LEON'S FURNITURE LIMITED Financial Highlights – Q2 - 2020
- Our second quarter performance was strong despite the economic impact of the COVID 19 pandemic. We proactively aligned our cost structure to the lower in-store demand while at the same time expanding our eCommerce solutions to better serve the interests of our customers.
- Revenue in the quarter was
$416.7 million compared to$560.9 million in the second quarter 2019. This reduction in revenue was primarily driven by the temporary physical store closures across the country due to the COVID-19 pandemic. eCommerce initiated sales during the quarter increased by over 500% compared to the second quarter 2019. These sales significantly mitigated the reduction in revenue and drove improved gross margins and operating leverage in the quarter. - As all the Company's retail stores reopened across
Canada in earlyJune 2020 , total merchandise sales increased 1.2% during the month ofJune 2020 compared to the prior year, with the largest dollar increases coming from furniture and appliance sales. - The results for the month of
June 2020 , compare favourably to the previous two months of April andMay 2020 . The significant sales reduction that began in lateMarch 2020 continued into the current quarter, as revenues during April andMay 2020 decreased by 46% and 38%, respectively as compared to the previous year. - As a result of COVID-19 and the rapid deterioration of customer demand that began at the end of the previous quarter and in order to alter its cost structure and operating leverage, the Company announced in late
March 2020 significant but temporary store closures and layoffs of many of its valued associates across the country. - In
April 2020 , theGovernment of Canada announced theCanada Emergency Wage Subsidy ("CEWS") program in order to provide assistance to help employers return and keep their employees on their payrolls. With this effective demonstration of leadership in these unprecendented times, this timely program provided by theGovernment of Canada allowed the Company to return the majority of its valued associates back to their previous roles during the month ofJune 2020 . - Without the sacrifice, dedication and service by the Company's valued associates across the country, the Company's results during the second quarter would not have been achievable. With the steps taken throughout the quarter to protect the Company's viability and preserve its liquidity during these highly uncertain times, the Company was able to produce the following positive operating results:
- Net income increased 88.8% in Q2-2020 to
$47.2 million from$25.0 million in Q2-2019. - Diluted EPS grew by 93.3% to
$0.58 in Q2-2020 from$0.30 in Q2-2019. - The net cash position, excluding lease liabilities, of the Company as at
June 30, 2020 amounted to$221 million , after generating over$200 million in free cash flow in the current quarter. - Net finance costs decreased 28.4% in Q2-2020 to
$4.8 million from$6.7 million in Q2-2019. - The Directors have decided to seek approval to extend the Company's Normal Course Issuer Bid for another year.
- The Directors have also approved that the Company's dividend will be increased from
$0.12 per common share to$0.14 per common share. - During the quarter, the Company increased its revolving credit facility to a total of
$175 million thereby increasing its available and unrestricted liquidity to approximately$490 million including the Company's$315 million in cash, cash equivalents and investments held as atJune 30, 2020 . - No amounts were drawn on this expanded revolving credit facility during the quarter and any amounts borrowed under this facility would become due in
May 2024 . Also, the Company's owned real estate portfolio of 4.2 million square feet of retail space, and industrial warehouse space, and undeveloped land holdings continue to be held on an unencumbered basis.
On
In response to the COVID-19 pandemic, the Company has taken the following actions to support its current operating environment and its liquidity position:
- In order to protect the health and safety of our customers and associates, the Company introduced several measures in the quarter to provide support to our associates and customers. These measures included: reduced store hours, contactless home delivery and customer pickup protocols, enhanced cleaning protocols and actions to support physical distancing including limiting the number of customers allowed in-store. The Company continued to operate its distribution centres and warehouse locations across the country with enhanced safety protocols.
- As a result of government restrictions during the month of
April 2020 , all store showrooms inOntario , like some other provinces, were closed to the public. However, the Company continued to operate showroom locations in certain provinces with a significantly reduced store headcount and continued to provide its customers with the ability to transact on its eCommerce websites across its various banners. - The Company applied for the CEWS program, which materially contributed towards its cost savings initiatives and allowed for the majority of its temporarily laid off associates to be returned to work in the second quarter of 2020.
The Directors have also approved, subject to obtaining regulatory approvals, the reinstatement of the Company's Normal Course Issuer Bid, which will expire on
For a full explanation of the Company's use of non-IFRS financial measures, please refer to the section of this press release with the heading "Non-IFRS Financial Measures".
