annual report 2009

Transcription

annual report 2009

West 49 I nc.
annual report 2009
aren’t we all a kid
at
barreling down the h ill,
our
limits.
testing
With constantly evolving tastes, the youth
action sports lifestyle
can be a difficult space to operate in.
But we LIVE IT and OWN IT .
This i s OUR s pa c e.
One Company. One Destination. West 49 Inc.
HEART?
About the
lifestyle
10 to 19 years old
>$4.9B annual
purchasing power
Spend about half on
clothing, footwear and
accessories
4.3 million tweens
and teens
Account for 76% of action
sports participants
Multiple sources
of discretionary
income
Skateboarding. Snowboarding. Surfing. BMX. Motocross. Action sports athletes and
enthusiasts often share many similar lifestyle preferences, including tastes in fashion,
apparel, footwear and accessories.
a lucrat
i
v
e
target
market
Part-time job. Allowance. Birthday money. Holiday money. Back-to-school money.
Debit card. Gift card. Pre-paid credit card. Mobile banking machine, also known
as a parent.
Our buyers live and breathe the action sports lifestyle. They devote considerable
time and effort to identifying emerging trends in apparel, equipment and brands in
Southern California, as most of the trends in actions sports have their beginning there.
g
n
i
k
a
T sk
i
r of
t
u
n
o hio
s
a
f
We understand the lifestyle of our target market. We also spend a lot of time
talking to our customers, in our stores and online, to learn which merchandise
is in demand. Their opinions are the only ones that matter.
Southern
California
20 buyers
More than 600 combined
days per year in Southern
California
1 incredible grassroots
marketing engine
Countless hours per year
spent online talking to
our customers
Understanding
our customers
How we
do retail
200 brands in demand
429 thousand square feet
134 stores
9 provinces
Our brand
ambassadors
Our stores, which are primarily mall-based, carry a variety of high-performance,
premium brand name and private label products that fulfill the action sports lifestyle
needs of Canadian tweens and teens.
FOC
APP US
E
ROA D
CH
Throngs of loyal customers. 171,000 loyalty club members. 1,540,637
Unique website visitors. 1,800 Passionate store associates. 1 Platinum Club
sales incentive program.
vision
the
we will be
retail destination of
choice for Canadian
tweens and teens
seeking to fulfill their action sports lifestyle needs.
growing
our core
business
open new stores
in new and existing markets
EXPAND
and relocate stores to more
optimum locations and sizes
Fellow shareholders:
The past year has been a challenging time for West 49 Inc. and for the apparel retail industry at large. The
obstacles to our success were considerable, and included a volatile Canadian currency, cross-border shopping,
minimum wage increases and a troubling economy. These poor operating conditions had a clear and direct
impact on our financial results. However, their brunt was lessened by a number of strategic actions we took
throughout the year to strengthen our business.
Best brands on Earth; lowest prices ever!
To defend against cross-border shopping we worked diligently with our vendors and lowered our prices to be
more in line with U.S. retailers – providing our customers with little reason to go south of the border to shop.
Our Platinum Club store sales incentive program, launched in March, helped drive higher units per transaction
throughout the balance of the year. In Ontario, which seemed particularly affected by cross-border shopping,
we ran a no-tax event in our West 49 stores during April and May, reinvigorating their sales performance. After
a lot of hard work, we had a new value proposition for our customers – “best brands on Earth; lowest prices
ever!” These actions combined to help us preserve market share and grow our comparable store sales during
perhaps the most challenging Back-to-School and Holiday selling periods in the history of our Company.
Strengthening our business
Now, I will be the first to admit, that the actions we took to preserve market share and grow our top line were at
the expense of our margins, and this will not be sustainable. However, we also took actions to strengthen other
elements of our business, which should benefit our margins and bottom line going forward.
We hired a Vice President, GMM in January 2008, who now has a year with us under his belt. He is working
hard to ensure that we get the most out of our vendor relationships and we expect this to translate to improved
product margins.
Our continued focus on expense management yielded further improvement to our selling, general and administrative
expenses as a rate to net sales. During the year, we consolidated our Off The Wall banner’s marketing and
merchandising functions into West 49 and we reduced our head office head count in the fourth quarter.
Difficult but necessary decisions
The success of any retailer is dependent on their ability to ensure that their stores, brands and merchandise
remain relevant and sought after by their target market customers. This has always been a priority of ours and
something that I believe we have demonstrated a pretty good track record of in the past. While you will always
have your misses, the key is to make the difficult decisions when something is not working. By the end of the
year we had to make that decision with our Duke’s Northshore concept. We launched Duke’s as a test concept
in 2006 to cater to what we saw as an under-serviced area of the market. Unfortunately, the few stores we had
opened did not generate the returns we were expecting and the remaining Duke’s locations will be subleased,
returned to the landlord or re-branded under one of our other banners.
We will continue to review our portfolio and will take the necessary action with respect to any stores we deem to
be underperforming. This survival of the fittest approach will enable us to devote more focus to growing our
core business, including our West 49 banner – which importantly, has maintained its market share throughout
these tough times, proving that we remain very relevant to our tween and teen target market customers.
9
Our focus
We remain focused on being the retail destination of choice for Canadian tweens and teens seeking to fulfill
their action sports lifestyle needs. We believe in the strong growth potential of our core business, especially our
West 49 banner. However, in light of the current economic environment, efforts to maximize the value from
existing operations will continue to take precedence over other elements of the Company’s growth strategy over
the near term. That does not mean that we will not open new stores, but that we will continue to be more
selective with respect to potential locations.
Our employees are our strongest asset
Our competitive retailing strategies and prudent management of operations have better positioned us for growth
once the economic recovery takes hold. Furthermore, the encouraging results from our Platinum Club sales
incentive program helped remind us that our strongest asset does not show on our balance sheet. Rather, our
strongest asset is our team of 2,000 employees who continually strive to ensure the ongoing viability and
competitiveness of our business from store to store and province to province in challenging and volatile times.
I would like to take this opportunity to personally thank each and every one of them.
In closing, I would like to thank our Board of Directors for their ongoing counsel and guidance, and our Senior
Management team for their contributions and commitment. Finally, I would like to thank our shareholders for
their ongoing support and our loyal customers, whom without we would not exist. I look forward to keeping you
apprised of our progress throughout fiscal 2010.
Sincerely,
Salvatore Baio
President and Chief Executive Officer
10
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations
Table of Contents
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Page #
Introduction
12
1.1
12
Forward-looking Statements
Company Overview
13
2.1
Store Real Estate Activity
13
2.2
Store Count by Banner and by Province
13
Company Performance
14
3.1
Seasonality of Results
14
3.2
Key Performance Indicators
14
Selected Financial Information
15
4.1
Selected Annual Consolidated Results
15
4.2
Selected Quarterly Consolidated Results
17
4.3
Summary of Results of Operations for the Fiscal Year
18
4.4
Summary of Results of Operations for the Fourth Quarter
19
Liquidity and Cash Flows
19
5.1
Liquidity
20
5.2
Cash Flows
20
5.3
Capital Management
21
5.4
Related Party Transactions
21
Policies, Controls and Procedures
22
6.1
Significant Accounting Estimates
22
6.2
Impact of New Accounting Pronouncements
23
6.3
Future Changes in Accounting Policies
24
6.4
Disclosure Controls and Procedures
25
6.5
Internal Control Over Financial Reporting
25
Growth Strategy and Outlook
26
7.1
Growth Strategy
26
7.2
Future Outlook
26
Risk Management
26
8.1
Economic Conditions
26
8.2
Banking Arrangements
27
8.3
Competition
27
8.4
Merchandise
28
8.5
Information Systems
28
8.6
Human Resources
29
8.7
Relationships with Commercial Landlords
29
8.8
Legal and Policies
29
8.9
Insurance Coverage
30
April 21, 2009
1.0 Introduction
The following Management’s Discussion and Analysis (“MD&A”) provides management’s perspective on the
performance of West 49 Inc. (the “Company”) for the 14 week and 53 week periods ended January 31, 2009
(herein referred to as the fourth quarter and fiscal year 2009 respectively) compared to the 13 week and 52
week periods ended January 26, 2008 (herein referred to as the fourth quarter and fiscal year 2008
respectively). This MD&A is supplemental to, and should be read in conjunction with the information contained
in the audited annual consolidated financial statements and accompanying notes of the Company for the year
ended January 31, 2009. These statements have been prepared in conformity with Canadian generally
accepted accounting principles (“GAAP”) and require management to make estimates and assumptions that
affect amounts reported and disclosed in such financial statements and related notes. All amounts in this MD&A
are expressed in Canadian dollars.
The Board of Directors, on the recommendation of the Audit Committee, approved the contents of this MD&A on
April 21, 2009. Disclosure contained in this document is current to this date, unless otherwise stated. Additional
information on the Company, including the Annual Information Form (“AIF”), is available on the SEDAR website
at www.sedar.com.
1.1 Forward-Looking Statements
Statements contained or incorporated by reference in this document that are not current or historical factual
statements may constitute forward-looking information within the meaning of applicable securities laws. Such
forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially different from any future
results, performance or achievements expressed in or implied by such forward-looking statements. When used
in this document, such statements are such words as “may”, “will”, “expect”, “believe”, “plan”, “anticipate”,
“intend”, “estimate” and other similar terminology. The following includes some of the factors that could cause
actual results, performance or achievements to differ materially from those expressed in or implied by any
forward-looking statements made by or on behalf of the Company: competition, changes in demographic trends,
changes in consumer preferences and discretionary spending patterns, changes in business and economic
conditions, human resource matters, legal proceedings, challenges to intellectual property rights, and changes
in laws, regulations, and accounting policies and practices. The foregoing list of factors is not exhaustive. Also
see “Risk Management” below. In formulating the forward-looking statements contained herein, management
has assumed that business and economic conditions affecting the Company’s operations will continue
substantially in the ordinary course, including without limitation with respect to industry conditions, general levels
of economic activity, laws, regulations (including regarding employees, facilities, consumers, sales, advertising,
competition, manufacturing, safety), taxes, foreign exchange rates, minimum wage rates and interest rates,
weather, that there will be no outbreaks of disease or public safety issues, and that there will be no unplanned
material changes in its facilities, equipment, supplies, with respect to relations with customers, suppliers,
landlords and employees, or with respect to credit availability, among other things. These assumptions, although
considered reasonable by management at the time of preparation, may prove to be incorrect. Except as may
expressly be required by law, the Company disclaims any obligation or undertaking to publicly release any
updates or revisions to any forward-looking statements contained herein to reflect any change in expectations,
estimates and projections with regard thereto or any changes in events, conditions or circumstances on which
any statement is based. In addition to the disclosure contained herein, for more information concerning the
Company’s various risks and uncertainties, please refer to the Company’s periodic public filings, including its
annual information form, all of which are available under the Company’s profile at www.sedar.com. Forwardlooking statements contained in this document reflect management’s current estimates, expectations and
projections, which it believes are reasonable as of the current date. Readers are cautioned that forward-looking
statements are not guarantees of future performance. Readers should not place undue importance on forwardlooking statements and should not rely upon this information as of any other date.
WEST 49 INC. – FISCAL 2009 MD&A
12
2.0 Company Overview
The Company is a leading Canadian specialty retailer of fashion and apparel, footwear, accessories and
equipment related to the youth action sports lifestyle. The Company’s stores, which are primarily mall-based,
carry a variety of high-performance, premium brand name and private label products that fulfill the lifestyle
needs of identified target markets, primarily active tweens and teens. At January 31, 2009, the Company
operated 134 stores in nine provinces under seven banners, consistent with the prior year. The Company also
operated online at www.boardzone.com and www.shop.west49.com.
2.1 Store Real Estate Activity
The following chart outlines the store opening and closing activity by banner for the fiscal year ended January 31,
2009 and the fiscal year ended January 26, 2008:
Banner
Opened
FY2009
Closed
FY2008
West 49
Billabong
Off The Wall
D-Tox
Amnesia/Arsenic
Duke's Northshore
1
1
-
1
1
72
6
17
19
17
3
71
6
16
19
18
4
Total
2
2
134
134
During fiscal 2009, the Company opened two new stores and closed two stores (fiscal 2008 – opened 12 new
stores and closed three stores). In addition, the Company relocated five stores in the year (fiscal 2008 – nine
stores). This has resulted in a 1.5% increase in the total gross square footage of stores in fiscal 2009 (fiscal
2008 – 12.6%). The Company intended to scale back its expansion plans in fiscal 2009 to manage capital and
focus on existing operations.
2.2 Store Count by Banner and by Province
The following chart outlines the store locations across Canada by province as at January 31, 2009 and January 26, 2008:
Province
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Ontario
Quebec
Saskatchewan
Total
West 49
11
13
3
3
1
2
37
2
72
Billabong Off The Wall
2
1
1
2
6
2
11
4
17
D-Tox
2
1
1
6
9
19
13
Amnesia/
Arsenic
17
17
Duke's
Northshore
1
2
3
FY2009
Total
17
26
4
4
1
3
51
26
2
134
FY2008
Total
16
25
4
4
1
3
52
27
2
134
3.0 Company Performance
The Company’s financial results in the earlier part of fiscal 2009 were impacted by a higher Canadian dollar and
the Company’s strategic actions to help mitigate the pronounced threat of cross-border shopping. These
strategic actions included lowering the Company’s retail price points on many goods to be competitive with like
retailers on both sides of the Canadian-U.S. border. While the lower prices were partly achieved through
successfully negotiating lower list prices from the Company’s vendors, the Company also sacrificed margins to
preserve market share, drive higher units per transaction and protect comparable store sales.
