ANNUAL REPORT
2010
CORPORATE PROFILE
Le Château is a leading Canadian specialty retailer
offering contemporary fashion apparel, accessories and
footwear to style-conscious women and men. Our
brand's success is built on quick identification of and
response to fashion trends through our design, product
development and vertically integrated operations.
Le Château brand name merchandise is sold
exclusively through our 238 stores. All stores are in
Canada, except for two locations in the New York City
area. In addition, the Company has 9 stores under
license in the Middle East.
Le Château, committed to research, design and
product development, manufactures approximately
40% of the Company's apparel in its own Canadian
production facilities.
STORES AND SQUARE FOOTAGE
JANUARY 29, 2011
JANUARY 30, 2010
STORES
SQUARE
FOOTAGE
STORES
SQUARE
FOOTAGE
77
70
28
28
9
8
7
5
3
1
397,398
372,220
149,160
147,924
39,570
38,148
28,322
19,332
15,314
3,480
75
68
27
27
7
8
5
5
3
1
371,240
360,017
139,605
133,025
28,083
38,148
20,157
19,332
15,314
3,480
TOTAL CANADA
TOTAL UNITED STATES
236
2
1,210,868
10,927
226
4
1,128,401
17,591
TOTAL LE CHÂTEAU STORES
238
1,221,795
230
1,145,992
ONTARIO
QUEBEC
ALBERTA
BRITISH COLUMBIA
NOVA SCOTIA
MANITOBA
SASKATCHEWAN
NEW BRUNSWICK
NEWFOUNDLAND
P.E.I.
SALES
(in ‘000)
SHAREHOLDERS’ EQUITY
(in ‘000)
350,000
200,000
300,000
150,000
250,000
200,000
100,000
150,000
100,000
50,000
50,000
0
08
09
10
0
09
10
CASH FLOW FROM OPERATIONS
(in ‘000)
NET EARNINGS
(in ‘000)
40,000
50,000
35,000
40,000
30,000
25,000
30,000
20,000
20,000
15,000
10,000
10,000
5,000
0
08
08
09
10
0
08
09
10
2010 annual report
3
FINANCIAL
HIGHLIGHTS
(in thousands of dollars except
per share data and ratios)
FISCAL YEARS ENDED
January 29,
2011
(52 weeks)
January 30,
2010
(52 weeks)
January 31,
2009
(53 weeks)
January 26,
2008
(52 weeks)
January 27,
2007
(52 weeks)
RESULTS
Sales
Earnings before income taxes
Net earnings
• Per share (basic)
• Per share (diluted)
Dividends per share
• Ordinary
• Special
Average number of shares outstanding (000)
319,039
27,344
19,109
0.77
0.77
321,733
43,246
29,837
1.23
1.22
345,614
57,706
38,621
1.56
1.55
336,070
50,523
32,596
1.30
1.29
303,879
38,406
24,751
1.02
1.00
0.70
—
24,668
0.70
—
24,339
0.625
0.25
24,796
0.50
—
24,978
0.28
0.75
24,181
97,539
162,149
246,887
91,853
157,221
236,032
85,620
142,414
216,431
74,384
133,605
206,876
45,928
108,174
185,709
2.95
1.12
0.22:1
3.13
1.71
0.21:1
3.03
1.75
0.20:1
2.55
1.59
0.17:1
1.75
1.08
0.14:1
8,074
26,969
238
1,221,795
311
41,643
20,075
230
1,145,992
335
41,821
21,467
221
1,047,529
385
54,117
24,091
209
965,077
408
38,393
27,701
195
853,767
407
FINANCIAL POSITION
Working capital
Shareholders’ equity
Total assets
FINANCIAL RATIOS
Current ratio
Quick ratio
Long-term debt to equity (1)
OTHER STATISTICS (units as specified)
Cash flow from operations (in ‘000)
Capital expenditures (in ‘000)
Number of stores at year-end
Square footage
Sales per square foot (2)
SHAREHOLDERS’ INFORMATION
Ticker symbol: CTU.A
Listing: TSX
Number of participating shares outstanding (as of May 13, 2011):
20,228,864 Class A Subordinate Voting Shares
4,560,000 Class B Voting Shares
Float: (3)
15,155,184 Class A Shares held by the public
(1) Including capital leases and current portion of debt.
(2) Excluding Le Château outlet stores.
(3) Excluding shares held by officers and directors of the Company.
As of May 13, 2011:
High/low of Class A Shares (12 months ended May 13, 2011):
$14.16 / $10.10
Recent price:
$10.40
Dividend yield:
6.7%
Price/earnings ratio:
13.5 X
Price/book value ratio:
1.6 X
Earnings per share (diluted): (4)
$0.77
Book value per share: (5)
$6.54
(4) For the year ended January 29, 2011.
(5) As at January 29, 2011.
2010 annual report
5
MESSAGE TO
SHAREHOLDERS
The year 2010 proved challenging for the retail clothing industry, as consumer discretionary spending in the sector remained cautious.
Le Château felt the impact of the economy’s sluggish recovery.
Sales for the fiscal year ended January 29, 2011 totalled $319 million, a decrease of 0.8% from the previous year. Comparable store sales
declined by 4.2%. Le Château’s EBITDA amounted to $46.9 million or 14.7% of sales, compared to $61.7 million or 19.2% of sales in the
previous year. Net earnings and diluted earnings per share were $19.1 million and $0.77 respectively in 2010, compared to $29.8 million and
$1.22 per share in 2009.
Nevertheless, the Company sustained its strength with a high level of liquidity and a solid financial position. At the same time we added to our
network strength across Canada and pursued a confident new direction for our brand, positioning Le Château for renewed growth.
During the year Le Château opened thirteen new stores and expanded seventeen existing locations, while closing five stores. At year’s end the
Company operated 238 stores, including forty fashion outlets, representing an addition of 76,000 square feet over the previous year.
Le Château’s new strategic direction involves identifying our brand with a higher quality, European-style appeal to a larger demographic. The
repositioning of ladies’ wear, although not fully completed, has translated into enhanced sales in comparison to other divisions.
The improvement in the ladies’ clothing division in 2010 was largely offset by the sales decline in the footwear and accessories divisions.
The brand repositioning in all segments including menswear, footwear and accessories, is being accelerated and we should begin seeing the
benefits in the third quarter of 2011. We believe that this strategy will yield growth, particularly since Le Château’s core strengths, including
powerful name recognition, a wide network of retail stores, a low debt level, vertical integration and a solid management and design team, all
remain firmly in place.
Also significantly for the evolution of Le Château as Canada’s premier fashion and design house, we launched our e-commerce website in
2010. In addition to providing an important platform to communicate our brand repositioning, the effect of this new online shopping initiative
has been to both widen and further differentiate Le Château’s unique appeal.
In the year ahead Le Château will focus on a range of key objectives, while continuing to design and deliver compelling fashion products.
To maximize profit and grow shareholder value, we aim to quicken revenue generation through our brand repositioning, further enhance our
service standards, and expand our offering through foreign licensing and franchising opportunities.
Sincere gratitude is owed to our shareholders for their confidence and support, and I wish to thank all the employees of Le Château for their
dedication to the Company and consistent delivery of a superb shopping experience for our customers.
JANE SILVERSTONE SEGAL, B.A.LLL
Chairman and Chief Executive Officer
2010 annual report
7
MANAGEMENT’S
DISCUSSION
AND ANALYSIS
April 8, 2011
The 2010 and 2009 years refer, in all cases, to the 52-week periods ended January 29, 2011 and January 30, 2010, respectively, while the
2008 year refers to the 53-week period ended January 31, 2009. Management’s Discussion and Analysis (“MD&A”) should be read in
conjunction with the audited consolidated financial statements and notes to the consolidated financial statements for the 2010 fiscal year of Le
Château Inc. All amounts in this report and in the tables are expressed in Canadian dollars, unless otherwise indicated.
Additional information relating to the Company, including the Company’s Annual Information Form, is available online at www.sedar.com.
SELECTED ANNUAL INFORMATION
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
2010
$
Sales
Earnings before income taxes
Net earnings
Net earnings per share
Basic
Diluted
Total assets
Long term debt (1)
Dividends per share
Ordinary
Special
Cash flow from operations (2)
Comparable store sales increase (decrease) %
Square footage of gross store space at year-end
Sales per square foot, excluding fashion outlet stores (in dollars)
(1)
(2)
2009
$
2008
$
(52 weeks)
(52 weeks)
(53 weeks)
319,039
27,344
19,109
321,733
43,246
29,837
345,614
57,706
38,621
0.77
0.77
246,887
36,180
1.23
1.22
236,032
33,216
1.56
1.55
216,431
28,736
0.70
—
8,074
(4.2) %
1,221,795
311
0.70
—
41,643
(8.5) %
1,145,992
335
0.625
0.25
41,821
(2.7) %
1,047,529
385
Includes current and long-term portion of long-term debt.
After net change in non-cash working capital items related to operations.
SALES
Comparable store sales, which are defined as sales generated by stores that have been opened for at least one year, decreased 4.2% based
on the 52-week period ended January 29, 2011. Taking in account the 13 new stores and 5 closures, total sales for the 52-week period ended
January 29, 2011 decreased 0.8% to $319.0 million, compared to $321.7 million for the 52-week period ended January 30, 2010. After an
encouraging second quarter, sales in the second half of 2010 were negatively impacted by slow traffic as consumers remained cautious on
discretionary spending. The sales increase in the ladies’ clothing division in 2010 was largely offset by the sales decline in the footwear and
accessories divisions.
2010 annual report
9
The repositioning of the ladies’ segment into a higher quality, European-inspired style brand with broader lifestyle appeal to a larger
demographic, although not fully completed, did translate into positive growth of 0.3% in comparable store sales in 2010. The Company is
accelerating this brand repositioning to all divisions: menswear, footwear, and accessories.
