Business Context and Reporting Period
Birks & Mayors Inc., a luxury jewelry retailer operating 64 stores across Canada, Florida, and Georgia, filed a Form 6-K on July 9, 2010. The filing reports full-year financial results for the fiscal year ended March 27, 2010 ("Fiscal 2010"), and sales results for the first quarter of Fiscal 2011 (thirteen weeks ended June 26, 2010).
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net Sales | $255.1 million | $270.9 million |
| Gross Profit | $104.5 million (41.0% margin) | $115.6 million (42.7% margin) |
| SG&A Expenses | $106.3 million (41.7% of sales) | $114.0 million (42.1% of sales) |
| Operating Loss | $(8.3 million) | $(18.2 million) |
| Net Loss | $(19.5 million) | $(61.0 million) |
| Net Loss Per Share (Diluted) | $(1.71) | $(5.38) |
| Bank Indebtedness | $64.5 million | $85.8 million |
| Excess Borrowing Capacity | $17.9 million | $9.2 million |
| Inventory | $143.8 million | $155.6 million |
| Cash and Cash Equivalents | $3.4 million | $2.0 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 5.8% year-over-year, driven by a 6% drop in comparable store sales. The decline was attributed to a difficult retail environment, particularly in the U.S. Florida market, which saw a 12% sales drop. This was partially offset by a stronger Canadian dollar, which added $5.3 million in translated sales.
- Margin Compression: Gross profit margin declined 170 basis points to 41.0% due to retail pricing pressures. SG&A expenses decreased 6.8% due to strategic staff downsizing, pay reductions, and lower marketing spend, improving the SG&A ratio by 40 basis points.
- Significant Loss Reduction: The net loss improved significantly from $61.0 million to $19.5 million. The prior year's loss included a $32.9 million non-cash income tax valuation allowance and $11.2 million in goodwill impairment. The current year included a $1.4 million non-cash fixed asset impairment.
- De-leveraging: Bank indebtedness decreased by $21.3 million as the company utilized operating cash flow to reduce funding under its senior secured revolving credit facility. Inventory decreased by 7.6% (excluding currency impacts, a 13% reduction in comparable store inventory) due to store closures and inventory management.
Outlook, Management Commentary, and Risks
First Quarter Fiscal 2011 Performance: Net sales increased 11.8% to $59.9 million, with comparable store sales up 6%. Growth was driven by a 9% increase in Canadian sales and a 2% increase in U.S. sales, supported by a successful Mother's Day and summer sale.
Management Commentary: CEO Tom Andruskevich stated the company achieved its primary goal of de-leveraging by reducing expenses and inventory, optimizing cash flow. Management plans to build on sales momentum, manage inventory productivity, control expenses, and limit capital expenditures while focusing on customer service.
Risks and Contingencies: The filing highlights risks related to the global economic crisis, specifically impacts on real estate markets (notably Florida), equity markets, and consumer confidence. Additional risks include foreign exchange fluctuations, commodity price increases, and the ability to maintain liquidity and vendor relationships.
Investor Verification Checklist
- Verify the sustainability of the 6% comparable store sales growth in Q1 Fiscal 2011 against the 6% decline in the full year.
- Confirm the impact of the stronger Canadian dollar on reported revenue and whether organic growth exists without currency translation.
- Assess the company's ability to maintain the reduced SG&A expense levels following staff downsizing and pay reductions.
- Monitor the $17.9 million excess borrowing capacity against potential capital expenditure needs or further inventory requirements.
- Review the status of the Florida market recovery, given the 12% sales decline in that region during Fiscal 2010.