Coast Wholesale Appliances Income Fund

Coast Wholesale Appliances Income Fund

March 24, 2008 16:15 ET

Coast Wholesale Appliances Income Fund Reports 2007 Fourth Quarter and Year-End Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Dec. 18, 2008) -

Coast Wholesale Appliances Income Fund (TSX: CWA.UN) will host a conference call and webcast to discuss its fourth quarter and year-end financial results on Tuesday, March 25, 2008 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialing: 1-800-733-7560 or 416-644-3414.

A replay will be available through April 8, 2008 at: 1-877-289-8525 or 416-640-1917, Passcode: 21263431 followed by the pound (No.) sign

The live and archived webcast can be accessed at or on the Fund's website at

Coast Wholesale Appliances Income Fund (the Fund) (TSX:CWA.UN) today reported financial results for the three and 12 months ended December 31, 2007. The three-month period represents the fourth quarter of its 2007 fiscal year.

The Fund holds a 65% indirect interest in Coast Wholesale Appliances LP (Coast), a leading independent supplier of major household appliances, and its results are entirely dependent upon Coast's operating results. The remaining 35% interest is held by the previous owner, CWAL Investments Ltd. (CWAL). Distributions to CWAL have been subordinated to those of the public unitholders, subject to the Fund meeting certain EBITDA and cash distribution targets, as set out in its June 15, 2005 prospectus. As anticipated, the conditions for removal of the subordination have been met and the subordination will be removed following the release of the Fund's 2007 year-end audited financial statements.

Performance Highlights

(in thousands of dollars except percentages and per-unit amounts)

Q1 Q2 Q3 Q4 YTD
Sales 31,161 36,809 37,759 37,306 143,035
Gross profit 7,732 9,228 9,495 9,317 35,772
As a percentage of sales 24.8% 25.1% 25.1% 25.0% 25.0%

Net income before
non-controlling interest 2,015 3,209 3,376 2,227 10,827
Basic and diluted net
income per unit 0.200 0.320 0.337 0.222 1.079

EBITDA 2,792 3,884 4,208 3,175 14,059
EBITDA margin 9.0% 10.6% 11.1% 8.5% 9.8%

Adjusted distributable cash 2,555 3,544 3,895 2,434 12,428
Adjusted distributable cash
per unit 0.25 0.36 0.39 0.24 1.24
Distribution per unit 0.30 0.30 0.30 0.31 1.21
Adjusted distribution ratio 117.8% 85.0% 77.3% 126.8% 97.5%

Q1 Q2 Q3 Q4 YTD
Sales 27,717 30,802 34,674 32,762 125,955
Gross profit 6,659 7,710 8,717 8,570 31,656
As a percentage of sales 24.0% 25.0% 25.1% 26.2% 25.1%

Net income before
non-controlling interest 1,843 2,317 3,379 2,836 10,375
Basic and diluted net
income per unit 0.184 0.231 0.337 0.282 1.034

EBITDA 2,747 3,249 4,342 3,832 14,170
EBITDA margin 9.9% 10.5% 12.5% 11.7% 11.3%

Adjusted distributable cash 2,450 2,822 3,987 3,512 12,771
Adjusted distributable cash
per unit 0.24 0.28 0.40 0.35 1.27
Distribution per unit 0.30 0.30 0.30 0.30 1.20
Adjusted distribution ratio 122.9% 106.7% 75.5% 85.7% 94.3%

Fourth quarter operating results

Coast's revenues for the three months ended December 31, 2007 were $37.3 million, up by $4.5 million, or 13.9%, from the $32.8 million recorded in the fourth quarter of 2006. At comparable stores - locations open for more than one year - sales increased by $2.8 million, or 8.4%. New store sales growth during the quarter came from the two Alberta locations added in the first quarter of 2007. Coast opened a second Edmonton store in mid-February and its first Red Deer location at the end of March, bringing its total store count to 15. The Fund's business is divided between direct sales to retail customers, and contract sales to developers and builders. Retail sales growth in the fourth quarter was comparable to the third quarter, but down from the particularly strong growth rates experienced in the first half of 2007 due to more cautious consumer spending. As anticipated, Coast's contract business remained strong in the fourth quarter, particularly in BC.

