measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing
comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Company plans to adopt the new standard on the required effective date. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements and related note disclosures. The Company has performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses. The Company will perform a detailed assessment in the coming quarters to determine the extent of the impact.
IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue that applies to all contracts with customers, except for contracts that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and will be effective for annual periods beginning on or after January 1, 2018. The Company is currently in the process of evaluating the impact this standard is expected to have on the consolidated financial statements. The Company in the process of assessing whether the loyalty program we currently offer could be considered a separate performance obligation. As we continue our evaluation, we will further clarify the expected impact of the adoption of the standard, which we do not believe will be material.
IFRS 16, “Leases” (“IFRS 16”) replaces IAS 17, “Leases”. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized in the statement of financial position. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019. Early application is permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its consolidated financial statements. The Company expects the adoption of IFRS 16 will have a significant impact as the Company will recognize new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of use assets and interest expense on lease liabilities. The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical expedients under the standard. The Company expects to disclose additional detailed information, including its transition method, any practical expedients elected and
estimated quantitative financial effects, before the adoption of IFRS 16.
IFRIC 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of adopting the interpretation of IFRIC 22 on its consolidated financial statements.
4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.
In preparing these unaudited condensed interim consolidated financial statements, critical judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in note 5 of the consolidated financial statements for the year ended January 28, 2017, other than as those disclosed in note 6.
During the three-month period ended July 29, 2017, the shareholders of the Company approved a resolution to reduce the stated capital maintained in respect of the common shares by an amount of $155,947, which resulted in a corresponding reduction of the deficit.
During the three and six-month period ended July 29, 2017, 195,773 and 412,773 stock options, respectively, were exercised for common shares for cash proceeds of $791 and $1,606 [July 30, 2016 — 282,056 and 676,571 stock options for cash proceeds of $500 and $844]. The carrying value of common shares during the three and six-month periods ended July 29, 2017 includes $175 and $828, respectively [July 30, 2016 — $178 and $304], which corresponds to a reduction in contributed surplus associated to options exercised during the period.
In addition, during the three and six-month periods ended July 29, 2017, 27,896 and 56,001 common shares, respectively, [July 30, 2016 – nil and 30,398 common shares] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $436 and $704, net of tax, respectively [July 30, 2016 – nil and $214] and a reduction in contributed surplus of $665 and $1,219 [July 30, 2016 — nil and $417].
Stock-based compensation
As at July 29, 2017, 654,236 common shares remain available for issuance under the 2015 Omnibus Plan.
The weighted average fair value of options granted of $2.39 for the six-month period ended July 29, 2017 [for the six-month period ended July 30, 2016 — $3.71] was estimated using the Black Scholes option pricing model, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
July 29,
|
|
July 30,
|
|
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
|
|
1.79
|
%
|
|
|
1.23
|
%
|
|
Expected volatility
|
|
|
27.4
|
%
|
|
|
29.8
|
%
|
|
Expected option life
|
|
|
4.0
|
years
|
|
|
4.0
|
years
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Exercise price
|
|
$
|
9.76
|
|
|
$
|
14.39
|
|
Expected volatility was estimated using historical volatility of similar companies whose share prices were publicly available.
A summary of the status of the Company’s stock option plan and changes during the six-month period is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
July 29,
|
|
July 30,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
average
|
|
|
|
average
|
|
|
|
Options
|
|
exercise
|
|
Options
|
|
exercise
|
|
|
|
outstanding
|
|
price
|
|
outstanding
|
|
price
|
|
|
|
#
|
|
$
|
|
#
|
|
$
|
|
Outstanding, beginning of period
|
|
933,195
|
|
5.63
|
|
2,146,880
|
|
3.04
|
|
Issued
|
|
161,980
|
|
9.76
|
|
172,011
|
|
14.63
|
|
Exercised
|
|
(412,773)
|
|
3.89
|
|
(676,571)
|
|
1.25
|
|
Forfeitures
|
|
(78,500)
|
|
11.81
|
|
(86,321)
|
|
5.03
|
|
Outstanding, end of period
|
|
603,902
|
|
7.12
|
|
1,555,999
|
|
5.00
|
|
Exercisable, end of period
|
|
270,906
|
|
4.46
|
|
780,234
|
|
3.42
|
The weighted average share price at the date of exercise for stock options exercised during the six-month period ended July 29, 2017 was $8.84 [for the six-month period ended July 30, 2016 — $15.02].
