Reitmans (Canada) Limited announces its results for the nine months ended October 30, 2010Dec 1, 2010 MONTREAL, Dec. 1 /CNW Telbec/ - Sales for the nine months ended October 30, 2010 increased 1.6% to $800,793,000 as compared with $788,407,000 for the nine months ended October 31, 2009. Same store sales were flat. Operating earnings before depreciation and amortization (EBITDA(1)) for the period increased 24.6% to $151,022,000 as compared with $121,171,000 last year. The Company's gross margin increased from 64.0% to 68.1% in the first nine months of fiscal 2011, primarily due to the strengthening of the Canadian dollar vis-à-vis the US dollar. Net earnings increased 42.3% to $75,620,000 or $1.12 diluted earnings per share, as compared with $53,148,000 or $0.77 diluted earnings per share last year. Sales for the third quarter ended October 30, 2010 decreased 1.7% to $266,162,000, as compared with $270,684,000 for the third quarter ended October 31, 2009. Same store sales for the comparable 13 weeks decreased 3.1%. Operating earnings before depreciation and amortization (EBITDA(1)) for the period decreased 0.3% to $41,966,000 as compared with $42,098,000 last year. The Company's gross margin increased from 65.2% to 66.7% in the third quarter ended October 30, 2010, primarily due to the strengthening of the Canadian dollar vis-à-vis the US dollar. Net earnings increased 1.9% to $19,274,000 or $0.29 diluted earnings per share as compared to $18,921,000 or $0.28 diluted earnings per share for the same period last year. Sales for the month of November (four weeks ended November 27, 2010) were flat compared to November 2009 with same store sales decreasing 1.0%. During the third quarter, the Company opened 9 new stores comprised of 2 Reitmans, 1 Smart Set, 1 RW & CO., 1 Cassis, 1 Penningtons and 3 Addition Elle; 7 stores were closed. At October 30, 2010, there were 979 stores in operation, consisting of 364 Reitmans, 161 Smart Set, 68 RW & CO., 76 Thyme Maternity, 22 Cassis, 165 Penningtons and 123 Addition Elle, as compared with a total of 981 stores as at October 31, 2009. An additional 4 stores are scheduled to open this year and 14 stores will be closed. At the Board of Directors meeting held on December 1, 2010, a quarterly cash dividend (constituting eligible dividends) of $0.20 per share on all outstanding Class A non-voting and Common shares of the Company was declared, payable January 27, 2011 to shareholders of record on January 7, 2011. Financial statements are attached. For management's commentary on the third quarter and nine months results, please refer to the attached Management's Discussion and Analysis of Financial Condition and Results of Operations for the periods ended October 30, 2010. As reported in the November 22, 2010 press release, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid, under which the Company may purchase up to 2,638,115 Class A non-voting shares, representing 5% of the issued and outstanding Class A non-voting shares as at November 17, 2010. The bid commenced on November 28, 2010 and may continue to November 27, 2011.
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Montreal, December 1, 2010
Jeremy H. Reitman
Chairman and Chief Executive Officer
Telephone: (514) 385-2630
Corporate Website: www.reitmans.ca
>>
All of the statements contained herein, other than statements of fact that are independently verifiable at the date hereof, are forward-looking statements. Such statements, based as they are on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown, many of which are beyond the Company's control. Such risks include but are not limited to: the impact of general economic conditions, general conditions in the retail industry, seasonality, weather and other risks included in public filings of the Company. Consequently, actual future results may differ materially from the anticipated results expressed in forward-looking statements. The reader should not place undue reliance on the forward-looking statements included herein. These statements speak only as of the date made and the Company is under no obligation and disavows any intention to update or revise such statements as a result of any event, circumstances or otherwise, except to the extent required under applicable securities law. (1) This release includes reference to certain Non-GAAP measures such as operating earnings before depreciation and amortization (EBITDA), which is defined as earnings before interest, taxes, depreciation and amortization and investment income, and same store sales, which is defined as sales generated by stores that have been opened for at least one year. The Company believes such measures provide meaningful information on the Company's performance and operating results. However, readers should know that such Non-GAAP measures have no standardized meaning as prescribed by GAAP and may not be comparable to similar measures presented by other companies. Accordingly, they should not be considered in isolation.
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STATEMENTS OF EARNINGS (Unaudited)
For the For the
nine months ended three months ended
(in thousands except October 30, October 31, October 30, October 31,
per share amounts) 2010 2009 2010 2009
Sales $ 800,793 $ 788,407 $ 266,162 $ 270,684
Cost of goods sold
and selling, general
and administrative
expenses (note 4) 649,771 667,236 224,196 228,586
---------- ---------- ---------- ----------
151,022 121,171 41,966 42,098
Depreciation and
amortization 45,075 45,181 15,163 15,022
---------- ---------- ---------- ----------
Operating earnings
before the undernoted 105,947 75,990 26,803 27,076
Investment income
(note 9) 2,674 2,020 1,030 613
Interest on
long-term debt 583 642 189 209
---------- ---------- ---------- ----------
Earnings before
income taxes 108,038 77,368 27,644 27,480
Income taxes:
Current 35,034 26,643 9,236 9,929
Future (2,616) (2,423) (866) (1,370)
---------- ---------- ---------- ----------
32,418 24,220 8,370 8,559
---------- ---------- ---------- ----------
Net earnings $ 75,620 $ 53,148 $ 19,274 $ 18,921
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share
(note 8):
Basic $ 1.13 $ 0.77 $ 0.29 $ 0.28
Diluted 1.12 0.77 0.29 0.28
The accompanying notes are an integral part of these financial
statements.
>>
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STATEMENTS OF CASH FLOWS (Unaudited)
For the For the
nine months ended three months ended
October 30, October 31, October 30, October 31,
(in thousands) 2010 2009 2010 2009
CASH FLOWS FROM
(USED IN) OPERATING
ACTIVITIES
Net earnings $ 75,620 $ 53,148 $ 19,274 $ 18,921
Adjustments for:
Depreciation and
amortization 45,075 45,181 15,163 15,022
Future income taxes (2,616) (2,423) (866) (1,370)
Stock-based
compensation 1,525 810 522 511
Amortization of
deferred lease
credits (3,731) (3,870) (1,236) (1,333)
Deferred lease
credits 2,713 3,312 1,549 2,297
Pension
contribution (465) (454) (155) (154)
Pension expense 1,413 1,350 471 450
Loss on sale of
marketable
securities - 61 - -
Foreign exchange
loss (gain) 358 722 198 (135)
Changes in non-cash
working capital
items relating to
operations (20,968) (16,035) 24 8,201
---------- ---------- ---------- ----------
98,924 81,802 34,944 42,410
CASH FLOWS (USED IN)
FROM INVESTING
ACTIVITIES
Purchases of
marketable securities (282) (1,843) (105) (70)
Proceeds on sale of
marketable securities - 1,390 - -
Additions to capital
assets (40,457) (27,811) (16,514) (11,113)
---------- ---------- ---------- ----------
(40,739) (28,264) (16,619) (11,183)
CASH FLOWS (USED IN)
FROM FINANCING
ACTIVITIES
Dividends paid (38,655) (37,101) (13,241) (12,244)
Purchase of Class A
non-voting shares
for cancellation (30,112) (32,485) - (7,050)
Repayment of
long-term debt (966) (907) (327) (307)
Proceeds from issue
of share capital 2,273 1,904 849 1,052
---------- ---------- ---------- ----------
(67,460) (68,589) (12,719) (18,549)
FOREIGN EXCHANGE (LOSS)
GAIN ON CASH HELD IN
FOREIGN CURRENCY (358) (722) (198) 135
---------- ---------- ---------- ----------
NET (DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS (9,633) (15,773) 5,408 12,813
CASH AND CASH
EQUIVALENTS, BEGINNING
OF THE PERIOD 228,577 214,054 213,536 185,468
---------- ---------- ---------- ----------
CASH AND CASH
EQUIVALENTS, END OF
THE PERIOD $ 218,944 $ 198,281 $ 218,944 $ 198,281
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental disclosure of cash flow information (note 9)
The accompanying notes are an integral part of these financial
statements.
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<<
BALANCE SHEETS (Unaudited)
Audited
October 30, October 31, January 30,
2010 2009 2010
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
(note 9) $ 218,944 $ 198,281 $ 228,577
Marketable securities (note 9) 51,345 37,254 48,026
Accounts receivable 3,622 3,311 2,926
Income taxes recoverable - 5,429 -
Merchandise inventories 94,078 91,791 63,127
Prepaid expenses 14,161 11,083 11,873
Future income taxes 2,214 2,735 2,395
---------- ---------- ----------
Total Current Assets 384,364 349,884 356,924
CAPITAL ASSETS
Property and equipment 203,436 219,582 210,612
Intangibles 11,740 10,520 9,964
---------- ---------- ----------
Total Capital Assets 215,176 230,102 220,576
GOODWILL 42,426 42,426 42,426
FUTURE INCOME TAXES 13,869 11,129 11,466
---------- ---------- ----------
$ 655,835 $ 633,541 $ 631,392
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
items $ 86,917 $ 81,814 $ 77,766
Income taxes payable 7,711 - 4,677
Current portion of long-term
debt (note 7) 1,363 1,279 1,300
---------- ---------- ----------
Total Current Liabilities 95,991 83,093 83,743
DEFERRED LEASE CREDITS 19,591 21,567 20,609
LONG-TERM DEBT (note 7) 10,402 11,765 11,431
ACCRUED PENSION LIABILITY 6,391 4,814 5,443
SHAREHOLDERS' EQUITY
Share capital (note 5) 27,985 25,370 25,888
Contributed surplus 6,134 4,715 5,164
Retained earnings 488,206 486,920 480,622
Accumulated other comprehensive
income (loss) 1,135 (4,703) (1,508)
---------- ---------- ----------
489,341 482,217 479,114
---------- ---------- ----------
Total Shareholders' Equity 523,460 512,302 510,166
---------- ---------- ----------
$ 655,835 $ 633,541 $ 631,392
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these financial
statements.