Summary financial highlights for the three months ended
For the | Three months ended | |||||||
(C$ in thousands except %, share and per share amounts) | $ Increase | % Increase | ||||||
Total system wide sales (1) | 509.9 | 667.7 | (157.8) | (23.6%) | ||||
Franchise sales (1) | 93.2 | 106.8 | (13.6) | (12.7%) | ||||
Revenue | 416.7 | 560.9 | (144.2) | (25.7%) | ||||
Same store sales (1) | 404.3 | 549.6 | (145.2) | (26.4%) | ||||
Gross profit margin as a percentage of revenue | 43.65% | 43.53% | ||||||
SG&A (2)(3) | 116.9 | 203.6 | (86.7) | (42.6%) | ||||
SG&A (2)(3) as a percentage of revenue | 28.05% | 36.30% | ||||||
Adjusted EBITDA | 92.9 | 71.4 | 21.5 | 30.1% | ||||
Adjusted net income (1) | 47.2 | 25.0 |
22.2 | 88.8% | ||||
Adjusted diluted earnings per share (1) | 93.3% | |||||||
Net income | 47.2 | 25.0 |
22.2 | 88.8% | ||||
Common share dividends declared | (14.3%) | |||||||
(1) | Refer to the "Non-IFRS Financial Measures" section of this press release for additional information on these measures. |
(2) | Selling, general and administrative expenses ("SG&A"). |
(3) | SG&A as a percentage of revenue for the three months ended |
Revenue
For the three months ended
In early June, as all the Company's physical stores reopened across
The rapid increase in eCommerce sales in the quarter also continue to validate that the Company's digital platform is infinitely scalable and capable of significantly contributing higher operating profit margin percentages due to its current operating cost structure. The digital platform is key to allow the Company to attract new customers as they begin their shopping experience online and then continue in store to be assisted by our knowledgeable sales associates.
Same Store Sales (1)
Due to COVID-19 and the subsequent retail store closures across the country, same store corporate sales decreased 26.4% compared to the second quarter 2019. Since the Company has over 50% of its retail store count in
Gross Profit
The gross profit margin increased slightly from the second quarter 2019 of 43.53% to 43.65% in the current quarter. This was due primarily to increases in gross profit margin across all product categories. Notwithstanding a very challenging retail environment, the higher mix of appliance sales in the quarter, the 500% increase in eCommerce initiated sales in the quarter, and the volatility in the foreign exchange market of the Canadian dollar relative to
Selling, general and administrative expenses
As a result of COVID-19 and the ensuing rapid deterioration of customer demand that began at the end of the previous quarter, the Company announced that 72 stores would be temporarily closed and over 3,900 associates would be unfortunately laid off. Given that there continued to be very limited visibility of demand as the second quarter began, the Company undertook the necessary steps to right size its operations and preserve its liquidity by putting in place further cost cutting measures that are summarized below:
- Temporarily laid off an additional 1,900 associates and temporarily closed an additional 92 of stores, which was also attributable to provincially mandated orders to cease operating our retail showrooms that began during the month of
April 2020 . These incremental lay-offs, including the previously announced headcount reductions, represented a total workforce reduction, at its peak, of approximately 70%. - Immediately reduced advertising and marketing expenses, deferred the receipt of most inventory purchase orders, negotiated rent deferrals and abatements, and worked with all vendor partners to reduce expenditures and adjust the payment cadence of the Company's monthly expenses.
- In
April 2020 , theGovernment of Canada announced the CEWS in order to help employers return and keep their employees on their payrolls. As atJune 30, 2020 , the Company is entitled to total CEWS installments of$29.8 million . There are no unfulfilled conditions attached to the CEWS, as such the Company has recorded the full amount of this subsidy as a reduction to its total SG&A expenses. - By the end of the second quarter and with the help of this very timely and extremely important government subsidy, the Company was able to return the majority of its temporarily laid off associates back to work.
Therefore, excluding the CEWS, the Company's SG&A as a percentage of revenue in the second quarter was 35.20%, a decrease of 110 basis points over the prior year's quarter SG&A of 36.30%. The cost reduction initiatives in the current quarter continue to demonstrate the Company's ability to adjust and leverage its cost structure even though total revenues were down significantly. When including the CEWS, the Company's SG&A as a percentage of revenue improved significantly, coming in at 28.05%, an improvement of 825 basis points over the prior year's quarter.