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained herein include statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and there are, or may be deemed to be,“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, new store opening projections, use of cash and operating and capital expenditures, impact of new accounting pronouncements, impact of improvements to internal control and financial reporting. These risks and uncertainties include, but are not limited to the risks described under the section entitled “Risk Factors” in our Annual Report on Form 10-K dated April 12, 2017 and filed on April 13, 2017. Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-Q, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Form 10-Q or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
Accounting Periods
All references to “Fiscal 2017” are to the Company’s fiscal year ending February 3, 2018. All references to “Fiscal 2016” are to the Company’s fiscal year ending January 28, 2017. All references to “Fiscal 2015” are to the Company’s fiscal year ended January 30, 2016.
The Company’s fiscal year ends on the Saturday closest to the end of January, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. The year ending February 3, 2018 covers a 53-week fiscal period. The years ending January 28, 2017 and January 30, 2016 cover a 52-week period.
Overview
We are a growing retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories and food and beverages, primarily through 236 company-operated DAVIDsTEA stores as of July 29, 2017, and our website, davidstea.com. We are building a brand that seeks to expand the definition of tea with innovative products that consumers can explore in an open and inviting retail environment. We strive to make tea a multi-sensory experience by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of tea as well as the ease of preparation.
Second Quarter 2017 Highlights
Compared to the second quarter of Fiscal 2016, we grew our sales from $41.1 million to $45.7 million, representing growth of 11.2% over the prior year.
We added 4 net new stores, increasing our store base from 232 stores as of April 29, 2017 to 236 stores as of July 29, 2017.
How we assess our performance
The key measures we use to evaluate the performance of our business and the execution of our strategy are set forth below:
Sales.
Sales consist primarily of sales from our retail stores and e-commerce site. Our business is seasonal and, as a result, our sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal quarter, which includes the holiday sales period, and tend to be lowest in the second and third fiscal quarter because of lower customer traffic in our locations in the summer months.
The specialty retail industry is cyclical, and our sales are affected by general economic conditions. Purchases of our products can be impacted by a number of factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence.
Comparable Sales.
Comparable sales refer to period-over-period comparison information for comparable stores and e-commerce. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation. As a result, data regarding comparable sales may not be comparable to similarly titled data from other retailers.
Measuring the change in period-over-period comparable sales allows us to evaluate how our business is performing. Various factors affect comparable sales, including:
|
|
·
|
|
our ability to anticipate and respond effectively to consumer preference, buying and economic trends;
|
|
|
·
|
|
our ability to provide a product offering that generates new and repeat visits to our stores and online;
|
|
|
·
|
|
the customer experience we provide in our stores and online;
|
|
|
·
|
|
the level of customer traffic near our locations in which we operate;
|
|
|
·
|
|
the number of customer transactions and average ticket in our stores and online;
|
|
|
·
|
|
the pricing of our tea, tea accessories, and food and beverages;
|
|
|
·
|
|
our ability to obtain and distribute product efficiently;
|
|
|
·
|
|
our opening of new stores in the vicinity of our existing stores; and
|
|
|
·
|
|
the opening or closing of competitor stores in the vicinity of our stores.
|
Non-Comparable Sales.
Non
-
comparable sales include sales from stores prior to the beginning of their thirteenth fiscal month of operation and wholesale sales, which includes sales to hotels, restaurants and institutions, office and workplace locations and food services, as well as corporate gifting. As we pursue our growth strategy, we expect that a significant percentage of our sales will continue to come from non-comparable sales.
Gross Profit.
Gross profit is equal to our sales less our cost of sales. Cost of sales includes product costs, freight costs, store occupancy costs and distribution costs.