>>
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STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the For the
nine months ended three months ended
October 30, October 31, October 30, October 31,
2010 2009 2010 2009
(in thousands)
SHARE CAPITAL
Balance, beginning
of the period $ 25,888 $ 23,830 $ 26,930 $ 24,430
Cash consideration
on exercise of
stock options 2,273 1,904 849 1,052
Ascribed value
credited to share
capital from
exercise of
stock options 555 633 206 71
Cancellation of
shares pursuant
to stock repurchase
program (note 5) (731) (997) - (183)
---------- ---------- ---------- ----------
Balance, end of the
period 27,985 25,370 27,985 25,370
---------- ---------- ---------- ----------
CONTRIBUTED SURPLUS
Balance, beginning
of the period 5,164 4,538 5,818 4,275
Stock option
compensation costs 1,525 810 522 511
Ascribed value
credited to share
capital from exercise
of stock options (555) (633) (206) (71)
---------- ---------- ---------- ----------
Balance, end of the
period 6,134 4,715 6,134 4,715
---------- ---------- ---------- ----------
RETAINED EARNINGS
Balance, beginning
of the period 480,622 502,361 482,173 487,110
Net earnings 75,620 53,148 19,274 18,921
Dividends (38,655) (37,101) (13,241) (12,244)
Premium on
repurchase of
Class A non-voting
(note 5) (29,381) (31,488) - (6,867)
---------- ---------- ---------- ----------
Balance, end of the
period 488,206 486,920 488,206 486,920
---------- ---------- ---------- ----------
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
Balance, beginning of
the period (1,508) (8,190) (539) (3,815)
Net unrealized gain
(loss) on available-
for-sale financial
assets arising
during the period
(net of tax of $394
for the nine months
and $250 for the
three months ended
October 30, 2010;
$549 for the nine
months and $424 for
the three months
ended October 31,
2009) 2,643 3,434 1,674 (888)
Reclassification
of losses on
available-for-sale
financial assets
to net earnings
(net of tax of
$8 for the nine
months ended
October 31, 2009) - 53 - -
---------- ---------- ---------- ----------
Balance, end of the
period(1) 1,135 (4,703) 1,135 (4,703)
---------- ---------- ---------- ----------
Total Shareholders'
Equity $ 523,460 $ 512,302 $ 523,460 $ 512,302
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(1) Marketable securities are classified as available-for-sale financial
investments and constitute the sole item in accumulated other
comprehensive income (loss).
The accompanying notes are an integral part of these financial
statements.
>>
<<
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the For the
nine months ended three months ended
October 30, October 31, October 30, October 31,
(in thousands) 2010 2009 2010 2009
Net earnings $ 75,620 $ 53,148 $ 19,274 $ 18,921
Other comprehensive
income:
Net unrealized gain
(loss) on available-
for-sale financial
assets arising
during the period
(net of tax of $394
for the nine months
and $250 for the
three months ended
October 30, 2010;
$549 for the nine
months and $424 for
the three months
ended October 31,
2009) 2,643 3,434 1,674 (888)
Reclassification of
losses on available-
for-sale financial
assets to net
earnings (net of
tax of $8 for the
nine months ended
October 31, 2009) - 53 - -
---------- ---------- ---------- ----------
2,643 3,487 1,674 (888)
---------- ---------- ---------- ----------
Comprehensive income $ 78,263 $ 56,635 $ 20,948 $ 18,033
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial
statements.
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<<
NOTES TO THE INTERIM FINANCIAL STATEMENTS (Unaudited)
(all amounts in thousands except per share amounts)
>>
1. BASIS OF PRESENTATION These unaudited interim financial statements (the "financial statements") have been prepared in accordance with Canadian generally accepted accounting principles for interim financial information and include all normal and recurring entries that are necessary for a fair presentation of the statements. Accordingly, they do not include all of the information and footnotes required by Canadian generally accepted accounting principles for annual financial statements. These financial statements should be read in conjunction with the most recently prepared annual financial statements for the 52 week period ended January 30, 2010. The Company applied the same accounting policies in the preparation of the financial statements as disclosed in note 4 of its annual financial statements in the Company's fiscal 2010 Annual Report. 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 experiences quarterly fluctuations in operating results. The business seasonality results in performance for the 39 weeks ended October 30, 2010, which is not necessarily indicative of performance for the balance of the year. All amounts in the attached footnotes are unaudited unless specifically identified. 2. ADOPTION OF NEW ACCOUNTING STANDARDS
<<
a) Goodwill and Intangible Assets
In February 2008, the Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 3064, Goodwill and Intangible Assets,
which replaces Section 3062, Goodwill and Other Intangible Assets, and
amends Section 1000, Financial Statement Concepts. The new section
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill and other intangible assets. Standards concerning
goodwill are unchanged from the standards included in the previous
Section 3062. This new standard is applicable to fiscal years beginning
on or after October 1, 2008. The impact of adopting this standard was to
reclassify the net book value of software of $9,964 as at January 30,
2010 from property and equipment to intangible assets on the balance
sheet. For comparative purposes, as at October 31, 2009, $10,520
representing the net book value of software was reclassified from
property and equipment to intangible assets.
b) Financial Instruments - Disclosures
In June 2009, the CICA amended Handbook Section 3862, Financial
Instruments - Disclosures, to enhance disclosures about fair value
measurements and liquidity risk of financial instruments. The amendment
applied to annual financial statements with fiscal years ending after
September 30, 2009. The purpose of this amendment is to provide further
convergence with IFRS. Financial instruments recognized at fair value on
the balance sheet must be classified in fair value hierarchy levels as
follows:
Level 1 - valuation based on quoted prices (unadjusted) in active markets
for identical assets or liabilities;
Level 2 - valuation techniques based on inputs that are other than quoted
prices included in Level 1 that are observable for the asset or
liability, either directly (prices) or indirectly (derived from prices);
Level 3 - valuation techniques with unobservable market inputs (involves
assumptions and estimates by management of how market participants would
price the assets or liabilities).
The amended section relates to disclosure only and did not impact the
financial results of the Company. As at October 30, 2010, October 31,
2009 and January 30, 2010, the Company held no significant assets or
liabilities required to be measured at fair value, except for cash and
cash equivalents and marketable securities, which were measured using
Level 1 inputs in the fair value hierarchy.
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3. RECENT ACCOUNTING PRONOUNCEMENTS The Canadian Accounting Standards Board has confirmed that the use of International Financial Reporting Standards ("IFRS") will be required for publicly accountable profit-oriented enterprises. IFRS will replace Canada's current GAAP for those enterprises. These new standards are applicable to fiscal years beginning on or after January 1, 2011. Companies will be required to provide comparative IFRS information for the previous fiscal year. The Company will implement this standard in its first quarter of fiscal year ending January 28, 2012 and is currently evaluating the impact of the transition to IFRS and will continue to invest in training and resources throughout the transition to facilitate a timely conversion. 4. INVENTORY The cost of inventory recognized as an expense and included in cost of goods sold and selling, general and administrative expenses for the nine months ended October 30, 2010 was $255,458 (October 31, 2009 - $284,442). During the quarter, the Company recorded $4,096 (October 31, 2009 - $3,912) of write-downs of inventory as a result of net realizable value being lower than cost and no inventory write-downs recognized in previous periods were reversed. 5. SHARE CAPITAL
<<
a) The Class A non-voting shares and the Common shares of the Company
rank equally and pari passu with respect to the right to receive
dividends and upon any distribution of the assets of the Company.
However, in the case of stock dividends, the holders of Class A
non-voting shares shall have the right to receive Class A non-voting
shares and the holders of Common shares shall have the right to
receive Common shares.
b) The Company has authorized an unlimited number of Class A non-voting
shares.
The following table summarizes Class A non-voting shares issued for
each of the periods listed:
>>
<<
For the For the
nine months ended three months ended Audited
October 30, October 31, October 30, October 31, January 30,
2010 2009 2010 2009 2010
Balance at
beginning
of the
period 54,160 56,864 52,693 54,934 56,864
Shares
issued
pursuant
to
exercise
of stock
options 186 197 70 89 277
Shares
purchased
under
issuer
bid (1,583) (2,481) - (443) (2,981)
------- ------- ------- ------- -------
Balance
at end
of the
period 52,763 54,580 52,763 54,580 54,160
------- ------- ------- ------- -------
------- ------- ------- ------- -------
The Company has authorized an unlimited number of Common shares. At
October 30, 2010, there were 13,440 common shares issued (October 31,
2009 - 13,440; January 30, 2010 - 13,440) with a value of $482
(October 31, 2009 - $482; January 30, 2010 - $482).
c) For the nine months ended October 30, 2010, the Company purchased,
under the prior year's normal course issuer bid, 1,583 Class A
non-voting shares having a book value of $731 for a total cash
consideration of $30,112. The excess of the purchase price over book
value of the shares in the amount of $29,381 was charged to retained
earnings.
