BGI

Business Context and Reporting Period

Company: Birks & Mayors Inc.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Twenty-six weeks ended September 24, 2011 (First half of Fiscal 2012).
Business Overview: A leading designer, maker, and purveyor of luxury jewelry, timepieces, and giftware operating in Canada (Birks brand) and the Southeastern U.S. (Mayors brand). The company operates two reportable segments: Retail and Other (corporate sales, gold exchange, manufacturing, wholesale).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $18.7 million (16.8%) driven by a 6% increase in comparable store sales, a stronger Canadian dollar (contributing $4.3 million), and new store openings net of closures.
• Profitability Improvement: The company moved from an operating loss of $3.9 million to a near-break-even operating income of $8,000. Net loss narrowed significantly from $9.5 million to $5.6 million.
• Margin Expansion: Gross margin improved by 160 basis points to 44.3%, attributed to retail price increases and reduced promotional pricing.
• Cash Flow: Net cash used in operating activities increased to $11.2 million (from $6.2 million used) primarily due to higher inventory purchases to support sales growth and rising commodity costs.
• Debt Levels: Total debt increased by approximately $13 million, with bank indebtedness rising to $73.8 million to fund working capital and inventory.

Outlook, Risks, and Management Commentary

Liquidity and Capital Resources

In June 2011, the company amended its credit facilities. The senior secured revolving credit facility was reduced to $115 million (from $132 million) and the term loan increased to $18 million (from $12.5 million). As of September 24, 2011, excess borrowing availability was $15.9 million. The company maintains a 100% valuation allowance on deferred tax assets due to uncertainty regarding future realization.

Key Risks and Contingencies

• Going Concern Uncertainty: Management notes that the ability to fund operations depends on maintaining positive excess availability. Lenders may impose discretionary reserves at their discretion, which could reduce borrowing capacity. Significant deterioration in performance could raise doubt about the company's ability to continue as a going concern.
• Market Risks: Exposure to fluctuations in interest rates (floating rate debt), foreign exchange rates (CAD/USD), and commodity prices (gold, diamonds). No hedging contracts existed for FX or commodities as of the reporting date.
• Seasonal Constraints: Seasonal availability blocks of $12.5 million and $5.0 million are imposed during December and January/February, reducing liquidity during peak retail periods.

Management Strategy

Short-term focus includes growing sales and gross margins, managing expenses efficiently, and maintaining flexible borrowing sources. Long-term drivers include executing merchandising strategies to lower discounts, enhancing brand awareness, and expanding international distribution channels.

Investor Verification Checklist

• Excess Availability: Verify current excess borrowing availability under the $115 million revolving credit facility, noting the risk of discretionary reserves imposed by lenders.
• Inventory Valuation: Review inventory levels ($146 million) and provisions, given the high exposure to commodity price fluctuations and the risk of obsolescence in a weak retail environment.
• Debt Covenants: Confirm compliance with the "positive excess availability" covenant and the fixed charge coverage ratio required for dividend eligibility.
• Currency Impact: Assess the sensitivity of future earnings and borrowing capacity to fluctuations in the Canadian vs. U.S. dollar exchange rate.
• Going Concern Status: Monitor subsequent filings for any updates on the company's ability to meet cash flow requirements without additional financing.