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Le Château Reports Second Quarter Results

MONTRÉAL, Sept. 20, 2019 (GLOBE NEWSWIRE) -- Le Château Inc. (TSX VENTURE: CTU), today reported financial results for the second quarter ended July 27, 2019. Unless otherwise indicated, the Company's results for the second quarter reflect the impact of the implementation of IFRS 16, as described below under “Adoption of IFRS 16 – Leases".

Sales for the second quarter ended July 27, 2019 amounted to $49.7 million as compared with $53.3 million for the second quarter ended July 28, 2018, a decrease of 6.9%, with 15 fewer stores in operation. Comparable store sales, which include online sales, decreased 2.5% versus the same period a year ago, with comparable regular store sales decreasing 4.0% and comparable outlet store sales increasing 9.7% (see non-GAAP measures below). Sales continue to be negatively impacted by reduced mall and store traffic.

Net loss for the second quarter ended July 27, 2019 amounted to $305,000 or $(0.01) per share compared to a net loss of $178,000 or $(0.01) per share for the same period last year. The net loss for the second quarter of 2019 included an unfavorable impact of IFRS 16 of $324,000.

Adjusted EBITDA (see non-GAAP measures below) for the second quarter of 2019 amounted to $11.4 million, compared to $4.4 million for the same period last year, an improvement of $7.0 million. The improvement in adjusted EBITDA includes a favorable impact of IFRS 16 of $7.2 million. Excluding the $7.2 million impact of IFRS 16, the adjusted EBITDA for the second quarter was $4.2 million compared with $4.4 million for same period last year. The decrease of $200,000 in adjusted EBITDA for the second quarter of 2019 was primarily attributable to the reduction of $3.2 million in gross margin dollars, partially offset by the decrease in selling, distribution and administrative expenses of $3.0 million. The decrease in selling, distribution and administrative expenses resulted primarily from the reduction in store operating expenses, due mainly to store closures, and a reduction in head office infrastructure costs. The decrease of $3.2 million in gross margin dollars was the result of the 6.9% overall sales decline for the second quarter, combined with the decrease in gross margin percentage to 66.3% from 67.9% in 2018.

Six-month Results

Sales for the six months ended July 27, 2019 amounted to $85.7 million as compared with $94.4 million last year, a decrease of 9.2%, with 15 fewer stores in operation. Comparable store sales, which include online sales, decreased 3.9% versus the same period a year ago, with comparable regular store sales decreasing 5.3% and comparable outlet store sales increasing 6.6%.

Net loss for the six-month period ended July 27, 2019 amounted to $11.1 million or $(0.37) per share compared to a net loss of $11.0 million or $(0.37) per share the previous year. The net loss for the first six months of 2019 included an unfavorable impact of IFRS 16 of $18,000.

Adjusted EBITDA for the six months ended July 27, 2019 amounted to $12.1 million, compared to $(1.8) million for the same period last year, an improvement of $13.9 million. The improvement in adjusted EBITDA includes a favorable impact of IFRS 16 of $15.0 million. Excluding the $15.0 million impact of IFRS 16, the adjusted EBITDA for first the six months of 2019 was $(2.9) million compared with $(1.8) million for same period last year. The decrease of $1.1 million in adjusted EBITDA for the first six months of 2019 was primarily attributable to the reduction of $6.9 million in gross margin dollars, partially offset by the decrease in selling, distribution and administrative expenses of $5.8 million. The decrease in selling, distribution and administrative expenses resulted primarily from the reduction in store operating expenses, due mainly to store closures, and a reduction in head office infrastructure costs. The decrease of $6.9 million in gross margin dollars was the result of the 9.2% overall sales decline for the first half of 2019, combined with the decrease in gross margin percentage to 64.4% from 65.8% in 2018.

During the first six months of 2019, the Company closed six underperforming stores. As at July 27, 2019, the Company operated 133 stores (including 15 fashion outlet stores) compared to 148 stores (including 28 fashion outlet stores) as at July 28, 2018. The Company is planning to close 2 additional stores in the second half of 2019.

Adoption of IFRS 16 - Leases

The Company adopted IFRS 16 – Leases, replacing IAS 17 – Leases and related interpretations, using the modified retrospective approach, effective for the annual reporting period beginning on January 27, 2019. As a result, the Company's results for the three and six-month periods ended July 27, 2019 reflect lease accounting under IFRS 16. Comparative figures for the three and six-month periods ended July 28, 2018 have not been restated and continue to be reported under IAS 17, Leases. Refer to Note 2 of the unaudited interim condensed consolidated financial statements for the three and six-month periods ended July 27, 2019 for additional details on the implementation of IFRS 16.

