Leon's Furniture Limited - 2012 First Quarter

TORONTO, May 14, 2012 /CNW/ - For the three months ended March 31, 2012, total Leon's sales were $200,651,000 including $43,220,000 of franchise sales ($191,592,000 including $40,809,000 of franchise sales in 2011), an increase of 4.7%. Same store sales were down 0.7% from the prior year first quarter. Net income was $8,599,000, $0.12 per common share ($10,293,000, $0.15 per common share in 2011). The profit decrease in the quarter compared to the prior quarter was mainly due to higher marketing expenses and opening costs related to four new stores that were opened in the latter part of 2011.

Major renovations are well underway in our Sudbury and Sault Ste. Marie, Ontario corporate stores. Our Kentville franchise has recently opened a new and larger replacement store in Coldbrook, Nova Scotia. Construction has also started for a brand new franchise store to replace our existing St. John, New Brunswick store. Finally, the Company has secured sites for four new corporate stores in: Orangeville and Brantford, Ontario; Sherbrooke, Quebec; and Rocky View County, Alberta, which is just north of Calgary. Our current plan is to open these locations during the latter part of 2012 and in 2013.

As previously announced, we paid a quarterly 10¢ dividend on April 5, 2012. Today we are happy to announce that the Directors have declared a quarterly dividend of 10¢ per common share payable on the 6^th day of July 2012 to shareholders of record at the close of business on the 6^th day of June 2012. As of 2007, dividends paid by Leon's Furniture Limited are "eligible dividends" pursuant to the changes to the Income Tax Act under Bill C-28, Canada.

EARNINGS PER SHARE FOR EACH QUARTER

LEON'S FURNITURE LIMITED / MEUBLES LEON LTÉE

Mark J. Leon
Chairman of the Board

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three months ended March 31, 2012 and 2011
Dated: May 14, 2012

The Management's Discussion and Analysis ("MD&A") for Leon's Furniture Limited/Meubles Leon Ltée (the "Company") should be read in conjunction with i) the Company's 2011 audited consolidated financial statements and the related notes and MD&A and ii) the Company's unaudited interim condensed consolidated financial statements for the three months ended March 31, 2012 and the related notes.

Cautionary Statement Regarding Forward-Looking Statements

This MD&A is intended to provide readers with the information that management believes is required to gain an understanding of Leon's Furniture Limited's current results and to assess the Company's future prospects. This MD&A, and in particular the section under heading "Outlook", includes forward-looking statements, which are based on certain assumptions and reflect Leon's Furniture Limited's current plans and expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results and future prospects to differ materially from current expectations. Some of the factors that can cause actual results to differ materially from current expectations are: a continuing slowdown in the Canadian economy; a further drop in consumer confidence; and dependency on product from third party suppliers. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Readers of this report are cautioned that actual events and results may vary.

Financial Statements Governance Practice

Leon's Furniture Limited's unaudited interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and incorporate the requirements of IAS 34, Interim Financial Reporting as issued by the International Accounting Standards Board ("IASB"). The amounts expressed are in Canadian dollars. Per share amounts are calculated using the weighted average number of shares outstanding for the applicable period.

The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the MD&A and the unaudited interim condensed consolidated financial statements, and recommended that the Board of Directors approve them. Following review by the full Board, the unaudited interim condensed consolidated financial statements and MD&A were approved on May 14, 2012.

Introduction

Leon's Furniture Limited has been in the furniture retail business for over 100 years. The Company's 43 corporate and 32 franchise stores can be found in every province across Canada except British Columbia. Main product lines sold at retail include furniture, appliances and electronics.

Revenues and Expenses

For the three months ended March 31, 2012, total Leon's sales were $200,651,000 including $43,220,000 of franchise sales ($191,592,000 including $40,809,000 of franchise sales in 2011), an increase of 4.7%.

Leon's corporate sales of $157,431,000 in the first quarter of 2012, increased by $6,648,000, or 4.4%, compared to the first quarter of 2011.  The increase in sales in the first quarter compared to the prior year was the result of opening four new stores in the latter part of the prior year. Same store sales decreased by 0.7% compared to the prior year.