In the latter part of the year, the Company’s performance was impacted by the current economic downturn,
which on a broader scale, resulted in reduced consumer confidence and spending. The Company’s
merchandising and pricing strategies focused on offering exceptional brands at competitive prices. This
strategy helped the Company defend its market share and was largely responsible for reclaiming comparable
store sales during the key Back-to-School and Holiday selling periods.
It should also be noted that the financial results for the fiscal year and fourth quarter ended January 31, 2009
include contributions from one additional week compared to the corresponding periods in fiscal 2008, due to the
Company’s floating year end.
3.1 Seasonality of Results
Revenues vary by quarter due to the seasonality of the retail industry. Retail sales are traditionally higher in the
third and fourth quarters due to the Back-to-School period and the Holiday season. In addition, fourth quarter
earnings are usually reduced by post Holiday season sale promotions. Variable costs can be adjusted to match
the revenue pattern, but costs such as occupancy are fixed, leading the Company to report a disproportionate
level of earnings in the third and fourth quarters. This business seasonality results in quarterly performance that
is not necessarily indicative of the year’s performance.
3.2 Key Performance Indicators
Management evaluates the following items, which it considers to be key performance indicators, in assessing
the performance of the Company:
Comparable store sales provide a measure of sales growth for current stores opened for at least one year. A
store is included in comparable store sales in the thirteenth month of operation and includes a relocated or
expanded store. Management considers comparable store sales to be a good indicator of the Company’s
current performance, helping leverage certain costs such as store payroll, store occupancy, general and
administrative expenses and other costs that are generally fixed. Positive comparable store sales results could
generate improved operating leverage while negative comparable store sales results could negatively impact
operating leverage.
Net sales per average gross square foot is a common retail metric used to measure the sales productivity of the
retail locations. The net sales per average gross square foot is calculated using net sales for the year, excluding
online sales, divided by the simple average of the beginning and ending gross square footage for the year.
Management considers net sales per average gross square foot a good indicator of the Company’s performance
relative to its competitors.
Gross margin measures whether the Company is appropriately optimizing the price and inventory levels of
merchandise. Gross margin is the difference between net sales and cost of sales. Cost of sales includes cost of
goods sold, shrink, freight, buying, distribution and occupancy costs. An inability to obtain acceptable levels of
initial markups or a significant increase in the use of markdowns could have an adverse effect on the
Company’s gross margin and results of operations.
Selling, general and administrative expenses (“SG&A”) include compensation costs associated with store and
head office locations, advertising and promotional expenses and other administrative costs. Management views
SG&A as a rate to net sales to be a key indicator of success as a multi-banner retailer. The ability to leverage
and control operating costs directly impacts the operating results of the Company.
14
Earnings before interest, income taxes, dividends, depreciation and amortization (“EBITDA”) is a non-GAAP
performance measure used by the Company. EBITDA does not have a standardized meaning prescribed by
GAAP and management cautions investors that EBITDA should not replace net income or loss or cash flows
from operating, investing and financing activities (as determined in accordance with GAAP), as an indicator of
the Company’s performance. The Company’s method of calculating EBITDA may differ from the methods used
by other issuers. Therefore, the Company’s EBITDA may not be comparable to similar measures presented by
other issuers. Management believes that EBITDA is a useful supplementary measure of operating performance
as it is a commonly used metric by investors. The primary drivers of EBITDA are total net sales, gross margin
and the Company’s ability to control operating costs.
Cash flow and liquidity are used by management to evaluate cash flow from operations, investing and financing
to determine the sufficiency of the Company’s cash position. Management believes that cash flow from
operations, along with leveraging the Company’s credit facilities throughout the year, will be sufficient to fund
anticipated capital expenditures and working capital requirements.
4.0 Selected Financial Information
4.1 Selected Annual Consolidated Results
The following table sets forth selected financial data and operating information for the Company for the 53 week
period ended January 31, 2009 and the 52 week periods ended January 26, 2008 and January 27, 2007.
(In thousands, except per share amounts and other
operating information)
FY2009
Summary of Operations:
Net sales
Gross margin
SG&A
EBITDA
Net income (loss)
$
$
Income (loss) per Share:
Basic and diluted
Weighted average common shares - basic
Weighted average common shares - diluted
$
Balance Sheet:
Cash and cash equivalents
Working capital
Total assets
Long-term obligations including current portion
Shareholders' equity
$
$
Other Operating Information:
Number of stores
Net sales per average gross square foot
Average gross square footage per store
Total gross square footage
$
FY2008
210,417 $
46,829
43,470
(9,529)
(12,341) $
FY2007
204,894 $
52,408
43,605
4,418
(2,405) $
195,268
53,543
40,504
12,539
4,137
(0.19) $
(0.04) $
0.07
63,605,190
63,323,829
62,198,635
63,605,190
63,323,829
63,110,717
6,788
3,039
94,747
21,301
45,654
134
490
3,203
429,197
$
$
$
8,369
9,592
103,110
22,370
56,923
134
509
3,155
422,716
$
$
$
5,413
6,335
102,066
21,018
58,685
125
566
3,002
375,308
Adjustments to Normalize
The results in the above table outlining selected financial information are based on GAAP, except for EBITDA
and other operating information. However, the discussions throughout the MD&A on results of operations are
based on the Company’s GAAP results excluding transactions that, in management’s opinion, do not arise as
part of the normal day-to-day operations and by excluding these items management believes readers are
provided with a more meaningful comparison of results for the fiscal years 2009, 2008 and 2007.
15
Goodwill and Intangible Assets Impairment
The Company completed its annual goodwill and intangible asset impairment test during the fourth quarter of
fiscal 2009, as required by GAAP. As a result of the depressed capital markets and the current macroeconomic
environment, which had a negative impact on the Company’s performance, the Company recognized a noncash, goodwill and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million; fiscal 2007 $0.5 million) in accordance with the Canadian Institute of Chartered Accountants (“CICA”) Section 3062:
“Goodwill and Other Intangible Assets”. The impairment charge does not affect the Company’s day-to-day
business operations or cash position. Given the size of the impairment, the Company has separately disclosed
this non-cash impairment in its statement of earnings and has also presented normalized results to exclude this
non-cash charge.
Store Restructuring Costs
During fiscal 2009, the Company evaluated the performance of its test concept, Duke’s Northshore (“Duke’s”),
and decided to take strategic action to close all four stores. One of the Duke’s stores was closed in the second
quarter of fiscal 2009, with non-cash provisions taken in the fourth quarter of $0.7 million on the remaining three
Duke’s stores, which will either be closed or rebranded in fiscal 2010. The total non-cash provision on these
four stores for fiscal 2009 was $0.9 million, of which $0.5 million was recorded as capital asset impairments and
$0.4 million as a provision for lease penalties and other exit costs. As at January 31, 2009, the balance in
accounts payable and accrued liabilities remained unchanged at $0.4 million, and will be paid out by the
Company in subsequent periods. Given the size of the Duke’s strategic restructuring, the Company has
separately disclosed the provision in its statement of earnings and has also presented normalized results to
exclude this non-cash, non-recurring charge.
Corporate Restructuring Costs
During fiscal 2008, the Company recorded corporate restructuring costs of $0.9 million as a result of centralizing
its finance, human resources, information technology, store operations and store development functions. The
majority of these costs related to termination benefits. The remainder of these costs were related to consulting,
legal and other administrative expenses. Given the size of this restructuring, the Company has separately
disclosed this charge in its statement of earnings and has also presented normalized results to exclude this nonrecurring charge.
The following table reconciles the Company’s actual results to a normalized basis:
(In thousands)
EBITDA
Net
Income (Loss)
Actual results
FY2009
FY2008
FY2007
(9,529)
4,418
12,539
(12,341)
(2,405)
4,137
Goodwill and intangible assets impairment
FY2009
FY2008
FY2007
12,000
3,500
500
9,108
3,361
500
Store restructuring costs
FY2009
FY2008
FY2007
888
-
604
-
Corporate restructuring costs
FY2009
FY2008
FY2007
885
-
576
-
Normalized results
FY2009
FY2008
FY2007
3,359
8,803
13,039
16
(2,629)
1,532
4,637
4.2 Selected Quarterly Consolidated Results
The table below includes selected data for the eight most recently completed quarters. This unaudited quarterly
information has been prepared on the same basis as the annual consolidated financial statements. The
operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
Q4
FY2009
(In thousands, except per share amounts)
Q3
FY2009
Q2
FY2009
Q1
FY2009
Q4
FY2008
Q3
FY2008
Q2
FY2008
Q1
FY2008
Summary of Operations:
Net sales
EBITDA - normalized
EBITDA
Net income (loss) - normalized
Net income (loss)
$ 64,759 $ 61,723
3,306
4,844
(9,409)
4,844
1,127
2,074
$ (8,467) $ 2,074
$ 45,019 $ 38,916 $ 62,389 $ 59,082
(474)
(4,317)
4,702
5,754
(647)
(4,317)
1,062
5,711
(1,636)
(4,194)
2,233
2,619
$ (1,754) $ (4,194) $ (1,219) $ 2,591
$ 42,426 $ 40,997
904
(2,557)
836
(3,191)
(545)
(2,775)
$
(589) $ (3,188)
$
$
$
$
$
$
Income (loss) per Share: (1)
Basic - normalized
Basic and diluted
(1)
0.02 $
(0.13) $
0.03
0.03
(0.03) $
(0.03) $
(0.07) $
(0.07) $
0.04 $
(0.02) $
0.04
0.04
(0.01) $
(0.01) $
(0.04)
(0.05)
The sum of the quarters may not equal the fiscal year totals due to rounding and changes in weighted average shares outstanding.
The table below is a reconciliation of the Company’s normalized EBITDA to net income (loss):
Q4
FY2009
(In thousands)
EBITDA - normalized
Less:
Goodwill and intangible assets impairment
$
$
4,844
Q2
FY2009
$
Q1
FY2009
(474) $ (4,317) $
Q4
FY2008
4,702
Q3
FY2008
$
5,754
Q2
FY2008
$
904
Q1
FY2008
$ (2,557)
715
12,000
-
173
-
-
140
3,500
43
-
(9,409)
4,844
(647)
(4,317)
1,062
5,711
836
(3,191)
1,415
203
(2,560)
1,405
235
1,130
1,508
302
(703)
1,534
213
(1,870)
1,362
276
643
1,302
224
1,594
1,368
391
(334)
1,447
154
(1,604)
$ (8,467) $
2,074
EBITDA
Less:
Amortization
Interest and dividends on preferred shares
Income taxes
Net income (loss)
3,306
Q3
FY2009
$
(1,754) $ (4,194) $ (1,219) $
2,591
68
-
$
634
-
(589) $ (3,188)
The table below is a reconciliation of the Company’s normalized net income (loss) to reported net income (loss):
Q4
FY2009
(In thousands)
Net income (loss) - normalized
Less (net of income tax):
Goodwill and intangible asset impairment
$
486
9,108
-
Net income (loss)
$ (8,467) $
2,074
1,127
Q3
FY2009
$
2,074
Q2
FY2009
$
(1,636) $ (4,194) $
118
-
$
17
Q1
FY2009
-
Q4
FY2008
2,233
Q3
FY2008
$
91
3,361
(1,754) $ (4,194) $ (1,219) $
2,619
Q2
FY2008
$
28
2,591
(545) $ (2,775)
44
-
$
Q1
FY2008
413
-
(589) $ (3,188)
4.3 Summary of Results of Operations for the Fiscal Year
Net Sales
Net sales increased $5.5 million, or 2.7%, to $210.4 million for the 53 weeks ended January 31, 2009 from
$204.9 million for the 52 weeks ended January 26, 2008. Comparable store sales for the Company for
comparable 53 week periods decreased 0.4% while the West 49 banner experienced an increase of 0.1%. This
compares to a 1.3% decrease in comparable store sales in the prior year for the Company and growth of 0.5%
for the West 49 banner.
The first quarter of fiscal 2009 was very disappointing with an 8.1% decrease in comparable store sales for the
Company. Since then, the Company has reaffirmed its merchandising and pricing strategies, improved
merchandise flow and fought to regenerate sales in an increasingly challenging economy. This culminated in
positive comparative store sales of 1.3% for both the Company’s Back-to-School selling season in the third
quarter, as well as the Holiday selling season in the fourth quarter.
Gross Margin
Gross margin decreased $5.6 million to $46.8 million in the 53 weeks ended January 31, 2009 from $52.4
million in the 52 weeks ended January 26, 2008. As a rate to net sales, gross margin declined by 340 basis
points to 22.2% in the 53 weeks ended January 31, 2009 from 25.6% in the 52 weeks ended January 26, 2008.
The decline in gross margin was primarily due to reduced product margins and increased supply chain costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”), decreased $0.1 million to $43.5 million for the 53 weeks
ended January 31, 2009 from $43.6 million during the 52 weeks ended January 26, 2008. As a rate to net
sales, SG&A expenses were 20.7% for the 53 weeks ended January 31, 2009 compared to 21.3% in the 52
weeks ended January 26, 2008. The 60 basis point decrease in SG&A as a rate to net sales was mainly due to
the continued focus on expense management.
Earnings before Interest, Income Taxes, Dividends, Depreciation and Amortization
On a normalized basis, excluding all restructuring costs of $0.9 million (2008 - $0.9 million) and the goodwill and
intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million), EBITDA was $3.4 million during
the 53 weeks ended January 31, 2009 from $8.8 million, for the 52 weeks ended January 26, 2008. The
decrease in EBITDA is almost entirely due to the reductions in gross margin.
