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MESSAGE TO SHAREHOLDERS
Dear shareholders,
Sales for the second quarter ended July 26, 2014 decreased 9.7% to $68.3 million from $75.7 million for the second quarter ended July 27,
2013, resulting primarily from a decrease of 8.6% in comparable store sales. On a year-to-date basis, sales decreased 8.3% to $121.6
million as compared with $132.6 million last year. Comparable store sales decreased 7.2% for the first six months as compared to last year.
Sales were negatively impacted for the first six months of 2014 by reduced store traffic and increased promotional activity.
Net loss for the second quarter amounted to $3.0 million or $(0.10) per share (diluted) compared to a net earnings of $1.1 million or $0.04
per share (diluted) the previous year. Results for the second quarter were negatively impacted by increased promotional activity resulting in a
decline in the gross margin to 64.2% from 66.9% for the same period last year. In addition, $800,000 of the net loss is attributed to the
unrecognized tax benefit of non-capital losses of $2.8 million for Canadian income tax purposes generated in the quarter, for which a full
valuation allowance has been taken against the related deferred tax asset. Despite lower sales in the second quarter, gross margin increased to 64.2% when compared to 60.7% for the first quarter of 2014. As a
result, the Company returned to a positive adjusted EBITDA of $2.9 million in the second quarter. Efforts to reduce inventories have resulted
in a 6% decline over last year. Finally, we remain focused on cost control initiatives which yielded savings of $1.8 million for the three months
ended July 26, 2014.
For the first five weeks of the third quarter (up to August 30, 2014), total retail sales decreased 10.7% and comparable store sales decreased
9.4% compared to the same period last year.
I wish to thank our employees, customers, suppliers and our shareholders for their continued support.
(signed)
Jane Silverstone Segal, B.A.LLL
Chairman of the Board and Chief Executive Officer
September 5, 2014
Management’s Discussion & Analysis
Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the unaudited interim condensed consolidated financial
statements for the six months ended July 26, 2014 and the audited consolidated financial statements and MD&A for the year ended January
25, 2014. The risks and uncertainties faced by Le Château Inc. (the “Company”) are substantially the same as those outlined in the
Company’s Annual Information Form and in the annual MD&A contained in the Annual Report for the year ended January 25, 2014. The
MD&A has been prepared as at September 5, 2014.
Results of Operations
Sales for the second quarter ended July 26, 2014 decreased 9.7% to $68.3 million from $75.7 million for the second quarter ended July 27,
2013, resulting primarily from a decrease of 8.6% in comparable store sales (see supplementary measures below). On a year-to-date basis,
sales decreased 8.3% to $121.6 million as compared with $132.6 million last year. Comparable store sales decreased 7.2% for the first six
months as compared to last year. Sales were negatively impacted for the first six months of 2014 by reduced store traffic and increased
promotional activity.
Earnings before interest, income taxes, depreciation, amortization, write-off and/or impairment of property and equipment and intangible
assets (“Adjusted EBITDA”) (see supplementary measures below) for the second quarter amounted to $2.9 million, compared to $7.9 million
last year. The decrease of $5.0 million in adjusted EBITDA for the second quarter was primarily attributable to the decrease of $6.8 million in
gross margin dollars, offset by a decrease in selling, general and administrative expenses of $1.8 million. The Company’s gross margin for
the second quarter of 2014 decreased to 64.2% from 66.9% in 2013, due to increased promotional activity.
Loss before interest, income taxes, depreciation, amortization, write-off and/or impairment of property and equipment and intangible assets
for the first six months ended July 26, 2014 amounted to $6.4 million, compared to earnings before interest, income taxes, depreciation,
amortization, write-off and/or impairment of property and equipment and intangible assets of $3.1 million last year. The decrease of $9.5
million in adjusted EBITDA for the first six months was primarily attributable to a decline of $11.6 million in gross margin dollars, offset by a
decrease in selling, general and administrative expenses of $2.1 million. The reduction in gross margin dollars was the result of the decrease
in the Company’s gross margin percentage to 62.7% from 66.3%, due to increased promotional activity.
Depreciation and amortization for the second quarter amounted to $4.6 million compared to $4.8 million last year. Write-off and impairment
of property and equipment relating to store closures, store renovations and underperforming stores, amounted to $533,000 in the second
quarter of 2014 (2013 – $753,000). For the first six months ended July 26, 2014, depreciation and amortization decreased to $9.2 million
from $9.6 million in 2013, due to the reduced investments in non-financial assets over the past year. On a year-to-date basis, write-off and
impairment of property and equipment amounted to $713,000 (2013 – $1.6 million).
Finance costs for the second quarter increased to $726,000 from $670,000 in 2013 and for the first six months ended July 26, 2014, finance
costs increased to $1.4 million from $1.36 million the previous year. The increases in finance costs for both periods were due to the
additional bank borrowings during the current year.
Net loss for the second quarter amounted to $3.0 million or $(0.10) per share (diluted) compared to net earnings of $1.1 million or $0.04 per
share (diluted) the previous year, mainly as a result of the decrease in the gross margin as mentioned above. In addition, $800,000 of the net
loss is attributed to the unrecognized tax benefit of non-capital losses of $2.8 million for Canadian income tax purposes generated in the
second quarter, for which a full valuation allowance has been taken against the related deferred tax asset.
For the six-month period ended July 26, 2014, the net loss amounted to $16.0 million or $(0.57) per share (diluted) compared to a net loss of
$7.1 million or $(0.26) per share (diluted) the previous year, mainly as a result of the decrease in the gross margin as mentioned above. In
addition, $2.9 million of the increase in the net loss is attributed to the unrecognized tax benefit of non-capital losses of $10.8 million for
Canadian income tax purposes generated in the six-month period ended July 26, 2014, for which a full valuation allowance has been taken
against the related deferred tax asset.