Fourth quarter cost of sales was $28.0 million, or 75.0% of sales. This resulted in a gross profit of $9.3 million, or 25.0% of sales. By comparison, in the fourth quarter of 2006, cost of sales was $24.2 million, or 73.8% of sales, resulting in a gross profit of $8.6 million, or 26.2% of sales. The lower gross margin in 2007 was mainly due to a year-over-year reduction in annual volume-based supplier rebates. In 2006, Coast received a rebate from a key supplier that effectively increased its fourth quarter gross margin by 1.1%. The Fund did not earn a comparable rebate in 2007, as attaining the necessary volume levels would have required a significant increase in purchases of slower selling merchandise in the fourth quarter.

Coast's fourth quarter EBITDA was $3.2 million, compared to $3.8 million in 2006, while its EBITDA margin of 8.5% was down from 11.7 % in the prior year. The EBITDA margin reduction was due mainly to the loss of the supplier rebate and the impact of generally higher expenses with the growth of Coast's business. Net income before non-controlling interest for the quarter was $2.2 million, or 6.0% of sales, down from $2.8 million, or 8.7% of sales, in 2006.

Twelve-month operating results

For the year ended December 31, 2007, Coast generated record annual revenues of $143.0 million, up by $17.0 million, or 13.6%, from the $126.0 million reported in 2006. Comparable store sales were up by $11.0 million, or 8.7%, over 2006. Similar growth levels were achieved in each of the four western provinces. As with the quarterly result, new store sales growth was concentrated in the Alberta retail market. With the addition of the two new Alberta stores, Coast had expected a slight shift in its overall business mix toward the retail sector in 2007. However, due to the slowing of retail sales growth in the second half and the strong contract sales recorded in the final quarter, annual revenues were again approximately evenly divided between the two sectors.

Cost of sales for the 12 months was $107.3 million, or 75.0% of sales, resulting in a gross profit of $35.8 million, or 25.0% of sales. This compares to cost of sales of $94.3 million, or 74.9% of sales, and a gross profit of $31.7 million, or 25.1% of sales, in 2006. The slight decrease in annual gross margin was mainly due to the lower volume rebates in 2007. This was partially offset by the first half shift in Coast's business mix toward retail sales, which generate a higher margin than contract business. The company also continued to benefit from the new, higher-margin product lines it added in early 2006.

During 2007, Coast's EBITDA decreased slightly to $14.1 million from $14.2 million in 2006, while its EBITDA margin decreased to 9.8% from 11.3% in 2006. As with the quarterly result, the lower EBITDA margin in 2007 was due to reduced supplier rebates and generally higher expenses. Net income before non-controlling interest increased to $10.8 million, or 7.6% of sales, from $10.4 million, or 8.2% of sales, in 2006.

"Although our revenues reached a new high in 2007, they were still below our expectations, due to the moderate slowing of retail sales that occurred in the second half of the year, while our expenses remained on plan," said Blain Lawson, President and CEO of Coast. "As the year unfolded, the difficult economic conditions in the US, coupled with a strengthening Canadian dollar, put pressure on our major suppliers. Retail consumers have become more price conscious, expecting to see an immediate benefit from the strong dollar across our product offerings. However, the strength of the Canadian dollar had no impact on pricing of products from our Asian and European suppliers, and our US suppliers were slow to respond with pricing changes. This delay had a negative impact on our gross margins, because products require approximately 60 days in our pipeline to see the full benefit of any supplier price reductions. To enhance our profitability, we have been working to achieve greater operating efficiency by streamlining our non-selling functions and focussing on driving up our comparable store sales."

In the third quarter of 2007, Coast relocated its Calgary warehouse to a newer, larger facility, which became fully operational in October. During the year, the company also moved forward with plans to relocate its Regina and Abbotsford stores to new, larger premises in higher traffic areas. These relocations are planned for the first and third quarters of 2008, respectively. In addition, by year-end, Coast had substantially completed a major upgrade of its inventory management and computer systems to support the future growth and expansion of its business. The company also launched a new marketing strategy focussed on building consumer awareness of the Coast brand through targeted print and radio advertising in its major markets.