During the year, Le Château opened 13 new stores, closed 5 and renovated 22 existing stores. As at January 29, 2011, the Company operated
238 stores (including 40 fashion outlet stores) compared to 230 stores (including 34 fashion outlets) at the end of the previous year. Total floor
space at the end of the year was 1,222,000 square feet compared to 1,146,000 square feet at the end of the preceding year, an increase of
76,000 square feet or 6.6%. Of the 76,000 square feet added during year, 42,000 square feet was attributable to new stores, net of closures,
and 34,000 square feet to the expansion of 17 existing stores.
Sales per square foot of retail space, excluding fashion outlets, decreased to $311 from $335 in 2009. The decrease in the sales per square
foot was due to the 4.2% decline in comparable stores sales and the fact that many of the new stores were added in smaller markets which
typically generate lower sales per square foot as compared to primary markets.
Le Château’s vertically integrated approach makes it unique, as a major Canadian retailer that not only designs and develops, but also
manufactures its own brand name clothing. The Company currently manufactures approximately 40% of the Company’s apparel (excluding
footwear and accessories) in its state-of-the-art production facilities located in Montreal, which have long provided it with several key
competitive advantages – short lead times and flexibility; improved cost control; the ability to give its customers what they want, when they want it;
allowing the Company to remain connected to the market throughout changing times.
Licensing: The Company is currently involved in a licensing arrangement with a retail developer in the Middle East regarding the opening of
Le Château branded stores in the region. As at January 29, 2011, there were 9 stores under licensee arrangement in this region. The Company
will seek to further expand its offering and brand awareness internationally, to accelerate revenue generation through foreign licensing and
franchising opportunities.
Online Shopping Launch: At the end of November 2010, the Company launched an online shopping initiative targeted at further broadening
its customer base to online shoppers in both Canada and the United States and to enhance the shopping experience of existing shoppers. The
E-Commerce website provides an important new vehicle for attracting new customers, and extends the Company’s reach well beyond its
network of stores.
TOTAL SALES BY DIVISION (IN THOUSANDS OF DOLLARS)
2010
$
Ladies’ Clothing
Men’s Clothing
Footwear
Accessories
10
2009
$
2008
$
(52 weeks)
(52 weeks)
(53 weeks)
185,490
53,128
32,865
47,556
319,039
179,158
53,686
35,160
53,729
321,733
190,676
57,847
38,562
58,529
345,614
% CHANGE
2010-2009
2009-2008
%
%
3.5
(1.0)
(6.5)
(11.5)
(0.8)
(6.0)
(7.2)
(8.8)
(8.2)
(6.9)
Ladiesʼ wear: The Ladies’ clothing division posted a sales increase of 3.5%; it continues to be the main revenue contributor among the
Company’s divisions, accounting for 58.1% of total sales as compared to 55.7% the previous year. The repositioning of the ladies’ segment into
a higher quality, European-inspired style brand with broader lifestyle appeal to a larger demographic, although not fully completed, did translate
into positive growth of 0.3% in comparable store sales in 2010.
Menswear: Sales in the Men’s division decreased 1.0% and accounted for 16.7% of total sales compared to 16.7% last year. During the year
13 more existing stores were expanded to provide adjacent, but distinct, premises for menswear, bringing the total number of stores with a
separate men’s entrance to 81. Altogether, 10.7% more footage was added to this division in 2010.
Footwear: Sales decreased 6.5% in 2010, accounting for 10.3% of total sales as compared to 10.9% the previous year. We continued to
coordinate our footwear offering more closely with our clothing and overall lifestyle brand. We recognize that this division has further growth
potential and we plan on strengthening our product offering to capture a larger market share. Our footwear offering is typically a “shop within a
shop”, but in some larger markets we are introducing full concept shoe stores, adjacent to our ladies store, with their own separate entrances
(similar to the separate entrances for Menswear that have proven successful). We now have 17 such footwear operations, all contiguous to
existing stores, up from 15 in 2009.
Accessories: Sales in the Accessories division decreased 11.5% in 2010 and accounted for 14.9% of total sales compared to 16.7% last year.
The decline in this division, emanating primarily from ladies accessories, was the result of a product offering which failed to adequately
complement our ladies clothing collection, in the minds of our customers. With the repositioning of this division, to better align with the
strategies being implemented in the ladies’ clothing division, we expect to restore positive growth.
TOTAL SALES BY REGION (IN THOUSANDS OF DOLLARS)
2010
$
Ontario
Quebec
Prairies
British Columbia
Atlantic
United States
2009
$
2008
$
(52 weeks)
(52 weeks)
(53 weeks)
109,774
85,401
65,202
38,908
16,872
2,882
319,039
108,833
87,933
63,374
40,375
16,646
4,572
321,733
118,135
94,268
65,396
44,157
17,704
5,954
345,614
% CHANGE
2010-2009
2009-2008
%
%
0.9
(2.9)
2.9
(3.6)
1.4
(37.0)
(0.8)
(7.9)
(6.7)
(3.1)
(8.6)
(6.0)
(23.2)
(6.9)
In Canada, all regions reported a decline in comparable store sales. In Quebec, total sales decreased 2.9% while comparable store sales
decreased 4.5%. Total sales increased 0.9% in Ontario while comparable store sales decreased 1.4%. Comparable store sales declined in
British Columbia by 7.8% and the Atlantic region by 3.6%. Prairies recorded a decrease of 5.4% in comparable stores sales, but with the
additional new stores, total sales increased 2.9%.
The Company’s U.S. stores reported a decrease in comparable store sales of 20.7% (11.3% in US$). During the year the Company closed 2
of these stores, leaving 2 stores in the U.S.
2010 annual report
11
EARNINGS
Net earnings were $19.1 million or $0.77 per share (diluted) in 2010 compared to $29.8 million or $1.22 per share in 2009. Earnings before
interest, income taxes, depreciation and amortization (“EBITDA”) for the year amounted to $46.9 million or 14.7% of sales, compared to
$61.7 million or 19.2% of sales last year. The Company’s gross margin percentage for 2010 decreased slightly to 69.2% from 69.9% in 2009.
The decrease of $14.8 million in EBITDA for 2010 was primarily attributable to (a) a decline of $4.0 million in gross margin, (b) an increase
of 0.8% in store compensation costs, as a percentage of sales, due to higher minimum wage costs, (c) an increase in store occupancy costs of
$4.0 million as a result of additional footage from new and expanded stores, and (d) an increase of $4.5 million in general and administrative
costs of which $2.4 million related to the launch of the Company’s new e-commerce website at the end of November 2010.
Net earnings attributable to Canadian operations amounted to $20.7 million or $0.84 per share (diluted) in 2010 compared to $31.4 million or
$1.28 per share in 2009. The Company’s U.S. operations recorded a net loss of $1.6 million Cdn or $(0.07) Cdn per share in 2010 as compared
to a net loss of $1.6 million or $(0.06) Cdn per share the previous year.
Interest income for 2010 decreased to $616,000 from $780,000 in 2009, primarily the result of lower balances in short and long-term
investments held by the Company as compared to last year.
EXPENSES
Interest expense increased slightly to $1.6 million in 2010 from $1.5 million in 2009, due to additional long-term financing of $15.0 million
obtained during the fourth quarter of 2010, offset by the repayment of $12.0 million of long-term debt in 2010.
Depreciation and amortization increased to $17.6 million from $17.2 million in 2009, due to the additional investments in fixed assets of
$27.0 million in 2010.
The $8.2 million provision for income taxes in 2010 represents an effective income tax rate of 30.1%, compared to 31.0% the previous year.
The reduction in the effective income tax rate is the result of decreases in the statutory corporate income tax rates in various tax jurisdictions,
partially offset by the increase in non-deductible items such as stock-based compensation and U.S. tax losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a high level of liquidity, more than sufficient to cover its operating requirements, as well as a strong financial position. The
Company’s liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures.
The Company’s cash position, including short-term investments, amounted to $48.0 million or $1.93 per share in 2010, compared to
$68.4 million or $2.79 per share in 2009. Short-term cash is conservatively invested in bank bearer deposit notes and bank term deposits with
major Canadian chartered banks. Cash flows from operating activities (including net changes in non-cash working capital items) decreased
to $8.1 million in 2010 from $41.6 million the previous year. The decrease of $33.5 million was mainly the result of lower net earnings of
$10.7 million for 2010 and an increase of $22.9 million in non-cash working capital requirements primarily related to higher inventory levels.
12
Cash provided by operating and financing activities was used in the following financing and investing activities:
1.
Capital expenditures of $27.0 million, consisting of:
CAPITAL EXPENDITURES (IN THOUSANDS OF DOLLARS)
New Stores (13 stores; 2009 – 12 stores; 2008 – 12 stores)
Renovated Stores (22 stores; 2009 – 14 stores; 2008 – 17 stores)
Information Technology
Other
2.
3.
2010
$
2009
$
2008
$
5,195
13,584
5,196
2,994
26,969
6,749
10,499
2,372
455
20,075
5,552
11,912
1,764
2,239
21,467
Dividend payments of $17.3 million
Long-term debt repayments of $12.0 million
The following table identifies the timing of contractual obligation amounts due after January 29, 2011:
CONTRACTUAL OBLIGATIONS (IN THOUSANDS OF DOLLARS)
Long-term debt
Operating leases (1)
(1)
Total
$
Less than
1 year
$
1-3 years
$
4-5 years
$
After 5 years
$
36,180
261,279
297,459
15,920
43,645
59,565
16,570
82,910
99,480
3,690
66,557
70,247
—
68,167
68,167
Minimum rentals payable under long-term operating leases excluding percentage rentals.
For 2011, the projected capital expenditures are $18.0 to $20.0 million, of which $13.0 to $15.0 million is expected to be used for the opening of
5 to 8 stores and the renovation of 15 to 20 existing stores, with the balance of $5.0 million to be used for investments in information technology
and distribution centre enhancements. In 2011, the Company expects to add 40,000 to 60,000 square feet, resulting from the addition of 5 to
8 new stores, as well as from the expansion (where possible) of some existing stores.
