Reitmans (Canada) Limited announces its results for the nine months ended November 1, 2008Dec 4, 2008
MONTREAL, Dec. 4 /CNW Telbec/ - Sales for the nine months ended November
1, 2008 increased 0.1% to $789,060,000 as compared with $788,102,000 for the
nine months ended November 3, 2007. Same store sales decreased 3.5% in a
challenging retail environment characterized by unseasonable weather
conditions, reduced customer traffic and deteriorating consumer confidence in
an unprecedented global economic environment. Operating earnings before
depreciation and amortization (EBITDA(1)) for the period increased 2.8% to
$151,192,000 as compared with $147,051,000 last year. A stronger Canadian
dollar and tight inventory management positively impacted EBITDA. Higher
depreciation expense due to an increased number of stores in operation and
lower investment income negatively affected earnings before income taxes. Net
earnings decreased 1.3% to $76,825,000 compared to $77,855,000, while diluted
earnings per share was unchanged at $1.08 per share. The Company had 978
stores in operation at the end of this period compared to 952 stores at the
same time last year.
Sales for the third quarter ended November 1, 2008 increased 2.2% to
$271,240,000, as compared with $265,465,000 for the third quarter ended
November 3, 2007. Same store sales for the comparable 13 weeks decreased 1.2%.
EBITDA for the period decreased 8.6% to $47,873,000 as compared with
$52,360,000 last year. Net earnings and diluted earnings per share decreased
to $23,004,000 or $0.32 per share as compared to $27,394,000 or $0.38 per
share for the same period last year.
The Company adopted the Canadian Institute of Chartered Accountants new
standard relating to the accounting for inventory costs (section 3031 -
Inventories) in the first quarter of fiscal 2009 retrospectively, without
restatement of prior periods. The adoption of this new standard resulted in an
increase in EBITDA of $1,575,000 for the three month period ended November 1,
2008. The net effect of this accounting change for the nine month year to date
period was a $1,600,000 increase in EBITDA.
Sales for the month of November (four weeks ended November 29, 2008), as
a result of the continuing difficult retail environment, decreased 1.2% with
same store sales decreasing 4.0%.
During the third quarter, the Company opened 15 new stores comprised of 5
Reitmans, 2 Smart Set, 2 RW & CO., 1 Penningtons and 5 Addition Elle; 7 stores
were closed. Accordingly, at November 1, 2008, there were 978 stores in
operation, consisting of 381 Reitmans, 166 Smart Set, 58 RW & CO., 75 Thyme
Maternity, 14 Cassis, 161 Penningtons and 123 Addition Elle. An additional 8
stores are scheduled to open this year and 12 stores will be closed.
At the Board of Directors meeting held on December 4, 2008, 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 29, 2009 to shareholders of record on January 9, 2009.
As reported in the November 17, 2008 press release, the Company received
approval from the Toronto Stock Exchange to proceed with a normal course
issuer bid. Under the bid, the Corporation may purchase up to 2,861,390 Class
A non-voting shares, representing 5% of the issued and outstanding Class A
non-voting shares as at November 1, 2008. The bid commenced on November 28,
2008 and may continue to November 27, 2009.
Financial statements are attached.
Montreal, December 4, 2008
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.
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
For the For the
nine months ended three months ended
(in thousands except November 1, November 3, November 1, November 3,
per share amounts) 2008 2007 2008 2007
Sales $ 789,060 $ 788,102 $ 271,240 $ 265,465
Cost of goods sold and
selling, general and
administrative expenses
(note 2) 637,868 641,051 223,367 213,105
---------- ---------- ---------- ----------
151,192 147,051 47,873 52,360
Depreciation and
amortization 43,297 36,500 14,515 12,662
---------- ---------- ---------- ----------
Operating earnings before
the undernoted 107,895 110,551 33,358 39,698
Investment income (note 8) 5,879 9,677 1,622 2,628
Interest on long-term debt 697 749 228 245
---------- ---------- ---------- ----------
Earnings before income
taxes 113,077 119,479 34,752 42,081
Income taxes:
Current 38,569 43,332 12,710 13,495
Future (2,317) (3,100) (962) 717
---------- ---------- ---------- ----------
36,252 40,232 11,748 14,212
Québec tax reassessments
- current - 1,392 - 475
---------- ---------- ---------- ----------
36,252 41,624 11,748 14,687
---------- ---------- ---------- ----------
Net earnings $ 76,825 $ 77,855 $ 23,004 $ 27,394
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share:
Basic $ 1.09 $ 1.09 $ 0.33 $ 0.39
Diluted 1.08 1.08 0.32 0.38
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the For the
nine months ended three months ended
November 1, November 3, November 1, November 3,
(in thousands) 2008 2007 2008 2007
CASH FLOWS (USED IN)
FROM OPERATING
ACTIVITIES
Net earnings $ 76,825 $ 77,855 $ 23,004 $ 27,394
Adjustments for:
Depreciation and
amortization 43,297 36,500 14,515 12,662
Future income taxes (2,317) (3,100) (962) 717
Stock-based
compensation 519 771 150 247
Amortization of
deferred lease credits (3,930) (3,416) (1,368) (1,186)
Deferred lease credits 5,287 4,255 1,651 1,165
Pension contribution (1,280) - (1,101) -
Pension expense 2,147 1,200 1,327 400
(Gain) loss on sale of
marketable securities - (1,991) - 15
Foreign exchange (gain)
loss (1,290) 516 (1,515) 419
Changes in non-cash
working capital items
relating to operations (37,095) (41,374) 3,371 (3,681)
---------- ---------- ---------- ----------
82,163 71,216 39,072 38,152
CASH FLOWS (USED IN) FROM
INVESTING ACTIVITIES
Proceeds on sale of
marketable securities - 12,846 - 1,250
Additions to capital
assets (45,507) (56,118) (18,624) (16,975)
---------- ---------- ---------- ----------
(45,507) (43,272) (18,624) (15,725)
CASH FLOWS (USED IN) FROM
FINANCING ACTIVITIES
Dividends paid (38,205) (34,169) (12,720) (11,337)
Purchase of Class A
non-voting shares for
cancellation (4,073) (11,021) - (11,021)
Repayment of long-term
debt (852) (800) (288) (270)
Proceeds from issue of
share capital 178 1,532 - 210
---------- ---------- ---------- ----------
(42,952) (44,458) (13,008) (22,418)
FOREIGN EXCHANGE GAIN
(LOSS) ON CASH HELD IN
FOREIGN CURRENCY 1,290 (516) 1,515 (419)
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (5,006) (17,030) 8,955 (410)
CASH AND CASH EQUIVALENTS,
BEGINNING OF THE PERIOD 214,301 188,491 200,340 171,871
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF THE PERIOD $ 209,295 $ 171,461 $ 209,295 $ 171,461
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental disclosure of cash flow information (note 8)
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 consolidated
financial statements.
