CTU Le Chateau Inc

Le Château Inc. (TSX VENTURE: CTU), today reported financial results for the third ended October 26, 2019. Unless otherwise indicated, the Company's results for the third quarter reflect the impact of the implementation of IFRS 16, as described below under “Adoption of IFRS 16 – Leases".

Sales for the third quarter ended October 26, 2019 amounted to $42.1 million as compared with $45.1 million for the third quarter ended October 27, 2018, a decrease of 6.5%, with 12 fewer stores in operation. Comparable store sales, which include online sales, decreased 4.0% versus the same period a year ago, with comparable regular store sales decreasing 4.0% and comparable outlet store sales decreasing 3.9% (see non-GAAP measures below). Sales continue to be negatively impacted by reduced mall and store traffic.

Net loss for the third quarter ended October 26, 2019 amounted to $6.9 million or $(0.23) per share compared to a net loss of $6.7 million or $(0.22) per share for the same period last year. The net loss for the third quarter of 2019 included a favorable impact of IFRS 16 of $62,000.

Adjusted EBITDA (see non-GAAP measures below) for the third quarter of 2019 amounted to $4.1 million, compared to $(2.1) million for the same period last year, an improvement of $6.2 million. The improvement in adjusted EBITDA includes a favorable impact of IFRS 16 of $7.3 million. Excluding the $7.3 million impact of IFRS 16, the adjusted EBITDA for the third quarter was $(3.2) million compared with $(2.1) million for same period last year. The decrease of $1.1 million in adjusted EBITDA for the third quarter of 2019 was primarily attributable to the reduction of $4.0 million in gross margin dollars, partially offset by the decrease in selling, distribution and administrative expenses of $2.9 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 $4.0 million in gross margin dollars was the result of the 6.5% overall sales decline for the third quarter, combined with the decrease in gross margin percentage to 61.6% from 66.3% in 2018. The decline in the gross margin percentage for the third quarter was the result of increased promotional activity, combined with the short-term liquidation process of store merchandise during the closing period for certain stores.

Nine-month Results

Sales for the nine months ended October 26, 2019 amounted to $127.9 million as compared with $139.5 million last year, a decrease of 8.3%, with 12 fewer stores in operation. Comparable store sales, which include online sales, decreased 4.0% versus the same period a year ago, with comparable regular store sales decreasing 4.9% and comparable outlet store sales increasing 3.0%.

Net loss for the nine-month period ended October 26, 2019 amounted to $18.0 million or $(0.60) per share compared to a net loss of $17.7 million or $(0.59) per share the previous year. The net loss for the first nine months of 2019 included a favorable impact of IFRS 16 of $44,000.

Adjusted EBITDA for the nine months ended October 26, 2019 amounted to $16.2 million, compared to $(3.9) million for the same period last year, an improvement of $20.1 million. The improvement in adjusted EBITDA includes a favorable impact of IFRS 16 of $22.3 million. Excluding the $22.3 million impact of IFRS 16, the adjusted EBITDA for first the nine months of 2019 was $(6.1) million compared with $(3.9) million for same period last year. The decrease of $2.2 million in adjusted EBITDA for the first nine months of 2019 was primarily attributable to the reduction of $10.9 million in gross margin dollars, partially offset by the decrease in selling, distribution and administrative expenses of $8.7 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 $10.9 million in gross margin dollars was the result of the 8.3% overall sales decline for the first nine months of 2019, combined with the decrease in gross margin percentage to 63.5% from 65.9% in 2018. The decline in the gross margin percentage for the first nine months of 2019 was the result of increased promotional activity, combined with the short-term liquidation process of store merchandise during the closing period for certain stores.

During the first nine months of 2019, the Company closed eight underperforming stores. As at October 26, 2019, the Company operated 131 stores (including 13 fashion outlet stores) compared to 143 stores (including 24 fashion outlet stores) as at October 27, 2018. The Company is planning to close 2 additional stores in the fourth quarter 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 nine-month periods ended October 26, 2019 reflect lease accounting under IFRS 16. Comparative figures for the three and nine-month periods ended October 27, 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 nine-month periods ended October 26, 2019 for additional details on the implementation of IFRS 16.