Amortization Expense
Amortization expense was $5.9 million in the 53 weeks ended January 31, 2009 up from $5.5 million in the 52
weeks ended January 26, 2008. The increase of $0.4 million in amortization expense was primarily the result of
a full year of amortization of new, expanded and relocated stores from the prior year’s growth.
Provision for Income Taxes
The provision for income taxes was a recovery of $4.0 million for the 53 weeks ended January 31, 2009 as
compared to a provision of $0.3 million in the 52 weeks ended January 26, 2008. The reduction in the provision
for income taxes was based on the net loss adjusted for permanent and other differences, including the goodwill
and intangible assets impairment.
Net Income (Loss)
The net loss for fiscal 2009, excluding the after-tax impact of the restructuring costs of $0.6 million (fiscal 2008 $0.6 million) and the goodwill and intangible assets impairment charge of $9.1 million (fiscal 2008 - $3.4 million)
was $2.6 million, or a $0.04 loss per share, compared to a normalized net income of $1.5 million, or $0.02 per
share for fiscal 2008. The per share amounts have been calculated based on a weighted average of
63,605,190 common shares during the 53 weeks ended January 31, 2009 compared to a weighted average of
63,323,829 common shares during the 52 weeks ended January 26, 2008.
18
4.4 Summary of Results of Operations for the Fourth Quarter
Net Sales
Net sales increased $2.4 million, or 3.8%, to $64.8 million in the 14 weeks ended January 31, 2009 from $62.4
million in the 13 weeks ended January 26, 2008. The increase was mostly attributable to the additional week in
the quarter. Comparable store sales for the Company for the comparable 14 week period decreased by 0.5%,
with the West 49 banner experiencing an increase of 0.3%. This compares to a 4.5% decrease in comparable
store sales in the prior year for the Company and a 2.4% decrease for the West 49 banner.
Despite the volatile and uncertain economy, which was especially disappointing in November and early December,
the Company executed well during the peak Holiday season with merchandising and pricing strategies producing
positive comparative store sales of 1.3% during the five week selling period ended January 3, 2009. This has
allowed the Company to maintain its customer base in a shrinking economy, while ensuring its product is current
and proving that the Company remains very relevant to its customer.
Gross Margin
Gross margin decreased $1.1 million, to $16.3 million in the 14 weeks ended January 31, 2009 from $17.4
million in the 13 weeks ended January 26, 2008. As a rate to net sales, gross margin decreased by 270 basis
points to 25.2% in the 14 weeks ended January 31, 2009 from 27.9% in the 13 weeks ended January 26, 2008.
The decline in gross margin was primarily due to lower product margins and increased supply chain costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $13.0 million during the 14 weeks ended January 31, 2009,
up $0.3 million from $12.7 million during the 13 weeks ended January 26, 2008. The increase is largely due to
the additional week. As a rate to net sales, normalized SG&A expenses were 20.1% for the 14 weeks ended
January 31, 2009, compared to 20.4% in the 13 weeks ended January 26, 2008. The decrease of 30 basis
points in SG&A as a rate to net sales was mainly attributable to the continued focus on expense management.
Earnings before Interest, Income Taxes, Dividends, Depreciation and Amortization
On a normalized basis, excluding restructuring costs of $0.7 million (fiscal 2008 – $0.1 million), and the goodwill
and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million), EBITDA was $3.3 million
during the 14 weeks ended January 31, 2009 compared to $4.7 million, during the 13 weeks ended January 26,
2008. The decline in EBITDA for the quarter was mainly due to lower gross margins.
Net Income
The net income, excluding the after-tax impact of restructuring costs and the goodwill and intangible assets
impairment charge, for the 14 weeks ended January 31, 2009 was $1.1 million, or $0.02 per share compared to
normalized net income of $2.2 million, or $0.04 per share in the 13 weeks ended January 26, 2008. The
normalized net income per share has been calculated based on a weighted average of 63,773,369 common
shares during the 14 weeks ended January 31, 2009 compared to a weighted average of 63,517,071 common
shares during the 13 weeks ended January 26, 2008.
Subsequent Events
Subsequent to January 31, 2009, the Company opened a West 49 store at the Milton Centre, in Milton, Ontario.
In addition, the company closed two stores: an Off The Wall store at Lougheed Town Centre, in Burnaby, British
Columbia, due to lease expiry; and a Duke’s store at Park Royal Shopping Centre, in West Vancouver, British
Columbia as part of the Company’s strategic decision to close this test concept.
5.0 Liquidity and Cash Flows
The Company’s principal capital requirements are to fund working capital needs, open new stores and expand
and relocate existing stores in connection with its strategic plans. These capital requirements have generally
been satisfied by a combination of cash flows from operations and borrowings under its credit facilities.
19
5.1 Liquidity
During the year ended January 31, 2009, operations generated cash of $2.3 million (fiscal 2008 - $7.1 million).
The decrease in cash from operations from the prior year was largely due to lower earnings during fiscal 2009,
mainly due to lower gross margins. Investing activities used cash of $4.2 million (fiscal 2008 – $6.8 million)
which were largely due to capital asset additions, partially offset by cash inducements from landlords. Capital
asset additions were mainly for new store growth, relocations and expansions of some existing stores, as well
as the first phase of a new retail merchandising system. Financing activities were essentially flat, as the
incremental borrowing of $2.0 million in fiscal 2009 was largely offset by debt repayments. This compares to the
prior year of net cash generated from financing activities of $2.6 million. Overall, cash balances ended for fiscal
2009 at $6.8 million, compared to $8.4 million in the prior year.
Due to the seasonality of the retail industry, working capital balances tend to fluctuate significantly throughout
the year. Cash and cash equivalents are generally highest in the fourth quarter, and inventory and accounts
payable balances tend to be considerably higher during the second and third quarters due to the Company’s
merchandise purchase patterns in preparation for the Back-to-School and Holiday selling periods. The
Company’s credit facilities are designed to support these seasonal fluctuations with a seasonal adjustment.
5.2 Cash Flows
Cash Flows Provided by Operating Activities
For the 53 weeks ended January 31, 2009, cash flows provided by operating activities were $2.3 million compared to
$7.1 million in the same period last year. The $4.8 million change from last year was due mainly to the decrease in
earnings from the prior year, adjusted for non-cash items, and a decreased investment in non-cash working capital.
Cash flows provided by operating activities were $11.0 million in the fourth quarter of fiscal 2008 compared to
$12.4 million in the same period last year. The $1.4 million change from last year was mainly due to the decreased
earnings in the period, adjusted for non-cash items, and a decreased investment in non-cash working capital.
Cash Flows Provided by Financing Activities
For the 53 weeks ended January 31, 2009, cash flows provided by financing activities were $0.3 million
compared to $2.6 million in the same period last year. The change was mainly due to the reduced draw on the
CAPEX credit facility of $2.0 million in the year, compared to a $4.2 million draw in the prior year.
Cash flows provided by financing activities were $0.9 million in the fourth quarter of fiscal 2009 compared to a
use of funds of $0.1 million in the same period last year. The change was mainly due to the repayments on the
CAPEX credit facility of $1.2 million in the quarter offset by a $2.0 million increase in long term debt.
Cash Flows Used by Investing Activities
For the 53 weeks ended January 31, 2009, cash flows used by investing activities were $4.2 million compared to
$6.8 million in the same period last year. The change was mainly due to purchases of capital assets of $5.4 million
compared to $7.7 million in the same period last year, combined with increased tenant inducements of $0.3 million.
For the fourth quarter of fiscal 2009, cash flows used by investing activities increased by $0.2 million to $1.4
million in the fourth quarter of fiscal 2009 compared to $1.2 million in the same period last year. The change was
mainly due to purchases of capital assets of $1.6 million, less tenant inducement received of $0.2 million
compared to $1.2 million of capital asset purchases in the same period last year.
Net Change in Cash and Cash Equivalents
For the 53 weeks ended January 31, 2009, the net result of the Company’s operating, financing and investing
activities was a decrease in cash and cash equivalents balance of $1.6 million compared to an increase of $3.0
million in the same period last year.
20
In the fourth quarter of fiscal 2009, the net change in the Company’s operating, financing and investing activities
was an increase in cash and cash equivalents balance of $10.5 million compared to an increase of $11.0 million
in the same period last year.
The table below sets out various categories of contractual obligations of the Company and the amounts due for
each period as of January 31, 2009:
(In thousands)
Within
1 year
Total
2 - 3 years
4 - 5 years
Thereafter
Long term debt
Operating leases
Preferred shares
$
6,843
96,211
5,223
$
1,322
16,897
33
$
4,228
29,486
5,190
$
1,293
23,696
-
$
26,132
-
Total contractual obligations
$
108,277
$
18,252
$
38,904
$
24,989
$
26,132
5.3 Capital Management
During fiscal 2009, the sources of capital included a $10.0 million revolving credit facility with a seasonal
adjustment increase to $15.0 million from April 1 to September 30. In addition, a revolving term loan facility of
$8.5 million has been available since August 29, 2008, previously at $6.5 million. Interest rates on these
facilities were at prime plus 1.25% and 1.75%, respectively. These facilities are secured by general security
agreements against all existing and future acquired assets of the Company, including a pledge of the shares
West 49 Inc. holds in its subsidiaries.
The Company is subject to certain restrictions and covenants in respect of its credit facilities, including a
minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth.
As at January 31, 2009, the Company was in violation of one of its bank covenants. Subsequent to January 31,
2009, the Company obtained a waiver for the default retroactive to January 31, 2009. The waiver obtained has the
following conditions set forth based on historical operating needs: the maximum limit on the Company’s operating
credit facility was reduced to $6.0 million from $10.0 million; the seasonal increase available on the operating line
from April 1 to September 30 has been lowered to $12.0 million from $15.0 million; the term loan facility has been
capped at $6.8 million, down from $8.5 million; and the credit facilities have also been changed to a demand basis
from a 364-day committed line. Interest rates on these facilities are at prime plus 4.0% and 4.75%, respectively.
With uncertainties in the current economic environment, it is not uncommon for banks to remove unutilized
credit facilities. Throughout the year, the Company has had varying amounts of unutilized credit facilities. The
bank indebtedness on the operating credit facility ranged from nil to $9.0 million at the peak of the seasonal
period. Management believes that the Company’s revised credit facilities, along with cash generated from
operations, will be sufficient to fund its operations and anticipated capital expenditures during fiscal 2010. In
addition, subsequent to January 31, 2009, the Company completed an amalgamation of various corporate
entities that will allow it to realize a significant amount of non-capital tax losses carried forward from prior years
which will reduce the amount of tax instalments by $1.7 million in fiscal 2010.
The Company’s credit facility renewal date is June 30, 2009. The Company anticipates that it may be in violation
of another covenant at the end of the first quarter. The Company’s bank is aware of this, and the Company has
already begun a full renewal process with the bank to negotiate mutually acceptable terms and anticipates this
to be completed during the second quarter of fiscal 2010.
5.4 Related Party Transactions
During the year, the Company, in the normal course of operations, provided administrative, payroll and
distribution services to 6271235 Canada Inc. (Prudhommes Factory Outlet, a clothing retailer) and considers
these to be related party transactions on account that a Director of the Company wholly owns 6271235 Canada
Inc. The outstanding amount due from 6271235 Canada Inc, as at January 31, 2009 was $10.0 thousand (2008
– $138.0 thousand), does not bear interest and has no specific terms of repayment. During the year, the
Company earned $36.0 thousand (2008 - $45.0 thousand) in management fees for providing these services,
which are included as other income in SG&A.
21
6.0 Policies, Controls and Procedures
6.1 Significant Accounting Estimates
Estimates
The preparation of the Company’s consolidated financial statements, in accordance with Canadian generally
accepted accounting principles, requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and expenses during the reporting
period. Due to the inherent uncertainties in making such estimates, and the current economic environment,
actual results reported in the near term could differ from those estimates. Estimates are used when accounting
for items such as inventory valuation, estimated returns and allowances, amortization, gift card liability,
impairment of long-lived assets, future income taxes and assumptions used when assessing goodwill and
intangible assets. Management reviews these estimates on an ongoing basis, and believes that the most critical
estimates and assumptions are in the following areas:
Revenue Recognition
Revenue includes sales to customers through stores operated by the Company. Sales are recognized at the
time of sale and receipt of merchandise by the customer, net of any returns. Allowances for customer returns
are estimated using the historical return patterns.
Upon the purchase of a gift card or issuance of a gift certificate, a liability is established for the cash value of the
gift card or gift certificate. Revenue is recognized when the gift card or gift certificate is redeemed for
merchandise. Gift card breakage is recognized by the Company when, based on historical patterns of
redemption, the Company determines the cards or certificates will not be redeemed.
Inventories
Inventories, which consist of fashion and apparel, footwear, accessories and equipment related to music, youth
culture and action sports, are valued at the lower of cost and net realizable value with cost being determined on
the weighted average basis. The cost of inventories includes the cost of purchases and estimates of the
capitalized portion of other costs incurred in bringing the inventories to their present location and condition.
Inventories owned by the Company are generally located at its warehouses and its retail locations. The
Company records valuation adjustments to inventories based on the aging of inventories and estimated
expected markdowns. The estimated reserve can be affected by changes in the Company’s markdown
strategies and selling patterns that could result in a fluctuation in gross margin.