CONSOLIDATED BALANCE SHEETS (Unaudited)
Audited
November 1, November 3, February 2,
(in thousands) 2008 2007 2008
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 8) $ 209,295 $ 171,461 $ 214,301
Marketable securities (note 8) 26,455 40,905 30,053
Accounts receivable 4,389 4,628 3,546
Income taxes recoverable 1,233 - -
Merchandise inventories (note 2) 96,839 86,736 52,441
Prepaid expenses 25,410 24,585 22,847
Future income taxes 1,239 344 1,772
---------- ---------- ----------
Total Current Assets 364,860 328,659 324,960
CAPITAL ASSETS 251,752 245,860 247,963
GOODWILL 42,426 42,426 42,426
FUTURE INCOME TAXES 7,930 5,949 5,611
---------- ---------- ----------
$ 666,968 $ 622,894 $ 620,960
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued items $ 92,531 $ 86,012 $ 69,189
Income taxes payable - 26,999 16,546
Future income taxes - - 761
Current portion of long-term debt
(note 6) 1,201 1,127 1,146
---------- ---------- ----------
Total Current Liabilities 93,732 114,138 87,642
DEFERRED LEASE CREDITS 22,823 21,697 21,466
LONG-TERM DEBT (note 6) 13,044 14,246 13,951
FUTURE INCOME TAXES - - 261
ACCRUED PENSION LIABILITY 3,388 2,495 2,521
SHAREHOLDERS' EQUITY
Share capital 23,892 23,135 23,777
Contributed surplus 4,476 3,864 4,001
Retained earnings (note 2) 509,753 444,088 468,374
Accumulated other comprehensive loss (4,140) (769) (1,033)
---------- ---------- ----------
505,613 443,319 467,341
---------- ---------- ----------
Total Shareholders' Equity 533,981 470,318 495,119
---------- ---------- ----------
$ 666,968 $ 622,894 $ 620,960
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the For the
nine months ended three months ended
November 1, November 3, November 1, November 3,
(in thousands) 2008 2007 2008 2007
SHARE CAPITAL
Balance, beginning of
the period $ 23,777 $ 21,323 $ 23,892 $ 22,981
Cash consideration on
exercise of stock
options 178 1,532 - 210
Ascribed value credited
to share capital from
exercise of stock
options 44 490 - 154
Cancellation of shares
pursuant to stock
purchase program (107) (210) - (210)
---------- ---------- ---------- ----------
Balance, end of the period 23,892 23,135 23,892 23,135
---------- ---------- ---------- ----------
CONTRIBUTED SURPLUS
Balance, beginning of the
period 4,001 3,583 4,326 3,771
Stock option compensation
costs 519 771 150 247
Ascribed value credited
to share capital from
exercise of stock
options (44) (490) - (154)
---------- ---------- ---------- ----------
Balance, end of the period 4,476 3,864 4,476 3,864
---------- ---------- ---------- ----------
RETAINED EARNINGS
Balance, beginning of the
period 468,374 411,213 499,469 438,842
Adjustment to opening
retained earnings due
to adoption of new
accounting standard
(net of tax of $3,121)
(note 2) 6,725 - - -
Net earnings 76,825 77,855 23,004 27,394
Dividends (38,205) (34,169) (12,720) (11,337)
Premium on purchase of
Class A non-voting (3,966) (10,811) - (10,811)
---------- ---------- ---------- ----------
Balance, end of the period 509,753 444,088 509,753 444,088
---------- ---------- ---------- ----------
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
Balance, beginning of the
period (1,033) - (609) (305)
Adjustment to opening
balance due to the new
accounting policies
adopted regarding
financial instruments
(net of tax of $523) - 2,883 - -
Net unrealized gain (loss)
on available-for-sale
financial assets arising
during the period (net of
tax of $491 for the nine
months and $425 for the
three months ended
November 1, 2008; $337
for the nine months and
$86 for the three months
ended November 3, 2007) (3,107) (1,906) (3,531) (455)
Reclassification
adjustment for net
gains included in
net earnings (net of
tax of $332 for the
nine months and $1
for the three months
ended November 3,
2007) - (1,746) - (9)
---------- ---------- ---------- ----------
Balance, end of the
period(1) (4,140) (769) (4,140) (769)
---------- ---------- ---------- ----------
Total Shareholders'
Equity $ 533,981 $ 470,318 $ 533,981 $ 470,318
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(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 consolidated
financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the For the
nine months ended three months ended
November 1, November 3, November 1, November 3,
(in thousands) 2008 2007 2008 2007
Net earnings $ 76,825 $ 77,855 $ 23,004 $ 27,394
Other comprehensive
income (loss):
Net unrealized gain
(loss) on available-
for-sale financial
assets arising during
the period (net of tax
of $491 for the nine
months and $425 for
the three months ended
November 1, 2008; $337
for the nine months and
$86 for the three months
ended November 3, 2007) (3,107) (1,906) (3,531) (455)
Reclassification
adjustment for net gains
included in net earnings
(net of tax of $332 for
the nine months and $1
for the three months
ended November 3, 2007) - (1,746) - (9)
---------- ---------- ---------- ----------
(3,107) (3,652) (3,531) (464)
---------- ---------- ---------- ----------
Comprehensive income $ 73,718 $ 74,203 $ 19,473 $ 26,930
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(all amounts in thousands except per share amounts)
1. BASIS OF PRESENTATION
These unaudited interim consolidated 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 February 2, 2008. The Company applied the same
accounting policies in the preparation of the financial statements as
disclosed in note 4 of its annual consolidated financial statements in the
Company's fiscal 2008 Annual Report except as described below in note 2 -
Adoption of new accounting standard.
