Annual report
2 0 11
Corporate ProfilE
Le C h âte a u i s a l e a d i n g C a n a d i a n s p e c i a l t y ret a i l e r of fe r i n g c o nte m p o r a r y
f a s h i o n a p p a re l, a c c e s s o r i e s a n d fo ot we a r to s t y l e - c o n s c i o u s wo m e n
a n d m e n. O u r b r a n d’s s u c c e s s i s b u i l t o n q u i c k i d e nti f i c ati o n of a n d
re s p o n s e to f a s h i o n tre n d s th ro u g h o u r d e s i g n, p ro d u c t d eve l o p m e nt
a n d ve r ti c a l l y i nte g r ate d o p e r ati o n s.
Le C h âte a u b r a n d n a m e m e rc h a n d i s e i s s o l d exc l u s i ve l y th ro u g h o u r
24 3 ret a i l l o c ati o n s, of w h i c h 241 a re l o c ate d i n C a n a d a . I n a d d i ti o n, th e
C o m p a ny h a s 7 s to re s u n d e r l i c e n s e i n th e M i d d l e E a s t. Le C h âte a u’s
we b -b a s e d m a r keti n g i s f u r th e r b ro a d e n i n g th e C o m p a ny’s c u s to m e r
b a s e a m o n g I nte r n et s h o p p e r s i n b oth C a n a d a a n d th e U n i te d S t ate s.
Le C h âte a u, c o m m i t te d to re s e a rc h, d e s i g n a n d p ro d u c t d eve l o p m e nt,
m a n u f a c tu re s a p p rox i m ate l y 3 5% of th e C o m p a ny’s a p p a re l i n i ts ow n
C a n a d i a n p ro d u c ti o n f a c i l i ti e s.
2011 annual report
1
CALGARY - THE CORE
CALGARY - THE CORE
TORONTO - SHERWAY GARDENS
MONTREAL - ST-BRUNO
stores and square footage
JANUARY 28, 2012
JANUARY 29, 2011
STORES
SQUARE
FOOTAGE
STORES
SQUARE
FOOTAGE
ONTARIO
79
414,175
77
397,398
QUEBEC
71
385,944
70
372,220
ALBERTA
30
179,530
28
149,160
BRITISH COLUMBIA
27
143,339
28
147,924
MANITOBA
9
42,571
8
38,148
NOVA SCOTIA
9
39,570
9
3 9 , 5 70
SASK ATCHEWAN
7
29,957
7
28,322
NEW BRUNSWICK
5
19,441
5
19,332
NEW FOUNDL AND
3
15,314
3
15,314
P. E. I .
1
3,480
1
3,480
241
1,273,321
236
1,210,868
2
10,927
2
10,927
243
1,284,248
238
1,221,795
TOTAL CANADA
TOTAL UNITED STATES
TOTAL LE CHÂTEAU STORES
Sales
(in ‘000)
Shareholders’ Equity
(in ‘000)
200,000
350,000
300,000
160,000
250,000
200,000
120,000
150,000
80,000
100,000
40,000
50,000
0
09
(1)
10
11
0
Net earnings (loss)
(in ‘000)
10
11
Cash Flow From Operations
(in ‘000)
50,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
-5,000
40,000
30,000
20,000
10,000
0
-10,000
09
(1)
09
10
11
09
10
11
The selected information presented for the year ended January 30, 2010 does not reflect the impact of the adoption of IFRS.
2011 annual report
3
FINANCIAL
HIGHLIGHTS4
FISCAL YEARS ENDED
January 28,
2012
January 29,
2011
January 30,
2010 (1)
January 31,
2009(1)
Januar y 26,
2008 (1)
(52 weeks)
(52 weeks)
(52 weeks)
(53 weeks)
(52 weeks)
302,707
(2,9 82)
(2,386)
(0.10)
(0.10)
319,039
27,566
19,557
0.79
0.79
321,733
43,246
29,837
1.23
1.22
345,614
57,706
38,621
1.56
1.55
336,070
50,523
32,59 6
1.30
1.29
0.43
—
24,789
0.70
—
24,668
0.70
—
24,339
0.625
0.25
24,79 6
0.50
—
24,978
90,345
143,105
233,79 4
96,381
155,653
246,146
91,853
157,221
236,032
85,620
142,414
216,431
74,384
133,605
206,876
3.13
0.32
0.32:1
2.89
1.09
0.23:1
3.13
1.71
0.21:1
3.03
1.75
0.20:1
2.55
1.59
0.17:1
(11,304)
23,755
243
1,284,248
277
8,074
26,969
238
1,221,79 5
311
41,643
20,075
230
1,145,9 9 2
335
41,821
21,467
221
1,047,529
385
54,117
24,091
209
9 65,077
408
RESULTS
Sales
Earnings (loss) before income taxes
Net earnings (loss)
• Per share - basic
• Per share - diluted
Dividends per share
• Ordinary
• Special
Average number of shares outstanding (000)
FINANCIAL POSITION
Working capital
Shareholders’ equity
Total assets
FINANCIAL RATIOS
Current ratio
Quick ratio
Long-term debt to equity
(2)
OTHER STATISTICS (units as specified)
Cash flows related to operating activities (in ‘000)
Capital expenditures (in ‘000)
Number of stores at year-end
Square footage
Sales per square foot (3)
SHAREHOLDERS’ INFORMATION
Ticker symbol: CTU. A
Listing: TSX
Number of participating shares outstanding
(as of may 28, 2012):
20,228,864 Class A Subordinate Voting Shares
4,560,000 Class B Voting Shares
Float: (4)
15,225,184 Class A Shares held by the public
As of may 28, 2012:
High/low of Class A Shares
(12 months ended May 28, 2012): $10.05 / $1.03
Recent price: $1.41
Dividend yield: -%
Price/book value ratio: 0.24X
Earnings (loss) per share (diluted):
Book value per share: (6) (5)
$ ( 0.10 )
$ 5.77
(1) The selected information presented for the years ended January 30, 2010, (4) Excluding shares held by officers and directors of the Company.
January 31, 2009 and January 26, 2008 do not reflect the impact of the adoption of IFRS.
(5) For the year ended January 28, 2012.
(2) Including capital leases and current portion of debt.
(6) As at January 28, 2012.
(3) Excluding Le Château outlet stores.
2011 annual report
5
MESSAGE TO
SHAREHOLDERS4
Message to Shareholders
2011 was a challenging year. Revenues for the fiscal year ended January 28, 2012 totaled $302.7 million, a year-over-year decrease of 5.1%.
Comparable store sales declined by 7.9%. EBITDA amounted to $20.2 million or 6.7% of sales, compared to $47.0 million or 14.7% of sales
in the previous year. Net loss for the year came to $2.4 million or $(0.10) per share, compared to net earnings of $19.6 million or $0.79 per
share in the previous fiscal year.
Throughout our 50 year history, we have undergone a number of shifts in brand strategy to address changes in demographics as well
as price/value segments. The most recent shift was set in motion more than 5 years ago. It has not been seamless, and it happened to
occur during one of the worst recessions in recent times. Nevertheless, we met these challenges, and begin the new year with a clear and
unwavering focus on our target market: contemporary fashion for today’s modern man and woman.
The rise in inventory levels, which started in the fall of 2010, is one of the key issues being currently addressed. The shift in product mix,
weak retail market conditions and the unseasonably warm weather of the past winter have contributed to the increase in inventory. We
have implemented a focused plan to reduce excess inventory. As a part of this plan, 26 outlet stores were fully converted by the end of the
third quarter of 2011 to only carry discounted merchandise from prior seasons. Additionally, the footprint of retail outlets was temporarily
expanded. Once the inventory returns to more normal levels, the retail outlet network will be realigned to address more modest needs in
terms of inventory clearance.
In addition, we will also remain focused on addressing a range of fixed costs to widen our margins. Our objective, which is on course and
remains a work-in-progress, is to put in place a more flexible cost structure able to react rapidly to fluctuations in sales.
Throughout 2011 we saw growth in the traffic to our on-line store. Le Château’s e-commerce initiative increasingly represents a significant
means of expanding our sales well beyond Canada, in addition to being effective as a brand builder. With this presence on the Web, cross
channel customer service capabilities are being enhanced. Moreover, we now have a solid stake in the tremendous growth of on-line
retailing, and an additional means of building shareholder value.
I wish to thank all the employees of Le Château, and express my sincere appreciation to our shareholders for their trust and support.
JANE SILVERSTONE SEGAL, B.A.LLL
Chairman and Chief Executive Officer
2011 annual report
7
Management's
Discussion
and analysis4
MANAGEMENT’S DISCUSSION AND ANALYSIS
April 25, 2012
The 2011, 2010 and 2009 years refer, in all cases, to the 52-week periods ended January 28, 2012, January 29, 2011 and January 30, 2010,
respectively. 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 2011 fiscal year of Le Château Inc. All amounts in this report and in
the tables are expressed in Canadian dollars, unless otherwise indicated.
Effective for the three months ended April 30, 2011, the Company began reporting its financial results in accordance with International
Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), including comparative
information. As a result of the adoption of IFRS, a number of areas of financial reporting are impacted by the changeover to IFRS which are
highlighted in note 26 of the audited consolidated financial statements.
The audited consolidated financial statements have been prepared in accordance with IFRS and with the accounting policies included in
the notes to the audited consolidated financial statements for the year ended January 28, 2012. The financial information presented in this
MD&A for 2009, which was prior to the transition date for the Company to IFRS, was prepared in accordance with accounting principles
generally accepted in Canada and therefore, comparisons to this period may be difficult.
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)
2011
$
2010
$
2009 (3)
$
(52 weeks)
(52 weeks)
(52 weeks)
302,707
(2,982)
(2,386)
319,039
27,566
19,557
321,733
43,246
29,837
(0.10)
(0.10)
233,794
45,468
0.43
(11,304)
(7.9)%
0.79
0.79
246,146
36,180
0.70
8,074
(4.2)%
1.23
1.22
235,274
33,216
0.70
41,643
(8.5)%
Sales
Earnings (loss) before income taxes
Net earnings (loss)
Net earnings (loss) per share
Basic
Diluted
Total assets
Long term debt (1)
Dividends per share
Cash flows related to operating activities (2)
Comparable store sales increase (decrease) %
Square footage of gross store space at year end
Regular stores
Outlet stores
Total
Number of stores at year end
Regular stores
Outlet stores
Total
Sales per square foot (in dollars)
Regular stores
Outlet stores
868,383
415,865
1,284,248
878,416
343,379
1,221,795
846,126
299,866
1,145,992
194
49
243
198
40
238
196
34
230
277
139
311
152
335
166
Includes current and long-term portion of long-term debt.
After net change in non-cash working capital items related to operations.
(3)
The selected information presented for the year ended January 30, 2010 does not reflect the impact of the adoption of IFRS.
(1)
(2)
2011 annual report
9
SALES
Comparable store sales, which are defined as sales generated by stores that have been open for at least one year, decreased 7.9% based
on the year ended January 28, 2012. Taking into account the 6 new stores and 1 closure, total sales for the year ended January 28, 2012
decreased 5.1% to $302.7 million, compared to $319.0 million for the year ended January 29, 2011.
Sales were negatively impacted throughout 2011 by several factors including: a 9.2% contraction in store traffic as consumers continued to
remain cautious on discretionary spending within a challenging retail environment; the impact of an unseasonably warm winter on demand
for winter-wear; and a shift out of the junior casual wear market in order to re-align all of the product categories under one clear, focused
lifestyle brand targeting contemporary fashion for today’s modern man and woman.
Key investment strategy shifts in career-wear produced some positive results but an enhancement of the overall assortment to include
a more focused casual wear offering is required. In Fall 2011, an upgraded footwear collection shifting from junior synthetic footwear to
better quality women’s fashion footwear was also tested in certain stores. The early signs indicate that this strategy is gaining traction and
customers are responding well to the changes made.