Profile

Le Château is a leading Canadian specialty retailer and manufacturer of exclusively designed apparel, footwear and accessories for contemporary and style-conscious women and men, with an extensive network of 131 prime locations across Canada and an e-com platform servicing Canada and the U.S. Le Château, committed to research, design and product development, manufactures approximately 30% of the Company’s apparel in its own Canadian production facilities.

Non-GAAP Measures

In addition to discussing earnings measures in accordance with IFRS, this press release provides adjusted EBITDA as a supplementary earnings measure, which is defined as earnings (loss) before interest, income taxes, depreciation, amortization, write-off and/or impairment of property and equipment and intangible assets and accretion of First Preferred shares series 1 (“Adjusted EBITDA”). Adjusted EBITDA is provided to assist readers in determining the ability of the Company to generate cash from operations and to cover financial charges. It is also widely used for valuation purposes for public companies in our industry.

The following table reconciles adjusted EBITDA to loss before income taxes in the unaudited interim condensed consolidated statements of loss for the three and six-month periods ended July 27, 2019 and July 28, 2018:

   
  For the three months ended
(Unaudited)
(In thousands of Canadian dollars)
July 27, 2019
(Excluding impact
of IFRS 16) (1)
IFRS 16 impacts July 27, 2019
(Including impact
of IFRS 16)
July 28, 2018
Loss before income taxes $ 19 $ (324) $ (305) $ (178)
Depreciation and amortization   1,902   6,118   8,020   2,229
Write-off and impairment of property and equipment   -   -   -   53
Finance costs   2,287   1,375   3,662   1,597
Accretion of First Preferred shares series 1   -   -   -   682
Adjusted EBITDA $ 4,208 $ 7,169 $ 11,377 $ 4,383
   
  For the six months ended
(Unaudited)
(In thousands of Canadian dollars)
July 27, 2019
(Excluding impact
of IFRS 16) (1)
IFRS 16 impacts July 27, 2019
(Including impact
of IFRS 16)
July 28, 2018
Loss before income taxes $ (11,124) $ (18) $ (11,142) $ (10,955)
Depreciation and amortization   3,834   12,263   16,097   4,514
Write-off and impairment of property and equipment   41   -   41   116
Finance costs   4,394   2,735   7,129   3,185
Accretion of First Preferred shares series 1   -   -   -   1,345
Adjusted EBITDA $ (2,855) $ 14,980 $ 12,125 $ (1,795)
                 

(1) Adjusted EBITDA for the three and six-month periods ended July 27, 2019 excluding impact of IFRS 16 assumes the Company continued to report under IAS 17, Leases and did not adopt IFRS 16, other than for differences related to testing long-lived assets for impairment and accounting for onerous store leases pursuant to the guidance of IAS 37, Provisions, contingent liabilities and contingent assets, which could have had an impact on the EBITDA and net loss of the Company under accounting standards applicable prior to January 27, 2019. Under IFRS 16, the nature and timing of expenses related to operating leases have changed as the straight-line operating lease expenses have been replaced with a depreciation charge for right-of use assets and interest expense on lease liabilities. Accordingly, IFRS 16 had a favorable impact of approximately $7.2 million and $15.0 million, respectively, on adjusted EBITDA for the three and six-month periods ended July 27, 2019 as operating leases expenses have been replaced with depreciation and interest expenses, which are not included in the calculation of adjusted EBITDA.

The Company also discloses comparable store sales which are defined as sales generated by stores that have been open for at least one year on a comparable week basis. Online sales are included in comparable store sales.

The following table reconciles comparable store sales to total sales disclosed in the unaudited interim condensed consolidated statements of loss for the three and six-month periods ended July 27, 2019 and July 28, 2018:

     
(Unaudited) For the three months ended For the six months ended
(In thousands of Canadian dollars) July 27, 2019 July 28, 2018 July 27, 2019 July 28, 2018
Comparable store sales – Regular stores $ 41,787 $ 43,539 $ 72,386 $ 76,412
Comparable store sales – Outlet stores   6,113   5,571   10,326   9,688
Total comparable store sales   47,900   49,110   82,712   86,100
Non-comparable store sales   1,761   4,203   3,019   8,297
Total sales $ 49,661 $ 53,313 $ 85,731 $ 94,397
                 

The above measures do not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.

