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Danier Leather Reports Fiscal 2015 Fourth Quarter and Year End ResultsMonday, September 21, 2015 > 11:20:28
Danier Leather Inc. (TSX:DL) ("Danier" or the "Company") today announced its consolidated financial results for the fourth quarter and fiscal year ended June 27, 2015.
- The increase in the Company's net loss in 2015 was caused by reduced sales and gross profit margins, a $5.2 million write-down of deferred income tax asset and $3.2 million of asset impairment losses.
- Converted its existing operating and revolving credit into a senior secured asset-based credit facility with its current lender, Canadian Imperial Bank of Commerce.
- Signed a purchase and sale agreement to sell its head office building and property for expected net proceeds of $11.6 million with seven-year lease back at fixed rental rates.
- Strengthened management team with addition of Brent Houlden as Interim Chief Financial Officer and the return of Olga Koel as Vice-President, Merchandising.
- Fall/Winter product offering includes a broader range of fabrics and materials beyond leather and the Company is selectively introducing branded merchandise which complements Danier exclusive product offerings.
FINANCIAL HIGHLIGHTS ($000s, except earnings per share (EPS), square footage and number of stores):
|For the 13 Weeks Ended||For the 52 Weeks Ended|
|Net Earnings (Loss)||(13,291||)||(6,680||)||(19,869||)||(7,663||)|
|EPS - Basic||$||(3.45||)||$||(1.74||)||$||(5.16||)||$||(2.00||)|
|EPS - Diluted||$||(3.45||)||$||(1.74||)||$||(5.16||)||$||(2.00||)|
|Number of Stores||86||90||86||90|
|Retail Square Footage||272,124||283,303||272,124||283,303|
Revenue decreased by 11% or $15.9 million to $126 million in 2015 from $141.9 million in 2014. During the fourth quarter of 2015, revenue decreased by 5% or $1.2 million to $23.5 million from $24.7 million during the fourth quarter of 2014. Comparable store sales(2) in 2015 decreased by 14% as compared to 2014. In the fourth quarter of 2015, comparable store sales decreased by 5%.
There were a number of external and internal factors that contributed to the decrease in 2015 sales. Beyond the ongoing challenging retail environment, the merchandise purchased for fall and winter was not aligned to current fashion trends resulting in significant sales declines. As a result, the Company's sales were negatively affected during what has historically been Danier's busiest selling season and this resulted in a build-up of inventory, which carried into spring. This resulted in the need to implement large discounts to clear built-up inventory. By year-end, Danier had effectively reduced the surplus fall and winter inventory to levels similar to the fiscal 2014 year-end.
Gross profit dollars decreased by 18% or $12.4 million to $55.8 million in 2015, compared with $68.2 million in 2014. The decrease in gross profit dollars was mainly due to an 11% decrease in sales, increased promotional activity needed to sell built-up inventory, a $0.38 million decrease in write-downs of inventory and a weakening of the Canadian dollar relative to the U.S. dollar. For the fourth quarter of 2015, gross profit as a percentage of revenue decreased to 30.0% compared with 39.9% during the fourth quarter of 2014. The decrease in gross profit in the fourth quarter was mainly due to a 5% decrease in sales, increased promotional activity needed to sell built-up inventory, a $0.5 million increase in write-downs of inventory and a weakening of the Canadian dollar relative to the U.S. dollar.
Selling, general and administrative ("SG&A") expense (3) decreased by 5% or approximately $3.7 million to $75.3 million in 2015. In 2015, SG&A was increased by asset impairment losses, severance, and higher store occupancy costs that were offset by foreign exchange gains and cost reduction initiatives. For the fourth quarter of 2015, SG&A of $18.1 million decreased by approximately $0.5 million compared with the fourth quarter of 2014. In the fourth quarter of 2015, SG&A declined even though asset impairment losses and strategic review fees increased over fourth quarter of 2014.
Effective income tax provision rate for 2015 was (1.1%) and (21.4%) for the fourth quarter of 2015. In 2014, the effective tax rate for 2014 and for the fourth quarter of 2014 was 29.0% and 28.9%, respectively. The differences in the effective tax rates are due to the $5.2 million write-down of the deferred income tax asset in the fourth quarter of 2015.