During the first six months of 2014, the Company opened one store, closed two stores and renovated five existing locations. As at July 26,
2014, the Company operated 227 stores (including 43 fashion outlet stores) compared to 233 stores (including 46 fashion outlet stores) as at
July 27, 2013. Total square footage for the Le Château network as at July 26, 2014 amounted to 1,237,000 square feet, compared to
1,267,000 square feet as at July 27, 2013.
The e-commerce business launched at the end of 2010. While the contribution from online sales remains a small percentage of overall sales,
the e-commerce platform continues to gain traction and is expanding customer reach. Included in comparable store sales for the three and
six-month periods ended July 26, 2014, are online sales which increased 7% and 24%, respectively, compared to the same period last year.
Page 1
Management’s Discussion & Analysis
Liquidity and Capital Resources
Cash flow from operating activities amounted to $11.4 million for the second quarter ended July 26, 2014, compared with $7.3 million for the
same period last year. The increase of $4.1 million in cash flow from operating activities for the second quarter of 2014 was mainly the result
of: (a) the $4.7 million of income taxes refunded, (b) the additional $3.9 million provided by non-cash working capital items, offset by (c) the
higher net loss of $4.0 million, and (d) a decrease of $408,000 in depreciation, amortization, write-off and net impairment of property and
equipment.
On a year-to-date basis, cash flow used for operating activities amounted to $5.2 million, compared with $8.4 million last year. The decrease
of $3.2 million in cash flow used for operating activities during the first six months of 2014 was mainly the result of: (a) the $5.5 million of
income taxes refunded, (b) the decrease of $6.6 million in non-cash working capital requirements, offset by (c) the higher net loss of $8.9
million, and (d) a decrease of $1.3 million in depreciation, amortization, write-off and net impairment of property and equipment.
The Company’s bank indebtedness, including the current portion, net of cash, amounted to $40.0 million at the end of the second quarter,
compared with $28.2 million as at July 27, 2013 and $29.3 million as at January 25, 2014.
On June 5, 2014, the Company renewed its asset based credit facility for a three-year term ending on June 5, 2017 with an increased limit of
$80.0 million. The revolving credit facility is collateralized by the Company’s cash, cash equivalents, marketable securities, credit card
accounts receivable and inventories, as defined in the agreement. The facility consists of revolving credit loans, which include both a swing
line loan facility limited to $15.0 million and a letter of credit facility limited to $15.0 million. The available borrowings bear interest at a rate
based on the Canadian prime rate, plus an applicable margin ranging from 0.50% to 1.00%, or a banker’s acceptance rate, plus an
applicable margin ranging from 1.75% to 2.25%. The Company is required to pay a standby fee ranging from 0.25% to 0.375% on the
unused portion of the revolving credit. The Credit Agreement requires the Company to comply with certain covenants, including restrictions
with respect to the payment of dividends and the purchase of the Company’s shares under certain circumstances. As at July 26, 2014, the
Company had drawn $43.0 million (2013 - $30.0 million) under this credit facility and had outstanding standby letters of credit totaling
$700,000 (2013 - $700,000) which reduced the availability under this credit facility. Financing costs related to obtaining the above facility
have been deferred and netted against the amounts drawn under the facility, and are being amortized over the term of the facility.
In addition, as at July 26, 2014, the Company had an import line of credit of $25.0 million which included a $1.0 million loan facility. The
import line was for letters of credit which guaranteed the payment of purchases from foreign suppliers. Amounts drawn under these facilities
were payable on demand, bearing interest at rates based on the bank’s prime rate plus 0.50% for loans in Canadian and U.S. dollars.
Furthermore, the terms of the banking agreement required the Company to meet certain non-financial covenants. As at July 26, 2014, the
Company had outstanding letters of credit totaling $5.7 million (2013 - $9.8 million) and no other amounts drawn under this facility (2013 $175,000).
As of September 1, 2014, the Company no longer has a separate $25.0 million import line of credit and all letters of credit opened will be
secured under the $80.0 million asset based credit facility.
Aside from the letters of credit outstanding, the Company did not have any other off-balance sheet financing arrangements as at July 26,
2014.
Capital expenditures for the second quarter amounted to $1.5 million, compared to $1.1 million for the same period last year. Capital
expenditures for the first six months of 2014 amounted to $6.6 million, compared to $4.3 million for the same period last year and are
primarily related to the opening of one new store, the renovation and/or expansion of certain existing stores and investments in information
technology. Capital expenditures were financed with the Company’s credit facility as well as the $5.0 million long-term debt financing
obtained during the first quarter of 2014.
Financial Position
Working capital stood at $83.4 million at the end of the second quarter of 2014, compared to $81.0 million as at July 27, 2013 and $74.9
million as at January 25, 2014.
Long-term debt, including the current portion, amounted to $11.7 million as at July 26, 2014, compared with $15.8 million as at January 25,
2014. The decrease in long-term debt is attributable to the repayments of $4.1 million during the first six months of 2014. As at July 26, 2014,
the long-term debt to equity ratio decreased to 0.10:1 from 0.13:1 as at January 25, 2014.
On March 3, 2014, the Company borrowed $5.0 million from a company that is directly controlled by the Chairman and Chief Executive
Officer and director of the Company. On June 18, 2014, the $5.0 million loan was converted into 2,617,801 Class A subordinate voting
shares at $1.91 per share. The loan was unsecured and carried an annual interest of 5.5%, payable monthly, with capital repayment payable
at maturity on February 28, 2018.