Forward-Looking Statements

This news release may contain forward-looking statements relating to the Company and/or the environment in which it operates that are based on the Company's expectations, estimates and forecasts. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and/or are beyond the Company's control. A number of factors may cause actual outcomes and results to differ materially from those expressed. These factors also include those set forth in other public filings of the Company. Therefore, readers should not place undue reliance on these forward-looking statements. In addition, these forward-looking statements speak only as of the date made and the Company disavows any intention or obligation to update or revise any such statements as a result of any event, circumstance or otherwise except to the extent required under applicable securities law.

The Company’s ability to continue as a going concern for the next twelve months is dependent on its ability to obtain necessary financing either through a renewal of its revolving credit facility and refinancing of its subordinated term loan, or from other financing sources; the availability under its current credit facility; its ability to improve its sales and generate positive cash flow from operations and the continued support of its suppliers and other creditors. Management is currently addressing its financing requirements with its lenders. There can be no assurance that borrowings will be available to the Company or available on acceptable terms, in an amount sufficient to fund the Company’s needs or that the Company’s suppliers and other creditors will continue their support of the Company (see note 2 of the Company’s unaudited interim condensed consolidated financial statements).

Factors which could cause actual results or events to differ materially from current expectations include, among other things: the ability of the Company to successfully implement its business initiatives and whether such business initiatives will yield the expected benefits; liquidity risks; competitive conditions in the businesses in which the Company participates; changes in consumer spending; general economic conditions and normal business uncertainty; seasonality and weather patterns; changes in the Company's relationship with its suppliers; lease renewals; information technology security and loss of customer data; fluctuations in foreign currency exchange rates; interest rate fluctuations and changes in laws, rules and regulations applicable to the Company. The foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results.

The Company’s unaudited interim condensed consolidated financial statements and Management’s Discussion and Analysis for the second quarter ended July 27, 2019 are available online at www.sedar.com.

For further information

Emilia Di Raddo, CPA, CA, President (514) 738-7000
Johnny Del Ciancio, CPA, CA, Vice-President, Finance, (514) 738-7000
MaisonBrison:  Pierre Boucher, (514) 731-0000
Source:  Le Château Inc.

 
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of Canadian dollars)
As at
July 27, 2019
As at
July 28, 2018 (1)
As at
January 26, 2019 (1)
ASSETS            
Current assets            
Accounts receivable $ 2,326 $ 1,069 $ 1,031
Income taxes refundable   318   329   440
Inventories   85,024   88,775   86,487
Prepaid expenses   2,325   1,948   1,976
Total current assets   89,993   92,121   89,934
Deposits   485   485   485
Property and equipment   18,220   24,768   21,648
Intangible assets     1,434   2,085   1,831
Right-of-use assets   74,683   -   -
  $ 184,815 $ 119,459 $ 113,898
             
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)            
Current liabilities            
Bank indebtedness $ 41 $ 171 $ 489
Current portion of credit facility     46,024   11,911   19,093
Trade and other payables     20,355   18,115   20,437
Deferred revenue     1,750   2,935   2,402
Current portion of lease liabilities   32,507   -   -
Current portion of provision for onerous leases     -   400   240
Current portion of long-term debt     15,000   -   -
Total current liabilities   115,677   33,532   42,661
Credit facility   -   33,002   29,901
Long-term debt     16,058   29,289   29,684
Lease liabilities    65,422   -   -
Provision for onerous leases   -   80   -
Deferred lease credits   -   6,971   6,490
First Preferred shares series 1   -   24,182   -
Total liabilities     197,157   127,056   108,736
             
Shareholders' equity (deficiency)            
Share capital     73,573   47,967   73,573
Contributed surplus     14,193   14,125   14,132
Deficit   (100,108)   (69,689)   (82,543)
Total shareholders' equity (deficiency)   (12,342)   (7,597)   5,162
  $ 184,815 $ 119,459 $ 113,898
             

(1) The Company has initially applied IFRS 16 as at January 27, 2019. Under the transition method chosen, comparative information is not restated.

NOTICE
The Company’s independent auditors have not performed a review of the accompanying interim condensed consolidated financial statements.