The Company received, in November 2010, approval from the Toronto
Stock Exchange to proceed with a normal course issuer bid. Under the
bid, the Company may purchase up to 2,638 Class A non-voting shares of
the Company, representing 5% of the issued and outstanding Class A
non-voting shares as at November 17, 2010. The bid commenced on
November 28, 2010 and may continue to November 27, 2011.
>>
6. STOCK-BASED COMPENSATION The Company has a share option plan as described in note 11 c) to the financial statements contained in the 2010 Annual Report. Changes in outstanding stock options were as follows:
<<
For the nine months ended
October 30, 2010 October 31, 2009
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Outstanding, at
beginning of period 3,207 $ 14.14 1,594 $ 12.84
Granted 115 18.03 1,920 14.50
Exercised (186) 12.23 (197) 9.67
Forfeited - - (30) 12.23
---------- ---------- ---------- ----------
Outstanding, at end
of period 3,136 $ 14.39 3,287 $ 14.01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Options exercisable, at
end of period 1,018 $ 13.51 963 $ 12.94
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
For the three months ended
October 30, 2010 October 31, 2009
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Outstanding, at
beginning of period 3,206 $ 14.35 3,376 $ 13.95
Granted - - - -
Exercised (70) 12.23 (89) 11.83
Forfeited - - - -
---------- ---------- ---------- ----------
Outstanding, at end
of period 3,136 $ 14.39 3,287 $ 14.02
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Options exercisable, at
end of period 1,018 $ 13.51 963 $ 12.94
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Compensation cost related to stock option awards granted during the nine
months ended October 30, 2010 under the fair value based approach was
calculated using the following assumptions:
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<<
100 Options 15 Options
Granted Granted
April 7, June 2,
2010 2010
Expected option life 6.5 years 4.9 years
Risk-free interest rate 3.59% 2.44%
Expected stock price volatility 47.18% 37.40%
Average dividend yield 4.00% 4.38%
Weighted average fair value of options granted $6.22 $4.25
>>
7. LONG-TERM DEBT
<<
Audited
October 30, October 31, January 30,
2010 2009 2010
Mortgage bearing interest at 6.40%,
payable in monthly instalments of
principal and interest of $172,
due November 2017 and secured by
the Company's distribution centre $ 11,765 $ 13,044 $ 12,731
Less current portion 1,363 1,279 1,300
---------- ---------- ----------
$ 10,402 $ 11,765 $ 11,431
---------- ---------- ----------
---------- ---------- ----------
>>
8. 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
October 30, October 31, October 30, October 31,
2010 2009 2010 2009
Weighted average number
of shares per basic
earnings per share
calculations 66,954 69,061 66,168 68,200
Effect of dilutive
options outstanding 461 148 566 265
---------- ---------- ---------- ----------
Weighted average number
of shares per diluted
earnings per share
calculations 67,415 69,209 66,734 68,465
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
>>
As at October 30, 2010, a total of 273 stock options were excluded from the calculation of diluted earnings per share as these were deemed to be anti-dilutive, because the exercise prices were greater than the average market price of the shares during the quarter. 9. OTHER INFORMATION
<<
a) Included in the determination of the Company's net earnings for the
three months and nine months ended October 30, 2010 are foreign
exchange gains of $966 and $837 respectively (losses of $1,073 and
$293 for the three months and nine months ended October 31, 2009
respectively).
b) Supplementary cash flow information:
Audited
October 30, October 31, January 30,
2010 2009 2010
Balance with banks $ 5,117 $ 3,909 $ 4,677
Short-term deposits,
bearing interest at
0.9% (October 31,
2009 - 0.3%; January
30,2010 - 0.3%) 213,827 194,372 223,900
---------- ---------- ----------
Cash and cash
equivalents $ 218,944 $ 198,281 $ 228,577
---------- ---------- ----------
---------- ---------- ----------
Marketable securities:
Fair value $ 51,345 $ 37,254 $ 48,026
Cost 49,405 42,052 49,123
Non-cash transactions:
Capital asset
additions included
in accounts payable
and accrued items $ 626 $ 870 $ 1,408
Ascribed value
credited to share
capital from
exercise of stock
options 555 633 655
For the For the
nine months ended three months ended
October 30, October 31, October 30, October 31,
2010 2009 2010 2009
Cash paid during the
period for:
Income taxes $ 37,870 $ 28,663 $ 8,529 $ 7,737
Interest 583 642 189 209
Investment income:
Available-for-sale
financial assets:
Dividends $ 1,941 $ 1,562 $ 655 $ 490
Realized loss
on disposal - (61) - -
Held-for-trading
financial assets:
Interest income 733 519 375 123
---------- ---------- ---------- ----------
$ 2,674 $ 2,020 $ 1,030 $ 613
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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10. FINANCIAL INSTRUMENTS
<<
a) Fair Value Disclosure
Fair value estimates are made at a specific point in time, using
available information about the financial instrument. These estimates are
subjective in nature and often cannot be determined with precision.
The Company has determined that the carrying value of its short-term
financial assets and liabilities approximates fair value at the period-
end dates due to the short-term maturity of these instruments. The fair
values of the marketable securities are based on published market prices
at period-end, which are considered Level 1 inputs in the fair value
hierarchy.
The fair value of long-term debt is $12,031 (October 31, 2009 - $12,003;
January 30, 2010 - $13,045) compared to its carrying value of $11,765
(October 31, 2009 - $13,044; January 30, 2010 - $12,731).
The fair value of the Company's long-term debt bearing interest at a
fixed rate was calculated using the present value of future payments of
principal and interest discounted at the current market rates of interest
available to the Company for the same or similar debt instruments with
the same remaining maturities.
b) Risk Management
Disclosures relating to exposure to risks, in particular credit risk,
liquidity risk, foreign currency risk, interest rate risk and equity
price risk were provided in the January 30, 2010 financial statements
contained in the 2010 Annual Report and there have been no significant
changes in the Company's risk exposures in the first nine months of
fiscal 2011 with the exception of foreign currency risk as described
below.
Foreign Currency Risk
The Company purchases a significant amount of its merchandise with US
dollars and as such significant volatility in the US dollar vis-à-vis the
Canadian dollar can have an adverse impact on the Company's gross
margin. The Company considers a variety of strategies designed to manage
the cost of its continuing US dollar long-term commitments, including
spot rate purchases and foreign exchange option contracts with maturities
not exceeding three months. A foreign exchange option contract represents
an option to buy a foreign currency from a counterparty to meet its
obligations. Credit risks exist in the event of failure by a counterparty
to fulfill its obligations. The Company reduces this risk by dealing only
with highly-rated counterparties, normally major Canadian financial
institutions. For the first nine months of fiscal 2011, the Company
satisfied its US dollar requirements through spot rate purchases.
As at October 30, 2010, October 31, 2009 and January 30, 2010, there were
no outstanding foreign exchange option contracts.
The Company has performed a sensitivity analysis on its US dollar
denominated financial instruments, which as at October 30, 2010 consist
principally of cash and cash equivalents of $26,101 and accounts payable
of $2,507 to determine how a change in the US dollar exchange rate would
impact net earnings. On October 30, 2010, a 10% rise or fall in the
Canadian dollar against the US dollar, assuming that all other variables,
in particular interest rates, had remained the same, would have resulted
in a $1,685 decrease or increase, respectively, in the Company's net
earnings for the three and nine months ended October 30, 2010.