Selling, General and Administration Expenses.
Selling, general and administration expenses consist of store operating expenses and other general and administration expenses, including store impairments and provision (recovery) for onerous contracts. Store operating expenses consist of all store expenses excluding occupancy related costs (which
are included in costs of sales). General and administration costs consist of salaries and other payroll costs, travel, professional fees, stock compensation, marketing expenses, information technology and other operating costs.
General and administration costs, which are generally fixed in nature, do not vary proportionally with sales to the same degree as our cost of sales. We believe that these costs will decrease as a percentage of sales over time. Accordingly, this expense as a percentage of sales is usually higher in lower volume quarters and lower in higher volume quarters.
We present Adjusted selling, general and administration expenses as a supplemental measure because we believe it facilitates a comparative assessment of our selling, general and administration expenses under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure on page 21 of this Quarterly Report on Form 10-Q.
Results from Operating Activities.
Results from operating activities consist of our gross profit less our selling, general and administration expenses.
We present Adjusted results from operating activities as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure on page 21 of this Quarterly Report on Form 10-Q.
Finance Costs.
Finance costs consist of cash and imputed non-cash charges related to our credit facility, as well as the accretion expense on the provisions for onerous contracts.
Provision for Income Tax.
Provision for income tax consists of federal, provincial, state and local current and deferred income taxes.
Adjusted EBITDA.
We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. Specifically, Adjusted EBITDA allows for an assessment of our operating performance and our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, finance costs, deferred rent, non-cash compensation expense, costs (recovery) related to onerous contracts or contracts where we expect the costs of the obligations to exceed the economic benefit, loss on disposal of property and equipment, impairment of property and equipment, and certain non-recurring expenses. This measure also functions as a benchmark to evaluate our operating performance. It is reconciled to its nearest IFRS measure on page 22 of this Quarterly Report on Form 10-Q.
Selected Operating and Financial Highlights
Results of Operations
The following table summarizes key components of our results of operations for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the six months ended
|
|
|
|
|
July 29,
|
|
July 30,
|
|
July 29,
|
|
July 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
Consolidated statement of income (loss) data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
45,687
|
|
$
|
41,079
|
|
$
|
94,356
|
|
$
|
85,548
|
|
|
Cost of sales
|
|
|
25,482
|
|
|
21,171
|
|
|
49,969
|
|
|
42,485
|
|
|
Gross profit
|
|
|
20,205
|
|
|
19,908
|
|
|
44,387
|
|
|
43,063
|
|
|
Selling, general and administration expenses
|
|
|
27,816
|
|
|
22,810
|
|
|
51,969
|
|
|
43,929
|
|
|
Results from operating activities
|
|
|
(7,611)
|
|
|
(2,902)
|
|
|
(7,582)
|
|
|
(866)
|
|
|
Finance costs
|
|
|
157
|
|
|
19
|
|
|
288
|
|
|
36
|
|
|
Finance income
|
|
|
(135)
|
|
|
(148)
|
|
|
(271)
|
|
|
(269)
|
|
|
Loss before income taxes
|
|
|
(7,633)
|
|
|
(2,773)
|
|
|
(7,599)
|
|
|
(633)
|
|
|
Provision for income tax (recovery)
|
|
|
(2,070)
|
|
|
(506)
|
|
|
(1,674)
|
|
|
120
|
|
|
Net loss
|
|
$
|
(5,563)
|
|
$
|
(2,267)
|
|
$
|
(5,925)
|
|
$
|
(753)
|
|
|
Percentage of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
Cost of sales
|
|
|
55.8%
|
|
|
51.5%
|
|
|
53.0%
|
|
|
49.7%
|
|
|
Gross profit
|
|
|
44.2%
|
|
|
48.5%
|
|
|
47.0%
|
|
|
50.3%