Impairment of Long-lived Assets
Management evaluates the ongoing value of assets associated with the Company’s retail stores. Long-lived
assets are tested for recoverability on an annual basis or more frequently as events or changes in
circumstances indicate that their carrying value exceeds the total undiscounted cash flows expected from their
use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying
value of the assets over their fair value.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair market value of the net identifiable assets of
the acquired business. Goodwill and intangible assets are assessed for impairment on an annual basis or more
frequently as events or circumstances change that indicate goodwill or intangible assets of a reporting unit may
be impaired. When the carrying amount exceeds the fair value, an impairment charge is recognized in earnings
in an amount equal to the excess of the carrying value over its fair market value
22
Future Income Taxes
The Company follows the liability method of accounting for income taxes. Under this method, future income
taxes are recognized for the future income tax consequences attributable to differences between the carrying
values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities
are measured using the enacted and substantively enacted income tax rates expected to apply to taxable
income in the years in which temporary differences are expected to be recovered or settled. The effect on
future income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that
includes the substantively enacted dates. Future income tax assets are recognized to the extent that it is more
likely than not that they will be realized.
6.2 Impact of New Accounting Pronouncements
The Canadian Institute of Chartered Accountants (“CICA”) amended section 1400 “General Standards of Financial
Statement Presentation” to include requirements to assess an entity’s ability to continue as a going concern. The
new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or
after January 1, 2008. Accordingly, the Company adopted the amendment to this standard on January 27, 2008.
The adoption of this amendment did not have an impact on the Company’s consolidated financial statements.
The CICA issued four new accounting standards that became effective for the Company’s first quarter of fiscal
2009: Section 1535 “Capital Disclosures”, Section 3031 “Inventories”, Section 3862 “Financial Instruments –
Disclosures” and Section 3863 “Financial Instruments – Presentation”. The Company applied these new
accounting standards at the beginning of its 2009 fiscal year.
Capital Management Disclosures
Section 1535 “Capital Disclosures” establishes standards for disclosing information about an entity’s capital and how
it is managed. Required disclosure includes information that enables users of an entity’s financial statements to
evaluate its objectives, policies and processes for managing capital. This disclosure includes a description of capital
under management, and disclosure of externally imposed capital requirements to which the entity is subject. The
adoption of this standard did not have an impact on the Company’s consolidated financial statements.
Inventories
Section 3031 replaces Section 3030 “Inventories”. The objective of this new section is to prescribe the
accounting treatment for inventories. This section requires inventories to be measured at the lower of cost and
net realizable value and also provides guidance on the appropriate methods of determining cost and the impact
of any write-downs to net realizable value. Reversals of previous write-downs to net realizable value where
there is a subsequent increase in the value of inventories is now required. This reversal is limited to the extent
of the initial write-down. Under this new accounting standard, the cost of inventories includes the cost of
purchases and other costs incurred in bringing the inventories to their present location and condition.
The Company implemented this new accounting standard at the beginning of its 2009 fiscal year, on a
retrospective basis, without restatement of prior periods. As a result of the retrospective application of this new
standard, the opening deficit for fiscal 2009 has been adjusted by the difference in the measurement of opening
inventories. The impact of this transitional adjustment was an increase in opening inventories of $1.2 million, an
increase in current future income taxes payable of $0.4 million, and a decrease of $0.8 million to the opening
deficit. As at January 31, 2009, the costs capitalized to inventory totaled $1.6 million.
Financial Instruments Disclosure and Presentation
Sections 3862 and 3863 replaced Section 3861 “Financial Instruments – Disclosure and Presentation”, with the
exception of accounting for insurance contracts, which may still be accounted for in accordance with Section
3861. Section 3862 requires disclosure that enables financial statement users to evaluate the significance of
financial instruments for an entity’s financial position and performance, the nature and extent of risks arising
from financial instruments to which the entity is exposed, and the entity’s process for managing such risks.
Section 3863 enhances a financial statement user’s understanding of the significance of financial instruments to
an entity’s financial position, performance and cash flows by establishing standards for presentation of financial
instruments and non-financial derivatives. The adoption of this standard did not have an impact on the
Company’s consolidated financial statements.
23
6.3 Future Changes in Accounting Policies
In February 2008, the CICA amended Section 1000 “Financial Statement Concepts” to clarify the criteria for
recognition of an asset and the timing of recognition of expenses. This amendment is effective for interim and
annual financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the
Company will apply this amendment at the beginning of its fiscal 2010 year. The Company is currently
evaluating the impact that the adoption of this amendment will have on its consolidated financial statements.
In February 2008, the CICA issued Section 3064 “Goodwill and Intangible Assets”. Section 3064 replaced
Section 3062 “Goodwill and Other Intangible Assets” and Section 3450 “Research and Development”. This new
section provides additional guidance on the recognition, measurement, presentation and disclosure of goodwill
and intangible assets. This standard is effective for interim and annual financial statements for fiscal years
beginning on or after October 1, 2008. Accordingly, the Company will apply this new standard at the beginning
of its fiscal 2010 year. The Company is currently evaluating the impact that the adoption of this Section will
have on its consolidated financial statements.
In February 2008, the CICA announced that the Canadian Accounting Standards Board confirmed that the
changeover to International Financial Reporting Standards (“IFRS”) from Canadian GAAP will be required for
publicly accountable enterprises’ interim and annual financial statements effective for fiscal years beginning on
or after January 1, 2011. Companies will be required to provide comparative information under IFRS for the
previous fiscal year. The implementation of IFRS will be applicable for the Company for the first quarter of fiscal
2012, for which the current and comparative financial information will be presented in accordance with IFRS.
The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the
Company’s reported financial results.
In addition, the International Accounting Standards Board has projects underway that are expected to result in
new pronouncements that continue to evolve IFRS, and as a result, IFRS as at the transition date is expected to
differ from its current form.
Preliminary IFRS Impact Assessment
An initial evaluation or impact assessment has been completed to analyze potential significant differences
between current IFRS and Canadian GAAP as they apply to the Company. The results of the assessment
identified the following:
x
x
x
x
Preliminary analysis of all Canadian GAAP to IFRS differences and IFRS 1 elections, including a
prioritization of high, medium and low impact areas for the Company;
Preliminary resource requirements;
Preliminary training requirements; and
Preliminary IFRS Transition Plan.
The initial assessment has identified some standards as having a higher likelihood for generating accounting
differences including Intangible Assets (IAS 38), Impairment of Assets (IAS 36) and Business Combinations
(IFRS 3), as well as the more extensive presentation and disclosure requirements under IFRS. The Company
continues to analyze available accounting policy choices including IFRS 1 elections, and is therefore unable to
quantify the exact impact of IFRS on the Company’s financial statements at this time.
IFRS Transition Plan
During fiscal 2010, the Company will finalize and implement a formal IFRS Transition Plan. This plan will include
the following:
x
x
x
x
x
x
x
An established project structure and governance practices;
Detailed timetable for fiscal 2010;
Identification and allocation of resources (internal and external);
Development and execution of a training program;
Detailed analysis of all Canadian GAAP to IFRS differences;
Detailed analysis and selection of all IFRS 1 elections; and
Assessment of impact on data systems, internal controls over financial reporting, and business
activities, such as financing and compensation arrangements.
24
IFRS Transition Disclosures
As the Company transitions from Canadian GAAP to IFRS, it is required to qualitatively disclose its
implementation impacts. As the IFRS Transition Plan progresses, disclosure on accounting policy differences is
expected to increase.
In January, 2009, the CICA issued Sections 1582 “Business Combinations”, 1601 “Consolidated Financial
Statements” and 1602 “Non-Controlling Interests”, which replaced Sections 1581 “Business Combinations” and
1600 “Consolidated Financial Statements”. These new Sections harmonize Canadian accounting with the
International Accounting Standards Board’s (IASB) International Financial Reporting Standard 3 “Business
Combinations”. These new standards are to be applied prospectively for business combinations in the first
annual reporting period beginning on or after January 1, 2011. The Company intends to apply these Sections at
the beginning of its fiscal 2012 year, although earlier application is permitted. Assets and liabilities that arose
from business combinations which precede the application date will not be adjusted upon adoption of the new
standards. The Non-Controlling Interests standard is not applicable to the Company at this time.
6.4 Disclosure Controls and Procedures
Management is responsible for establishing and maintaining a system of controls and procedures over the
public disclosure of financial and non-financial information regarding the Company. Disclosure controls and
procedures are designed to seek to ensure that information required to be disclosed in reports filed with
Canadian securities regulatory authorities is recorded, processed, summarized and reported on a timely basis,
and is accumulated and communicated to senior management, including the Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
The Company’s system of disclosure controls and procedures includes, but is not limited to, a Disclosure Policy,
a Code of Business Conduct, the effective functioning of a Disclosure Committee and internal controls over
financial reporting. The Company’s management, including the CEO and the CFO, does not expect that the
disclosure controls will prevent or detect all misstatements due to error or fraud. Because of the inherent
limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute, assurance
that all control issues and instances of fraud or error, if any, have been detected. The Company is continually
seeking to evolve and enhance its system of controls and procedures.
Based on the evaluation of the disclosure controls and procedures which included documentation review,
enquiries and other procedures considered by management to be appropriate in the circumstances, the CEO
and CFO have concluded that, to their knowledge, as at January 31, 2009, except for the weakness identified
below in the internal control over financial reporting, the disclosure controls and procedures are designed and
operating effectively.
6.5 Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining appropriate internal controls over financial
reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with GAAP. The Company’s internal controls over financial reporting include, but are not limited to, policies and
procedures related to accounting and reporting, and controls over systems that process transactions. The
Company’s procedures for financial reporting also include the involvement of qualified financial professionals,
senior management and the Company’s Audit Committee.
During fiscal 2009, management engaged the services of external consultants, independent of the Company’s
external auditor, to provide additional advice and technical expertise relating to internal controls over financial
reporting. During the process of management's review and evaluation of the design and operational effectiveness
of the Company's internal control over financial reporting, the CEO and CFO have concluded that, as at January
31, 2009, the internal controls over financial reporting are effective in providing reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with GAAP with the exception of the previously disclosed design weakness. As is indicative of many small
companies, management has identified the existence of full competencies in the complex areas of taxation as an
area requiring improvement. Risks associated with this weakness have the potential to result in material
misstatements in the Company’s consolidated financial statements among other things. Senior management
seeks to mitigate these risks by consulting with external experts to assist management in their analysis.
25
Management does not intend to remediate the Company’s lack of in-house tax expertise as it does not believe it
to be economically beneficial at this time and that the established procedures are sufficient at this time. It should
be noted that a control system, no matter how well conceived or operated, can only provide reasonable
assurance, not absolute assurance, that the objectives of the control system are met.
Management has evaluated whether there were changes in internal controls over financial reporting during the
quarter ended January 31, 2009 that materially affected, or are reasonably likely to materially affect, the internal
controls over financial reporting. Management has determined that no material changes occurred during in the
fourth quarter.
7.0 Growth Strategy and Outlook
7.1 Growth Strategy
The Company’s vision is to be the retail destination of choice for Canadian tweens and teens seeking to fulfill
their action sports lifestyle needs. The Company will fulfill its vision and achieve its objectives through executing
a growth strategy which is primarily focused on maximizing returns at existing locations (through improving
gross margins; leveraging expenses; and driving comparable store sales) as well as growing its stores across
Canada (by opening new stores in existing markets and expanding into new markets).
7.2 Future Outlook
The economic downturn that began in 2008 has continued to evolve into a global economic meltdown,
negatively impacting consumer confidence across Canada. While spending by the Company’s tween and teen
target market consumers has historically been thought of as recession resistant, the effects have been far more
reaching and volatile than the past, and Canadian youth are looking to make their dollars go further.
Management and the Board of Directors continue to believe in the strong growth potential of the Company over
the next several years. However, in light of the current macroeconomic environment and constraints in the
capital markets, management will continue to be prudent and definitive in the actions taken to preserve and
grow market share and strengthen the profitability of the Company. This means that maximizing the value from
existing operations will continue to take precedence over other elements of our growth strategy over the near
term. As such, store growth will likely be limited to four or five new stores and only a few major
renovation/relocations in fiscal 2010. In addition, the Company will continue to reassess underperforming
stores, and intends to close two to four stores in fiscal 2010 as opportunities to exit leases arise.
8.0 Risk Management
The Company attempts to mitigate and manage risks wherever possible through various tactics including
continuous monitoring of its internal and external environments for threats and opportunities, planning for the risk
with contingency plans and protecting against the risk of loss with insurance, where applicable. The risks described
below are inherent in the Company’s normal course of business and have the potential to impact the financial
performance of the Company. The risks included here are not exhaustive. The Company operates in a very
competitive and rapidly changing environment. New risk factors may emerge from time to time and it is not possible
for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company.
8.1 Economic Conditions
Current Economic Downturn
The apparel retail industry can be affected by macroeconomic factors, including changes in national, regional, and
local economic conditions, employment levels, salary and wage levels, interest and currency exchange rates,
taxation and consumer spending patterns. The current global economic downturn has adversely impacted the
Canadian retail landscape primarily in the form of reduced consumer confidence and could negatively affect
consumers’ willingness to purchase the Company’s products as they reduce their discretionary spending. Moreover,
current economic conditions may adversely affect the ability of the Company’s manufacturers and/or suppliers to
obtain the credit necessary to fund their working capital needs, which could negatively impact their ability to continue
to provide products to the Company. If the current economic conditions persist or deteriorate, sales of the
Company’s products could be adversely affected and the Company may face obsolescence issues with its
inventory, either of which could have a material adverse impact on its operating results and financial condition.
26
The Company’s sales also depend on the continuing popularity of malls as shopping and leisure-time
destinations for tweens and teens. The current economic recession and uncertain economic outlook in Canada
may further lower consumer spending levels and cause a decrease in mall traffic or new mall development,
each of which could adversely affect the Company.