On
Adjusted Net Income (1) and Adjusted Diluted Earnings Per Share (1)
Including the impact of the CEWS, adjusted net income in the current quarter totalled
Excluding the impact of the CEWS and coupled with the Company's ability to effectively manage its operating expenses while experiencing rapidly deteriorating sales decreases in the current quarter, adjusted net income in the current quarter totaled
Net Income and Diluted Earnings Per Share
Net income for the second quarter of 2020 was
(1) | Refer to the "Non-IFRS Financial Measures" section of this press release for additional information on these measures. |
Summary financial highlights for the six months ended
For the | Six months ended | |||
(C$ in thousands except %, share and per share amounts) | $ Increase | % Increase | ||
Total system wide sales (1) | 1,108.0 | 1,264.8 | (156.8) | (12.4%) |
Franchise sales (1) | 193.7 | 204.2 | (10.5) | (5.1%) |
Revenue | 914.3 | 1,060.6 | (146.3) | (13.8%) |
Same store sales (1) | 888.0 | 1,038.4 | (150.4) | (14.5%) |
Gross profit margin as a percentage of revenue | 43.37% | 43.40% | ||
SG&A (2)(3) | 309.6 | 400.8 | (91.2) | (22.8%) |
SG&A (2)(3) as a percentage of revenue | 33.86% | 37.79% | ||
Adjusted EBITDA | 142.3 | 122.1 | 20.2 | 16.5% |
Adjusted net income (1) | 61.1 | 34.5 | 26.6 | 77.1% |
Adjusted diluted earnings per share (1) | 76.2% | |||
Net income | 60.9 | 34.4 | 26.5 | 77.0% |
Common share dividends declared | $- | 0.0% | ||
(1) | Refer to the "Non-IFRS Financial Measures" section of this press release for additional information on these measures. |
(2) | Selling, general and administrative expenses ("SG&A"). |
(3) | SG&A as a percentage of revenue for the six months ended |
Revenue
For the six months ended
Same Store Sales (1)
Same store corporate sales decreased 14.5% compared to the six months ended
Gross Profit
The gross profit margin decreased slightly from 43.40% for the six months ended
Selling, general and administrative expenses
As a result of COVID-19 and the ensuing rapid deterioration of customer demand that began quickly near the end of
In
Excluding the CEWS, the Company's SG&A as a percentage of revenue for the six months ended
Adjusted Net Income (1) and Adjusted Diluted Earnings Per Share (1)
Adjusted net income for the six months ended
Excluding the impact of the CEWS, adjusted net income for the six months ended
Net Income and Diluted Earnings Per Share
Including the mark-to-market impact of the Company's financial derivatives, net income for the second quarter of 2020 was
(1) | Refer to the "Non-IFRS Financial Measures" section of this press release for additional information on these measures. |
Dividends
As previously announced, we paid a quarterly dividend of
Outlook
In the short-term, the duration and full financial effect of COVID-19 is unknown, as is the efficacy of government and central bank interventions to curb the spread of COVID-19 and stimulate the economy. Federal and provincial governments have instituted social distancing requirements, bans on non-essential travel and other measures that directly led to reductions in store traffic and sales figures in the quarter. The Company continues to actively monitor the situation and will continue to respond as the impact of the COVID-19 pandemic evolves, which will depend on a number of factors including the course of the virus, our customer and employee reactions and any further government actions, none of which can be predicted with any degree of certainty.
Management anticipates that actions taken to date have positioned the Company strongly to weather the current crisis and to take advantage of any accretive opportunities that may arise. Several of the Company's existing attributes are expected to function as operating positions of strength which will act as offsets in the current environment:
- Essential nature of some of the Company's products and services. Household appliances that are necessary to cook and clean have been deemed essential by provincial governments. The Company also owns the largest third-party appliance service company in
Canada , Transglobal Service, that has been operating across the country with enhanced health and safety protocols to protect both our customers and our technicians. - Rapidly scaling our eCommerce business. The Company's eCommerce revenue has grown significantly in the second quarter and continues to increase at an annualized rate of more than 250% subsequent to the quarter end of
June 30, 2020 . Since the Company moved its online stores to the Shopify Plus platform, the eCommerce offering has become a better customer experience and a more interactive offering. The platform has resulted in improved scalability and enabled significant operating leverage, which has and continues to provide a competitive advantage to the Company. - Unencumbered ownership of substantial real estate assets across the country. The Company owns 4.2 million square feet (office, retail, industrial) of approximately 13 million square feet in use today by the Company. This is a significant competitive advantage in the current environment, resulting in a far lower carrying cost for closed stores or other properties than similar leased properties. In addition, the value inherent in this portfolio would enable the Company to readily access additional liquidity to support existing operations and take advantage of accretive opportunities as they arise.