|
|
|
Selling, general and administration expenses
|
|
|
60.9%
|
|
|
55.5%
|
|
|
55.1%
|
|
|
51.4%
|
|
|
Results from operating activities
|
|
|
(16.7%)
|
|
|
(7.1%)
|
|
|
(8.1%)
|
|
|
(1.0%)
|
|
|
Finance costs
|
|
|
0.3%
|
|
|
0.0%
|
|
|
0.3%
|
|
|
0.0%
|
|
|
Finance income
|
|
|
(0.3%)
|
|
|
(0.4%)
|
|
|
(0.3%)
|
|
|
(0.3%)
|
|
|
Loss before income taxes
|
|
|
(16.7%)
|
|
|
(6.8%)
|
|
|
(8.1%)
|
|
|
(0.7%)
|
|
|
Provision for income tax (recovery)
|
|
|
(4.5%)
|
|
|
(1.2%)
|
|
|
(1.8%)
|
|
|
0.1%
|
|
|
Net loss
|
|
|
(12.2%)
|
|
|
(5.5%)
|
|
|
(6.3%)
|
|
|
(0.9%)
|
|
|
Other financial and operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (1)
|
|
$
|
(2,234)
|
|
$
|
168
|
|
$
|
(691)
|
|
$
|
4,747
|
|
|
Adjusted EBITDA as a percentage of sales
|
|
|
(4.9%)
|
|
|
0.4%
|
|
|
(0.7%)
|
|
|
5.5%
|
|
|
Number of stores at end of period
|
|
|
236
|
|
|
208
|
|
|
236
|
|
|
208
|
|
|
Comparable sales growth (decline) for period (2)
|
|
|
(0.9%)
|
|
|
5.1%
|
|
|
(3.4%)
|
|
|
5.0%
|
|
|
|
(1)
|
|
For a reconciliation of Adjusted EBITDA to net income see “—Non-IFRS Metrics” below.
|
|
|
(2)
|
|
Comparable sales refer to period-over-period comparison information for comparable stores and e-commerce. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation.
|
Non-IFRS Metrics
Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA are not a presentation made in accordance with IFRS, and the use of the terms Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA may differ from similar measures reported by other companies. We believe that Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA provides investors with useful information with respect to our historical operations. Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA are not measurements of our financial performance under IFRS and should not be considered in isolation or as an alternative to net income, net cash provided by operating, investing or financing activities or any other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with IFRS. We understand that although Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as an
analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under IFRS. Some of these limitations are:
|
|
·
|
|
Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
·
|
|
Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA do not reflect the cash requirements necessary to service interest or principal payments on our debt; and
|
|
|
·
|
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.
|
Because of these limitations, Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations.
The following tables present reconciliations of Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA to our net income (loss) determined in accordance with IFRS:
Reconciliation of
Adjusted selling, general and administration expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the six months ended
|
|
|
|
|
July 29,
|
|
July 30,
|
|
July 29,
|
|
July 30,
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administration expenses
|
|
|
27,816
|
|
|
22,810
|
|
|
51,969
|
|
|
43,929
|
|
|
Executive separation costs (a)
|
|
|
(962)
|
|
|
—
|
|
|
(962)
|
|
|
—
|
|
|
Impairment of property and equipment (b)
|
|
|
(2,313)
|
|
|
—
|
|
|
(2,313)
|
|
|
—
|
|
|
Impact of onerous contracts (c)
|
|
|
1,360
|
|
|
—
|
|
|
2,775
|
|
|
—
|
|
|
Adjusted selling, general and administration expenses
|
|
$
|
25,901
|
|
$
|
22,810
|
|
$
|
51,469
|
|
$
|
43,929
|
|
|
|
(a)
|
|
Executive separation costs represent salary owed to the former Chief Financial Officer of $812 for the three and six months ended July 29, 2017 as part of his separation agreement and stock-based compensation of $150 for the three and six months ended July 29, 2017 relating to the vesting of equity awards pursuant to the separation agreement.
|
|
|
(b)
|
|
Represents costs related to impairment of property and equipment for stores.
|
|
|
(c)
|
|
Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.