During the year, Le Château opened 6 new stores, closed 1 and renovated 19 existing stores. As at January 28, 2012, the Company operated
243 stores (including 49 fashion outlet stores) compared to 238 stores (including 40 fashion outlets) at the end of the previous year. Total
floor space at the end of the year was 1,284,000 square feet compared to 1,222,000 square feet at the end of the preceding year, an
increase of 62,000 square feet or 5.1%. Of the 62,000 square feet added during year, 34,000 square feet was attributable to new stores, net
of closures, and 28,000 square feet to the expansion of 12 existing stores. In addition, the Company temporarily leased 32,700 square feet
of warehouse space for clearance purposes until February 2012.
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 35% 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; and allowing the Company to remain connected to the market throughout changing times.
TOTAL SALES BY DIVISION (IN THOUSANDS OF DOLLARS)
% CHANGE
2011
$
2010
$
2009
$
2011-2010
%
2010-2009
%
(52 weeks)
(52 weeks)
(52 weeks)
Ladies’ Clothing
Men’s Clothing
Footwear
Accessories
172,221
53,360
31,480
45,646
185,490
53,128
32,865
47,556
179,158
53,686
35,160
53,729
(7.2)
0.4
(4.2)
(4.0) 3.5
(1.0)
(6.5)
(11.5)
302,707
319,039
321,733
(5.1)
(0.8)
Ladies’ wear: The Ladies’ clothing division posted a sales decrease of 7.2%, accounting for 56.9% of total sales as compared to 58.1% the
previous year. Sales were impacted by traffic declines which originated in the second half of 2010 and continued into 2011, compounded
by an unseasonably warm winter which reduced demand for winter-wear. In addition, although the better-value, career suiting category
achieved some positive sales traction, the casual wear category had not been fully evolved for its target market. These factors, combined
with the shift out of the junior casual wear category created a temporary lapse in sales.
10
Menswear: Sales in the Men’s division increased 0.4% and accounted for 17.6% of total sales compared to 16.7% last year. Square footage
increased 6.1% as we continue to create distinct selling space for menswear. The net gain in menswear was achieved largely through the
success of an improved men’s suiting strategy launched in early 2011. The introduction of well-priced but higher value men’s suiting has
increased the carrying value per unit of the menswear inventory at year end.
Footwear: Sales decreased 4.2% in 2011, accounting for 10.4% of total sales as compared to 10.3% the previous year. We are transitioning
this division to be better aligned with our ladies’ lifestyle brand, replacing junior synthetic footwear with better quality women’s fashion
footwear, including leather. This process began in Fall 2011 in certain test stores with some positive results. The effect of this shift resulted in
the carrying value of footwear inventory as at year end to be double that of the previous year, although unit inventory remained relatively flat.
Accessories: Sales in the Accessories division decreased 4.0% in 2011 and accounted for 15.1% of total sales compared to 14.9% last
year. Although adverse traffic also affected this division in 2011, we are further aligning our offering with the ladies’ repositioning in order to
strengthen this division for future growth.
Licensing: The Company is currently involved in several licensing arrangements with retail developers in the Middle East to expand the
number of Le Château branded stores in the region. As at January 28, 2012, there were 7 stores under licensee arrangement in this region.
The Company will seek to further expand its offering and brand awareness internationally, in order to generate additional revenue through
foreign licensing and franchising opportunities.
E-commerce: The Company has invested in e-commerce for cost-effective brand building purposes as well as for a strong additional
revenue stream. Cross channel customer service capabilities are being enhanced, and web activity is strong.
TOTAL SALES BY REGION (IN THOUSANDS OF DOLLARS)
% CHANGE
2011
$
2010
$
2009
$
2011-2010
%
2010-2009
%
(52 weeks)
(52 weeks)
(52 weeks)
Ontario Quebec
Prairies British Columbia
Atlantic
United States
104,597
80,990
62,064
36,851
16,340
1,865
109,774
85,401
65,202
38,908
16,872
2,882
108,833
87,933
63,374
40,375
16,646
4,572
(4.7)
(5.2)
(4.8)
(5.3)
(3.2)
(35.3)
0.9
(2.9)
2.9
(3.6)
1.4
(37.0)
302,707
319,039
321,733
(5.1)
(0.8)
EARNINGS
Net loss for the 2011 year amounted to $2.4 million or $(0.10) per share (diluted), compared to net earnings of $19.6 million or $0.79 per
share in 2010. Earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the year amounted to $20.2 million or
6.7% of sales, compared to $47.0 million or 14.7% of sales last year. The decrease of $26.8 million in EBITDA for the 2011 year was primarily
attributable to a decline of $14.2 million in gross margin dollars and an increase of $9.9 million in selling expenses. The decrease in gross
margin dollars was the result of a 5.1% reduction in sales in 2011, combined with a decrease in the Company’s gross margin percentage to
68.2% from 69.2%, due to increased promotional activity. The increase in selling expenses was mainly due to (a) an increase of 0.9% in store
compensation costs, as a percentage of sales, due to higher minimum wage costs, (b) an increase in store occupancy costs of $3.4 million
as a result of additional footage from new and expanded stores as well as increases in occupancy rates, and (c) $5.8 million in non-recurring
expenses associated with the temporary ramp-up in marketing expenses to accelerate the brand repositioning efforts and start-up costs
related to the e-commerce initiative.
2011 annual report
11
Depreciation and amortization increased to $19.4 million from $17.5 million in 2010, due to the additional investments in non-financial
assets of $23.8 million in 2011. Write-off and impairment of property and equipment relating to store closures, stores renovations and
underperforming stores, increased to $2.0 million in 2011 from $1.0 million last year.
Finance income for 2011 decreased to $217,000 from $616,000 in 2010, primarily the result of lower balances in cash and cash equivalents
and short-term investments held by the Company as compared to last year.
Finance costs increased to $2.0 million in 2011 from $1.6 million in 2010, due to additional long-term financing of $27.5 million obtained
during 2011, offset by the repayment of $18.3 million of long-term debt.
The income tax recovery of $596,000 in 2011 represents an effective income tax recovery rate of 20.0%, compared to a provision for income
taxes of $8.0 million or 29.1% the previous year.
LIQUIDITY AND CAPITAL RESOURCES
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 $7.2 million or $0.29 per share as at January 28, 2012,
compared to $48.0 million or $1.93 per share as at January 29, 2011. Short-term cash is conservatively invested in bank bearer deposit
notes and bank term deposits with major Canadian chartered banks. Cash flows used for operating activities amounted to $11.3 million
in 2011, compared with cash flow from operating activities of $8.1 million the previous year. The decrease of $19.4 million was the result of
lower net earnings for 2011.
Long-term debt, including the current portion, increased to $45.5 million from $36.2 million in 2010, due to the additional long-term debt
financing of $27.5 million obtained during 2011, net of repayment of $18.3 million during the year. As at January 28, 2012, the long-term
debt to equity ratio increased to 0.32:1, compared to 0.23:1 the previous year. We expect that the new Credit Agreement described below,
together with the facilities already in place, will provide the Company with the flexibility to fully execute its business plan.
In addition to the Company’s operating line of credit of $20.0 million, which was increased to $22.0 million subsequent to year end, the
Company obtained during the fourth quarter of 2011, an import line of credit of $25.0 million which includes a $1.0 million loan facility. The
import line is for letters of credit which guarantee the payment of purchases from foreign suppliers. Amounts drawn under these facilities
are payable on demand and bear interest at rates based on the bank’s prime rate plus 0.50% for loans in Canadian and U.S. dollars.
In addition, the Company obtained a leasing facility of $7.5 million and, on November 9, 2011, the Company borrowed $7.5 million on the
lease facility at an interest rate of 4.12%, repayable over 60 months. The borrowing is collateralized by an equivalent amount of store fixtures
and equipment.
During the fourth quarter of 2011, the Company also arranged for $10.0 million of long-term financing from a company that is directly
controlled by a director of the Company. The loan is unsecured and bears interest at a rate of 7.5%, payable monthly, with capital repayments
over 36 months commencing in February 2013. The loan may be prepaid without penalty. The purpose of the loan is for the financing of
ongoing capital expenditures and other investment purposes.
Subsequent to year end, on April 25, 2012, the Company entered into a Credit Agreement for an asset based credit facility of up to
$70.0 million, replacing its previous credit facility of $22.0 million. The revolving credit facility is collateralized by the Company’s credit
card accounts receivable and inventories, as defined in the agreement. The facility has a term of 3 years and consists of revolving credit
loans, which include both a swing line loan facility limited to $15.0 million and a letter of credit facility limited to $15.0 million. The available
borrowings will bear interest at a rate based on the Canadian prime rate, plus an applicable margin ranging from 0.75% to 1.50%, or
a banker’s acceptance rate, plus an applicable margin ranging from 2.00% to 2.75%. The Company is required to pay a standby fee
ranging from 0.25% to 0.375% on the unused portion of the revolving credit. The Credit Agreement requires the Company to comply
with certain covenants, including restrictions with respect to the payment of dividends and the purchase of the Company’s shares under
certain circumstances.
12
Cash provided by operating and financing activities was used in the following financing and investing activities:
1. Capital expenditures of $23.8 million, consisting of:
CAPITAL EXPENDITURES (IN THOUSANDS OF DOLLARS)
2011
$
2010
$
2009
$
New Stores (6 stores; 2010 – 13 stores; 2009 – 12 stores)
Renovated Stores (19 stores; 2010 – 22 stores; 2009 – 14 stores)
Information Technology
Warehousing equipment
Other
3,853
12,896
2,660
2,534
1,812
5,195
13,584
5,196
1,582
1,412
6,749
10,499
2,372
56
399
23,755
26,969
20,075
2. Dividend payments of $15.0 million
3. Long-term debt repayments of $18.3 million
The following table identifies the timing of contractual obligation amounts due after January 28, 2012:
CONTRACTUAL OBLIGATIONS (IN THOUSANDS OF DOLLARS)
Total
$
Less than
1 year
$
1-3
years
$
4-5
years
$
After
5 years
$
Long-term debt and finance
lease obligations
Operating leases (1)
45,468
259,012
16,323
44,998
22,705
83,887
6,440
62,057
—
68,070
304,480
61,321
106,592
68,497
68,070
(1)
Minimum rentals payable under long-term operating leases excluding percentage rentals.
For 2012, the projected capital expenditures are between $6.5 to $8.0 million, of which $5.0 to $6.5 million is expected to be used for the
opening of 2 to 3 stores and the renovation of 7 to 10 existing stores, with $1.5 million to be used for investments in information technology
and distribution centre enhancements. In 2012, the Company is planning to close 8 stores in Canada and 1 store in the U.S., the latter
being the Broadway store in New York. The Company expects its total square footage to remain in line with the 1,284,000 square feet as of
January 28, 2012.
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 as well as the new 3-year committed asset backed credit facility of up to $70.0 million.
The Company has $7.3 million of letters of credit outstanding as at January 28, 2012. The Company does not have any other off-balance
sheet financing arrangements.
2011 annual report
13
FINANCIAL POSITION
Working capital amounted to $90.3 million as at January 28, 2012, compared to $96.4 million as at January 29, 2011.
Total inventories as at January 28, 2012 amounted to $119.3 million compared to $91.8 million as at January 29, 2011. Total finished goods
inventory at year end was up 46.0% in dollars and 7.4% on a unit basis, year over year. The increase is primarily attributable to (a) higher
average unit costs due to changes in product mix as a result of the Company’s investments in the higher value men’s and ladies’ suiting
and footwear categories, (b) weaker than expected sales experienced during 2011, and (c) unseasonably warm weather in the fourth quarter
impacting demand for winter related products. For the year ended January 28, 2012, the Company recorded write-downs of inventory
totalling $6.9 million, compared to $6.7 million the previous year.
As part of the Company’s inventory reduction plan, 26 outlet stores located predominantly in power centers and previously generating
more than half of their sales from current season merchandise were fully converted by the end of the third quarter of 2011 to only carry
prior season discounted merchandise. As at January 28, 2012, there were 49 outlets (416,000 square feet) fully focused on the sale of prior
season discounted product.
Shareholders’ equity amounted to $143.1 million at year-end, after deducting $10.7 million in dividends. Book value per share amounted
to $5.77 as at January 28, 2012, including $0.29 per share in cash and cash equivalents, compared to a book value per share of $6.28 as
at January 29, 2011.