Page 2
Management’s Discussion & Analysis
Inventory
Total inventories as at July 26, 2014 amounted to $123.0 million compared to $131.2 million as at July 27, 2013 and $124.9 million as at
January 25, 2014. Total finished goods inventory at the end of the second quarter decreased by 4.7% compared to July 27, 2013 and by
0.3% compared to January 25, 2014.
As part of the Company’s inventory management plan, the Company continues to use 43 outlets (389,000 square feet) in its network to sell
prior season discounted merchandise. On-line selling of these goods was enabled in the first quarter of 2012 through an on-line outlet
division.
Outstanding Share Data
As at September 5, 2014, there are 25,403,762 Class A subordinate voting shares and 4,560,000 Class B voting shares outstanding.
Furthermore, there are 2,829,000 stock options outstanding with exercise prices ranging from $1.44 to $13.25, of which 1,027,500 are
exercisable. During the second quarter ended July 26, 2014, the Company granted 10,000 options to purchase Class A subordinate voting
shares at an exercise price of $1.91. On June 18, 2014, a $5.0 million loan payable to a company that is directly controlled by the Chairman and Chief Executive Officer and
director of the Company was converted into 2,617,801 Class A subordinate voting shares at $1.91 per share.
Critical Accounting Policies and Estimates
Critical Accounting Estimates:
The preparation of financial statements requires the Company to estimate the effect of various matters that are inherently uncertain as of the
date of the financial statements. Each of these required estimates varies in regard to the level of judgment involved and its potential impact
on the Company’s reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or
where changes in the estimates are reasonably likely to occur from period to period, and would materially impact the Company’s financial
position, changes in financial position or results of operations. The Company’s significant accounting policies are discussed in notes 3 and 5
of the audited consolidated financial statements for the year ended January 25, 2014; critical estimates inherent in these accounting policies
are discussed in the following paragraphs.
Inventory valuation
The Company records a write-down to reflect management’s best estimate of the net realizable value of inventory which includes
assumptions and estimates for future sell-through of units, selling prices, as well as disposal costs, where appropriate, based on historical
experience. Management continually reviews the carrying value of its inventory, to assess whether the write-down is adequate, based on
current economic conditions and an assessment of sales trends.
Impairment of non-financial assets
Non-financial assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be
recoverable. A review for impairment is conducted by comparing the carrying amount of the cash generating unit’s (“CGU”) assets with their
respective recoverable amounts based on value in use. Value in use is determined based on management’s best estimate of expected future
cash flows, which includes estimates of growth rates, from use over the remaining lease term and discounted using a pre-tax weighted
average cost of capital.
Management is required to make significant judgments in determining if individual commercial premises in which it carries out its activities
are individual CGUs, or if these units should be aggregated at a district or regional level to form a CGU. The significant judgments applied by
management in determining if stores should be aggregated in a given geographic area to form a CGU include the determination of expected
customer behaviour and whether customers could interchangeably shop in any of the stores in a given area and whether management views
the cash flows of the stores in the group as inter-dependant.
Deferred revenue
The Company measures the gift card liability and breakage income by estimating the value of gift cards that are not expected to be
redeemed by customers, based on historical redemption patterns.
Provisions
When a provision for onerous contracts is recorded, the provision is determined based on management’s best estimate of the present value
of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract. Assumptions and
estimates are made in relation to discount rates, the expected cost to terminate a contract and the related timing of those costs.
Page 3
Management’s Discussion & Analysis
Income Taxes
From time to time, the Company is subject to audits related to tax risks, and uncertainties exist with respect to the interpretation of tax
regulations, changes in tax laws, and the amount and timing of future taxable income. Differences arising between the actual results and the
assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income and income tax expense
already recorded. The Company establishes provisions if required, based on reasonable estimates, for possible consequences of audits by
the tax authorities. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing
interpretations of tax regulations by the entity and the responsible tax authority, which may arise on a wide variety of issues.
Stock-based compensation
The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the
date on which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation model
for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This also requires determining the most
appropriate inputs to the valuation model including the assumptions with respect to the expected life of the option, volatility and dividend
yield.
Accounting Standards Implemented in 2014:
There were no new accounting standards implemented during the six months ended July 26, 2014.
New Standards Not Yet Effective:
IFRS 9, “Financial Instruments”, partially replaces the requirements of IAS 39, “Financial Instruments: Recognition and Measurement”. This
standard is the first step in the project to replace IAS 39. The IASB intends to expand IFRS 9 to add new requirements for the classification
and measurement of financial liabilities, derecognition of financial instruments, impairment and hedge accounting to become a complete
replacement of IAS 39. These changes are applicable for annual periods beginning on or after January 1, 2015, with earlier application
permitted. The Company has not yet assessed the future impact of this new standard on its consolidated financial statements.
