CTU Le Chateau Inc

Le Château Inc. (TSX VENTURE: CTU), a leading Canadian specialty retailer and manufacturer, today reported its financial results for the first quarter ended April 25, 2020, in the context of the COVID-19 pandemic.

“With the growing importance of e-commerce, we implemented a shift in strategy over five years ago by investing in our e-commerce platform, while significantly reducing our store network over that same period of time by almost 50% from 243 stores to 126 well-located, top-performing stores. We believe we now have the right balance between our digital and physical presence, which positions us well in a post COVID-19 world.”

“While our industry has been hit particularly hard by the unprecedented social and economic impacts of the COVID-19 pandemic, we acted swiftly to preserve our financial position, and to safeguard the health and safety of our clients and employees, in addition to providing support to our community.”

‘’With most of our stores now open across Canada, we look forward to continuing to serve our customers safely, supported by our e-commerce business. We are also pleased to have reached agreements with the majority of our landlords concerning our COVID-19 rental obligations. We remain fully committed to our long-term strategy as a proudly Canadian, Quebec-based specialty retailer, in order to create long-term value for our shareholders.” − Le Château Executive Team.

Financial and operating results

Sales for the first quarter ended April 25, 2020 amounted to $17.7 million as compared with $36.1 million for the first quarter ended April 27, 2019, a decrease of 51.0%. The decrease is primarily attributable to the government-mandated temporary closure of all retail stores, effective March 18, 2020, due to COVID-19 (see “COVID-19 impact” and “Current developments and subsequent events” sections below).

Gross profit for the first quarter of 2020 decreased to $10.4 million from $22.3 million for the same period last year. The decrease of $11.9 million in gross profit was the result of the 51.0% overall sales decline for the first quarter of 2020, combined with the decrease in gross profit as a percentage of sales to 59.0% from 61.9% for the first quarter of 2019.

Adjusted EBITDA (see non-GAAP measures below) for the first quarter of 2020 amounted to $(5.2) million, compared with $748,000 for the same period last year. The decrease of $6.0 million in Adjusted EBITDA for the first quarter of 2020 was primarily attributable to the decrease of $11.9 million in gross profit, partially offset by the reduction in selling, distribution and administrative expenses of $5.9 million. The decrease in selling, distribution and administrative expenses resulted primarily from the reduction in store operating expenses due mainly to the temporary closure of all our stores effective March 18, 2020.

Net loss for the first quarter ended April 25, 2020 amounted to $13.4 million or $(0.45) per share compared to a net loss of $10.8 million or $(0.36) per share for the same period last year.

COVID-19 impact

The main impact of COVID-19 on first quarter results is due to the government mandated full shut down of all brick and mortar operations beginning nationally March 18, 2020. Markets began to re-open progressively, as early as May 4, 2020 in Manitoba and as late as June 24, 2020 in Toronto, Ontario.

Prior to the COVID-19 pandemic, and beginning in 2015, the Company began the execution of its strategic plan aimed at optimizing its brick and mortar network across Canada in the context of the growing importance of e-commerce and the increasing challenges of brick and mortar retail. During this 5-year period, the Company’s store network was optimized and reduced by almost 50%, from 243 stores to 126 well-located, top-performing stores.

Over the same period of time, the Company continued to invest significantly in upgrading and maintaining a compelling fashion e-commerce shopping and delivery system supported by a leaner network of retail stores across Canada.

In reaction to the impacts of the COVID-19 pandemic, the Company has taken measures to protect its financial position. Such measures included:

• Furloughing the majority of store and head office employees during the closure period, while maintaining essential services such as e-commerce, warehousing and distribution;
• Initiating reduced work week schedules for all staff based on business requirements;
• Availing itself of the Canada Emergency Wage Subsidy (“CEWS”)
• Adjusting inventory levels by cancelling, delaying or reducing orders;
• Extending payment terms with merchandise and non-merchandise suppliers;
• Reducing discretionary expenditures;
• Cancelling or delaying all non-essential investments in capital expenditures for the balance of the year;
• Supporting the medical community through the manufacturing of medical gowns.

In addition, in August 2020, the Company reached agreement with the majority of its landlords concerning its rental obligations covering the period impacted by COVID-19. Accordingly, the impact of the agreements will be reflected in the interim financial statements for the third quarter ending October 24, 2020.

Current developments and subsequent events

As disclosed in note 2 of the unaudited interim condensed consolidated financial statements (‘interim financial statements”) for the first quarter ended April 25, 2020, there are material uncertainties that cast significant doubt upon the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.

As described further in note 3 of the interim financial statements, the Company has a $70.0 million asset-based revolving credit facility as well as a three-year $15.0 million subordinated term loan from another lender, both of which were extended on April 1, 2020, from June 9, 2020 to December 31, 2020. As the revolving credit facility and the subordinated term loan agreements have not been renewed, the full amounts drawn under these facilities are presented as current liabilities as at April 25, 2020. For the first quarter ended April 25, 2020, the Company generated a loss of $13.4 million and had a working capital deficiency of $63.9 million as at April 25, 2020 due mainly to the classification of the above facilities as current liabilities.

