Business Context and Reporting Period
Company: Birks & Mayors Inc. (a Canadian corporation)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended March 27, 2010 (52 weeks)
Business Overview: Birks & Mayors is a leading North American luxury jewelry brand operating 64 retail stores across Canada (Birks and Brinkhaus brands) and the Southeastern U.S. (Mayors brand). The company designs, manufactures, and retails fine jewelry, timepieces, and giftware. Operations are highly seasonal, with the third fiscal quarter historically driving the majority of sales.
Key Financial Metrics (Fiscal 2010)
| Metric | Value (USD) |
|---|---|
| Net Sales | $255.1 million |
| Gross Profit | $104.5 million |
| Gross Margin | 41.0% |
| Operating Loss | $(8.3) million |
| Net Loss | $(19.5) million |
| Loss Per Share (Basic & Diluted) | $(1.71) |
| Total Assets | $191.7 million |
| Total Debt (Bank Indebtedness + Long-term) | $118.2 million |
| Shareholders' Equity | $18.4 million |
| Working Capital | $39.2 million |
| Cash and Cash Equivalents | $3.4 million |
| Excess Borrowing Capacity | $17.9 million |
Material Changes vs. Prior Period (Fiscal 2009)
- Revenue Decline: Net sales decreased 5.8% to $255.1 million from $270.9 million, driven by a 6% decline in comparable store sales and the closure of six stores. This was partially offset by a stronger Canadian dollar.
- Margin Compression: Gross profit margin fell 170 basis points to 41.0% (from 42.7%) due to retail pricing pressures in a difficult economic environment.
- Reduced Losses: Net loss improved significantly to $(19.5) million from $(61.0) million. The prior year included a $32.9 million non-cash income tax expense (valuation allowance) and a $13.6 million impairment charge. Fiscal 2010 included only a $1.4 million impairment charge and a negligible tax benefit.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased $7.7 million (6.8%) due to staff downsizing, pay reductions, and lower marketing spend.
- Debt Reduction: Total bank indebtedness decreased from $85.8 million to $64.5 million, while long-term debt increased slightly. Total indebtedness to total capitalization ratio remained high at 86.5%.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to invest approximately $3 million in capital expenditures for fiscal 2011, split evenly between the U.S. and Canada, financed primarily through their revolving credit facility. The company believes it has sufficient liquidity to fund operations for the next 12 months, though this is contingent on maintaining positive excess availability under credit facilities and achieving projected operating performance.
Key Risks and Contingencies
- Liquidity and Debt: The company carries significant leverage (86.5% debt-to-capitalization). Operations depend on maintaining positive excess availability under senior secured credit facilities. Lenders may impose discretionary reserves, reducing borrowing capacity. A 10% strengthening of the Canadian dollar could decrease borrowing availability by approximately $2.7 million.
- Going Concern: While financial statements are prepared on a going concern basis, management notes that if operating performance is significantly lower than forecasted or if lenders impose additional restrictions, there could be significant uncertainty regarding the ability to continue as a going concern.
- Supplier Concentration: Rolex merchandise accounted for approximately 22% of total net sales in fiscal 2010. The loss of this supplier would have a material adverse effect.
- Related Party Transactions: The company received $5.0 million in cash advances from its controlling shareholder (Montrovest) bearing interest at 16% (effective 17.8%). These are subordinated to senior debt and convertible into equity.
- Inventory and Impairment: The company recorded a $1.4 million non-cash impairment charge related to underperforming retail stores and assets held for sale (Rhode Island facility).
Investor Verification Checklist
- Credit Facility Status: Verify current excess borrowing availability and whether lenders have imposed any new discretionary reserves since the filing date.
- Rolex Relationship: Confirm the status of the distribution agreement with Rolex, given it represents ~22% of sales.
- Debt Covenants: Review compliance with financial covenants, specifically the requirement to maintain positive excess availability and fixed charge coverage ratios.
- Inventory Levels: Assess inventory turnover and potential for further write-downs given the $143.8 million inventory balance and historical slow-moving inventory provisions.
- Related Party Advances: Monitor the $5.0 million subordinated debt from Montrovest and any potential conversion or repayment demands.
- Store Portfolio: Track the impact of the six store closures in fiscal 2010 and the performance of the new "Mayors by Birks" location.