|
Reconciliation of
Adjusted results from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the six months ended
|
|
|
|
|
|
July 29,
|
|
July 30,
|
|
July 29,
|
|
July 30,
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results from operating activities
|
|
|
(7,611)
|
|
|
(2,902)
|
|
|
(7,582)
|
|
|
(866)
|
|
|
|
Executive separation costs (a)
|
|
|
962
|
|
|
—
|
|
|
962
|
|
|
—
|
|
|
|
Impairment of property and equipment (b)
|
|
|
2,313
|
|
|
—
|
|
|
2,313
|
|
|
—
|
|
|
|
Impact of onerous contracts (c)
|
|
|
(1,360)
|
|
|
—
|
|
|
(2,775)
|
|
|
—
|
|
|
|
Adjusted results from operating activities
|
|
$
|
(5,696)
|
|
$
|
(2,902)
|
|
$
|
(7,082)
|
|
$
|
(866)
|
|
|
|
|
(a)
|
|
Executive separation costs represent salary owed to the former Chief Financial Officer of $812 for the three and six months ended July 29, 2017 as part of his separation agreement and stock-based compensation of $150 for the three and six months ended July 29, 2017 relating to the vesting of equity awards pursuant to the separation agreement.
|
|
|
(b)
|
|
Represents costs related to impairment of property and equipment for stores.
|
|
|
(c)
|
|
Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.
|
Reconciliation of Adjusted
EBITDA to our net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the six months ended
|
|
|
|
|
July 29,
|
|
July 30,
|
|
July 29,
|
|
July 30,
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,563)
|
|
$
|
(2,267)
|
|
$
|
(5,925)
|
|
$
|
(753)
|
|
|
Finance costs
|
|
|
157
|
|
|
19
|
|
|
288
|
|
|
36
|
|
|
Finance income
|
|
|
(135)
|
|
|
(148)
|
|
|
(271)
|
|
|
(269)
|
|
|
Depreciation and amortization
|
|
|
2,586
|
|
|
2,090
|
|
|
4,932
|
|
|
4,037
|
|
|
Loss on disposal of property and equipment
|
|
|
24
|
|
|
—
|
|
|
30
|
|
|
—
|
|
|
Provision for income tax (recovery)
|
|
|
(2,070)
|
|
|
(506)
|
|
|
(1,674)
|
|
|
120
|
|
|
EBITDA
|
|
$
|
(5,001)
|
|
$
|
(812)
|
|
$
|
(2,620)
|
|
$
|
3,171
|
|
|
Additional adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense (a)
|
|
|
802
|
|
|
614
|
|
|
1,376
|
|
|
930
|
|
|
Executive separation costs related to salary (b)
|
|
|
812
|
|
|
—
|
|
|
812
|
|
|
—
|
|
|
Impairment of property and equipment (c)
|
|
|
2,313
|
|
|
—
|
|
|
2,313
|
|
|
—
|
|
|
Impact of onerous contracts (d)
|
|
|
(1,360)
|
|
|
—
|
|
|
(2,775)
|
|
|
—
|
|
|
Deferred rent (e)
|
|
|
200
|
|
|
366
|
|
|
203
|
|
|
646
|
|
|
Adjusted EBITDA
|
|
$
|
(2,234)
|
|
$
|
168
|
|
$
|
(691)
|
|
$
|
4,747
|
|
|
|
(a)
|
|
Represents non-cash stock-based compensation expense.
|
|
|
(b)
|
|
Executive separation costs related to salary represent salary owed to the former Chief Financial Officer as part of his separation agreement.
|
|
|
(c)
|
|
Represents costs related to impairment of property and equipment for stores.
|
|
|
(d)
|
|
Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.
|
|
|
(e)
|
|
Represents the extent to which our annual rent expense has been above or below our cash rent payments.
|
Three Months Ended July 29, 2017 Compared to Three Months Ended July 30, 2016
Sales.
Sales for the three months ended July 29, 2017 increased 11.2%, or $4.6 million, to $45.7 million from $41.1 million for the three months ended July 30, 2016, comprising a $0.3 million decrease in comparable sales and a $4.9 million increase in non-comparable sales. Comparable sales decreased by 0.9% and non-comparable sales increased primarily due to an additional 28 net new stores opened as at July 29, 2017 as compared to July 30, 2016. Comparable sales decreased as we faced more a challenging overall consumer retail backdrop.
