Business Context and Reporting Period
Company: Birks & Mayors Inc.
Filing Type: Form 20-F (Annual Report)
Period Ended: March 26, 2011 (Fiscal 2011)
Business Overview: A leading North American luxury jewelry retailer operating under the Birks (Canada), Mayors (U.S.), Brinkhaus, and Rolex brands. The company designs, manufactures, and retails fine jewelry, timepieces, and giftware. As of March 26, 2011, it operated 61 luxury jewelry stores across Canada and the Southeastern U.S.
Key Financial Metrics
| Metric (in thousands, except per share) | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net Sales | $270,948 | $255,057 |
| Gross Profit | $116,095 | $104,451 |
| Gross Margin | 42.8% | 41.0% |
| Operating Income (Loss) | $3,597 | $(8,346) |
| Net Loss | $(7,746) | $(19,471) |
| Net Loss Per Share (Basic & Diluted) | $(0.68) | $(1.71) |
| Working Capital | $32,093 | $39,230 |
| Total Assets | $184,323 | $191,734 |
| Total Indebtedness | $112,243 | $118,244 |
| Stockholders' Equity | $11,340 | $18,387 |
| Debt-to-Capitalization Ratio | 90.8% | 86.5% |
| Operating Cash Flow | $10,314 | $29,195 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 6.2% to $270.9 million, driven by a 2% increase in comparable store sales, the opening of new stores, and a stronger Canadian dollar which added $9.6 million in translated sales.
- Profitability Improvement: The company returned to operating profitability ($3.6 million) compared to an operating loss of $8.3 million in the prior year. Gross margin expanded 180 basis points to 42.8% due to reduced promotional pricing.
- Net Loss Reduction: Net loss narrowed significantly to $7.7 million from $19.5 million, aided by the absence of goodwill and long-lived asset impairments that totaled $13.6 million in Fiscal 2010.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased slightly in absolute dollars ($107.2 million vs. $106.3 million) but decreased as a percentage of sales (39.6% vs. 41.7%) due to reduced marketing spend and lower compensation costs from store closures.
- Liquidity: Operating cash flow decreased to $10.3 million from $29.2 million, primarily due to a smaller reduction in inventory levels and a smaller increase in accounts payable compared to the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditures: Projected capital expenditures for Fiscal 2012 are approximately $5 million, to be financed primarily through the senior secured revolving credit facility.
- Subsequent Events (June 2011): The company amended and extended its credit facilities. The revolving credit facility was reduced to $115 million, and the term loan was increased to $18 million, with terms extended to June 2015. Interest rates were adjusted, and a 7% conversion fee on a shareholder cash advance was eliminated.
- Key Risks:
- High Leverage: Debt-to-capitalization ratio stands at 90.8%. The company relies on maintaining positive excess availability under its credit facilities to fund operations.
- Liquidity Constraints: Lenders may impose discretionary reserves on borrowing capacity. Seasonal availability blocks reduce borrowing power during peak holiday periods.
- Concentration Risk: Rolex merchandise accounted for approximately 24% of total net sales in Fiscal 2011. Loss of this supplier would have a material adverse effect.
- Foreign Exchange: Significant exposure to fluctuations between the U.S. and Canadian dollars, which impacts reported earnings and borrowing availability.
- Going Concern: While management believes it can fund operations for the next 12 months, continued economic weakness or lender restrictions could raise uncertainty about the company's ability to continue as a going concern.
- Dividend Policy: The company has not paid dividends since 1998 and does not intend to pay dividends in the foreseeable future due to credit agreement restrictions.
Investor Verification Checklist
- Credit Facility Status: Verify current excess borrowing availability and whether lenders have imposed any discretionary reserves post-fiscal year-end.
- Rolex Relationship: Confirm the status of the distribution agreement with Rolex, given its 24% contribution to sales.
- Store Performance: Review comparable store sales trends in the U.S. (Florida/Georgia) versus Canada to assess regional economic impacts.
- Inventory Levels: Monitor inventory turnover and potential write-downs, as the company holds significant inventory ($141.8 million) relative to sales.
- Shareholder Control: Note that the Goldfish Trust (via Montrovest) controls 67.8% of voting shares, which may influence corporate decisions differently than minority shareholders.