Le Château Inc. (TSX VENTURE: CTU), a leading Canadian specialty
retailer and manufacturer, today reported its financial results for
the first quarter ended April 25, 2020, in the context of the
COVID-19 pandemic.
“With the growing importance of e-commerce, we
implemented a shift in strategy over five years ago by investing in
our e-commerce platform, while significantly reducing our store
network over that same period of time by almost 50% from 243 stores
to 126 well-located, top-performing stores. We believe we now have
the right balance between our digital and physical presence, which
positions us well in a post COVID-19 world.”
“While our industry has been hit particularly
hard by the unprecedented social and economic impacts of the
COVID-19 pandemic, we acted swiftly to preserve our financial
position, and to safeguard the health and safety of our clients and
employees, in addition to providing support to our community.”
‘’With most of our stores now open across
Canada, we look forward to continuing to serve our customers
safely, supported by our e-commerce business. We are also pleased
to have reached agreements with the majority of our landlords
concerning our COVID-19 rental obligations. We remain fully
committed to our long-term strategy as a proudly Canadian,
Quebec-based specialty retailer, in order to create long-term value
for our shareholders.” − Le Château Executive Team.
Financial and operating
results
Sales for the first quarter ended April 25, 2020
amounted to $17.7 million as compared with $36.1 million for the
first quarter ended April 27, 2019, a decrease of 51.0%. The
decrease is primarily attributable to the government-mandated
temporary closure of all retail stores, effective March 18, 2020,
due to COVID-19 (see “COVID-19 impact” and “Current developments
and subsequent events” sections below).
Gross profit for the first quarter of 2020
decreased to $10.4 million from $22.3 million for the same period
last year. The decrease of $11.9 million in gross profit was the
result of the 51.0% overall sales decline for the first quarter of
2020, combined with the decrease in gross profit as a percentage of
sales to 59.0% from 61.9% for the first quarter of 2019.
Adjusted EBITDA (see non-GAAP measures below)
for the first quarter of 2020 amounted to $(5.2) million, compared
with $748,000 for the same period last year. The decrease of $6.0
million in Adjusted EBITDA for the first quarter of 2020 was
primarily attributable to the decrease of $11.9 million in gross
profit, partially offset by the reduction in selling, distribution
and administrative expenses of $5.9 million. The decrease in
selling, distribution and administrative expenses resulted
primarily from the reduction in store operating expenses due mainly
to the temporary closure of all our stores effective March 18,
2020.
Net loss for the first quarter ended April 25,
2020 amounted to $13.4 million or $(0.45) per share compared to a
net loss of $10.8 million or $(0.36) per share for the same period
last year.
COVID-19
impact
The main impact of COVID-19 on first quarter
results is due to the government mandated full shut down of all
brick and mortar operations beginning nationally March 18, 2020.
Markets began to re-open progressively, as early as May 4, 2020 in
Manitoba and as late as June 24, 2020 in Toronto, Ontario.
Prior to the COVID-19 pandemic, and beginning in
2015, the Company began the execution of its strategic plan aimed
at optimizing its brick and mortar network across Canada in the
context of the growing importance of e-commerce and the increasing
challenges of brick and mortar retail. During this 5-year period,
the Company’s store network was optimized and reduced by almost
50%, from 243 stores to 126 well-located, top-performing
stores.
Over the same period of time, the Company
continued to invest significantly in upgrading and maintaining
a compelling fashion e-commerce shopping and delivery system
supported by a leaner network of retail stores across Canada.
In reaction to the impacts of the COVID-19
pandemic, the Company has taken measures to protect its financial
position. Such measures included:
- Furloughing the majority of store and head office employees
during the closure period, while maintaining essential services
such as e-commerce, warehousing and distribution;
- Initiating reduced work week schedules for all staff based on
business requirements;
- Availing itself of the Canada Emergency Wage Subsidy
(“CEWS”)
- Adjusting inventory levels by cancelling, delaying or reducing
orders;
- Extending payment terms with merchandise and non-merchandise
suppliers;
- Reducing discretionary expenditures;
- Cancelling or delaying all non-essential investments in capital
expenditures for the balance of the year;
- Supporting the medical community through the manufacturing of
medical gowns.