Gross Profit.
Gross profit increased by 1.5%, or $0.3 million, to $20.2 million for the three months ended July 29, 2017 from $19.9 million for the three months ended July 30, 2016. Gross profit as a percentage of sales decreased to 44.2% for the three months ended July 29, 2017, from 48.5% for the three months ended July 30, 2016 primarily due to the planned clearance of seasonal products and deleveraging of fixed costs due to the negative 0.9% comparable sales this quarter.
Selling, General and Administration Expenses.
Selling, general and administration expenses increased by 21.9%, or $5.0 million, to $27.8 million in the three months ended July 29, 2017 from $22.8 million for the three months ended July 30, 2016. As a percentage of sales, selling, general and administration expenses increased to 60.9% for the three months ended July 29, 2017, as compared to 55.5% for the three months ended July 30, 2016. Excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts for the three months ended July 29, 2017, selling, general and administration expenses increased to $25.9 million in the three months ended July 29,
2017 from $22.8 million for the three months ended July 30, 2016 due primarily to the hiring of additional staff to support the growth of the Company, including new stores, and higher store operating expenses to support the operations of 236 stores as of July 29, 2017 as compared to 208 stores as of July 30, 2016. As a percentage of sales, selling, general and administration expenses excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts increased to 56.6% from 55.5%.
Results from Operating Activities.
Results from operating activities decreased by $4.7 million, to $(7.6) million in the three months ended July 29, 2017 from $(2.9) million in the three months ended July 30, 2016. Excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts for the three months ended July 29, 2017, results from operating activities decreased by $2.8 million, to $(5.7) million from $(2.9) million for the three months ended July 30, 2016.
Provision for Income Taxes (Recovery).
Recovery for income taxes increased by $1.6 million, to $2.1 million for the three months ended July 29, 2017 from a recovery for income taxes of $0.5 million for the three months ended July 30, 2016. The increase in the recovery for income taxes was due primarily to lower results from operating activities. Our effective tax rates were 27.1% and 18.2% for the three months ended July 29, 2017 and July 30, 2016, respectively. This increase in the effective tax rate is due to a decrease in non-deductible expenses, differences in foreign tax rates vs. statutory income tax rates and other items that result in an increase in income tax recovery for the three months ended July 29, 2017.
Six Months Ended July 29, 2017 Compared to Six Months Ended July 30, 2016
Sales.
Sales for the six months ended July 29, 2017 increased 10.4%, or $8.9 million, to $94.4 million from $85.5 million for the six months ended July 30, 2016, comprising a $2.8 million decrease in comparable sales and a $11.7 million increase in non-comparable sales. Comparable sales decreased by 3.4% and non-comparable sales increased primarily due to an additional 28 net new stores opened as at July 29, 2017 as compared to July 30, 2016. Comparable sales decreased as we faced more a challenging overall consumer retail backdrop.
Gross Profit.
Gross profit increased by 3.0%, or $1.3 million, to $44.4 million for the six months ended July 29, 2017 from $43.1 million for the six months ended July 30, 2016. Gross profit as a percentage of sales decreased to 47.0% for the six months ended July 29, 2017, from 50.3% for the six months ended July 30, 2016 primarily due to the planned clearance of seasonal products and deleveraging of fixed costs due to the negative 3.9% comparable sales for the year-to-date.
Selling, General and Administration Expenses.
Selling, general and administration expenses increased by 18.5%, or $8.1 million, to $52.0 million in the six months ended July 29, 2017 from $43.9 million for the six months ended July 30, 2016. As a percentage of sales, selling, general and administration expenses increased to 55.1% for the six months ended July 29, 2017, as compared to 51.4% for the six months ended July 30, 2016. Excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts for the six months ended July 29, 2017, selling, general and administration expenses increased to $51.5 million in the six months ended July 29, 2017 from $43.9 million for the six months ended July 30, 2016 due primarily to the hiring of additional staff to support the growth of the Company, including new stores, and higher store operating expenses to support the operations of 236 stores as of July 29, 2017 as compared to 208 stores as of July 30, 2016. As a percentage of sales, selling, general and administration expenses excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts increased to 54.6% from 51.4%.
