West 49
Inc. reported sales increased 3.8% in the fourth quarter ended Jan. 31, to
Canadian $64.8 million (U.S. $52.1 million), primarily due to the inclusion of
an additional week compared to the corresponding periods in fiscal 2008.
Normalized net income dropped 50% to C$1.1 million ($884,000), or C2 cents a
share, for the quarter compared to C$2.2 million ($1.8 million), or 4 cents per
share, for the fourth quarter of fiscal 2008.
special items,
49's fourth-quarter loss widened to C$8.5 million ($6.9 million) from C$1.2
million ($968,000) a year earlier, and warned that it was in violation of one
of its bank covenants at the quarter's close. The action sports chain, based in
negotiated a waiver, but said it may be in violation of another covenant at the
end of its current quarter. Management expects revised credit facilities, along
with cash generated from operations, to be sufficient to fund its operations
and capital expenditures during the year.
a $0.7 million charge to close its three remaining Duke's stores. The quarter
also included an asset-impairment charge of $12 million as result of the
depressed capital markets and the current macroeconomic environment and
resulting impact on the company's performance.
For the
quarter, 14-week comparable store sales decreased by 0.5% on a consolidated
basis despite comparable store sales growth of 1.3% during the
14-week comparable store sales for the West 49 banner were up 0.3%.
The
action sports chain, based in
incurred a net loss of C$2.6 million ($2.1 million), or C4 cents a share, on a normalized basis in
the full year compared to net income of C$1.5 million ($1.2 million), or C2
cents, a year earlier. After special items, the net loss of C$12.3 million ($9.9 million) compared with a deficit of C$2.4 million ($1.9 million) a year ago.
Net sales 2.7% to C$210.4 million ($169.4 million) for
the fiscal year. For the fiscal year, 53-week comparable store sales decreased
0.4% on a consolidated basis but were up 0.1% for the West 49 banner. For
reference purposes, in the prior year the company reported a consolidated
comparable store sales decrease of 4.5% for the fourth quarter and 1.3% for the
year.
As a rate
to net sales, gross margin declined 270 basis points to 25.2% for the quarter and
340 basis points to 22.2% for the fiscal year. The decline in gross margin was
primarily due to lower product margins and higher supply chain costs.
The
company's prudent management of expenses yielded further improvement to its
selling, general and administrative (SG&A) expenses as a rate to net sales.
The company's SG&A expense rate decreased 30 basis points to 20.1% of net
sales for the quarter and 60 basis points to 20.7% of net sales for the fiscal
year. In absolute dollars, SG&A expenses increased C$0.3 million for the
quarter, but were down C$0.1 million for the year. The increase in the quarter
was largely due to the inclusion of the additional week.
Normalized
EBITDA(2) decreased 29.8% to C$3.3 million for the quarter and 61.4% to C$3.4
million for the fiscal year. The decreases were primarily due to the lower
gross margins achieved.
“Despite
the volatile and uncertain economy, we have maintained our market share,
proving that we remain very relevant to our customers,” said Sam Baio,
Chief Executive Officer of West 49 Inc. “We continued to grow our top
line, largely the result of our strong performance during the peak
Back-to-School and
merchandising and pricing strategies, focused on offering exceptional brands at
competitive prices, have reinvigorated our sales over the last few quarters
following a very disappointing first quarter. While we took a hit on margins to
preserve market share in this challenging retail environment, our focus on
expense management continued to yield returns. More importantly, our
competitive retailing strategies and prudent management of operations better
position us for longer erm growth.”
Store Real Estate
Activity
During the quarter, the
company relocated and expanded a West 49 store in the
end of the quarter the company was operating 134 stores, consistent with fiscal
2008.
Subsequent to January 31,
2009, the company opened a West 49 store at the Milton Centre, in
the company closed two stores: an Off The Wall store at Lougheed Town Centre,
in
Duke's Northshore store at Park Royal Shopping Centre, in
part of the company's strategic decision to close this test concept.