Management expects to be able to continue financing the Company’s operations and a portion of its capital expenditure requirements through
cash flow from operations and long-term debt. If necessary, it can also draw upon its financial resources, which include cash and cash
equivalents and short-term investments of $48.0 million at year-end, as well as a revolving line of credit of $16.0 million with its bank, of which
only $10.0 million was used as at year-end 2010 to support letters of credit.
The Company does not have any off-balance sheet financing arrangements.
2010 annual report
13
FINANCIAL POSITION
Working capital increased 6.1% to $97.5 million at the end of the fiscal year, compared to $91.9 million at the end of 2009.
Total inventories as at January 29, 2011 amounted to $91.8 million compared to $61.2 million as at January 30, 2010. Finished goods inventory,
which totaled $70.3 million at the end of the year, were up 48.6% in dollars and 26.3% on a unit basis, year over year. On a per square footage
basis, inventory units increased 18.5% compared to last year. The increase in finished goods inventory is attributable to a 6.6% increase in total
square footage to 1,222,000 year over year and to higher average unit costs due to changes in product mix as a result of the Company’s
rebranding strategy to appeal to a more mature, broader customer base.
Long-term debt, including the current portions, increased to $36.2 million from $33.2 million in 2009, due to the additional long-term debt
financing of $15.0 million obtained in the fourth quarter of 2010, net of repayment of $12.0 million during the year. As at January 29, 2011, the
long-term debt to equity ratio remained conservative at 0.22:1, compared to 0.21:1 the previous year.
Shareholders’ equity increased to $162.1 million at year-end, after deducting $17.3 million in dividends. Book value per share increased
to $6.54 as at January 29, 2011, including $1.93 per share in cash and cash equivalents (including short-term investments), compared to
$6.41 as at January 30, 2010.
DIVIDENDS AND OUTSTANDING SHARE DATA
In 2010, Le Château continued, for the seventeenth consecutive year, its policy of paying quarterly dividends on the Class A subordinate voting
and Class B voting shares. Total regular dividends per Class A and Class B share amounted to $0.70 in 2010 and 2009.
On April 8, 2011, the Board of Directors declared a quarterly dividend of $0.175 per Class A subordinate voting share and Class B voting
share. The dividend is payable on May 17, 2011 to shareholders of record at the close of business on May 3, 2011. This represents the
70th consecutive quarterly dividend declared by Le Château. The Company’s annual regular dividend of $0.70 per share currently yields 6.1%,
based on the April 7, 2011 closing price of $11.41 per share.
The Company designated the above dividends to be eligible dividends pursuant to the Income Tax Act (Canada) and its provincial equivalents.
As at April 7, 2011, there were 20,228,864 Class A subordinate voting and 4,560,000 Class B voting shares outstanding. Furthermore, there
were 1,050,400 options outstanding with exercise prices ranging from $9.40 to $15.14, of which 400,580 were exercisable.
The Company announced on June 9, 2010 that it intended to proceed with a normal course issuer bid which was subsequently approved by the
Toronto Stock Exchange (“TSX”). Under the bid, the Company may purchase up to 1,003,328 Class A subordinate voting shares of the
Company, representing 5% of the issued shares of such class as at June 8, 2010. The bid commenced on June 21, 2010 and may continue to
June 20, 2011, or on such earlier date as the Company may complete its purchases pursuant to the bid. The average daily trading volume for
the 6-month period preceding June 1, 2010 was 16,921 shares. In accordance with TSX requirements, a maximum daily repurchase of 25% of
this average may be made, representing 4,230 shares. The shares will be purchased on behalf of the Company by a registered broker through
the facilities of the TSX. 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. All shares purchased by the Company will be cancelled. Since
June 21, 2010, no Class A subordinate voting shares have been purchased by the Company.
14
NON-GAAP MEASURES
In addition to discussing earnings measures in accordance with Canadian generally accepted accounting principles (“GAAP”), this MD&A
provides EBITDA as a supplementary earnings measure which includes depreciation and amortization and the write-off of fixed assets.
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 EBITDA to GAAP measures disclosed in the audited consolidated statements of earnings for the years ended
January 29, 2011 and January 30, 2010:
(In thousands of dollars)
Earnings before income taxes
Depreciation and amortization
Write-off of fixed assets
Interest on long-term debt
Interest income
EBITDA
2010
$
27,344
17,595
965
1,588
(616)
46,876
2009
$
43,246
17,216
538
1,503
(780)
61,723
The Company also discloses comparable store sales which are defined as sales generated by stores that have been opened for at least one year.
The above measures do not have a standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by
other companies.
RELATED PARTY TRANSACTIONS
Companies that are directly or indirectly controlled by a director, sublease real estate from the Company. Total amounts earned under the
sublease during the year amounted to $151,000 (2009 - $177,000). In addition, one of the related parties sold merchandise to the Company
during the year in the amount of $219,000 (2009 – nil). There were no amounts receivable or payable as at January 29, 2011. These amounts
are recorded at their exchange value.
ACCOUNTING STANDARDS IMPLEMENTED IN 2010
There were no new accounting standards implemented during 2010.
INTERNATIONAL FINANCIAL REPORTING STANDARDS CHANGEOVER PLAN
In February 2008, the Canadian Accounting Standards Board confirmed that publicly-accountable enterprises would be required to use
International Financial Reporting Standards (“IFRS”) in the preparation of interim and annual financial statements for fiscal years beginning on
or after January 1, 2011. 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 its transition to IFRS in 2009. A project team was formed and a detailed conversion plan was created outlining
the major phases of the transition to IFRS. External advisors were also engaged to assist in the IFRS conversion plan. The project team reports
quarterly to the Audit Committee.
2010 annual report
15
The conversion plan consists of the following three phases: initial scoping and diagnostic phase, detailed analysis and design phase and the
implementation phase.
Initial Scoping and Diagnostic Phase:
The Company has completed the initial scoping and diagnostic phase which included the review and identification of major differences between
current Canadian generally accepted accounting principles (“GAAP”) and IFRS as well as an initial evaluation of IFRS 1 transition exemptions.
Activities in this phase also included the training of key employees. The first phase was completed in the second quarter of 2009.
Detailed Analysis and Design Phase:
The second phase of the conversion plan entailed a detailed analysis of all relevant accounting differences between IFRS and GAAP, as
identified in the initial scoping and diagnostic phase, which will be impacted by the conversion to IFRS. The analysis included a review of the
changes required to the current accounting policies as well as any policy alternatives. The implications of these changes on business
processes, information systems and internal control over financial reporting were also analyzed. Training was provided to key employees. The
second phase was completed in the third quarter of 2010.
Implementation Phase:
The final phase of the Company’s IFRS changeover plan will entail the implementation of the changes identified in the second phase as well as
the preparation and approval of IFRS financial statements. The Company has substantially completed the analysis of changes identified and
has concluded on the majority of the accounting policies and process changes. Training is being provided on a continuous basis to employees.
The Company is in the process of preparing draft financial statements and related note disclosure in accordance with IAS 1 – “Presentation of
Financial Statements”. IAS 1 will require classification changes to the Statement of Earnings by using either the Function of Expense Method or
the Nature of Expense Method, as well as additional disclosure requirements. The Company is in the process of determining which method is
appropriate. The final phase will be completed in the first quarter of 2011.
The following have been identified by management as some of the more significant areas containing differences between current Canadian
GAAP and IFRS which will have a potential impact on the Company’s financial statements The areas listed below are based on progress to
date and should not be viewed as an exhaustive list.
IFRS 1 “First-Time Adoption of International Financial Reporting Standards”, which is designed to provide guidance to first time adopters on
first IFRS accounts and the method to determine the opening balance sheet as well as to address the specific issues faced by first time
adopters as they transition from Canadian GAAP. The general requirement of IFRS 1 is to apply IFRS standards retrospectively at the time of
transition. IFRS 1 however does provide certain optional exemptions from the retrospective application. The Company does not intend to elect
any of the optional exemptions as provided by IFRS 1.
IAS 17 “Leases”, which will require changes to the basis of the expense recognition over the lease term. For operating leases, the Company
currently expenses rental payments as incurred. Under IFRS, rent expense will be recognized on a straight-line basis over the lease term.
Management expects this change in policy to result in a decrease to retained earnings of approximately $5.2 to $5.7 million for the IFRS
opening balance sheet. Management is in the process of assessing the impact to the 2010 comparative figures.
16
IAS 36 “Impairment of Assets”, which will require the impairment of assets to be applied to the Cash Generating Units (CGU), the lowest level
at which separately independent cash inflows can be identified. Assets will be assessed using a one-step test, where the carrying value of an
asset or group of assets will be compared directly to its recoverable amount on a discounted cash flow basis. Currently the Company uses a
two-step approach to assess and measure impairment losses. Management expects this change in policy to result in a decrease to retained
earnings by approximately $700,000 for the IFRS opening balance sheet. Management is in the process of assessing the impact to the 2010
comparative figures.
IAS 38 “Intangible Assets”, which will require advertising costs to be recognized as an expense when incurred and not deferred as per
Canadian GAAP. This change in policy is not expected to have a significant financial impact on the opening IFRS balance sheet or the 2010
comparative figures.
IAS 39 “Financial Instruments”, which will require changes to the process required to measure effectiveness as it relates to hedge accounting.
This change in policy will not have a significant financial impact.
The Company has evaluated the implications of these changes on business processes, information systems, internal controls over financial
reporting and disclosure controls and procedures. The Company is the process of updating all impacted business process documentation. The
Company has concluded that there are no significant changes to its information systems. Internal controls over financial reporting and
disclosure controls and procedures are being revised as a result of the changes in policy and processes under IFRS.
The Company's IFRS conversion plan is progressing according to schedule.
CONTROLS AND PROCEDURES
In compliance with the Canadian Securities Administrators’ National Instrument 52-109 (“NI 52-109”), Certification of Disclosure in Issuers'
Annual and Interim Filings, the Company will file certificates signed by the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)
that, among other things, report on the design and effectiveness of disclosure controls and procedures (“DC&P”) and the design and
effectiveness of internal controls over financial reporting (“ICFR”).
