Reitmans (Canada) Limited announces its results for the six months ended August 2, 2008Sep 4, 2008
MONTREAL, Sept. 4 /CNW Telbec/ - Sales for the six months ended August 2,
2008 decreased 0.9% to $517,820,000 as compared with $522,637,000 for the
six months ended August 4, 2007. Comparable store sales decreased 4.7% in a
challenging retail environment characterized by unseasonable weather
conditions, reduced customer traffic and reduced consumer confidence.
Operating earnings before depreciation and amortization (EBITDA(1)) for the
period increased 9.1% to $103,319,000 as compared with $94,691,000 last year.
A stronger Canadian dollar and tight inventory management positively impacted
operating margins. Higher depreciation expenses due to an increased number of
stores in operation and lower investment income negatively affected earnings
before tax. Net earnings increased 6.7% to $53,821,000 compared to $50,461,000
while diluted earnings per share increased 8.6% to $0.76 per share compared to
$0.70 per share for last year. The Company had 970 stores in operation at the
end of this period compared to 935 stores at the same time last year.
Sales for the second quarter ended August 2, 2008 decreased 0.8% to
$289,502,000, as compared with $291,942,000 for the second quarter ended
August 4, 2007. Same store sales for the comparable 13 weeks decreased 4.5%.
Operating earnings before depreciation and amortization (EBITDA(1)) for the
period increased 6.7% to $63,982,000 as compared with $59,941,000 last year.
Net earnings and diluted earnings per share increased to $35,385,000 or
$0.50 per share as compared to $32,077,000 or $0.44 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 operating earnings of $2,746,000 for the three month period ended
August 2, 2008. In the first quarter of this year, this accounting change
reduced operating earnings by $2,721,000 such that the net effect of this
accounting change for the six month year to date period was a $25,000 increase
in operating income.
Sales for the month of August (four weeks ended August 30, 2008), as a
result of the continuing difficult retail environment, increased 0.7% with
comparable store sales decreasing 2.3%.
During the second quarter, the Company opened 10 new stores comprised of
4 Reitmans, 2 RW & CO., 2 Thyme Maternity, 1 Penningtons and 1 Addition Elle;
4 stores were closed. Accordingly, at August 2, 2008, there were 970 stores in
operation, consisting of 377 Reitmans, 164 Smart Set, 57 RW & CO., 75 Thyme
Maternity, 14 Cassis, 163 Penningtons and 120 Addition Elle. An additional
21 stores are scheduled to open this year, 20 stores will be remodeled and
6 stores will be closed.
At the Board of Directors meeting held on September 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 October 30, 2008 to shareholders of record on October 16, 2008.
Financial statements are attached.
Montreal, September 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)
(in thousands For the six months ended For the three months ended
except per August 2, August 4, August 2, August 4,
share amounts) 2008 2007 2008 2007
Sales $ 517,820 $ 522,637 $ 289,502 $ 291,942
Cost of goods
sold and selling,
general and
administrative
expenses (note 2) 414,501 427,946 225,520 232,001
---------- ---------- ---------- ----------
103,319 94,691 63,982 59,941
Depreciation and
amortization 28,782 23,838 14,817 12,140
---------- ---------- ---------- ----------
Operating earnings
before the
undernoted 74,537 70,853 49,165 47,801
Investment
income (note 8) 4,257 7,049 2,066 2,729
Interest on
long-term debt 469 504 232 250
---------- ---------- ---------- ----------
Earnings before
income taxes 78,325 77,398 50,999 50,280
Income taxes:
Current 25,859 29,837 16,862 20,190
Future (1,355) (3,817) (1,248) (2,450)
---------- ---------- ---------- ----------
24,504 26,020 15,614 17,740
Québec tax
reassessments -
current - 917 - 463
---------- ---------- ---------- ----------
24,504 26,937 15,614 18,203
---------- ---------- ---------- ----------
Net earnings $ 53,821 $ 50,461 $ 35,385 $ 32,077
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share:
Basic $ 0.76 $ 0.71 $ 0.50 $ 0.45
Diluted $ 0.76 0.70 $ 0.50 0.44
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the six months ended For the three months ended
August 2, August 4, August 2, August 4,
(in thousands) 2008 2007 2008 2007
CASH FLOWS
(USED IN)
FROM OPERATING
ACTIVITIES
Net earnings $ 53,821 $ 50,461 $ 35,385 $ 32,077
Adjustments for:
Depreciation
and
amortization 28,782 23,838 14,817 12,140
Future income
taxes (1,355) (3,817) (1,248) (2,450)
Stock-based
compensation 369 524 195 268
Amortization of
deferred lease
credits (2,562) (2,230) (1,283) (1,146)
Deferred lease
credits 3,636 3,090 1,742 1,738
Pension
contribution (179) - (89) -
Pension expense 820 800 410 400
Gain on sale
of marketable
securities - (2,006) - (10)
Unrealized
foreign
exchange
loss 225 97 480 41
Changes in
non-cash working
capital items
relating to
operations (40,466) (37,693) 4,447 17,975
---------- ---------- ---------- ----------
43,091 33,064 54,856 61,033
CASH FLOWS
(USED IN) FROM
INVESTING
ACTIVITIES
Proceeds on sale
of marketable
securities - 11,596 - 534
Additions to
capital assets (26,883) (39,143) (13,809) (20,919)
---------- ---------- ---------- ----------
(26,883) (27,547) (13,809) (20,385)
CASH FLOWS
(USED IN) FROM
FINANCING
ACTIVITIES
Dividends paid (25,485) (22,832) (12,720) (11,420)
Purchase of
Class A
non-voting
shares for
cancellation (4,073) - (4,073) -
Repayment of
long-term debt (564) (530) (284) (267)
Proceeds from
issue of
share capital 178 1,322 54 72
---------- ---------- ---------- ----------
(29,944) (22,040) (17,023) (11,615)
EFFECT OF FOREIGN
EXCHANGE ON CASH
AND CASH
EQUIVALENTS (225) (97) (480) (41)
NET (DECREASE)
INCREASE IN CASH
AND CASH
EQUIVALENTS (13,961) (16,620) 23,544 28,992
CASH AND CASH
EQUIVALENTS,
BEGINNING OF
THE PERIOD 214,301 188,491 176,796 142,879
---------- ---------- ---------- ----------
CASH AND CASH
EQUIVALENTS,
END OF THE
PERIOD $ 200,340 $ 171,871 $ 200,340 $ 171,871
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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
August 2, August 4, February 2,
(in thousands) 2008 2007 2008
ASSETS
CURRENT ASSETS
Cash and cash
equivalents (note 8) $ 200,340 $ 171,871 $ 214,301
Marketable securities (note 8) 30,543 42,721 30,053
Accounts receivable 3,536 3,337 3,546
Income taxes recoverable 45 - -
Merchandise inventories (note 2) 73,512 72,911 52,441
Prepaid expenses 26,812 24,775 22,847
Future income taxes 420 3,666 1,772
---------- ---------- ----------
Total Current Assets 335,208 319,281 324,960
CAPITAL ASSETS 246,297 239,955 247,963
GOODWILL 42,426 42,426 42,426
FUTURE INCOME TAXES 7,230 5,058 5,611
---------- ---------- ----------
$ 631,161 $ 606,720 $ 620,960
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
items $ 63,848 $ 72,864 $ 69,189
Income taxes payable - 27,309 16,546
Future income taxes - 1,802 761
Current portion of long-term
debt (note 6) 1,182 1,110 1,146
---------- ---------- ----------
Total Current Liabilities 65,030 103,085 87,642
DEFERRED LEASE CREDITS 22,540 21,718 21,466
LONG-TERM DEBT (note 6) 13,351 14,533 13,951
FUTURE INCOME TAXES - - 261
ACCRUED PENSION LIABILITY 3,162 2,095 2,521
SHAREHOLDERS' EQUITY
Share capital 23,892 22,981 23,777
Contributed surplus 4,326 3,771 4,001
Retained earnings (note 2) 499,469 438,842 468,374
Accumulated other comprehensive