In addition, the outbreak of the coronavirus disease (COVID-19), which was declared a pandemic on March 11, 2020 by the World Health Organization, is having significant impacts on the Company. The measures adopted by the Federal and provincial governments in order to mitigate the spread of the outbreak required the Company to close all of its retail locations across the country effective March 18, 2020. During the period of closure, the Company’s only sales were derived from its e-commerce channel. The duration and impact of the outbreak are unknown and may influence consumer shopping behavior and consumer demand including online shopping. The Company has since re-opened most of its stores during the period May 4, 2020 to June 26, 2020 in accordance with provincial and regional governmental guidelines.

The Company’s ability to continue as a going concern for the next twelve months involves significant judgment and is dependent on, among other things, its ability to obtain necessary financing, either through an amendment and renewal of its revolving credit facility and refinancing of its subordinated term loan, or from other financing sources; the availability of adequate credit under its revolving credit facility and subordinated term loan; the impact of the COVID-19 pandemic and related government restrictions on the Company’s operations and liquidities (including the Company’s ability to resume normal operations); if previously negotiated rent concessions prove to be insufficient, the Company’s ability to negotiate additional favorable amendments to lease rents and other obligations with major landlords; the Company’s ability to improve its sales and generate positive cash flow from operations; and the continued support of its suppliers, landlords and other creditors.

The going concern uncertainty note in the Company’s annual consolidated financial statements for the fiscal year ended January 25, 2020, filed on July 6, 2020, caused the Company to be in default under a covenant contained in its revolving credit facility agreement and subordinated term loan agreement. The above-mentioned default caused a default under the Company’s third-ranking secured loans. As a result, the secured loans are presented as current liabilities. Under the terms of an agreement entered into with the senior lenders, the holders of the third-ranking secured loans do not have the right to exercise their recourses until the senior lenders have been fully repaid. As a result of the breach, the credit facility and subordinated term loan became due on demand and, on August 7, 2020, the Company entered into amending agreements with its existing lenders with respect to its revolving credit facility agreement and subordinated term loan agreement to provide for further availability under such agreements. Pursuant to the amending agreements, the Company obtained a waiver from its existing lenders of the above noted default. In accordance with the amending agreements, the Company is subject to certain conditions and undertakings, including the requirement to refinance its revolving credit facility and subordinated term loan, failing which a contingency plan will need to be implemented. There is no assurance that the Company will be successful in completing a refinancing on acceptable terms, or at all. There can be no assurance that availability under the existing credit facilities, as amended, or that any alternative source of financing will be sufficient to finance the Company’s operations to the maturity date of the credit facilities, that borrowings or alternative sources of financing 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, landlords and other creditors will continue their support of the Company. Consequently, the Company’s management is evaluating its alternatives should these contingencies materialize. The COVID-19 pandemic has further strained the Company’s ability to return to profitability, and therefore there is no assurance that it will be able to generate positive cash flow from operations.

The interim financial statements for the first quarter ended April 25, 2020 have been prepared on a going concern basis, which assumes the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. These interim financial statements as at and for the first quarter ended April 25, 2020 do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate. Such adjustments could be material.

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 124 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, and write-off and impairment of long-term assets (“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 interim statements of loss for the first quarters ended April 25, 2020 and April 27, 2019:

(Unaudited)	For the three months ended
(In thousands of Canadian dollars)	April 25, 2020			April 27, 2019
Loss before income taxes	$	(13,358	)	$	(10,837	)
Depreciation and amortization		4,399			8,077
Write-off of long-term assets		630			41
Finance costs		3,112			3,467
Adjusted EBITDA	$	(5,217	)	$	748

The Company typically 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. As indicated above, the Company temporarily closed all of its retail stores on March 18, 2020, while continuing to service its customers online. Due to the significant impacts caused by COVID-19, comparable stores sales have not been disclosed for the first quarter of 2020 as the Company believes they are not currently representative of its business trends and would not provide any meaningful information.

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 involves significant judgment and is dependent on, among other things, its ability to obtain necessary financing, either through an amendment and renewal of its revolving credit facility and refinancing of its subordinated term loan, or from other financing sources; the availability of adequate credit under its revolving credit facility and subordinated term loan; the impact of the COVID-19 pandemic and related government restrictions on the Company’s operations and liquidities (including the Company’s ability to resume normal operations); if previously negotiated rent concessions prove to be insufficient, the Company’s ability to negotiate additional favorable amendments to lease rents and other obligations with major landlords; the Company’s ability to improve its sales and generate positive cash flow from operations; and the continued support of its suppliers, landlords and other creditors. There can be no assurance that availability under the existing credit facilities, as amended, or that any alternative source of financing will be sufficient to finance the Company’s operations to the maturity date of the credit facilities, that borrowings or alternative sources of financing 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, landlords and other creditors will continue their support of the Company. Consequently, the Company’s management is evaluating its alternatives should these contingencies materialize (see note 2 of the Company’s interim 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 continue as a going concern; public health crises & economic downturn; liquidity risks; general economic conditions and normal business uncertainty; the ability of the Company to successfully implement its business initiatives and whether such business initiatives will yield the expected benefits; the ability of the Company to complete the refinancing on acceptable terms and, to the extent applicable, to implement the contingency plan; competitive conditions in the businesses in which the Company participates; changes in consumer spending; seasonality; changes in the Company’s relationship with its suppliers; inventory management; extreme changes in weather; lease renewals and obligations; 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 risks and uncertainties faced by the Company are substantially the same as those outlined in the annual MD&A for the year ended January 25, 2020, other than as described in note 2 of the interim financial statements.