Supplementary Measures
In addition to discussing earnings measures in accordance with IFRS, this MD&A provides adjusted EBITDA as a supplementary earnings
measure, which is defined as earnings (loss) before interest, income taxes, depreciation, amortization, write-off and/or impairment of
property and equipment and intangible assets. 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 tax recovery disclosed in the unaudited interim condensed
consolidated statements of loss for the three and six-month periods ended July 26, 2014 and July 27, 2013:
(in thousands of Canadian dollars)
Earnings (loss) before income taxes
Depreciation and amortization
Write-off and net impairment of property and
equipment and intangible assets
Finance costs
Finance income
Adjusted EBITDA
$
$
For the three months ended
July 26, 2014
July 27, 2013
(2,970)
$
1,707
4,609
4,797
533
726
(8)
2,890
$
753
670
(5)
7,922
For the six months ended
July 26, 2014
July 27, 2013
$
(17,731)
$
(9,410)
9,200
9,569
$
713
1,413
(11)
(6,416)
$
1,594
1,360
(8)
3,105
The Company also discloses comparable store sales which are defined as sales generated by stores that have been open for at least one
year. The following table reconciles comparable store sales to total sales disclosed in the unaudited interim condensed consolidated
statements of loss for the three and six-month periods ended July 26, 2014 and July 27, 2013:
(in thousands of Canadian dollars)
Total sales
Non-comparable store sales
Comparable store sales
$
$
For the three months ended
July 26, 2014
July 27, 2013
68,304
$
75,680
(821)
(1,882)
67,483
$
73,798
For the six months ended
July 26, 2014
July 27, 2013
121,609
132,562
$
$
(2,881)
(4,611)
118,728
127,951
$
$
The above measures do not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures presented
by other companies.
Page 4
Management’s Discussion & Analysis
Summary of Quarterly Results
The table below presents selected financial data for the eight most recently reported quarters. This unaudited quarterly information has been
prepared under IFRS. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
(In thousands of Canadian dollars, except per share amounts)
Second quarter ended July 26, 2014
First quarter ended April 26, 2014
Fourth quarter ended January 25, 2014
Third quarter ended October 26, 2013
Second quarter ended July 27, 2013
First quarter ended April 27, 2013
Fourth quarter ended January 26, 2013
Third quarter ended October 27, 2012
$
Sales
68,304
53,305
76,918
65,360
75,680
56,882
80,800
63,736
Earnings (loss)
before
income taxes
$
(2,970)
(14,761)
(5,012)
(7,286)
1,707
(11,117)
409
(5,565)
Net
earnings (loss)
$
(2,970)
(13,045)
(3,860)
(5,016)
1,077
(8,187)
158
(3,625)
Earnings (loss) per share
Basic
Diluted
$
(0.10) $
(0.10)
(0.48)
(0.48)
(0.15)
(0.15)
(0.18)
(0.18)
0.04
0.04
(0.30)
(0.30)
0.01
0.01
(0.14)
(0.14)
Retail sales are traditionally higher in the fourth quarter due to the holiday season. In addition, fourth quarter earnings results are usually
reduced by post holiday sale promotions.
Controls and Procedures
Disclosure Controls and Procedures
The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have designed disclosure controls and procedures (“DC&P”), or
have caused them to be designed under their supervision, to provide reasonable assurance that material information relating to the
Company has been made known to them and has been properly disclosed in the annual and quarterly regulatory filings.
Internal Controls over Financial Reporting
The CEO and CFO have designed internal controls over financial reporting (“ICFR”), or have caused them to be designed under their
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for
external purposes in accordance with IFRS. The CEO and CFO have evaluated whether there were changes to its ICFR during the three and
six-month periods ended July 26, 2014 that have materially affected, or are reasonably likely to materially affect, its ICFR. No such changes
were identified through their evaluation.
Forward-looking Statements
This “Management’s Discussion and Analysis” 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 forwardlooking 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.
Factors which could cause actual results or events to differ materially from current expectations include, among other things: the ability of the
Company to successfully implement its business initiatives and whether such business initiatives will yield the expected benefits; competitive
conditions in the businesses in which the Company participates; changes in consumer spending; general economic conditions and normal
business uncertainty; seasonality and weather patterns; changes in the Company’s relationship with its suppliers; lease renewals;
information technology security and loss of customer data; fluctuations in foreign currency exchange rates; interest rate fluctuations; liquidity
risk; 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.
Page 5
FINANCIAL HIGHLIGHTS
(Unaudited)
(In units except where otherwise stated)
Working capital ($'000)
Current ratio
Quick ratio
Long-term debt to equity ratio
Capital expenditures ($'000)
Number of stores at end of quarter
Total number of square feet ('000)
Book value per share
July 26, 2014
83,362
2.74
0.17
0.10
$
6,636
227
1,237
$
3.80
$
$
$
$
July 27, 2013
80,986
2.32
0.18
0.15
4,345
233
1,267
4.87
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of Canadian dollars)
ASSETS
Current assets
Cash
Accounts receivable (note 3)
Income taxes refundable
Derivative financial instruments
Inventories (notes 3 and 4)
Prepaid expenses
Total current assets
Property and equipment (note 5)
Intangible assets (note 6)
As at
July 26, 2014
$
$
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of bank indebtedness (note 3)
Trade and other payables (note 7)
Deferred revenue
Current portion of provisions (note 8)
Derivative financial instruments
Current portion of long-term debt
Total current liabilities
Bank indebtedness (note 3)
Long-term debt
Provisions (note 8)
Deferred income taxes
Deferred lease credits
Total liabilities
$
Shareholders' equity
Share capital (note 9)