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 November 1, 2008,
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 June 2007, the CICA issued Section 3031, Inventories, which replaces
Section 3030 and harmonizes the Canadian standards related to inventories with
International Financial Reporting Standards ("IFRS"). This section provides
changes to the measurement and more extensive guidance on the determination of
cost, including allocation of overhead; narrows the permitted cost formulas;
requires impairment testing and expands the disclosure requirements to
increase transparency. This section applies to interim and annual financial
statements for fiscal years beginning on or after January 1, 2008. The Company
adopted this standard in the first quarter of fiscal 2009 retrospectively,
without restatement of prior periods.
Merchandise inventories are valued at the lower of cost, determined
principally on an average basis using the retail inventory method and net
realizable value. Costs include the cost of purchase, transportation costs
that are directly incurred to bring inventories to their present location and
condition and certain distribution centre costs related to inventories. The
Company estimates net realizable value as the amount that inventories are
expected to be sold taking into consideration fluctuations of retail prices
due to seasonality. Inventories are written down to net realizable value when
the cost of inventories is not estimated to be recoverable due to declining
selling prices. The transitional adjustments resulting from the implementation
of Section 3031 were recognized in the first quarter of fiscal 2009 opening
balance of retained earnings and prior periods have not been restated. Upon
implementation of these requirements, an increase in opening inventories of
$9,846, an increase in taxes payable of $3,121 and an increase of $6,725 to
opening retained earnings were recorded on the consolidated balance sheet
resulting from the application of this new standard. 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 November 1, 2008
was $260,065. During the quarter, the Company recorded $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. The impact
of the adoption of the new accounting standard on net earnings for the nine
months ended November 1, 2008 was an increase of $1,088.
3. RECENT ACCOUNTING PRONOUNCEMENTS
CICA Section 3064 - Goodwill and Intangible Assets
In February 2008, the 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 subsequent to its initial
recognition. 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
consolidated financial statements.
International Financial Reporting Standards
The Canadian Accounting Standards Board has confirmed that the use of 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 their adoption on its consolidated financial statements. The Company
expects the transition to IFRS to impact financial reporting, business
processes and information systems. The Company is assessing the impact of the
transition to IFRS and will continue to invest in training and resources
throughout the transition period to facilitate a timely conversion.
4. SHARE CAPITAL
The Company has authorized an unlimited number of Class A non-voting
shares.
The following table summarizes changes in Class A non-voting shares
outstanding:
For the For the
nine months ended three months ended Audited
November 1, November 3, November 1, November 3, February 2,
2008 2007 2008 2007 2008
Balance at
beginning of
the period 57,473 57,817 57,228 57,935 57,817
Shares
issued
pursuant to
exercise of
stock options 30 156 - 38 217
Shares
purchased under
issuer bid (275) (561) - (561) (561)
---------- ---------- ---------- ---------- ----------
Balance at end
of the period 57,228 57,412 57,228 57,412 57,473
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
The Company has authorized an unlimited number of Common shares. At
November 1, 2008, there were 13,440 common shares issued (November 3, 2007 -
13,440; February 2, 2008 - 13,440) with a value of $482 (November 3, 2007 -
$482; February 2, 2008 - $482).
5. STOCK-BASED COMPENSATION
The Company has a share option plan as described in note 10 c) to the
consolidated financial statements contained in the 2008 Annual Report. During
the quarter ended November 1, 2008, no options were granted and 12,000 options
were cancelled.
6. LONG-TERM DEBT
Audited
November 1, November 3, February 2,
2008 2007 2008
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 $ 14,245 $ 15,373 $ 15,097
Less current portion 1,201 1,127 1,146
---------- ---------- ----------
$ 13,044 $ 14,246 $ 13,951
---------- ---------- ----------
---------- ---------- ----------
7. EARNINGS PER SHARE
The number of shares used in the earnings per share calculation is as
follows:
For the For the
nine months ended three months ended
November 1, November 3, November 1, November 3,
2008 2007 2008 2007
Weighted average number
of shares per basic
earnings per share
calculations 70,803 71,244 70,668 71,079
Effect of dilutive
options outstanding 356 688 314 619
---------- ---------- ---------- ----------
Weighted average number
of shares per diluted
earnings per share
calculations 71,159 71,932 70,982 71,698
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
As at November 1, 2008, 273 stock options (2007 - nil) 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.
8. SUPPLEMENTARY INFORMATION
Year ended
November 1, November 3, February 2,
2008 2007 2008
(Audited)
Balance with banks $ 4,923 $ 4,234 $ 2,474
Short-term deposits, bearing interest
at 3.21% (November 3, 2007- 4.67%;
February 2, 2008- 4.0%) 204,372 167,227 211,827
---------- ---------- ----------
Cash and cash equivalents $ 209,295 $ 171,461 $ 214,301
---------- ---------- ----------
---------- ---------- ----------
Marketable securities:
Fair value $ 26,455 $ 40,905 $ 30,053
Cost 31,249 41,819 31,249
Non-cash transactions:
Capital asset additions included in
accounts payable $ 2,908 $ 2,912 $ 1,329
For the For the
nine months ended three months ended Year ended
November 1, November 3, November 1, November 3, February 2,
2008 2007 2008 2007 2008
(Audited)
Cash paid
during the
period for:
Income
taxes $ 59,504 $ 61,196 $ 13,920 $ 14,917 $ 73,305
Interest 705 802 230 250 1,045
Investment
income:
Available-
for-sale
financial
assets:
Interest
income $ 36 $ 51 $ 14 $ 11 $ 62
Dividends 1,224 1,833 401 586 2,398
Realized
gain on
disposal - 1,991 - (15) 474
Held-for-
trading
financial
assets:
Interest
income 4,619 5,802 1,207 2,046 8,194
---------- ---------- ---------- ---------- ----------
$ 5,879 $ 9,677 $ 1,622 $ 2,628 $ 11,128
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
9. 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 recent widespread declines in the stock market
have resulted in reduction in the market value of these securities. The
Company's portfolio of marketable securities includes $17,086 (reported at
fair value) of preferred shares of BCE Inc. Under the terms of the proposed
privatization of BCE Inc., outstanding preferred share capital of BCE Inc.
would be redeemed. Failure to complete the proposed privatization transaction
could have an impact on the market price of BCE Inc. preferred shares. The
Company is unable to predict the ultimate impact on the value of its portfolio
investment in BCE Inc. preferred shares. Based upon the reported market prices
of BCE Inc. preferred shares at December 3, 2008, the Company would have
recognized a further write down of its investment, and an offsetting
adjustment to other comprehensive income, of $3,926 from that recorded as at
November 1, 2008. The Company has gradually been reducing the size of its
investment portfolio and managing its cash on a short-term basis.
