TORONTO, May 14, 2020 /CNW/ - Leon's Furniture
Limited ("LFL" or the "Company") (TSX:
LNF), today announced financial results for the first quarter
2020.
Financial Highlights – Q1-2020
- Same store sales(1) in Q1-2020 were down 1.2%.
Prior to the impact of COVID-19, the Company's same store sales up
to the end of February 2020 increased
5.4%.
- Total system wide sales (1) were relatively flat at
$598,103,000 in Q1-2020.
- Revenue in Q1-2020 was relatively flat at $497,611,000.
- The company's focus on ecommerce, including its live chat
initiative, has generated a five-fold increase to the annualized
run rate in eCommerce sales subsequent to the quarter end of
March 31, 2020.
- Gross profit margin was relatively flat at 43.1% in the quarter
and selling, general and administrative expenses as a percentage of
revenue were down 73 basis points compared to the prior year's
quarter, which generated improved operating leverage in the
quarter.
- Adjusted net income (1) increased 48% in Q1-2020 to
$13,933,000 from $9,414,000 in Q1-2019.
- Adjusted diluted earnings per share (1) grew by 33%
to $0.16 in Q1-2020 from $0.12 in Q1-2019.
- The Company continues to be in a net cash position, as at
March 31, 2020 this amounted to a
total of $33,751,000.
Furthermore, most of the Company's remaining convertible debentures
of approximately $50,000,000 were
converted to common shares during the quarter and an additional
$5,000,000 was repaid towards the
Company's term loan.
- Net finance costs decreased 23% in Q1-2020 to $4,849,000 from $6,297,000 in Q1-2019.
- Subsequent to the quarter end, the Company expanded its
revolving credit facility to $175,000,000 thereby increasing its unrestricted
liquidity to approximately $300,000,000 when considering the Company's cash,
cash equivalents and debt and equity investments as at March 31, 2020.
- No amounts have been drawn on this expanded revolving credit
facility and any amounts borrowed under this facility are due in
May 2024. Also, the Company's owned real estate portfolio of
4,200,000 square feet of retail space, industrial warehouse space
and undeveloped land holdings continue to be held on an
unencumbered basis.
- Since acquiring The Brick Ltd. in 2013, over $440,000,000 in various forms of debt has been
eliminated to date.
_______________________________________________________________________________________________________________________________
(1)
Refer to the "Non-IFRS Financial Measures" section of this press
release for additional information on these
measures.
|
On March 11, 2020, the World
Health Organization declared the novel coronavirus, ("COVID-19"),
which has caused severe respiratory illnesses and deaths, a global
pandemic. As an emerging risk, the duration and full
financial effect of the COVID-19 pandemic is unknown at this time,
as is the efficacy of the government and central bank
interventions. The financial impact of COVID-19 pandemic
began to be felt in the Company's store traffic and sales figures
commencing in the early part of March 2020. The Company
cannot predict the timing for when economic conditions will
improve. However, the Company continues to actively monitor
the situation and will continue to respond as the impact of the
COVID-19 pandemic evolves, which will depend on a number of factors
including the course of the virus, our customer and employee
reactions and any further government actions, none of which can be
predicted with any degree of certainty.
In response to the COVID-19 pandemic, the Company has taken or
has planned the following actions to support its current operating
environment and its liquidity position:
- On March 25, 2020, the Company
temporarily closed a significant number of store locations and
temporarily laid off 3,900 valued associates, representing
approximately 50% of its total workforce. Subsequent to these
payroll cost reductions, the Company increased the number of
temporary layoffs by an incremental 20% of its total
workforce.
- In order to protect the health and safety of our customers and
associates, the Company introduced several measures in the quarter
to provide support to our associates and customers. These
measures included: reduced store hours, contactless home delivery
and customer pickup protocols, enhanced cleaning protocols and
actions to support physical distancing including limiting the
number of customers allowed in-store. The Company continued
to operate its distribution centres and warehouse locations across
the country with enhanced safety protocols.