loss (609) (305) (1,033)
---------- ---------- ----------
498,860 438,537 467,341
---------- ---------- ----------
Total Shareholders' Equity 527,078 465,289 495,119
---------- ---------- ----------
$ 631,161 $ 606,720 $ 620,960
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the six months ended For the three months ended
August 2, August 4, August 2, August 4,
(in thousands) 2008 2007 2008 2007
SHARE CAPITAL
Balance, beginning
of the period $ 23,777 $ 21,323 $ 23,932 $ 22,866
Cash consideration
on exercise of
stock options 178 1,322 54 72
Ascribed value
credited to share
capital from
exercise of stock
options 44 336 13 43
Cancellation of
shares pursuant
to stock purchase
program (107) - (107) -
---------- ---------- ---------- ----------
Balance, end of the
period 23,892 22,981 23,892 22,981
---------- ---------- ---------- ----------
CONTRIBUTED SURPLUS
Balance, beginning of
the period 4,001 3,583 4,144 3,546
Stock option
compensation costs 369 524 195 268
Ascribed value
credited to share
capital from
exercise of stock
options (44) (336) (13) (43)
---------- ---------- ---------- ----------
Balance, end of the
period 4,326 3,771 4,326 3,771
---------- ---------- ---------- ----------
RETAINED EARNINGS
Balance, beginning
of the period 468,374 411,213 480,770 418,185
Adjustment to
opening retained
earnings due to
adoption of
new accounting
standard (net
of tax of
$3,121) (note 2) 6,725 - - -
Net earnings 53,821 50,461 35,385 32,077
Dividends (25,485) (22,832) (12,720) (11,420)
Premium on purchase
of Class A
non-voting (3,966) - (3,966) -
---------- ---------- ---------- ----------
Balance, end of the
period 499,469 438,842 499,469 438,842
---------- ---------- ---------- ----------
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
Balance, beginning
of the period (1,033) - (597) (81)
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 $66 for
the six months
and $(4) for
the three
months ended
August 2, 2008;
$250 for the six
months and $11
for the three
months ended
August 4, 2007) 424 (1,451) (12) (206)
Reclassification
adjustment for
net gains
included in net
earnings (net of
tax of $331) - (1,737) - (18)
---------- ---------- ---------- ----------
Balance, end of
the period(1) (609) (305) (609) (305)
---------- ---------- ---------- ----------
Total Shareholders'
Equity $ 527,078 $ 465,289 $ 527,078 $ 465,289
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(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 six months ended For the three months ended
August 2, August 4, August 2, August 4,
(in thousands) 2008 2007 2008 2007
Net earnings $ 53,821 $ 50,461 $ 35,385 $ 32,077
Other comprehensive
income (loss):
Net unrealized
gain (loss) on
available-for-
sale financial
assets arising
during the
period (net of
tax of $66 for
the six months
and $(4) for
the three
months ended
August 2, 2008;
$250 for the
six months and
$11 for the
three months ended
August 4, 2007) 424 (1,451) (12) (206)
Reclassification
adjustment for
net gains
included in net
earnings (net of
tax of $331 for
the six months
and $19 for the
three months ended
August 4, 2007) - (1,737) - (18)
---------- ---------- ---------- ----------
424 (3,188) (12) (224)
---------- ---------- ---------- ----------
Comprehensive income $ 54,245 $ 47,273 $ 35,373 $ 31,853
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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 August 2, 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 six months ended August 2, 2008
was $164,948. During the quarter, the Company recorded $3,170 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
retrospective impact on net earnings for the six months ended August 2, 2008
was a reduction of $17.
