Business Context and Reporting Period
Company: Birks & Mayors Inc. (Birks Group Inc.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Thirteen and thirty-nine weeks ended December 27, 2008 (Fiscal 2009 interim).
Business Overview: A leading designer and retailer of luxury jewelry, timepieces, and giftware operating 37 Birks stores in Canada, 30 Mayors stores in the Southeastern U.S., and two Brinkhaus locations. The company operates two segments: Retail and Other (corporate sales and manufacturing).
Key Financial Metrics
| Metric | 13 Weeks Ended Dec 27, 2008 | 39 Weeks Ended Dec 27, 2008 |
|---|---|---|
| Net Sales | $88.1 million | $221.7 million |
| Gross Profit | $37.5 million (42.6% margin) | $97.8 million (44.1% margin) |
| Operating Loss | $(4.7) million | $(6.3) million |
| Net Loss | $(42.7) million | $(46.6) million |
| Net Loss Per Share (Basic) | $(3.76) | $(4.11) |
| Cash and Equivalents | $6.3 million (as of Dec 27, 2008) | N/A |
| Total Debt (Bank Indebtedness + Long-Term) | $129.2 million | N/A |
| Operating Cash Flow | N/A | $8.6 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 28.2% in the 13-week period and 11.5% in the 39-week period compared to the prior year. This was driven by a 23% drop in comparable store sales (13 weeks) and a 14% drop (39 weeks), exacerbated by a weaker Canadian dollar reducing translated revenue.
- Profitability Collapse: The company swung from a net income of $12.7 million (13 weeks prior year) to a net loss of $42.7 million. The 39-week period saw a shift from $7.2 million income to a $46.6 million loss.
- Significant Non-Cash Charges:
- Goodwill Impairment: A full impairment of $11.2 million was recorded due to declining stock price and market capitalization.
- Deferred Tax Valuation Allowance: A $34.3 million non-cash charge was recorded against deferred tax assets due to uncertainty regarding future profitability in both U.S. and Canadian operations.
- Asset Impairment: $0.7 million charge for long-lived assets (leasehold improvements) at three U.S. stores.
- Margin Compression: Gross margin declined 590 basis points in the 13-week period and 380 basis points in the 39-week period, attributed to price reductions in Canada and sales initiatives to drive volume.
Outlook, Risks, and Management Commentary
Liquidity and Going Concern: Management states the financial statements are prepared on a going concern basis, though this is subject to substantial doubt if operating performance worsens or lenders impose further restrictions. The company has secured additional financing to fund operations for the next twelve months.
Financing Actions:
- Amended and extended senior secured revolving credit facility to $135 million (expiring Dec 2011) with higher interest rates.
- Obtained a $13 million secured term loan (subordinated) at high interest rates (16% or LIBOR + 12%).
- Secured Cdn $12.9 million in term loans from Investissement Quebec (one for Olympic sponsorship, one for working capital).
- Received a $2.0 million advance from controlling shareholder Montrovest BV.
Cost Reductions: Implemented expense reductions including the elimination of 80 full-time positions, suspension of management cash bonuses, and a salary reduction program for all employees.
Risks:
- Economic Environment: Severe impact from the global recession, banking crisis, and high foreclosure rates in the U.S. (specifically Florida).
- Currency Risk: Significant exposure to fluctuations between the Canadian and U.S. dollars.
- Commodity Risk: Exposure to gold, silver, and platinum price volatility.
- Dividend Restrictions: Credit facility amendments restrict dividend payments based on excess borrowing capacity and fixed charge coverage ratios.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the fixed charge coverage ratio (1.30 to 1.00) and minimum excess availability ($20 million) required for dividend eligibility.
- Cash Burn Rate: Assess whether the $8.6 million operating cash flow (39 weeks) and new financing are sufficient to cover the $129.2 million debt load and interest obligations (approx. $1.1 million annualized interest sensitivity per 100bps rate change).
- Inventory Levels: Review inventory valuation ($167.3 million) against the significant decline in comparable store sales to assess potential future write-downs.
- Shareholder Advance Terms: Confirm the terms of the $2.0 million advance from Montrovest BV, specifically regarding conversion to equity or repayment conditions.
- Goodwill Recovery: Evaluate the likelihood of the $11.2 million goodwill impairment being permanent given the current market capitalization vs. net book value.