Results from Operating Activities.
Results from operating activities decreased by $6.7 million, to $(7.6) million in the six months ended July 29, 2017 from $(0.9) million in the six months ended July 30, 2016. Excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts for the six months ended July 29, 2017, results from operating activities decreased by $6.2 million, to $(7.1) million from $(0.9) million for the six months ended July 30, 2016.
Provision for Income Taxes.
Provision for income taxes decreased by $1.8 million, to a recovery of $1.7 million for the six months ended July 29, 2017 from a provision of $0.1 million for the six months ended July 30,
2016. The decrease in the provision for income taxes was due primarily to lower results from operating activities. Our effective tax rates were 22.0% and (19.0)% for the six months ended July 29, 2017 and July 30, 2016, respectively. This increase in the effective tax rate is due to non-deductible expenses, differences in foreign tax rates vs. statutory income tax rates and other items that resulted in an income tax recovery for the six months ended July 29, 2017.
Liquidity and Capital Resources
As at July 29, 2017 we had $56.4 million of cash primarily held with major Canadian financial institutions. Our working capital was $73.0 million as of July 29, 2017, compared to $78.7 million as at January 28, 2017.
Our primary sources of liquidity are cash on hand, cash flows from operations and borrowings under our revolving credit facility. Our primary cash needs are to support the increase in inventories as we expand the number of our stores, and for capital expenditures related to new stores and store renovations.
Capital expenditures typically vary depending on the timing of new stores openings and infrastructure-related investments. During fiscal 2017, we plan to spend approximately $15.0-$18.0 million on capital expenditures. We expect to construct, lease and open 10-12 new stores in Canada and up to 5 new stores in the United States, and renovate a number of existing stores. The remainder of the capital budget will be used to make continued investment in our infrastructure.
Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent and other store operating costs. Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. We funded our capital expenditures and working capital requirements from cash on hand and net cash provided by our operating activities.
We believe that our cash position, net cash provided by our operating activities and available borrowings under our revolving credit facility will be adequate to finance our planned capital expenditures and working capital requirements for the foreseeable future.
Cash Flow
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the six months ended
|
|
|
|
|
July 29,
|
|
July 30,
|
|
July 29,
|
|
July 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
2,819
|
|
$
|
(1,783)
|
|
$
|
(3,842)
|
|
$
|
(2,571)
|
|
|
Investing activities
|
|
|
(3,551)
|
|
|
(7,181)
|
|
|
(5,797)
|
|
|
(10,183)
|
|
|
Financing activities
|
|
|
791
|
|
|
500
|
|
|
1,606
|
|
|
844
|
|
|
Increase (decrease) in cash
|
|
$
|
59
|
|
$
|
(8,464)
|
|
$
|
(8,033)
|
|
$
|
(11,910)
|
|
Cash Flows Provided by Operating Activities
Net cash flows provided by (used in) operating activities increased to $2.8 million for the three months ended July 29, 2017 from $(1.8) million for the three months ended July 30, 2016. The increase in the cash flows provided by operating activities was due primarily to a reduction in excess inventory levels from year-end, compared to the three months ended July 30, 2016, during which time inventory grew at normal levels to support sales for the third and fourth quarters of fiscal 2016.
Net cash used in operating activities increased to $(3.8) million for the six months ended July 29, 2017 from $(2.6) million for the six months ended July 30, 2016. The increase in the cash flows used in operating activities was due
primarily to lower results from operating activities, partially offset by a reduction in inventory levels from year-end, as described above.
Cash Flows Provided by Investing Activities
Capital expenditures decreased by $3.6 million, to $3.6 million for the three months ended July 29, 2017, from $7.2 million for the three months ended July 30, 2016. This decrease was primarily due to the number of new store build-outs and the timing of investments in infrastructure. We opened 5 new stores for the three months ended July 29, 2017 compared to 10 new stores for the three months ended July 30, 2016.