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
six months ended three months ended Audited
August 2, August 4, August 2, August 4, February 2,
2008 2007 2008 2007 2008
Balance at
beginning of
the period 57,473 57,817 57,491 57,925 57,817
Shares issued
pursuant to
exercise of
stock options 30 118 12 10 217
Shares purchased
under issuer bid (275) - (275) - (561)
-------- -------- -------- -------- --------
Balance at end
of the period 57,228 57,935 57,228 57,935 57,473
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
The Company has authorized an unlimited number of Common shares. At August
2, 2008, there were 13,440 common shares issued (August 4, 2007 - 13,440;
February 2, 2008 - 13,440) with a value of $482 (August 4, 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 August 2, 2008, ten thousand options were granted and no
options were cancelled.
Compensation cost related to stock option awards granted during the
quarter under the fair value based approach was calculated using the following
assumptions:
Expected option life 4.1 years
Risk-free interest rate 3.55%
Expected stock price volatility 31.54%
Average dividend yield 3.94%
Weighted average fair value of options granted $3.76
6. LONG-TERM DEBT
Audited
August 2, August 4, 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 $ 14,533 $ 15,643 $ 15,097
Less current portion 1,182 1,110 1,146
---------- ---------- ----------
$ 13,351 $ 14,533 $ 13,951
---------- ---------- ----------
---------- ---------- ----------
7. EARNINGS PER SHARE
The number of shares used in the earnings per share calculation is as
follows:
For the six months ended For the three months ended
August 2, August 4, August 2, August 4,
2008 2007 2008 2007
Weighted average
number of shares
per basic earnings
per share
calculations 70,871 71,327 70,825 71,370
Effect of dilutive
options outstanding 376 769 353 781
---------- ---------- ---------- ----------
Weighted average
number of shares
per diluted
earnings per share
calculations 71,247 72,096 71,178 72,151
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
As at August 2, 2008, 223 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
Audited
August 2, August 4, February 2,
2008 2007 2008
Balance with banks
(overdraft) $ (3,851) $ 3,447 $ 2,474
Short-term deposits, bearing interest
at 3.0% (August 4, 2007 - 4.5%;
February 2, 2008 - 4.0%) 204,191 168,424 211,827
---------- ---------- ----------
Cash and cash equivalents $ 200,340 $ 171,871 $ 214,301
---------- ---------- ----------
---------- ---------- ----------
Marketable securities:
Fair value $ 30,543 $ 42,721 $ 30,053
Cost 31,249 43,084 31,249
Non-cash transactions:
Capital asset additions included
in accounts payable $ 1,562 $ 1,320 $ 1,329
For the For the
six months ended three months ended Audited
August 2, August 4, August 2, August 4, February 2,
2008 2007 2008 2007 2008
Cash paid
during the
period for:
Income taxes $ 45,584 $ 46,279 $ 15,217 $ 14,166 $ 73,305
Interest 475 552 236 252 1,045
Investment
income:
Available-
for-sale
financial
assets:
Interest
income $ 22 $ 40 $ 11 $ 21 $ 62
Dividends 823 1,247 404 562 2,398
Realized
gain on
disposal - 2,006 - 10 474
Held-for-
trading
financial
assets:
Interest
income 3,412 3,756 1,651 2,136 8,194
---------- ---------- ---------- ---------- ----------
$ 4,257 $ 7,049 $ 2,066 $ 2,729 $ 11,128
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
9. FINANCIAL INSTRUMENTS
The Company's significant financial instruments consist of cash and cash
equivalents along with marketable securities. Financial instruments that are
exposed to concentrations of credit risk consist primarily of cash
equivalents. The Company uses its cash resources to fund ongoing store
construction and renovations along with working capital needs. 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 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 and there
have been no significant changes in the Company's risk exposures in the first
six months of fiscal 2009.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIOD ENDED AUGUST 2, 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 August 2, 2008 and the audited
consolidated financial statements of Reitmans for the fiscal year ended
February 2, 2008 and the notes thereto which are available at www.sedar.com.
This MD&A is dated September 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 September 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, 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 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
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 anticipates that this initiative will represent an
opportunity for the Company to enhance sales while offering customers the
convenience of online purchasing.