- Solid balance sheet as evidenced by the Company's commitment to repaying over
$440 million in various forms of debt since 2013. The Company has unrestricted liquidity of approximately$490 million as atJune 30, 2020 , with room to expand further if necessary.
On a longer-term basis, we still believe that the underlying Canadian economy remains relatively strong. Although it is difficult to gauge future consumer confidence and what impact it may have on retail, we remain cautiously optimistic that our sales and profitability will increase. Given the Company's strong and continuously improving financial position, our principal objective is to increase our market share and profitability. We remain focused on our commitment to effectively manage our costs but to also continuously invest in digital innovation that we believe will drive more customers to both our online eCommerce presence and our 304 physical locations across
Upcoming Management Changes
Mr.
Store Network
The Company has 304 retail stores in
Number of stores as at | Number of stores as at | |||
Banner | At | Opened | Closed | |
Corporate Stores | ||||
Leon's | 52 | - | - | 52 |
Appliance | 5 | - | - | 5 |
The Brick (1) | 115 | 2 | (2) | 115 |
24 | - | - | 24 | |
9 | - | - | 9 | |
Corporate Subtotal | 205 | 2 | (2) | 205 |
Franchise Stores | ||||
Leon's | 34 | - | - | 34 |
The Brick | 65 | 1 | (1) | 65 |
Franchise Subtotal | 99 | 1 | (1) | 99 |
Total Corporate & Franchise Stores | 304 | 3 | (3) | 304 |
(1) | Includes the Midnorthern Appliance banner. |
Non-IFRS Financial Measures
The Company uses financial measures that do not have standardized meaning under IFRS and may not be comparable to similar measures presented by other entities. The Company calculates the non-IFRS financial measures by adjusting certain IFRS measures for specific items the Company believes are significant, but not reflective of underlying operations in the period, as detailed below:
Non-IFRS Measure | IFRS Measure |
Adjusted net income | Net income |
Adjusted income before income taxes | Income before income taxes |
Adjusted earnings per share - basic | Earnings per share - basic |
Adjusted earnings per share - diluted | Earnings per share - diluted |
Adjusted EBITDA | Net income |
Adjusted Net Income
Leon's calculates comparable measures by excluding the effect of changes in fair value of derivative instruments, related to the net effect of USD-denominated forward contracts and an interest rate swap on the Company's term credit facility. The Company uses forward currency contracts to manage the risk associated with its USD-denominated purchases and an interest rate swap to manage interest rate risk on its term credit facility in accordance with the Company's corporate treasury policy. Management believes excluding from income the effect of these mark-to-market valuations and changes thereto, until settlement, better aligns the intent and financial effect of these contracts with the underlying cash flows.
The following is a reconciliation of reported net income to adjusted net income, basic and diluted earnings per share to adjusted basic and diluted earnings per share:
For the | Three months ended | Six months ended | ||
(C$ in millions except per share amounts) | ||||
Net Income | 47.2 | 25.0 | 60.9 | 34.4 |
After-tax mark-to-market (gain)/loss on financial derivative instruments | - | - | 0.2 | 0.1 |
Adjusted net income | 47.2 | 25.0 | 61.1 | 34.5 |
Basic earnings per share | ||||
Diluted earnings per share | ||||
Adjusted basic earnings per share | ||||
Adjusted diluted earnings per share | ||||
Adjusted EBITDA
Adjusted earnings before interest, income taxes, depreciation and amortization, mark-to-market adjustment due to the changes in the fair value of the Company's financial derivative instruments and any non-recurring charges to income ("Adjusted EBITDA") is a non-IFRS financial measure used by the Company. The Company considers Adjusted EBITDA to be an effective measure of profitability on an operational basis and is commonly regarded as an indirect measure of operating cash flow, a significant indicator of success for many businesses. Adjusted EBITDA is a non-IFRS financial measure used by the Company. The Company's Adjusted EBITDA may not be comparable to the Adjusted EBITDA measure of other companies, but in management's view appropriately reflects LFL's specific financial condition. This measure is not intended to replace net income, which, as determined in accordance with IFRS, is an indicator of operating performance.
