Business Context and Reporting Period
Company: Birks Group Inc.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Twenty-six weeks ended September 26, 2020 (Fiscal 2021 First Half)
Business Overview: Birks is a leading designer and retailer of fine jewelry and timepieces in Canada, operating 26 Maison Birks stores, plus locations for Brinkhaus, Graff, and Patek Philippe. The company also engages in wholesale and e-commerce.
Key Event: Operations were severely impacted by the COVID-19 pandemic, resulting in temporary store closures from March to July 2020. As of November 2020, seven stores (including the Bloor Street flagship) were temporarily closed due to a "second wave" of restrictions, though concierge and curbside services remained active.
Key Financial Metrics
| Metric (in $CAD millions) | 26 Weeks Ended Sep 26, 2020 | 26 Weeks Ended Sep 28, 2019 |
|---|---|---|
| Net Sales | 57.0 | 85.3 |
| Gross Profit | 22.8 | 32.6 |
| Gross Margin | 40.1% | 38.2% |
| Operating Loss | (1.4) | (2.1) |
| Net Loss | (2.8) | (4.6) |
| Cash Used in Operating Activities | (8.9) | (6.2) |
| Cash and Cash Equivalents (End of Period) | 2.4 | 1.6 |
| Total Debt (Bank Indebtedness + Long-term) | 83.5 | 74.3 |
| Stockholders' Equity | 0.6 | 3.4 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by 33.2% ($28.3 million) year-over-year. Retail sales dropped 35.1% due to store closures, while "Other" sales (primarily e-commerce) increased 192% to offset some losses.
- Comparable Store Sales: Declined 32% for the period. The first quarter saw a 65% drop due to closures, while the second quarter saw a 4% increase following reopenings.
- Margin Expansion: Gross margin improved by 190 basis points to 40.1%, driven by reduced discounting and a shift in product mix toward branded timepieces.
- Expense Reduction: SG&A expenses decreased by $10.9 million (33.7%) due to rent abatements ($3.2 million), lower compensation costs ($5.7 million), and reduced marketing spend ($1.4 million).
- Equity Erosion: Stockholders' equity fell from $3.4 million to $0.6 million due to the net loss for the period.
Guidance, Outlook, and Risks
Liquidity and Capital Resources
- Debt Facilities: The company maintains a $85.0 million senior secured credit facility (outstanding: $60.0 million) and a $12.5 million term loan. A new $10.0 million term loan was secured from Investissement Québec in July 2020.
- Covenants: The company must maintain minimum excess availability of $8.5 million. As of September 26, 2020, excess availability was $14.9 million. Management expects to meet this requirement for the next 12 months.
- Cost Mitigation: Actions taken include temporary layoffs, executive salary reductions (20%), workweek reductions, and postponement of capital expenditures.
- Government Support: Received $1.2 million from the Canada Emergency Wage Subsidy (CEWS).
Listing Status and Risks
- NYSE American Compliance: The company was notified of non-compliance with listing standards due to stockholders' equity below $4.0 million and losses in three of the last four fiscal years. A compliance plan was accepted, granting an extension until February 6, 2022. Failure to regain compliance may result in delisting.
- Going Concern: While management believes it can fund operations for the next 12 months, the filing notes that financing may be unavailable or on unfavorable terms, which could materially impact the ability to continue as a going concern.
- Market Risks: Significant exposure to interest rate fluctuations (floating rate debt), foreign exchange rates (CAD vs. USD/EUR/CHF), and commodity prices (gold, diamonds).
Investor Verification Checklist
- Excess Availability: Verify the company maintains the required $8.5 million minimum excess availability under its credit facility to avoid an event of default.
- Listing Compliance: Monitor progress toward regaining NYSE American listing standards (equity > $4.0 million) by the February 2022 deadline.
- Store Operations: Track the impact of ongoing provincial restrictions on store closures and the effectiveness of e-commerce/concierge channels in offsetting retail losses.
- Debt Maturities: Review the repayment schedule for the new Investissement Québec loan (starting July 2021) and the maturity of the senior credit facility (October 2022).
- Inventory Levels: Assess inventory valuation and potential obsolescence given the significant reduction in sales volume and the luxury nature of the merchandise.