Net loss for 2015 was $19.9 million ($5.16 loss per share) compared with a net loss of $7.7 million ($2.00 loss per share) in 2014. The net loss for the fourth quarter of 2015 was $13.3 million ($3.45 loss per share) compared with $6.7 million ($1.74 loss per share) in the fourth quarter of 2014.
In addition to reduced sales and gross profit margins, a $5.2 million write-down of deferred income tax asset and $3.2 million of asset impairment losses, combined to significantly increase the Company's net loss in 2015.
Balance sheet highlights:
- The Company's cash balance decreased from $13.5 million at the end of 2014 to net bank indebtedness of $1.4 million as at June 27, 2015. The decrease in cash was principally due to the net loss of $19.9 million in 2015.
- Total inventory at the end of 2015 was approximately $0.2 million lower than inventory at the end of 2014.
- The deferred income tax asset was written-off in 2015. As at June 27, 2015, the Company has available non-capital losses of approximately $8.6 million which can be used to reduce income taxes in future years. These income tax losses will expire in 2035.
- Total liabilities of $12.5 million at the end of 2015 were $0.3 million higher than total liabilities of $12.2 million at the end of 2014.
UPDATE ON STRATEGIC AND OPERATING ACTIVITIES
During fiscal 2015 and 2014, the Company experienced decreases in comparable store sales and gross profit margin and reported net losses of $19.9 million and $7.7 million, respectively. These net losses are the main cause of the Company's cash balance decreasing from $13.5 million as at June 28, 2014 to net bank indebtedness of $1.4 million as at June 27, 2015.
"Although it's been our toughest year ever, we have addressed the missteps and product issues that were made in recent past," said Jeffrey Wortsman, President and Chief Executive Officer. "We are convinced that we now have a viable turnaround plan which we are implementing to improve Danier's performance in fiscal 2016 and beyond. As we look forward, we have a strong line up of merchandise that is on trend."
Management and the Company's Board of Directors are responding to Danier's deteriorating operating performance by taking the following steps:
1. STRATEGIC REVIEW PROCESS - On February 6, 2015, the Company announced that it was exploring strategic alternatives potentially available to the Company including, without limitation a private placement or other offering of equity or debt, the sale, lease or financing of certain assets of the Company, or a sale of, merger or other business combination, joint venture or strategic alliances with the Company. The Company had formed a special committee comprised of independent members of the Board of Directors to oversee this initiative and engaged Consensus Advisory Services LLC as financial advisors.
Subsequent to June 27, 2015, the strategic review process resulted in the extended and amended credit facilities and the sale of the Company's head office building, each as discussed below. On September 18, 2015, the Board of Directors of the Company formally disbanded the special committee in order to allow the Company to focus its efforts on its operational and strategic plans, including the turnaround plan discussed below.
2. EXTENDED AND AMENDED CREDIT FACILITIES - On August 27, 2015, the Company entered into a third amended and restated credit agreement ("Credit Agreement") with its existing lender Canadian Imperial Bank of Commerce ("CIBC"), which converts the Company's existing operating and revolving credit facilities into a senior secured asset-based credit facility (the "ABL Credit Facility") with CIBC, bearing interest at prime plus 2%. The ABL Credit Facility provides an initial commitment of up to $35 million, which will reduce to $28.5 million if the Company sells its head office location as discussed below. Borrowings under the ABL Credit Facility are subject to a borrowing base calculated by reference to the Company's eligible accounts receivables and inventory and real estate, less an availability block, priority payables and other reserves calculated in accordance with the Credit Agreement. The ABL Credit Facility has an initial term of three years, extending the maturity of Danier's facilities to August 27, 2018. The ABL Credit Facility is subject to various financial and other covenants, reporting requirements and restrictions that, if breached, could cause a default and may result in the requirement for immediate repayment of all amounts outstanding under the ABL Credit Facility, as well as other rights and remedies of CIBC. The Company intends to use the ABL Credit Facility to fund its working capital requirements and for general corporate purposes.