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders' equity
$
2,468
1,691
1,319
122,996
2,671
131,145
66,851
3,557
201,553
22,052
16,723
3,135
332
372
5,169
47,783
20,400
6,543
481
12,373
87,580
47,967
4,140
62,238
(372)
113,973
201,553
As at
July 27, 2013
$
$
$
$
1,507
1,638
5,715
4
131,199
2,460
142,523
76,716
4,453
223,692
29,752
20,353
3,041
246
8,145
61,537
11,712
474
2,239
14,678
90,640
42,876
3,044
87,129
3
133,052
223,692
As at
January 25, 2014
$
$
$
$
1,446
1,476
6,663
418
124,878
2,292
137,173
69,870
3,815
210,858
30,767
19,553
3,712
265
7,987
62,284
7,843
391
1,829
13,412
85,759
42,960
3,581
78,253
305
125,099
210,858
See accompanying notes
Page 6
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(Unaudited)
(In thousands of Canadian dollars, except per share information)
Sales (note 11)
Cost of sales and expenses
Cost of sales (note 4)
Selling (note 5)
General and administrative (notes 5 and 6)
Results from operating activities
Finance costs
Finance income
Earnings (loss) before income taxes
Income tax expense (recovery)
Net earnings (loss)
Net earnings (loss) per share (note 10)
Basic
Diluted
For the six months ended
July 26, 2014
July 27, 2013
$
121,609
$
132,562
For the three months ended
July 26, 2014
July 27, 2013
$
68,304
$
75,680
24,453
37,469
8,634
70,556
25,036
39,408
8,864
73,308
45,406
74,656
17,876
137,938
44,716
78,012
17,892
140,620
(2,252)
726
(8)
(2,970)
2,372
670
(5)
1,707
630
1,077
(16,329)
1,413
(11)
(17,731)
(1,716)
(16,015)
(8,058)
1,360
(8)
(9,410)
(2,300)
(7,110)
$
(2,970)
$
$
(0.10)
(0.10)
$
Weighted average number of shares outstanding ('000)
28,524
0.04
0.04
$
$
(0.57)
(0.57)
27,256
$
$
(0.26)
(0.26)
27,933
27,249
See accompanying notes
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands of Canadian dollars)
Net earnings (loss)
Other comprehensive income (loss) to be reclassified to profit
or loss in subsequent periods
Change in fair value of forward exchange contracts
Income tax expense
For the three months ended
July 26, 2014
July 27, 2013
$
(2,970)
$
1,077
Realized forward exchange contracts reclassified
to net earnings (loss)
Income tax recovery (expense)
Total other comprehensive income (loss)
Comprehensive income (loss)
$
For the six months ended
July 26, 2014
July 27, 2013
$
(16,015)
$
(7,110)
(360)
(8)
(368)
4
(1)
3
(388)
(388)
1
1
16
16
(352)
(3,322)
3
(1)
2
5
1,082
(402)
113
(289)
(677)
(16,692)
(212)
59
(153)
(152)
(7,262)
$
$
$
See accompanying notes
Page 7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands of Canadian dollars)
SHARE CAPITAL
Balance, beginning of period
Issuance of subordinate voting shares upon conversion
of long-term debt (notes 9 and 13)
Issuance of subordinate voting shares upon exercise of options
Reclassification from contributed surplus due to exercise of share options
Balance, end of period
CONTRIBUTED SURPLUS
Balance, beginning of period
Stock-based compensation expense
Exercise of share options
Balance, end of period
RETAINED EARNINGS
Balance, beginning of period
Net earnings (loss)
Balance, end of period
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of period
Other comprehensive income (loss) for the period
Balance, end of period
Total shareholders’ equity
For the three months ended
July 26, 2014
July 27, 2013
For the six months ended
July 26, 2014
July 27, 2013
$
42,962
$
42,960
$
5,000
3
2
47,967
$
5,000
5
2
47,967
$
$
$
$
$
3,871
271
(2)
4,140
65,208
(2,970)
62,238
$
42,740
$
125
11
42,876
$
$
$
$
$
$
(20)
(352)
(372)
$
113,973
2,784
271
(11)
3,044
86,052
1,077
87,129
$
$
$
$
$
$
(2)
5
3
$
133,052
3,581
561
(2)
4,140
78,253
(16,015)
62,238
$
42,740
$
125
11
42,876
$
2,664
391
(11)
3,044
$
$
$
94,239
(7,110)
87,129
$
$
305
(677)
(372)
$
155
(152)
3
$
113,973
$
133,052
See accompanying notes
Page 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of Canadian dollars)
OPERATING ACTIVITIES
Net earnings (loss)
Adjustments to determine net cash from operating activities
Depreciation and amortization (notes 5 and 6)
Write-off and impairment of property and equipment (note 5)
Amortization of deferred lease credits
Deferred lease credits
Stock-based compensation
Provisions
Finance costs
Interest paid
Income tax expense (recovery)
For the three months ended
July 26, 2014
July 27, 2013
$
(2,970)
$
1,077
For the six months ended
July 26, 2014
July 27, 2013
$
(16,015)
$
(7,110)
Net change in non-cash working capital items related to operations
Income taxes refunded
Cash flows related to operating activities
4,609
533
(589)
260
271
144
726
(686)
2,298
4,425
4,650
11,373
4,797
753
(841)
39
271
16
670
(658)
630
6,754
527
7,281
9,200
713
(1,173)
134
561
157
1,413
(1,261)
(1,716)
(7,987)
(2,735)
5,548
(5,174)
9,569
1,594
(1,273)
39
391
(38)
1,360
(1,228)
(2,300)
1,004
(9,375)
(8,371)
FINANCING ACTIVITIES
Increase (decrease) in bank indebtedness
Proceeds of long-term debt
Repayment of long-term debt
Issue of capital stock upon exercise of options
Cash flows related to financing activities
(7,662)
(2,065)
3
(9,724)
(5,677)
(1,980)
125
(7,532)
11,945
5,000
(4,118)
5
12,832
16,592
(4,277)
125
12,440
INVESTING ACTIVITIES
Additions to property and equipment and
intangible assets (notes 5 and 6)
Cash flows related to investing activities
(1,515)
(1,515)
(1,097)
(1,097)
(6,636)
(6,636)
(4,345)
(4,345)
134
2,334
2,468
(1,348)
2,855
1,507
1,022
1,446
2,468
(276)
1,783
1,507
Increase (decrease) in cash
Cash, beginning of period
Cash, end of period
$
$
$
$
See accompanying notes
Page 9
Notes to the Interim Condensed Consolidated Financial Statements
(Unaudited –Tabular figures in thousands of Canadian dollars, except share information)
1. Corporate information
The unaudited condensed interim consolidated financial statements of Le Château Inc. (the “Company”) for the three and six-month periods
ended July 26, 2014 were authorized for issue on September 5, 2014 in accordance with a resolution of the Board of Directors. The
Company is incorporated and domiciled in Canada and its shares are publicly traded. The registered office is located in Montreal, Quebec,
Canada. The Company’s principal business activity is the retail of fashion apparel, accessories and footwear aimed at style-conscious
women and men.
