Business Context and Reporting Period
Company: Birks & Mayors Inc. (Foreign Private Issuer)
Filing Type: Form 6-K (Interim Report)
Reporting Period: Twenty-six weeks ended September 25, 2010 (First half of Fiscal 2011).
Business Overview: The Company is a designer, maker, and retailer of luxury jewelry, timepieces, and giftware. Operations are split into two segments: "Retail" (33 Birks stores in Canada, 29 Mayors stores in the U.S., plus Brinkhaus and Jan Bell locations) and "Other" (corporate sales and manufacturing).
Key Financial Metrics
| Metric | 26 Weeks Ended Sept 25, 2010 | 26 Weeks Ended Sept 26, 2009 |
|---|---|---|
| Net Sales | $111.2 million | $102.2 million |
| Gross Profit | $47.5 million (42.7% margin) | $43.5 million (42.5% margin) |
| Operating Loss | $(3.9) million | $(7.3) million |
| Net Loss | $(9.5) million | $(12.9) million |
| Net Loss Per Share | $(0.84) | $(1.13) |
| Cash from Operations | $(6.2) million (Used) | $2.3 million (Provided) |
| Total Debt (Bank Indebtedness + Long-term) | $125.4 million | $118.2 million |
| Cash and Equivalents | $2.9 million | $3.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by $9.0 million (8.8%). This was driven by a 5% increase in comparable store sales, a stronger Canadian dollar (contributing $5.8 million in translated sales), and new store openings, partially offset by the closure of six stores.
- Profitability Improvement: The operating loss narrowed significantly from $7.3 million to $3.9 million. Gross margin expanded by 20 basis points due to reduced promotional pricing pressures in the U.S.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased slightly in absolute dollars ($48.6M vs $48.1M) due to currency translation but decreased as a percentage of sales (43.7% vs 47.1%). This was aided by lower occupancy costs from store closures and reduced marketing spend.
- Cash Flow Shift: Operating cash flow turned negative ($6.2M used) compared to positive in the prior year ($2.3M provided). This shift was primarily due to the Company paying down accounts payable and accrued liabilities to take advantage of early payment discounts, rather than extending payables as in the prior year.
- Inventory Reduction: Inventory levels decreased by $3.0 million, reflecting management's strategy to reduce inventory levels in response to economic weakness.
Outlook, Risks, and Contingencies
- Liquidity and Going Concern: The Company operates on a going-concern basis but faces significant liquidity constraints. It relies on a $131.6 million senior secured revolving credit facility with only $12.4 million in excess availability as of September 25, 2010. Management believes it can fund operations for the next 12 months, but this is contingent on maintaining positive excess availability.
- Credit Facility Risks: Lenders may impose discretionary reserves at any time, which would reduce borrowing availability. There are also seasonal availability blocks (totaling $25 million) imposed during the holiday season (Dec 20 - Feb 20). The credit facilities mature in December 2011 and must be renewed.
- Market Risks:
- Currency: A 10% strengthening of the Canadian dollar would increase borrowing availability by ~$3.0 million but decrease earnings by ~$1.6 million. No hedges were in place as of the reporting date.
- Interest Rates: Approximately $86.5 million of debt is floating-rate. A 100 basis point increase in rates would increase annualized interest expense by ~$0.9 million.
- Commodities: Exposure to gold, silver, and platinum prices. No hedging contracts existed as of September 25, 2010.
- Dividend Restrictions: The Company cannot pay dividends unless it maintains a fixed charge coverage ratio of 1.30 to 1.00 and minimum excess availability of $20 million. Current excess availability ($12.4M) is below this threshold.
Investor Verification Checklist
- Credit Facility Renewal: Verify the status of the renewal for the senior secured revolving credit facility and term loan maturing in December 2011.
- Excess Availability: Monitor the "excess availability" under the credit facility, as it is the primary covenant and liquidity metric. Current levels are tight ($12.4M).
- Discretionary Reserves: Watch for any lender-imposed discretionary reserves that could further restrict borrowing capacity.
- Inventory Valuation: Confirm that inventory levels remain aligned with sales trends to avoid further write-downs or reduced borrowing capacity.
- Currency Hedging: Assess if the Company will implement hedging strategies to mitigate the impact of CAD/USD fluctuations on earnings and borrowing capacity.