BGI

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 28, 2009 (52 weeks)

Business Overview: A leading North American luxury jewelry retailer operating 69 stores under the Birks (Canada), Mayors (U.S.), and Brinkhaus (Canada) brands. The company designs, manufactures, and retails fine jewelry, timepieces, and giftware.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 13.9% to $270.9 million, driven by a 14% drop in comparable store sales due to the global economic downturn and a weaker Canadian dollar.
• Profitability Collapse: The company swung from a net income of $10.4 million in 2008 to a net loss of $61.0 million in 2009. This was primarily due to a $13.6 million non-cash impairment charge (goodwill and long-lived assets) and a $39.0 million non-cash valuation allowance against deferred tax assets.
• Margin Compression: Gross margin declined 380 basis points to 42.7%, attributed to price reductions in Canada to align with U.S. markets and lower-margin sales initiatives.
• Cost Reductions: Selling, General, and Administrative (SG&A) expenses decreased by $14.3 million (11.1%) due to reduced marketing spend, lower commissions, and a strategic downsizing initiative initiated in January 2009.
• Asset Base Reduction: Total assets decreased by $85.7 million (29.4%) largely due to the write-down of goodwill and long-lived assets.

Guidance, Outlook, Risks, and Unusual Items

Unusual Items

• Impairment Charges: Recorded an $11.2 million goodwill impairment and a $2.3 million long-lived asset impairment (U.S. retail locations and Rhode Island manufacturing facility).
• Tax Valuation Allowance: Recognized a full valuation allowance of $47.8 million against net deferred tax assets, resulting in a $39.0 million tax expense charge, as management determined it was not "more likely than not" that these assets would be realized.

Liquidity and Capital Resources

• Credit Facilities: The senior secured revolving credit facility was amended and extended to $133 million (down from $160 million) with a maturity in December 2011. A new $13 million secured term loan was obtained.
• Excess Availability: Excess borrowing capacity was only $9.2 million as of March 28, 2009. Lenders have the discretion to impose reserves that could further reduce availability.
• Shareholder Support: Received $5.0 million in cash advances from controlling shareholder Montrovest BV (subordinated debt) to fund working capital.

Risks and Outlook

• Going Concern: Management states the financial statements are prepared on a going concern basis, but notes significant uncertainty regarding the ability to continue operations if economic conditions worsen or if lenders impose additional restrictions.
• Consumer Spending: Business is highly sensitive to discretionary spending; the economic recession has severely impacted luxury retail demand.
• Supplier Concentration: Rolex merchandise accounted for approximately 24% of total net sales in 2009. Loss of this relationship would be material.
• Capital Expenditures: Projected to be $3–4 million for the fiscal year ending March 2010, financed primarily through credit facilities.

Investor Verification Checklist

• Credit Facility Covenants: Verify current excess availability and whether lenders have imposed discretionary reserves that could restrict operations.
• Deferred Tax Assets: Assess the likelihood of reversing the $47.8 million valuation allowance if profitability improves.
• Rolex Relationship: Confirm the status of the distribution agreement with Rolex, given its 24% contribution to sales.
• Shareholder Advances: Review the terms of the $5.0 million subordinated advances from Montrovest BV, including conversion rights and repayment triggers.
• Inventory Levels: Monitor inventory write-downs and obsolescence reserves in light of reduced sales velocity.