Disclosure controls and procedures
The CEO and the CFO have designed 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 regulatory filings.
As of January 29, 2011, an evaluation was carried out, under the supervision of the CEO and CFO, of the effectiveness of the Company’s
DC&P as defined in NI 52-109. Based on this evaluation, the CEO and the CFO concluded that the design and operation of these DC&P
were effective.
Internal controls over financial reporting
The CEO and CFO have designed 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 Canadian
GAAP. The CEO and CFO have evaluated whether there were changes to its ICFR during the year ended January 29, 2011 that have materially
affected, or are reasonably likely to materially affect, its ICFR. No such changes were identified through their evaluation.
2010 annual report
17
As of January 29, 2011, an evaluation was carried out, under the supervision of the CEO and CFO, of the effectiveness of the Company’s ICFR
as defined in NI 52-109. Based on this evaluation, the CEO and the CFO concluded that the design and operation of these ICFR were effective.
The evaluations were conducted in accordance with the framework and criteria established in Internal Control - Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), a recognized control model, and the
requirements of NI 52-109.
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 judgement 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 condition,
changes in financial condition or results of operations. The Company’s significant accounting policies are discussed in note 1 of the “Notes to
Consolidated Financial Statements”; critical estimates inherent in these accounting policies are discussed in the following paragraphs.
Inventory valuation
The Company records a provision to reflect management’s best estimate of the net realizable value of inventory which includes a provision for
disposal costs and obsolescence based on historical experience. Management continually reviews the provision, to assess whether it is
adequate, based on economic conditions and an assessment of sales trends.
Fixed asset impairment
Management evaluates the ongoing value of assets associated with retail stores. Impairment is assessed by comparing the carrying amount of
an asset with its expected future net undiscounted cash flows from use. If such assets are considered impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value, generally determined on a
discounted expected cash flow basis.
Stock-based compensation
A stock based compensation expense for stock options is calculated based on the fair value method using the Black-Scholes model and is
recorded for all options granted after January 25, 2003. In order to establish fair value, the Company uses estimates and assumptions to
determine risk-free interest rate, expected term, anticipated volatility and anticipated dividend yield. The use of different assumptions could
result in different stock-based compensation amounts.
RISKS AND UNCERTAINTIES
The risks presented below are not exhaustive and are in addition to other risks mentioned herein or in Le Château’s publicly filed documents. A
more complete list of the risks and uncertainties can be found in the Company’s most recent Annual Information Form. Le Château operates in
a competitive and rapidly changing environment. New risk factors may emerge from time to time and it is not possible for management to
predict all such risk factors, nor can it assess the impact of all such risk factors on Le Château’s business.
Competitive and economic environment
Fashion is a highly competitive global business that is subject to rapidly changing consumer demands. In addition, there are several external
factors that affect the economic climate and consumer confidence over which the Company has no influence.
18
This environment intensifies the importance of in-store differentiation, quality of service and continually exceeding customer expectations,
thereby delivering an outstanding total customer experience.
With this view, Le Château believes that its distinctive edge in fashion, its innovative store design and merchandising, its strong financial
position and its winning team of vibrant employees dedicated to providing the best whole store experience, will facilitate continued success.
Changes in customer spending
The Company must anticipate and respond to changing customer preferences and merchandising trends in a timely manner. Although the
Company attempts to stay abreast of emerging lifestyle and consumer preferences affecting its merchandise, failure by the Company to identify
and respond to such trends could have a material effect on the Company’s business. Changes in customer shopping patterns could also affect
sales. The majority of the Company’s stores are located in enclosed shopping malls. The ability to sustain or increase the level of sales
depends in part on the continued popularity of malls as shopping destinations and the ability of malls, tenants and other attractions to generate
a high volume of customer traffic. Many factors that are beyond the control of the Company may decrease mall traffic, including, economic
downturns, closing of anchor department stores, weather, concerns of terrorist attacks, construction and accessibility, alternative shopping
formats such as e-commerce, discount stores and lifestyle centres, among other factors. Any changes in consumer shopping patterns could
adversely affect the Company’s financial condition and operating results.
General economic conditions and normal business uncertainty
Shifts in the economic health of the environment in which the Company operates – such as economic growth, inflation, exchange rates and
levels of taxation – can impact consumer confidence and spending and could also impact the Company’s ability to source products at a
competitive cost. Increases in the cost of raw materials (including cotton and other fabrics) could also impact the Company's profitability. Some
other external factors over which the Company exercises no influence, including interest rates, personal debt levels, unemployment rates and
levels of personal disposable income, may also affect economic variables and consumer confidence. The Company monitors economic
developments in the markets where it operates and uses this information in its continuous strategic and operational reviews to adjust its
initiatives as economic conditions dictate and to facilitate ongoing innovation of stores, merchandising concepts and products. The Company is
monitoring the general softening of consumer demand that seems to be affecting the market presumably as a reaction to slowdown in the
economy, but is uncertain what effect, if any, it will have on sales.
Leases
All of the Company’s stores are held under long-term leases, except for the Company owned St. Jean street store in Quebec City. Any increase
in retail rental rates would adversely impact the Company.
Foreign exchange
The Company’s foreign exchange risk mainly relates 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 expected U.S. dollar requirements. The contracts are matched with anticipated foreign
currency purchases. As at January 29, 2011 the Company had $35.4 million of contracts outstanding to buy U.S. dollars (2009 – $2.2 million).
The Company only enters into foreign exchange contracts with Canadian chartered banks to minimize credit risk.
Seasonality
The Company offers many seasonal goods. The Company sets budgeted inventory levels and promotional activity in accordance with its
strategic initiatives and expected consumer spending changes. Businesses that generate revenue from the sale of seasonal merchandise are
subject to the risk of changes in consumer spending behaviour as a result of unseasonable weather patterns.
2010 annual report
19
QUARTERLY RESULTS (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
The table below sets forth selected financial data for the eight most recently reported quarters. This unaudited quarterly information has been
prepared on the same basis as the annual financial statements. The operating results for any quarter are not necessarily indicative of the
results to be expected for any future period.
FIRST QUARTER
2010
$
(13 weeks)
Sales
Earnings before
income taxes
Net earnings
Net earnings per share
Basic
Diluted
2009
$
(13 weeks)
SECOND QUARTER
2010
$
2009
$
(13 weeks) (13 weeks)
THIRD QUARTER
2010
$
(13 weeks)
2009
$
(13 weeks)
FOURTH QUARTER
2010
$
(13 weeks)
2009
$
(13 weeks)
TOTAL
2010
$
2009
$
(52 weeks)
(52 weeks)
70,896
71,775
86,536
81,437
74,458
75,305
87,149
93,216
319,039
321,733
6,479
4,484
7,570
5,070
11,777
8,157
11,550
7,780
3,881
2,686
8,334
5,599
5,207
3,782
15,792
11,388
27,344
19,109
43,246
29,837
0.18
0.18
0.21
0.21
0.33
0.33
0.32
0.32
0.11
0.11
0.23
0.23
0.15
0.15
0.47
0.46
0.77
0.77
1.23
1.22
The Company’s business is seasonal in nature. As the Company executes its strategy of broadening its customer base, the Company expects
that its business will become less seasonal. However, 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.
Fourth quarter results
The Company recorded a sales decrease of 6.5% to $87.1 million for the 13-week period ended January 29, 2011, compared with sales of
$93.2 million for the 13-week period ended January 30, 2010. Comparable store sales decreased by 8.8% versus the same period a year ago.
A soft second half necessitated heavy discounting in the fourth quarter which negatively impacted gross margins and net earnings. The
Company’s gross margin percentage for the fourth quarter of 2010 decreased to 64.0% from 68.3% in 2009.
EBITDA for the fourth quarter amounted to $10.6 million or 12.1% of sales, compared to $20.7 million or 22.2% of sales last year. The decrease
of $10.1 million in EBITDA for the fourth quarter was primarily attributable to (a) a decline of $7.9 million in gross margin, (b) an increase of
1.4% in store compensation costs, as a percentage of sales, due to higher minimum wage costs, (c) an increase in store occupancy costs of
$1.1 million as a result of additional footage from new and expanded stores, and (d) an increase of $600,000 in general and administrative
costs primarily related to the launch of the Company’s new e-commerce website at the end of November 2010.
Net earnings for the fourth quarter ended January 29, 2011 were $3.8 million or $0.15 per share (diluted), as compared to $11.4 million or
$0.46 per share for the fourth quarter ended January 30, 2010.
Cash flows from operating activities (including net changes in non-cash working capital items) decreased to $10.1 million for the fourth quarter
of 2010, from $24.2 million the previous year, mainly the result of lower net earnings of $7.6 million for the fourth quarter and an increase of
$7.2 million in non-cash working capital requirements, primarily related to higher inventory levels.
20
OUTLOOK
The Company continues to expand its customer base and remains committed to enhancing the customer experience by elevating service
standards and by focusing on a compelling merchandizing selection.
Building on the preliminary success of its brand repositioning, the Company will continue to move the strategy forward into a higher quality,
European-inspired style brand with broader lifestyle appeal to a larger demographic. This repositioning in the ladies’ segment is well under way
and is delivering the anticipated results. The Company is accelerating this brand repositioning to all divisions: menswear, footwear, and
accessories. The Company believes that this strategy will restore positive overall growth. Le Château’s core strengths, including a solid
management and design team, a wide network of retail stores, powerful name recognition, vertical integration and a strong financial position,
are all firmly in place.
FORWARD-LOOKING STATEMENTS
This MD&A along with the Annual Report 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 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.
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; customer preferences towards product offerings; seasonal weather patterns; fluctuations in foreign currency exchange
rates; changes in the Company’s relationship with its suppliers; interest rate fluctuations and other changes in borrowing costs; and changes in
laws, rules and regulations applicable to the Company.
2010 annual report
21
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENTʼS RESPONSIBILITY
For Financial Information
The accompanying consolidated financial statements of Le Château Inc. and all the information in this annual report are the responsibility
of management.