- As a result of government restrictions, beginning April 5, 2020, all store showrooms in
Ontario, like some other
provinces, were closed to the public. However, the
Company continues to operate showroom locations in certain
provinces with a significantly reduced store headcount and
continues to provide its customers with the ability to transact on
its eCommerce websites across its various banners.
- The Company has now applied for the Canada Emergency Wage Subsidy, which will
materially contribute towards its cost savings initiatives and
allow for more of its temporarily laid off associates to be
returned to work in the second quarter of 2020.
- On April 27, 2020 the Company
exercised its $125,000,000 credit
accordion available under its Senior Secured Credit Agreement,
thereby increasing its total revolving credit facility to
$175,000,000. Any amounts
borrowed under the revolving credit facility must be repaid in full
by May 31, 2024. As of today, the
Company's unrestricted liquidity has increased from $171,272,000 to $296,272,000 excluding its unencumbered real
estate portfolio comprising of land and buildings.
Edward Leon, President and Chief
Executive Officer of LFL Group commented, "Fortunately, our
management teams had been able to build up some forward momentum
before feeling the impact of COVID-19 which began in early
March. Through disciplined gross margin management and
effective cost controls, our associates were able to deliver a 33%
growth in adjusted diluted earnings per share. Needless to
say, we are very proud of them. However, Q1 is now behind us.
Turning to the present, we expect Q2 financial results to be more
impacted by COVID-19 and the measures taken by both federal and
provincial governments to reduce the spread of the virus. In late
March we announced the difficult but necessary decision to layoff
approximately 50% of our workforce and since that time have carried
out further layoffs. These measures were necessary in response to
store closures and declines in traffic in stores that remain open
under the various provincial governments essential service
guidelines. LFL has always been loyal to its associates, evidenced
by the long tenure of many of our associates across the country,
and we very much look forward to the time when we can bring these
people back."
Mr. Leon continued, "This is not an easy environment for any
retail operator, however LFL has several mitigating factors and
levers at its disposal that will not only ensure that the Company
weathers the current global crisis but emerges an even stronger
organization. Financially, LFL has unencumbered ownership of over
4.2 million square feet of its 13.4 million square foot real
estate portfolio, and a rock-solid balance sheet with approximately
$300,000,000 of available
unrestricted liquidity as of today. From an operational
perspective, the Company's eCommerce business has continued to grow
rapidly, expanding over five-fold subsequent to the quarter end of
March 2020, and businesses such as
Transglobal are performing very well in an environment where people
are staying home more than ever. Before I close, I would like to
express my sincere thanks to all the front-line healthcare workers
in Canada who are actively and
knowingly putting themselves at risk on a daily basis. On behalf of
our entire team, I would like to say thank you and that watching
your selflessness in action, has made me prouder to be a Canadian
today than ever before."
For a full explanation of the Company's use of non-IFRS
financial measures, please refer to the section of this press
release with the heading "Non-IFRS Financial
Measures".
Summary of Financial Highlights
|
|
For the three
months ended March 31
|
(000's of $ except
% and per share amounts)
|
2020
|
2019
|
$
Increase
|
%
Increase
|
Total system wide
sales (1)
|
|
598,103
|
|
597,158
|
|
945
|
0.2%
|
Franchise sales
(1)
|
|
100,492
|
|
97,417
|
|
3,075
|
3.2%
|
Revenue
|
|
497,611
|
|
499,741
|
|
(2,130)
|
(0.4%)
|
Same store sales
(1)
|
|
483,671
|
|
489,456
|
|
(5,785)
|
(1.2%)
|
Gross profit margin
as a percentage of revenue
|
|
43.11%
|
|
43.26%
|
|
|
|
SG&A(2)
|
|
192,732
|
|
197,222
|
|
(4,490)
|
(2.3%)
|
SG&A(2) as a percentage of
revenue
|
|
38.73%
|
|
39.46%
|
|
|
|
Adjusted
EBITDA(1)
|
|
49,426
|
|
50,669
|
|
(1,243)
|
(2.5%)
|
Adjusted net
income(1)
|
|
13,933
|
|
9,414
|
|
4,519
|
48.0%
|
Adjusted diluted
earnings per share(1)
|
$
|
0.16
|
$
|
0.12
|
$
|
0.04
|
33.3%
|
Net income
|
|
13,694
|
|
9,334
|
|
4,360
|
46.7%
|
Common share
dividends declared
|
$
|
0.16
|
$
|
0.14
|
$
|
0.02
|
14.3%
|
(1)
Refer to the "Non-IFRS Financial Measures" section of this press
release for additional information on these
measures.