DIVIDENDS AND OUTSTANDING SHARE DATA
Total regular dividends per Class A subordinate voting and Class B voting share amounted to $0.43 in 2011 and $0.70 in 2010. The Company
designated the dividends to be eligible dividends pursuant to the Income Tax Act (Canada) and its provincial equivalents.
At the Board of Directors meeting held on December 9, 2011, the Company decided not to declare a quarterly dividend in order to provide
maximum operational flexibility and in the long-term interest of shareholders.
As at April 25, 2012, there were 20,228,864 Class A subordinate voting and 4,560,000 Class B voting shares outstanding. Furthermore, there
were 401,800 options outstanding with exercise prices ranging from $9.40 to $13.25, of which 101,400 options were exercisable.
On July 7, 2011, the Company announced that it intended to proceed with a normal course issuer bid to purchase up to 1,011,443 Class
A subordinate voting shares of the Company, representing 5% of the issued shares of such class as at July 6, 2011. The bid commenced
July 18, 2011 and continues to July 17, 2012. In accordance with TSX requirements, a maximum daily repurchase of 25% of previous six
month’s average daily trading volume could be made, representing 5,284 shares. Since July 18, 2011, the Company did not purchase any
Class A subordinate voting shares under the normal course issuer bid.
NON-GAAP MEASURES
In addition to discussing earnings measures in accordance with IFRS, this MD&A provides EBITDA as a supplementary earnings measure.
Depreciation and amortization includes write-off and impairment of property and equipment. 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.
14
The following table reconciles EBITDA to earnings (loss) before income taxes for the years ended January 28, 2012 and January 29, 2011:
(In thousands of dollars)
2011
$
2010
$
Earnings (loss) before income taxes
Depreciation and amortization
Write-off and impairment of property and equipment
Finance costs Finance income (2,9 82)
19,364
2,033
1,974
(217)
27,566
17,480
965
1,588
(616)
EBITDA 20,172
46,983
The Company also discloses comparable store sales which are defined as sales generated by stores that have been open for at least one year.
The above measures do not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures presented
by other companies.
RELATED PARTY TRANSACTIONS
The consolidated financial statements include the financial statements of Le Château Inc. and its wholly-owned U.S. subsidiary, Château
Stores Inc, incorporated under the laws of the State of Delaware.
Key management of the Company includes the Chief Executive Officer, President and Vice-Presidents, as well as the non-executive
Directors. The compensation earned by key management in aggregate was as follows:
(In thousands of dollars)
2011
$
2010
$
Salaries and short-term benefits
Stock-based compensation
2,814
211
2,771
349
3,025
3,120
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 $176,000 (2010 – $151,000).
There were no purchases made from related parties during the year (2010 – $219,000). Goods purchased during the year on behalf of
companies that are directly or indirectly controlled by a director amounted to $94,000 (2010 – nil).
During the fourth quarter of 2011, the Company borrowed $10.0 million from a company that is directly controlled by a director of the
Company. The loan is unsecured and bears interest at a rate of 7.5%, payable monthly, with capital repayments over 36 months commencing
in February 2013. The loan may be prepaid without penalty. For the year ended January 28, 2012, interest expense of $56,000 was recorded.
Amounts payable to related parties as at January 28, 2012 totalled $56,000 (2010 – nil).
These amounts are recorded at their exchange value and are made at terms equivalent to those that prevail in arms’ length transactions.
There are no guarantees provided or received with respect to these transactions.
2011 annual report
15
NEW STANDARDS NOT YET EFFECTIVE
IAS 1, “Presentation of Financial Statements”, has been amended to require entities to separate items presented in other comprehensive
income (“OCI”) into two groups, based on whether or not items may be recycled in the future. Entities that choose to present OCI items
before tax will be required to show the amount of tax related to the two groups separately. The amendment is effective for annual periods
beginning on or after July 1, 2012 with earlier application permitted. The Company has not yet assessed the future impact of this new
standard on its consolidated financial statements.
IFRS 9, “Financial Instruments”, partially replaces the requirements of IAS 39, “Financial Instruments: Recognition and Measurement”. This
standard is the first step in the project to replace IAS 39. The IASB intends to expand IFRS 9 to add new requirements for the classification
and measurement of financial liabilities, derecognition of financial instruments, impairment and hedge accounting to become a complete
replacement of IAS 39. These changes are applicable for annual periods beginning on or after January 1, 2015, with earlier application
permitted. The Company has not yet assessed the future impact of this new standard on its consolidated financial statements.
IFRS 13, “Fair Value Measurement”, is a comprehensive standard for fair value measurement and disclosure requirements for use across all
IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in
an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement.
Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value
measurements and in many cases does not reflect a clear measurement basis or consistent disclosures. The Company does not believe
that this new standard will have a material impact on the consolidated financial statements.
TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Canadian Accounting Standards Board requires publicly-accountable enterprises to adopt IFRS in the preparation of interim and
annual financial statements for fiscal years beginning on or after January 1, 2011, which for the Company is the fiscal year ended January
28, 2012. The Company began reporting under IFRS for the first quarter ended April 30, 2011.
Reconciliations prepared in accordance with IFRS 1 “First-Time Adoption of IFRS” are provided in note 26 to the January 28, 2012
audited consolidated financial statements, including IFRS 1 reconciliations for the consolidated statement of earnings and statement of
comprehensive income (loss) for the year ended January 29, 2011 and the opening IFRS balance sheet as at January 31, 2010 and balance
sheet as at January 29, 2011.
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 28, 2012, an evaluation of the effectiveness of the Company’s DC&P, as defined in NI 52-109, was carried out under the
supervision of the CEO and CFO. Based on this evaluation, the CEO and the CFO concluded that the design and operation of these DC&P
were effective.
16
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 IFRS.
The CEO and CFO have evaluated whether there were changes to its ICFR during the year ended January 28, 2012 that have materially
affected, or are reasonably likely to materially affect, its ICFR. No such changes were identified through their evaluation.
As of January 28, 2012, an evaluation of the effectiveness of the Company’s ICFR, as defined in NI 52-109, was carried out under the
supervision of the CEO and CFO. 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
notes 3 and 4 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 assumptions
and estimates for disposal costs and recoverability, where appropriate, based on historical experience. Management continually reviews
the provision, to assess whether it is adequate, based on current economic conditions and an assessment of sales trends.
Impairment of non-financial assets
Non-financial assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be
recoverable. A review for impairment is conducted by comparing the carrying amount of the cash generating unit’s (“CGU”) assets with their
respective recoverable amounts based on value in use. Value in use is determined based on management’s best estimate of expected future
cash flows from use over the remaining lease terms and discounted using a pre-tax weighted average cost of capital.
Management is required to make significant judgements in determining if individual commercial premises in which it carries out its activities
are basic CGUs, or if these basic units can be aggregated at a district or regional level.
Stock-based compensation
The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at
the date on which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation
model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This also requires determining the
most appropriate inputs to the valuation model including the assumptions with respect to the expected life of the option, volatility and
dividend yield.
2011 annual report
17
Deferred revenue
The Company measures the gift card liability and breakage income by estimating the value of gift cards that are not expected to be
redeemed by customers, based on historical redemption patterns.
Provisions
When a provision for onerous contracts is recorded, the provision is determined based on management’s best estimate of the present value
of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract. Assumptions and
estimates are made in relation to discount rates, the expected cost to terminate a contract and the related timing of those costs.
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.
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, 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, including the general softening of consumer demand 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.
18
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 28, 2012 the Company had $14.9 million of contracts outstanding to buy U.S. dollars
(2010 – $35.4 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.
QUARTERLY RESULTS (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
The table below presents selected financial data for the eight most recently reported quarters. This unaudited quarterly information
has been prepared under IFRS. The operating results for any quarter are not necessarily indicative of the results to be expected for any
future period.
FIRST QUARTER
2011
$
Sales
2010
$
SECOND QUARTER
2011
$
2010
$
THIRD QUARTER
2011
$
2010
$
FOURTH QUARTER
2011
$
2010
$
(13 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks)
87,149
TOTAL
2011
$
2010
$
(52 weeks) (52 weeks)
64,959
70,896
84,810
86,536
70,412
74,458
82,526
Earnings (loss)
before income taxes
302,707
319,039
(4,039)
6,405
4,904
11,851
(5,833)
3,553
1,986
5,757
(2,982)
27,566
Net earnings (loss)
(2,869)
4,502
3,484
8,281
(4,143)
2,532
1,142
4,242
(2,386)
19,557
Net earnings (loss)
per share
Basic
Diluted
(0.12)
(0.12)
0.18
0.18
0.14
0.14
0.34
0.34
(0.17)
(0.17)
0.10
0.10
0.05
0.05
0.17
0.17
(0.10)
(0.10)
0.79
0.79
The Company’s business is seasonal in nature. 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.
2011 annual report
19
Fourth quarter results
The Company recorded a sales decrease of 5.3% to $82.5 million for the fourth quarter ended January 28, 2012, compared with sales of
$87.1 million for the fourth quarter ended January 29, 2011. Comparable store sales decreased by 7.2% versus the same period a year ago.
Sales were negatively impacted by traffic declines as consumers continued to remain cautious on discretionary spending. In addition, the
unseasonably warm weather impacted demand for winter related products in particular.
Net earnings for the fourth quarter of 2011 amounted to $1.1 million or $0.05 per share (diluted), compared to $4.2 million or $0.17 per
share the previous year. The Company’s gross margin for the fourth quarter of 2011 was 68.9% compared to 64.0% in 2010 and 68.3% in
2009. The higher gross margin reflects a larger proportion of sales from prior season goods at better than expected recoveries compared
to the same period the previous year. EBITDA for the fourth quarter amounted to $8.8 million or 10.6% of sales, compared to $11.1 million
or 12.7% of sales last year. The decrease of $2.3 million in EBITDA for the fourth quarter was primarily attributable to (a) an increase in
store occupancy costs of $960,000 as a result of additional footage from new and expanded stores as well as increases in occupancy
rates, and (b) $600,000 in non-recurring expenses associated with the temporary ramp-up in marketing expenses to accelerate the brand
repositioning efforts and start-up costs related to the e-commerce initiative.
Depreciation and amortization for the fourth quarter increased to $5.0 million from $4.5 million last year, due to the additional investments
in non-financial assets of $23.8 million in 2011. Write-off and impairment of property and equipment relating to store closures, stores
renovations and underperforming stores, amounted to $1.3 million in the fourth quarter of 2011, compared to $582,000 last year.
Cash flows from operating activities amounted to $6.3 million for the fourth quarter of 2011 and decreased compared to $10.1 million in 2010,
mainly the result of lower net earnings for the fourth quarter.
OUTLOOK
Throughout Le Château’s 50 year history, the Company has undergone a number of shifts in brand strategy to address changes in
demographics as well as price/value segments. The most recent shift was set in motion more than 5 years ago. It has not been seamless,
and it happened to occur during one of the worst recessions in recent times. Nevertheless, the Company met these challenges, and begins
the new year with a clear and unwavering focus on its target market: contemporary fashion for today’s modern man and woman.
The rise in inventory levels, which started in the fall of 2010, is one of the key issues being currently addressed. The shift in product mix,
weak retail market conditions and the unseasonably warm weather of the past winter have contributed to the increase in inventory. The
Company has implemented a focused plan to reduce excess inventory. As a part of this plan, 26 outlet stores were fully converted by the
end of the third quarter of 2011 to only carry discounted merchandise from prior seasons. Additionally, the footprint of retail outlets was
temporarily expanded. Once the inventory returns to more normal levels, the retail outlet network will be realigned to address more modest
needs in terms of inventory clearance. With continuing efforts to reduce inventory, the percentage of marked down sales in relation to total
sales is expected to remain higher than normal which could impact comparable sales and margins. Over the past few quarters, the debt
level has largely increased in relation to the rise in inventory. With inventory levels expected to decline in the latter part of 2012, the debt
level should also follow a similar trend.
During 2012, the Company is planning to close 8 stores in Canada and 1 store in the U.S. As a result, only 1 store will remain in the U.S.
market. We remain extremely focused on addressing various types of fixed costs with the objective of putting in place a much more flexible
cost structure that can react more quickly to fluctuations in sales.