The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. When
alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements
are not precise since they include certain amounts based on estimates and judgement. Management has determined such amounts on a
reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Management has prepared the
financial information presented elsewhere in the Annual Report and has ensured that it is consistent with that in the financial statements.
The Company maintains systems of internal accounting and administrative controls of high quality, consistent with reasonable cost. Such
systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and the Company’s
assets are appropriately accounted for and adequately safeguarded.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately
responsible for reviewing and approving the financial statements. The Board carries out this responsibility principally through the Audit
Committee which consists of three outside directors appointed by the Board. The Committee meets quarterly with management as well as with
the independent external auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting
issues. The Committee reviews the consolidated financial statements and the external auditors’ report thereon and reports its findings to the
Board for consideration when the Board approves the financial statements for issuance to the Company’s shareholders. The Committee also
considers, for review by the Board and approval by the shareholders, the engagement or re-appointment of the external auditors. The external
auditors have full and free access to the Audit Committee.
On behalf of the shareholders, the financial statements have been audited by Ernst &Young LLP, the external auditors, in accordance with
Canadian generally accepted auditing standards.
(Signed)
Jane Silverstone Segal, B.A.LLL
Chairman and Chief Executive Officer
22
(Signed)
Emilia Di Raddo, CA
President and Secretary
INDEPENDENT AUDITORSʼ REPORT
To the Shareholders of
Le Château Inc.
We have audited the accompanying consolidated financial statements of Le Château Inc. (the “Company”), which comprise the consolidated
balance sheets as at January 29, 2011 and January 30, 2010, and the consolidated statements of retained earnings, earnings, comprehensive
income and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Managementʼs responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian
generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditorsʼ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Le Château Inc. as at January 29, 2011
and January 30, 2010, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted
accounting principles.
1
Montréal, Canada
April 8, 2011
Chartered Accountants
1
CA Auditor Permit no. 20201
2010 annual report
23
Le Château Inc. Incorporated under the Canada Business Corporations Act
CONSOLIDATED BALANCE SHEETS As at January 29, 2011 and January 30, 2010
[In thousands of Canadian dollars]
ASSETS [note 2]
Current
Cash and cash equivalents
Short-term investments [note 3]
Accounts receivable
Income taxes refundable
Derivative financial instruments
Inventories [note 4]
Future income taxes [note 9]
Prepaid expenses
Total current assets
Long-term investments [note 3]
Fixed assets [notes 5 and 7]
Intangible assets [note 6]
LIABILITIES AND SHAREHOLDERSʼ EQUITY
Current
Accounts payable and accrued liabilities
Dividend payable
Derivative financial instruments
Current portion of long-term debt [note 7]
Future income taxes [note 9]
Total current liabilities
Long-term debt [note 7]
Future income taxes [note 9]
Deferred lease inducements
Total liabilities
Shareholders’ equity
Capital stock [note 8]
Contributed surplus [note 8]
Retained earnings
Accumulated other comprehensive income [note 17]
Total shareholdersʼ equity
2011
$
2010
$
17,661
30,300
2,439
3,602
—
91,773
35
1,704
147,514
—
94,133
5,240
246,887
23,411
45,000
2,454
1,602
59
61,234
—
1,308
135,068
10,000
88,437
2,527
236,032
29,599
4,338
118
15,920
—
49,975
20,260
4,745
9,758
84,738
27,151
4,293
—
11,752
19
43,215
21,464
3,910
10,222
78 811
37,729
2,006
122,497
(83)
162,149
246,887
34,335
2,159
120,687
40
157,221
236,032
Commitments, contingencies and guarantees [notes 11 and 16]
Subsequent event [note 19]
See accompanying notes
On behalf of the Board:
24
[Signed]
Jane Silverstone Segal, B.A.LLL
Director
[Signed]
Emilia Di Raddo, CA
Director
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Years ended January 29, 2011 and January 30, 2010
[In thousands of Canadian dollars]
2011
$
2010
$
120,687
19,109
139,796
17,299
122,497
107,914
29,837
137,751
17,064
120,687
2011
$
2010
$
319,039
321,733
272,163
17,595
965
1,588
(616)
291,695
260,010
17,216
538
1,503
(780)
278,487
27,344
8,235
19,109
43,246
13,409
29,837
0.77
0.77
1.23
1.22
24,667,812
24,339,461
Balance, beginning of year
Net earnings
Dividends declared [note 8]
Balance, end of year
See accompanying notes
CONSOLIDATED STATEMENTS OF EARNINGS Years ended January 29, 2011 and January 30, 2010
[In thousands of Canadian dollars]
Sales
Cost of sales and expenses
Cost of sales and selling, general and administrative
Depreciation and amortization
Write-off of fixed assets [note 5]
Interest on long-term debt
Interest income
Earnings before income taxes
Provision for income taxes [note 9]
Net earnings
Net earnings per share [note 10]
Basic
Diluted
Weighted average number of shares outstanding
See accompanying notes
2010 annual report
25
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended January 29, 2011 and January 30, 2010
[In thousands of Canadian dollars]
Net earnings
Other comprehensive income
Change in fair value of foreign exchange contracts
Income tax (expense) recovery
Realized forward exchange contracts reclassified to net earnings
Income tax recovery
Total other comprehensive loss
Comprehensive income
See accompanying notes
26
2011
$
2010
$
19,109
29,837
157
(47)
110
(1,401)
446
(955)
(334)
101
(233)
(70)
22
(48)
(123)
18,986
(1,003)
28,834
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended January 29, 2011 and January 30, 2010
[In thousands of Canadian dollars]
OPERATING ACTIVITIES
Net earnings
Adjustments to determine net cash from operating activities
Depreciation and amortization
Write-off of fixed assets
Amortization of deferred lease inducements
Future income taxes
Stock-based compensation [note 8]
Net change in non-cash working capital items related to operations [note 13]
Deferred lease inducements
Cash flows related to operating activities
FINANCING ACTIVITIES
Repayment of capital lease obligations
Proceeds of long-term debt
Repayment of long-term debt
Issue of capital stock upon exercise of options
Dividends paid
Cash flows related to financing activities
INVESTING ACTIVITIES
Decrease in short-term investments
Decrease (increase) in long-term investments
Additions to fixed assets and intangible assets
Cash flows related to investing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary information:
Interest paid during the year
Income taxes paid during the year
2011
$
2010
$
19,109
29,837
17,595
965
(1,885)
835
506
37,125
17,216
538
(1,540)
734
341
47,126
(30,472)
1,421
8,074
(7,554)
2,071
41,643
—
15,000
(12,036)
2,735
(17,254)
(11,555)
(1,008)
15,000
(9,512)
2,696
(17,010)
(9,834)
14,700
10,000
(26,969)
(2,269)
11,643
(10,000)
(20,075)
(18,432)
(5,750)
23,411
17,661
13,377
10,034
23,411
1,588
9,379
1,503
15,929
See accompanying notes
2010 annual report
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 29, 2011 and January 30, 2010
[Tabular amounts in thousands of Canadian dollars except per share amounts and where otherwise indicated]
Year-end
The Company’s fiscal year ends on the last Saturday in January. The years ended January 29, 2011 and January 30, 2010 cover a 52-week
fiscal period.
1. SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The consolidated financial statements of Le Château Inc. [the “Company”] have been prepared by Management in accordance with Canadian
generally accepted accounting principles [GAAP]. The preparation of financial statements in conformity with GAAP requires Management to
make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates. The financial statements have, in Management’s opinion, been properly prepared within reasonable limits of
materiality and within the framework of the accounting policies summarized below.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany transactions
have been eliminated. The Company has no interests in variable interest entities.
Foreign currency translation
Transactions denominated in foreign currencies and those of an integrated foreign operation are translated using the temporal method.
Monetary assets and liabilities are translated into Canadian dollars at the rates in effect at the balance sheet date. Other assets and liabilities
are translated at the rates prevailing at the transaction dates. Revenues and expenses are translated at the average exchange rates prevailing
during the year, except for the cost of inventory used and depreciation and amortization, which are translated at exchange rates prevailing
when the related assets were acquired. Gains and losses arising from the fluctuations in exchange rates are reflected in earnings.
Revenue recognition
Revenue from merchandise sales are net of estimated returns and allowances, exclude sales taxes and are recorded upon delivery to the
customer. Revenue from gift cards or gift certificates [collectively referred to as “gift cards”] is recognized at the time of redemption or in
accordance with the Company’s accounting policy for breakage. Breakage income is included in other income and represents the estimated
value of gift cards that are not expected to be redeemed by customers and is estimated based on the terms of the gift cards and historical
redemption patterns.
Cash and cash equivalents
Cash consists of cash on hand and balances with banks. Cash equivalents are restricted to investments that are readily convertible into a
known amount of cash, that are subject to minimal risk of changes in value and which have a maturity of three months or less at acquisition.
Cash equivalents are carried at fair value.
Investments
Short-term investments include investments with original maturity terms of 90 days or more. Long-term investments include investments with
original maturity terms of more than 365 days. Short and long-term investments are classified as available-for-sale and are carried at fair value.
28
Inventories
Raw materials, work-in-process and finished goods are valued at the lower of average cost, which includes vendor rebates, and net realizable value.
1. SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
Fixed assets
Fixed assets are recorded at cost. Depreciation is charged to earnings on the following bases:
Building
Point-of-sale cash registers and computer equipment
Other furniture and fixtures
Automobiles
4% to 10% diminishing balance
5 years straight-line
5 to 10 years straight-line
30% diminishing balance
Leasehold improvements are depreciated on the straight line basis over the initial term of the leases, plus one renewal period, not to exceed 10 years.
Gains and losses arising on the disposal of individual assets are recognized in income in the period of disposal.
Intangible assets
Intangible assets, consisting of software, are recorded at cost and are amortized on a straight-line basis over periods ranging from 3 to 5 years.