Cash distributions

As previously announced, the Fund increased its monthly cash distribution from $0.10 per unit to $0.1025 per unit, beginning with the October 2007 distribution. Distributions in this amount, which represents an annualized distribution rate of $1.23 per unit, were declared for each of the final three months of 2007. By the end of the fourth quarter, the Fund had paid a total of 30 consecutive monthly cash distributions to its public unitholders, as well as 10 consecutive quarterly cash distributions to the subordinated non-controlling interest held by CWAL.

During the fourth quarter, the Fund earned $2.4 million, or $0.24 per unit, in adjusted distributable cash (before the non-controlling interest). This was down from $3.5 million, or $0.35 per unit, in the same period of 2006. The amount distributed and accrued for payment to unitholders and the non-controlling interest increased in 2007 to $3.1 million, or $0.31 per unit, from $3.0 million, or $0.30 per unit, in 2006.

For the full 2007 fiscal year, the Fund's adjusted distributable cash (before non-controlling interest) totaled $12.4 million, or $1.24 per unit, compared to $12.8 million, or $1.27 per unit, in 2006. The amount distributed and accrued for payment to unitholders and the non-controlling interest increased in 2007 to $12.1 million, or $1.21 per unit, from $12.0 million, or $1.20 per unit in 2006.

The Fund's adjusted payout ratio for 2007 was 97.5%, up from the 94.3% it achieved in 2006. The higher payout ratio in 2007 was due mainly to Coast's increased maintenance capital expenditures in the final quarter of the year. These expenditures were primarily for building and computer systems upgrades necessary to support the future growth of Coast's business. These planned expenditures exceeded the 2006 level by $0.3 million.


In 2008, Coast expects continued sales growth from its existing stores, as well as incremental sales gains from its two new Alberta locations. The company is continuing to actively review opportunities for expansion by increasing its coverage of Western Canada and potentially entering the eastern Canadian market.

"We are cautious, but optimistic, about the outlook for our business," said Lawson. "We have begun to see a strengthening in our retail sales and, now that the dollar is a little more stable, we expect to see a return to more normal historical margins. Although we are still seeing a slowing of single-family housing starts in Western Canada, the multi-family market remains robust and we expect that total housing starts will be close to the record levels of the past two years."

Lawson said the company is continuing to concentrate on increasing sales from its existing stores and enhancing profitability. "We will be working this year to improve our supply chain management in order to reduce our receivables and inventory. We are also strengthening internal controls and further reducing operating expenses by centralizing more of our business functions."

He added that the Fund continues to evaluate the potential impact of the taxation of distributions at the trust level set to begin in 2011, and will determine the most appropriate course of action as more information relating to transition rules becomes available.

A more detailed discussion of the Fund's financial results can be found in its 2007 Management's Discussion and Analysis, which will be posted with audited financial statements at the Fund's website ( and at SEDAR ( on or before March 25, 2008.

Company profile

Coast Wholesale Appliances is a leading independent supplier of major household appliances to developers and builders of multi-family and single-family housing and to retail customers in Western Canada. Founded in 1978, Coast currently operates 15 locations and four warehouse distribution centres across the four western provinces.

Forward-looking statements

This news release may contain forward-looking statements relating to expected future events and financial and operating results of Coast that involve risks and uncertainties. The actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons. These include market and general economic conditions, and the risks and uncertainties detailed from time to time in Coast's continuous disclosure materials filed with Canadian securities regulatory authorities, including the 2007 year-end Management's Discussion and Analysis filed at SEDAR ( These forward-looking statements are based on assumptions that management considered reasonable at the time they were prepared. Due to the potential impact of these factors, Coast disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law.

Non-GAAP Financial Measures

EBITDA, EBITDA margin and adjusted distributable cash are non-GAAP financial measures that are defined in the 2007 year-end Management's Discussion and Analysis posted on the Fund's website and SEDAR.

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