2. Basis of preparation
The unaudited interim condensed consolidated financial statements for the three and six-month periods ended July 26, 2014 have been
prepared in accordance with IAS 34 “Interim Financial Reporting”. The same accounting policies were followed in the preparation of these
unaudited interim condensed consolidated financial statements as those used in the preparation of the most recent audited annual
consolidated financial statements for the year ended January 25, 2014. These interim condensed consolidated financial statements for the
three and six-month periods ended July 26, 2014 should be read together with the audited annual consolidated financial statements for the
year ended January 25, 2014 prepared in accordance with International Financial Reporting Standards (“IFRS”).
New Accounting Standards Implemented
There were no new accounting standards implemented during the six months ended July 26, 2014.
Basis of consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary.
The unaudited interim financial statements of the subsidiary are prepared for the same reporting period as the parent company, using
consistent accounting policies. All intercompany transactions, balances and unrealized gains or losses have been eliminated. The Company
has no interests in special purpose entities.
3. Credit facilities
On June 5, 2014, the Company renewed its asset based credit facility for a three-year term ending on June 5, 2017 with an increased limit of
$80.0 million. The revolving credit facility is collateralized by the Company’s cash, cash equivalents, marketable securities, credit card
accounts receivable and inventories, as defined in the agreement. The facility consists of revolving credit loans, which include both a swing
line loan facility limited to $15.0 million and a letter of credit facility limited to $15.0 million. The available borrowings bear interest at a rate
based on the Canadian prime rate, plus an applicable margin ranging from 0.50% to 1.00%, or a banker’s acceptance rate, plus an
applicable margin ranging from 1.75% to 2.25%. The Company is required to pay a standby fee ranging from 0.25% to 0.375% on the
unused portion of the revolving credit. The Credit Agreement requires the Company to comply with certain covenants, including restrictions
with respect to the payment of dividends and the purchase of the Company’s shares under certain circumstances. As at July 26, 2014, the
Company had drawn $43.0 million (2013 - $30.0 million) under this credit facility and had outstanding standby letters of credit totaling
$700,000 (2013 - $700,000) which reduced the availability under this credit facility. Financing costs related to obtaining the above facility
have been deferred and netted against the amounts drawn under the facility, and are being amortized over the term of the facility.
In addition, as at July 26, 2014, the Company had an import line of credit of $25.0 million which included a $1.0 million loan facility. The
import line was for letters of credit which guaranteed the payment of purchases from foreign suppliers. Amounts drawn under these facilities
were payable on demand, bearing interest at rates based on the bank’s prime rate plus 0.50% for loans in Canadian and U.S. dollars.
Furthermore, the terms of the banking agreement required the Company to meet certain non-financial covenants. As at July 26, 2014, the
Company had outstanding letters of credit totaling $5.7 million (2013 - $9.8 million) and no other amounts drawn under this facility (2013 $175,000).
As of September 1, 2014, the Company no longer has a separate $25.0 million import line of credit and all letters of credit opened will be
secured under the $80.0 million asset based credit facility.
4. Inventories
Raw materials
Work-in-process
Finished goods
Finished goods in transit
July 26, 2014
$
7,401
2,394
107,160
6,041
$
122,996
July 27, 2013
$
8,211
3,288
112,457
7,243
$
131,199
January 25, 2014
$
8,181
2,782
107,523
6,392
$
124,878
Page 10
Notes to the Interim Condensed Consolidated Financial Statements
The cost of inventory recognized as an expense and included in cost of sales for the three and six-month periods ended July 26, 2014 was
$24.4 million and $45.4 million, respectively (2013 – $25.0 million and $44.7 million). For the three and six-month periods ended July 26,
2014, the Company recorded $1.6 million of write-downs as a result of net realizable value being lower than cost (2013 – $1.8 million) and
$831,000 of reversals of inventory write-downs recognized in prior periods (2013 – $1.4 million).
5. Property and equipment
Depreciation for the three and six-month periods ended July 26, 2014 and July 27, 2013 is reported in the consolidated statements of
earnings (loss) as follows:
Selling expenses
General and administrative expenses
For the three months ended
July 26, 2014
July 27, 2013
$
3,423
$
3,596
733
753
$
4,156
$
4,349
For the six months ended
July 26, 2014
July 27, 2013
$
6,856
$
7,159
1,456
1,516
$
8,312
$
8,675
Additions to property and equipment for the three and six-month periods ended July 26, 2014 amounted to $1.2 million and $6.0 million
respectively (2013 – $677,000 and $3.7 million).
