BGI

Business Context and Reporting Period

Company: Birks & Mayors Inc.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended March 31, 2007 (53 weeks).
Business Overview: A leading North American luxury jewelry retailer operating 67 stores under the "Birks" brand in Canada and the "Mayors" brand in the Southeastern United States. The company designs, manufactures, and retails fine jewelry, timepieces, and giftware.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 6.9% to $294.3 million, driven by a 4% increase in comparable store sales. Growth was aided by a stronger Canadian dollar (contributing $5.3 million) and an extra week in the fiscal year ($4.3 million).
• Profitability: Net income more than doubled to $13.1 million from $5.7 million. Operating income rose 38.9% to $20.4 million. Gross margin expanded to 48.3% due to higher retail margins and successful merchandising strategies.
• Expense Management: Selling, General, and Administrative (SG&A) expenses increased to $115.5 million (39.2% of sales) from $109.2 million (39.7% of sales). The increase was partially offset by the absence of merger-related expenses incurred in the prior year.
• Cash Flow: Operating cash flow turned negative ($10.6 million used) compared to positive cash flow in the prior year. This was primarily due to increased inventory investment for internal manufacturing strategies and new store openings, alongside a decrease in accounts payable.
• Debt Levels: Bank indebtedness increased to $109.2 million to fund working capital needs. The company prepaid an $11.7 million junior secured term loan during the year.

Guidance, Outlook, and Risks

• Capital Expenditures: Management projects capital expenditures of $11 million to $13 million for the fiscal year ending March 29, 2008, with approximately two-thirds allocated to U.S. operations. Funding is expected to come from operating cash flows and existing credit facilities.
• Expansion Plans: The company plans to open new Mayors stores in Weston, Florida (Summer 2007) and Jacksonville, Florida (Fall 2007).
• Dividend Policy: The company has not paid dividends since 1998 and does not intend to pay dividends in the foreseeable future. Dividend payments are restricted by credit agreement covenants.
• Key Risks:
  • Concentration Risk: Rolex merchandise accounted for approximately 22% of total net sales in fiscal 2007. Loss of this supplier would have a material adverse effect.
  • Control Structure: The Goldfish Trust controls 68.6% of voting shares, potentially delaying or preventing changes in management or control.
  • Commodity Prices: Exposure to fluctuations in gold, diamond, and gemstone prices, though the company does not maintain long-term inventories to hedge against these.
  • Currency Risk: Significant exposure to foreign exchange fluctuations between the Canadian and U.S. dollars.

Investor Verification Checklist

• Rolex Dependency: Verify the status of the distribution agreement with Rolex, given it represents 22% of sales.
• Inventory Levels: Review the $158.8 million inventory balance and the reasons for the negative operating cash flow driven by inventory buildup.
• Debt Covenants: Confirm compliance with the fixed charge coverage ratio and excess borrowing capacity thresholds under the $135 million credit facility.
• Related Party Transactions: Review the $970,000 in management fees paid to Iniziativa S.A. (controlling shareholder affiliate) and the $7.8 million in diamond purchases from Prime Investments SA (43.5% shareholder).
• Accounting Adjustments: Note the $1.1 million adjustment to opening retained earnings and inventory due to the adoption of SAB 108 regarding prior year misstatements.