The Company’s interim financial statements and Management’s Discussion and Analysis for the first quarter ended April 25, 2020 are available online at www.sedar.com under the Company’s profile.

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 April 25, 2020(1)		As at April 27, 2019		As at January 25, 2020
ASSETS
Current assets
Cash	$	-	$	1,241	$	-
Accounts receivable		1,956		1,113		870
Income taxes refundable		240		264		426
Inventories		79,532		88,805		76,093
Prepaid expenses		2,084		2,355		1,678
Total current assets		83,812		93,778		79,067
Deposits		485		485		485
Property and equipment		6,431		19,897		7,883
Intangible assets		552		1,641		621
Right-of-use assets		43,512		79,369		45,810
	$	134,792	$	195,170	$	133,866
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Bank indebtedness	$	297	$	-	$	1,064
Current portion of credit facility		53,766		25,134		43,525
Trade and other payables		32,995		18,348		27,200
Deferred revenue		1,455		2,069		1,646
Current portion of lease liabilities		28,548		27,741		19,609
Current portion of long-term debt		30,618		-		30,369
Total current liabilities		147,679		73,292		123,413
Credit facility		-		33,524		-
Long-term debt		-		30,838		-
Lease liabilities		69,725		69,553		79,707
Total liabilities		217,404		207,207		203,120
Shareholders' deficiency
Share capital		73,573		73,573		73,573
Contributed surplus		15,354		14,193		15,354
Deficit		(171,539)		(99,803)		(158,181)
Total shareholders' deficiency		(82,612)		(12,037)		(69,254)
	$	134,792	$	195,170	$	133,866

(1)	See note 2, Going concern uncertainty, in the interim financial statements for the first quarter ended April 25, 2020.

NOTICEThe Company’s independent auditors have not performed a review of the interim financial statements.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)	For the three months ended
(In thousands of Canadian dollars, except per share information)	April 25, 2020		April 27, 2019
Sales	$	17,659	$	36,070
Cost of sales and expenses
Cost of sales		7,242		13,744
Selling and distribution		18,060		24,908
Administrative		2,603		4,788
		27,905		43,440
Results from operating activities		(10,246)		(7,370)
Finance costs		3,112		3,467
Loss before income taxes		(13,358)		(10,837)
Income tax recovery		-		-
Net loss and comprehensive loss	$	(13,358)	$	(10,837)
Net loss per share
Basic	$	(0.45)	$	(0.36)
Diluted		(0.45)		(0.36)
Weighted average number of shares outstanding ('000)		29,964		29,964

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIENCY
(Unaudited)	For the three months ended
(In thousands of Canadian dollars)	April 25, 2020		April 27, 2019
SHARE CAPITAL	$	73,573	$	73,573
CONTRIBUTED SURPLUS
Balance, beginning of period	$	15,354	$	14,132
Fair value adjustment of long-term debt		-		61
Balance, end of period	$	15,354	$	14,193
DEFICIT
Balance, beginning of period	$	(158,181)	$	(82,543)
Transitional adjustments on adoption of new accounting standards		-		(6,423)
Adjusted balance, beginning of period		(158,181)		(88,966)
Net loss		(13,358)		(10,837)
Balance, end of period	$	(171,539)	$	(99,803)
Total shareholders’ deficiency	$	(82,612)	$	(12,037)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)	For the three months ended
(In thousands of Canadian dollars)	April 25, 2020		April 27, 2019
OPERATING ACTIVITIES
Net loss	$	(13,358)	$	(10,837)
Adjustments to determine net cash from operating activities
Depreciation and amortization		4,399		8,077
Write-off of long-term assets		630		41
Finance costs		3,112		3,467
Interest paid		(1,041)		(1,155)
		(6,258)		(407)
Net change in non-cash working capital items related to operations		117		(5,625)
Income taxes refunded		219		230
Cash flows related to operating activities		(5,922)		(5,802)
FINANCING ACTIVITIES
Net increase in credit facility		10,156		9,571
Payment of lease liabilities		(2,929)		(2,733)
Other finance costs		(378)		(274)
Proceeds of long-term debt		-		1,000
Cash flows related to financing activities		6,849		7,564
INVESTING ACTIVITIES
Additions to property and equipment and intangible assets		(160)		(32)
Cash flows related to investing activities		(160)		(32)
Increase in cash / decrease in bank indebtedness		767		1,730
Bank indebtedness, beginning of period		(1,064)		(489)
Cash (bank indebtedness), end of period	$	(297)	$	1,241