Capital expenditures decreased by $4.4 million, to $5.8 million for the six months ended July 29, 2017, from $10.2 million for the six months ended July 30, 2016. This decrease was primarily due to the number of new store build-outs anf the timing of investments in infrastructure. We opened 9 new stores for the six months ended July 29, 2017 compared to 15 new stores for the six months ended July 30, 2016.
Cash Flows Provided By Financing Activities
Net cash flows provided by financing activities amounted to $0.8 million for the three months ended July 29, 2017 due to proceeds from share issuances, compared to $0.5 million for the three months ended July 30, 2016.
Net cash flows provided by financing activities amounted to $1.6 million for the six months ended July 29, 2017 due to proceeds from share issuances, compared to $0.8 million for the six months ended July 30, 2016.
Credit Facility with Bank of Montreal
The Company has a credit arrangement (hereinafter referred to as “Credit Agreement”) with the Bank of Montreal (“BMO”). The Credit agreement provides for a three-year revolving term facility, maturing October 31, 2019, in the principal amount of $20.0 million (which we refers to as the “Revolving Facility”) or the equivalent amount in U.S. dollars, repayable at any time. The Credit Agreement also provides for an accordion feature whereby we may, at any time prior to the end of the term and with the permission of BMO, request an increase to the Revolving Facility by an amount not greater than $10.0 million. As at July 29, 2017, we did not have any borrowings on the Revolving Facility.
The credit facility contains a number of financial and non-financial covenants that, among other things and subject to certain exceptions, restrict our ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. We also cannot make any dividend payments. As at July 29, 2017, we are in compliance with these covenants.
Off-Balance Sheet Arrangements
Other than operating lease obligations, we have no off-balance sheet obligations.
Contractual Obligations and Commitments
There have been no significant changes to our contractual obligations as disclosed in our consolidated financial statements for the fiscal year ended January 28, 2017, other than those which occur in the normal course of business.
Critical Accounting Policies and Estimates
Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of financial statements requires us to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard to the level of judgement involved and its potential impact on our reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to
period, and would materially impact our financial position, changes in financial position or results of operations. Our significant accounting policies are discussed under note 3 to our consolidated financial statements for the year ended January 28, 2017 included in our Annual Report on Form 10-K dated April 12, 2017 and filed on April 13, 2017. There have been no material changes to the critical accounting policies and estimates since January 28, 2017, other than as described below.
Recently Issued Accounting Standards
Information on significant new accounting standards and amendments issued but not yet adopted is described below.
IFRS 9, “Financial Instruments”. In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments” that replaces IAS 39, “Financial Instruments: Recognition and Measurement” and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Company plans to adopt the new standard on the required effective date. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements and related note disclosures. The Company has performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses. The Company will perform a detailed assessment in the coming quarters to determine the extent of the impact.
IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue that applies to all contracts with customers, except for contracts that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and will be effective for annual periods beginning on or after January 1, 2018. The Company is currently in the process of evaluating the impact this standard is expected to have on the consolidated financial statements. The Company in the process of assessing whether the loyalty program we currently offer could be considered a separate performance obligation. As we continue our evaluation, we will further clarify the expected impact of the adoption of the standard, which we do not believe will be material.
IFRS 16, “Leases” (“IFRS 16”) replaces IAS 17, “Leases”. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized in the statement of financial position. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019. Early application is permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its consolidated financial statements. The Company expects the adoption of IFRS 16 will have a significant impact as the Company will recognize new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of use assets and interest expense on lease liabilities. The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical expedients under the standard. The Company expects to disclose additional detailed information, including its transition method, any practical expedients elected and
estimated quantitative financial effects, before the adoption of IFRS 16.
IFRIC 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. Early adoption is
permitted. The Company is in the process of evaluating the impact of adopting the interpretation of IFRIC 22 on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the foreign exchange and interest rate risk discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K dated April 12, 2017 and filed on April 13, 2017.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of July 29, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of July 29, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There has been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the six-month period ended July 29, 2017, that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.