|
(2)
Selling, general and administrative
expenses.
|
Revenue
For the three months ended March 31,
2020, revenue was $497,611,000
compared to $499,741,000 in the prior
year's first quarter. Revenue decreased $2,130,000 or 0.4% as compared to the prior
quarter due to a decrease primarily in the sale of furniture and
partially offset by the strength of appliance sales. This
reversal in sales growth occurred in the final weeks of the quarter
and was primarily attributable to the significant reduction in
physical store traffic due to COVID-19 and offset by the demand for
appliances in both the retail and commercial segments.
Same Store Sales (1)
Overall, same store corporate sales decreased 1.2% compared to
the prior year's first quarter. This reversal in same store
sales growth occurred in the final weeks of the quarter and was
primarily attributable to the significant reduction in store
traffic due to COVID-19, however this was partially offset by the
meaningful increases to the annualized run rate in eCommerce
initiated sales orders. In order to mitigate the effect on
sales due to the drop in physical store traffic, the Company
redeployed store headcount to the creation of live chat teams in
order to service customers virtually while they navigate the
Company's websites and also to increase online conversion rates in
a meaningful way. This company wide live chat initiative has
generated a five-fold increase to the annualized run rate in
eCommerce sales subsequent to the quarter end of March 31, 2020.
Gross Profit
The gross profit margin decreased slightly from the prior year's
first quarter result of 43.26% to 43.11% in the current quarter,
this reduction of 15 basis points was attributable to the current
quarter's product mix.
Selling, general and administrative expenses
("SG&A")
SG&A as a percentage of revenue in the current quarter was
down by 73 basis points due to effectively managing overall
SG&A expenses throughout the quarter while at the same time
optimizing advertising spend in the quarter to drive digital
traffic to the Company's websites.
Adjusted Net Income(1) and Adjusted Diluted
Earnings Per Share(1)
Adjusted net income in the current quarter totaled $13,933,000 an increase of $4,519,000 or 48% over the prior year's
quarter. Adjusted diluted earnings per share for the Company
increased by $0.04 to $0.16 per share, an increase of 33.3% over the
prior year's quarter.
Net Income and Diluted Earnings Per Share
Including the mark-to-market impact of the Company's financial
derivatives, net income for the first quarter of 2020 was
$13,694,000, $0.17 per diluted earnings per share (net income
$9,334,000, $0.12 per diluted earnings per share in
2019).
(1) Refer to the "Non-IFRS
Financial Measures" section of this press release
|
Dividends
As previously announced, we paid a quarterly dividend of
$0.16 on April
9, 2020. Today the Directors have declared a quarterly
dividend of $0.12 per common share
payable on the 6th day of July, 2020 to shareholders of
record at the close of business on the 5th day of June,
2020. This represents a 25% reduction from our previous
dividend. The Board has decided to take this proactive and
prudent step in light of the ongoing economic uncertainty. As
of 2007, dividends paid by Leon's Furniture Limited are "eligible
dividends" pursuant to the changes to the Income Tax Act under Bill
C-28, Canada.