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<<
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIODS ENDED OCTOBER 30, 2010
>>
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of Reitmans (Canada) Limited ("Reitmans" or the "Company") should be read in conjunction with the unaudited financial statements for the periods ended October 30, 2010 and the audited financial statements of Reitmans for the fiscal year ended January 30, 2010 and the notes thereto which are available at www.sedar.com. This MD&A is dated December 1, 2010. All financial information contained in this MD&A and Reitmans' financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), except for certain information referred to as Non-GAAP measures discussed below. All amounts in this report are in Canadian dollars, unless otherwise noted. The financial statements and this MD&A were reviewed by Reitmans' Audit Committee and were approved by its Board of Directors on December 1, 2010. Additional information about Reitmans, including the Company's 2010 Annual Information Form, is available on the Company's website at www.reitmans.ca or on the SEDAR website at www.sedar.com. FORWARD-LOOKING STATEMENTS All of the statements contained herein, other than statements of fact that are independently verifiable at the date hereof, are forward-looking statements. Such statements, based as they are on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown, many of which are beyond the Company's control. Such risks include but are not limited to: the impact of general economic conditions, general conditions in the retail industry, seasonality, weather and other risks included in public filings of the Company. Consequently, actual future results may differ materially from the anticipated results expressed in forward-looking statements. The reader should not place undue reliance on the forward-looking statements included herein. These statements speak only as of the date made and the Company is under no obligation and disavows any intention to update or revise such statements as a result of any event, circumstances or otherwise, except to the extent required under applicable securities law. NON-GAAP MEASURES In addition to discussing earnings measures in accordance with GAAP, this MD&A provides earnings before interest, taxes, depreciation and amortization and investment income ("EBITDA") as a supplementary earnings measure. Depreciation and amortization includes the write-off of capital assets. The Company believes this measure provides meaningful information on the Company's performance and operating results. However, readers should know that this Non-GAAP financial measure has no standardized meaning as prescribed by GAAP and may not be comparable to similar measures presented by other companies. Accordingly, it should not be considered in isolation. The following table reconciles EBITDA to GAAP measures disclosed in the statements of earnings for the nine and three months ended October 30, 2010 and October 31, 2009:
<<
For the For the
nine months ended three months ended
-----------------------------------------------------------
October 30, October 31, October 30, October 31,
2010 2009 2010 2009
-----------------------------------------------------------
Earnings
before
income
taxes $ 108,038,000 $ 77,368,000 $ 27,644,000 $ 27,480,000
Interest on
long-term
debt 583,000 642,000 189,000 209,000
Investment
income (2,674,000) (2,020,000) (1,030,000) (613,000)
Depreciation
and
amortization 45,075,000 45,181,000 15,163,000 15,022,000
-----------------------------------------------------------
EBITDA $ 151,022,000 $ 121,171,000 $ 41,966,000 $ 42,098,000
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The Company also discloses same store sales, which are defined as sales generated by stores that have been opened for at least one year. Same store sales is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, same store sales as discussed in this MD&A may not be comparable to similar measures presented by other companies. CORPORATE OVERVIEW Reitmans is a Canadian ladies' wear specialty apparel retailer. The Company has seven banners: Reitmans, Smart Set, RW & CO., Thyme Maternity, Cassis, Penningtons and Addition Elle. Each banner is focused on a particular niche in the retail marketplace. Each banner has a distinct marketing program as well as a specific website thereby allowing the Company to continue to enhance its brands and strengthen customer loyalty. The Company has several competitors in each niche, including local, regional and national chains of specialty stores and department stores as well as foreign-based competitors. The Company's stores are located in malls, strip plazas, retail power centres and on major shopping streets across Canada. The Company continues to grow all areas of its business by investing in stores, technology and people. The Company's growth has been driven by continuing to offer Canadian consumers affordable fashions and accessories at the best value reflecting price and quality. The Company offers e-commerce website shopping in its plus-size banners (Penningtons and Addition Elle). This online channel offers customers convenience, selection and ease of purchase, while enhancing customer loyalty and continuing to build the brands. The Company's planned launch of an e-commerce website for its Reitmans banner was delayed to the fourth quarter of fiscal 2011. OPERATING RESULTS FOR THE NINE MONTHS ENDED OCTOBER 30, 2010 ("year to date") AND COMPARISON TO OPERATING RESULTS FOR NINE MONTHS ENDED OCTOBER 31, 2009 ("year to date fiscal 2010") Sales for the year to date increased 1.6% to $800,793,000 as compared with $788,407,000 for the year to date fiscal 2010. Same store sales were flat. The Company experienced modest improvements in the first and second fiscal quarters, however consumers showed signs of reduced spending into the third quarter. The Bank of Canada, in its October 2010 Monetary Policy Report, changed its economic outlook for Canada predicting a more modest growth in calendar 2010 and into 2011. Statistics Canada reported that although the consumer price index rose in August and September, prices in the clothing and footwear sector declined. This downward pressure on retail clothing prices is considered largely due to increased competition along with pressure from value conscious customers. Despite these factors, the Company has been able to maintain its comparative store sales by continuing to offer value reflecting price and quality. Earlier patterns of challenging sales in western Canada continued while eastern Canada, notably Québec and Ontario, showed stronger sales. For the year to date, EBITDA increased by $29,851,000 or 24.6% to $151,022,000 as compared with $121,171,000 for the year to date fiscal 2010. The Company's gross margin of 68.1% for the year to date increased as compared to 64.0 % in the year to date fiscal 2010. As the Company purchases the majority of its merchandise with US dollars, a significant fluctuation of the Canadian dollar vis-à-vis the US dollar impacts earnings. The increase in gross margin was primarily attributable to the impact of the reduced cost of merchandise sold due to the strengthened Canadian dollar, with respect to related purchases, during the fourth quarter of fiscal 2010 and into fiscal 2011. The average rate for a US dollar in the year to date was $1.03 Canadian as compared to $1.15 Canadian in the year to date fiscal 2010. Spot prices for $1.00 US for the year to date ranged between a high of $1.08 and a low of $1.00 Canadian ($1.30 and $1.03 respectively for the year to date fiscal 2010). Significant components of store operating costs that impacted EBITDA included store wage costs which increased by 24 basis points as a percentage of sales, primarily due to increases in minimum wage rates in various jurisdictions. Depreciation and amortization expense for the year to date was $45,075,000 compared to $45,181,000 for the year to date fiscal 2010. Included in the year to date amount is $1,117,000 of write-offs as a result of closed and renovated stores, compared to $1,197,000 in the year to date fiscal 2010. Investment income for the year to date increased 32.4% to $2,674,000 as compared to $2,020,000 in the year to date fiscal 2010. Dividend income for the year to date was $1,941,000 as compared to $1,562,000 for the year to date fiscal 2010. There were no net capital gains or losses in the year to date, while there were $61,000 of net capital losses for the year to date fiscal 2010. Interest income increased for the year to date to $733,000 as compared to $519,000 for the year to date fiscal 2010 due to improved rates of interest earned on short-term investments. Interest expense on long-term debt decreased to $583,000 for the year to date from $642,000 in the year to date fiscal 2010. 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 $32,418,000, for an effective tax rate of 30.0% as compared to $24,220,000 for the year to date fiscal 2010, for an effective tax rate of 31.3%. The reduction in the effective tax rate reflects the impact of changes in substantively enacted tax rates in various tax jurisdictions. Net earnings for the year to date increased 42.3% to $75,620,000 ($1.12 diluted earnings per share) as compared with $53,148,000 ($0.77 diluted earnings per share) for the year to date fiscal 2010. The increase was primarily attributable to the impact of the reduced cost of merchandise sold due to the strengthened Canadian dollar. 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 $178,000,000 US (October 31, 2009 - $169,000,000 US). The Canadian dollar continued to experience volatility against the US dollar in the year to date. The Company considers a variety of strategies designed to manage the cost of its continuing US dollar long-term commitments, including spot rate purchases and foreign exchange option contracts with maturities not exceeding three months. For the year to date, the Company satisfied its US dollar requirements through spot rate purchases. During the year to date, the Company opened 27 stores comprised of 9 Reitmans, 2 Smart Set, 2 RW & CO., 1 Thyme Maternity, 5 Cassis, 4 Penningtons and 4 Addition Elle; 25 stores were closed. At October 30, 2010, there were 979 stores in operation, consisting of 364 Reitmans, 161 Smart Set, 68 RW & CO., 76 Thyme Maternity, 22 Cassis, 165 Penningtons and 123 Addition Elle, as compared with a total of 981 stores as at October 31, 2009. Store closings take place for a variety of reasons as the viability of each store and its location is constantly monitored and assessed for continuing profitability. In most cases when a store is closed, merchandise at that location is sold off in the normal course of business and any unsold merchandise remaining at the closing date is generally transferred to other stores operating under the same banner for sale in the normal course of business.
<<
OPERATING RESULTS FOR THE THREE MONTHS ENDED OCTOBER 30, 2010 ("third
quarter of fiscal 2011") AND COMPARISON TO OPERATING RESULTS FOR THREE
MONTHS ENDED OCTOBER 31, 2009 ("third quarter of fiscal 2010")
>>
In the third quarter of fiscal 2011, reduced consumer spending resulted in a more challenging retail environment for the Company. Sales for the third quarter of fiscal 2011 decreased 1.7% to $266,162,000 as compared with $270,684,000 for the third quarter of fiscal 2010. Same store sales decreased by 3.1%. Statistics Canada reported that although the consumer price index rose in August and September, prices in the clothing and footwear sector declined. This downward pressure in retail clothing prices is considered largely due to increased competition along with pressure from value conscious customers. Earlier patterns of challenging sales in western Canada continued while eastern Canada, notably Québec and Ontario, showed stronger sales. For the third quarter of fiscal 2011, EBITDA remained relatively unchanged, decreasing by $132,000 or 0.3% to $41,966,000 as compared with $42,098,000 for the third quarter of fiscal 2010. The Company's gross margin of 66.7% for the third quarter of fiscal 2011 increased compared to 65.2% for the third quarter of fiscal 2010, driven primarily by the strengthened Canadian dollar. As the Company purchases the majority of its merchandise with US dollars, a significant fluctuation of the Canadian dollar vis-à-vis the US dollar impacts earnings. The average rate for a US dollar in the third quarter of fiscal 2011 was $1.03 Canadian as compared to $1.07 Canadian in the third quarter of fiscal 2010. Spot prices for $1.00 US for the third quarter of fiscal 2011 ranged between a high of $1.06 and a low of $1.00 Canadian ($1.11 and $1.03 respectively for the third quarter of fiscal 2010). Significant components of store operating costs that impacted EBITDA included store wage costs which increased by 39 basis points as a percentage of sales, primarily due to increases in minimum wage rates in various jurisdictions. Depreciation and amortization expense for the third quarter of fiscal 2011 was $15,163,000 compared to $15,022,000 for the third quarter of fiscal 2010. Included in the third quarter of fiscal 2011 amount is $322,000 of write-offs as a result of closed and renovated stores, compared to $107,000 for the third quarter of fiscal 2010. Investment income for the third quarter of fiscal 2011 increased 68.0% to $1,030,000 as compared to $613,000 for the third quarter of fiscal 2010. Dividend income for the third quarter of fiscal 2011 was $655,000 as compared to $490,000 for the third quarter of fiscal 2010. Interest income increased for the third quarter of fiscal 2011 to $375,000 as compared to $123,000 for the third quarter of fiscal 2010 due to improved rates of interest earned on short-term investments. Interest expense on long-term debt decreased to $189,000 for the third quarter of fiscal 2011 from $209,000 for the third quarter of fiscal 2010. This decrease reflects the continued repayment of the mortgage on the Company's distribution centre. Income tax expense for the third quarter of fiscal 2011 amounted to $8,370,000, for an effective tax rate of 30.3% as compared to $8,559,000 for the third quarter of fiscal 2010, for an effective tax rate of 31.1%. The reduction in the effective tax rate reflects the impact of changes in substantively enacted tax rates in various tax jurisdictions. Net earnings for the third quarter of fiscal 2011 increased 1.9% to $19,274,000 ($0.29 diluted earnings per share) as compared with $18,921,000 ($0.28 diluted earnings per share) for the third quarter of fiscal 2010. The increase was primarily attributable to the impact of the reduced cost of merchandise sold due to the strengthened Canadian dollar. 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 $72,000,000 US (October 31, 2009 - $65,000,000 US). The Canadian dollar continued to experience volatility against the US dollar into the third quarter. The Company considers a variety of strategies designed to manage the cost of its continuing US dollar long-term commitments, including spot rate purchases and foreign exchange option contracts with maturities not exceeding three months. For the third quarter of fiscal 2011, the Company satisfied its US dollar requirements through spot rate purchases. During the third quarter of fiscal 2011, the Company opened 9 stores comprised of 2 Reitmans, 1 Smart Set, 1 RW & CO., 1 Cassis, 1 Penningtons and 3 Addition Elle; 7 stores were closed. At October 30, 2010, there were 979 stores in operation, consisting of 364 Reitmans, 161 Smart Set, 68 RW & CO., 76 Thyme Maternity, 22 Cassis, 165 Penningtons and 123 Addition Elle, as compared with a total of 981 stores as at October 31, 2009. SUMMARY OF QUARTERLY RESULTS The table below sets forth selected financial data for the eight most recently completed quarters. This unaudited quarterly information has been prepared on the same basis as the annual financial statements.