The Company early adopted the requirements of the CICA Handbook Section
3862 at February 2, 2008, Financial Instruments - Disclosures, which apply to
fiscal years beginning on or after October 1, 2007. This new Handbook section
requires disclosures to enable users to evaluate the significance of financial
instruments for the entity's financial position and performance, and the
nature and extent of an entity's exposure to risks arising from financial
instruments, including how the entity manages those risks. 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 Annual Report for the year ended February 2, 2008. 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. There have been no other
significant changes in the Company's risk exposures in the first nine months
of fiscal 2009.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIOD ENDED NOVEMBER 1, 2008
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 consolidated
financial statements for the period ended November 1, 2008 and the audited
consolidated financial statements of Reitmans for the fiscal year ended
February 2, 2008 which are available at www.sedar.com. This MD&A is dated
December 4, 2008.
All financial information contained in this MD&A and Reitmans'
consolidated 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
consolidated financial statements and this MD&A were reviewed by Reitmans'
Audit Committee and were approved by its Board of Directors on December 4,
2008.
Additional information about Reitmans, including the Company's 2008 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 on page 5. 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,
Penningtons, Addition Elle and Cassis. 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 embarked on an e-commerce initiative in its plus-size banners
(Penningtons and Addition Elle) and launched an e-commerce website for these
banners in November 2007. The Company is encouraged with the acceptance shown
by customers using the e-commerce website and the first twelve months of
operation have shown promising results while offering customers the
convenience of online purchasing. The Company is considering launching
additional banners in the e-commerce domain in the coming year.
CONSOLIDATED OPERATING RESULTS FOR THE NINE MONTHS ENDED NOVEMBER 1, 2008
("year to date") AND COMPARISON TO CONSOLIDATED OPERATING RESULTS FOR THE
NINE MONTHS ENDED NOVEMBER 3, 2007 ("year to date fiscal 2008")
Sales for the year to date increased 0.1% to $789,060,000 as compared with
$788,102,000 for the year to date fiscal 2008. Same store sales decreased
3.5%. In the first and second quarters of fiscal 2009 weakness in the US
economy and sharp increases in the price of certain commodities in Canada,
most notably oil and gas, negatively impacted consumer confidence, which led
to reduced traffic in malls, power centres and street store locations as
consumers cut back on spending for apparel. Particularly unfavourable weather
conditions yielded close to historical records for snowfall which persisted
into the spring in Central and Eastern Canada, contributing to a softening in
the demand for spring merchandise as customers delayed their purchases.
Unseasonable weather continued throughout Canada during the months of May,
June and July with higher than average levels of rainfall and below normal
temperatures. This impacted traditional buying patterns as consumers delayed
purchases resulting in the Company's merchandise being more heavily promoted
to manage inventory levels. In the third quarter of fiscal 2009 global
economic conditions deteriorated significantly. Despite a relatively positive
outlook in Canada, consumer confidence continued to weaken over financial
markets concerns and the fear of recession. This resulted in downward pressure
on retail prices for apparel as concern over inventory levels rose. While a
recent Statistics Canada report indicated the consumer price index rose 2.6%
in the twelve months to October 2008, somewhat slower than earlier months,
women's clothing was the primary contributor to a 2.8% decline in the clothing
and footwear price index which was the only major component to experience a
decline. Consumers continued to be influenced by current economic conditions
that impacted spending for apparel.
Operating earnings before depreciation and amortization (EBITDA) for the
year to date increased 2.8% to $151,192,000 as compared with $147,051,000 for
the year to date fiscal 2008. The Company adopted a new accounting standard
(as explained below in "Adoption of New Accounting Standard") with respect to
the accounting for inventory costs which on a year to date basis had a
$1,600,000 positive impact on EBITDA. Gross margin improved 156 basis points
prior to giving effect to a 168 basis point reduction in gross margin
primarily attributable to the inclusion of transportation costs and certain
distribution centre costs. The strength of the Canadian dollar during much of
year to date favourably impacted the gross margin despite a sharp decline in
the Canadian dollar against the US dollar in October 2008. Spot prices for
$1.00 US for the year to date ranged between a high of $1.29 and a low of
$0.97 Canadian ($1.19 and $0.94 respectively for the year to date fiscal
2008). The Company continued to focus on managing its inventory levels while
ensuring that customers were provided with a broad selection of quality
fashion merchandise. Consumer demand continued softening in the year to date,
which resulted in all banners taking more markdowns to sell merchandise.
Depreciation and amortization expense for the year to date was $43,297,000
compared to $36,500,000 for the same period last year. This increase reflects
the increased new store construction and store renovation activities of the
Company. As well, it includes $2,386,000 of write-offs as a result of closed
and renovated stores, compared to $1,271,000 for the same period last year.
Investment income for the year to date decreased 39.2% to $5,879,000 as
compared to $9,677,000 for the same period last year. The disposal of
marketable securities in the fourth quarter of fiscal 2008 contributed to a
reduction in dividend income for the year to date to $1,224,000 as compared to
$1,833,000 for the year to date fiscal 2008. There were no net capital gains
for the year to date as compared to $1,991,000 for the same period last year.
Interest income decreased for the year to date to $4,655,000 as compared to
$5,853,000 for the year to date fiscal 2008 due to lower rates of interest.
The Company maintained larger cash balances while its investment portfolio was
reduced and the resulting cash was managed on a short-term basis.
Interest expense on long-term debt decreased to $697,000 for the year to
date from $749,000 for the year to date fiscal 2008. 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 $36,252,000, for an
effective tax rate of 32.0%. For the same period last year, income tax expense
was $41,624,000, for an effective tax rate of 34.8%. This decrease in income
tax is due to a reduction in the federal basic income tax rate, along with the
income tax expense recorded in the prior year related to the retroactive
income tax re-assessments issued in connection with Bill 15 enacted by the
Québec National Assembly.