Outlook
In the short-term, the duration and full financial effect of
COVID-19 is unknown, as is the efficacy of government and central
bank interventions to curb the spread of COVID-19 and stimulate the
economy. Federal and provincial governments have instituted
shelter-in-place guidelines, social distancing requirements, bans
on non-essential travel and other measures that have directly led
to reductions in store traffic and sales figures at the Company's
bricks and mortar retail locations commencing in the early part of
March 2020 and continuing today. The
Company continues to actively monitor the situation and will
continue to respond as the impact of the COVID-19 pandemic evolves,
which will depend on a number of factors including the course of
the virus, our customer and employee reactions and any further
government actions, none of which can be predicted with any degree
of certainty.
Management anticipates that actions taken to date, including
necessary layoffs and store closures, have positioned the Company
strongly to weather the current crisis and to take advantage of any
accretive opportunities that may arise. Several of the Company's
existing attributes are expected to function as operating positions
of strength which will act as offsets in the current
environment:
- Essential nature of some of the Company's products and
services. Household appliances that are necessary to cook and
clean have been deemed essential by most provincial
governments. The Company also owns the largest third-party
appliance service company in Canada, Transglobal Service, that has been
operating across the country with enhanced health and safety
protocols to protect both our customers and our technicians.
- Rapidly scaling our eCommerce business. The Company's
eCommerce revenue has grown more than fivefold subsequent to the
quarter end of March 31, 2020.
In late 2018, we moved the Company's online stores to the Shopify
Plus platform, which has enabled a richer and more interactive
eCommerce offering, has resulted in improved scalability and
enabled significant operating leverage.
- Unencumbered ownership of substantial real estate assets across
the country. The Company owns 4.2 million square feet
(office, retail, industrial) of approximately 13.4 million square
feet in use today by the Company. This is a significant competitive
advantage in the current environment, resulting in a far lower
carrying cost for closed stores or other properties than similar
leased properties. In addition, the value inherent in this
portfolio would enable the Company to readily access additional
liquidity to support existing operations and take advantage of
accretive opportunities as they arise.
- Pristine balance sheet as evidenced by the Company's commitment
to deleveraging over $440,000,000 in
various forms of debt since purchasing The Brick in 2013.
Furthermore, the Company is currently in a net cash position. as at
March 31, 2020 this amounted to a
total of $33,751,000. In addition,
the Company has unrestricted liquidity of approximately
$300,000,000 currently with room to
further expand if necessary.
- The Company believes that its existing financing resources
together with cash flow provided from its operations and its
expanded revolving credit facility that was amended after the
quarter end of March 31, 2020, will
provide a sound liquidity and working capital position throughout
the next twelve months.
On a longer-term basis, we still believe that the underlying
Canadian economy remains relatively strong. Although it is
difficult to gauge future consumer confidence and what impact it
may have on retail, we remain confident that our sales and
profitability will increase. Given the Company's strong and
continuously improving financial position, our principal objective
is to increase our market share and profitability. We remain
focused on our commitment to effectively manage our costs but to
also continuously invest in digital innovation that we believe will
drive more customers to both our online eCommerce presence and our
304 physical locations across Canada.
Store Network
The Company has 304 retail stores from coast to coast in
Canada under the various banners
indicated below which also includes 99 franchise locations.
Including our franchises, there are over 10,000 associates across
Canada.
The following table illustrates the Company's store count
continuity from December 31, 2019 to
March 31, 2020 by retail banner.
