CTU Le Chateau Inc

Le Château Inc. (TSX-V: CTU), a leading Canadian specialty retailer and manufacturer, today reported its financial results for the second quarter ended July 25, 2020.

“Our results for the second quarter of 2020 reflect the unprecedented impacts of the pandemic on fashion retailers across Canada. Given the historical importance of occasion wear during this three-month period, we experienced a meaningful decline in sales as communities across Canada were forced to limit social interactions. We nonetheless saw an uptick in casual wear and growing online sales. We would like to acknowledge the continued support of our landlords during this time and we were pleased to gradually re-open our stores across Canada throughout the quarter, despite the continued impact of social distancing and other COVID-19 measures in place on store traffic.”

“Through our 60-year history, we have experienced many shifts in the retail landscape and have proven time and again our ability to adapt. Having taken decisive action in the last several months to preserve our financial position, and with our 5-year strategic plan aimed at right-sizing our footprint and leveraging our e-commerce platform now behind us, Le Château is on a clear path to providing customers with compelling fashion apparel both online and in-store as economic activity resumes, and to serve the modern millennial market in a post-COVID world.” - Le Château Executive Team.

Financial and operating results – Second quarter of 2020 Results for the second quarter ended July 25, 2020 were negatively impacted due to the government-mandated shut down of all brick and mortar operations, since March 18, 2020. All retail locations remained closed as of the beginning of the second quarter and only gradually re-opened as of May 4, 2020 in Manitoba and as late as June 26, 2020 in Toronto, Ontario. Once re-opened, stores were negatively impacted by social distancing and other measures in place, resulting in lower store traffic, especially in malls. See “COVID-19 impact” and “Current developments and subsequent events” sections below for more information.

Sales for the second quarter ended July 25, 2020 amounted to $14.7 million as compared with $49.7 million for the second quarter ended July 27, 2019, a decrease of 70.5%.

Gross profit for the second quarter of 2020 decreased to $9.0 million from $33.0 million for the same period last year. The decrease of $24.0 million in gross profit was the result of the 70.5% overall sales decline for the second quarter of 2020, combined with the decrease in gross profit as a percentage of sales to 61.7% from 66.4% for the second quarter of 2019.

Adjusted EBITDA (see non-GAAP measures below) for the second quarter of 2020 amounted to $2.7 million, compared with $11.4 million the same period last year. The decrease of $8.7 million in Adjusted EBITDA for the second quarter of 2020 was primarily attributable to the decrease of $24.0 million in gross profit, partially offset by the reduction in selling, distribution and administrative expenses of $15.3 million. The decrease in selling, distribution and administrative expenses resulted primarily from (a) the reduction in store operating expenses due to stores remaining closed for a portion of the second quarter and (b) $3.7 million related to the Canada Emergency Wage Subsidy (“CEWS”).

Net earnings for the second quarter ended July 25, 2020 amounted to $337,000 or $0.02 per share compared to a net loss of $305,000 or $(0.01) per share for the same period last year.

In July and August 2020, the Company reached agreement with the majority of its landlords concerning its rental obligations, including the period impacted by COVID-19. Accordingly, the impact of the agreements reached in July 2020 led to lease modifications resulting in a $4.6 million benefit reported in the consolidated statements of earnings (loss) for the second quarter ended July 25, 2020, as a reduction in selling and distribution expenses.

Financial and operating results – First six months of 2020 Sales for the six months ended July 25, 2020 amounted to $32.3 million as compared with $85.7 million for the six months ended July 27, 2019, a decrease of 62.3%. See “COVID-19 impact” and “Current developments and subsequent events” sections below for more information.

Gross profit for the first half of 2020 decreased to $19.5 million from $55.3 million for the same period last year. The decrease of $35.8 million in gross profit was the result of the 62.3% overall sales decline for the first half of 2020, combined with the decrease in gross profit as a percentage of sales to 60.2% from 64.5% for the first half of 2019.