Profile

Le Château is a 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 nine-month periods ended October 26, 2019 and October 27, 2018:

	For the three months ended
(Unaudited) (In thousands of Canadian dollars)	October 26, 2019(Excluding impactof IFRS 16) (1)				IFRS 16 impacts			October 26, 2019 (Including impactof IFRS 16)				October 27, 2018
Loss before income taxes	$	(6,923	)		$	62			$	(6,861	)		$	(6,708	)
Depreciation and amortization		1,644				6,046				7,690				2,039
Write-off and impairment of property and equipment		14				(14	)			-				156
Finance costs		2,020				1,237				3,257				1,688
Accretion of First Preferred shares series 1		-				-				-				702
Adjusted EBITDA	$	(3,245	)		$	7,331			$	4,086			$	(2,123	)
	For the nine months ended
(Unaudited) (In thousands of Canadian dollars)	October 26, 2019 (Excluding impactof IFRS 16) (1)				IFRS 16 impacts			October 26, 2019 (Including impactof IFRS 16)				October 27, 2018
Loss before income taxes	$	(18,047	)		$	44			$	(18,003	)		$	(17,663	)
Depreciation and amortization		5,478				18,309				23,787				6,553
Write-off and impairment of property and equipment		55				(14	)			41				272
Finance costs		6,414				3,972				10,386				4,873
Accretion of First Preferred shares series 1		-				-				-				2,047
Adjusted EBITDA	$	(6,100	)		$	22,311			$	16,211			$	(3,918	)

(1)

Adjusted EBITDA for the three and nine-month periods ended October 26, 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 $7.3 million and $22.3 million, respectively, on adjusted EBITDA for the three and nine-month periods ended October 26, 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 nine-month periods ended October 26, 2019 and October 27, 2018:

(Unaudited)	For the three months ended					For the nine months ended
(In thousands of Canadian dollars)	October 26, 2019			October 27, 2018		October 26, 2019			October 27, 2018
Comparable store sales – Regular stores	$	35,669		$	37,174		$	108,055		$	113,586
Comparable store sales – Outlet stores		4,811			5,006			15,137			14,694
Total comparable store sales		40,480			42,180			123,192			128,280
Non-comparable store sales		1,669			2,919			4,688			11,216
Total sales	$	42,149		$	45,099		$	127,880		$	139,496

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 of credit 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 and has begun discussions with other potential sources of financing. 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 third quarter ended October 26, 2019 are available online at www.sedar.com.

For further information

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

CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands of Canadian dollars)	As at October 26, 2019 (2)					As at October 27, 2018 (1)				As at January 26, 2019 (1)
ASSETS
Current assets
Cash	$		800			$	1,278			$	-
Accounts receivable			1,969				1,050				1,031
Income taxes refundable			372				389				440
Inventories			86,248				93,395				86,487
Prepaid expenses			2,147				1,976				1,976
Total current assets			91,536				98,088				89,934
Deposits			485				485				485
Property and equipment			16,903				23,374				21,648
Intangible assets			1,252				1,981				1,831
Right-of-use assets			74,322				-				-
	$		184,498			$	123,928			$	113,898
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Bank indebtedness	$		-			$	-			$	489
Current portion of credit facility			55,084				11,418				19,093
Trade and other payables			18,725				18,447				20,437
Deferred revenue			1,485				2,549				2,402
Current portion of lease liabilities			32,323				-				-
Current portion of provision for onerous leases			-				340				240
Current portion of long-term debt			15,965				-				-
Total current liabilities		123,582					32,754				42,661
Credit facility		-					44,294				29,901
Long-term debt		14,164					29,484				29,684
Lease liabilities		64,794					-				-
Provision for onerous leases		-					20				-
Deferred lease credits		-					6,791				6,490
First Preferred shares series 1		-					24,884				-
Total liabilities		202,540					138,227				108,736
Shareholders' equity (deficiency)
Share capital		73,573					47,967				73,573
Contributed surplus		15,354					14,131				14,132
Deficit		(106,969			)		(76,397		)		(82,543			)
Total shareholders' equity (deficiency)		(18,042			)		(14,299		)		5,162
	$	184,498				$	123,928			$	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.
(2)		See note 2, Going concern assumption, in the unaudited interim condensed consolidated financial statements for the three and nine-month periods ended October 26, 2019