Gains and losses arising on the disposal of individual intangible assets are recognized in income in the period of disposal.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Impairment is assessed by comparing the carrying amount of an asset with its expected future net undiscounted cash flows
from use together with its residual value [net recoverable value]. If such assets are considered impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds their fair value, generally determined on a discounted expected
cash flow basis. Any impairment results in a write-down of the asset and a charge to earnings during the year.
Deferred lease inducements
Deferred lease inducements are amortized on the straight-line basis over the initial term of the leases, plus one renewal period, not to
exceed 10 years.
Stock-based compensation
All awards granted or modified after January 25, 2003, are accounted for under the fair value method. Under this method, the value of the
compensation is measured at the grant date using the Black Scholes option pricing model. The value of the compensation expense is
recognized over the vesting period of the stock options as an expense included in cost of sales and selling, general and administrative
expenses, with a corresponding increase to contributed surplus in shareholders’ equity.
All awards granted or modified prior to January 26, 2003 are accounted for as capital transactions. No compensation expense is recorded
in the consolidated financial statements for these awards. Had the Company used the fair value method, the earnings would not have been
materially different.
Any consideration paid by plan participants on the exercise of stock options is credited to share capital.
2010 annual report
29
Store opening costs
Store opening costs are expensed as incurred.
1. SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
Income taxes
The Company uses the liability method of accounting for income taxes, which requires the establishment of future tax assets and liabilities, as
measured by enacted or substantively enacted tax rates, for all temporary differences caused when the tax bases of assets and liabilities differ
from those reported in the financial statements. A valuation allowance is recorded to the extent that it is more likely than not that future income
tax assets will not be realized.
Earnings per share
Basic earnings per share are calculated using the weighted average number of shares outstanding for the year.
The diluted earnings per share are calculated using the treasury stock method. Under the treasury stock method, the diluted weighted average
number of shares outstanding is calculated as if all dilutive options had been exercised at the later of the beginning of the reporting period or
date of issuance, and the proceeds from the exercise of such dilutive options are used to repurchase common shares at the average market
price for the period.
Leases
A lease which transfers substantially all of the benefits and risks incidental to ownership of property is classified as a capital lease and recorded
as the acquisition of an asset and the assumption of an obligation. All other leases are accounted for as operating leases wherein rental
payments are expensed as incurred.
Financial instruments
Financial instruments are recognized depending on their classification with changes in subsequent measurements being recognized in net
earnings or other comprehensive income [“OCI”].
The Company has made the following classifications:
•
Cash and cash equivalents are classified as “Held for Trading” and measured at fair value. Changes in fair value are recorded in net earnings.
•
Short and long-term investments are classified as “Available-for-Sale”. After their initial fair value measurement, unrealized gains and losses
are recognized in other comprehensive income, except for impairment losses which are recognized immediately in net earnings. Upon derecognition of the financial asset, the cumulative gains or losses previously recognized in accumulated other comprehensive income are
reclassified to net earnings.
•
Accounts receivable are classified as “Loans and Receivables”. After their initial fair value measurement, they are measured at amortized
cost using the effective interest rate method.
•
Accounts payable, dividend payable and long-term debt are classified as “Other Financial Liabilities”. After their initial fair value
measurement, they are measured at amortized cost using the effective interest rate method.
30
Hedges
Section 3865, Hedges, whose application is optional, establishes how hedge accounting may be applied. The Company, in keeping with its risk
management strategy, continues to apply hedge accounting for its foreign exchange contracts and designates them as cash flow hedges. In a
cash flow hedge relationship, the portion of the gains or losses on the hedging item that is determined to be an effective hedge is recognized in
OCI, while the ineffective portion is recorded in net earnings. The amounts recognized in OCI are reclassified to net earnings when the hedged
item affects earnings.
1. SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
Future accounting policies
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board confirmed that publicly-accountable enterprises would be required to use
International Financial Reporting Standards [“IFRS”] in the preparation of interim and annual financial statements for fiscal years
beginning on or after January 1, 2011. The transition to IFRS will impact financial reporting, business processes, internal controls and
information systems. The Company is completing its assessment of the impact of the transition to IFRS on these areas and will begin
reporting under IFRS for the quarter ending April 30, 2011 which will include an opening balance sheet as well as information that
conforms to IFRS for comparative periods presented.
2. CREDIT FACILITIES
The Company has an operating line of credit totalling $16.0 million which is collateralized by the Company’s accounts receivable, inventories
and a first charge on the Company’s assets. This credit agreement is renewable annually. Amounts drawn under this line of credit are payable
on demand and bear interest at rates based on the prime bank rate for loans in Canadian dollars, U.S. base rate for loans in U.S. dollars and
banker’s acceptance plus 1.25% for banker’s acceptances in Canadian dollars. Furthermore, the terms of the banking agreement require the
Company to meet certain non-financial covenants, all of which have been met as at January 29, 2011. As at January 29, 2011, the Company
had outstanding letters of credit in the amount of $10.0 million, of which $5.6 million had been accepted at year-end. The letters of credit
represent guarantees for payment of purchases from foreign suppliers and reduce available credit under this facility. Aside from the outstanding
letters of credit, no other amounts were drawn under this facility as at January 29, 2011.
3. INVESTMENTS
As at January 29, 2011, the carrying value of the Company’s short-term investments, comprised of guaranteed investment certificates with
major Canadian chartered banks, amount to $30.3 million [2010 – $45.0 million] and include investments with original maturity terms between
90 and 365 days as well as any long-term investments with remaining maturity terms of less than 365 days. As at January 29, 2011, the
weighted average effective interest rate was 1.81% [2010 – 0.82%] and their maturity dates vary over periods ending up to January 7, 2012
[2010 – December 17, 2010]. The Company did not hold any long-term investments as at January 29, 2011. As at January 30, 2010, long-term
investments amounted to $10.0 million and included an investment with an original maturity term of more than 365 days. The effective interest
rate was 3.00% with a maturity date of March 11, 2011.
The carrying value of all short and long-term investments approximated their fair value and are denominated in Canadian dollars.
2010 annual report
31
4. INVENTORIES
Raw materials
Work-in-process
Finished goods
Finished goods in transit
2011
$
2010
$
10,443
1,959
70,301
9,070
91,773
7,720
1,528
47,318
4,668
61,234
The cost of inventory recognized as an expense and included in cost of sales and selling, general and administrative expenses for the year
ended January 29, 2011 is $98.3 million [2010 – $97.0 million]. During the year, the Company recorded $6.7 million [2010 – $4.8 million] of
write-downs as a result of net realizable value being lower than cost and no inventory write-downs recognized in prior periods were reversed.
5. FIXED ASSETS
January 29, 2011
Land and building
Leasehold improvements
Point-of-sale cash registers and computer equipment
Other furniture and fixtures
Automobiles
January 30, 2010
Land and building
Leasehold improvements
Point-of-sale cash registers and computer equipment
Other furniture and fixtures
Automobiles
Cost
$
Accumulated
depreciation
$
Net book
value
$
1,651
65,325
8,755
80,520
187
156,438
758
23,047
6,024
32,363
113
62,305
893
42,278
2,731
48,157
74
94,133
1,651
59,854
8,262
73,840
169
143,776
729
20,654
5,741
28,078
137
55,339
922
39,200
2,521
45,762
32
88,437
Fixed assets with a net book value of $965,000 [2010 − $538,000] were written-off during the year. The cost of these fixed assets amounted to
$10.4 million [2010 − $9.1 million] and with accumulated depreciation of $9.4 million [2010 − $8.6 million]. These fixed assets were primarily
related to leasehold improvements and furniture and fixtures, which are no longer in use as a result of store renovations and closures.
Depreciation for the year amounted to $16.4 million [2010 − $16.1 million].
32
6. INTANGIBLE ASSETS
January 29, 2011
Software
Cost
$
Accumulated
amortization
$
Net book
value
$
14,160
8,920
5,240
January 30, 2010
Software
10,271
7,744
2,527
Additions to intangible assets for the year amounted to $3.9 million [2010 – $1.2 million]. Amortization for the year amounted to $1.2 million
[2010 – $1.1 million].
7. LONG-TERM DEBT
5.30% Specific Security Agreement, maturing February 7, 2012
5.89% Specific Security Agreement, maturing October 30, 2012
5.18% Specific Security Agreement, maturing February 15, 2013
4.70% Specific Security Agreement, maturing December 16, 2014
Less: current portion
January 29,
2011
$
3,917
9,479
8,069
14,715
36,180
15,920
20,260
January 30,
2010
$
7,338
14,234
11,644
—
33,216
11,752
21,464
The loans are collateralized by the fixed assets acquired with the long-term debt proceeds.
Principal repayments are due in the following fiscal years:
2012
2013
2014
2015
$
15,920
12,381
4,189
3,690
36,180
Authorized
An unlimited number of non-voting first, second and third preferred shares issuable in series.
8. CAPITAL STOCK
An unlimited number of Class A subordinate voting shares.
An unlimited number of Class B voting shares.
2010 annual report
33
Principal features
[a] With respect to the payment of dividends and the return of capital, the shares rank as follows:
8.
CAPITAL STOCK [Cont’d]
First Preferred
Second Preferred
Third Preferred
Class A and Class B
[b]
Subject to the rights of the Preferred shareholders, the Class A subordinate voting shareholders are entitled to a non-cumulative
preferential dividend of $0.0125 per share, after which the Class B shareholders are entitled to a non-cumulative dividend of $0.0125 per
share; any further dividends declared in a fiscal year must be declared and paid in equal amounts per share on all the Class A and Class
B Shares then outstanding without preference or distinction.
[c]
Subject to the foregoing, the Class A and Class B Shares rank equally, share for share, in earnings.
[d]
The Class A subordinate voting shares carry one vote per share and the Class B Shares carry 10 votes per share.