3. SALE OF HEAD OFFICE LOCATION - On August 17, 2015, the Company signed a purchase and sale agreement to sell its head office building and property for estimated net proceeds of $11.6 million. The proceeds from the sale will be used to pay outstanding bank indebtedness (discussed above) and the Company will lease back its building from the purchaser for the next seven years at fixed rental rates.
Together, the amended and extended credit facilities and the proceeds from the proposed sale of the building (discussed above) will provide working capital for Danier to continue to reposition its product offerings and purchase inventory in the normal course of business, rationalize operations and reduce costs and continue to implement its operational turnaround plan as outlined below.
4. STRENGTHENING THE MANAGEMENT TEAM - On July 2, 2015, Brent Houlden was hired as interim CFO to oversee the amendment and extension of the Company's credit facilities and to assist with the development of a turnaround plan, including re-aligning the cost structure of the business. Mr. Houlden has extensive retail strategy and operations expertise with deep financial skills. During his 26 years as a partner of Deloitte LLP, Mr. Houlden held various senior leadership positions, including building Deloitte's Consulting and Financial Advisory practices as well as leading its retail practice in Canada.
In August 2015, Olga Koel was re-hired to Danier as the Vice-President, Merchandising responsible for all aspects of merchandise procurement. Ms. Koel's priorities are to improve the execution of the Company's merchandising group and to drive more excitement and "newness" in the products being offered by Danier. She is a proven merchant who has over 30 years of experience, including a deep understanding of the Danier brand and a reputation for taking action and driving results. Ms. Koel will also assume the merchandising responsibilities of Brian Burgess, the former Executive Vice-President, Merchandising, Sourcing and Planning, who resigned from the Company on August 31, 2015.
In addition, the Company has reduced and streamlined its management reporting layers to improve decision-making and accelerate the pace of execution. Communication among members of Management has also been enhanced by improving the physical proximity of the leadership team. Manager accountability, teamwork and cross-department collaboration will be key to a successful turnaround.
5. TURNAROUND PLAN - Management's primary short-term goal is to reverse the decline in same store sales and gross margin. While cost reductions and rationalization of operations is an important component of this strategy, cost-cutting will not be enough to offset the declines in operating income that have been experienced over the last several years. Accordingly, Management's turnaround plan is focused on the following key priorities:
- improving Danier's merchandise sourcing and assortment planning, including the introduction of a broader range of fabrics and materials beyond just leather which will provide warmth during the winter season;
- improving the Company's merchandise planning processes in an effort to have the right assortment of products at the most profitable stores at the right time;
- enhancing the in-store visual merchandising experience, with more emphasis on product, quality, value and differentiation rather than discounting and store-wide sales, and the introduction of streamlined reporting for store personnel to focus them on key retail performance indicators being rolled out;
- rationalizing operations and reducing Danier's cost structure to better align the business and operations with the current retail environment, including modifying processes for sourcing, receiving and distributing to reduce costs and the non-renewal of leases at certain unprofitable store locations and other potential store closures;
- improving branding to emphasize sophistication, luxury, value and differentiation, together with increased use of digital forms of marketing to appeal to a broader base of customers without alienating Danier's core customer;
- continuing to grow on-line sales, the direct shipment offering and other omni channel initiatives;
- improving sales and gross margins through better price management and reducing the level of mark-downs; and
- utilizing advanced analytics to give Management access to relevant statistical data and improve decision-making.
Danier's Management's team is committed to turning around the Company's performance and returning Danier to profitability. The Company is currently projecting another unprofitable year in fiscal 2016 but at a lower level of losses than experienced in 2014 and 2015. If the Company misjudges fashion trends or consumer preferences for the upcoming selling seasons, or its allocation and marketing programs prove less successful than anticipated, this would adversely impact the Company's results and ability to implement its turnaround plan.
For further details concerning the Company's fiscal 2015 fourth quarter and year-end financial position, results of operations, liquidity and capital resources, business strategy and plans, investors are encouraged to read the management's discussion & analysis and audited annual consolidated financial statements and notes thereto for the fiscal year ended June 27, 2015, copies of which will be available on SEDAR at www.sedar.com.