<<
-------------------------------------------------------------------------
(in thousands, except Earnings per
per share amounts) Share ("EPS")
Net
Sales Earnings Basic Diluted
--------------------------------------------------
October 30, 2010 $ 266,162 $ 19,274 $ 0.29 $ 0.29
July 31, 2010 295,653 39,875 0.59 0.59
May 1, 2010 238,978 16,471 0.24 0.24
January 30, 2010 268,120 14,088 0.21 0.21
October 31, 2009 270,684 18,921 0.28 0.28
August 1, 2009 286,071 26,426 0.38 0.38
May 2, 2009 231,652 7,801 0.11 0.11
January 31, 2009 261,801 8,981 0.13 0.13
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The retail business is seasonal and results of operations for any interim period are not necessarily indicative of the results of operations for the full fiscal year or any future period. BALANCE SHEET
<<
COMPARISON OF FINANCIAL POSITION AS AT OCTOBER 30, 2010 WITH THE
FINANCIAL POSITION AS AT JANUARY 30, 2010
>>
Cash and cash equivalents amounted to $218,944,000 or 4.2% lower than $228,577,000 as at January 30, 2010. The reduction in cash of $9,633,000 was mainly attributable to capital asset additions of $40,457,000, payment of dividends of $38,655,000 and the purchase of Class A non-voting shares for cancellation of $30,112,000 offset by cash flows from operating activities. Marketable securities held by the Company consist primarily of preferred shares of Canadian public companies. At October 30, 2010, marketable securities (reported at fair value) amounted to $51,345,000 as compared with $48,026,000 as at January 30, 2010. The Company's investment portfolio is subject to stock market volatility. Continued market improvement in the first nine months of fiscal 2011 resulted in an increase in the Company's investment portfolio of approximately 6.3%. The Company is highly liquid with its cash and cash equivalents being invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1. Accounts receivable were $3,622,000 or $696,000 higher than as at January 30, 2010. The Company's accounts receivable are essentially the credit card sales from the last few days of the fiscal quarter. Merchandise inventories were $94,078,000 or $30,951,000 higher than as at January 30, 2010, which is primarily due to the normal build-up of inventory for the holiday selling season, despite a reduction in the cost of merchandise due to the strengthened Canadian dollar. Traditionally, the highest levels of inventory on a quarterly basis occur at the end of the first quarter and the third quarter of any given fiscal year in preparation for the summer and the holiday selling seasons, respectively. Prepaid expenses were $14,161,000 as compared to $11,873,000 as at January 30, 2010, which increase was principally due to the timing of payment of various prepaid items such as insurance and maintenance contracts. Future income taxes are attributable to differences between the carrying values of assets and liabilities and their respective income tax bases and are recognized at enacted or substantively enacted tax rates for the future income tax consequences. The future income tax assets are primarily attributable to differences relating to capital assets. The Company invested $40,457,000 in additions to capital assets in the first nine months of fiscal 2011. This included $33,450,000 in new store construction and existing store renovation costs and $7,007,000 mainly related to information technology system enhancements at the Sauvé Street office and Henri-Bourassa Boulevard distribution centre. The Company has embarked on a significant upgrade to its merchandising and supply chain operations, important to the Company's growth strategy. The technology initiatives along with warehouse management systems improvements will support changes and growth across all parts of the Company with improved integration while enabling the Company to reduce the overall cost of system maintenance and upgrades. The total project, which is being phased in through to completion in fiscal 2013, is estimated to cost approximately $13,000,000. Accounts payable and accrued items were $86,917,000, or $9,151,000 higher than as at January 30, 2010. The Company's accounts payable consist largely of trade payables, sales and withholding taxes and liabilities for unredeemed gift cards. Income taxes payable were $7,711,000 as compared to $4,677,000 as at January 30, 2010, higher primarily due to reduced tax instalments. The Company maintains a defined benefit pension plan ("Plan"). An actuarial valuation was performed as at December 31, 2007 and was extrapolated to January 30, 2010 to determine the estimated liability the Company incurred with respect to the provisions of the Plan. The Company also sponsors a Supplemental Executive Retirement Plan ("SERP") for certain senior executives. The SERP is unfunded and when the obligation arises to make any payment called for under the SERP (e.g. when an eligible plan member retires and begins receiving payments under the SERP), the payments reduce the accrual amount as the payments are actually made. As at October 30, 2010, the accrued pension liability of the plans was $6,391,000 compared to $5,443,000 as at January 30, 2010. The increase is due to an amount of $1,413,000 being expensed in the year to date with respect to both plans while pension contributions paid in the year to date were $465,000.
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COMPARISON OF FINANCIAL POSITION AS AT OCTOBER 30, 2010 WITH THE
FINANCIAL POSITION AS AT OCTOBER 31, 2009
>>
Cash and cash equivalents amounted to $218,944,000 or 10.4% higher than $198,281,000 as at October 31, 2009. Marketable securities held by the Company consist primarily of preferred shares of Canadian public companies. At October 30, 2010, marketable securities (reported at fair value) amounted to $51,345,000 as compared with $37,254,000 as at October 31, 2009. The Company's investment portfolio is subject to stock market volatility. The increase in marketable securities was a result of the purchase of securities combined with a significant improvement in the market value of the portfolio over the prior year. The Company is highly liquid with its cash and cash equivalents being invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1. Accounts receivable were $3,622,000 or $311,000 higher than as at October 31, 2009. The Company's accounts receivable are essentially the credit card sales from the last few days of the fiscal quarter. Merchandise inventories were $94,078,000 or $2,287,000 higher than as at October 31, 2009, due mainly to softer sales in the third quarter of fiscal 2011. Prepaid expenses were $14,161,000 as compared to $11,083,000 as at October 31, 2009, which increase was principally due to the timing of payment of various prepaid items such as insurance and maintenance contracts. Future income taxes are attributable to differences between the carrying values of assets and liabilities and their respective income tax bases and are recognized at enacted or substantively enacted tax rates for the future income tax consequences. The future income tax assets are primarily attributable to differences relating to capital assets. Capital assets were $215,176,000 as compared to $230,102,000 as at October 31, 2009. The reduction in the net book value of capital assets reflects reduced capital expenditures in the fourth quarter of fiscal 2010 due to the difficult economic environment. The Company's additions to capital assets for the year to date amounted to $40,457,000. Year to date additions included $33,450,000 in new store construction and existing store renovation costs and $7,007,000 mainly related to information technology system enhancements at the Sauvé Street office and Henri-Bourassa Boulevard distribution centre. The Company has embarked on a significant upgrade to its merchandising and supply chain operations, important to the company's growth strategy. The technology initiatives along with warehouse management systems improvements will support changes and growth across all parts of the Company with improved integration while enabling the Company to reduce the overall cost of system maintenance and upgrades. The total project, which is being phased in through to completion in fiscal 2013, is estimated to cost approximately $13,000,000. Accounts payable and accrued items were $86,917,000, or $5,103,000 higher than as at October 31, 2009. The Company's accounts payable consist largely of trade payables, sales and withholding taxes and liabilities for unredeemed gift cards. Income taxes payable were $7,711,000 as compared to income taxes recoverable of $5,429,000 as at October 31, 2009, primarily due to tax instalments paid in excess of the estimated tax liability in the prior year. OPERATING RISK MANAGEMENT Economic Environment Economic conditions have improved in Canada, however, as noted by The Bank of Canada in their October 2010 Monetary Policy Report, the economy is entering a period of more modest growth. The Company closely monitors economic conditions in order to react to consumer spending habits and constraints in developing both its short-term and long-term operating decisions. Additionally, despite the impact of reduced access to credit for many businesses, the Company is in a strong financial position with significant liquidity available and ample financial credit resources to draw upon as deemed necessary. Competitive Environment The apparel business in Canada is highly competitive with competitors including department stores, specialty apparel chains and independent retailers. There is no effective barrier to entry into the Canadian apparel retailing marketplace by any potential competitor, foreign or domestic, and the Company has witnessed the arrival over the past few years of a number of foreign-based competitors now operating in virtually all of the Company's Canadian retail sectors. Additionally, Canadian women have a significant number of e-commerce shopping alternatives available to them on a global basis. The Company believes that it is well positioned to compete with any competitor. The Company operates under seven banners and our product offerings are diversified as each banner is directed to and focused on a different niche in the Canadian women's apparel market. Our stores, located throughout Canada, offer affordable fashions to consumers. Seasonality The Company is principally engaged in the sale of women's apparel through 979 leased retail outlets operating under seven banners located across Canada. The Company's business is seasonal and is also subject to a number of factors, which directly impact retail sales of apparel over which it has no control, namely fluctuations in weather patterns, swings in consumer