Write-off of property and equipment for the three and six-month periods ended July 26, 2014 amounted to $7,000 and $187,000, respectively
(2013 – $342,000 and $742,000). This property and equipment was primarily related to leasehold improvements and furniture and fixtures,
which are no longer in use as a result of store renovations and closures.
An assessment of impairment indicators was performed which caused the Company to review the recoverable amount of the property and
equipment for certain cash generating units (“CGUs”) with an indication of impairment, consisting primarily of under-performing stores.
Impairment losses for each of the three and six-month periods ended July 26, 2014 amounted to $526,000, respectively (2013 – $411,000
and $852,000, respectively). These losses, related to store leasehold improvements and furniture and fixtures, were determined by
comparing the carrying amount of the CGU’s assets with their respective recoverable amounts based on value in use and is included in
selling expenses. Value in use was determined based on management’s best estimate of expected future cash flows from use over the
remaining lease term, and was then discounted using a pre-tax weighted average cost of capital of 19.4% (12.5% after-tax). No impairment
losses recognized in prior periods were reversed.
6. Intangible assets
Additions to intangible assets for the three and six-month periods ended July 26, 2014 amounted to $329,000 and $630,000 (2013 –
$420,000 and $675,000). Amortization for the three and six-month periods ended July 26, 2014 amounted to $453,000 and $888,000,
respectively (2013 – $448,000 and $894,000) and is reported in the consolidated statements of earnings (loss) under general and
administrative expenses. No impairment of intangible assets was recorded during the three and six-month periods (2013 – NIL).
7. Trade and other payables
Trade payables
Non-trade payables due to related parties
Other non-trade payables
Accruals related to compensation and employee benefits
July 26, 2014
$
8,493
23
3,161
5,046
$
16,723
July 27, 2013
$
11,831
23
3,502
4,997
$
20,353
January 25, 2014
$
10,290
23
3,986
5,254
$
19,553
8. Provisions
Balance, January 25, 2014
Arising during the period
Amortization
Balance, July 26, 2014
Less: current portion
$
656
300
(143)
813
(332)
481
Page 11
Notes to the Interim Condensed Consolidated Financial Statements
Provisions for onerous contracts have been recognized in respect of store leases where the unavoidable costs of meeting the obligations
under the lease agreements exceed the economic benefits expected to be received from the contract. The provision was determined based
on the present value of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract.
9. Share capital
a)
Issued and outstanding
July 26, 2014
Class A subordinate voting shares
Balance, beginning of period
Issuance of subordinate voting shares upon conversion of long-term debt
(note 13)
Issuance of subordinate voting shares upon exercise of options
Reclassification from contributed surplus due to exercise of share options
Balance, end of period
Class B voting shares
January 25, 2014
Number of
shares
$
Number of
shares
$
22,782,461
42,558
22,682,961
42,338
2,617,801
5,000
-
-
3,500
25,403,762
5
2
47,565
99,500
22,782,461
159
61
42,558
4,560,000
29,963,762
402
47,967
4,560,000
27,342,461
402
42,960
All issued shares are fully paid.
b)
Stock option plan
The status of the Company’s stock option plan is summarized as follows:
July 26, 2014
Outstanding at beginning of period
Granted
Exercised
Expired
Forfeited
Outstanding at end of period
Options exercisable at end of period
Options
3,126,200
10,000
(3,500)
(169,200)
(104,500)
2,859,000
1,047,500
Weighted
Average
Exercise price
$
4.01
1.91
1.44
9.40
2.80
$
3.74
$
4.41
July 27, 2013
Options
2,255,700
1,026,000
(75,500)
(18,000)
3,188,200
611,900
Weighted
Average
Exercise price
$
3.63
4.59
1.65
1.74
$
4.00
$
6.15
10. Earnings per share
The number of shares used in the earnings per share calculation is as follows:
Weighted average number of shares outstanding - basic
Dilutive effect of stock options
Weighted average number of shares outstanding - diluted
For the three months ended
July 26, 2014
July 27, 2013
28,523,641
27,255,812
265,420
684,318
28,789,061
27,940,130
For the six months ended
July 26, 2014
July 27, 2013
27,933,226
27,249,387
358,969
668,261
27,917,648
28,292,195
Because the Company reported a net loss for the three and six-month periods ended July 26, 2014, the weighted average number of shares
used for basic and diluted loss per share is the same, as the effect of stock options would reduce the loss per share, and therefore be antidilutive. As at July 27, 2013, a total of 1,403,700 stock options were excluded from the calculation of diluted earnings per share as these
were deemed to be anti-dilutive.
Page 12
Notes to the Interim Condensed Consolidated Financial Statements
11. Segmented information
The Company operates in a single business segment which is the retail of apparel, accessories and footwear aimed at fashion-conscious
women and men. The Company’s assets are located in Canada.
For the three months ended
July 26, 2014
July 27, 2013
Sales by division
Ladies' Clothing
Men's Clothing
Footwear
Accessories
$
37,765
12,407
8,613
9,519
68,304
$
$
42,334
13,893
8,751
10,702
75,680
$
For the six months ended
July 26, 2014
July 27, 2013
$
$
69,710
20,587
14,998
16,314
121,609
$
76,209
23,121
14,900
18,332
132,562
$
12. Financial instruments
Fair values
July 26, 2014
Carrying
value
Financial assets
Derivative financial instruments
Financial liabilities
Derivative financial instruments
Long-term debt
January 25, 2014
Fair
value
Carrying
value
-
-
372
11,712
$ 12,084
372
11,695
$ 12,067
$
418
15,830
$ 15,830
Fair
value
$
418
15,789
$ 15,789
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however,
considerable judgment is required to develop these estimates. The estimated fair value amounts can be materially affected by the use of
different assumptions or methodologies. The methods and assumptions used to estimate the fair value of financial instruments are described
below:

The fair values of derivative financial instruments have been determined by reference to quoted market prices of instruments with
similar characteristics (Level 2).