CONSOLIDATED OPERATING RESULTS FOR THE SIX MONTHS ENDED AUGUST 2, 2008
("year to date") AND COMPARISON TO CONSOLIDATED OPERATING RESULTS FOR THE
SIX MONTHS ENDED AUGUST 4, 2007 ("year to date fiscal 2008")
Sales for the year to date decreased 0.9% to $517,820,000 as compared with
$522,637,000 for the year to date fiscal 2008. Same store sales decreased
4.7%. The continued weakness in the US economy and sharp increases in the
price of certain commodities in Canada, most notably oil and gas, continued to
impact 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.
Operating earnings before depreciation and amortization for the year to
date increased 9.1% to $103,319,000 as compared with $94,691,000 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 no
significant impact on operating earnings before depreciation and amortization.
The Company improved its gross margin despite a very competitive and highly
promotional environment. Gross margin improved 326 basis points prior to
giving effect to a 178 basis point reduction in gross margin attributable to
the inclusion of transportation costs and certain distribution centre costs.
The strength of the Canadian dollar continued to favourably impact the gross
margin for the year to date. Spot prices for $1.00 US for the year to date
ranged between a high of $1.03 and a low of $0.97 Canadian ($1.19 and $1.03
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. Despite consumer demand
softening in the year to date, which resulted in all banners taking more
markdowns to sell the merchandise, improvements in gross margin contributed
significantly to improved operating earnings before depreciation and
amortization.
Depreciation and amortization expense for the year to date was $28,782,000
compared to $23,838,000 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 $2,074,000 of write-offs as a result of closed
and renovated stores, compared to $996,000 for the same period last year.
Investment income for the year to date decreased 39.6% to $4,257,000 as
compared to $7,049,000 for the same period last year. Dividend income for the
year to date was $823,000 as compared to $1,247,000 for the year to date
fiscal 2008, while there were no net capital gains for the year to date as
compared to $2,006,000 for the same period last year. Interest income
decreased for the year to date to $3,434,000 as compared to $3,796,000 for the
year to date fiscal 2008 due to lower rates of interest. The Company
maintained larger cash balances while continuing to reduce the size of its
investment portfolio and managing the resulting cash on a short-term basis.
Interest expense on long-term debt decreased to $469,000 for the year to
date from $504,000 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 $24,504,000, for an
effective tax rate of 31.3%. For the same period last year, income tax expense
was $26,937,000, 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 increased 6.7% to $53,821,000
($0.76 diluted earnings per share) as compared with $50,461,000 ($0.70 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. Most of these purchases must be paid for in
US dollars. In the year to date, these merchandise purchases exceeded
$103,000,000 US. The Company uses a variety of strategies designed to fix the
cost of its continuing US dollar long-term commitments at the lowest possible
cost, while at the same time allowing itself the opportunity to take advantage
of an increase in the value of the Canadian dollar. For the year to date,
these strategies increased the Company's gross margin as the Canadian dollar
remained strong.
During the year to date, the Company opened 24 stores comprised of
11 Reitmans, 2 Smart Set, 4 RW & CO., 3 Thyme Maternity, 2 Penningtons, and
2 Addition Elle; 12 stores were closed. Accordingly, at August 2, 2008, there
were 970 stores in operation, consisting of 377 Reitmans, 164 Smart Set, 57 RW
& CO., 75 Thyme Maternity, 14 Cassis, 163 Penningtons and 120 Addition Elle as
compared with a total of 935 stores last year.
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 AUGUST 2, 2008
("second quarter") AND COMPARISON TO CONSOLIDATED OPERATING RESULTS FOR
THE THREE MONTHS ENDED AUGUST 4, 2007 ("second quarter of fiscal 2008")
Sales for the second quarter decreased 0.8% to $289,502,000 as compared
with $291,942,000 for the second quarter of fiscal 2008. Same store sales
decreased 4.5%. The continued weakness in the US economy and sharp increases
in the price of certain commodities in Canada, most notably oil and gas,
continued to impact consumer confidence, which led to reduced traffic in
malls, power centres and street store locations as consumers cut back on
spending for apparel. Unseasonable weather continued throughout Canada during
the months of May, June and July with higher than average levels of rainfall
and temperatures below normal. This impacted traditional buying patterns as
consumers delayed purchases resulting in the Company's merchandise being more
heavily promoted to manage its inventory levels.