In addition, in August 2020, the Company reached
agreement with the majority of its landlords concerning its rental
obligations covering the period impacted by COVID-19. Accordingly,
the impact of the agreements will be reflected in the interim
financial statements for the third quarter ending October 24,
2020.
Current developments and
subsequent events
As disclosed in note 2 of the unaudited interim
condensed consolidated financial statements (‘interim financial
statements”) for the first quarter ended April 25, 2020, there are
material uncertainties that cast significant doubt upon the
Company’s ability to continue as a going concern and, therefore,
realize its assets and discharge its liabilities in the normal
course of business.
As described further in note 3 of the interim
financial statements, the Company has a $70.0 million asset-based
revolving credit facility as well as a three-year $15.0 million
subordinated term loan from another lender, both of which were
extended on April 1, 2020, from June 9, 2020 to December 31, 2020.
As the revolving credit facility and the subordinated term loan
agreements have not been renewed, the full amounts drawn under
these facilities are presented as current liabilities as at April
25, 2020. For the first quarter ended April 25, 2020, the Company
generated a loss of $13.4 million and had a working capital
deficiency of $63.9 million as at April 25, 2020 due mainly to the
classification of the above facilities as current liabilities.
In addition, the outbreak of the coronavirus
disease (COVID-19), which was declared a pandemic on March 11, 2020
by the World Health Organization, is having significant impacts on
the Company. The measures adopted by the Federal and provincial
governments in order to mitigate the spread of the outbreak
required the Company to close all of its retail locations across
the country effective March 18, 2020. During the period of closure,
the Company’s only sales were derived from its e-commerce channel.
The duration and impact of the outbreak are unknown and may
influence consumer shopping behavior and consumer demand including
online shopping. The Company has since re-opened most of its stores
during the period May 4, 2020 to June 26, 2020 in accordance with
provincial and regional governmental guidelines.
The Company’s ability to continue as a going
concern for the next twelve months involves significant judgment
and is dependent on, among other things, its ability to obtain
necessary financing, either through an amendment and renewal of its
revolving credit facility and refinancing of its subordinated term
loan, or from other financing sources; the availability of adequate
credit under its revolving credit facility and subordinated term
loan; the impact of the COVID-19 pandemic and related government
restrictions on the Company’s operations and liquidities (including
the Company’s ability to resume normal operations); if previously
negotiated rent concessions prove to be insufficient, the Company’s
ability to negotiate additional favorable amendments to lease rents
and other obligations with major landlords; the Company’s ability
to improve its sales and generate positive cash flow from
operations; and the continued support of its suppliers, landlords
and other creditors.
The going concern uncertainty note in the
Company’s annual consolidated financial statements for the fiscal
year ended January 25, 2020, filed on July 6, 2020, caused the
Company to be in default under a covenant contained in its
revolving credit facility agreement and subordinated term loan
agreement. The above-mentioned default caused a default under the
Company’s third-ranking secured loans. As a result, the secured
loans are presented as current liabilities. Under the terms of an
agreement entered into with the senior lenders, the holders of the
third-ranking secured loans do not have the right to exercise their
recourses until the senior lenders have been fully repaid. As a
result of the breach, the credit facility and subordinated term
loan became due on demand and, on August 7, 2020, the Company
entered into amending agreements with its existing lenders with
respect to its revolving credit facility agreement and subordinated
term loan agreement to provide for further availability under such
agreements. Pursuant to the amending agreements, the Company
obtained a waiver from its existing lenders of the above noted
default. In accordance with the amending agreements, the Company is
subject to certain conditions and undertakings, including the
requirement to refinance its revolving credit facility and
subordinated term loan, failing which a contingency plan will need
to be implemented. There is no assurance that the Company will be
successful in completing a refinancing on acceptable terms, or at
all. There can be no assurance that availability under the existing
credit facilities, as amended, or that any alternative source of
financing will be sufficient to finance the Company’s operations to
the maturity date of the credit facilities, that borrowings or
alternative sources of financing will be available to the Company,
or available on acceptable terms, in an amount sufficient to fund
the Company’s needs or that the Company’s suppliers, landlords and
other creditors will continue their support of the Company.