In terms of new business opportunities, the Company expects to add 5 to 8 new stores this year under licensee arrangements for a total
of 12 to 15 stores. With growing traffic, our e-commerce initiative represents a significant opportunity to profitably expand the Company’s
activities well beyond Canada, and well beyond a traditional business model that relied exclusively on brick and mortar.
20
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 forwardlooking statements speak only as of the date made and the Company disavows any intention or obligation to update or revise any such
statements as a result of any event, circumstance or otherwise except to the extent required under applicable securities law.
Factors which could cause actual results or events to differ materially from current expectations include, among other things: the ability
of the Company to successfully implement its business initiatives and whether such business initiatives will yield the expected benefits;
competitive conditions in the businesses in which the Company participates; changes in consumer spending; general economic conditions
and normal business uncertainty; 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.
2011 annual report
21
MANAGEMENT’S 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 consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards.
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 consolidated 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 consolidated 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 consolidated financial statements. The Board carries out this responsibility principally
through the Audit Committee which consists of three outside directors appointed by the Board. The Audit 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 Audit 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 consolidated financial statements for
issuance to the Company’s shareholders. The Audit 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 consolidated 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, CPA, CA
President and Secretary
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of
Le Château Inc.
We have audited the accompanying consolidated financial statements of Le Château Inc., which comprise the consolidated balance
sheets as at January 28, 2012, January 29, 2011 and January 31, 2010, and the consolidated statements of earnings (loss), comprehensive
income (loss), changes in shareholders’ equity and cash flows for the years ended January 28, 2012 and January 29, 2011, and a summary
of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, 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.
Auditors’ 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 28, 2012, January 29, 2011 and January 31, 2010, and its financial performance and its cash flows for the years ended January 28, 2012
and January 29, 2011 in accordance with International Financial Reporting Standards.
1
Montreal, Canada
April 25, 2012
Ernst & Young LLP
Chartered Accountants
1
CA Auditor Permit no. 20201
2011 annual report
23
Le Château Inc. Incorporated under the Canada Business Corporations Act
CONSOLIDATED BALANCE SHEETS
As at January 28, 2012, January 29, 2011 and January 31, 2010
[in thousands of Canadian dollars]
2012
$
2011
$
2010
$
[note 26]
ASSETS
Current assets
Cash and cash equivalents [note 6]
7,19 3 17,661 Short-term investments [note 7]
—
30,300 Accounts receivable [note 5]
2,358 2,439 Income taxes refundable
2,137 3,629 Derivative financial instruments 129 —
Inventories [notes 5 and 8]
119,325 91,773 Prepaid expenses
1,564 1,614 [note 26]
23,411
45,000
2,454
1,602
59
61,234
1,308
Total current assets
Long-term investments [note 7]
Property and equipment [notes 9 and 13]
Intangible assets [note 10]
132,706 —
95,744 5,344 147,416 —
93,490 5,240 135,068
10,000
87,679
2,527
233,794 246,146 235,274
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other payables [note 11]
21,820 25,338 Dividend payable
—
4,338 Deferred revenue
3,918 4,261 Current portion of provisions [note 12]
300 1,060 Derivative financial instruments —
118 Current portion of long-term debt [note 13]
16,323 15,920 22,730
4,293
4,421
1,112
—
11,752
Total current liabilities
Long-term debt [note 13]
Provisions [note 12]
Deferred income taxes [note 15]
Deferred lease credits
42,361
29,145 120 2,954 16,109 51,035 20,260 414 2,848 15,936 44,308
21,464
1,538
2,266
15,421
Total liabilities
90,689 90,493 84,997
Shareholders’ equity
Share capital [note 14]
37,729 37,729 Contributed surplus
2,328 2,006 Retained earnings
102,956 116,001 Accumulated other comprehensive income (loss)
92 (83)
34,335
2,159
113,743
40
Total shareholders’ equity
143,105 155,653 150,277
233,794 246,146 235,274
Contingencies, commitments and guarantees [notes 12, 19 and 25]
Subsequent event [note 27]
See accompanying notes­
On behalf of the Board:
24
[Signed]
Jane Silverstone Segal, B.A.LLL
Director
[Signed]
Emilia Di Raddo, CPA, CA
Director
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
Years ended January 28, 2012 and January 29, 2011
[in thousands of Canadian dollars, except per share information]
2012
$
2011
$
[note 26]
Sales
302,707
319,039
Cost of sales and expenses
Cost of sales [note 8]
Selling [note 9]
General and administrative [notes 9 and 10]
96,145
168,035
39,752
98,327
155,891
36,283
303,932
290,501
Results from operating activities
Finance costs
Finance income
(1,225)
1,974
(217)
28,538
1,588
(616)
Earnings (loss) before income taxes
Income tax expense (recovery) [note 15]
(2,982)
(596)
27,566
8,009
Net earnings (loss)
(2,386)
19,557
(0.10)
(0.10)
0.79
0.79
Weighted average number of shares outstanding
See accompanying notes
24,788,864
24,667,812
2012
$
2011
$
[note 26]
Net earnings (loss)
(2,386)
19,557
Other comprehensive income (loss)
Change in fair value of forward exchange contracts
Income tax recovery (expense)
(949)
275 157
(47)
Net earnings (loss) per share [note 18]
Basic
Diluted
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended January 28, 2012 and January 29, 2011
[in thousands of Canadian dollars]
(674)
110
Realized forward exchange contracts reclassified to net earnings
Income tax recovery (expense)
1,196 (347)
(334)
101
849 (233)
Total other comprehensive income (loss)
175 (123)
Comprehensive income (loss)
(2,211)
19,434
See accompanying notes
2011 annual report
25
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended January 28, 2012 and January 29, 2011
[in thousands of Canadian dollars]
2012
$
2011
$
[note 26]
SHARE CAPITAL
Balance, beginning of year
37,729 Issuance of subordinate voting shares upon exercise of options
—
Reclassification from contributed surplus due to exercise of share options
—
34,335
2,735
659
Balance, end of year
37,729 37,729
CONTRIBUTED SURPLUS
Balance, beginning of year
Stock-based compensation expense
Exercise of share options
2,006 322 —
2,159
506
(659)
Balance, end of year
2,328 2,006
RETAINED EARNINGS
Balance, beginning of year 116,001 Net earnings (loss)
(2,386)
Dividends declared
(10,659)
113,743
19,557
(17,299)
Balance, end of year
102,956 116,001
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year
(83)
Other comprehensive income (loss) for the year
175 40
(123)
Balance, end of year
92 (83)
Total shareholders’ equity
143,105 155,653
See accompanying notes
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 28, 2012 and January 29, 2011
[in thousands of Canadian dollars]
2012
$
2011
$
[note 26]
(2,386)
19,557
19,364 2,033 (1,127)
1,300 322 (1,054)
1,974 (217)
(1,998)
513 (596)
17,480
965
(906)
1,421
506
(1,176)
1,588
(616)
(1,612)
813
8,009
OPERATING ACTIVITIES
Net earnings (loss)
Adjustments to determine net cash from operating activities
Depreciation and amortization [notes 9 and 10]
Write-off and impairment of property and equipment [note 9]
Amortization of deferred lease credits
Deferred lease credits
Stock-based compensation
Provisions
Finance costs
Finance income
Interest paid
Interest received
Income tax expense (recovery)
Net change in non-cash working capital items
related to operations [note 22]
18,128 46,029
(31,976)
(28,576)
Income taxes refunded (paid)
(13,848)
2,544 17,453
(9,379)
Cash flows related to operating activities
(11,304)
8,074
FINANCING ACTIVITIES
Proceeds of long-term debt
Repayment of long-term debt
Issue of share capital upon exercise of options
Dividends paid
27,546 (18,258)
—
(14,997)
15,000
(12,036)
2,735
(17,254)
Cash flows related to financing activities
(5,709)
(11,555)
INVESTING ACTIVITIES
Decrease in short-term investments
Decrease in long-term investments
Additions to property and equipment and intangible assets [notes 9 and 10]
30,300 —
(23,755)
14,700
10,000
(26,969)
Cash flows related to investing activities
6,545 (2,269)
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
(10,468)
17,661 (5,750)
23,411
Cash and cash equivalents, end of year
See accompanying notes
7,193 17,661
2011 annual report
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 28, 2012, January 29, 2011 and January 31, 2010
[Tabular amounts in thousands of Canadian dollars except per share amounts and where otherwise indicated]
1. CORPORATE INFORMATION
The consolidated financial statements of Le Château Inc. [the “Company”] for the year ended January 28, 2012 were authorized for issue
in accordance with a resolution of the Board of Directors on April 25, 2012. The Company is incorporated and domiciled in Canada and its
shares are publicly traded. The registered office is located in Montreal, Quebec, Canada. The Company’s principal business activity is the
retail of fashion apparel, accessories and footwear aimed at style-conscious women and men.
The Company’s business is seasonal in nature. 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.
2. BASIS OF PREPARATION
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards
[“IFRS”] as issued by the International Accounting Standards Board [“IASB”], including IFRS 1 “First-Time Adoption of IFRS”. For all periods
up to and including the year ended January 29, 2011, the Company prepared its consolidated financial statements in accordance with
Canadian generally accepted accounting principles [“GAAP”]. These consolidated financial statements, for the year ended January 28, 2012,
are the first the Company has prepared in accordance with IFRS.
Accordingly, the Company has prepared consolidated financial statements which comply with IFRS applicable for periods beginning on or
after January 31, 2010 as described in the accounting policies below. In preparing these consolidated financial statements, the Company’s
opening balance sheet was prepared as at January 31, 2010 [“Transition Date”], the Company’s date of transition to IFRS. Note 26 explains
the principal adjustments made by the Company in restating its Canadian GAAP balance sheet as at January 31, 2010 and its previously
published Canadian GAAP consolidated financial statements as at and for the year ended January 29, 2011.
The consolidated financial statements have been prepared on a historical cost basis, except as disclosed in the accounting policies set
out below.
The Company’s fiscal year ends on the last Saturday in January. The years ending January 28, 2012 and January 29, 2011 cover a 52-week
fiscal period.
Basis of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. The financial statements of
the subsidiary are prepared for the same reporting period as the parent company, using consistent accounting policies. All intercompany
transactions, balances and unrealized gains or losses have been eliminated. The Company has no interests in special purpose entities.
3. SIGNIFICANT ACCOUNTING POLICIES
Foreign currency translation
The consolidated financial statements are presented in Canadian dollars, which is also the functional currency of the Company and its
subsidiary. The functional currency is the currency of the primary economic environment in which each entity operates.
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rates in effect as at the
balance sheet date. Non-monetary items that are measured in terms of historical cost denominated in a foreign currency are translated at
the rates prevailing at the initial transaction dates. Foreign currency transactions are translated into Canadian dollars using the exchange
rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions
and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in
the consolidated statements of earnings (loss) and total comprehensive income (loss), except when deferred in equity as qualifying cash
flow hedges.
28
3. SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
Revenue recognition
Revenue from merchandise sales is net of estimated returns and allowances, excludes sales taxes and is recorded upon delivery to
the customer.
Gift cards or gift certificates [collectively referred to as “gift cards”] sold are recorded as deferred revenue and revenue is recognized at the
time of redemption or in accordance with the Company’s accounting policy for breakage. Breakage income represents the estimated value
of gift cards that is not expected to be redeemed by customers and is estimated based on historical redemption patterns.
Finance income
Interest income is recognized as interest accrues [using the effective interest method].
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of an asset that takes a substantial period of time to get
ready for its intended use or sale are capitalized as part of the cost of the respective asset. All other borrowing costs are recognized in the
consolidated statements of earnings (loss) in the period during which they occur. Borrowing costs consist of interest and other costs that an
entity incurs in connection with the borrowing of funds. No borrowing costs have been capitalized by the Company as there are no assets
which take a substantial period of time to get ready for their intended use or sale.
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. Investments are classified as available-for-sale and are carried at fair value.
Inventories
Raw materials, work-in-process and finished goods are valued at the lower of average cost, which include vendor rebates, and net realizable
value. Net realizable value is the estimated selling price of inventory in the ordinary course of business, less any estimated selling costs.