[e]
The Articles of the Corporation provide in effect that if there is an accepted or completed offer for more than 20% of the Class B Shares or
an accepted or completed offer to more than 14 holders thereof at a price in excess of 115% of their market value [as defined in the
Articles of the Corporation], each Class A subordinate voting share will be, at the option of the holder, converted into one Class B Share
for the purposes of accepting such offer, unless at the same time an offer is made to all holders of the Class A subordinate voting shares
for a percentage of such shares at least equal to the percentage of Class B Shares which are the subject of the offer and otherwise on
terms and conditions not less favourable. In addition, each Class A subordinate voting share shall be converted into one Class B Share if
at any time the principal shareholder of the Company or any corporation controlled directly or indirectly by him ceases to be the beneficial
owner, directly or indirectly, and with full power to exercise in all circumstances the voting rights attached to such shares, of shares of the
Corporation having attached thereto more than 50% of the votes attached to all outstanding shares of the Corporation.
Issued and outstanding
Class A subordinate voting shares
Balance – beginning of year
Issuance of subordinate voting shares upon exercise of options
Reclassification from contributed surplus
due to exercise of share options
Balance, end of year
Class B multiple voting shares
Balance, end of year
34
January 29, 2011
Number
of shares
$
January 30, 2010
Number
of shares
$
19,973,464
255,400
33,933
2,735
19,663,464
310,000
30,595
2,696
—
20,228,864
659
37,327
—
19,973,464
642
33,933
4,560,000
24,788,864
402
37,729
4,560,000
24,533,464
402
34,335
Dividends
During the year, the Company declared dividends in the amount of $17.3 million [2010 – $17.1 million].
8.
CAPITAL STOCK [Cont’d]
Stock option plan
Under the provisions of the stock option plan, the Company may grant options to key employees, directors and consultants to purchase Class A
subordinate voting shares. The maximum number of Class A subordinate voting shares issuable from time to time under the Plan is 12% of the
aggregate number of Class A subordinate voting shares and Class B Shares issued and outstanding from time to time. The option price may
not be less than the closing price for the Class A subordinate voting shares on the Toronto Stock Exchange on the last business day before the
date on which the option is granted. The stock options may be exercised by the holder, progressively, over a period of 5 years from the date of
granting. Under certain circumstances, the vesting period can be accelerated.
A summary of the status of the Company’s stock option plan as of January 29, 2011 and January 30, 2010, and changes during the years then
ended is presented below:
Outstanding at beginning of year
Granted
Exercised
Cancelled / expired
Outstanding at end of year
Options exercisable at end of year
January 29, 2011
Weighted
average
exercise
Shares
price
$
1,074,300
13.14
234,500
12.34
(255,400)
10.71
(3,000)
12.65
1,050,400
13.55
400,580
15.00
January 30, 2010
Weighted
average
exercise
Shares
price
$
1,172,800
12.64
215,500
9.40
(310,000)
8.70
(4,000)
10.75
1,074,300
13.14
415,600
13.41
Of the 234,500 stock options granted during the year, 214,500 options will expire on July 13, 2015 and 20,000 on September 12, 2015.
2010 annual report
35
8. CAPITAL STOCK [Cont’d]
The following table summarizes information about the stock options outstanding at January 29, 2011:
Range of
exercise
prices
$
9.40
12.25 - 13.37
15.14
Number
outstanding at
January 29,
2011
#
176,100
235,500
638,800
1,050,400
Contributed surplus, beginning of year
Stock-based compensation expense
Exercise of share options
Contributed surplus, end of year
Weighted
average
remaining
life
3.2 years
4.4 years
1.2 years
2.3 years
Weighted
average
exercise
price
$
9.40
12.34
15.14
13.55
Number of
options
exercisable at
January 29,
2011
#
6,100
11,200
383,280
400,580
2011
$
2,159
506
(659)
2,006
Weighted
average
exercise
price
$
9.40
13.26
15.14
15.00
2010
$
2,460
341
(642)
2,159
Compensation expense recorded in the consolidated financial statements during the year for stock options amounted to $506,000
[2010 – $341,000]. During the second quarter ended August 1, 2009, modifications were made to 160,000 options granted to a former director.
Of these options, 80,000 were not vested at the time of the modification, which resulted in a reversal of previously recognized stock based
compensation expense amounting to $212,000. The modification to vested options was expensed in the second quarter and the modifications
to the unvested options will be expensed over their revised vesting period. In the fourth quarter ended January 30, 2010, there was a reversal of
stock based compensation expense in the amount of $125,000 related to the cancellation of 80,000 non-vested options to a former employee.
These modifications are reflected in the tables above.
During the year ended January 29, 2011, the Company granted 234,500 stock options [2010 – 215,500] to purchase Class A subordinate
voting shares. The weighted-average grant date fair value of stock options granted during 2011 was $2.14 per option. The fair value of each
option granted was determined using the Black-Scholes option pricing model and the following weighted-average assumptions:
Risk-free interest rate
Expected life
Expected volatility in the market price of the shares
Expected dividend yield
36
Assumptions
2.45%
2.9 years
37.8%
5.7%
Stock purchase plan
Under the provisions of the stock purchase plan, the Company may grant the right to key employees to subscribe for Class A shares. The
plan, which was amended on May 28, 1997, provides that the maximum number of shares that may be issued thereunder, from and after
May 28, 1997, is 10,000 Class A shares. The subscription price may not be less than the closing price for the Class A shares on the Toronto
Stock Exchange on the last business day before the date on which the right to subscribe is granted. Since May 28, 1997, no shares have been
issued under the stock purchase plan.
8. CAPITAL STOCK [Cont’d]
Normal course issuer bid
The Company proceeded with a normal course issuer bid to purchase up to 1,003,328 Class A subordinate voting shares of the Company,
representing 5% of the issued shares of such class as at June 8, 2010. The bid commenced June 21, 2010 and may continue to June 20, 2011.
In accordance with TSX requirements, a maximum daily repurchase of 25% of previous six month’s average daily trading volume may be made,
representing 4,230 shares. The number of shares purchased and the timing of any such purchases will be determined by the Company. All
shares purchased by the Company will be cancelled.
Since June 21, 2010, no Class A subordinate voting shares have been purchased by the Company under the normal course issuer bid.
9. INCOME TAXES
As at January 29, 2011, a U.S. subsidiary has accumulated losses amounting to $9.9 million [US $9.8 million] which expire during the years
2012 to 2031. A full valuation allowance has been taken against the related future income tax asset and accordingly, the tax benefits pertaining
to these loss carry-forwards have not been recognized in the financial statements.
The U.S. tax losses expire in the following years:
$
—
9,880
9,880
2012 – 2016
2017 – 2031
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
Statutory tax rate
Increase (decrease) in income tax rate resulting from:
Unrecognized benefit on U.S. tax losses
Non-deductible items and translation adjustment
Effect of change in income tax rate
Other
Effective tax rate
2011
%
29.8
2010
%
31.2
1.7
0.3
(0.8)
(0.9)
30.1
1.1
(0.2)
(0.9)
(0.2)
31.0
2010 annual report
37
9.
INCOME TAXES [Cont’d]
The details of the provision for income taxes are as follows:
2011
$
7,400
835
8,235
2010
$
12,675
734
13,409
2011
$
2010
$
7,399
—
7,399
6,768
19
6,787
2,592
62
35
3,888
(3,888)
2,689
4,710
2,801
57
—
3,725
(3,725)
2,858
3,929
Current income taxes
Future income taxes
Provision for income taxes
The tax effects of temporary differences that give rise to future income tax assets and liabilities are as follows:
Future income tax liabilities
Carrying values of capital assets in excess of tax bases
Unrealized foreign exchange gain on forward contracts
Total future income tax liabilities
Future income tax assets
Deferred lease inducements
Eligible capital expenditures
Unrealized foreign exchange loss on forward contracts
U.S. tax losses
Valuation allowance
Total future income tax assets
Net future income taxes
10. EARNINGS PER SHARE
The following is a reconciliation of the numerators and the denominators used for the computation of the basic and diluted earnings per share:
Net earnings (numerator)
Weighted average number of shares outstanding (denominator)
Weighted average number of shares outstanding – basic
Dilutive effect of stock options
Weighted average number of shares outstanding – diluted
2011
$
19,109
2010
$
29,837
24,668
63
24,731
24,339
70
24,409
As at January 29, 2011, a total of 660,800 stock options [2010 – 642,000] 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.
38
11. COMMITMENTS AND CONTINGENCIES
The minimum annual rentals payable under long-term operating leases are as follows:
$
43,645
42,641
40,269
36,067
30,490
68,167
261,279
2012
2013
2014
2015
2016
2017 and thereafter
Certain of the operating leases provide for additional annual rentals based on store sales and for annual increases in operating charges of the landlord.
In the normal course of doing business, the Company is involved in various legal actions. In the opinion of management, potential liabilities that may
result from these actions are not expected to have a material adverse effect on the Company’s financial position or its results of operations.
12. SEGMENTED INFORMATION
The Company’s only operating segment is the retail of apparel, accessories and footwear aimed at young-spirited, fashion-conscious men and women.