The following is a reconciliation of reported net income to adjusted EBITDA:
For the | Three months ended | Six months ended | ||
(C$ in millions) | ||||
Net Income | 47.2 | 25.0 | 60.9 | 34.4 |
Income tax expense | 13.2 | 8.9 | 16.1 | 12.1 |
Net finance costs | 4.8 | 6.7 | 9.6 | 13.0 |
Depreciation and amortization | 27.8 | 30.8 | 55.4 | 62.5 |
Mark-to-market (gain)/loss on financial derivative instruments | (0.1) | - | 0.3 | 0.1 |
Adjusted EBITDA | 92.9 | 71.4 | 142.3 | 122.1 |
Same Store Sales
Same store sales are defined as sales generated by stores, both in store and through online transactions, that have been open for more than 12 months on a fiscal basis. Same store sales are not an earnings measure recognized by IFRS, and does not have a standardized meaning prescribed by IFRS, but it is a key indicator used by the Company to measure performance against prior period results. Same store sales as discussed in this MD&A may not be comparable to similar measures presented by other issuers, however this measure is commonly used in the retail industry. We believe that disclosing this measure is meaningful to investors because it enables them to better understand the level of growth of our business.
Total System Wide Sales
Total system wide sales refer to the aggregation of revenue recognized in the Company's consolidated financial statements plus the franchise sales occurring at franchise stores to their customers which are not included in the revenue figure presented in the Company's consolidated financial statements. Total system wide sales are not a measure recognized by IFRS and does not have a standardized meaning prescribed by IFRS, but it is a key indicator used by the Company to measure performance against prior period results. Therefore, total system wide sales as discussed in this MD&A may not be comparable to similar measures presented by other issuers. We believe that disclosing this measure is meaningful to investors because it serves as an indicator of the strength of the Company's overall store network, which ultimately impacts financial performance.
Franchise Sales
Franchise sales figures refer to sales occurring at franchise stores to their customers which are not included in the revenue figures presented in the Company's consolidated financial statements, or in the same store sales figures in this MD&A. Franchise sales is not a measure recognized by IFRS, and does not have a standardized meaning prescribed by IFRS, but it is a key indicator used by the Company to measure performance against prior period results. Therefore, franchise sales as discussed in this MD&A may not be comparable to similar measures presented by other issuers. Once again, we believe that disclosing this measure is meaningful to investors because it serves as an indicator of the strength of the Company's brands, which ultimately impacts financial performance.
About
Cautionary Statement
This press release may contain forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to vary materially from targeted results. Such risks and uncertainties include those described in
This News Release may include certain "forward-looking statements" which are not comprised of historical facts. Forward-looking statements include estimates and statements that describe the Company's future plans, objectives or goals, including words to the effect that the Company or management expects a stated condition or result to occur. Forward-looking statements may be identified by such terms as "believes", "anticipates", "expects", "estimates", "may", "could", "would", "will", or "plan". Since forward-looking statements are based on assumptions and address future events and conditions, by their very nature they involve inherent risks and uncertainties. Although these statements are based on information currently available to the Company, the Company provides no assurance that actual results will meet management's expectations. Risks, uncertainties and other factors involved with forward-looking information could cause actual events, results, performance, prospects and opportunities to differ materially from those expressed or implied by such forward-looking information. Forward looking information in this news release includes, but is not limited to, the Company's objectives, goals or future plans, and estimates of market conditions. Factors that could cause actual results to differ materially from such forward-looking information include, but are not limited to failure to identify beneficial business opportunities, failure to convert the potential in the pursued business opportunities to tangible benefits to the Company or its shareholders, the ability of the Company to counteract the potential impact of the COVID-19 coronavirus on factors relevant to the Company's business, delays in obtaining or failures to obtain required shareholder and TSX approvals, changes in equity markets, inflation, changes in exchange rates, fluctuations in commodity prices, delays in the development of projects, and those risks set out in the Company's public documents filed on SEDAR. Although the Company believes that the assumptions and factors used in preparing the forward-looking information in this news release are reasonable, undue reliance should not be placed on such information, which only applies as of the date of this news release, and no assurance can be given that such events will occur in the disclosed time frames or at all. The Company disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, other than as required by law.
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