Property and equipment
Property and equipment are recorded at cost, net of accumulated depreciation and impairment losses, if any. Cost includes expenditures
that are directly attributable to the acquisition of the asset, including any costs directly related to bring the asset to a working condition for
its intended use. All repair and maintenance costs are recognized in the consolidated statement of earnings (loss) as incurred.
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.
2011 annual report
29
3. SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
Gains and losses arising on the disposal or derecognition of individual assets, or a part thereof, are recognized in the consolidated statement
of earnings (loss) in the period of disposal.
The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year end, and adjusted prospectively,
if appropriate.
Intangible assets
Intangible assets, consisting of software, are recorded at cost, net of accumulated amortization and impairment losses, if any. Intangible
assets 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 earnings in the period of disposal.
The assets’ residual values, useful lives and methods of amortization are reviewed at each financial year end and adjusted prospectively,
if appropriate.
Impairment of non-financial assets
The Company assesses at each reporting date whether there is an indication that non-financial assets may be impaired. If any indication
exists, impairment is assessed by comparing the carrying amount of an asset or cash generating unit [“CGU”] with its recoverable amount,
which is the higher of the asset’s or CGU’s value in use or fair value less costs to sell. Value in use is based on expected future cash flows
from use, together with its residual value, discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. The fair value less costs to sell is the amount for which an
asset or related CGU can be sold in a transaction under normal market conditions between knowledgeable and willing contracting parties,
less costs to sell. Recoverable amount is determined for an individual asset, unless the asset does not generate largely independent cash
inflows, in which case the recoverable amount is determined for the CGU to which the asset belongs.
Based on the management of operations, the Company has defined each of the commercial premises in which it carries out its activities
as basic CGUs, although where appropriate these basic units can be aggregated at a district or regional level. Company assets which are
not clearly assignable under this scheme, for example, head office assets, are treated separately within the context of this general policy
according to their specific nature.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no
longer exist or may have decreased and if there has been a change in the assumptions used to determine the asset’s recoverable amount.
The reversal is limited to the extent that an asset’s carrying amount does not exceed the carrying amount that would have been determined,
net of depreciation or amortization, had no impairment loss been recognized.
Impairment losses and reversals are recognized in earnings during the year.
Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an
outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate,
the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a
finance cost.
30
3. SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
A provision for onerous contract is recognized when the unavoidable costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under the contract. The provision is determined based on the present value of the lower of the
expected cost of terminating the contract and the expected net cost of operating under the contract. Before a provision is established, the
Company recognizes any impairment loss on the assets associated with the contract.
Stock-based compensation
The fair value of stock-based compensation awards granted to employees 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
general and administrative expenses, with a corresponding increase to contributed surplus in shareholders’ equity. The amount recognized
as an expense is adjusted to reflect the Company’s best estimate of the number of awards that will ultimately vest. No expense is recognized
for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting
irrespective of whether or not the market condition is satisfied, provided that all other performance and/or service conditions are satisfied.
Any consideration paid by plan participants on the exercise of stock options is credited to share capital.
Store opening costs
Store opening costs are expensed as incurred.
Income taxes
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net earnings except to the extent
that they relate to items recognized directly in equity or in other comprehensive income.
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered or paid.
The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.
The Company uses the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax assets
and liabilities for all temporary differences caused when the tax bases of assets and liabilities differ from their carrying amounts reported
in the consolidated financial statements. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply
to the temporary differences when they reverse, based on tax rates that have been enacted or substantively enacted at the end of the
reporting period.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the
temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no
longer probable that the related tax benefit will be realized.
Government assistance
Government assistance, including investment tax credits and design tax credits, is recognized where there is reasonable assurance that the
assistance will be received. When the assistance relates to an expense item, it is recognized as income over the period necessary to match
the assistance on a systematic basis to the costs that it is intended to compensate.
2011 annual report
31
3. SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
Earnings per share
Basic earnings per share are calculated using the weighted average number of shares outstanding during the period.
The diluted earnings per share are calculated by adjusting the weighted average number of shares outstanding to include additional shares
issued from the assumed exercise of stock options, if dilutive. The number of additional shares is calculated by assuming that the proceeds
from such exercises are used to purchase common shares at the average market price for the period.
Leased assets
Leases are classified as either operating or finance, based on the substance of the transaction at inception of the lease. Classification is
re-assessed if the terms of the lease are changed.
Leases in which a significant portion of the risks and rewards of ownership are not assumed by the Company are classified as operating
leases. The Company carries on its operations in premises under leases of varying terms and renewal options, which are accounted for as
operating leases. Payments under an operating lease are recognized in net earnings on a straight-line basis over the term of the lease. When
a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line
basis and, consequently, records the difference between the recognized rental expense and the amounts payable under the lease as a
deferred lease credit. Contingent [sales-based] rentals are recognized as an expense when incurred.
Tenant allowances are recorded as deferred lease credits and amortized as a reduction of rent expense on a straight-line basis over the
initial term of the leases, plus one renewal period, not to exceed 10 years.
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 “Fair Value through Profit or Loss”, 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 OCI, 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.
•Trade and other payables, 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.
32
3. SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
The Company assesses at the end of each reporting period whether there is any objective evidence that a financial asset is impaired.
A financial asset is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that
has occurred after the initial recognition of the asset [an incurred “loss event”] and that loss event has an impact on the estimated future
cash flows of the financial asset or the group of financial assets that can be reliably estimated. The losses arising from an impairment are
recognized in net earnings as a finance cost.
Impairment losses on available-for-sale investment securities are recognized by transferring the cumulative loss that has been recognized
in equity to net earnings. The cumulative loss that is removed from other comprehensive income and recognized in net earnings is the
difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment
loss previously recognized.
Hedges
The Company, in keeping with its risk management strategy, applies hedge accounting for its forward exchange contracts and designates
them as cash flow hedges. At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship.
Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to
determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. In a cash
flow hedge relationship, the effective portion of the gains or losses on the hedged item is recognized directly 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.
Standards issued but not yet effective
IAS 1, “Presentation of Financial Statements”, has been amended to require entities to separate items presented in OCI into two groups,
based on whether or not items may be recycled in the future. Entities that choose to present OCI items before tax will be required to
show the amount of tax related to the two groups separately. The amendment is effective for annual periods beginning on or after
July 1, 2012 with earlier application permitted. The Company has not yet assessed the future impact of this new standard on its consolidated
financial statements.
IFRS 9, “Financial Instruments”, partially replaces the requirements of IAS 39, “Financial Instruments: Recognition and Measurement”. This
standard is the first step in the project to replace IAS 39. The IASB intends to expand IFRS 9 to add new requirements for the classification
and measurement of financial liabilities, derecognition of financial instruments, impairment and hedge accounting to become a complete
replacement of IAS 39. These changes are applicable for annual periods beginning on or after January 1, 2015, with earlier application
permitted. The Company has not yet assessed the future impact of this new standard on its consolidated financial statements.
IFRS 13, “Fair Value Measurement”, is a comprehensive standard for fair value measurement and disclosure requirements for use across all
IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in
an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement.
Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value
measurements and in many cases does not reflect a clear measurement basis or consistent disclosures. The Company does not believe
that this new standard will have a material impact on the consolidated financial statements.
4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions in the
application of the accounting policies, that affect the amounts reported in the consolidated financial statements and accompanying notes.
Estimates and assumptions are reviewed regularly and are based on historical experience and other factors including expectations of future
events. Actual results could differ from those estimates.
2011 annual report
33
4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS [Cont’d]
The judgements, estimates and assumptions which could result in a material adjustment to the carrying amount of assets and liabilities are
discussed below:
Inventory valuation
The Company records a provision to reflect management’s best estimate of the net realizable value of inventory which includes assumptions
and estimates for disposal costs and recoverability, where appropriate, based on historical experience. Management continually reviews
the provision, to assess whether it is adequate, based on current economic conditions and an assessment of sales trends.
Impairment of non-financial assets
Non-financial assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be
recoverable. A review for impairment is conducted by comparing the carrying amount of the CGU’s assets with their respective recoverable
amounts based on value in use. Value in use is determined based on management’s best estimate of expected future cash flows from use
over the remaining lease terms and discounted using a pre-tax weighted average cost of capital.
Management is required to make significant judgements in determining if individual commercial premises in which it carries out its activities
are basic CGUs, or if these basic units can be aggregated at a district or regional level.
Deferred revenue
The Company measures the gift card liability and breakage income by estimating the value of gift cards that are not expected to be
redeemed by customers, based on historical redemption patterns.
Provisions
When a provision for onerous contracts is recorded, the provision is determined based on management’s best estimate of the present value
of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract. Assumptions and
estimates are made in relation to discount rates, the expected cost to terminate a contract and the related timing of those costs.
Stock-based compensation
The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at
the date on which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation
model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This also requires determining the
most appropriate inputs to the valuation model including the assumptions with respect to the expected life of the option, volatility and
dividend yield.
5. CREDIT FACILITIES
The Company has an operating line of credit totalling $20.0 million which is collateralized by the Company’s accounts receivable and
inventories. 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 rate
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 28, 2012. As at January 28, 2012, the Company had outstanding
letters of credit in the amount of $580,000 of which $264,000 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 28, 2012 [note 27].
34
5. CREDIT FACILITIES [Cont’d]
During the year ended January 28, 2012, the Company obtained an import line of credit of $25.0 million which includes a $1.0 million loan
facility. The import line is for letters of credit which guarantee the payment of purchases from foreign suppliers. Amounts drawn under these
facilities are payable on demand and bear interest at rates based on the bank’s prime rate plus 0.50% for loans in Canadian and U.S. dollars.
Furthermore, the terms of the banking agreement require the Company to meet certain non-financial covenants, all of which have been
met as at January 28, 2012. As at January 28, 2012, the Company had outstanding letters of credit in the amount of $6.7 million of which
$1.4 million had been accepted at year end. Aside from the outstanding letters of credit, no other amounts were drawn under this facility as
at January 28, 2012.
6. CASH AND CASH EQUIVALENTS
Cash and cash equivalents as at January 28, 2012, January 29, 2011 and January 31, 2010 consist of cash on hand and balances with banks.
7.INVESTMENTS
The Company did not hold any short-term investments as at January 28, 2012. 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, amounted to $30.3 million
[2010 – $45.0 million] and included 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 varied over periods ending up to January 7, 2012 [2010 – December 17, 2010]. The Company did not
hold any long-term investments as at January 28, 2012 or January 29, 2011. As at January 31, 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.
8. INVENTORIES
January 28, 2012
$
January 29, 2011
$
January 31, 2010
$
Raw materials
Work-in-process
Finished goods
Finished goods in transit
11,998
1,039
102,656
3,632
10,443
1,959
70,301
9,070
7,720
1,528
47,318
4,668
119,325
91,773
61,234
The cost of inventory recognized as an expense and included in cost of sales for the year ended January 28, 2012 is $96.1 million
[2011 – $98.3 million], including write-downs recorded of $6.9 million [2011 – $6.7 million], as a result of net realizable value being lower than
cost. No inventory write-downs recognized in prior periods were reversed.
2011 annual report
35
9. PROPERTY AND EQUIPMENT
Leasehold
Land and
improve-
building
ments
$
$
Cost
Balance, January 31, 2010
Point‑of‑
sale cash
registers
Other
and
furniture
computer
and
Auto-
equipment
fixtures
mobiles
Total
$
$
$
$
1,651
59,854
8,262
73,840
169
143,776
—
—
10,510
(5,039)
1,259
(766)
11,198
(4,518)
64
(46)
23,031
(10,369)
1,651
65,325
8,755
80,520
187
156,438
—
—
12,520
(3,394)
960
(417)
8,537
(4,947)
38
(28)
22,055
(8,786)
1,651
74,451
9,298
84,110
197
169,707
Accumulated depreciation and impairment
Balance, January 31, 2010
729
21,367
5,741
28,123
137
Depreciation 29
6,743
1,049
8,416
18
Disposals
—
(4,457)
(766)
(4,139)
(42)
56,097
16,255
(9,404)
Balance, January 29, 2011
Acquisitions
Disposals
Balance, January 29, 2011
Acquisitions
Disposals
Balance, January 28, 2012
758
23,653
6,024
32,400
113
62,948
27
—
—
7,668
402
(2,734)
1,074
—
(418)
8,971
444
(4,419)
28
—
(28)
17,768
846
(7,599)
785
28,989
6,680
37,396
113
73,963
Net carrying value
Balance, January 31, 2010
922
38,487
2,521
45,717
32
Balance, January 29, 2011
893
41,672
2,731
48,120
74
Balance, January 28, 2012
866
45,462
2,618
46,714
84
87,679
93,490
95,744
Depreciation Impairment
Disposals
Balance, January 28, 2012
An amount of $7.5 million [2011 – nil] of the leasehold improvements and furniture and fixtures is held under finance lease. Accumulated
depreciation relating to this property and equipment amounts to $588,000 [2011 – nil].
