goodwill and other intangible assets. Standards concerning goodwill are
unchanged from the standards included in the previous Section 3062. This new
standard is applicable to fiscal years beginning on or after October 1, 2008.
The Company has evaluated the new section and determined that there is no
impact of its adoption on its financial statements.
CONVERGENCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS
In February 2008, the Canadian Accounting Standards Board confirmed that
publicly accountable enterprises will be required to adopt International
Financial Reporting Standards ("IFRS") for interim and annual reporting
purposes, beginning on or after January 1, 2011. The Company will be required
to begin reporting under IFRS for the quarter ending April 30, 2011 and will
be required to prepare an opening balance sheet and provide information that
conforms to IFRS for comparative periods presented.
The Company began planning the transition from current Canadian GAAP to
IFRS in 2008 by establishing a project plan and a project team. The project
team is led by senior finance executives that provide overall project
governance, management and support. Members also include representatives from
various areas of the organization as necessary and external advisors that have
been engaged to assist in the IFRS conversion project. The project team
reports quarterly to the Audit Committee of the Company.
The project plan consists of three phases: the initial assessment,
detailed assessment and design, and implementation. The Company has completed
the initial assessment phase, which included the completion of a high level
review of the major differences between current Canadian GAAP and IFRS, and an
initial evaluation of IFRS 1 transition exemptions. The initial assessment
also included training sessions for project team members and discussions with
the Company's external auditors and advisors.
The Company is now engaged in the detailed assessment and design phase.
The detailed assessment and design phase involves completing a comprehensive
analysis of the impact of the IFRS differences identified in the initial
assessment phase. The design of solutions to resolve these IFRS differences is
progressing according to plan and set out below are the main areas where
changes to accounting policies are expected at this time:
<<
- Presentation of Financial Statements (IAS 1)
- Income Taxes (IAS 12)
- Property, Plant and Equipment (IAS 16)
- Impairment of Assets (IAS 36)
>>
During the implementation phase, the Company will implement the
identified changes to business processes, financial systems, accounting
policies, disclosure controls and internal controls over financial reporting.
The Company continues to assess the financial reporting impacts of
converting to IFRS and, at this time, the impact on future financial position
and results of operations is not reasonably determinable or estimable.
OUTSTANDING SHARE DATA
At December 8, 2009, 13,440,000 Common shares of the Company and
54,579,456 Class A non-voting shares of the Company were issued and
outstanding. Each Common share entitles the holder thereof to one vote at
meetings of shareholders of the Company. Following approval by the
shareholders and the Toronto Stock Exchange in June 2009, the Company amended
its stock option plan to provide that up to 10% of the Class A non-voting
shares outstanding from time to time may be issued pursuant to the exercise of
options granted under the plan. The Company has 3,287,250 options outstanding
at an average exercise price of $14.01. 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 year to date, the Company purchased
for cancellation 2,481,000 Class A non-voting shares, having a book value of
$997,000, for a total cash consideration of $32,485,000. The excess of the
purchase price over book value of the shares in the amount of $31,488,000 was
charged to retained earnings.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Company has designed disclosure controls and procedures to provide
reasonable assurance that material information related to the Company is
included in the annual and quarterly filings. In addition, the Company
evaluated the effectiveness of the disclosure controls and procedures as of
January 31, 2009 and concluded that these controls were effective.
The Company, under the supervision of the Chief Executive Officer and
Chief Financial Officer, has designed internal controls over financial
reporting, as defined by National Instrument 52-109, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company evaluated the effectiveness of the
internal controls over financial reporting as of January 31, 2009 and
concluded that these controls were effective.
There have been no changes in the Company's internal controls over
financial reporting during the nine months ended October 31, 2009 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
OUTLOOK
The prolonged economic recession continues to negatively impact the
retail environment despite some evidence of a slow recovery. High unemployment
levels and consumer concern over erosion of their wealth due to declines in
equity markets and house prices have impacted consumer discretionary spending.
The Bank of Canada October 2009 Monetary Policy Report indicated that
household spending began to recover in the second quarter of calendar 2009 in
response to substantial monetary and fiscal stimulus and improved consumer
confidence and projections are that the Canadian economy will return to full
capacity in the third quarter of 2011. However, the Company believes that
consumer demand will remain weak throughout much of the remainder of the
Company's fiscal 2010 year with lower household spending due to labour market
conditions and reduced disposable income. We are being guided by these
expectations in conducting all facets of our business. On the positive side,
we believe that we remain poised to strengthen the Company's market position
in all of our market niches 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.
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/For further information: Jeremy H. Reitman, President, (514) 385-2630,
Corporate Website: www.reitmans.ca/
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