confidence and buying habits, and the potential of rapid changes in fashion preferences. Distribution and Supply Chain The Company depends on the efficient operation of its sole distribution centre, such that any significant disruption in the operation thereof (e.g. natural disaster, system failures, destruction or major damage by fire), could materially delay or impair its ability to replenish its stores on a timely basis causing a loss of future sales, which could have a significant effect on the Company's results of operations. Information Technology The Company depends on information systems to manage its operations, including a full range of retail, financial, merchandising and inventory control, planning, forecasting, reporting and distribution systems. The Company regularly invests to upgrade, enhance, maintain and replace these systems. Any significant disruptions in the performance of these systems could have a material adverse impact on the Company's operations and financial results. Government Regulation The Company is structured in a manner that management considers to be most effective to conduct its business in every Canadian province and territory. The Company is therefore subject to all manner of material and adverse changes that can take place in any one or more of these jurisdictions as they might impact income and sales, taxation, duties, quota impositions or re-impositions and other legislated or government regulated matters. Merchandise Sourcing Virtually all of the Company's merchandise is private label. In the first nine months of fiscal 2011, no supplier represented more than 10% of the Company's purchases (in dollars and/or units) and there are a variety of alternative sources (both domestic and offshore) for virtually all of the Company's merchandise. The Company has good relationships with its suppliers and has no reason to believe that it is exposed to any material risk that would operate to prevent the Company from acquiring, distributing and/or selling merchandise on an ongoing basis. A recent surge in the price of cotton to record high prices, an important component in clothing fabrication, along with a significant shortage of supply is anticipated to place strains on certain product margins. The Company continues to closely monitor this development in an effort to maintain its value pricing proposition. The Company endeavours to be environmentally responsible and recognizes that the competitive pressures for economic growth and cost efficiency must be integrated with sound sustainability management, including environmental stewardship. The Company has adopted sourcing and other business practices to address the environmental concerns of its customers. The Company has established guidelines that require compliance with all applicable environmental laws and regulations. Although the Company requires its suppliers to adhere to these guidelines, there is no guarantee that these suppliers will not take actions that hurt the Company's reputation, as they are independent third parties that the Company does not control. However, if there is a lack of apparent compliance, it may lead the Company to search for alternative suppliers. This may have an adverse effect on the Company's financial results, by increasing costs and potentially causing delays in delivery. FINANCIAL RISK MANAGEMENT Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk were provided in the Company's 2010 Annual Report and there have been no significant changes in the Company's risk exposures in the nine months ended October 30, 2010 with the exception of foreign currency risk as described below. Foreign Currency Risk The Company purchases a significant amount of its merchandise with US dollars and as such significant volatility in the US dollar vis-à-vis the Canadian dollar can have an adverse impact on the Company's gross margin. The Company considers a combination of foreign exchange option contracts, not to exceed three months, and spot rate purchases to manage its foreign exchange exposure on cash flows related to these purchases. A foreign exchange option contract represents an option to buy a foreign currency from a counterparty. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally major Canadian financial institutions. For the first nine months of fiscal 2011, the Company satisfied its US dollar requirements through spot rate purchases. As at October 30, 2010, October 31, 2009 and January 30, 2010, there were no outstanding foreign exchange option contracts. The Company has performed a sensitivity analysis on its US dollar denominated financial instruments, which consisted as at October 30, 2010 principally of cash and cash equivalents of $26,101,000 and accounts payable of $2,507,000 to determine how a change in the US dollar exchange rate would impact net earnings. On October 30, 2010, a 10% rise or fall in the Canadian dollar against the US dollar, assuming that all other variables, in particular interest rates, had remained the same, would have resulted in a $1,685,000 decrease or increase, respectively, in the Company's net earnings for the three and nine months ended October 30, 2010. LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES Shareholders' equity at October 30, 2010 amounted to $523,460,000 or $7.91 per share as compared to $512,302,000 or $7.53 per share last year (January 30, 2010 - $510,166,000 or $7.55 per share). In fiscal 2010, the impact of the recession on the Canadian equity markets resulted in a significant drop in the Toronto Stock Exchange composite index, however, the Company by virtue of its holdings of cash and cash equivalents, sustained minimal loss in value in its liquid assets. Due to market improvement, the market value of the Company's investment portfolio has recovered significantly. 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 $270,289,000 as compared with $235,535,000 last year (January 30, 2010 - $276,603,000). Cash is conservatively invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1. The Company closely monitors its risk with respect to short-term cash investments. The Company has unsecured borrowing and working capital credit facilities available of $125,000,000. As at October 30, 2010, $45,362,000 (October 31, 2009 - $35,928,000; January 30, 2010 - $53,624,000) of the operating line of credit was committed for documentary and standby letters of credit. These credit facilities are used principally for US dollar letters of credit to satisfy offshore third-party vendors, which require such backing before confirming purchase orders issued by the Company. The Company rarely uses such credit facilities for other purposes. The Company has granted standby letters of credit, issued by highly-rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at October 30, 2010, the maximum potential liability under these guarantees was $5,063,000. The standby letters of credit mature at various dates during fiscal 2011. The Company has recorded no liability with respect to these guarantees, as the Company does not expect to make any payments for these items. The Company is self-insured on a limited basis with respect to certain property risks and also purchases excess insurance coverage from financially stable third-party insurance companies. The Company maintains comprehensive internal security and loss prevention programs aimed at mitigating the financial impact of theft. The Company continued repayment on its long-term debt, relating to the mortgage on the distribution centre, paying down $327,000 in the third quarter of fiscal 2011. The Company paid dividends amounting to $13,241,000 in the third quarter of fiscal 2011 compared to $12,244,000 in the third quarter of fiscal 2010. In the third quarter of fiscal 2011, the Company did not purchase any Class A non-voting shares under a normal course issuer bid. In the year to date, the Company invested $40,457,000 on new and renovated stores, and information technology system enhancements at the Sauvé Street office and Henri-Bourassa Boulevard distribution centre. The Company has embarked on a significant upgrade to its merchandising and supply chain operations, important to the Company's growth strategy. The technology initiatives along with warehouse management systems improvements will support changes and growth across all parts of the Company with improved integration while enabling the Company to reduce the overall cost of system maintenance and upgrades. The total project, which is being phased in through to completion in fiscal 2013, is estimated to cost approximately $13,000,000. In the fiscal year ending January 29, 2011, the Company had planned to invest approximately $30,000,000 in capital expenditures related to new stores and renovations and information technology enhancements. Largely due to the timing of payments relating to the new technology initiatives along with increased store capital expenditures, the Company now anticipates the total investment in additions to capital assets to be approximately $45,000,000 for fiscal 2011. These expenditures, together with the payment of cash dividends, the repayments related to the Company's bank credit facility and long-term debt obligations and purchases of Class A non-voting shares are expected to be funded by the Company's existing financial resources and funds derived from its operations. FINANCIAL COMMITMENTS The following table sets forth the Company's financial commitments, excluding accounts payable and accrued items, as at October 30, 2010, the details of which are described in the previous commentary.
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Contractual Within 2 to 4 5 years
Obligations Total 1 year years and over
-----------------------------------------------------------
Store & office
operating
leases (1) $ 467,495,000 $ 100,492,000 $ 219,960,000 $ 147,043,000
Purchase
obliga-
tions (2) 134,530,000 133,114,000 1,416,000 -
Other
operating
leases (3) 17,851,000 4,495,000 10,495,000 2,861,000
Long-term
debt 11,765,000 1,363,000 4,642,000 5,760,000
Interest on
long-term
debt 2,853,000 704,000 1,557,000 592,000
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Total
contractual
obligations $ 634,494,000 $ 240,168,000 $ 238,070,000 $ 156,256,000
-----------------------------------------------------------
-----------------------------------------------------------
(1) Represents the minimum lease payments under long-term leases for
store locations and office space as at October 30, 2010.
(2) Includes amounts pertaining to agreements to purchase goods or
services that are enforceable and legally binding on the Company.
(3) Includes lease payments for computer equipment, automobiles and
office equipment.