Operating earnings before depreciation and amortization for the second
quarter increased 6.7% to $63,982,000 as compared with $59,941,000 for the
second 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 $2,746,000
in operating earnings before depreciation and amortization for the second
quarter. The Company improved its gross margin during the quarter despite a
very competitive and highly promotional environment. Gross margin improved
223 basis points prior to giving effect to a 59 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
continued to favourably impact the gross margin for the second quarter. Spot
prices for $1.00 US for the second quarter ranged between a high of $1.03 and
a low of $0.98 Canadian ($1.11 and $1.03 respectively for the second 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. Despite consumer demand softening in the second
quarter, which resulted in all banners taking more markdowns to sell the
merchandise, improvements in gross margin contributed significantly to
improved operating earnings before depreciation and amortization.
Depreciation and amortization expense for the second quarter was
$14,817,000 compared to $12,140,000 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 $1,278,000 of write-offs as a
result of closed and renovated stores, compared to $294,000 in the same period
last year.
Investment income for the second quarter decreased 24.3% to $2,066,000 as
compared to $2,729,000 in the same period last year. Dividend income for the
second quarter was $404,000 as compared to $562,000 for the second quarter of
fiscal 2008, while there were no net capital gains for the second quarter as
compared to $10,000 for the same period last year. Interest income decreased
for the second quarter to $1,662,000 as compared to $2,157,000 for the second
quarter of fiscal 2008 due to lower rates of interest. The Company maintained
larger cash balances while continuing to reduce the size of its investment
portfolio and managing the resulting cash on a short-term basis.
Interest expense on long-term debt decreased to $232,000 in the second
quarter from $250,000 in the second quarter of fiscal 2008. This decrease
reflects the continued repayment of the mortgage on the Company's distribution
centre.
Income tax expense for the second quarter amounted to $15,614,000, for an
effective tax rate of 30.6%. For the same period last year, income tax expense
was $18,203,000, for an effective tax rate of 36.2%. 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 second quarter increased 10.3% to $35,385,000
($0.50 diluted earnings per share) as compared with $32,077,000 ($0.44 diluted
earnings per share) for the second 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. Most of these purchases must be paid for in
US dollars. In the second quarter, these merchandise purchases exceeded
$44,000,000 US. The Company uses a variety of strategies designed to fix the
cost of its continuing US dollar long-term commitments at the lowest possible
cost, while at the same time allowing itself the opportunity to take advantage
of an increase in the value of the Canadian dollar. For the second quarter,
these strategies helped the Company's gross margin as the Canadian dollar
remained strong.
During the second quarter, the Company opened 10 stores comprised of
4 Reitmans, 2 RW & CO., 2 Thyme Maternity, 1 Penningtons and 1 Addition Elle;
4 stores were closed. Accordingly, at August 2, 2008, there were 970 stores in
operation, consisting of 377 Reitmans, 164 Smart Set, 57 RW & CO., 75 Thyme
Maternity, 14 Cassis, 163 Penningtons and 120 Addition Elle as compared with a
total of 935 stores last year.
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 6, 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 per share amounts) Earnings per share
("EPS")
Net
Sales Earnings Basic Diluted
------------------------------------------------------
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
October 28, 2006 258,602 23,390 0.33 0.33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in thousands,
except per share amounts) Adjusted Earnings
per share ("EPS")
Adjusted
Net
Earnings Basic Diluted
------------------------------------------------------
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
October 28, 2006 23,823 0.34 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 due to the geographical diversity of
the Company's stores and product offerings, the Company experiences quarterly
fluctuations in operating results. Sales have traditionally been higher in the
fourth quarter compared to other quarterly periods due to consumer holiday
buying patterns. However, with the growth of the Company's plus-size and
maternity businesses, second and third quarters' merchandise sales have been
positively impacted resulting in higher sales revenues relative to the fourth
quarter. Management assumes that this trend will continue in the future.