Currency Exchange Rates
The Company’s foreign currency exchange rate risk is generally limited to currency fluctuations between the
Canadian and United States (U.S.) dollar. The Company is exposed to foreign exchange rate variability on its
merchandise purchases in U.S. dollars. Pricing is determined in advance with considerable lead times, and
significant fluctuations in foreign exchange rates could have an impact on the Company’s operating results and
financial condition. The Company does not currently engage in any foreign currency hedging activities due to
the relatively small volume of transactions in U.S. dollars.
A significant portion of the Company’s merchandise purchases are made through Canadian distributors of U.S.
suppliers. Similar to the above, pricing is determined in advance with considerable lead times, and significant
fluctuations in foreign exchange rates could have immediate positive or negative affects on the Company’s
ability to be price competitive. Since the Company’s pricing is locked in for longer periods of time, this
competitive pricing delay can be adjusted by the Company in the short-term through markdowns or other
means, which could have significant positive or negative effects on the Company’s operating results and
financial condition.
8.2 Banking Arrangements
Aside from cash flows from operations, the Company is dependent on borrowings under its credit facilities to
support its seasonal cash requirements. The current global financial market downturn has resulted in severe
restrictions on credit availability in most parts of the world, including Canada. Credit contraction in financial
markets may hurt the Company's ability to borrow funds to meet its anticipated cash needs and access credit in
the event that it identifies an acquisition opportunity or some other opportunity that would require a significant
investment in resources.
A significant decrease in the operating results of the Company could adversely affect the Company’s ability to
maintain required financial ratios under the Company’s credit facilities. Required financial ratios include a
minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth. The
Company is also subject to a maximum amount of capital expenditure per annum. If these financial ratios are
not maintained or the capital expenditure limit is exceeded, the lender will have the option to terminate the
facilities and require immediate repayment of all amounts outstanding under the credit facilities. If the Company
were unable to obtain waivers or renegotiate acceptable lending terms, there can be no guarantee that the
Company would be able to obtain a new credit agreement with another bank or group of lenders on similar
terms or at all and this could have an adverse effect on the Company.
8.3 Competition
The Canadian retail apparel and accessory industry is highly competitive. The Company competes with other
retailers for manufacturers and/or suppliers, customers, suitable store locations, qualified associates and
management personnel. In addition, given the close proximity of many of the Company’s stores to the U.S.,
cross-border shopping also presents a constant risk. The Company currently competes directly with street-level
alternative stores located primarily in metropolitan areas as well as with other mall-based teenage-focused
retailers such as, but not limited to: Bluenotes™, American Eagle Outfitters™, Old Navy™, Below the Belt™,
The GAP™ and boathouse™. The Company may also experience increased competition from additional nonCanadian retailers moving into the Canadian marketplace. Among the other retailers who could enter the
Canadian marketplace are PacSun™ (Pacific Sunwear™), Zumiez™ and Hot Topic™. Some of the Company’s
competitors are larger and may have greater resources than the Company. Direct competition with these and
other retailers may increase significantly in the future, which could require the Company, among other things, to
lower its prices. Failure to develop and implement appropriate competitive strategies could have an adverse
effect on the Company.
27
8.4 Merchandise
Dependence on Manufacturers and/or Suppliers
The Company’s financial results also depend on its ability to maintain access to manufacturers and/or suppliers
who develop and sell current action sport, fashion, music and pop culture related merchandise as well as the
Company’s ability to purchase merchandise in sufficient quantities and to do so at competitive prices. Although
the Company acquires its merchandise from various manufacturers and/or suppliers, many of them limit the
quantity of merchandise produced and sold to the Company as a result of capacity limitations and other factors.
There is no guarantee that the Company will be able to maintain its relationships with its manufacturers and/or
suppliers on current terms or that the Company will obtain the quantity of merchandise it seeks at competitive
prices in the future. Any inability to acquire suitable merchandise, or the loss of one or more key manufacturers
and/or suppliers could have an adverse effect on the Company.
Unfavourable trends or developments, including among others, fluctuations in the price of raw materials, the
unavailability of certain products, the loss of or inability to obtain leased premises on reasonable terms,
transportation disruptions, strikes, lock-outs, labour unrest and/or financial difficulties affecting the Company’s
manufacturers and/or suppliers, may cause a significant reduction in the availability or quality of products and
services purchased by the Company. There can be no assurance that the Company will be able to find alternate
manufacturers and/or suppliers which could have an adverse impact on the Company.
As a diverse and multi-channel retailer, the Company promotes many brands as part of its normal course of business. Damage
to the reputation of any of these brands or the reputation of the manufacturers and/or suppliers of these brands could negatively
impact consumer opinions of the Company and/or its related products and have an adverse effect on the Company.
Private Label Merchandise
The Company’s private label merchandise generally carries higher margins than its other merchandise. Accordingly,
if the Company fails to anticipate, identify and react to trends with its private label merchandise, particularly the ideal
mix of private label versus branded merchandise, then it could have an adverse effect on the Company.
Merchandise Sourcing
A significant portion of merchandise sold by the Company is sourced from manufacturers and/or suppliers
requiring advance notice periods in order to supply the quantities that the Company requires. Lead times may
adversely impact the Company’s ability to respond to changing consumer preferences, resulting in inventory
levels that are insufficient to meet demand or in merchandise that may have to be sold at lower prices. The
inability of a manufacturer and/or supplier to ship orders in a timely manner could also cause the Company to
fail to meet the merchandise requirements of its stores, which could result in lost sales and dissatisfied
customers. Interruptions in the Company’s sourcing could have an adverse effect on the Company and
inappropriate inventory levels may negatively impact the Company’s performance.
In addition, a significant portion of the Company’s private label merchandise is manufactured outside of Canada,
principally in Asia and the United States, through arrangements with distributors and agents. The Company’s
distributors and agents are subject to the risks generally associated with doing business abroad, including
foreign government regulations, political instability, the imposition of additional regulations relating to imports,
the imposition of additional duties, taxes and other charges on imports, significant fluctuations in the value of the
dollar against foreign currencies or restrictions on the transfer of funds.
8.5 Information Systems
The Company has experienced significant growth over the last several years. While the Company regularly
evaluates its information systems capabilities and requirements, there can be no assurance that its existing
information systems will be adequate to support future growth or will remain adequate to support the existing
needs of the Company’s business. In order to support future growth, and to consolidate the many different
platforms across the Company’s business areas, the Company has begun to undertake a significant information
system implementation for all banners. One banner was completed in fiscal 2009. The Company intends to
convert all banners to the new common point-of-sale and merchandising system. Such projects include inherent
risks associated with replacing existing systems, such as system disruptions and the failure to accurately
capture data, among others. Information system disruptions, if not anticipated and appropriately mitigated, could
have an adverse effect on the Company.
28
8.6 Human Resources
There can be no assurance that the Company will be able to maintain key personnel at either the senior
management or retail level. The success of the Company depends upon the efforts of key personnel and,
accordingly, its ability to retain and attract qualified personnel, maintain good relations with its personnel, and to
continue to successfully grow the business. The loss of the services of one or more of these individuals, or the
lack of certain in-house specialized expertise (for example, in tax and other areas), could have an adverse effect
on the Company, and could lead to disclosure errors among other things.
8.7 Relationships with Commercial Landlords
The Company operates its stores with the majority situated in urban malls and other similar urban centres on
premises leased to the Company by various commercial landlords. While the Company is able to change its
merchandise mix and relocate stores in order to maintain its competitiveness, it may be restricted from vacating
a current store location without breaching its contractual obligations and incurring, for example, lease related
expenses up to the remaining term of the lease. In some cases, the long-term nature of the leases may limit the
Company’s ability to respond to changes in the demographics or retail environment at any location. As at
January 31, 2009, the remaining terms of the various leases ranged from less than one year to ten years, with
the average remaining term of the lease being approximately five years.
The Company’s financial results, business and operations are impacted by the Company’s relationships with its
numerous commercial landlords and their agents and representatives. There can be no assurance that the
Company will maintain positive working relationships with such persons and entities which, if compromised,
could impact the Company’s ability to operate its stores, open new stores and to renew leases on existing
stores, among other things. This could, accordingly, have an adverse effect on the Company.
8.8 Legal and Policies
Laws and Regulations
Changes to laws, regulations, policies, rules, orders, practices, methods and similar, including but not limited to
accounting adjustments and changes in accounting policies and methods (collectively, “Laws and Practices”), as
well as changes in the interpretation, implementation or enforcement of Laws and Practices, could adversely
affect the Company. The Company may also incur significant costs in the course of complying with any changes
to applicable Laws and Practices. The Company’s failure to comply with applicable Laws and Practices could
result in judgments, sanctions and/or financial penalties against the Company which could adversely impact the
Company in a number of ways, including potential negative impacts on its reputation.
Intellectual Property
If the Company fails to enforce or maintain any of its intellectual property rights, it may be unable to capitalize on
its efforts to establish and maintain brand equity. All registered trade-marks in Canada can be challenged
pursuant to provisions of the Trade-marks Act (Canada) and if any of the Company’s intellectual property is ever
successfully challenged, this may have an adverse impact on the Company. There can also be no assurance
that any of the Company’s efforts to register or protect its intellectual property will be successful. The use of
unregistered trade-marks, registered trade-marks and licensed trade-marks, among other things, can also be
challenged. Moreover, it is possible that the Company’s licenses to use certain intellectual property will be
terminated or not renewed. The loss of any brand could have an adverse effect on the Company.
In non-Canadian jurisdictions the Company may not own or have the right to use identical or similar trademarks, licenses and other intellectual property owned by the Company in Canada. Third parties may also use
such intellectual property in jurisdictions other than Canada in a manner that diminishes its value. If this occurs,
the value of the Company’s intellectual property may suffer and net sales of the Company could decline.
Similarly, negative publicity or events associated with such intellectual property in jurisdictions both in and
outside of Canada may negatively affect the image and reputation of the Company, resulting in a decline in net
sales of the Company.
29
Legal and Regulatory Proceedings
The Company may be subject to legal proceedings including those related to product liability, intellectual
property infringement and any other proceedings arising out of its business. Such potential liability may be
material to the Company and may adversely affect its ability to continue operations. In addition, the Company
may be subject to actions by governmental or regulatory authorities in connection with its operations. Such
actions may result in fines or penalties, revocations of consents, permits, approvals or licenses or other similar
actions, which could be material and may adversely impact the results of operations of the Company. The
Company’s current insurance coverage may not be adequate to cover any or all of the potential losses, liabilities
and damages that could result from the actions referred to above. Publicity resulting from any allegations may
also adversely affect the Company, regardless of whether such allegations are true or whether the Company is
ultimately held liable.
8.9 Insurance Coverage
The Company uses its discretion in determining amounts, coverage limits and deductibility provisions of
insurance, with a view of maintaining appropriate insurance coverage on its assets at a reasonable cost and on
suitable terms. This may result in insurance coverage that, in the event of a substantial loss, may not be
sufficient to cover the full market value or current replacement cost of its assets. This could, accordingly, have
an adverse effect on the Company.
30
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION
Preparation of the consolidated financial statements accompanying this annual report and the presentation of all
other information in the report are the responsibility of management. The consolidated financial statements have
been prepared in accordance with Canadian generally accepted accounting principles and reflect management’s
best estimates and judgments. The financial information contained elsewhere in this annual report has been
reviewed to ensure consistency with that in the consolidated financial statements.
Management maintains a system of internal controls over accounting and financial reporting. This system is
designed to provide reasonable assurance that relevant and reliable financial information is produced, and that
the Company’s assets are adequately safeguarded and appropriately accounted for.
The Board of Directors carries out its responsibility for oversight and approval of the consolidated financial
statements and other financial information in this annual report principally through its independent directors of
the Audit Committee. The Audit Committee meets regularly with management and the external auditors to
discuss the results of audit examinations and to review the financial statements and financial reporting matters.
The Audit Committee reports its findings to the Board of Directors for consideration in approving the annual
consolidated financial statements to be issued to shareholders.
The consolidated financial statements have been audited by Deloitte & Touche LLP, Chartered Accountants, who
have full access to the Audit Committee with and without the presence of management. Their report follows.
Kenneth Fowler
Chairman
April 21, 2009
Salvatore Baio
AUDITORS’ REPORT
To the Shareholders of West 49 Inc.
We have audited the consolidated balance sheets of West 49 Inc. as at January 31, 2009 and January 26, 2008
and the consolidated statements of operations and comprehensive loss, deficit, and cash flows for the 53 week
period ended January 31, 2009 and the 52 week period ended January 26, 2008. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial
position of the Company as at January 31, 2009 and January 26, 2008 and the results of its operations and its
cash flows for the 53 week period ended January 31, 2009 and the 52 week period ended January 26, 2008 in
accordance with Canadian generally accepted accounting principles.
Chartered Accountants
Licensed Public Accountants
Burlington, Ontario
April 21, 2009
31
WEST 49 INC.