Leon's franchise sales of $43,220,000 in the first quarter of 2012, increased by $2,411,000 or 5.9%, compared to the first quarter of 2011. The increase in sales in the first quarter compared to the same period in the prior year was mainly the result of opening two new stores in the latter part of 2011. Same store franchise sales increased by 1.6%.

Our gross margin for the first quarter 2012 of 40.8% was down approximately 0.8% from the first quarter of 2011. The decrease in gross margin was mainly attributable to the decline in electronics margins.

Net operating expenses of $53,306,000 were up $4,016,000 or 8.1% for the first quarter 2012 compared to the first quarter of 2011. The increase in operating expenses compared to the prior year were mainly due to two factors; higher costs including marketing, payroll and occupancy as a result of opening four new corporate stores in late 2011, being Guelph, Ontario; Mississauga, Ontario; Rosemère, Quebec; and Regina, Saskatchewan; higher sales commissions expenses as a result of higher sales for the quarter compared to the prior year quarter. Our accounting policy is to expense all new store opening costs as incurred.

As a result of the above, net income for the first quarter of 2012 was $8,599,000, $0.12 per common share ($10,293,000, $0.15 per common share in 2011), a decrease of $0.03 per common share.

Annual Financial Information

Liquidity and Financial Resources

Cash, cash equivalents and available-for-sale financial assets decreased by $25,892,000 in the quarter mainly as a result of dividends paid.

Major renovations are well underway in our Sudbury and Sault Ste. Marie, Ontario corporate stores. Our Kentville franchise has recently opened a new and larger replacement store in Coldbrook, Nova Scotia. Construction has also started for a brand new franchise store to replace our existing St. John, New Brunswick store. Finally, the Company has secured sites for four new corporate stores in: Orangeville and Brantford, Ontario; Sherbrooke, Quebec; and Rocky View County, Alberta, which is just north of Calgary. Our current plan is to open these locations during the latter part of 2012 and 2013. All funding for new store projects and renovations are planned to come from our existing cash resources.

Quarterly Results (2012, 2011, 2010)

Quarterly Income Statement ($000) - except per share data

Common Shares

At March 31, 2012, there were 69,919,120 common shares issued and outstanding. During the first quarter 2012, 19,104 shares were repurchased at an average cost of $12.16 and then cancelled by the Company through its Normal Course Issuer Bid. In addition, during the quarter ended March 31, 2012, 89,668 convertible, non-voting series 2002 shares and 32,822 convertible, non-voting series 2005 shares were converted into common shares. There were 12,237 convertible, non-voting series 2009 shares cancelled. For details on the Company's commitments related to its redeemable shares, please refer to note 13 of the unaudited interim condensed consolidated financial statements.

Commitments

¹The Company is obligated under operating leases to future minimum rental payments for various land and building sites across Canada.

Critical Accounting Estimates and Assumptions

Please refer to Note 4 of the 2011 annual consolidated financial statements for the Company's critical accounting estimates and assumptions.

Pending Changes to Accounting Policies

Several new and amended standards are not yet effective for the Company's interim condensed consolidated financial statements for the three month period ended March 31, 2012.  These pending changes to accounting standards and amendments are the same as those discussed in Note 3 of Leon's 2011 annual consolidated financial statements.  Please refer to the section heading "Accounting standards and amendments issued but not yet adopted" for further details, presented within Note 3 of Leon's 2011 annual consolidated financial statements.

Risks and Uncertainties

For a complete discussion of the risks and uncertainties which apply to the Company's business and operating results please refer to the Company's Annual Information Form dated March 30, 2012 available on www.sedar.com.

Disclosure Controls & Procedures

Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported on a timely basis to senior management, including the Chief Executive Officer and Chief Financial Officer so that appropriate decisions can be made by them regarding public disclosure.

Internal Controls over Financial Reporting

Management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.  All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation. Additionally, management is required to use judgment in evaluating controls and procedures.