>>
OUTSTANDING SHARE DATA At December 1, 2010, 13,440,000 Common shares of the Company and 52,762,306 Class A non-voting shares of the Company were issued and outstanding. Each Common share entitles the holder thereof to one vote at meetings of shareholders of the Company. The Company has 3,136,000 stock options outstanding at an average exercise price of $14.39. 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 2010, 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 2,638,115 Class A Non-Voting Shares of the Company, representing 5% of the issued and outstanding Class A Non-Voting Shares as at November 17, 2010. The average daily trading volume for the six month period preceding November 1, 2010 was 71,905 shares. In accordance with Toronto Stock Exchange rules, a maximum daily repurchase of 25% of this average may be made, representing 17,976 shares. The bid commenced on November 28, 2010 and may continue to November 27, 2011. 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. For the nine months ended October 30, 2010, the Company purchased, under the prior year's normal course issuer bid, 1,583,000 Class A non-voting shares having a book value of $731,000 for a total cash consideration of $30,112,000. The excess of the purchase price over book value of the shares in the amount of $29,381,000 was charged to retained earnings. OFF-BALANCE SHEET ARRANGEMENTS Derivative Financial Instruments The Company in its normal course of business must make long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. Most of these purchases must be paid for in US dollars. The Company considers a variety of strategies designed to manage the cost of its continuing US dollar long-term commitments, including spot rate purchases and foreign exchange option contracts. For the year to date, the Company satisfied its US dollar requirements through spot rate purchases. A foreign exchange option contract represents an option to buy a foreign currency from a counterparty at a predetermined date and amount. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally Canadian chartered banks. The Company does not use derivative financial instruments for speculative purposes. Foreign exchange option contracts are considered, with maturities not exceeding three months. As at October 30, 2010, October 31, 2009 and January 30, 2010, the Company had no outstanding foreign exchange option contracts. Included in the determination of the Company's net earnings for the three months and nine months ended October 30, 2010 are foreign exchange gains of $966,000 and $837,000 respectively (losses of $1,073,000 and $293,000 for the three and nine months ended October 31, 2009 respectively). RELATED PARTY TRANSACTIONS The Company leases two retail locations which are owned by a related party. The leases for such premises were entered into on commercial terms similar to those for leases entered into with third parties for similar premises. In the year to date, the rent expense under these leases was, in the aggregate, approximately $149,000 (October 31, 2009 - $149,000). The Company incurred $530,000 in the year to date (October 31, 2009 - $360,000) with professional service firms connected to outside directors of the Company for fees in conjunction with general legal advice and other consultation. The Company believes that such remuneration was based on normal terms for business transactions between unrelated parties. These transactions are recorded at the amount of consideration paid, as established and agreed to by the related parties. FINANCIAL INSTRUMENTS The Company's significant financial instruments consist of cash and cash equivalents along with marketable securities. The Company uses its cash resources to fund ongoing store construction and renovations along with working capital needs. Financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company reduces its credit risks by investing available cash in bank bearer deposit notes and bank term deposits with major Canadian chartered banks. The Company closely monitors its risk with respect to short-term cash investments. Marketable securities consist primarily of preferred shares of Canadian public companies. The Company's investment portfolio is subject to stock market volatility. Due to recent market improvement, the market value of the Company's investment portfolio has recovered significantly. The Company is highly liquid with its cash and cash equivalents being invested on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1. The volatility of the Canadian dollar impacts earnings and while the Company considers a variety of strategies designed to manage the cost of its continuing US dollar commitments, such as spot rate purchases and foreign exchange option contracts, this volatility can result in exposure to risk. CRITICAL ACCOUNTING ESTIMATES Inventory Valuation The Company uses the retail inventory method in arriving at cost. Merchandise inventories are valued at the lower of cost and net realizable value. Excess or slow moving items are identified and a provision is taken using management's best estimate. In addition, a provision for shrinkage and sales returns are also recorded using historical rates experienced. Given that inventory and cost of sales are significant components of the financial statements, any changes in assumptions and estimates could have a material impact on the Company's financial position and results of operations. Stock-Based Compensation The Company accounts for stock-based compensation and other stock-based payments using the fair value method. Stock options granted result in an expense over their vesting period based on their estimated fair values on the date of grant, determined using the Black-Scholes option pricing model. In computing the compensation cost related to stock option awards granted during the year under the fair value approach, various assumptions are used to determine the expected option life, risk-free interest rate, expected stock price volatility and average dividend yield. The use of different assumptions could result in a stock compensation expense that differs from that which the Company has recorded. Pension The Company maintains a contributory, defined benefit pension plan and sponsors a SERP. The costs of the defined benefit pension plan and SERP are determined periodically by independent actuaries. Pension expense is included in the results of operations. Assumptions used in developing the pension expense and projected benefit obligation include a discount rate, rate of increase in salary levels and expected long-term rate of return on plan assets. Effective the beginning of the fiscal year ended January 30, 2010, due to the performance in the equity markets in North America, the Company reduced the expected long-term rate of return on plan assets from 7.5% to 7.0%. The use of different assumptions could result in a pension expense that differs from that which the Company has recorded. The defined benefit pension plan is fully funded and solvent, based on the actuarial valuation as at December 31, 2007, which was extrapolated to January 30, 2010, and the SERP is an unfunded pay as you go plan. Goodwill Goodwill is not amortized but rather is tested for impairment annually at year end or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the Company determines in the future that impairment has occurred, the Company would be required to write off the impaired portion of goodwill. Gift Cards Gift cards sold are recorded as a liability and revenue is recognized when the gift card is redeemed. The Company, for each reporting period, reviews the gift card liability and assesses its adequacy. In its review, the Company estimates expected usages and evaluates specific trends and patterns, which can result in an adjustment to the liability for unredeemed gift cards. ADOPTION OF NEW ACCOUNTING STANDARDS Goodwill and Intangible Assets In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section 3064, Goodwill and Intangible Assets, which replaces Section 3062, Goodwill and Other Intangible Assets, and amends Section 1000, Financial Statement Concepts. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and other intangible assets. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. This new standard is applicable to fiscal years beginning on or after October 1, 2008. The impact of adopting this standard was to reclassify the net book value of software of $9,964,000 as at January 30, 2010 from property and equipment to intangible assets on the balance sheet. For comparative purposes, as at October 31, 2009, $10,520,000 representing the net book value of software was reclassified from property and equipment to intangible assets. Financial Instruments - Disclosures In June 2009, the CICA amended Handbook Section 3862, Financial Instruments - Disclosures, to enhance disclosures about fair value measurements and liquidity risk of financial instruments. The amendment applied to annual financial statements with fiscal years ending after September 30, 2009. The purpose of this amendment is to provide further convergence with International Financial Reporting Standards ("IFRS"). Financial instruments recognized at fair value on the balance sheet must be classified in fair value hierarchy levels as follows: Level 1 - valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 - valuation techniques based on inputs that are other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices); Level 3 - valuation techniques with unobservable market inputs (involves assumptions and estimates by management of how market participants would price the assets or liabilities). The amended section relates to disclosure only and did not impact the financial results of the Company. As at October 30, 2010, October 31, 2009 and January 30, 2010, the Company held no significant assets or liabilities required to be measured at fair value, except for cash and cash equivalents, and marketable securities, which were measured using Level 1 inputs in the fair value hierarchy. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS The Canadian Accounting Standards Board confirmed that publicly accountable enterprises will be required to adopt IFRS, for interim and annual reporting purposes, beginning on or after January 1, 2011, which for the Company will be the fiscal year ending January 28, 2012. The Company will be required to begin reporting under IFRS for the quarter ending April 30, 2011 and will be required to prepare an opening balance sheet and provide information that conforms to IFRS for comparative periods presented. The Company began planning the transition from current Canadian GAAP to IFRS in 2008 by establishing a project plan and a project team. The project team is led by senior finance executives who provide overall project governance, management and support. Members also include representatives from various areas of the organization as necessary and external advisors who have been engaged to assist in the IFRS conversion project. The project team reports quarterly to the Audit Committee of the Company. The project plan consists of three phases - the initial assessment, detailed assessment and design, and implementation for which details are outlined below:
<<
-------------------------------------------------------------------------
Phase 1:
Initial Assessment
-------------------------------------------------------------------------
Actions - High-level review of the major differences between
current Canadian GAAP and IFRS.
- Initial evaluation of the different IFRS 1
exemptions available at date of transition.
- High-level assessment of potential consequences on
financial reporting, business processes, internal
controls and information systems.
- Training sessions on IFRS for the various members
of the IFRS project team.
-------------------------------------------------------------------------
Timetable Third quarter of fiscal 2009
-------------------------------------------------------------------------
Progress Completed
-------------------------------------------------------------------------
Phase 2:
Detailed Assessment
and Design
-------------------------------------------------------------------------
Actions - Each area of accounting differences between
Canadian GAAP and IFRS identified in the initial
phase is assessed and an IFRS project team member
dedicated to review these differences.
- This review includes the changes required to
existing accounting policies, information systems,
and business processes, together with an analysis
of policy alternatives allowed under IFRS and
impacts on drafting of financial statements under
IFRS.
- The analysis on these differences are discussed by
the Company's IFRS project team and decisions
made, including the Company's selection of IFRS 1
exemptions at the date of transition, are included
in IFRS memos and approved by the external
auditors.
- Developing draft IFRS financial statements and
notes.
- Presentation of major differences and impact to
the Audit Committee on a quarterly basis.
-------------------------------------------------------------------------
Timetable Second quarter of fiscal 2011
-------------------------------------------------------------------------
Progress - IFRS differences were analyzed and most were
concluded on for accounting policy choices,
changes to processes and selection of one-time
transition choices.
- The Company is currently working on preliminary
IFRS financial statements in accordance with IAS 1
Presentation of Financial Statements.
- Periodic project status updates and information
sessions are presented to Senior management and to
the Audit Committee.