NOTICEThe 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 nine months ended
(In thousands of Canadian dollars, except per share information)	October 26, 2019			October 27, 2018 (1)			October 26, 2019			October 27, 2018 (1)
Sales	$	42,149		$	45,099		$	127,880		$	139,496
Cost of sales and expenses
Cost of sales		16,183			15,203			46,616			47,523
Selling and distribution		25,077			28,781			75,376			86,165
Administrative		4,493			5,433			13,505			16,551
		45,753			49,417			135,497			150,239
Results from operating activities		(3,604	)		(4,318	)		(7,617	)		(10,743	)
Finance costs		3,257			1,688			10,386			4,873
Accretion of First Preferred shares series 1		-			702			-			2,047
Loss before income taxes		(6,861	)		(6,708	)		(18,003	)		(17,663	)
Income tax recovery		-			-			-			-
Net loss and comprehensive loss	$	(6,861	)	$	(6,708	)	$	(18,003	)	$	(17,663	)
Net loss per share
Basic	$	(0.23	)	$	(0.22	)	$	(0.60	)	$	(0.59	)
Diluted		(0.23	)		(0.22	)		(0.60	)		(0.59	)
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 nine months ended
(In thousands of Canadian dollars)	October 26, 2019				October 27, 2018 (1)			October 26, 2019			October 27, 2018 (1)
SHARE CAPITAL	$	73,573			$	47,967		$	73,573		$	47,967
CONTRIBUTED SURPLUS
Balance, beginning of period	$	14,193			$	14,125		$	14,132		$	9,600
Transitional adjustments on adoption of new accounting standards		-				-			-			4,502
Adjusted balance, beginning of period		14,193				14,125			14,132			14,102
Fair value adjustment of long-term debt		1,160				-			1,221			-
Stock-based compensation expense		1				6			1			29
Balance, end of period	$	15,354			$	14,131		$	15,354		$	14,131
DEFICIT
Balance, beginning of period	$	(100,108		)	$	(69,689	)	$	(82,543	)	$	(57,367	)
Transitional adjustments on adoption of new accounting standards		-				-			(6,423	)		(1,367	)
Adjusted balance, beginning of period		(100,108		)		(69,689	)		(88,966	)		(58,734	)
Net loss		(6,861		)		(6,708	)		(18,003	)		(17,663	)
Balance, end of period	$	(106,969		)	$	(76,397	)	$	(106,969	)	$	(76,397	)
Total shareholders’ deficiency	$	(18,042		)	$	(14,299	)	$	(18,042	)	$	(14,299	)

(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 nine months ended
(In thousands of Canadian dollars)	October 26, 2019			October 27, 2018 (1)			October 26, 2019			October 27, 2018 (1)
OPERATING ACTIVITIES
Net loss	$	(6,861	)	$	(6,708	)	$	(18,003	)	$	(17,663	)
Adjustments to determine net cash from operating activities
Depreciation and amortization		7,690			2,039			23,787			6,553
Write-off and impairment of property and equipment		-			156			41			272
Amortization of deferred lease credits		-			(430	)		-			(1,165	)
Deferred lease credits		25			250			25			845
Stock-based compensation		1			6			1			29
Provision for onerous leases		-			(120	)		-			(1,140	)
Finance costs		3,257			1,688			10,386			4,873
Accretion of First Preferred shares series 1		-			702			-			2,047
Interest paid		(1,052	)		(1,069	)		(3,259	)		(3,121	)
		3,060			(3,486	)		12,978			(8,470	)
Net change in non-cash working capital items related to operations		(3,023	)		(5,074	)		(4,803	)		(4,427	)
Income taxes refunded		-			-			230			240
Cash flows related to operating activities		37			(8,560	)		8,405			(12,657	)
FINANCING ACTIVITIES
Increase in credit facility		8,967			10,706			5,811			16,890
Payment of lease liabilities		(7,745	)		-			(12,650	)		-
Other finance costs		(259	)		-			(1,068	)		-
Proceeds from long-term debt		-			-			1,000			-
Cash flows related to financing activities		963			10,706			(6,907	)		16,890
INVESTING ACTIVITIES
Additions to property and equipment and intangible assets		(159	)		(697	)		(209	)		(2,694	)
Cash flows related to investing activities		(159	)		(697	)		(209	)		(2,694	)
Increase in cash		841			1,449			1,289			1,539
Bank indebtedness, beginning of period		(41	)		(171	)		(489	)		(261	)
Cash, end of period	$	800		$	1,278		$	800		$	1,278

(1)

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