Corporate
Stores
|
At December 31,
2019
|
Opened
|
Closed
|
At March 30,
2020
|
Leon's
|
52
|
—
|
—
|
52
|
Appliance
Canada
|
5
|
—
|
—
|
5
|
The Brick
(1)
|
115
|
—
|
—
|
115
|
The Brick
Mattress Store
|
24
|
—
|
—
|
24
|
Brick
Outlet
|
9
|
—
|
—
|
9
|
Corporate
Subtotal
|
205
|
—
|
—
|
205
|
|
|
|
|
|
Franchise
Stores
|
|
|
|
|
Leon's
|
34
|
—
|
—
|
34
|
The
Brick
|
65
|
—
|
—
|
65
|
Franchise
Subtotal
|
99
|
—
|
—
|
99
|
Total Corporate
& Franchise Stores
|
304
|
—
|
—
|
304
|
(1)Includes the Midnorthern Appliance
banner
|
|
|
|
Non-IFRS Financial Measures
The Company uses financial measures that do not have
standardized meaning under IFRS and may not be comparable to
similar measures presented by other entities. The Company
calculates the non-IFRS financial measures by adjusting certain
IFRS measures for specific items the Company believes are
significant, but not reflective of underlying operations in the
period, as detailed below:
Non-IFRS
Measure
|
|
IFRS
Measure
|
Adjusted net
income
|
|
Net income
|
Adjusted income
before income taxes
|
|
Income before income
taxes
|
Adjusted earnings per
share – basic
|
|
Earnings per share –
basic
|
Adjusted earnings per
share – diluted
|
|
Earnings per share –
diluted
|
Adjusted
EBITDA
|
|
Net income
|
For a reconciliation of the Company's non-IFRS financial
measures please refer to the Company's MD&A for the quarter
ended March 31, 2020, which is
available on SEDAR at www.sedar.com.
Adjusted Net Income
Leon's calculates comparable measures by excluding the effect of
changes in fair value of derivative instruments, related to the net
effect of USD-denominated forward contracts and an interest rate
swap on the Company's term credit facility. The Company uses
forward currency contracts to manage the risk associated with its
USD-denominated purchases and an interest rate swap to manage
interest rate risk on its term credit facility in accordance with
the Company's corporate treasury policy. Management believes
excluding from income the effect of these mark-to-market valuations
and changes thereto, until settlement, better aligns the intent and
financial effect of these contracts with the underlying cash
flows.
The following is a reconciliation of reported net income to
adjusted net income, basic and diluted earnings per share to
adjusted basic and diluted earnings per share:
|
|
|
|
For the three
months ended
|
|
March
31
|
($ in thousands
except per share amounts)
|
2020
|
2019
|
Net
Income
|
13,694
|
9,334
|
After-tax
mark-to-market (gain)/loss on financial derivative
instruments
|
239
|
80
|
Adjusted net
income
|
13,933
|
9,414
|
Basic earnings per
share
|
$
|
0.17
|
$
|
0.12
|
Diluted earnings per
share
|
$
|
0.17
|
$
|
0.12
|
Adjusted basic
earnings per share
|
$
|
0.17
|
$
|
0.12
|
Adjusted diluted
earnings per share
|
$
|
0.16
|
$
|
0.12
|
Adjusted EBITDA
Adjusted earnings before interest, income taxes, depreciation
and amortization, mark-to-market adjustment due to the changes in
the fair value of the Company's financial derivative instruments
and any non-recurring charges to income ("Adjusted EBITDA") is a
non-IFRS financial measure used by the Company. The Company
considers adjusted EBITDA to be an effective measure of
profitability on an operational basis and is commonly regarded as
an indirect measure of operating cash flow, a significant indicator
of success for many businesses. Adjusted EBITDA is a non-IFRS
financial measure used by the Company. The Company's Adjusted
EBITDA may not be comparable to the Adjusted EBITDA measure of
other companies, but in management's view appropriately reflects
Leon's specific financial condition. This measure is not
intended to replace net income, which, as determined in accordance
with IFRS, is an indicator of operating performance.
The following is a reconciliation of reported net income to
adjusted EBITDA:
|
|
|
|
For the three
months ended
|
|
March
31
|
($ in
thousands)
|
2020
|
2019
|
Net
Income
|
13,694
|
9,334
|
Income tax
expense
|
2,928
|
3,204
|
Net finance
costs
|
4,849
|
6,297
|
Depreciation and
amortization
|
27,629
|
31,724
|
Mark-to-market
(gain)/loss on financial derivative instruments
|
326
|
110
|
Adjusted
EBITDA
|
49,426
|
50,669
|
Same Store Sales
Same store sales are defined as sales generated by stores, both
in store and through online transactions, that have been open
for more than 12 months on a fiscal basis. Same store sales is not
an earnings measure recognized by IFRS, and does not have a
standardized meaning prescribed by IFRS, but it is a key indicator
used by the Company to measure performance against prior period
results. Same store sales as discussed in this MD&A may
not be comparable to similar measures presented by other issuers,
however this measure is commonly used in the retail industry.