Consequently, the Company’s management is evaluating its
alternatives should these contingencies materialize. The COVID-19
pandemic has further strained the Company’s ability to return to
profitability, and therefore there is no assurance that it will be
able to generate positive cash flow from operations.
The interim financial statements for the first
quarter ended April 25, 2020 have been prepared on a going concern
basis, which assumes the Company will continue its operations for
the foreseeable future and will be able to realize its assets and
discharge its liabilities and commitments in the normal course of
business. These interim financial statements as at and for the
first quarter ended April 25, 2020 do not include any adjustments
to the carrying amounts and classification of assets, liabilities
and reported expenses that may otherwise be required if the going
concern basis was not appropriate. Such adjustments could be
material.
Profile
Le Château is a leading Canadian specialty
retailer and manufacturer of exclusively designed apparel, footwear
and accessories for contemporary and style-conscious women and men,
with an extensive network of 124 prime locations across Canada and
an e-com platform servicing Canada and the U.S. Le Château,
committed to research, design and product development, manufactures
approximately 30% of the Company’s apparel in its own Canadian
production facilities.
Non-GAAP
Measures
In addition to discussing earnings measures in
accordance with IFRS, this press release provides Adjusted EBITDA
as a supplementary earnings measure, which is defined as earnings
(loss) before interest, income taxes, depreciation, amortization,
and write-off and impairment of long-term assets (“Adjusted
EBITDA”). Adjusted EBITDA is provided to assist readers in
determining the ability of the Company to generate cash from
operations and to cover financial charges. It is also widely used
for valuation purposes for public companies in our industry.
The following table reconciles Adjusted EBITDA
to loss before income taxes in the interim statements of loss for
the first quarters ended April 25, 2020 and April 27, 2019:
(Unaudited) |
For
the three months ended |
(In thousands of Canadian dollars) |
April 25, 2020 |
|
April 27, 2019 |
|
Loss before income taxes |
$ |
(13,358 |
) |
$ |
(10,837 |
) |
Depreciation and amortization |
|
4,399 |
|
|
8,077 |
|
Write-off of long-term assets |
|
630 |
|
|
41 |
|
Finance costs |
|
3,112 |
|
|
3,467 |
|
Adjusted EBITDA |
$ |
(5,217 |
) |
$ |
748 |
|
The Company typically discloses comparable store
sales which are defined as sales generated by stores that have been
open for at least one year on a comparable week basis. As indicated
above, the Company temporarily closed all of its retail stores on
March 18, 2020, while continuing to service its customers online.
Due to the significant impacts caused by COVID-19, comparable
stores sales have not been disclosed for the first quarter of 2020
as the Company believes they are not currently representative of
its business trends and would not provide any meaningful
information.
Forward-Looking
Statements
This news release may contain
forward-looking statements relating to the Company and/or the
environment in which it operates that are based on the Company’s
expectations, estimates and forecasts. These statements are not
guarantees of future performance and involve risks and
uncertainties that are difficult to predict and/or are beyond the
Company’s control. A number of factors may cause actual outcomes
and results to differ materially from those expressed. These
factors also include those set forth in other public filings of the
Company. Therefore, readers should not place undue reliance on
these forward-looking statements. In addition, these
forward-looking statements speak only as of the date made and the
Company disavows any intention or obligation to update or revise
any such statements as a result of any event, circumstance or
otherwise except to the extent required under applicable securities
law.
The Company’s ability to continue as a going
concern for the next twelve months involves significant judgment
and is dependent on, among other things, its ability to obtain
necessary financing, either through an amendment and renewal of its
revolving credit facility and refinancing of its subordinated term
loan, or from other financing sources; the availability of adequate
credit under its revolving credit facility and subordinated term
loan; the impact of the COVID-19 pandemic and related government
restrictions on the Company’s operations and liquidities (including
the Company’s ability to resume normal operations); if previously
negotiated rent concessions prove to be insufficient, the Company’s
ability to negotiate additional favorable amendments to lease rents
and other obligations with major landlords; the Company’s ability
to improve its sales and generate positive cash flow from
operations; and the continued support of its suppliers, landlords
and other creditors. There can be no assurance that availability
under the existing credit facilities, as amended, or that any
alternative source of financing will be sufficient to finance the
Company’s operations to the maturity date of the credit facilities,
that borrowings or alternative sources of financing will be
available to the Company or available on acceptable terms, in an
amount sufficient to fund the Company’s needs or that the Company’s
suppliers, landlords and other creditors will continue their
support of the Company. Consequently, the Company’s management is
evaluating its alternatives should these contingencies materialize
(see note 2 of the Company’s interim financial statements).