BALANCE SHEET
Cash and cash equivalents amounted to $200,340,000 or 16.6% higher than
$171,871,000 last year as the Company continued to reduce its investment
portfolio and manage the resulting cash 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 August 2, 2008, marketable securities (reported at fair value)
amounted to $30,543,000 as compared with $42,721,000 last year. The Company
has been gradually reducing the size of its investment portfolio and managing
the resulting cash on a short-term basis, and in particular, reducing its
investments in income trusts. Accounts receivable are $3,536,000 or $199,000
higher than last year. The Company's accounts receivable are essentially the
credit card sales from the last few days of the fiscal quarter. Merchandise
inventories this year were $73,512,000 or $601,000 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 second quarter by $9,871,000. The
favourable impact of the Canadian dollar on inventory offset this increase in
inventory. As a result of the Company's change in accounting policy for
inventories, the inventory balance as at August 2, 2008 is not comparable with
August 4, 2007. Prepaid expenses, the majority of which represent prepaid
rent, are $26,812,000 or approximately $2,037,000 higher than last year,
principally due to rent and related costs from more stores.
Income taxes recoverable are $45,000 as compared to an income tax payable
of $27,309,000 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 the current year's taxes recoverable. 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.
The Company invested $26,883,000 in additions to capital assets in the
year to date and $13,809,000 in the second quarter. This included $23,520,000
(2008 - $31,556,000) in new store construction and existing store renovation
costs and $3,363,000 (2008 - $7,587,000) in the Sauvé Street office and
distribution centre asset additions.
Accounts payable and accrued items are $63,848,000, or $9,016,000 less
than last year. The reduction in the liabilities is primarily due to lower
trade payables, which is a function of the timing of receipt of goods and
lower employee incentive bonus costs related to the Company employee
performance incentive plan. The Company's accounts payable consist largely of
trade payables and liabilities for unredeemed gift certificates and credit
vouchers.
In addition to its defined benefit plan, the Company has a Supplemental
Executive Retirement Plan ("SERP") for certain senior executives. An actuarial
calculation was made in fiscal 2007 to determine the estimated liability the
Company incurred with respect to the provisions of the plan. An amount of
$820,000 (2008 - $800,000) was expensed in the year to date with respect to
this plan. The plan is unfunded. When the obligation arises to make any
payment called for under the plan (e.g. when an eligible plan member retires
and begins receiving payments under the plan), the payments will reduce the
accrual amount as the payments are actually made.
COMPARISON OF CONSOLIDATED FINANCIAL POSITION AS AT AUGUST 2, 2008 WITH
THE CONSOLIDATED FINANCIAL POSITION AS AT FEBRUARY 2, 2008
Cash and cash equivalents amounted to $200,340,000 or 6.5% lower than
$214,301,000 as at February 2, 2008, largely due to the timing of payments for
summer merchandise receipts in the second quarter. Marketable securities
(reported at fair value) amounted to $30,543,000 as compared with $30,053,000
at February 2, 2008. Marketable securities held by the Company consist
primarily of preferred shares of Canadian public companies. The Company has
been gradually reducing the size of its investment portfolio and managing the
resulting cash on a short-term basis, and in particular, reducing its
investments in income trusts. Accounts receivable were $3,536,000 or $10,000
less 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. Merchandise inventories were $73,512,000 or $21,071,000 higher
than the fiscal year ended February 2, 2008. This increase is due to the
build-up of inventory for the fall selling season in the second quarter. 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 second quarter by $9,871,000. As a result of the
Company's change in accounting policy for inventories, the inventory balance
as at August 2, 2008 is not comparable with February 2, 2008. Prepaid
expenses, the majority of which represent prepaid rent, are $26,812,000 or
$3,965,000 higher than the fiscal year ended February 2, 2008, principally due
to rent and related costs from more stores. Income taxes recoverable are
$45,000 as compared to an income tax 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 current year's taxes recoverable. 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.