 
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited) For the three months ended For the six months ended
(In thousands of Canadian dollars, except per share information) July 27, 2019 July 28, 2018 (1) July 27, 2019 July 28, 2018 (1)
Sales $   49,661 $ 53,313 $   85,731 $ 94,397
Cost of sales and expenses        
Cost of sales     16,689   17,131     30,433   32,320
Selling and distribution   25,391   28,324   50,299   57,384
Administrative     4,224   5,757     9,012   11,118
      46,304   51,212   89,744   100,822
Results from operating activities      3,357   2,101     (4,013)   (6,425)
Finance costs   3,662   1,597     7,129   3,185
Accretion of First Preferred shares series 1     -   682     -   1,345
Loss before income taxes     (305)   (178)     (11,142)   (10,955)
Income tax recovery     -   -     -   -
Net loss and comprehensive loss $   (305) $ (178) $   (11,142) $ (10,955)
         
Net loss per share        
Basic $   (0.01) $ (0.01) $   (0.37) $ (0.37)
Diluted     (0.01)   (0.01)      (0.37)   (0.37)
Weighted average number of shares outstanding ('000)     29,964   29,964     29,964   29,964
                 

(1) The Company has initially applied IFRS 16 as at January 27, 2019. Under the transition method chosen, comparative information is not restated.

 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIENCY
(Unaudited) For the three months ended
For the six months ended
(In thousands of Canadian dollars) July 27, 2019 July 28, 2018 (1) July 27, 2019 July 28, 2018 (1)
                 
SHARE CAPITAL $    73,573 $ 47,967 $   73,573 $ 47,967
CONTRIBUTED SURPLUS                
Balance, beginning of period $    14,193 $ 14,114 $    14,132 $ 9,600
Transitional adjustments on adoption of new accounting standards     -   -     -   4,502
Adjusted balance, beginning of period   14,193   14,114     14,132   14,102
Fair value adjustment of long-term debt     -   -     61   -
Stock-based compensation expense     -   11     -   23
Balance, end of period $    14,193 $ 14,125 $   14,193 $ 14,125
DEFICIT                
Balance, beginning of period $   (99,803) $ (69,511) $   (82,543) $ (57,367)
Transitional adjustments on adoption of new accounting standards      -   -     (6,423)   (1,367)
Adjusted balance, beginning of period   (99,803)   (69,511)     (88,966)   (58,734)
Net loss     (305)   (178)     (11,142)   (10,955)
Balance, end of period $   (100,108) $ (69,689) $   (100,108) $ (69,689)
Total shareholders’ deficiency $    (12,342) $ (7,597) $     (12,342) $ (7,597)
                 

(1) The Company has initially applied IFRS 16 as at January 27, 2019. Under the transition method chosen, comparative information is not restated.

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the three months ended
For the six months ended
(In thousands of Canadian dollars) July 27, 2019
July 28, 2018 (1)
July 27, 2019
July 28, 2018 (1)
OPERATING ACTIVITIES                
Net loss $   (305) $ (178) $   (11,142) $ (10,955)
Adjustments to determine net cash from operating activities                
Depreciation and amortization     8,020   2,229     16,097   4,514
Write-off and impairment of property and equipment   -   53     41   116
Amortization of deferred lease credits   -   (368)   -   (735)
Deferred lease credits   -   526   -   595
Stock-based compensation   -   11   -   23
Provision for onerous leases   -   (883)   -   (1,020)
Finance costs   3,662   1,597     7,129   3,185
Accretion of First Preferred shares series 1   -   682   -   1,345
Interest paid     (1,052)   (1,056)     (2,207)   (2,052)
      10,325   2,613     9,918   (4,984)
Net change in non-cash working capital items related to operations     3,845   3,808     (1,780)   647
Income taxes refunded   -   -     230   240
Cash flows related to operating activities     14,170   6,421     8,368   (4,097)
                 
FINANCING ACTIVITIES                
Increase (decrease) in credit facility     (12,727)   (7,272)     (3,156)   6,184
Payment of lease liabilities   (2,172)   -   (4,905)   -
Other finance costs   (535)   -   (809)   -
Proceeds from long-term debt   -    -     1,000   -
Cash flows related to financing activities   (15,434)   (7,272)   (7,870)   6,184
                 
INVESTING ACTIVITIES                
Additions to property and equipment and intangible assets     (18)   (1,322)     (50)   (1,997)
Cash flows related to investing activities     (18)   (1,322)     (50)   (1,997)
                 
Increase (decrease) in cash (bank indebtedness)     (1,282)   (2,173)     448   90
Cash (bank indebtedness), beginning of period     1,241   2,002     (489)   (261)
Bank indebtedness, end of period $   (41) $ (171) $   (41) $ (171)
                 

(1) The Company has initially applied IFRS 16 as at January 27, 2019. Under the transition method chosen, comparative information is not restated.