-------------------------------------------------------------------------
Phase 3:
Implementation
-------------------------------------------------------------------------
Actions - Embedding changes to systems, business processes
and internal controls, as required.
- Parallel accounting under Canadian GAAP and IFRS.
- Preparation of detailed reconciliations of
Canadian GAAP to IFRS financial statements.
- Training programs for the Company's finance and
other staff, as necessary.
- Audit Committee approval of IFRS financial
statements.
-------------------------------------------------------------------------
Timetable Third and fourth quarters of fiscal 2011
-------------------------------------------------------------------------
Progress In progress
-------------------------------------------------------------------------
>>
The Company's progress-to-date has resulted in the following conclusions: First-Time Adoption (IFRS 1) IFRS 1 provides the framework for the first-time adoption of IFRS and outlines that, in general, an entity shall apply the principles under IFRS retrospectively and that adjustments arising on conversion to IFRS shall be directly recognized in retained earnings. IFRS 1 provides a number of optional and mandatory exemptions. The Company currently expects to apply the following exemptions:
<<
-------------------------------------------------------------------------
Exemption Application of exemption
-------------------------------------------------------------------------
Business combinations The Company intends to use this exemption and
not restate the accounting of past business
combinations.
-------------------------------------------------------------------------
Fair value as deemed The Company does not intend to use this exemption
cost but intends to keep property and equipment at
original cost.
-------------------------------------------------------------------------
Pension obligations The Company intends to use this exemption and
only present one year comparative information.
-------------------------------------------------------------------------
>>
The remaining elective exemptions have limited or no applicability to the Company. Accounting Policies Set out below are selected key areas of accounting differences where changes in accounting policies in conversion to IFRS may impact the Company's financial statements. The list should not be interpreted as a comprehensive list of changes; it highlights those areas of accounting differences the Company currently believes are to be most significant upon conversion to IFRS along with the anticipated transitional adjustments. Property, Plant and Equipment (IAS 16) Under IFRS, each component of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately, over different useful lives. The Company will adopt component accounting for its buildings at the date of conversion to IFRS. Upon implementation of IFRS, the Company expects to record a transitional adjustment to increase property and equipment and decrease future income tax assets. The transitional adjustment will increase retained earnings by approximately $1,100,000. Impairment of Assets (IAS 36) Canadian GAAP impairment testing involves two steps, the first of which compares the long-lived asset carrying values with undiscounted future cash flows to determine whether impairment exists. If the carrying value exceeds the amount recoverable on an undiscounted basis, then the cash flows are discounted to calculate the amount of the impairment and the carrying values are written down to estimated fair value. IAS 36 Impairment of Assets, uses a one-step approach for both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use (which uses discounted future cash flows). The Company has completed the analysis of its operations and has determined its cash generating units ("CGU") to be used for the purpose of impairment testing and groups of CGU's for goodwill testing purposes. Models have been developed, which will be used for the impairment testing as required at the date of transition to IFRS and on a going forward basis. Upon implementation of IFRS, the Company expects to record a transitional adjustment to decrease property, plant and equipment and increase future income tax assets. The transitional adjustment will decrease retained earnings by approximately $2,700,000. Customer Loyalty Programs (IFRIC 13) IFRS requires the fair value of loyalty programs to be recognized as a separate component of the initial sales transaction. The Company will be required to defer a portion of the initial sales transaction in which the awards are granted until the Company has fulfilled its obligation. Under Canadian GAAP, the Company recognizes the net cost of the program in operating expenses. Upon implementation of IFRS, the Company expects to record a transitional adjustment to decrease accounts payable and accrued items, record deferred revenue and increase future income tax assets. The transitional adjustment will decrease retained earnings by approximately $5,300,000. Employee Benefits (IAS 19) Under IFRS, liabilities and expenses for vested past service costs under a defined benefit plan are recognized immediately in the statement of operations. The vested past service costs under the Company's defined benefit plan is recognized over the expected average remaining service period under Canadian GAAP. Upon implementation of IFRS, the Company expects to record a transitional adjustment to increase the accrued pension liability and increase the future income tax assets. The transitional adjustment will decrease retained earnings by approximately $3,700,000. The Company has also chosen as its accounting policy for its defined benefit plan to recognize actuarial gains and losses directly into other comprehensive income rather than through net earnings. The impact of accounting for this change is not expected to be significant. Intangible Assets (IAS 38) Canadian GAAP allows for advertising costs to be deferred (as prepaid items) and expensed at the time the advertising occurs. Under IFRS advertising costs must be recognized as an expense at the time the expense is incurred. Upon implementation of IFRS, the Company expects to record a transitional adjustment to decrease prepaid expenses and increase future income tax assets. The transitional adjustment will decrease retained earnings by approximately $600,000. Financial Instruments (IAS 39) The Company's marketable securities are classified as "available-for-sale securities". These financial assets are marked-to-market through other comprehensive income at each period end. Under Canadian GAAP when there is a decline in fair value of a financial asset that is "other than temporary", for assets available-for-sale (carried at fair value), the cumulative loss that had been recognized directly in other comprehensive income is removed from accumulated other comprehensive income and recognized in net earnings even though the financial asset has not been sold. Under IFRS, an impairment on "available-for-sale securities" is recognized when there has been a "significant or prolonged" decline in its fair value below cost. The amount of any impairment loss is recognized in profit or loss. Due to the change in determination of impairment from "other than temporary" to "significant or prolonged", upon implementation of IFRS, the Company expects to record a transitional adjustment to reclassify impairment losses from accumulated other comprehensive income and decrease retained earnings by approximately $6,200,000. A number of other areas of IFRS will impact the Company to a lesser extent. Impact on Information Systems and Technology At this time, the transition is expected to have minimal impact on information systems used by the organization. Impact on Internal Controls and Disclosure Controls and Procedures The Company's internal controls will not be materially affected by the transition to IFRS. The IFRS differences may lead to presentation and process changes to report more detailed information in the notes to the financial statements, but it is not currently expected to lead to many differences in the accounting treatments used by the Company. Disclosure controls and procedures may change due to the transition to IFRS, but the impact is expected to be minimal as well. Impact on Financial Reporting Expertise Training and education has been provided to all members of the finance team who are directly affected by the transition to IFRS. IFRS training to other financial staff will be done as deemed necessary. General Management has implemented a system for the parallel recording of financial information in accordance with IFRS at the transition date and for each of the fiscal 2011 financial periods to be presented as comparative figures in the fiscal 2012 IFRS financial statements. The Company continues to monitor and assess the impact of evolving differences between Canadian GAAP and IFRS, since the International Accounting Standards Board ("IASB") is expected to continue issuing new accounting standards during the transition period. The Company's IFRS conversion project is progressing according to schedule. As the project advances, the Company could alter its intentions and the milestones communicated at the time of reporting as a result of changes to international standards currently in development, or in light of new information or other external factors that could arise between now and when the changeover is completed. INTERNAL CONTROLS OVER FINANCIAL REPORTING The Company has designed disclosure controls and procedures to provide reasonable assurance that material information related to the Company is included in the annual and quarterly filings. In addition, the Company evaluated the effectiveness of the disclosure controls and procedures as of January 30, 2010 and concluded that these controls were effective. The Company, under the supervision of the Chief Executive Officer and Chief Financial Officer, has designed internal controls over financial reporting, as defined by National Instrument 52-109, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company evaluated the effectiveness of the internal controls over financial reporting as of January 30, 2010 and concluded that these controls were effective. There have been no changes in the Company's internal controls over financial reporting during the nine months ended October 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. OUTLOOK Despite signs of an economic recovery emerging, the Canadian economy has not returned to pre-recession levels. The Bank of Canada, in its October 2010 Monetary Policy Report, has revised its outlook predicting a more modest pace of growth than previously anticipated. Employment levels in Canada have shown gradual improvement, retail trade sales reports are more favorable while the inflation level has remained stable with projections that it will remain low. The strength of the Canadian dollar favours importers, however it creates a drag on the economic activity of other sectors in Canada. A recent surge in the price of cotton to record high prices, an important component in clothing fabrication, along with a significant shortage of supply is anticipated to place strains on certain product margins. The Company continues to closely monitor this development in an effort to maintain its value pricing proposition. The Company believes that consumer demand will remain weak throughout the balance of fiscal 2011 with modest improvement thereafter as consumers remain cautious. We are being guided by these expectations in conducting all facets of our business. On the positive side, we believe that we remain poised to strengthen the Company's market position in all of our market niches by offering a broad assortment of quality merchandise at affordable prices. The Company has virtually no debt and has liquid cash reserves which provide us with the ability to act when opportunities present themselves in whatever format including merchandising, store acquisition/construction, system replacements/upgrading or expansion by acquisition. The Company's Hong Kong office continues to serve the Company well, with over 110 full-time employees dedicated to seeking out the highest quality, affordable and fashionable apparel for all of our banners. On an annual basis, the Company directly imports approximately 80% of its merchandise, largely from China. We believe that, in general, our merchandise offerings will continue to remain attractive values to the consumer, even in these difficult times. The Company has a strong balance sheet, with excellent liquidity and borrowing capacity. Its systems, including merchandise procurement, inventory control, planning, allocation and distribution, distribution centre management, point-of-sale, financial management and information technology are fully integrated. The Company is committed to continue to invest in training for all levels of its employees. %SEDAR: 00002316EF For further information: Jeremy H. Reitman, Chairman and Chief Executive Officer, Telephone: (514) 385-2630, Corporate Website: www.reitmans.ca |