ReitmansSmart SetRW&CO.PenningtonsAddition ElleThyme Maternity
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Chairman’s Report

To our shareholders,

Sales for the three months ended August 2, 2014 increased 1.9%, despite a net reduction of 55 stores, to $258.3 million as compared with $253.4 million for the three months ended August 3, 2013. Same store sales* increased 4.6%, excluding e-commerce which increased 48.3%. Sales improved in the second quarter of fiscal 2015 in most banners, as consumers responded well to rebranding efforts and new product offerings. The Smart Set banner is showing improved performance as it continues to eliminate underperforming locations and gains consumer acceptance through its repositioning and rebranding efforts. The Company’s gross margin for the three months ended August 2, 2014 decreased to 59.5% from 62.4% for the three months ended August 3, 2013. The weaker Canadian dollar against the U.S. dollar negatively impacted margins, with the average rate for a U.S. dollar ranging between $1.06 and $1.10 during the three months ended August 2, 2014 as compared to $1.00 and $1.06 in the three months ended August 3, 2013. Net earnings for the three months ended August 2, 2014 were $9.6 million ($0.15 diluted earnings per share) as compared with net earnings of $10.2 million ($0.16 diluted earnings per share) for the three months ended August 3, 2013. Adjusted EBITDA* decreased by 22.9% to $23.6 million for the three months ended August 2, 2014 as compared with $30.6 million for the three months ended August 3, 2013. The decrease in net earnings and reduction in adjusted EBITDA were primarily attributable to the significant decline in the Canadian dollar vis-à-vis the U.S. dollar resulting in increased costs of goods sold and a significant loss on the remeasurement to fair value of U.S. dollar option contracts.

Sales for the six months ended August 2, 2014 were $464.8 million as compared with $470.3 million for the six months ended August 3, 2013, a decrease of 1.2%, impacted by a net reduction of 55 stores. Same store sales* increased by 0.6%, excluding e-commerce which increased 36.9%. The Company’s banners showed improvement in the second quarter of fiscal 2015 after experiencing weak sales in the first quarter. The Company’s e-commerce direct to consumer channel continues to show significant sales growth, although representing a small proportion of total Company sales. The Company’s gross margin for the six months ended August 2, 2014 decreased to 59.5% from 63.4% for the six months ended August 3, 2013. The weaker Canadian dollar against the U.S. dollar negatively impacted margins, with the average rate for a U.S. dollar ranging between $1.06 and $1.13 during the six months ended August 2, 2014 as compared to $1.00 and $1.06 in the six months ended August 3, 2013. Net loss for the six months ended August 2, 2014 was $3.9 million ($0.06 diluted loss per share) as compared with net earnings of $7.6 million ($0.12 diluted earnings per share) for the six months ended August 3, 2013. For the six months ended August 2, 2014, adjusted EBITDA1 was $19.5 million as compared with $41.3 million for the six months ended August 3, 2013, a decrease of $21.8 million. The net loss and reduction in adjusted EBITDA were primarily attributable to the significant decline in the Canadian dollar vis-à-vis the U.S. dollar resulting in increased costs of goods sold and a significant loss on the remeasurement to fair value of U.S. dollar option contracts. A reduction in the number of employees in both head office and field operations, in conjunction with a reduction in the number of store locations has resulted in wages and benefit savings. Additional savings have been achieved through improved cost management in non-wage areas. These initiatives aimed at reducing costs across the organization have yielded savings in both the three and six months ended August 2, 2014.

During the quarter, the Company opened 1 new store and closed 18. Accordingly, at August 2, 2014, there were 845 stores consisting of 343 Reitmans, 143 Penningtons, 102 Addition Elle, 76 RW & CO., 68 Thyme Maternity and 113 Smart Set, as compared with a total of 900 stores as at August 3, 2013. The Company also operates 21 Thyme Maternity shop-in-shop boutiques in select Babies"R"Us locations in Canada.

Sales for the month of August (the four weeks ended August 30, 2014) increased 1.8% with same store sales* increasing 5.0%, excluding e-commerce which increased 62.7%.

At the Board of Directors meeting held on September 11, 2014, a quarterly cash dividend (constituting eligible dividends) of $0.05 per share on all outstanding Class A non-voting and Common shares of the Company was declared, payable October 23, 2014 to shareholders of record on October 9, 2014.

On behalf of the Board of Directors,


Jeremy H. Reitman
Chairman and Chief Executive Officer

Montreal, September 11, 2014

* The above text includes a reference to adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is defined as earnings before income tax expense, other income, dividend income, interest income, realized gains or losses on disposal of available-for-sale financial assets, interest expense, depreciation, amortization and impairment charges. The Company also discloses same store sales, which are defined as sales generated by stores that have been continuously open during both of the periods being compared and includes e-commerce sales. The same store sales metric compares the same calendar days for each period. Same store sales is a measure widely used amongst retailers and is considered useful information for both investors and analysts. Although this key performance indicator is expressed as a ratio, it is a non-GAAP financial measure that does not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures used by other companies.