Property and equipment with a net book value of $1.2 million [2011 – $965,000] were written-off during the year. The cost of this property
and equipment amounted to $8.8 million [2011 – $10.4 million] with accumulated depreciation of $7.6 million [2011 – $9.4 million]. This
property and equipment was primarily related to leasehold improvements and furniture and fixtures, which are no longer in use as a result
of store renovations and closures.
Included in property and equipment are fully depreciated assets still in use with an original cost of $4.3 million [2011 – $3.9 million].
36
9. PROPERTY AND EQUIPMENT [Cont’d]
Depreciation for the year is reported in the consolidated statement of earnings (loss) as follows:
January 28, 2012
$
January 29, 2011
$
Selling expenses
General and administrative expenses
14,466
3,302
13,252
3,003
17,768
16,255
During the year ended January 28, 2012, an assessment of impairment indicators was performed which caused the Company to review
the recoverable amount of the property and equipment for certain CGU’s with an indication of impairment. The CGU’s reviewed included
non-performing stores that no longer met the Company’s criteria for the brand repositioning, some of which are scheduled for closure in
the upcoming fiscal year.
An impairment loss of $846,000 [2011 – nil] related to store leasehold improvements and furniture and fixtures was determined by comparing
the carrying amount of the CGU’s assets with their respective recoverable amounts based on value in use and is included in selling
expenses in the consolidated statement of earnings (loss). Value in use was determined based on management’s best estimate of expected
future cash flows from use over the remaining lease terms, and was then discounted using a pre-tax weighted average cost of capital of
43% [12.5% after-tax].
10. INTANGIBLE ASSETS
Accumulated
Net carrying
Cost
amortization
values
$
$
$
Balance, January 31, 2010
Acquisitions
Amortization
Disposals
Balance, January 29, 2011
Acquisitions
Amortization
Disposals
Balance, January 28, 2012
10,271
7,744
2,527
3,938
—
(49)
—
1,225
(49)
3,938
(1,225)
—
14,160
8,920
5,240
1,700
—
(342)
—
1,596
(342)
1,700
(1,596)
—
15,518
10,174
5,344
Amortization for the year is reported in the consolidated statement of earnings (loss) under general and administrative expenses.
Included in intangible assets are fully depreciated assets still in use with an original cost of $7.2 million [2011 – $6.5 million].
2011 annual report
37
11. TRADE AND OTHER PAYABLES
January 28, 2012
$
January 29, 2011
$
January 31, 2010
$
Trade payables
Other non-trade payables due to related parties
Other non-trade payables
Accruals related to employee benefit expenses
12,505
56
3,492
5,767
15,984
—
3,504
5,850
11,531
—
3,175
8,024
21,820
25,338
22,730
12.PROVISIONS
$
Balance, January 31, 2010
Amortization
2,650
(1,176)
Balance, January 29, 2011
Arising during the year
Amortization
1,474
236
(1,290)
Balance, January 28, 2012
Less: non-current portion
420
(120)
300
Onerous contracts
Provisions for onerous contracts have been recognized in respect of store leases where the unavoidable costs of meeting the obligations
under the lease agreements exceed the economic benefits expected to be received from the contract. The provision was determined based
on the present value of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract.
Contingent liabilities
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.
38
13. LONG-TERM DEBT
January 28, 2012
$
January 29, 2011
$
January 31, 2010
$
310
3,917
7,338
4,435
9,479
14,234
4,304
8,069
11,644
5.30% Specific Security Agreement,
payable monthly over 60 months,
maturing February 7, 2012
5.89% Specific Security Agreement,
payable monthly over 36 months,
maturing October 30, 2012
5.18% Specific Security Agreement,
payable monthly over 60 months,
maturing February 15, 2013
4.70% Specific Security Agreement,
payable monthly over 48 months,
maturing December 16, 2014
4.45% Specific Security Agreement,
payable monthly over 48 months,
maturing March 23, 2015
7.5% Unsecured loan from a related party,
maturing January 31, 2016 [note 20]
4.12% Obligation under finance lease,
payable monthly over 60 months,
maturing October 31, 2016
11,211
14,715­—
8,080
—
—
10,000
—
—
7,128
—
—
Less: current portion
45,468
16,323
36,180
15,920
33,216
11,752
29,145
20,260
21,464
The secured loans are collateralized by property and equipment, with a net carrying value of $53.2 million as at January 28, 2012, acquired
with the long-term debt proceeds.
The finance lease agreement includes a purchase option for a nominal amount.
Principal repayments are due as follows:
Loans
payable
$
Obligation
under finance
lease
$
Total
$
Within one year
After one year but not more than five years
14,811
23,529
1,512
5,616
16,323
29,145
38,340
7,128
45,468
2011 annual report
39
13. LONG-TERM DEBT [Cont’d]
The balance of minimum lease payments is as follows:
Future
minimum
Less
lease payments
interest
$
$
Present value
of future
minimum
lease payments
$
Within one year
After one year but not more than five years
1,777
6,036
265
420
1,512
5,616
7,813
685
7,128
14. SHARE CAPITAL
Authorized
An unlimited number of non-voting first, second and third preferred shares issuable in series, without par value
An unlimited number of Class A subordinate voting shares, without par value
An unlimited number of Class B voting shares, without par value
Principal features
[a] With respect to the payment of dividends and the return of capital, the shares rank as follows:
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.
40
14. SHARE CAPITAL [Cont’d]
[e]The Articles of the Company 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 Company having attached thereto more than 50% of the votes attached to all outstanding shares of
the Company.
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
January 28, 2012
January 29, 2011
Number of shares
$
Number of shares
$
20,228,864
37,327
19,973,464
33,933
—
—
255,400
2,735
—
—
—
659
20,228,864
37,327
20,228,864
37,327
4,560,000
402
4,560,000
402
24,788,864
37,729
24,788,864
37,729
All issued shares are fully paid.
Dividends
During the year, the Company declared dividends in the amount of $10.7 million [$0.43 per Class A subordinate voting share and Class B
voting share] [2011 – $17.3 million [$0.70 per Class A subordinate voting share and Class B voting share]].
Stock option plan
Under the provisions of the stock option plan [the “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. There are no cash
settlement alternatives for the employees.
2011 annual report
41
14. SHARE CAPITAL [Cont’d]
A summary of the status of the Company’s Plan as of January 28, 2012 and January 29, 2011, and changes during the years then ended is
presented below:
January 28, 2012
Shares
January 29, 2011
Weighted
average
exercise
price
Shares
$
Weighted
average
exercise
price
$
Outstanding at beginning of year
Granted
Exercised
Forfeited
1,050,400
—
—
(10,600)
13.55
—
—
12.06
1,074,300
234,500
(255,400)
(3,000)
Outstanding at end of year
1,039,800
13.56
1,050,400
13.55
739,400
14.57
400,580
15.00
Number
of options
exercisable at
January 28, 2012
#
Weighted
average
exercise
price
$
Options exercisable at end of year
13.14
12.34
10.71
12.65
The following table summarizes information about the stock options outstanding at January 28, 2012:
Range of
exercise
prices
$
9.40
12.25 – 13.25
15.14
Number
Weighted
Weighted
outstanding at
average
average
January 28, remaining
exercise
2012
life
price
#
$
173,800
228,000
638,000
2.2 years
3.5 years
0.2 years
9.40
12.34
15.14
47,800
53,600
638,000
9.40
12.47
15.14
1,039,800
1.3 years
13.56
739,400
14.57
During the year ended January 28, 2012, the Company did not grant any stock options [2011 – 234,500] 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 inputs and assumptions:
Risk-free interest rate
Expected option life
Expected volatility in the market price of the shares
Expected dividend yield
Share price at grant date
42
Assumptions
2.45%
2.9 years
37.8%
5.7%
$12.34
14. SHARE CAPITAL [Cont’d]
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.
Normal course issuer bid
The Company proceeded with a normal course issuer bid to purchase up to 1,011,443 Class A subordinate voting shares of the Company,
representing 5% of the issued shares of such class as at July 6, 2011. The bid commenced July 18, 2011 and may continue to July 17, 2012.
In accordance with TSX requirements, a maximum daily repurchase of 25% of the previous six months’ average daily trading volume may
be made, representing 5,284 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 July 18, 2011, no Class A subordinate voting shares have been purchased by the Company under the normal course issuer bid.
15. INCOME TAXES
As at January 28, 2012, the Company’s U.S. subsidiary has accumulated losses amounting to $10.3 million [US $10.4 million] which expire
during the years 2018 to 2032. A full valuation allowance has been taken against the related deferred income tax asset and accordingly, the
tax benefits pertaining to these loss carry-forwards have not been recognized in the consolidated financial statements.
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
January 28, 2012
%
January 29, 2011
%
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
Benefit of current year loss carried back to a prior year
with higher income tax rates
Other
28.0
29.8
(4.7)
(4.6)
—
1.7
0.3
(0.8)
2.0
(0.7)
—
(1.9)
Effective tax rate
20.0
29.1
The change in the statutory tax rate was as a result of a decrease in the Canadian corporate tax rate.
2011 annual report
43
15. INCOME TAXES [Cont’d]
The details of the provision for income taxes are as follows:
January 28, 2012
$
January 29, 2011
$
Current income taxes
Income tax expense (recovery) for the year
Adjustments in respect of previous years
(550)
(80)
7,623
(250)
Total current income taxes
(630)
7,373
Deferred income taxes
Origination and reversal of temporary differences
Changes in tax rates
34
—
755
(119)
Total deferred income taxes
34
636
Provision for income taxes
(596)
8,009
January 28, 2012
$
January 29, 2011
$
Unrealized foreign exchange gain (loss) in forward contracts
72
(54)
Income tax charged directly to OCI
72
(54)
Deferred tax related to items charged or credited directly to OCI during the year:
44
15. INCOME TAXES [Cont’d]
The tax effects of temporary differences that give rise to deferred income tax assets and liabilities are as follows:
Consolidated statements
Consolidated balance sheets
of earnings (loss)
January 28, 2012
$
January 28,
2012
$
January 29,
2011
$
Deferred income tax liabilities Property, equipment and
intangible assets
9,060
7,265
6,670
1,795
Unrealized foreign exchange
gain on forward contracts
37
—
19
—
595
Total deferred
income tax liabilities
9,097
January 29,
2011
$
7,265
January 31,
2010
$
6,689
—
1,795
595
Deferred income tax assets
Obligations under
finance lease
1,870
—
—
1,870
Deferred lease credits
4,198
4,181
4,141
17
Eligible capital expenditures
57
62
57
(5)
Provisions
18
139
225
(121)
Unrealized foreign exchange
loss on forward contracts
—
35
—
—
U.S. tax losses
4,057
3,888
3,725
169
Valuation allowance
(4,057)
(3,888)
(3,725)
(169)
Total deferred
income tax assets
6,143
4,417
4,423
Net deferred tax liability
2,954
2,848
2,266
Deferred tax expense
—
40
5
(86)
—
163
(163)
1,761
(41)
34
636
January 28, 2012
$
January 29,
2011
$
Wages, salaries and employee benefits
Stock-based compensation
89,557
322
87,622
506
89,879
88,128
16. EMPLOYEE BENEFIT EXPENSES
17. GOVERNMENT ASSISTANCE
Government assistance, consisting mainly of income tax credits of $420,000 [2011 – $493,000], has been recorded in relation to certain
wages and eligible expenses and is included in general and administrative expenses or cost of sales. There are no unfulfilled conditions or
contingencies attached to the assistance received.