Changes in Internal Control over Financial Reporting

Management has also evaluated whether there were changes in the Company's internal control over financial reporting that occurred during the period beginning on January 1, 2012 and ended on March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company has determined that no material changes in internal controls have occurred during this period.

Outlook

The slowdown in the economy which began in 2009 continues to affect our results and we do not see signs of any immediate improvement. As such, we anticipate that consumer discretionary spending will remain soft throughout 2012. To help counter this, we plan an even more robust marketing and merchandising campaign for the balance of 2012. The recent opening of four new stores in the latter part of 2011 should also aid our sales in 2012. Even with these measures in place, growing profits in 2012 will be challenging, but our strong financial position coupled with our experience in adjusting to changing market conditions, provide us with the confidence to adapt to the prevailing economic conditions.

Non-IFRS Financial Measures

In order to provide additional insight into the business, the Company has provided the measure of same store sales, in the revenue and expenses section above.  This measure 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. Comparable store sales are defined as sales generated by stores that have been open or closed for more than 12 months on a yearly basis. The reconciliation between total corporate sales (an IFRS measure) and comparable store sales is provided below:

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the company have been prepared by and are the responsibility of the company's management.

No auditor has performed a review of these financial statements.

Dated as of the 14^th day of May, 2012.

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)
Leon's Furniture Limited

Tabular amounts in thousands of Canadian dollars except shares outstanding and earnings per share

For the three month periods ended March 31, 2012 and 2011

1. GENERAL INFORMATION

Leon's Furniture Limited was incorporated by Articles of Incorporation under the Business Corporations Act on February 28, 1969. Leon's Furniture Limited and its subsidiaries ("Leon's" or the "Company") is a public company with its common shares listed on the Toronto Stock Exchange and is incorporated and domiciled in Canada. The address of the Company's head and registered office is 45 Gordon Mackay Road, Toronto, Ontario, M9N 3X3.

Leon's is a retailer of home furnishings, electronics and appliances across Canada from Alberta to Newfoundland and Labrador. The Company owns a chain of forty-one retail stores operating as Leon's Home Furnishings Super Stores, two retail stores operating under the brand of Appliance Canada and operates an ecommerce internet site www.leons.ca. In addition, the Company has twenty-seven franchisees operating thirty-two Leon's Furniture franchise stores.

2. BASIS OF PRESENTATION

The interim condensed consolidated financial statements of the Company are prepared in accordance with IAS 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB").  These interim condensed consolidated financial statements have been prepared using the same accounting policies and methods of computation as the annual consolidated financial statements of Leon's for the year ended December 31, 2011. The disclosure contained in these interim condensed consolidated financial statements does not include all requirements in IAS 1, Presentation of Financial Statements. Accordingly, the interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2011.

The preparation of interim financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates.  It also requires management to exercise judgment in applying the Company's accounting policies.  The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are consistent with those disclosed in the notes to the annual consolidated financial statements for the year ended December 31, 2011.  Accordingly, certain information and note disclosure normally included in the annual financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the IASB, have been omitted or condensed.  The financial statements of the Company include the financial results of Leon's Furniture Limited and its wholly owned subsidiaries, Murlee Holdings Limited, Leon Holdings (1967) Limited and Ablan Insurance Corporation.

The interim condensed consolidated financial statements have been prepared using the historical cost convention, as modified by certain financial assets measured at fair value through profit or loss. These interim condensed consolidated financial statements were approved and authorized for issuance by the Board of Directors on May 14, 2012.

3. STANDARDS ISSUED BUT NOT EFFECTIVE

Several new and amended standards are not yet effective for the Company's interim condensed consolidated financial statements for the three month period ended March 31, 2012.  These pending changes to accounting standards and amendments are the same as those discussed in Note 3 of Leon's 2011 annual consolidated financial statements.  Please refer to the section heading "Accounting standards and amendments issued but not yet adopted" for further details, presented within Note 3 of Leon's 2011 annual consolidated financial statements.

4. FINANCIAL RISK MANAGEMENT

Classification of financial instruments and fair value

The classification of the Company's financial instruments, as well as, their carrying amounts and fair values are disclosed in the table below.