CONSOLIDATED BALANCE SHEETS
AS AT
January 26,
2008
January 31,
2009
(In thousands of dollars)
Assets
Current
Accounts receivable
Income taxes receivable
Inventories (Note 3)
Future income taxes (Note 17)
Prepaid expenses
$
Capital assets (Note 7)
Deferred costs (Note 8)
Due from related parties (Note 20)
Goodwill (Note 9)
Intangible assets (Note 10)
Liabilities
Current
Accounts payable and accrued charges
Income taxes payable
Current portion of long-term debt (Note 11)
Current portion of deferred lease obligations (Note 12)
Current preferred shares (Note 13)
6,788
1,226
16
28,552
1,326
741
$
8,369
1,537
24,998
459
38,649
35,363
26,897
640
10
2,142
12,580
13,829
28,205
755
138
21,054
17,595
$
94,747
$
103,110
$
27,792
6,843
942
33
$
23,203
614
1,023
868
63
Long-term debt (Note 11)
Deferred lease obligations (Note 12)
Preferred shares (Note 13)
Shareholders' Equity
Share capital (Note 15)
Contributed surplus (Note 16)
Deficit
35,610
25,771
8,293
5,190
49,093
5,448
1,875
7,903
5,190
46,187
62,961
2,238
(8,276)
63,371
2,054
(19,771)
45,654
$
94,747
56,923
$
103,110
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board of Directors:
Kenneth Fowler
Chairman
Salvatore Baio
WEST 49 INC. – FISCAL 2009 FINANCIAL STATEMENTS
32
WEST 49 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE PERIODS ENDED
(In thousands of dollars except per share amounts)
January 31,
2009
(53 weeks)
Net sales
$
210,417
January 26,
2008
(52 weeks)
$
204,894
Cost of sales
163,588
152,486
Gross margin
46,829
52,408
Selling, general and administrative expenses
43,470
43,605
3,359
8,803
351
602
5,862
888
12,000
424
621
5,479
885
3,500
19,703
10,909
(16,344)
(2,106)
Income before other expenses
Other expenses:
Dividends on preferred shares
Interest expense on long-term debt
Amortization
Restructuring costs (Note 5)
Goodwill and intangible asset impairments (Notes 9 & 10)
Loss before income taxes
(Recovery) provision for income taxes (Note 17)
299
(4,003)
Net loss and comprehensive loss
$
(12,341)
$
(2,405)
Basic and diluted loss per share (Note 18)
$
(0.19)
$
(0.04)
33
WEST 49 INC.
CONSOLIDATED STATEMENTS OF DEFICIT
January 26,
2008
(52 weeks)
January 31,
2009
(53 weeks)
Deficit, beginning of period as previously reported
$
Impact of adoption of new accounting standard,
Section 3031 - Inventories (Note 3)
$
Net loss
$
(7,430)
(5,871)
(12,341)
(2,405)
(19,771)
$
34
(5,871)
-
846
Deficit, beginning of period as restated
Deficit, end of period
(8,276)
(8,276)
WEST 49 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
January 26,
2008
(52 weeks)
January 31,
2009
(53 weeks)
Operating Activities
Net loss
Non-cash items included above:
Amortization of capital assets
Amortization of deferred costs
Amortization of deferred lease inducements
Amortization of intangible assets
Future income taxes (Notes 3 & 17)
Impairment or disposition of store assets (Note 7)
Goodwill and intangible assets impairment (Notes 9 & 10)
Straight-line rent expense
Stock based compensation
$
(12,341)
$
(2,405)
5,622
292
(1,073)
240
(5,747)
1,400
12,000
281
226
900
5,169
246
(833)
310
(2,283)
61
3,500
484
554
4,803
Changes in non-cash working capital
from operations (Note 19)
1,434
2,283
Net cash flows provided by operating activities
2,334
7,086
128
(183)
2,000
(30)
(1,628)
(120)
(23)
4,150
89
(1,448)
Financing Activities
Due from related parties
Increase in deferred costs
Increase in long-term debt
Issuance of common stock
Redemption of preferred shares
Repayment of long-term debt
Net cash flows provided by financing activities
2,648
287
Investing Activities
Additions to capital assets
Deferred lease inducements received
Proceeds from disposition of capital assets
(5,370)
1,168
-
(7,693)
855
60
Net cash flows used by investing activities
(4,202)
(6,778)
Net change in cash and cash equivalents
(1,581)
2,956
8,369
5,413
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
6,788
$
8,369
$
619
368
2,425
$
567
424
3,841
Supplemental Disclosure
Interest paid
Dividends paid on preferred shares
Income taxes paid
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2009 and January 26, 2008
1. Nature of Operations
Operations
West 49 Inc. (the “Company”) is a leading Canadian specialty retailer of fashion and apparel,
footwear, accessories and equipment related to the youth action sports lifestyle. The Company’s
stores, which are primarily mall-based, carry a variety of high-performance, premium brand name and
private label products that fulfill the lifestyle needs of identified target markets, primarily tweens and
teens. At January 31, 2009, the Company operated 134 stores in nine provinces under seven
banners, consistent with the prior year. The Company also operated online with www.boardzone.com
and www.shop.west49.com.
2. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements and accompanying notes have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement of liabilities in the
normal course of business. All significant inter-company balances and transactions with its whollyowned subsidiaries have been eliminated upon consolidation.
Fiscal Year
The Company’s fiscal year is determined on a 52 or 53 week period, ending on the last Saturday of
January each year. The Company’s 2009 fiscal year (“FY 2009”) consisted of a 53 week period
ended January 31, 2009 compared to the prior year (“FY 2008”) of a 52 week period ended
January 26, 2008. Each month within the fiscal year is either a four or five week period based on
the four-five-four week reporting schedule.
Estimates
The preparation of the Company’s consolidated financial statements, in accordance with Canadian
generally accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial statements, and the reported amounts
of revenue and expenses during the reporting period. Due to the inherent uncertainties in making
such estimates, and the current economic environment, actual results reported in the near term
could differ from those estimates. Estimates are used when accounting for items such as inventory
valuation, estimated returns and allowances, amortization, gift card liability, impairment of longlived assets, future income taxes and assumptions used when assessing goodwill and intangible
assets. Management reviews these estimates on an ongoing basis.
Revenue Recognition
Revenue includes sales to customers through stores operated by the Company. Sales are
recognized at the time of sale and receipt of merchandise by the customer, net of any returns.
Allowances for customer returns are estimated using the historical return patterns.
Revenue is recognized upon shipment to the customer for orders placed through the Company’s
online websites. Shipping and handling fees charged to the Company’s internet customers are
included in net sales. Amounts paid by the Company for internet shipping and handling expenses
are included in cost of sales.
Upon the purchase of a gift card or issuance of a gift certificate, a liability is established for the
cash value of the gift card or gift certificate. Revenue is recognized when the gift card or gift
certificate is redeemed for merchandise. Gift card breakage is recognized by the Company when,
based on historical patterns of redemption, the Company determines the cards or certificates will
not be redeemed.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in the bank, less outstanding cheques.
WEST 49 INC. – FISCAL 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
Inventories
Inventories, which consist of fashion and apparel, footwear, accessories and equipment related to
music, youth culture and action sports, are valued at the lower of cost and net realizable value with
cost being determined on the weighted average basis. The cost of inventories includes the cost of
purchases and estimates of the capitalized portion of other costs incurred in bringing the
inventories to their present location and condition. Inventories owned by the Company are
generally located at its warehouses and its retail locations. The Company records valuation
adjustments to inventories based on the aging of inventories and estimated expected markdowns.
The estimated reserve can be affected by changes in the Company’s markdown strategies and
selling patterns that could result in a fluctuation in gross margin.
Capital Assets
Capital assets are stated at cost and are amortized on a straight-line basis over their estimated
useful lives as follows:
Leasehold improvements
Furniture and fixtures
Equipment
Computer equipment
Computer software
Retail management system
Term of lease
10 years
5 years
5 years
3 years
7 years
Capital assets under development are not amortized until the asset is in use. This typically relates
to stores under construction, store fixtures and equipment pending installation, or information
technology under development. During fiscal 2009, the Company had implemented, and began
amortizing, the first phase of a new retail management system.
Impairment of Long-lived Assets
Management evaluates the ongoing value of assets associated with the Company’s retail stores.
Long-lived assets are tested for recoverability on an annual basis or more frequently as events or
changes in circumstances indicate that their carrying value exceeds the total undiscounted cash
flows expected from their use and eventual disposition. The amount of the impairment loss is
determined as the excess of the carrying value of the assets over their fair value.
Deferred Costs
Deferred costs include deferred lease costs and deferred financing fees. Deferred lease costs
represent expenses incurred in negotiating store leases. The deferred lease costs are amortized
on a straight-line basis over the remaining term of the lease. Deferred financing fees represent
bank financing and professional fees incurred in obtaining the Company’s credit facilities. The
financing costs are amortized on a straight-line basis over the term of the facility.
Goodwill represents the excess of the purchase price over the fair market value of the net
identifiable assets of the acquired business. Goodwill and intangible assets are assessed for
impairment on an annual basis or more frequently as events or circumstances change that indicate
goodwill or intangible assets of a reporting unit may be impaired. When the carrying amount
exceeds the fair value, an impairment charge is recognized in earnings in an amount equal to the
excess of the carrying value over its fair market value. Intangible assets with finite lives include
non-competition agreements, customer lists and the online computer system which are amortized
on a straight-line basis over a three to five year period.
37
Future Income Taxes
The Company follows the liability method of accounting for income taxes. Under this method,
future income taxes are recognized for the future income tax consequences attributable to
differences between the carrying values of assets and liabilities and their respective income tax
bases. Future income tax assets and liabilities are measured using the enacted and substantively
enacted income tax rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on future income tax assets and
liabilities of a change in tax rates is recognized in earnings in the period that includes the
substantively enacted dates. Future income tax assets are recognized to the extent that it is more
likely than not that they will be realized.
Deferred Lease Obligations
Certain lease agreements provide for the Company to receive lease inducements from landlords to assist
in the financing of certain capital assets. Lease inducements are recorded as a deferred lease credit and
amortized as a reduction of rent expense on a straight-line basis over the term of the related lease.
The Company records rent expense on a straight-line basis over the term of the lease. Accordingly,
reasonably assured rent escalations are amortized over the lease term. Free rent fixturing periods
are capitalized as leaseholds and amortized on a straight-line basis over the term of the lease.
Translation of Foreign Currencies
Foreign currency assets and liabilities are translated into Canadian dollars at exchange rates in effect
at the balance sheet dates. Foreign currency revenues and expenses are translated into Canadian
dollars at the rates approximating the rate of exchange prevailing on the dates of the transactions.
Gains and losses arising from fluctuations in exchange rates are recognized in earnings.
Stock Based Compensation
The Company uses the fair-value method of accounting for stock options granted to employees.
Under the fair-value method, the estimated fair-value of the stock options granted is recognized
over the applicable vesting period as a charge to stock based compensation expense and a credit
to contributed surplus. When the options granted are exercised, the proceeds and the related
amount in contributed surplus are credited to share capital.
Financial Instruments
The Company’s financial assets and liabilities are initially recorded at fair value and subsequently
measured based on their assigned classifications as follows:
Asset / Liability
Category
Measurement
Accounts receivable
Due from related parties
Bank indebtedness
Accounts payable
Long-term debt
Preferred shares
Held-for-trading
Loans and receivables
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Other balance sheet accounts, such as inventories, prepaid expenses, current and future income
taxes, deferred costs, goodwill, intangible assets, capital assets, and deferred lease obligations are
not financial instruments.
38
Transaction costs related to financial liabilities, classified as other than held-for-trading, are
recorded as a reduction in the carrying value of the debt and included in the amortized cost
measurement. Transaction costs incurred for the Company’s credit facilities have been recorded as
other non-current assets and are amortized over the term of the facility in accordance with EIC 101
“Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements”.
Embedded derivatives are required to be separated and measured at fair value if certain criteria
are met. Embedded derivatives include elements of contracts whose cash flows move
independently from the host contract. The Company did not have any significant embedded
derivatives that required separate accounting and disclosure for fiscal 2009 and fiscal 2008.
Hedge Accounting
The Company does not participate in any hedging activities.
3.
Change in Accounting Policies
The Canadian Institute of Chartered Accountants (“CICA”) amended section 1400 “General
Standards of Financial Statement Presentation” to include requirements to assess an entity’s ability
to continue as a going concern. The new requirements are effective for interim and annual
financial statements relating to fiscal years beginning on or after January 1, 2008. Accordingly, the
Company adopted the amendment to this standard on January 27, 2008. The adoption of this
amendment did not have an impact on the Company’s consolidated financial statements.
The CICA issued four new accounting standards that became effective for fiscal 2009: Section
1535 “Capital Disclosures”, Section 3031 “Inventories”, Section 3862 “Financial Instruments –
Disclosures” and Section 3863 “Financial Instruments – Presentation”. The Company applied
these new accounting standards at the beginning of its 2009 fiscal year.
Capital Management Disclosures
Section 1535 “Capital Disclosures” establishes standards for disclosing information about an
entity’s capital and how it is managed. Required disclosure includes information that enables users
of an entity’s financial statements to evaluate its objectives, policies and processes for managing
capital. This disclosure includes a description of capital under management, and disclosure of
externally imposed capital requirements to which the entity is subject. The only affect of the
adoption of this standard were the additional disclosures in Note 6.
Inventories
Section 3031 replaced Section 3030 “Inventories”. The objective of this new section is to prescribe
the accounting treatment for inventories. This section requires inventories to be measured at the
lower of cost and net realizable value and also provides guidance on the appropriate methods of
determining cost and the impact of any write-downs to net realizable value. Reversals of previous
write-downs to net realizable value where there is a subsequent increase in the value of inventories
is now required. This reversal is limited to the extent of the initial write-down. Under this new
accounting standard, the cost of inventories includes the cost of purchases and other costs
incurred in bringing the inventories to their present location and condition.
The Company implemented this new accounting standard at the beginning of its 2009 fiscal year,
on a retrospective basis, without restatement of prior periods. As a result of the retrospective
application of this new standard, the opening deficit for fiscal 2009 has been adjusted by the
difference in the measurement of opening inventories. The impact of this transitional adjustment
was an increase in opening inventories of $1.2 million, an increase in current future income taxes
payable of $0.4 million, and a decrease of $0.8 million to the opening deficit. As at January 31,
2009, the costs capitalized to inventory totaled $1.6 million.