The estimated fair value of long-term debt was determined by discounting expected cash flows at rates currently offered to the
Company for similar debt (Level 2).
There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the periods presented.
Financial instrument risk management
There has been no change with respect to the Company’s overall risk exposure during the three and six-month periods ended July 26, 2014.
Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign exchange risk and interest rate risk are provided below.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The
Company’s financial instruments that are exposed to concentrations of credit risk are primarily cash and forward exchange contracts. The
Company limits its exposure to credit risk with respect to cash by investing available cash with major Canadian chartered banks. The
Company only enters into forward exchange contracts with Canadian chartered banks to minimize credit risk.
The Company’s cash is not subject to any external restrictions. The Company has an investment policy that monitors the safety and
preservation of principal and investments, which limits the amount invested by issuer.
Page 13
Notes to the Interim Condensed Consolidated Financial Statements
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s approach to
managing liquidity risk is to ensure, to the extent possible, that it will always have sufficient liquidity to meet liabilities when due. The
Company’s liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. As at July 26, 2014, the
Company had $2.5 million in cash. In addition, as outlined in note 3, the Company had a committed asset based credit facility of $80.0 million
of which $43.0 million was drawn as at July 26, 2014, as well as an import line of credit of $25.0 million, which includes a $1.0 million loan
facility. The Company expects to finance its store renovation program through cash flows from operations and long-term debt as well as its
asset based credit facility. The Company expects that its trade and other payables will be discharged within 90 days and its long-term debt
discharged as contractually agreed and as disclosed elsewhere in these interim condensed consolidated financial statements or as disclosed
in its annual consolidated financial statements.
Market risk – foreign exchange risk
The Company’s foreign exchange risk is primarily limited to currency fluctuations between the Canadian and U.S. dollar. In order to protect
itself from the risk of losses should the value of the Canadian dollar decline compared to the foreign currency, the Company uses forward
contracts to fix the exchange rate of a substantial portion of its expected U.S. dollar requirements. The contracts are matched with
anticipated foreign currency purchases.
Their nominal and contract values as at July 26, 2014 are as follows:
Average contractual
exchange rate
Purchase contracts
U.S. dollar
1.1030
Nominal foreign
currency value
(000's)
Contract value
$
(000's)
18,905
20,853
The range of maturity of these contracts is from July 28, 2014 to December 22, 2014. As at July 26, 2014, the fair value of these contracts
resulted in an unrealized foreign exchange loss of $372,000 (2013 – unrealized foreign exchange gain of $4,000), all of which is expected to
be reclassified to earnings within the next 12 months.
Market risk – interest rate risk
Financial instruments that potentially subject the Company to cash flow interest rate risk include financial assets and liabilities with variable
interest rates and consist of cash and bank indebtedness. As at July 26, 2014, cash consisted of cash on hand and balances with banks.
Financial assets and financial liabilities that bear interest at fixed rates are subject to fair value interest rate risk. The Company’s long-term
debt is the only financial liability bearing a fixed interest rate. It is recorded at amortized cost.
13. Related party transactions
In addition to compensation earned by key management during the three and six-month periods ended July 26, 2014, the following are
related party transactions that have occurred.
Companies that are directly or indirectly controlled by a director sublease real estate from the Company. Total amounts earned under the
sublease during the three and six-month periods ended July 26, 2014 amounted to $68,000 and $135,000, respectively (July 27, 2013 
$70,000 and $155,000).
During the year ended January 28, 2012, the Company borrowed $10.0 million from a company that is directly controlled by a director of the
Company. The loan amount outstanding as at July 26, 2014 was $5.0 million and bears interest at an annual rate of 5.5%, payable monthly,
with capital repayment payable at maturity on January 31, 2016. For the three and six-month periods ended July 26, 2014, the Company
recorded interest expense of $68,000 and $137,000, respectively (July 27, 2013 - $85,000 and $179,000).
On March 3, 2014, the Company borrowed $5.0 million from a company that is directly controlled by the Chairman and Chief Executive
Officer and director of the Company. On June 18, 2014, the $5.0 million loan was converted into 2,617,801 Class A subordinate voting
shares at $1.91 per share. For the three and six-month periods ended July 26, 2014, the Company recorded interest expense of $36,000
and $81,000, respectively. The loan was unsecured and carried an annual interest of 5.5%, payable monthly, with capital repayment payable
at maturity on February 28, 2018.
Page 14
Notes to the Interim Condensed Consolidated Financial Statements
Amounts payable to related parties as at July 26, 2014 totalled $23,000 (January 25, 2014 – $23,000).
14. Income taxes
The Company has non-capital losses of $10.8 million for Canadian income tax purposes generated in the six-month period ended July 26,
2014, expiring in 2035, for which a full valuation allowance has been taken against the related deferred tax asset. Accordingly, the tax
benefits of these losses have not been recognized in the unaudited interim condensed consolidated financial statements.
From time to time, the Company is subject to tax audits. While the Company believes that its filing positions are appropriate and supportable,
periodically, certain matters are challenged by tax authorities. On April 3, 2014, the Company received a draft assessment with respect to an
ongoing audit by a taxation authority. In July 2014, a final assessment of $5,000 was issued with respect to this audit.
15. Comparative figures
Certain comparative figures have been reclassified to conform to the presentation adopted in the current period.
Page 15