Adjusted EBITDA (see non-GAAP measures below) for the first half of 2020 amounted to $(2.5) million, compared with $12.1 million the same period last year. The decrease of $14.6 million in Adjusted EBITDA for the first half of 2020 was primarily attributable to the decrease of $35.8 million in gross profit, partially offset by the reduction in selling, distribution and administrative expenses of $21.2 million. The decrease in selling, distribution and administrative expenses resulted primarily from (a) the reduction in store operating expenses due to stores remaining closed for a portion of the first half of 2020 and (b) $4.5 million related to the CEWS.

Net loss for the six months ended July 25, 2020 amounted to $13.0 million or $(0.43) per share compared to a net loss of $11.1 million or $(0.37) per share for the same period last year.

COVID-19 impact 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 pandemic 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 Company has since re-opened substantially all of its stores during the period May 4, 2020 to June 26, 2020 in accordance with provincial and regional governmental guidelines. The duration and impact of the pandemic are unknown and may influence consumer shopping behavior and consumer demand including both in-store and online.

In reaction to the COVID-19 pandemic, the Company has taken the following measures to protect its financial position:

• 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 remaining staff based on business requirements;
• Availing itself of the CEWS;
• Working with landlords to reach agreement on rental obligations;
• 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 capital expenditures for the balance of the year;
• Supporting the medical community through the manufacturing of medical gowns.

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 to 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 123 well-located, top-performing stores. Over the same period of time, the Company invested significantly in upgrading and maintaining a compelling fashion e-commerce shopping and delivery system supported by a leaner network of retail stores across Canada.

Current developments and subsequent events As disclosed in note 2 of the unaudited interim condensed consolidated financial statements (‘interim financial statements”) for the second quarter ended July 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 $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 July 25, 2020. For the six-month period ended July 25, 2020, the Company generated a loss of $13.0 million and had a working capital deficiency of $45.7 million as at July 25, 2020 due mainly to the classification of the above facilities as current liabilities.

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 from its existing lenders 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. 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 by October 31, 2020, 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 second quarter ended July 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 second quarter ended July 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 123 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, lease modifications, 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 earnings (loss) before income taxes in the interim statements of earnings (loss) for the three and six-month periods ended July 25, 2020 and July 27, 2019:

(Unaudited)	For the three months ended							For the six months ended
(In thousands of Canadian dollars)	July 25, 2020				July 27, 2019			July 25, 2020				July 27, 2019
Earnings (loss) before income taxes	$	337			$	(305	)		$	(13,021	)		$	(11,142	)
Depreciation and amortization		4,117				8,020				8,516				16,097
Write-off of long-term assets		14				-				781				41
Lease modifications		(4,568	)			-				(4,705	)			-
Finance costs		2,838				3,662				5,950				7,129
Adjusted EBITDA	$	2,738			$	11,377			$	(2,479	)		$	12,125

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 second 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 from its existing lenders 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 second quarter ended July 25, 2020 are available online at www.sedar.com under the Company’s profile.

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

CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands of Canadian dollars)	As at July 25, 2020(1)			As at July 27, 2019			As at January 25, 2020
ASSETS
Current assets
Cash	$	1,108		$	-		$	-
Accounts receivable		3,244			2,326			870
Income taxes refundable		294			318			426
Inventories		81,981			85,024			76,093
Prepaid expenses		2,099			2,325			1,678
Total current assets		88,726			89,993			79,067
Deposits		485			485			485
Property and equipment		5,726			18,220			7,883
Intangible assets		487			1,434			621
Right-of-use assets		23,404			74,683			45,810
	$	118,828		$	184,815		$	133,866
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Bank indebtedness	$	-		$	41		$	1,064
Current portion of credit facility		50,860			46,024			43,525
Trade and other payables		41,391			20,355			27,200
Deferred revenue		1,238			1,750			1,646
Current portion of lease liabilities		10,097			32,507			19,609
Current portion of long-term debt		30,876			15,000			30,369
Total current liabilities		134,462			115,677			123,413
Long-term debt		-			16,058			-
Lease liabilities		66,641			65,422			79,707
Total liabilities		201,103			197,157			203,120
Shareholders' deficiency
Share capital		73,573			73,573			73,573
Contributed surplus		15,354			14,193			15,354
Deficit		(171,202	)		(100,108	)		(158,181	)
Total shareholders' deficiency		(82,275	)		(12,342	)		(69,254	)
	$	118,828		$	184,815		$	133,866