39
Included in cost of sales for the 53 weeks ended January 31, 2009 is $122.2 million of inventories
recognized as an expense (fiscal 2008 - $113.6 million). During the period, there were no
significant write-downs of inventories as a result of net realizable value being lower than cost, and
there were no significant reversals of write-downs from previous periods. All of the Company’s
inventories are pledged as security for the credit facilities.
Financial Instruments Disclosure and Presentation
Sections 3862 and 3863 replaced Section 3861 “Financial Instruments – Disclosure and
Presentation”, with the exception of accounting for insurance contracts, which may still be
accounted for in accordance with Section 3861. Section 3862 requires disclosure that enables
financial statement users to evaluate the significance of financial instruments for an entity’s
financial position and performance, the nature and extent of risks arising from financial instruments
to which the entity is exposed, and the entity’s process for managing such risks. Section 3863
enhances a financial statement user’s understanding of the significance of financial instruments to
an entity’s financial position, performance and cash flows by establishing standards for
presentation of financial instruments and non-financial derivatives. The only affect of the adoption
of this standard were the additional disclosures in Note 14.
4. Future Changes in Accounting Policies
Financial Statement Concepts
In February 2008, the CICA amended Section 1000 “Financial Statement Concepts” to clarify the
criteria for recognition of an asset and the timing of recognition of expenses. This amendment is
effective for interim and annual financial statements relating to fiscal years beginning on or after
October 1, 2008. Accordingly, the Company will apply this amendment at the beginning of its fiscal
2010 year. The Company is currently evaluating the impact that the adoption of this amendment
will have on its consolidated financial statements.
In February 2008, the CICA issued Section 3064 “Goodwill and Intangible Assets”. Section 3064
replaced Section 3062 “Goodwill and Other Intangible Assets” and Section 3450 “Research and
Development”. This new section provides additional guidance on the recognition, measurement,
presentation and disclosure of goodwill and intangible assets. This standard is effective for interim
and annual financial statements for fiscal years beginning on or after October 1, 2008.
Accordingly, the Company will apply this new standard at the beginning of its fiscal 2010 year. The
Company is currently evaluating the impact that the adoption of this Section will have on its
consolidated financial statements.
International Financial Reporting Standards (“IFRS”)
In February 2008, the CICA announced that the Canadian Accounting Standards Board confirmed
that the changeover to International Financial Reporting Standards (“IFRS”) from Canadian GAAP
will be required for publicly accountable enterprises’ interim and annual financial statements effective
for fiscal years beginning on or after January 1, 2011. Companies will be required to provide
comparative information under IFRS for the previous fiscal year. The implementation of IFRS will be
applicable for the Company for the first quarter of fiscal 2012, for which the current and comparative
financial information will be presented in accordance with IFRS. The Company is currently evaluating
the impact that the adoption of IFRS will have on its consolidated financial statements.
Business Combinations
In January 2009, the CICA issued Sections 1582 “Business Combinations”, 1601 “Consolidated
Financial Statements” and 1602 “Non-Controlling Interests”, which replaced Sections 1581
“Business Combinations” and 1600 “Consolidated Financial Statements”. These new Sections
harmonize Canadian accounting with the International Accounting Standards Board’s (IASB)
International Financial Reporting Standard 3 “Business Combinations”. These new standards are to
be applied prospectively for business combinations in the first annual reporting period beginning on
40
or after January 1, 2011. The Company intends to apply these Sections at the beginning of its fiscal
2012 year, although earlier application is permitted. Assets and liabilities that arose from business
combinations which precede the application date will not be adjusted upon adoption of the new
standards. The Non-Controlling Interests standard is not applicable to the Company at this time.
5. Restructuring Costs
During fiscal 2009, the Company evaluated the performance of its test concept, Duke’s Northshore,
and decided to take strategic action to close all four stores. One of the stores was closed in the
second quarter of fiscal 2009. The remaining three stores will either be closed or rebranded in fiscal
2010. The non-cash provision on these four stores totaled $0.9 million for fiscal 2009, of which $0.5
million was recorded as capital asset impairments and $0.4 million as a provision for lease penalties
and other exit costs. As at January 31, 2009, the balance in accounts payable and accrued liabilities
remained unchanged at $0.4 million, and will be paid out by the Company in subsequent periods.
During fiscal 2008, the Company recorded corporate restructuring costs of $0.9 million as a result of
centralizing its finance, human resources, information technology, store operations and store
development functions. The majority of these costs related to termination benefits. The remainder of
these costs were related to consulting, legal and other administrative expenses. As at January 31,
2009, there were no liabilities outstanding with respect to these costs (fiscal 2008 - $0.1 million
remained outstanding in liabilities).
6. Capital Management Disclosures
The Company views its capital as a combination of net debt and shareholders’ equity. Net debt is
comprised of interest-bearing debt less cash and cash equivalents, including the convertible
preferred shares.
The Company’s objective in managing capital is to ensure adequate liquidity to fund its current
operations and future growth strategy while maintaining a conservative approach towards financial
risk management and ensuring the Company’s ability to continue as a going concern.
The Company’s primary uses of capital are to fund leasehold improvements for new stores, the expansion
of existing stores and other capital expenditures incurred by the Company. The Company currently funds
these requirements through the use of its credit facilities and internally generated cash flows.
As at January 31, 2009 and January 26, 2008, total capital under management was as follows:
FY2009
(In thousands)
FY2008
Current portion of long-term debt
Long-term debt
Current preferred shares
Preferred shares
Less: cash and cash equivalents
Net debt
Shareholders' equity
$
6,843
33
5,190
(6,788)
5,278
45,654
$
1,023
5,448
63
5,190
(8,369)
3,355
56,923
Capital under management
$
50,932
$
60,278
During fiscal 2009, the sources of capital included a $10.0 million revolving credit facility with a
seasonal adjustment increase to $15.0 million from April 1 to September 30. In addition, a revolving
term loan facility of $8.5 million has been available since August 29, 2008, previously at $6.5
million. Interest rates on these facilities were at prime plus 1.25% and 1.75%, respectively. These
facilities are secured by general security agreements against all existing and future acquired assets
of the Company, including a pledge of the shares West 49 Inc. holds in its subsidiaries.
41
The Company is subject to certain restrictions and covenants in respect of its credit facilities, including
a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth.
As at January 31, 2009, the Company was in violation of one of its bank covenants. Subsequent to
January 31, 2009, the Company obtained a waiver for the default retroactive to January 31, 2009. The
waiver obtained has the following conditions set forth based on historical operating needs: the
maximum limit on the Company’s operating credit facility was reduced to $6.0 million from $10.0
million; the seasonal increase available on the operating line from April 1 to September 30 has been
lowered to $12.0 million from $15.0 million; the term loan facility has been capped at $6.8 million, down
from $8.5 million; and the credit facilities have also been changed to a demand basis from a 364-day
committed line. Interest rates on these facilities are at prime plus 4.0% and 4.75%, respectively.
With uncertainties in the current economic environment, it is not uncommon for banks to remove
unutilized credit facilities. Throughout the year, the Company has had varying amounts of unutilized
credit facilities. The bank indebtedness on the operating credit facility ranged from nil to $9.0 million
at the peak of the seasonal period. Management believes that the Company’s revised credit
facilities, along with cash generated from operations, will be sufficient to fund its operations and
anticipated capital expenditures during fiscal 2010. In addition, subsequent to January 31, 2009,
the Company completed an amalgamation of various corporate entities that will allow it to realize a
significant amount of non-capital tax losses carried forward from prior years which will reduce the
amount of tax instalments by $1.7 million in fiscal 2010.
The Company’s credit facility renewal date is June 30, 2009. The Company anticipates that it may
be in violation of another covenant at the end of the first quarter. The Company’s bank is aware of
this, and the Company has already begun a full renewal process with the bank to negotiate mutually
acceptable terms and anticipates this to be completed during the second quarter of fiscal 2010.
Management considers the Company’s capital management requirements when preparing and
updating annual budgets. The annual budgets are approved by the Board of Directors. In order to
maximize flexibility to finance the Company’s growth strategy and be able to take advantage of
additional new capital investments, the Company does not currently pay out dividends to common
shareholders.
42
7. Capital Assets
Equipment
Computer equipment
Computer software
Retail management system
Net Book Value
FY2009
$
27,595
8,985
3,113
3,492
1,561
1,688
$
10,492
3,518
2,051
2,010
1,438
28
$
17,103
5,467
1,062
1,482
123
1,660
$
46,434
$
19,537
$
26,897
(In thousands)
Equipment
Computer equipment
Computer software
Vehicles
Accumulated
Amortization
Cost
(In thousands)
Accumulated
Amortization
Cost
Net Book Value
FY2008
$
25,702
9,165
2,973
2,651
1,824
59
$
7,304
2,674
1,482
1,518
1,132
59
$
18,398
6,491
1,491
1,133
692
-
$
42,374
$
14,169
$
28,205
During the fourth quarter, the Company completed its annual review of long-lived assets and tested
each store for recoverability. Based on this review, the Company has provided $0.4 million (fiscal
2008 - $0.1 million) for impairments related to stores where the carrying value of the assets
exceeds the undiscounted cash flows expected over the remaining term of the leases. Under
management’s review, these stores may continue to be operated, closed or be rebranded.
Other losses on stores closed or relocated in the ordinary course of business during the year
totaled $0.1 million (fiscal 2008 – a gain of $0.1 million).
In addition, the Company also recorded store restructuring costs of $0.9 million as a result of
restructuring its Duke’s Northshore stores, as further described in Note 5. These costs included
capital asset impairments of $0.5 million (fiscal 2008 - nil).
Assets capitalized throughout the Company’s 2009 fiscal year relating to the new retail
management system totaled $1.7 million, of which $1.3 million relates to the next phase of
implementation and was not amortized at year end.
43
8. Deferred Costs
Accumulated
Amortization
Cost
(In thousands)
Lease costs
Financing fees
Net Book Value
FY2009
Net Book Value
FY2008
$
931
374
$
429
236
$
502
138
$
569
186 .
$
1,305
$
665
$
640
$
755
9. Goodwill
The change in the carrying amount of goodwill is as follows:
(In thousands)
FY 2009
FY2008
Balance, opening
Goodwill impairment
$
21,054
(8,474)
$
24,554
(3,500)
Balance, closing
$
12,580
$
21,054
During the fourth quarter of fiscal 2009, the Company completed a review of its goodwill and
recorded an impairment charge of $8.5 million (fiscal 2008 - $3.5 million). The 2009 impairment
was significantly impacted by the depressed capital markets and the current macroeconomic
environment, which had a negative impact on the Company’s performance.
10. Intangible Assets
The change in the carrying amount of intangible assets is summarized below:
Trademarks and tradenames
Finite life intangibles
Accumulated
Amortization
Cost
(In thousands)
Net Book Value
FY2009
Net Book Value
FY2008
$
13,829
945
$
945
$
13,829
-
$
17,100
495
$
14,774
$
945
$
13,829
$
17,595
During the fourth quarter of fiscal 2009, the Company completed a review of intangible assets and
recorded an impairment charge of $3.5 million (fiscal 2008 – nil). Of this amount, $0.2 million
related to finite life intangibles and $3.3 million related to trademarks and tradenames. The
impairment was significantly impacted by the depressed capital markets and the current
macroeconomic environment, which had a negative impact on the Company’s performance.
44
11. Long-term Debt
The following schedule sets out details of long-term debt:
FY2009
(In thousands)
Term loan, bearing interest at prime plus 1.75% (2008 - prime plus
1.50%), repayable over four years, maturing in January 2012
$
Term loan, bearing interest at prime plus 1.75%, repayable
over four years, maturing in January 2013
FY2008
4,843
$
2,000
-
-
Capital lease obligations
Less: current portion of long-term debt
$
6,457
14
6,843
6,471
(6,843)
(1,023)
-
$
5,448
As at January 31, 2009, the term loans have been classified as current in accordance with the
Emerging Issues Committee of the CICA’s Abstract 122 (Balance Sheet Classification of Callable
Debt) as a result of the demand feature contained in the waiver of covenant default obtained from the
Company’s banker subsequent to year end. In addition, subsequent to January 31, 2009, the waiver
amended interest rates on the term loans to be prime plus 4.75%. Refer to Note 6 for further details.
The scheduled repayments for the term loans are presented below:
Repayment
Amounts
Fiscal years ending (in thousands)
2010
2011
2012
2013
2014
$
1,322
2,114
2,114
1,105
188
$
6,843
12. Deferred Lease Obligations
FY2009
(In thousands)
Deferred lease inducements
Deferred rent
$
5,751
3,484
9,235
(942)
$
5,754
3,017
8,771
(868)
$
8,293
$
7,903
Less: current portion of deferred lease inducements
45
FY2008
13. Preferred Shares
The preferred shares are non-voting, and are entitled to cumulative quarterly dividends at a rate
equal to prime plus 2% per annum. These shares are convertible at the option of the holder into
common shares on a one to one basis. They are redeemable and retractable at $1 per share. For
the year ended January 31, 2009, the Company has received waivers from the majority of the
preferred shareholders outlining that they have forfeited their rights to redeem their shares until
December 1, 2010. The remaining shares have been classified as current liabilities. Dividends on
these shares are recognized in earnings.