Store Restructuring
Costs
During fiscal 2009, the
company evaluated the performance of its test concept, Duke's Northshore
(“Duke's”), and decided to take strategic action to close all four
stores. As previously announced, one of the Duke's stores was closed in the
second quarter of fiscal 2009. Today, the company announced that it had taken a
non-cash provision of $0.7 million in the fourth quarter of fiscal 2009 on the
remaining three Duke's stores, which will either be closed or rebranded in
fiscal 2010. The non-cash provision on these four stores was $0.9 million, of
which $0.5 million was recorded as capital asset impairments and $0.4 million
as a provision for lease penalties and other exit costs.
Given the size of the
Duke's strategic restructuring, the company hasseparately disclosed the
provision in its statement of earnings and has also presented normalized
results to exclude this non-cash, non-recurring charge.
Goodwill and
Intangible Asset Impairment
The company completed its
annual goodwill and intangible asset impairment test during the fourth quarter
as required by generally accepted accounting principles. As a result of the
depressed capital markets and the current macroeconomic environment and
resulting impact on the company's performance, the company recognized a
non-cash, goodwill and intangible assets impairment charge of $12.0 million in
accordance with the Canadian Institute of Chartered Accountants Section 3062:
“Goodwill and Other Intangible Assets”. The impairment charge does
not affect the company's day-to-day business operations or cash position. As is
typical of many other companies, and given the size of the impairment, the
company has separately disclosed this non-cash impairment in its statement of
earnings and has also presented normalized results to exclude this non-cash
charge.
Banking Arrangements
As at January 31, 2009,
the company was in violation of one of its bank covenants. Subsequent to
January 31, 2009, the company obtained a waiver for the default retroactive to
January 31, 2009.
The waiver obtained has
the following conditions set forth based on historical operating needs: the
maximum limit on the company's operating credit facility was reduced to $6.0
million from $10.0 million; the seasonal increase available on the operating
line from April 1 to September 30 has been lowered to $12.0 million from $15.0
million; the term loan facility has been capped at $6.8 million, down from $8.5
million; and the credit facilities have also been changed to a demand basis
from a 364-day committed line.
With uncertainties in the
current economic environment, it is not uncommon for banks to remove unutilized
credit facilities. Throughout the year, the company has had varying amounts of
unutilized credit facilities. The bank indebtedness on the credit facility
ranged from nil to $9.0 million at the peak of the seasonal period. Management
believes that the company's revised credit facilities, along with cash
generated from operations, will be sufficient to fund its operations and
anticipated capital expenditures during fiscal 2010. In addition, subsequent to
January 31, 2009, the company completed an amalgamation of various corporate
entities that will allow it to realize a significant amount of non-capital tax
losses carried forward from prior years which will reduce the amount of tax
installments by $1.7 million in fiscal 2010.
The company's credit
facility renewal date is June 30, 2009. The company anticipates that it may be
in violation of another covenant at the end of the first quarter. The company's
bank is aware of this and the company has already begun a full renewal process
with the bank to negotiate mutually acceptable terms with the bank and
anticipates this to be completed during the second quarter of fiscal 2010.
Outlook
“Although, our
inventory was a little higher at year end than it was the year before, this was
the result of a strategic decision to flow goods into the stores earlier in
January,” said Mr. Baio. “This has helped our comparable stores sales
in February and March – the first two months of our first quarter of fiscal
2010. During these two months, our comparable store sales have been especially
strong for our core West 49 banner, comping in the low double digits. While we
are pleased with the strong comparable store sales during the first two months
of our first quarter, we caution investors that we ran a “No-Tax”
discount event in our West 49 stores during the month of April last year and we
would be hard-pressed to comp positively to results for that month.”
Speaking about the
company's longer-term outlook, Mr. Baio added: “We remain focused on being
the leading Canadian apparel retailer for the youth action sports lifestyle. We
continue to believe in the strong growth potential of our business, especially
our core West 49 banner. However, given the current environment we have to be
prudent and definitive in the actions we take to preserve and grow our market
share and strengthen our business. This means that maximizing the value from
existing operations will continue to take precedence over other elements of our
growth strategy over the near term.”