2011 annual report
45
18. 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:
January 28, 2012
$
January 29, 2011
$
Net earnings (loss) (numerator) (2,386)
19,557
Weighted average number of shares outstanding (denominator)
Weighted average number of shares outstanding – basic
Dilutive effect of stock options
24,789
7
24,668
63
Weighted average number of shares outstanding – diluted
24,796
24,731
As at January 28, 2012, a total of 1,039,800 stock options [2011 – 660,800] 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.
19.COMMITMENTS
The commercial premises from which the Company carries out its retail operations and its head office and warehouse locations are
leased from third parties. These rental contracts are classified as operating leases since there is no transfer of risks and rewards inherent
to ownership.
These leases have varying terms and renewal rights. In many cases the amounts payable to the lessor include a fixed rental payment as
well as a percentage of the sales obtained by the Company in the leased premises. These contingent rental payments may have minimum
guaranteed amounts or certain rules of calculation attached.
Many leases include escalating rental payments, whereby cash outflows increase over the lease term. Free rental periods are also sometimes
included. The expense is recognized on a straight-line basis.
The minimum rent payable under non-cancellable operating leases is as follows:
January 28, 2012
$
Within one year
After one year but not more than five years
More than five years
44,998
145,944
68,070
259,012
The total future minimum sublease payments to be received are $1.8 million.
During the year ended January 28, 2012 an amount of $42.9 million was recognized as an expense in respect of operating leases
[2011 – $39.8 million]. Contingent rentals recognized as an expense for the year amounted to $1.2 million [2011 – $913,000]. An amount of
$1.1 million was recognized in respect of subleases [2011 – $421,000].
46
20. RELATED PARTY DISCLOSURES
The consolidated financial statements include the financial statements of Le Château Inc. and its wholly-owned U.S. subsidiary, Château
Stores Inc., incorporated under the laws of the State of Delaware.
Key management of the Company includes the Chief Executive Officer, President and Vice-Presidents, as well as the non-executive
Directors. The compensation earned by key management in aggregate was as follows:
January 28, 2012
$
January 29, 2011
$
Salaries and short-term benefits
Stock-based compensation
2,814
211
2,771
349
3,025
3,120
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 $176,000 [2011 – $151,000].
There were no purchases made from related parties during the year [2011 – $219,000]. Goods purchased during the year on behalf of
companies that are directly or indirectly controlled by a director amounted to $94,000 [2011 – nil].
During the year ended January 28, 2012, the Company borrowed $10.0 million from a company that is directly controlled by a director. The
loan is unsecured and bears interest at a rate of 7.5%, payable monthly, with capital repayments commencing in February 2013. The loan
may be prepaid without penalty. For the year ended January 28, 2012, interest expense of $56,000 was recorded.
Amounts payable to related parties as at January 28, 2012 totalled $56,000 [2011 – nil].
These amounts are recorded at their exchange value and are made at terms equivalent to those that prevail in arms’ length transactions.
There are no guarantees provided or received with respect to these transactions.
21. SEGMENTED INFORMATION
The Company operates in a single business segment which is the retail of apparel, accessories and footwear aimed at fashion-conscious
women and men. The Company’s assets are located in Canada.
The following table summarizes the Company’s sales by division:
January 28, 2012
$
January 29, 2011
$
Ladies’ clothing
Men’s clothing
Footwear
Accessories
172,221
53,360
31,480
45,646
185,490
53,128
32,865
47,556
302,707
319,039
2011 annual report
47
22. 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:
January 28, 2012
$
January 29, 2011
$
Accounts receivable
Income taxes refundable
Inventories
Prepaid expenses
Trade and other payables
Deferred revenue
(215)
(422)
(27,552)
50
(3,494)
(343)
(182)
(21)
(30,539)
(306)
2,632
(160)
Net change in non-cash working capital items related to operations
(31,976)
(28,576)
23. 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 3 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 financial instruments, as well as their carrying values and fair values, are
shown in the tables below:
January 28, 2012
Carrying
value
$
Fair
value
$
January 29, 2011
Carrying
value
$
Fair
value
$
January 31, 2010
Carrying
value
$
Fair
value
$
Financial assets
Fair value through profit or loss
Cash and cash equivalents
7,193
7,193
17,661
17,661
23,411
Available for sale
Short-term investments
—
—
30,300
30,300
45,000
Long-term investments
—
—
—
—
10,000
Loans and receivables
Accounts receivable 2,358
2,358
2,439
2,439
2,454
Derivatives
Derivative financial instruments
129
129
—
—
59
45,000
10,000
80,924
80,924
Financial liabilities
Other financial liabilities
Trade and other payables1
18,350
18,350
21,841
21,841
19,563
Dividend payable
—
—
4,338
4,338
4,293
Long-term debt
45,468
45,502
36,180
36,341
33,216
Derivatives
Derivative financial instruments
—
—
118
118
—
19,563
4,293
33,045
56,901
1
9,680
63,818
Excludes commodity taxes and other provisions
48
9,680
63,852
50,400
62,477
50,400
62,638
57,072
23,411
2,454
59
—
23. FINANCIAL INSTRUMENTS [Cont’d]
Fair values
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:
•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, trade and other payables 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 28, 2012 and
January 29, 2011.
Financial instrument risk management
There has been no change with respect to the Company’s overall risk exposure during the year ended January 28, 2012. 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 forward exchange contracts. The Company limits its exposure to credit risk with respect to cash and cash equivalents and
short-term investments by investing available cash in bank bearer deposit notes and bank term deposits with major Canadian chartered
banks. The Company only enters into forward exchange contracts with Canadian chartered banks to minimize credit risk.
The Company’s cash is not subject to any external restrictions. The Company has an investment policy that monitors the safety and
preservation of principal and investments, which limits the amount invested by issuer.
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’s
liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. As at January 28, 2012, the
Company had $7.2 million in cash and cash equivalents. In addition, as outlined in note 5, the Company has an operating line of credit
totaling $20.0 million and an import line of credit of $25.0 million which includes a $1.0 million loan facility. The Company finances its store
expansion and renovation program through cash flows from operations and long-term debt. The Company expects that its trade and other
payables will be discharged within 90 days and its long-term debt discharged as contractually agreed and as disclosed in note 13.
2011 annual report
49
23. FINANCIAL INSTRUMENTS [Cont’d]
Market risk – foreign exchange risk
The Company’s foreign exchange risk is primarily limited to currency fluctuations between the Canadian and U.S. dollar.
The significant balances in U.S. dollars as at January 28, 2012 consist of cash and cash equivalents of $957,000, accounts receivable of
$147,000 and trade and other payables of $3.4 million. Assuming that all other variables remain constant, a revaluation of these monetary
assets and liabilities 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 (loss) in the amount of $82,000.
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 and EURO requirements. The
contracts are matched with anticipated foreign currency purchases.
Their nominal values and contract values as at January 28, 2012 are as follows:
Average contractual
Nominal foreign
exchange rate
currency value
Contract
value
$
Purchase contracts
U.S. dollar
0.9930
14,900
EURO
1.3363
666
14,795
890
The range of maturity of these contracts is from January 30, 2012 to May 29, 2012. As at January 28, 2012, the fair value of these contracts
amounted to an unrealized foreign exchange gain of $129,000 [2011 – unrealized foreign exchange loss of $118,000], all of which is expected
to be reclassified to earnings within the next 12 months.
Market risk – interest rate risk
Financial instruments that potentially subject the Company to cash flow interest rate risk include financial assets and liabilities with variable
interest rates and consist of cash and cash equivalents. As at January 28, 2012, cash and cash equivalents consisted of cash on hand and
balances with banks.
Financial assets and financial liabilities that bear interest at fixed rates are subject to fair value interest rate risk. The Company’s long-term
debt is the only financial liability bearing a fixed interest rate. It is recorded at amortized cost.
24. 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.
50
24. MANAGEMENT OF CAPITAL [Cont’d]
As at January 28, 2012, 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 (loss)]
45,468
143,013
188,481
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 related to operations as well as its financial resources, which include
cash and cash equivalents of $7.2 million as at January 28, 2012 and its lines of credit [note 5]. The Board of Directors does not establish
quantitative return on capital criteria for management; but rather promotes year over year sustainable profitable growth. 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 28, 2012 and January 29, 2011. There has been no change with respect to the overall capital risk management strategy during the
year ended January 28, 2012.
25.GUARANTEES
Generally, the Company does not 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
28, 2012, 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.
26. FIRST-TIME ADOPTION OF IFRS
For all periods up to and including the year ended January 29, 2011, the Company prepared its consolidated financial statements in
accordance with Canadian GAAP. These consolidated financial statements, for the year ended January 28, 2012, are the first the Company
has prepared in accordance with IFRS.
Accordingly, the Company has prepared consolidated financial statements which comply with IFRS applicable for periods beginning on or
after January 31, 2010 using the accounting policies in note 3. In preparing these consolidated financial statements, the Company’s opening
balance sheet was prepared as at January 31, 2010, the Company’s date of transition to IFRS. This note explains the principal adjustments
made by the Company in restating its Canadian GAAP balance sheet as at January 31, 2010 and its previously published Canadian GAAP
consolidated financial statements for the year ended January 29, 2011.
2011 annual report
51
26. FIRST-TIME ADOPTION OF IFRS [Cont’d]
The transition from Canadian GAAP to IFRS involves retrospective application of these principles except for exemptions as outlined by
IFRS 1, “First-Time Adoption of IFRS”. The Company has opted not to apply any of the optional exemptions. In the conversion from
Canadian GAAP to IFRS, the IFRS 1 exception with respect to estimates was applied. Hindsight is not used to create or revise estimates.
The estimates previously made by the Company under Canadian GAAP were not revised for application of IFRS except where necessary to
reflect any difference in accounting policies.