Accounts payable and accrued items are $63,848,000, or $5,341,000 lower
than the fiscal year ended February 2, 2008. The reduction in the liabilities
is attributable to lower trade payables, which is a function of the timing of
receipt of goods and a lower gift certificate and credit voucher liability due
to the timing of gift certificate and credit voucher redemptions. The
Company's accounts payable consist largely of trade payables and liabilities
for unredeemed gift certificates and credit vouchers.
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES
Shareholders' equity at August 2, 2008 amounted to $527,078,000 or
$7.46 per share as compared to $465,289,000 or $6.52 per share last year
(February 2, 2008 - $495,119,000 or $6.98 per share). 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 $230,883,000 as compared with
$214,592,000 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 August 2, 2008,
$62,018,000 (August 4, 2007 - $63,347,000; 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 August 2, 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 $564,000 in the year to date.
The Company paid dividends amounting to $25,485,000 in the year to date
compared to $22,832,000 in the year to date fiscal 2008.
In the year to date, the Company invested $26,883,000 on new and renovated
stores, the distribution centre and the Sauvé Street office. The Company has
committed approximately $2,000,000 to complete repairs and ongoing 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
August 2, 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 $ 14,533,000 $ 1,182,000 $ 4,029,000 $ 9,322,000
Store leases
and equipment 457,744,000 101,025,000 214,380,000 142,339,000
------------------------------------------------------------
Total
contractual
obligations $ 472,277,000 $ 102,207,000 $ 218,409,000 $ 151,661,000
------------------------------------------------------------
------------------------------------------------------------
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 at the lowest possible cost, while at the same time allowing
itself the opportunity to take advantage of an increase in the value of the
Canadian dollar vis-à-vis the US dollar.
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 August 2, 2008, August 4, 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 six months ended August 2, 2008 are foreign exchange gains of
$134,000 and $413,000 respectively (losses of $391,000 and $1,188,000 for the
three months and six months ended August 4, 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 $95,000 (year to date fiscal 2008 - $95,000).
The Company incurred fees of $162,000 in the year to date (year to date
fiscal 2008 - $173,000) 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. Financial instruments that are
exposed to concentrations of credit risk consist primarily of cash
equivalents. The Company uses its cash resources to fund ongoing store
construction and renovations along with working capital needs. 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.
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 and there have been no
significant changes in the Company's risk exposures in the year to date.
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 Certificates and Credit Vouchers
Gift certificates sold are recorded as a liability and revenue is
recognized when the gift certificate is redeemed. Customers may receive a
credit voucher in exchange for returned goods. Credit vouchers are recorded as
a liability until redeemed. The Company, for each reporting period, reviews
the gift 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 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 six months ended
August 2, 2008 was $164,948,000. For the year to date, the Company recorded
$3,170,000 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 retrospective impact on net earnings for the
six months ended August 2, 2008 was a reduction of $17,000.
OUTSTANDING SHARE DATA
At September 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 925,000 Class A non-voting shares remained authorized for future
issuance. The Company had 1,637,250 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 2007, 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 2,870,615 Class A non-voting shares of the Company,
representing 5% of the issued and outstanding Class A non-voting shares as at
November 9, 2007. The average daily trading volume for the six month period
preceding November 9, 2007 is 127,150 shares. In accordance with the Toronto
Stock Exchange requirements, a maximum daily repurchase of 25% of this average
may be made. The bid commenced on November 28, 2007 and may continue to
November 27, 2008. 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
six months ended August 2, 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
970 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 the
Company's merchandise is private label. In the first six 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 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 to ensure
it is protected against any material adverse fluctuations in the value of the
Canadian dollar between the time the relevant merchandise is ordered and when
it must be paid for.
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
The Company believes that it is well positioned for the future. 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 positioned for further growth. 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; Corporate Website: www.reitmans.ca |