Fair value hierarchy

The following table classifies financial assets and liabilities that are recognized on the consolidated statements of financial position at fair value in a hierarchy that is based on significance of the inputs used in making the measurements. The levels in the hierarchy are:

Financial risks factors

The Company's activities expose it to a variety of financial risks: market risk (including foreign currency risk, interest rate risk, and other price risk), credit risk and liquidity risk.  Risk management is carried out by the Company by identifying and evaluating the financial risks inherent within its operations.  The Company's overall risk management activities seek to minimize potential adverse effects on the Company's financial performance.

(a)   Market risk

(b)   Credit risk

Credit risk arises from cash and cash equivalents, available-for-sale financial assets and trade receivables. The Company places its cash and cash equivalents and available-for-sale financial assets with institutions of high credit worthiness. Maximum credit risk exposure represents the loss that would be incurred if all of the Company's counterparties were to default at the same time.

The Company has some credit risk associated with its trade receivables as it relates to the Appliance Canada division that is partially mitigated by the Company's credit management practices.

The Company's trade receivables total $17,315,000 as at March 31, 2012 [as at December 31, 2011 - $28,937,000]. The amount of trade receivables that the Company has determined to be past due [which is defined as a balance that is more than 90 days past due] is $85,000 as at March 31, 2012 [as at December 31, 2011 - $191,000] which relates entirely to the Appliance Canada division. The Company's provision for impairment of trade receivables, established through on-going monitoring of individual customer accounts, was $500,000 as at March 31, 2012 [as at December 31, 2011 - $500,000].

The majority of the Company's sales are paid through cash, credit card or non-recourse third-party finance.  The Company relies on one third-party credit supplier to supply financing to its customers.

(c)   Liquidity risk

The Company has no outstanding borrowings and does not rely upon available credit facilities to finance operations or to finance committed capital expenditures.  The portfolio of available-for-sale financial assets consists primarily of actively traded Canadian and international bonds.  There is no immediate need for cash by the Company from its investment portfolio.

The Company expects to settle its trade and other payables within 30 days of the period end date. The redeemable share liability does not have any fixed terms of repayment.

5. CAPITAL RISK MANAGEMENT

The Company defines capital as shareholders' equity.  The Company's objectives when managing capital are to:

• ensure sufficient liquidity to support its financial obligations and execute its operating and strategic plans; and
• utilize working capital to negotiate favourable supplier agreements both in respect of early payment discounts and overall payment terms.

The Company is not subject to any externally imposed capital requirements.

6. CASH AND CASH EQUIVALENTS

7. INVENTORIES

The amount of inventory recognized as an expense for the three month period ended March 31, 2012 was $91,301,000 (period ended March 31, 2011 - $85,873,000) which is presented within cost of sales on the interim consolidated income statements.

During the three month period ended March 31, 2012, there was $125,000 in inventory write-downs (three month period ended March 31, 2011 - $149,000). At March 31, 2012, the inventory markdown provision totaled $4,971,000 (As at December 31, 2011 - $4,846,000). There were no reversals of any write-down for the period ended March 31, 2012 (period ended March 31, 2011 - $nil). None of the Company's inventory has been pledged as security for any liabilities of the Company.

8. PROPERTY, PLANT AND EQUIPMENT

Included in the above balances at March 31, 2012 are assets not being amortized with a net book value of approximately $2,946,000 [as at December 31, 2011 - $2,638,000] being construction-in-progress.

9. INVESTMENT PROPERTIES

The fair value of the investment property portfolio as at March 31, 2012 was approximately $29,750,000 [as at December 31, 2011 - $29,750,000]. The fair value was compiled internally by management based on available market evidence.

10. INTANGIBLE ASSETS

11. TRADE AND OTHER PAYABLES

12. PROVISIONS

(a)     The provision for profit sharing and bonuses is payable within the first half of the following fiscal year.
(b)     The provision for vacation pay represents employee entitlements to untaken vacation at each reporting date.