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

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

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)	For the three months ended					For the six months ended
(In thousands of Canadian dollars, except per share information)	July 25, 2020		July 27, 2019			July 25, 2020			July 27, 2019
Sales	$	14,652	$	49,661		$	32,311		$	85,731
Cost of sales and expenses
Cost of sales	5,610		16,689			12,852			30,433
Selling and distribution	5,124		25,391			23,184			50,299
Administrative	743		4,224			3,346			9,012
	11,477		46,304			39,382			89,744
Results from operating activities	3,175		3,357			(7,071		)	(4,013		)
Finance costs	2,838		3,662			5,950			7,129
Earnings (loss) before income taxes	337		(305		)	(13,021		)	(11,142		)
Income tax recovery	-		-			-			-
Net earnings (loss) and comprehensive income (loss)	$	337	$	(305	)	$	(13,021	)	$	(11,142	)
Net earnings (loss) per share
Basic	$	0.02	$	(0.01	)	$	(0.43	)	$	(0.37	)
Diluted	0.02		(0.01		)	(0.43		)	(0.37		)
Weighted average number of shares outstanding ('000)	29,964		29,964			29,964			29,964

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIENCY
(Unaudited)	For the three months ended							For the six months ended
(In thousands of Canadian dollars)	July 25, 2020				July 27, 2019			July 25, 2020			July 27, 2019
SHARE CAPITAL	$	73,573			$	73,573		$	73,573		$	73,573
CONTRIBUTED SURPLUS
Balance, beginning of period	$	15,354			$	14,193		$	15,354		$	14,132
Fair value adjustment of long-term debt		-				-			-			61
Balance, end of period	$	15,354			$	14,193		$	15,354		$	14,193
DEFICIT
Balance, beginning of period	$	(171,539		)	$	(99,803	)	$	(158,181	)	$	(82,543	)
Transitional adjustments on adoption of new accounting standards		-				-			-			(6,423	)
Adjusted balance, beginning of period		(171,539		)		(99,803	)		(158,181	)		(88,966	)
Net earnings (loss)		337				(305	)		(13,021	)		(11,142	)
Balance, end of period	$	(171,202		)	$	(100,108	)	$	(171,202	)	$	(100,108	)
Total shareholders’ deficiency	$	(82,275		)	$	(12,342	)	$	(82,275	)	$	(12,342	)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)	For the three months ended						For the six months ended
(In thousands of Canadian dollars)	July 25, 2020			July 27, 2019			July 25, 2020			July 27, 2019
OPERATING ACTIVITIES
Net earnings (loss)	$	337		$	(305	)	$	(13,021	)	$	(11,142	)
Adjustments to determine net cash from operating activities
Depreciation and amortization	4,117			8,020			8,516			16,097
Write-off of long-term assets	14			-			781			41
Lease modifications	(4,568		)	-			(4,705		)	-
Finance costs	2,838			3,662			5,950			7,129
Interest paid	(904		)	(1,052		)	(1,945		)	(2,207		)
	1,834			10,325			(4,424		)	9,918
Net change in non-cash working capital items related to operations	3,755			3,845			3,872			(1,780		)
Income taxes refunded	-			-			219			230
Cash flows related to operating activities	5,589			14,170			(333		)	8,368
FINANCING ACTIVITIES
Increase (decrease) in credit facility	(2,935		)	(12,727		)	7,221			(3,156		)
Payment of lease liabilities	(971		)	(2,172		)	(3,900		)	(4,905		)
Other finance costs	(238		)	(535		)	(616		)	(809		)
Proceeds from long-term debt	-			-			-			1,000
Cash flows related to financing activities	(4,144		)	(15,434		)	2,705			(7,870		)
INVESTING ACTIVITIES
Additions to property and equipment and intangible assets	(40		)	(18		)	(200		)	(50		)
Cash flows related to investing activities	(40		)	(18		)	(200		)	(50		)
Increase (decrease) in cash (bank indebtedness)	1,405			(1,282		)	2,172			448
Cash (bank indebtedness), beginning of period	(297		)	1,241			(1,064		)	(489		)
Cash (bank indebtedness), end of period	$	1,108		$	(41	)	$	1,108		$	(41	)