Net earnings for the year to date decreased 1.3% to $76,825,000 ($1.08
diluted earnings per share) as compared with $77,855,000 ($1.08 diluted
earnings per share) for the year to date fiscal 2008.
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 $170,000,000 US. The
Canadian dollar remained strong through September 2008. In October 2008 the
Canadian dollar weakened significantly against the US dollar and has continued
to remain below rates experienced earlier in the year. Due to the strength of
the Canadian dollar throughout most of the nine months ended November 1, 2008,
the Company satisfied its US dollar requirements through spot rate purchases.
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. As at November 1, 2008
the Company had no outstanding foreign exchange option contracts.
During the year to date, the Company opened 39 stores comprised of 16
Reitmans, 4 Smart Set, 6 RW & CO., 3 Thyme Maternity, 3 Penningtons, and 7
Addition Elle; 19 stores were closed. Accordingly, at November 1, 2008, there
were 978 stores in operation, consisting of 381 Reitmans, 166 Smart Set, 58 RW
& CO., 75 Thyme Maternity, 14 Cassis, 161 Penningtons and 123 Addition Elle as
compared with a total of 952 stores at November 3, 2007.
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.
CONSOLIDATED OPERATING RESULTS FOR THE THREE MONTHS ENDED NOVEMBER 1,
2008 ("third quarter") AND COMPARISON TO CONSOLIDATED OPERATING RESULTS
FOR THE THREE MONTHS ENDED NOVEMBER 3, 2007 ("third quarter of fiscal
2008")
Sales for the third quarter increased 2.2% to $271,240,000 as compared
with $265,465,000 for the third quarter of fiscal 2008. Same store sales
decreased 1.2%. In the third quarter global economic conditions deteriorated
significantly. Despite a relatively positive outlook in Canada, consumer
confidence continued to weaken over financial markets concerns and the fear of
recession. This resulted in a downward pressure on retail prices for apparel
as concern over inventory levels rose. While a recent Statistics Canada report
indicated the consumer price index rose 2.6% in the twelve months to October
2008, somewhat slower than earlier months, women's clothing was the primary
contributor to a 2.8% decline in the clothing and footwear price index which
was the only major component to experience a decline.
In the third quarter, EBITDA decreased 8.6% to $47,873,000 as compared
with $52,360,000 for the third quarter of fiscal 2008. The Company adopted a
new accounting standard (as explained below in "Adoption of New Accounting
Standard") with respect to the accounting for inventory costs which resulted
in an increase of $1,575,000 in EBITDA for the third quarter. The weakening of
the Canadian dollar impacted the gross margin for the third quarter. Gross
margin declined 171 basis points prior to giving effect to a 147 basis point
reduction in gross margin primarily attributable to the inclusion of
transportation costs and certain distribution centre costs. Spot prices for
$1.00 US for the third quarter ranged between a high of $1.29 and a low of
$1.03 Canadian ($1.08 and $0.94 respectively for the third quarter of fiscal
2008). The Company continued to focus on managing its inventory levels while
ensuring that customers were provided with a broad selection of quality
fashion merchandise.
Depreciation and amortization expense for the third quarter was
$14,515,000 compared to $12,662,000 for the same period last year. This
increase reflects the increased new store construction and store renovation
activities of the Company. As well, it includes $312,000 of write-offs as a
result of closed and renovated stores, compared to $275,000 in the same period
last year.
Investment income for the third quarter decreased 38.3% to $1,622,000 as
compared to $2,628,000 in the same period last year. The disposal of
marketable securities in the fourth quarter of fiscal 2008 contributed to a
reduction in dividend income for the third quarter to $401,000 as compared to
$586,000 for the third quarter of fiscal 2008. There were no net capital gains
for the third quarter as compared to net capital losses of $15,000 for the
same period last year. Interest income decreased for the third quarter to
$1,221,000 as compared to $2,057,000 for the third quarter of fiscal 2008 due
to lower rates of interest. The Company maintained larger cash balances while
its investment portfolio was reduced and the resulting cash was managed on a
short-term basis.
Interest expense on long-term debt decreased to $228,000 in the third
quarter from $245,000 in the third quarter of fiscal 2008. This decrease
reflects the continued repayment of the mortgage on the Company's distribution
centre.
Income tax expense for the third quarter amounted to $11,748,000, for an
effective tax rate of 33.8%. For the same period last year, income tax expense
was $14,687,000, for an effective tax rate of 34.9%. The decrease in expense
is due to the reduction in the federal basic income tax rate, along with the
income tax expense recorded in the prior year related to the retroactive
income tax re-assessments issued in connection with Bill 15 enacted by the
Québec National Assembly.
Net earnings for the third quarter decreased 16.0% to $23,004,000 ($0.32
diluted earnings per share) as compared with $27,394,000 ($0.38 diluted
earnings per share) for the third quarter of fiscal 2008.
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, approximated $68,000,000 US. Due
to the strength of the Canadian dollar throughout most of the third quarter,
the Company satisfied its US dollar requirements through spot rate purchases.
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. The Company did not
enter into any foreign exchange option contracts during the third quarter and
as at November 1, 2008 the Company had no outstanding foreign exchange option
contracts.
During the third quarter, the Company opened 15 stores comprised of 5
Reitmans, 2 Smart Set, 2 RW & CO., 1 Penningtons and 5 Addition Elle; 7 stores
were closed. Accordingly, at November 1, 2008, there were 978 stores in
operation, consisting of 381 Reitmans, 166 Smart Set, 58 RW & CO., 75 Thyme
Maternity, 14 Cassis, 161 Penningtons and 123 Addition Elle as compared with a
total of 952 stores at November 3, 2007.
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.
SUMMARY OF QUARTERLY RESULTS
The table below sets forth selected consolidated financial data for the
eight most recently completed quarters. This unaudited quarterly information
has been prepared on the same basis as the annual consolidated 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 the retroactive Québec income tax
reassessments as discussed on page 7, 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, except Earnings
per share amounts) per share ("EPS")
Net
Sales Earnings Basic Diluted
----------------------------------------------
November 1, 2008 $ 271,240 $ 23,004 $ 0.33 $ 0.32
August 2, 2008 289,502 35,385 0.50 0.50
May 3, 2008 228,318 18,436 0.26 0.26
February 2, 2008 269,618 37,047 0.52 0.52
November 3, 2007 265,465 27,394 0.39 0.38
August 4, 2007 291,942 32,077 0.45 0.44
May 5, 2007 230,695 18,384 0.26 0.26
February 3, 2007(*) 282,110 22,957 0.32 0.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in thousands, except Adjusted Earnings
per share amounts) per share ("EPS")
Adjusted
Net
Earnings Basic Diluted
----------------------------------------------
November 1, 2008 $ 23,004 $ 0.33 $ 0.32
August 2, 2008 35,385 0.50 0.50
May 3, 2008 18,436 0.26 0.26
February 2, 2008 28,506 0.40 0.40
November 3, 2007 27,869 0.40 0.39
August 4, 2007 32,540 0.46 0.45
May 5, 2007 18,838 0.27 0.27
February 3, 2007(*) 23,433 0.33 0.33
-------------------------------------------------------------------------
(*)Results for the fourth quarter ended February 3, 2007 include 14 weeks
instead of the normal 13 weeks.
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 $209,295,000 or 22.1% higher than
$171,461,000 last year, in part due to the sale of marketable securities in
the fourth quarter of fiscal 2008 and the resulting cash being managed on a
short-term basis. The Company does not hold any asset-backed commercial paper.
Marketable securities held by the Company consist primarily of preferred
shares of Canadian public companies. At November 1, 2008, marketable
securities (reported at fair value) amounted to $26,455,000 as compared with
$40,905,000 last year, $14,450,000 lower due to the sale of securities in the
fourth quarter of fiscal 2008 and the impact of declining market values (a
decline of $3,598,000 year to date from the end of fiscal 2008, which was
charged to other comprehensive income) . The Company's portfolio of marketable
securities includes $17,086,000 (reported at fair value) of preferred shares
of BCE Inc. Under the terms of the proposed privatization of BCE Inc.,
outstanding preferred share capital of BCE Inc. would be redeemed. Failure to
complete the proposed privatization transaction could have an impact on the
market price of BCE Inc. preferred shares. The Company is unable to predict
the ultimate impact on the value of its portfolio investment in BCE Inc.
preferred shares. Based upon the reported market prices of the BCE Inc.
preferred shares at December 3, 2008, the Company would have recognized a
further write down of its investment, and an offsetting adjustment to other
comprehensive income, of $3,926,000 from that recorded as at November 1, 2008.
To the extent that the proposed privatization fails to materialize the Company
plans to hold these investments on a long-term basis. The Company is highly
liquid with over 85% of its cash, cash equivalents and marketable securities
being invested in bank bearer deposit notes and bank term deposits of short
duration with major Canadian chartered banks.
Accounts receivable are $4,389,000 or $239,000 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 $1,233,000
as compared to income taxes payable of $26,999,000 last year. The reduction of
the tax liability is attributed to the payment by the Company of $12,905,000
in March 2008 to settle all matters related to the retroactive income tax
re-assessments issued in connection with Bill 15 enacted by the Québec
National Assembly, along with increased instalments that resulted in a
reduction of the current year's taxes payable. For additional information on
the retroactive tax re-assessments, refer to note 9 a) of the consolidated
financial statements for the year ended February 2, 2008. Merchandise
inventories this year were $96,839,000 or $10,103,000 higher than last year,
due to the Company adopting a new accounting standard as described below in
"Adoption of New Accounting Standard". The adoption of this new standard
increased the inventory at the end of the third quarter by $11,446,000. As a
result of the Company's change in accounting policy for inventories, the
inventory balance as at November 1, 2008 is not comparable with November 3,
2007. Prepaid expenses, the majority of which represent prepaid rent, are
$25,410,000 or approximately $825,000 higher than last year, principally due
to rent and related costs from more stores.
The Company invested $45,507,000 in additions to capital assets in the
year to date compared to $56,118,000 last year. This included $41,736,000
(2008 - $45,573,000) in new store construction and existing store renovation
costs and $3,771,000 (2008 - $10,545,000) to the Sauvé Street office and
Henri-Bourassa Boulevard distribution centre.
Accounts payable and accrued items are $92,531,000, or $6,519,000 higher
than last year. The Company's accounts payable consist largely of trade
payables and liabilities for unredeemed gift cards/certificates and credit
vouchers. The increase in the liabilities is primarily due to higher trade
payables, which is a function of the timing of receipt of goods, offset by
lower employee incentive bonus costs related to the Company employee
performance incentive plan.
The Company maintains a defined benefit pension plan ("plan"). An
actuarial valuation was performed as at December 31, 2007 to determine the
estimated liability the Company incurred with respect to the provisions of the
plan. This valuation was updated to consider the widespread stock market
declines that occurred during the nine months ended November 1, 2008 which led
to declines in the market value of the plan assets. As a result, the Company
recognized a larger expense than was projected. In addition, in the third
quarter the Company elected to contribute $865,000 to the plan to fully fund a
solvency requirement as determined by its actuaries. 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 $2,147,000 (2008 -
$1,200,000) was expensed in the year to date with respect to both plans.
COMPARISON OF CONSOLIDATED FINANCIAL POSITION AS AT NOVEMBER 1, 2008 WITH
THE CONSOLIDATED FINANCIAL POSITION AS AT FEBRUARY 2, 2008
Cash and cash equivalents amounted to $209,295,000 or 2.3% lower than
$214,301,000 as at February 2, 2008, largely due to the timing of payments for
fall merchandise receipts in the third quarter. Marketable securities held by
the Company consist primarily of preferred shares of Canadian public
companies. Marketable securities (reported at fair value) amounted to
$26,455,000 as compared with $30,053,000 at February 2, 2008, $3,598,000 lower
due to the impact of declining market values (which has been charged to other
comprehensive income). The Company's portfolio of marketable securities
includes $17,086,000 (reported at fair value) of preferred shares of BCE Inc.
Under the terms of the proposed privatization of BCE Inc., outstanding
preferred share capital of BCE Inc. would be redeemed. Failure to complete the
proposed privatization transaction could have an impact on the market price of
BCE Inc. preferred shares. The Company is unable to predict the ultimate
impact on the value of its portfolio investment in BCE Inc. preferred shares.
Based upon the reported market prices of BCE Inc. preferred shares at December
3, 2008, the Company would have recognized a further write down of its
investment, and an offsetting adjustment to other comprehensive income, of
$3,926,000 from that recorded as at November 1, 2008.
Accounts receivable were $4,389,000 or $843,000 higher than the fiscal
year ended February 2, 2008. The Company's accounts receivable are essentially
the credit card sales from the last few days of the fiscal quarter. Income
taxes recoverable are $1,233,000 as compared to income taxes payable of
$16,546,000 at February 2, 2008. The reduction of the tax liability is
attributed to the payment by the Company of $12,905,000 in March 2008 to
settle all matters related to the retroactive income tax re-assessments issued
in connection with Bill 15 enacted by the Québec National Assembly, along with
increased instalments that resulted in the reduction in the current year's
taxes payable. For additional information on the retroactive tax
re-assessments, refer to note 9 a) of the consolidated financial statements
for the year ended February 2, 2008. Merchandise inventories were $96,839,000
or $44,398,000 higher than the fiscal year ended February 2, 2008. This
increase is due to the build-up of inventory for the holiday selling season.
The Company adopted a new accounting standard as described below in "Adoption
of New Accounting Standard". The adoption of this new standard increased the
inventory at the end of the third quarter by $11,446,000. As a result of the
Company's change in accounting policy for inventories, the inventory balance
as at November 1, 2008 is not comparable with February 2, 2008. Prepaid
expenses, the majority of which represent prepaid rent, are $25,410,000 or
$2,563,000 higher than the fiscal year ended February 2, 2008, principally due
to rent and related costs from more stores.
Accounts payable and accrued items are $92,531,000, or $23,342,000 higher
than the fiscal year ended February 2, 2008. The Company's accounts payable
consist largely of trade payables and liabilities for unredeemed gift
cards/certificates and credit vouchers. The increase in the liabilities is
attributable to higher trade payables, which is a function of the timing of
receipt of goods offset by lower gift card/certificate and credit voucher
liabilities due to the timing of gift card/certificate and credit voucher
redemptions.
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES
Shareholders' equity at November 1, 2008 amounted to $533,981,000 or $7.56
per share as compared to $470,318,000 or $6.64 per share last year (February
2, 2008 - $495,119,000 or $6.98 per share). Despite recent developments in the
Canadian equity market that has 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 $235,750,000
as compared with $212,366,000 last year ($244,354,000 as at February 2, 2008).
Short-term cash is conservatively invested 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 and does not
hold any asset-backed commercial paper. The Company has borrowing and working
capital credit facilities (unsecured) available of $125,000,000. As at
November 1, 2008, $37,375,000 (November 3, 2007 - $33,416,000; February 2,
2008 - $48,274,000) 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 November 1, 2008,
the maximum potential liability under these guarantees was $5,778,000. The
standby letters of credit mature at various dates during fiscal 2009. 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
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 $852,000 in the year to date.
The Company paid dividends amounting to $38,205,000 in the year to date
compared to $34,169,000 in the year to date fiscal 2008.
In the year to date, the Company invested $45,507,000 on new and renovated
stores, the Sauvé Street office and Henri-Bourassa Boulevard distribution
centre. The Company has completed its repairs and renovation of its Sauvé
Street office. These expenditures, together with ongoing store construction
and renovation programs, 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
November 1, 2008, the details of which are described in the previous
commentary.
Payments Due by Period
--------------------------------------------------------
Contractual Within 2 to 4 5 years
Obligations Total 1 year years and over
--------------------------------------------------------
Long-term debt $ 14,245,000 $ 1,201,000 $ 4,093,000 $ 8,951,000
Store leases
and equipment 457,498,000 101,500,000 212,947,000 143,051,000
--------------------------------------------------------
Total
contractual
obligations $471,743,000 $102,701,000 $217,040,000 $152,002,000
--------------------------------------------------------
--------------------------------------------------------
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. Due to the strength of the Canadian dollar throughout most of the
nine months ended November 1, 2008, 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 November 1, 2008, November 3, 2007 and
February 2, 2008, 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 November 1, 2008 are foreign exchange gains of
$1,323,000 and gains of $1,736,000 respectively (gains of $233,000 and losses
of $955,000 for the three months and nine months ended November 3, 2007
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. The year to date rent expense under these leases is, in the
aggregate, approximately $142,000 (year to date fiscal 2008 - $142,000).
The Company incurred fees of $277,000 in the year to date (year to date
fiscal 2008 - $240,000) with a law firm, of which two of the Company's outside
directors are partners. The Company believes that such remuneration was based
on normal terms for 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 has gradually been reducing the size of
its investment portfolio and managing its cash on a short-term basis. The
Company's investment portfolio is subject to stock market volatility and
recent widespread declines in the stock market have resulted in reduction in
the market value of these securities. The Company's portfolio of marketable
securities includes $17,086,000 (reported at fair value) of preferred shares
of BCE Inc. Under the terms of the proposed privatization of BCE Inc.,
outstanding preferred share capital of BCE Inc. would be redeemed. Failure to
complete the proposed privatization transaction could have an impact on the
market price of BCE Inc. preferred shares. The Company is unable to predict
the ultimate impact on the value of its portfolio investment in BCE Inc.
preferred shares. Based upon the reported market prices of BCE Inc. preferred
shares at December 3, 2008, the Company would have recognized a further write
down of its investment, and an offsetting adjustment to other comprehensive
income, of $3,926,000 from that recorded as at November 1, 2008. To the extent
that the proposed privatization fails to materialize the Company plans to hold
these investments on a long-term basis. The Company is highly liquid with over
85% of its cash, cash equivalents and marketable securities being invested in
bank bearer deposit notes and bank term deposits of short duration with major
Canadian chartered banks.
For the year ended February 2, 2008, the Company early adopted the
requirements of the CICA Handbook Section 3862, Financial Instruments -
Disclosures. This new Handbook section requires disclosures to enable users to
evaluate the significance of financial instruments for the entity's financial
position and performance, and the nature and extent of an entity's exposure to
risks arising from financial instruments, including how the entity manages
those risks. 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 February 2, 2008. 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 consolidated
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 plan and sponsors a
SERP. The costs of the defined benefit plan and SERP are determined
periodically by independent actuaries. Pension expense is included annually 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. The use of
different assumptions could result in a pension expense that differs from that
which the Company has recorded. The defined benefit 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/Certificates and Credit Vouchers
Gift cards/certificates sold are recorded as a liability and revenue is
recognized when the gift card/certificate is redeemed. The Company no longer
issues credit vouchers which have been replaced by gift cards, however,
outstanding credit vouchers are recorded as a liability until redeemed. The
Company, for each reporting period, reviews the gift card/certificate and
credit voucher 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/certificates and/or credit vouchers.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
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 these standards in its first quarter of fiscal year
ending January 28, 2012 and is currently evaluating the impact of their
adoption on its consolidated financial statements. The Company expects the
transition to IFRS to impact financial reporting, business processes and
information systems. The Company is assessing the impact of the transition to
IFRS and will continue to invest in training and resources throughout the
transition period to facilitate a timely conversion.
ADOPTION OF NEW ACCOUNTING STANDARD
In June 2007, the CICA issued Section 3031, Inventories, which replaces
Section 3030 and harmonizes the Canadian standards related to inventories with
IFRS. This section provides changes to the measurement and more extensive
guidance on the determination of cost, including allocation of overhead;
narrows the permitted cost formulas; requires impairment testing and expands
the disclosure requirements to increase transparency. This section applies to
interim and annual financial statements for fiscal years beginning on or after
January 1, 2008. The Company adopted this standard in the first quarter of
fiscal 2009 retrospectively, without restatement of prior periods.
Merchandise inventories are valued at the lower of cost, determined
principally on an average basis using the retail inventory method and net
realizable value. Costs include the cost of purchase, transportation costs
that are directly incurred to bring inventories to their present location and
condition and certain distribution centre costs related to inventories. The
Company estimates net realizable value as the amount that inventories are
expected to be sold taking into consideration fluctuations of retail prices
due to seasonality. Inventories are written down to net realizable value when
the cost of inventories is not estimated to be recoverable due to declining
selling prices. The transitional adjustments resulting from the implementation
of Section 3031 are recognized in the first quarter of fiscal 2009 opening
balance of retained earnings and prior periods have not been restated. Upon
implementation of these requirements, an increase in opening inventories of
$9,846,000, an increase in taxes payable of $3,121,000 and an increase of
$6,725,000 to opening retained earnings were recorded on the consolidated
balance sheet resulting from the application of this new standard. 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
November 1, 2008 was $260,065,000. For the year to date, the Company recorded
$4,359,000 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. The impact of the adoption of the new accounting
standard on net earnings for the nine months ended November 1, 2008 was an
increase of $1,088,000.
OUTSTANDING SHARE DATA
At December 4, 2008, 13,440,000 Common shares of the Company and
57,227,806 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 reserved 5,520,000
Class A non-voting shares for issuance under its Share Option Plan of which
937,000 Class A non-voting shares remained authorized for future issuance. The
Company had 1,625,250 options outstanding at an average exercise price of
$12.75. 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 2008, 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 2,861,390 Class A non-voting shares of the Company,
representing 5% of the issued and outstanding Class A non-voting shares as at
November 1, 2008. The average daily trading volume for the six-month period
preceding November 1, 2008 is 111,325 shares. In accordance with TSX
requirements and until March 31, 2009 (unless extended), a maximum daily
repurchase of 50% of this average may be made, representing 55,662 shares.
Thereafter, the maximum daily repurchase will be 25% of the average,
representing 27,831 shares. The bid commenced on November 28, 2008 and may
continue to November 27, 2009. 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. The Company purchased for cancellation
275,000 Class A non-voting shares at prevailing market prices pursuant to its
Share Repurchase Program (normal course issuer bid) for a total cash
consideration of $4,073,000 in June 2008.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Company, under the supervision of the Chief Executive Officer and
Chief Financial Officer, has designed internal controls over financial
reporting, as defined in Multilateral Instrument 52-109. There were no changes
to the Company's internal controls over financial reporting during the nine
months ended November 1, 2008 that have materially affected, or are reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
TRENDS, UNCERTAINTIES AND RISKS
The Company is principally engaged in the sale of women's apparel through
978 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.
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. The Company is structured in a manner
that management considers to be most effective to conduct its business in
every Canadian province and territory and 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. As well, there is no effective barrier to entry into the
Canadian apparel retailing marketplace by any potential competitor, foreign or
domestic, and in fact the Company has witnessed the arrival over the past few
years of a number of foreign-based competitors now operating in virtually all
the Company's Canadian retail sectors. Additionally, Canadian women have a
significant number of e-commerce shopping alternatives available to them on a
global basis.
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.
To mitigate these risk exposures, each banner is directed to and focused
on a different niche in the Canadian women's apparel market. Virtually all of
the Company's merchandise is private label. In the first nine months of fiscal
2009, 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. When
merchandise is sourced offshore and must be paid for in US dollars, the
Company uses a variety of strategies to fix the cost of US dollars. 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.
Geographically, the Company's stores are located generally according to
Canada's population. About 27% of RW & CO.'s merchandise is young menswear.
Menswear sales account for approximately 3% of all apparel sales made by the
Company.
The Company has good relationships with its landlords and 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.
OUTLOOK
Consumers continue to be concerned with current economic conditions that
adversely impact spending for apparel. The Company believes that it is well
positioned for the future despite current economic conditions, offering a
broad assortment of quality merchandise at affordable prices. The Reitmans
banner has continued to successfully expand its offerings in off-mall, lower
cost locations, while serving its target market in larger stores with a deeper
merchandise assortment. The Company's more youth-oriented banners, namely
Smart Set and RW & CO., are well positioned for further growth. Our
Penningtons and Addition Elle banners continue to perform well serving the
plus-size customer. The Company also believes that the Cassis banner will be
successful and that the e-commerce website will enhance sales as it continues
to grow. The Company continues to close marginal or unprofitable stores as
appropriate.
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.
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: Jeremy H. Reitman, President, (514) 385-2630; www.reitmans.ca |