13. REDEEMABLE SHARE LIABILITY

Under the terms of the Plan, the Company advanced non-interest bearing loans to certain of its employees in 2002, 2005 and 2009 to allow them to acquire convertible, non-voting, series 2002 shares, series 2005 shares and series 2009 shares, respectively, of the Company.  These loans are repayable through the application against the loans of any dividends on the shares, with any remaining balance repayable on the date the shares are converted to common shares.  Each issued and fully paid for series 2002, 2005 and 2009 share may be converted into one common share at any time after the fifth anniversary date of the issue of these shares and prior to the tenth anniversary of such issue.   Series 2002 shares may also be redeemed at the option of the holder or by the Company at any time after the fifth anniversary date of the issue of these shares and must be redeemed prior to the tenth anniversary of such issue.  The series 2005 and series 2009 shares are redeemable at the option of the holder for a period of one business day following the date of issue of such shares.  The Company has the option to redeem the series 2005 and series 2009 shares at any time after the fifth anniversary date of the issue of these shares and must redeem them prior to the tenth anniversary of such issue.  The redemption price is equal to the original issue price of the shares adjusted for subsequent subdivisions of shares plus accrued and unpaid dividends.  The purchase prices of the shares are $7.19 per series 2002 share, $9.44 per series 2005 share and $8.85 per series 2009 share.

Dividends paid to holders of series 2002, 2005 and 2009 shares of approximately $465,000 [2011 - $470,000] have been used to reduce the respective shareholder loans. The preferred dividends are paid once a year during the first quarter.

During the three month period ended March 31, 2012, 89,668 series 2002 shares [three month period ended March 31, 2011 - 71,198] and 32,822 series 2005 shares [three month period ended March 31, 2011 - 45,986] were converted into common shares with a stated value of approximately $644,000 [three month period ended March 31, 2011 - $512,000] and $310,000 [three month period ended March 31, 2011 - $434,000], respectively.

During the three month period ended March 31, 2012, the Company cancelled 12,237 series 2009 shares [three month period ended March 31, 2011 - nil] in the amount of $108,000 [three month period ended March 31, 2011 - $nil].

14. COMMON SHARES

During the three month period ended March 31, 2012, 89,668 series 2002 shares [three month period ended March 31, 2011 - 71,198] and 32,822 series 2005 shares [three month period ended March 31, 2011 - 45,986] were converted into common shares with a stated value of approximately $644,000 [three month period ended March 31, 2011 - $512,000] and $310,000 [three month period ended March 31, 2011 - $434,000], respectively.

During the three month period ended March 31, 2012, the Company repurchased 19,104 [three month period ended March 31, 2011 - 51,274] of its common shares on the open market pursuant to the terms and conditions of Normal Course Issuer Bid at a net cost of approximately $232,000 [three month period ended March 31, 2011 - $715,000].  All shares repurchased by the Company pursuant to its Normal Course Issuer Bid have been cancelled.  The repurchase of common shares resulted in a reduction of share capital in the amount of approximately $2,000 [three month period ended March 31, 2011 - $6,000].  The excess net cost over the average carrying value of the shares of approximately $230,000 [three month period ended March 31, 2011 - $709,000] has been recorded as a reduction in retained earnings.

The dividends paid for the three month periods ended March 31, 2012 and March 31, 2011 were $17,457,000 [$0.25 per share] and $6,310,000 [$0.09 per share] respectively.

15. REVENUE

16. OPERATING EXPENSES BY NATURE

17. INCOME TAX EXPENSE

Income tax expense is recognized based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual rates used for the three month periods ended March 31, 2012 and March 31, 2011 were 26.75% and 28.5%, respectively.

18. EARNINGS PER SHARE

Earnings per share are calculated using the weighted average number of shares outstanding. The weighted average number of shares used in the basic earnings per share calculations amounted to 69,870,782 for the three month period ended March 31, 2012 [three month period ended March 31, 2011 - 70,148,298]

The following table reconciles the profit for the period and the number of shares for the basic and diluted earnings per share calculations:

19. COMMITMENTS AND CONTINGENCIES

20. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS