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

To our shareholders,

Sales for the third quarter ended November 1, 2014 decreased 4.5% to $238.3 million compared with $249.4 million for the third quarter last year, impacted by a net reduction of 52 stores. Same store sales* increased 0.2% with conventional stores decreasing 1.5% and e-commerce sales increasing 76.4%. The Company’s gross margin for the third quarter ended November 1, 2014 was 61.2% compared with 61.0% for the third quarter last year. Net earnings for the third quarter ended November 1, 2014 were $12.9 million ($0.20 diluted earnings per share) as compared with net earnings of $5.8 million ($0.09 diluted earnings per share) for the third quarter last year. Adjusted EBITDA1 increased by 48.2% to $31.1 million for the third quarter ended November 1, 2014 as compared with $21.0 million for the third quarter ended November 2, 2013, the increase being primarily attributable to the closure of non performing stores and previously reported initiatives aimed at reducing costs across the organization.

Sales for the nine months ended November 1, 2014 were $703.1 million as compared with $719.7 million for the nine months ended November 2, 2013, a decrease of 2.3%, impacted by a net reduction of 52 stores. Same store sales* increased 0.9% with conventional stores decreasing 0.1% and e-commerce sales increasing 52.3%. The Company’s gross margin for the nine months ended November 1, 2014 decreased to 60.1% from 62.6% for the nine months ended November 2, 2013, primarily due to the impact of a significant decline in the Canadian dollar vis-à-vis the U.S. dollar. Net earnings for the nine months ended November 1, 2014 were $9.0 million ($0.14 diluted earnings per share) as compared with net earnings of $13.4 million ($0.21 diluted earnings per share) for the nine months ended November 2, 2013. For the nine months ended November 1, 2014, adjusted EBITDA* was $50.7 million as compared with $62.3 million for the nine months ended November 2, 2013, a decrease of $11.6 million.

On November 25, 2014 the Company announced its plan to close all 107 Smart Set stores over the next twelve to eighteen months to improve the Company’s operating results and refocus its sales and merchandising efforts by converting approximately 76 Smart Set stores to other Company banners and closing 31 stores. The decision to close the Smart Set banner resulted in non-cash asset write-offs of $2.7 million for the three and nine months ended November 1, 2014.

During the quarter, the Company opened 8 new stores and closed 10. Accordingly, at November 1, 2014, there were 843 stores consisting of 343 Reitmans, 141 Penningtons, 105 Addition Elle, 79 RW & CO., 68 Thyme Maternity and 107 Smart Set, as compared with a total of 895 stores as at November 2, 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 November (the four weeks ended November 29, 2014) increased 0.2% with same store sales* increasing 4.1%, conventional stores increasing 2.4% and e-commerce sales increasing 60.6%.

At the Board of Directors meeting held on December 4, 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 January 29, 2015 to shareholders of record on January 19, 2015.

On behalf of the Board of Directors,


Jeremy H. Reitman
Chairman and Chief Executive Officer

Montreal, December 4, 2014

* The above text includes a reference to adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is defined as net 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 net impairment charges. The following table reconciles the most comparable GAAP measure, net earnings, to adjusted EBITDA. 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.

The following table reconciles net earnings to adjusted EBITDA for the three and nine months ended November 1, 2014 and November 2, 2013.

(unaudited) For the three months ended For the nine months ended
November 1, 2014 November 2, 2013 November 1, 2014 November 2, 2013
Net earnings $ 12,866 $ 5,763 $ 9,008 $ 13,359
Depreciation, amortization and net impairment losses 15,942 13,913 41,773 46,412
Dividend income (592) (872) (1,889) (2,608)
Interest income (273) (133) (617) (437)
Realized gain on disposal of available-for-sale financial assets (836) - (775) -
Impairment loss on available-for-sale financial assets 564 190 574 692
Interest expense 95 121 306 382
Income tax expense 3,362 2,029 2,283 4,517
ADJUSTED EBITDA $ 31,128 $ 21,011 $ 50,663 $ 62,317