Factors which could cause actual results or
events to differ materially from current expectations include,
among other things: the ability of the Company to continue as a
going concern; public health crises & economic downturn;
liquidity risks; general economic conditions and normal business
uncertainty; the ability of the Company to successfully implement
its business initiatives and whether such business initiatives will
yield the expected benefits; the ability of the Company to complete
the refinancing on acceptable terms and, to the extent applicable,
to implement the contingency plan; competitive conditions in the
businesses in which the Company participates; changes in consumer
spending; seasonality; changes in the Company’s relationship with
its suppliers; inventory management; extreme changes in weather;
lease renewals and obligations; information technology security and
loss of customer data; fluctuations in foreign currency exchange
rates; interest rate fluctuations and changes in laws, rules and
regulations applicable to the Company. The foregoing list of risk
factors is not exhaustive and other factors could also adversely
affect our results. The risks and uncertainties faced by the
Company are substantially the same as those outlined in the annual
MD&A for the year ended January 25, 2020, other than as
described in note 2 of the interim financial statements.
The Company’s interim financial statements and
Management’s Discussion and Analysis for the first quarter ended
April 25, 2020 are available online at www.sedar.com under the
Company’s profile.
For further
information
Emilia Di Raddo, CPA, CA, President (514)
738-7000Johnny Del Ciancio, CPA, CA, Vice-President, Finance, (514)
738-7000MaisonBrison: Pierre Boucher, (514)
731-0000Source: Le Château Inc.
|
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEETS |
|
|
|
|
|
|
(Unaudited) (In thousands of Canadian dollars) |
As at April 25,
2020(1) |
As at April 27, 2019 |
As at January 25, 2020 |
ASSETS |
|
|
|
|
Current assets |
|
|
|
|
Cash |
$ |
- |
$ |
1,241 |
$ |
- |
Accounts receivable |
|
1,956 |
|
1,113 |
|
870 |
Income taxes refundable |
|
240 |
|
264 |
|
426 |
Inventories |
|
79,532 |
|
88,805 |
|
76,093 |
Prepaid expenses |
|
2,084 |
|
2,355 |
|
1,678 |
Total current assets |
|
83,812 |
|
93,778 |
|
79,067 |
Deposits |
|
485 |
|
485 |
|
485 |
Property and equipment |
|
6,431 |
|
19,897 |
|
7,883 |
Intangible assets |
|
552 |
|
1,641 |
|
621 |
Right-of-use assets |
|
43,512 |
|
79,369 |
|
45,810 |
|
$ |
134,792 |
$ |
195,170 |
$ |
133,866 |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' DEFICIENCY |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Bank indebtedness |
$ |
297 |
$ |
- |
$ |
1,064 |
Current portion of credit facility |
|
53,766 |
|
25,134 |
|
43,525 |
Trade and other payables |
|
32,995 |
|
18,348 |
|
27,200 |
Deferred revenue |
|
1,455 |
|
2,069 |
|
1,646 |
Current portion of lease liabilities |
|
28,548 |
|
27,741 |
|
19,609 |
Current portion of long-term debt |
|
30,618 |
|
- |
|
30,369 |
Total current liabilities |
|
147,679 |
|
73,292 |
|
123,413 |
Credit facility |
|
- |
|
33,524 |
|
- |
Long-term debt |
|
- |
|
30,838 |
|
- |
Lease liabilities |
|
69,725 |
|
69,553 |
|
79,707 |
Total liabilities |
|
217,404 |
|
207,207 |
|
203,120 |
|
|
|
|
|
|
|
Shareholders' deficiency |
|
|
|
|
|
|
Share capital |
|
73,573 |
|
73,573 |
|
73,573 |
Contributed surplus |
|
15,354 |
|
14,193 |
|
15,354 |
Deficit |
|
(171,539) |
|
(99,803) |
|
(158,181) |
Total shareholders' deficiency |
|
(82,612) |
|
(12,037) |
|
(69,254) |
|
$ |
134,792 |
$ |
195,170 |
$ |
133,866 |
(1) |
See note 2, Going concern uncertainty, in the interim financial
statements for the first quarter ended April 25, 2020. |
|
|
NOTICEThe Company’s independent
auditors have not performed a review of the interim financial
statements.