We believe that disclosing this measure is meaningful to investors
because it enables them to better understand the level of growth of
our business.
Total System Wide Sales
Total system wide sales refer to the aggregation of revenue
recognized in the Company's consolidated financial statements plus
the franchise sales occurring at franchise stores to their
customers which are not included in the revenue figure presented in
the Company's consolidated financial statements. Total system wide
sales is not a measure recognized by IFRS and does not have a
standardized meaning prescribed by IFRS, but it is a key indicator
used by the Company to measure performance against prior period
results. Therefore, total system wide sales as discussed in this
MD&A may not be comparable to similar measures presented by
other issuers. We believe that disclosing this measure is
meaningful to investors because it serves as an indicator of the
strength of the Company's overall store network, which ultimately
impacts financial performance.
Franchise Sales
Franchise sales figures refer to sales occurring at franchise
stores to their customers which are not included in the revenue
figures presented in the Company's consolidated financial
statements, or in the same store sales figures in this MD&A.
Franchise sales is not a measure recognized by IFRS, and does not
have a standardized meaning prescribed by IFRS, but it is a key
indicator used by the Company to measure performance against prior
period results. Therefore, franchise sales as discussed in this
MD&A may not be comparable to similar measures presented by
other issuers. Once again, we believe that disclosing this
measure is meaningful to investors because it serves as an
indicator of the strength of the Company's brands, which ultimately
impacts financial performance.
About Leon's Furniture Limited
LFL is the largest retailer of furniture, mattresses, appliances
and electronics in Canada. Our retail banners include: Leon's;
The Brick; The Brick Mattress Store; and The Brick Outlet. Finally,
with the Midnorthern Appliance banner alongside the Appliance
Canada banner, we are also the country's largest commercial
retailer of appliances to builders, developers, hotels and property
management companies. LFL has 304 retail stores from coast-to coast
in Canada under various banners. As well, the Company
operates three e-commerce
sites: leons.ca, thebrick.com and its newest
site, furniture.ca.
Forward-Looking Statements
Information in this press release that is not current or
historical factual information may constitute forward-looking
information within the meaning of securities laws, including
future-oriented financial information and financial outlooks. This
information is based on certain assumptions regarding expected
growth, results of operations, performance, and business prospects
and opportunities. While the Company considers these assumptions to
be reasonable, based on information currently available, they may
prove to be incorrect. Forward-looking information is subject to a
number of risks, uncertainties and other factors that could cause
actual results to differ materially from what the Company currently
expects. These risks, uncertainties and other factors include, but
are not limited to: pandemic, credit, market, currency,
operational, liquidity and funding risks, including changes in
economic conditions, interest rates or tax rates, the timing and
market acceptance of future products, and competition in the
Company's markets.
To the extent any forward-looking information in this press
release constitutes future-oriented financial information or
financial outlooks, within the meaning of securities laws, such
information is being provided to demonstrate the potential of the
Company and readers are cautioned that this information may not be
appropriate for any other purpose. Future-oriented financial
information and financial outlooks, as with forward-looking
information generally, are based on assumptions and subject to
risks, uncertainties and other factors. Actual results may differ
materially from what the Company currently expects. Other than as
required under applicable securities laws, the Company does not
undertake to update any forward-looking information at any
particular time. The reader should not place undue importance on
forward-looking information and should not rely upon this
information as of any other date. All forward-looking information
contained in this press release is expressly qualified in its
entirety by this cautionary statement.
SOURCE Leon's Furniture Limited