Segmented information is attributed to geographic areas based on the locations of the Company’s stores. The following is a summary of the
Company’s operations and assets by geographic area:
Sale to customers
Canada
United States
Net earnings (loss)
Canada
United States
Fixed assets and intangible assets
Canada
United States
2011
$
2010
$
316,157
2,882
319,039
317,161
4,572
321,733
20,703
(1,594)
19,109
31,395
(1,558)
29,837
98,841
532
99,373
90,296
668
90,964
2010 annual report
39
12. SEGMENTED INFORMATION [Cont’d]
The following table summarizes the Company’s sales by division:
Ladies’ clothing
Men’s clothing
Footwear
Accessories
2011
$
185,490
53,128
32,865
47,556
319,039
2010
$
179,158
53,686
35,160
53,729
321,733
13. CHANGES IN NON-CASH WORKING CAPITAL
The cash generated from (used for) non-cash working capital items is made up of changes related to operations in the following accounts:
Accounts receivable
Income taxes refundable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Income taxes payable
Net change in non-cash working capital items related to operations
40
2011
$
15
(2,000)
(30,539)
(396)
2,448
—
(30,472)
2010
$
2,337
(1,602)
(7,222)
(530)
1,748
(2,285)
(7,554)
14. FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost. The disclosures in the “Financial
Instruments” section of note 1 describe how the categories of financial instruments are measured and how income and expenses, including fair
value gains and losses, are recognized. The classification of the financial instruments, as well as their carrying values and fair values are shown
in the tables below:
Other
Total
AvailableHeld for
Loans and
financial
carrying
Fair
for-sale
trading
receivables
liabilities
Derivatives
value
value
$
$
$
$
$
$
$
January 29, 2011
Financial assets
Cash and cash equivalents
—
17,661
—
—
—
17,661
17,661
Short-term investments
30,300
—
—
—
—
30,300
30,300
Accounts receivable
—
—
2,439
—
—
2,439
2,439
Total
30,300
17,661
2,439
—
—
50,400
50,400
Financial liabilities
Accounts payable and
accrued liabilities 1
Dividend payable
Derivative financial instruments
Long-term debt
Total
January 30, 2010
Financial assets
Cash and cash equivalents
Short-term investments
Accounts receivable
Derivative financial instruments
Long-term investments
Total
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25,287
4,338
—
36,180
65,805
—
—
118
—
118
25,287
4,338
118
36,180
65,923
25,287
4,338
118
36,341
66,084
—
45,000
—
—
10,000
55,000
23,411
—
—
—
—
23,411
—
—
2,454
—
—
2,454
—
—
—
—
—
—
—
—
—
59
—
59
23,411
45,000
2,454
59
10,000
80,924
23,411
45,000
2,454
59
10,000
80,924
—
—
—
—
—
—
—
—
—
—
—
—
21,976
4,293
33,216
59,485
—
—
—
—
21,976
4,293
33,216
59,485
21,976
4,293
33,045
59,314
Financial liabilities
Accounts payable and
accrued liabilities 1
Dividend payable
Long-term debt
Total
1
Excludes commodity taxes and other provisions
2010 annual report
41
Fair values and fair value hierarchy
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. Accordingly, the estimated fair values are not necessarily indicative of the
amounts the Company could realize or would pay in a current market exchange. 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:
14. FINANCIAL INSTRUMENTS [Cont’d]
• The fair values of derivative financial instruments have been determined by reference to published price quotations [Level 1].
• The fair value of cash equivalents, short and long-term investments have been determined with reference to quoted market prices of
instruments with similar characteristics [Level 2].
• Given their short-term maturity, the fair value of cash, accounts receivable, accounts payable and accrued liabilities and dividend payable
approximates their carrying value.
• 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.
There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the years ended January 29, 2011 and
January 30, 2010.
Financial instrument risk management
There has been no change with respect to the Company’s overall risk exposure during the year ended January 29, 2011. 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 cash equivalents, short-term
investments and foreign exchange contracts. The Company limits its exposure to credit risk with respect to cash, cash equivalents, short and
long-term investments by conservatively investing available cash in bank bearer deposit notes and bank term deposits with major Canadian
chartered banks. The Company only enters into foreign 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.
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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, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. The Company has
a high level of liquidity, more than sufficient to cover its operating requirements, as well as a strong financial position. The Company’s liquidity
follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. As at January 29, 2011, the Company had a
high degree of liquidity with $48.0 million in cash and cash equivalents and short-term investments. In addition, the Company has an operating
line of credit totaling $16.0 million of which $10.0 million is currently used due to outstanding letters of credit. The letters of credit represent
guarantees for payment of purchases from foreign suppliers and reduce available credit under this facility. Aside from the outstanding letters of
credit, no other amounts were drawn under this facility as at January 29, 2011. The Company finances its store expansion and renovation
program through cash flows from operations and long-term debt. The Company expects that its accounts payable and accrued liabilities and
dividend payable will be discharged within 90 days and its long-term debt discharged as contractually agreed and as disclosed in note 7.
14. FINANCIAL INSTRUMENTS [Cont’d]
Market risk – foreign exchange risk
The Company’s foreign exchange risk is primarily limited to currency fluctuations between Canadian and U.S. dollars. The significant balances
in U.S. dollars as at January 29, 2011 consist of cash and cash equivalents of $1.2 million, accounts receivable of $266,000 and accounts
payable and accrued liabilities of $8.2 million. Assuming that all other variables remain constant, a revaluation of these balances due to a
5% rise or fall in the Canadian dollar against the U.S. dollar would have resulted in an increase or decrease to net earnings in the amount
of $229,000.
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 values and contract values as at January 29, 2011 are as follows:
Purchase contracts
U.S. dollars
Average
contractual
exchange rate
Nominal
foreign
currency value
$
Contract value
$
1.0080
35,400
35,683
The range of maturity of these contracts is from February 28, 2011 to October 3, 2011. As at January 29, 2011, the fair value of these contracts
amounted to an unrealized foreign exchange loss of $118,000 [2010 – unrealized foreign exchange gain of $59,000], all of which is expected to
be reclassified to income within the next 12 months.
2010 annual report
43
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 cash equivalents. As at January 29, 2011, cash and cash equivalents consisted only of cash.
14. FINANCIAL INSTRUMENTS [Cont’d]
Financial assets and financial liabilities that bear interest at fixed rates are subject to fair value interest rate risk. The Company’s short-term
investments are the only financial assets bearing fixed interest rate, and the long-term debt is the only financial liability bearing a fixed interest
rate. The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change
in market interest rates relative to fixed interest rates on the short-term investments, owing to their relative short-term nature. The long-term
debt is recorded at amortized cost.
To manage the interest rate risk, the Company’s investments are made to achieve the highest rate of return while complying with the two
primary objectives for its investment portfolio: liquidity and capital preservation.
15. MANAGEMENT OF CAPITAL
The Company’s objectives in managing capital are:
• To ensure sufficient liquidity to enable the internal financing of capital projects thereby facilitating its expansion program;
• To maintain a strong capital base so as to maintain investor, creditor and market confidence;
• To provide an adequate return to shareholders.
As at January 29, 2011, the Company’s capital is composed of long-term debt, including the current portions, and shareholders’ equity
as follows:
Long-term debt
Shareholders’ equity (excluding accumulated other comprehensive income)
$
36,180
162,232
198,412
The Company’s primary uses of capital are to finance increases in non-cash working capital along with capital expenditures for its store
expansion and renovation program, as well as information technology and infrastructure improvements.
The Company currently funds these requirements from cash flows from operations and can also draw upon its financial resources, which
include cash and cash equivalents and short-term investments of $48.0 million as at January 29, 2011 and the unused portion of its line of
credit. The Board of Directors does not establish quantitative return on capital criteria for management; but rather promotes year over year
sustainable profitable growth. On a quarterly basis, the Company reviews the level of dividends paid to the Company’s shareholders. The
Company is not subject to any externally imposed capital requirements.
The Company is subject to certain non-financial covenants related to its credit facilities and long-term debt, all of which were met as at
January 29, 2011 and January 30, 2010. There has been no change with respect to the overall capital risk management strategy during the
year ended January 29, 2011.
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16. GUARANTEES
Generally, it is not the Company’s policy to issue guarantees to non-controlled affiliates or third parties, with limited exceptions.
Many of the Company’s agreements include indemnification provisions where the Company may be required to make payments to a vendor or
purchaser for breach of fundamental representation and warranty terms in the agreements with respect to matters such as corporate status,
title of assets, environmental issues, consents to transfer, employment matters, litigation, taxes payable and other potential material liabilities.
The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is not
reasonably quantifiable as certain indemnifications are not subject to a monetary limitation. At January 29, 2011, management does not believe
that these indemnification provisions would require any material cash payment by the Company.
The Company indemnifies its directors and officers against claims reasonably incurred and resulting from the performance of their services to
the Company, and maintains liability insurance for its directors and officers.
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income were as follows:
Balance, beginning of year
Other comprehensive loss for the year
Balance, end of year
2011
$
40
(123)
(83)
2010
$
1,043
(1,003)
40
18. RELATED PARTY TRANSACTIONS
Companies that are directly or indirectly controlled by a director, sublease real estate from the Company. Total amounts earned under the
sublease during the year amounted to $151,000 [2010 - $177,000]. In addition, one of the related parties sold merchandise to the Company
during the year in the amount of $219,000 [2010 – nil]. There were no amounts receivable or payable as at January 29, 2011. These amounts
are recorded at their exchange value.
19. SUBSEQUENT EVENT
On March 16, 2011, the Company borrowed $10.0 million at an interest rate of 4.45%, repayable over 48 months. The borrowing is collateralized by
an equivalent amount of store fixtures and equipment financed.
2010 annual report
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BOARD OF DIRECTORS
Herschel H. Segal
Former Chairman of the Board and
Chief Executive Officer of the Company
Herbert E. Siblin, CM, FCA*
President
Siblin and Associates Ltd.
Richard Cherney
Co-managing Partner of
Davies Ward Phillips & Vineberg LLP
Jane Silverstone Segal, B.A.LLL
Chairman of the Board and
Chief Executive Officer of the Company
David Martz*
Management Consultant
Max Mendelsohn*
Partner of McMillan LLP
*Member of the Audit Committee
Emilia Di Raddo, CA
President and Secretary
OFFICERS
Jane Silverstone Segal, B.A.LLL
Chairman of the Board
and Chief Executive Officer
Franco Rocchi
Senior Vice-President
Sales and Operations
Emilia Di Raddo, CA
President and Secretary
Johnny Del Ciancio, CA
Vice-President
Finance
Auditors
Ernst and Young LLP
Chartered Accountants
Corporate Counsel
Davies Ward Phillips & Vineberg LLP
Annual Meeting of Shareholders
Friday, July 8, 2011
at 10:00 am at our head office
Registrar and Transfer Agent
Computershare Investor Services Inc.
Bankers
Royal Bank of Canada
Produced by:
MaisonBrison Inc.
HEAD OFFICE
8300 Decarie Boulevard, Montreal, Quebec H4P 2P5
Telephone: 514.738.7000, www.lechateau.com
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