|
|
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE
LOSS |
(Unaudited) |
For the three months ended |
(In thousands of Canadian dollars, except per share
information) |
April 25, 2020 |
April 27, 2019 |
Sales |
$ |
17,659 |
$ |
36,070 |
Cost of sales and expenses |
|
|
|
|
Cost of sales |
|
7,242 |
|
13,744 |
Selling and distribution |
|
18,060 |
|
24,908 |
Administrative |
|
2,603 |
|
4,788 |
|
|
27,905 |
|
43,440 |
Results from operating activities |
|
(10,246) |
|
(7,370) |
Finance costs |
|
3,112 |
|
3,467 |
Loss before income taxes |
|
(13,358) |
|
(10,837) |
Income tax recovery |
|
- |
|
- |
Net loss and comprehensive loss |
$ |
(13,358) |
$ |
(10,837) |
|
|
|
|
|
Net loss per share |
|
|
|
|
Basic |
$ |
(0.45) |
$ |
(0.36) |
Diluted |
|
(0.45) |
|
(0.36) |
Weighted average number of shares outstanding
('000) |
|
29,964 |
|
29,964 |
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
DEFICIENCY |
(Unaudited) |
For the three months ended |
(In thousands of Canadian dollars) |
April 25, 2020 |
April 27, 2019 |
|
|
|
|
|
SHARE CAPITAL |
$ |
73,573 |
$ |
73,573 |
CONTRIBUTED SURPLUS |
|
|
|
|
Balance, beginning of period |
$ |
15,354 |
$ |
14,132 |
Fair value adjustment of long-term debt |
|
- |
|
61 |
Balance, end of period |
$ |
15,354 |
$ |
14,193 |
DEFICIT |
|
|
|
|
Balance, beginning of period |
$ |
(158,181) |
$ |
(82,543) |
Transitional adjustments on adoption of new accounting
standards |
|
- |
|
(6,423) |
Adjusted balance, beginning of period |
|
(158,181) |
|
(88,966) |
Net loss |
|
(13,358) |
|
(10,837) |
Balance, end of period |
$ |
(171,539) |
$ |
(99,803) |
Total shareholders’ deficiency |
$ |
(82,612) |
$ |
(12,037) |
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
|
|
(Unaudited) |
For the three months ended |
(In thousands of Canadian dollars) |
April 25, 2020 |
April 27, 2019 |
OPERATING ACTIVITIES |
|
|
|
|
Net loss |
$ |
(13,358) |
$ |
(10,837) |
Adjustments to determine net cash from operating activities |
|
|
|
|
Depreciation and amortization |
|
4,399 |
|
8,077 |
Write-off of long-term assets |
|
630 |
|
41 |
Finance costs |
|
3,112 |
|
3,467 |
Interest paid |
|
(1,041) |
|
(1,155) |
|
|
(6,258) |
|
(407) |
Net change in non-cash working capital items related to
operations |
|
117 |
|
(5,625) |
Income taxes refunded |
|
219 |
|
230 |
Cash flows related to operating activities |
|
(5,922) |
|
(5,802) |
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
Net increase in credit facility |
|
10,156 |
|
9,571 |
Payment of lease liabilities |
|
(2,929) |
|
(2,733) |
Other finance costs |
|
(378) |
|
(274) |
Proceeds of long-term debt |
|
- |
|
1,000 |
Cash flows related to financing activities |
|
6,849 |
|
7,564 |
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
Additions to property and equipment and intangible assets |
|
(160) |
|
(32) |
Cash flows related to investing activities |
|
(160) |
|
(32) |
|
|
|
|
|
Increase in cash / decrease in bank
indebtedness |
|
767 |
|
1,730 |
Bank indebtedness, beginning of period |
|
(1,064) |
|
(489) |
Cash (bank indebtedness), end of period |
$ |
(297) |
$ |
1,241 |
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