Reconciliation of balance sheet as at January 31, 2010 [ Transition date]
Canadian
IFRS
IFRS
GAAP
Adjustments
Reclassifications
IFRS
Notes
$
$
$
$
ASSETS
Current assets
Cash and cash equivalents
Short-term investments Accounts receivable
Income taxes refundable
Derivative financial instruments Inventories Prepaid expenses
23,411
45,000
2,454
1,602
59
61,234
1,308
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23,411
45,000
2,454
1,602
59
61,234
1,308
Total current assets
Long-term investments
Property and equipment B
Intangible assets
135,068
10,000
88,437
2,527
—
—
(758)
—
—
—
—
—
135,068
10,000
87,679
2,527
236,032
(758)
—
235,274
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other payablesG
27,151
—
(4,421)
Dividend payable
4,293
—
—
Deferred revenueG
—
—
4,421
Current portion of provisions
C
—
1,112
—
Current portion of long-term debt 11,752
—
—
Deferred income taxes
F
19
—
(19)
22,730
4,293
4,421
1,112
11,752
—
Total current liabilities
Long-term debt Provisions
C
Deferred income taxes B,C,D,F
Deferred lease credits
D
43,215
21,464
—
3,910
10,222
1,112
—
1,538
(1,663)
5,199
(19)
—
—
19
—
44,308
21,464
1,538
2,266
15,421
Total liabilities
78,811
6,186
—
84,997
Shareholders’ equity
Share capital
34,335
—
—
Contributed surplus
2,159
—
—
Retained earnings
B,C,D,E
120,687
(6,944)
—
Accumulated other comprehensive income
40
—
—
34,335
2,159
113,743
40
Total shareholders’ equity
157,221
(6,944)
—
150,277
236,032
(758)
—
235,274
52
26. FIRST-TIME ADOPTION OF IFRS [Cont’d]
Reconciliation of balance sheet as at January 29, 2011
Canadian
GAAP
Notes
$
IFRS
Adjustments
$
IFRS
Reclassifications
$
IFRS
$
ASSETS
Current assets
Cash and cash equivalents
17,661
—
—
Short-term investments 30,300
—
—
Accounts receivable
2,439
—
—
Income taxes refundable
A
3,602
27
—
Inventories 91,773
—
—
Deferred income taxes F
35
—
(35)
Prepaid expenses
A
1,704
(90)
—
17,661
30,300
2,439
3,629
91,773
—
1,614
Total current assets
Property and equipment B
Intangible assets
147,514
94,133
5,240
(63)
(643)
—
(35)
—
—
147,416
93,490
5,240
246,887
(706)
(35)
246,146
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other payablesG
29,599
—
(4,261)
Dividend payable
4,338
—
—
Deferred revenueG
—
—
4,261
Current portion of provisions
C
—
1,060
—
Derivative financial instruments
118
—
—
Current portion of long-term debt 15,920
—
—
25,338
4,338
4,261
1,060
118
15,920
Total current liabilities
Long-term debt Provisions
C
Deferred income taxes B,C,D,F
Deferred lease credits
D
49,975
20,260
—
4,745
9,758
1,060
—
414
(1,862)
6,178
—
—
—
(35)
—
51,035
20,260
414
2,848
15,936
Total liabilities
84,738
5,790
(35)
90,493
Shareholders’ equity
Share capital
37,729
—
—
Contributed surplus
2,006
—
—
Retained earnings
A,B,C,D,E
122,497
(6,496)
—
Accumulated other comprehensive loss
(83)
—
—
37,729
2,006
116,001
(83)
Total shareholders’ equity
162,149
(6,496)
—
155,653
246,887
(706)
(35)
246,146
2011 annual report
53
26. FIRST-TIME ADOPTION OF IFRS [Cont’d]
Reconciliation of net earnings and comprehensive income (loss) for the year ended January 29, 2011
Canadian
GAAP
Notes
$
IFRS
Adjustments
$
IFRS
Reclassifications
$
IFRS
$
—
—
319,039
Cost of sales and expenses
Cost of sales and selling, general
and administrative
H
272,163
—
(272,163)
Depreciation and amortization
H
17,595
—
(17,595)
Write-off of fixed assets
H
965
—
(965)
Cost of sales H
—
—
98,327
Selling A,B,C,D,H
—
(285)
156,176
General and administrative D,H
—
63
36,220
—
—
—
98,327
155,891
36,283
Sales 319,039
290,723
(222)
—
290,501
Results from operating activities
Finance costs
Finance income
28,316
1,588
(616)
222
—
—
—
—
—
28,538
1,588
(616)
Earnings before income taxes
Income tax expense
A,B,C,D
27,344
8,235
222
(226)
—
—
27,566
8,009
Net earnings
19,109
448
—
19,557
Net earnings per share
Basic
0.77
Diluted
0.77
Weighted average number of
shares outstanding
24,667,812
Net earnings
19,557
Other comprehensive income
Change in fair value of forward exchange contracts
157
—
—
Income tax expense
(47)
—
—
157
(47)
—
110
Realized forward exchange contracts reclassified to net earnings
(334)
—
—
Income tax recovery
101
—
—
(334)
101
(233)
—
—
(233)
Total other comprehensive loss (123)
—
—
(123)
Comprehensive income 18,986
448
—
19,434
110
448
24,667,812
—
54
19,109
0.79
0.79
—
26. FIRST-TIME ADOPTION OF IFRS [Cont’d]
Material adjustments to consolidated statements of cash flows
IFRS require cash flows from interest received and paid, and income taxes paid, to be disclosed directly in the consolidated statement of
cash flows. Under Canadian GAAP, the Company disclosed interest and income taxes paid as supplementary information in the consolidated
financial statements. This has resulted in a change to the presentation of the consolidated statements of cash flows for all periods presented
in these consolidated financial statements. There are no material differences between the Company’s consolidated statements of cash
flows presented under IFRS and the consolidated statements of cash flows presented under Canadian GAAP.
Notes to the reconciliations of equity, and net earnings and comprehensive income
The preceding are reconciliations of the consolidated financial statements previously presented under Canadian GAAP to the amended
consolidated financial statements prepared under IFRS. Items identified as “IFRS adjustments” are required as the accounting treatment
under Canadian GAAP differs from the treatment under IFRS. Items identified as “IFRS reclassifications” are solely presentation
reclassifications required to present the previous Canadian GAAP consolidated financial statement line items on a consistent basis with
that of the IFRS presentation. Details on the nature of both types of changes are described below.
IFRS adjustments
A. Prepaid advertising
Under Canadian GAAP advertising expenses were deferred as prepaid expenses and expensed over the campaign period. Under IFRS,
in accordance with IAS 38 “Intangible Assets”, advertising costs must be recognized as an expense at the time the expense is incurred.
This change did not have an impact on the opening balance sheet as at the transition date.
For the year ended January 29, 2011, this change in policy has resulted in a decrease in prepaid expenses of $90,000 and an increase in
income taxes refundable of $27,000. Net earnings for the year ended January 29, 2011 have been decreased by $63,000 as a result of an
increase in advertising expenses of $90,000 included in selling expenses, net of taxes of $27,000.
B.Impairment
Under Canadian GAAP the Company used a two-step approach to assess and measure impairment losses. In accordance with IAS 36
“Impairment of Assets”, IFRS requires the impairment of non-financial assets to be applied to the CGU, the lowest level at which separately
independent cash flows can be identified. Assets are then 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.
As a result of this change in policy, the Company has recorded an impairment charge to property and equipment in the amount of $758,000,
a decrease in deferred income tax liabilities of $98,000 and a decrease in retained earnings of $660,000 related to the impairment loss of
$758,000, net of taxes of $98,000, as at the transition date. The impairment loss was determined by comparing the carrying amount of the
CGU’s assets with their respective recoverable amounts based on value in use. Value in use was determined based on management’s best
estimate of expected future cash flows from use over the remaining lease terms and was then discounted using a pre-tax weighted average
cost of capital of 33% [9% after-tax]. The tax impact resulting from the impairment charge is only attributable to a Canadian store.
This change in policy did not result in an impairment adjustment for the year ended January 29, 2011, but did result in an increase in property
and equipment of $115,000, related to a reversal of depreciation taken on impaired assets as at the transition date, and an increase in
deferred income tax liabilities of $13,000. Net earnings for the year ended January 29, 2011 have been increased by $102,000 as a result of
the reversal of depreciation expense of $115,000 included in selling expenses, net of taxes of $13,000.
2011 annual report
55
26. FIRST-TIME ADOPTION OF IFRS [Cont’d]
C.Provisions
Under Canadian GAAP, provisions for onerous contracts were not required. In accordance with IAS 37 “Provisions, Contingent Liabilities
and Contingent Assets”, IFRS requires that a provision for onerous contracts be recognized when the unavoidable costs of meeting an
obligation under a contract exceed the economic benefits expected to be received under it.
As a result of this change in policy, the Company has recorded an increase in provisions in the amount of $2.7 million, a decrease in deferred
tax liabilities of $226,000 and a decrease in retained earnings of $2.4 million related to the provision for onerous contracts of $2.7 million,
net of taxes of $226,000, as at the transition date. The tax impact resulting from the provision for onerous contracts is only attributable to
a Canadian store.
For the year ended January 29, 2011, this change in policy has resulted in a decrease in provisions of $1.2 million and an increase in deferred
tax liabilities of $79,000. Net earnings for the year ended January 29, 2011 have been increased by $1.1 million as a result of an increase in
amortization of loss provision of $1.2 million included in selling expenses, net of taxes of $79,000.
D.Leases
Under Canadian GAAP, the Company expensed rental payments as incurred for operating leases. Under IFRS, the Company expenses fixed
rental payments on a straight-line basis over the term of the lease.
As a result of this change in policy, the Company has recorded an increase in deferred lease credits in the amount of $5.2 million, a
decrease to deferred tax liabilities of $1.3 million and a decrease in retained earnings of $3.9 million related to an increase in rent expense
of $5.2 million, net of taxes of $1.3 million, as at the transition date.
For the year ended January 29, 2011, this change in policy has resulted in an increase in deferred lease credits of $979,000 and a decrease
in deferred tax liabilities of $291,000. Net earnings for the year ended January 29, 2011 have been decreased by $688,000 as a result of
an increase in rent expense of $916,000 included in selling expenses, net of taxes of $274,000, and an increase in rent expense of $63,000
included in general and administrative expenses, net of taxes of $17,000.
56
26. FIRST-TIME ADOPTION OF IFRS [Cont’d]
E. Retained earnings
The adjustments related to the transition to IFRS as listed in this note had the following impact on retained earnings:
January 29, 2011
January 31, 2010
$
$
Retained earnings as previously reported under Canadian GAAP
Adjustments to retained earnings:
Advertising expenses
Current income tax recovery
122,497
120,687
(90)
27
—
—
(63)
—
Impairment of property and equipment
Deferred income tax recovery
(643)
85
(758)
98
(558)
(660)
Provision for onerous contracts
Deferred income tax recovery
(1,474)
147
(2,650)
226
(1,327)
(2,424)
Deferred lease credits
Deferred income tax recovery
(6,178)
1,630
(5,199)
1,339
(4,548)
(3,860)
Retained earnings reported under IFRS
116,001
113,743
IFRS reclassifications
F. Deferred income taxes
Under Canadian GAAP, the Company segregated the current and non-current portions of deferred income tax assets and liabilities based
on the classification of the related asset or liability or according to the date on which the balance was expected to be realized. Under IFRS,
in accordance with IAS 1 “Presentation of Financial Statements”, deferred income taxes must be classified as long-term on the balance
sheet. This change has resulted in a reclassification of deferred tax assets and liabilities from current to long-term.
G. Deferred revenue
Under Canadian GAAP, unredeemed gift cards were presented as accounts payable and accrued liabilities. Under IFRS, the Company has
presented unredeemed gift cards as deferred revenue on the balance sheet.
H. Consolidated statement of earnings
Under Canadian GAAP, there was no requirement for expenses to be classified according to their nature or function. Under IFRS, in
accordance with IAS 1 “Presentation of Financial Statements”, an analysis of expenses is required, either by nature or by function, on the
face of the statement of earnings. The Company has elected to present the analysis of expenses by function. Depreciation and amortization
expenses are allocated within each function to which it relates.
2011 annual report
57
27. SUBSEQUENT EVENTS
Credit facilities
On April 5, 2012, the Company increased its $20.0 million operating line of credit to $22.0 million. Amounts drawn under this line of credit
are payable on demand and bear interest at rates based on the prime bank rate plus 1% for loans in Canadian dollars and U.S. base rate
plus 1% for loans in U.S. dollars.
On April 25, 2012, the Company entered into a Credit Agreement for an asset based credit facility of up to $70.0 million, replacing its
previous banking facility. The revolving credit facility is collateralized by the Company’s credit card accounts receivable and inventories,
as defined in the agreement. The facility has a term of 3 years, and consists of revolving credit loans, which include both a swing line loan
facility limited to $15.0 million and a letter of credit facility limited to $15.0 million. The available borrowings will bear interest at a rate based
on the Canadian prime rate, plus an applicable margin ranging from 0.75% to 1.50%, or a banker’s acceptance rate, plus an applicable
margin ranging from 2.00% to 2.75%. The Company is required to pay a standby fee ranging from 0.25% to 0.375% on the unused portion
of the revolving credit. The Credit Agreement requires the Company to comply with certain covenants, including restrictions with respect to
the payment of dividends and the purchase of the Company’s shares under certain circumstances.
58
BOARD OF DIRECTORS
Herschel H. Segal
Former Chairman of the Board and
Chief Executive Officer of the Company
Jane Silverstone Segal, B.A.LLL
Chairman of the Board and
Chief Executive Officer of the Company
Emilia Di Raddo, CPA, CA
President and Secretary
David Martz*
Management Consultant
Norman Daitchman, FCPA, FCA*
Consultant
Max Mendelsohn*
Partner of McMillan LLP
*Member of the Audit Committee
Neil Kravitz
Partner, Davies Ward Phillips &
Vineberg LLP
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, CPA, CA
President and Secretary
Johnny Del Ciancio, CPA, CA
Vice-President, Finance
Auditors
Ernst and Young LLP
Chartered Accountants
Corporate Counsel
Davies Ward Phillips & Vineberg LLP
Annual Meeting of Shareholders
Tuesday, July 10, 2012
at 10:00 am at our head office
Registrar and Transfer Agent
Computershare Investor Services Inc.
Bankers
GE Capital Canada
HSBC Bank Canada
Produced by:
MaisonBrison Inc.
HEAD OFFICE
8300 Decarie Boulevard, Montreal, Quebec H4P 2P5
Telephone: 514.738.7000, www.lechateau.com