The following schedule sets out details of the preferred shares:
(In thousands, except share
amounts)
FY2009
Shares
Balance, opening
5,253,354
Shares redeemed
Less: current preferred shares
Balance, closing
5,253
5,253,354
(30,000)
5,223,354
(30)
5,223
5,253,354
(33,224)
(33)
5,190,130
$
FY2008
Shares
Value
$
$
5,253
5,253
(63,224)
5,190
Value
(63)
5,190,130
$
5,190
14. Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable,
amounts due from related parties, accounts payable and accrued charges, long-term debt and
preferred shares. The carrying value of the short-term financial instruments approximates their fair
value due to the short period to maturity. The carrying value of the long-term debt and preferred
shares approximates their fair value given the current market rates associated with these instruments.
The carrying values of the Company’s financial instruments as at January 31, 2009 and January 26,
2008 were as follows:
FY2009
(In thousands)
$
Held-for-trading
Other liabilities
6,788
1,236
39,858
FY2008
$
8,369
1,675
34,927
Credit risk
The Company is exposed to credit risk due to unexpected losses that could occur if a third party to
a financial instrument fails to satisfy its contractual obligations. Credit risk for the Company arises
from cash and cash equivalents held with banks and financial institutions, as well as outstanding
accounts receivable. The Company’s maximum exposure to credit risk is equal to the carrying
value of the financial assets. The accounts receivable balances of the Company primarily consist
of amounts due from landlords for tenant allowances. Management considers the level of credit
risk to be low due to the credit-worthiness of the third parties involved.
46
Liquidity risk
The Company is subject to the risk that it might not meet demands to fund its financial obligations
as they come due if there is an excess of financial obligations over available financial assets. The
Company manages liquidity risk through careful monitoring and forecasting of its cash flows and
maintains assets that can be liquidated into cash in a timely manner as needed.
The maturities of the contractual obligations of the Company’s financial liabilities as at January 31,
2009, are as follows:
Within
1 year
Total
(In thousands)
2 - 3 years
4 - 5 years
Long-term debt
Preferred shares
$
27,792
6,843
5,223
$
27,792
1,322
33
$
4,228
5,190
$
1,293
-
Total contractual obligations
$
39,858
$
29,147
$
9,418
$
1,293
Market risk
The Company is subject to certain risks associated with changes in economic factors including
foreign currency exchange rates and interest rate fluctuations.
Foreign currency risk
The Company is exposed to foreign exchange rate variability resulting from its merchandise purchases
from foreign sources, primarily the United States. Pricing is determined in advance with considerable
lead times, and significant fluctuations in foreign exchange rates could have an impact on the
Company. The Company does not currently engage in any foreign currency hedging activities.
As at January 31, 2009 and January 26, 2008 the Company was exposed to foreign currency
exchange rate risk through financial instruments denominated in U.S. dollars. These amounts are
presented below in their Canadian dollar equivalent:
FY2009
(In thousands)
$
202
560
FY2008
$
176
382
Interest rate risk
The Company is subject to interest rate fluctuations on its bank indebtedness, long-term debt and
preferred shares. Interest on these financial instruments is subject to fluctuation of prime rate as
established by the Bank of Canada. As at January 31, 2009, the Company’s long-term debt and
preferred shares were subject to floating interest rates. The dollar impact of the interest rate risk to
which the Company is exposed is not considered to be material to the Company’s results of
operations, financial position or cash flows. The Company estimates that a 100 basis point
increase or decrease in prime rate would result in an increase or decrease of $0.1 million in interest
and dividend expense on an annualized basis, excluding the effects of seasonality.
47
15. Share Capital
Authorized
The authorized capital of the Company consists of an unlimited number of common shares and an
unlimited number of preferred shares.
Issued
Common shares
A summary of the common shares issued is detailed below:
(In thousands, except share
amounts)
FY2009
Shares
FY2008
Shares
Value
Value
Balance, opening
Shares issued - Modes Freedom acquisition
Shares issued - Stock options exercised
Shares issued - Other
63,544,819
250,000
8,700
$
62,961
408
2
63,199,319
200,000
95,500
50,000
$
62,438
326
147
50
Balance, closing
63,803,519
$
63,371
63,544,819
$
62,961
During fiscal 2009, the Company issued 250,000 of the shares that were held in escrow pursuant
to the purchase transaction with Modes Freedom Inc. in fiscal 2005. The issuance of these shares
increased the Company’s share capital and decreased contributed surplus by $0.4 million. This is
the final issuance of shares held in escrow pursuant to this agreement.
Stock Option Plan
The Company’s stock option plan provides for directors, officers, key employees, consultants of the
Company and its subsidiaries, an opportunity to purchase common shares through options.
The Company issued 150,000 options in fiscal 2009 with a weighted average exercise price of
$0.85 per option. The estimated fair value of these options is $36.0 thousand and will be expensed
in Contributed Surplus over the vesting periods of one to three years. Fair values were determined
as $0.24 per option using the Black-Scholes option-pricing model, with the following assumptions:
expected stock price volatility of 60%; a risk free interest rate of 3.7%; expected time until exercise
of 8.3 years; and annual dividends of nil.
The Company did not issue any stock options during fiscal 2008.
A summary of the Company’s stock option transactions is detailed below:
FY2009
Weighted
Average
Exercise Price
Options
Balance, opening
Options granted
Options exercised
Options forfeited
Balance, closing
1,398,030
$
150,000
(129,000)
1,419,030
FY2008
1.39
0.85
1.42
$
1.33
Options
1,823,530
$
(95,500)
(330,000)
1,398,030
48
Weighted
Average
Exercise Price
1.40
0.94
1.57
$
1.39
The following table summarizes information about stock options outstanding:
Range of
Exercise
Prices
$0.84 - $0.86
$1.01 - $1.59
$1.60 - $1.68
Options Outstanding FY2009
Weighted
Number of
Average
Weighted
Outstanding
Remaining
Average
Contractual Life (1) Exercise Price
Options
Options Exercisable FY2009
Weighted
Average
Exercise Price
Number
Exercisable
259,030
1,034,500
125,500
8.0
6.4
6.9
$
0.85
1.42
1.61
109,030
1,034,500
121,500
$
0.85
1.42
1.61
1,419,030
6.8
$
1.33
1,265,030
$
1.39
(1) Weighted average remaining contractual life is expressed in years
Range of
Exercise
Prices
$0.50 - $0.85
$1.01 - $1.59
$1.60 - $1.68
Options Outstanding FY2008
Weighted
Number of
Average
Weighted
Outstanding
Remaining
Average
Contractual Life (1)
Options
Exercise Price
Options Exercisable FY2008
Weighted
Average
Exercise Price
Number
Exercisable
129,030
1,139,000
130,000
7.0
7.5
7.9
$
0.85
1.43
1.61
129,030
1,105,667
122,000
$
0.85
1.42
1.60
1,398,030
7.5
$
1.39
1,356,697
$
1.38
(1) Weighted average remaining contractual life is expressed in years
16. Contributed Surplus
A summary of contributed surplus activities is detailed below:
FY2009
(In thousands)
$
Balance, opening
2,238
FY2008
$
228
(2)
(410)
Employee stock based compensation
Other stock based compensation
Options exercised
Shares released from escrow and other
$
Balance, closing
2,054
49
2,118
500
54
(58)
(376)
$
2,238
17. Income Taxes
A reconciliation comparing income taxes calculated at the Canadian statutory rate to the amount
recorded in the consolidated financial statements is as follows:
(In thousands)
FY2009
FY2008
Combined federal and provincial statutory income tax rate
32.30%
34.92%
$
Net loss before income taxes
Expected income tax provision
Change in income taxes resulting from:
Non-deductible expenses
Dividends on preferred shares
Stock based compensation
Impairment of goodwill and intangible assets
Adjustments of prior year taxes and other
Adjustments due to changes in tax rates
(16,344)
$
(2,106)
(5,279)
(735)
44
114
74
479
(5)
570
43
148
193
1,083
2
(435)
(Recovery) provision for Income taxes
$
(4,003)
$
Represented by:
Current income taxes
Future income taxes
$
1,341
(5,344)
$
$
(4,003)
$
299
2,582
(2,283)
299
The components of future taxes are as follows:
FY2009
(In thousands)
FY2008
Tax loss carry-forward
Deferred financing costs
Capital assets, net of lease inducements
Goodwill
Other intangibles
Deferred rent
$
4,611
(118)
(598)
1,574
(2,960)
959
$
2,123
102
(697)
(232)
(4,009)
838
Future income tax assets (liabilities)
$
3,468
$
(1,875)
Current future income tax assets
Long-term future income tax assets (liabilities)
$
1,326
2,142
$
(1,875)
$
3,468
$
(1,875)
50
As at January 31, 2009, the Company had non-capital losses of approximately $15.1 million (fiscal
2008 - $6.9 million) available to reduce future years’ income for income tax purposes. These
losses, which have been recognized in the above future tax balance, expire as follows:
Tax Losses
2014
2015
2026
2027
2028
2029
$
92
33
195
1,850
4,595
8,361
$
15,126
Subsequent to January 31, 2009, the Company completed an amalgamation of various corporate
entities that will allow it to realize a significant amount of non-capital tax losses carried forward from
prior years which will reduce the amount of tax instalments by $1.7 million in fiscal 2010.
18. Loss per Share
Basic loss per share is calculated using the total net loss divided by the weighted average number
of common shares outstanding during the year of 63,605,190 (fiscal 2008 - 63,323,829).
Diluted income per share is calculated based on total net income, adding back preferred share
dividends, divided by the weighted average number of common shares including the effect of
outstanding options using the “treasury stock” method, and outstanding preferred shares using the
“if converted” method. Since net income was in a loss position for the year, the effect of these
calculations was antidilutive.
19. Supplemental Cash Flow Information
The cash generated from non-cash working capital is made up of changes related to operations in
the following accounts:
FY2009
(In thousands)
Accounts receivable
Inventories
Prepaid expenses
Income taxes payable / receivable
FY2008
$
311
(2,304)
(282)
4,339
(630)
$
1,470
(973)
332
2,614
(1,160)
$
1,434
$
2,283
During fiscal 2009, capital assets were acquired at an aggregate cost of $5.5 million (2008 - $8.2
million), of which $0.1 million (fiscal 2008 - $0.5 million) were non-cash rent adjustments relating to
free rent during fixturing periods.
51
20. Related Party Transactions
The Company, in the normal course of operations, provided administrative, payroll and distribution
services to 6271235 Canada Inc. (Prudhommes Factory Outlet, a clothing retailer) and considers
these to be related party transactions on account that a Director of the Company wholly owns
6271235 Canada Inc. The outstanding amount due from 6271235 Canada Inc, as at January 31,
2009 was $10.0 thousand (fiscal 2008 - $138.0 thousand), does not bear interest and has no
specific terms of repayment. The Company earned $36.0 thousand in annual management fees for
fiscal 2009 (fiscal 2008 - $45.0 thousand), which approximates the cost in the provision of these
services, and are included as other income in selling, general and administrative expenses. These
transactions are recorded at the exchange amount.
21. Commitments
Minimum lease payments under operating leases relating to retail stores, premises and equipment
of the Company for the next five years are as follows:
Lease
Commitments
2010
2011
2012
2013
2014
Thereafter
$
16,897
15,512
13,974
12,245
11,451
26,132
$
96,211
In addition to these rental payments, the leases generally provide for the payment by the Company
of real estate taxes, percentage rent and other operating expenses.
22. Segmented Reporting
In accordance with CICA Section 1701 “Segment Disclosures”, the Company has identified seven
operating segments (West 49, Billabong, Duke’s Northshore, Off The Wall, Amnesia/Arsenic, D-Tox
and online retailing) that reflect the basis used by management to review performance and make
operating decisions. These seven operating segments have been aggregated into one reportable
segment encompassing all retail banners based on their similar economic characteristics, products
and class of customer. The presentation of one reportable segment by the Company meets the
qualitative and quantitative requirements presented in CICA Section 1701 “Segment Disclosures”.
23. Subsequent Events
Subsequent to January 31, 2009, the Company obtained a waiver from its bank in respect to the
violation of a loan covenant. See Note 6 for further details.
The Company also completed an amalgamation of various corporate entities subsequent to
January 31, 2009, that will allow it to realize a significant amount of its non-capital tax losses
carried forward from prior years which will reduce the amount of tax instalments by $1.7 million in
fiscal 2010. See Note 17 for further details.
24. Comparative Figures
Certain comparative figures have been reclassified to conform to the presentation adopted for the
current year.
52
Corporate Information
%RDUGRI'LUHFWRUVDQG2I¦FHUV
Kenneth Fowler
Chairman
Salvatore Baio
Director, President and Chief Executive Officer
Maureen Fowler
Director
Roy Cairns*
Director
Arthur Ellis*
Director
Cos Georganas*
Director
Rhonda Biddix
Chief Financial Officer and Corporate Secretary
*member of the Audit Committee of the Board of Directors
([HFXWLYH2I¦FH
1100 Burloak Drive, Suite 200
Burlington, ON L7L 6B2
Telephone: (905) 336-5454
Fax: (905) 336-3490
Investor Relations Email: [email protected]
Investor Information
Transfer Agent
Auditors
Deloitte & Touche LLP
Chartered Accountants
Licensed Public Accountants
1005 Skyview Drive, Suite 202
Burlington, ON L7P 5B1
Listing
Toronto Stock Exchange
Symbol: WXX
Design and production by Equicom, a TMX Group Company.
Equity Transfer & Trust Company
200 University Avenue, Suite 400
Toronto, ON M5H 4H1
F: 905.336.3490
T: 905.336.5454
West 49
Inc.
1100 Burloak Drive, Suite 200
Burlington, ON L7L 6B2
[email protected]

annual report 2009

Transcription

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