Sterling Shoes Income Fund
TSX : SSI.UN
TSX : SSI.DB

Sterling Shoes Income Fund

March 18, 2010 19:33 ET

Sterling Shoes Income Fund Announces Fourth Quarter and Full Year 2009 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 18, 2010) - Sterling Shoes Income Fund (the "Fund") (TSX:SSI.UN)(TSX:SSI.DB) -

FOURTH QUARTER HIGHLIGHTS:

- Net bank debt improved to $0.9 million at December 31, 2009 from $11.8 million at September 30, 2009

- Sales were $41.2 million in fourth quarter 2009 compared to $42.5 million in 2008

- Gross margin increased to 56.3% of sales in fourth quarter 2009, compared to 56.0% last year

- Store and selling expenses and G&A expenses both decreased in fourth quarter 2009 as a percentage of sales compared to 2008

- Adjusted EBITDA rose to $8.1 million or 19.8% of sales in fourth quarter 2009 compared to $7.8 million or 18.3% of sales in 2008

Sterling Shoes Income Fund today reported its financial results for the fourth quarter and year ended December 31, 2009.

"We are pleased with our fourth quarter performance", said Jeremy Horwitz, President and Chief Executive Officer. "Despite challenging economic conditions and lower sales, Sterling improved gross margins, lowered operating and administrative costs and increased profitability compared to the same period last year. We also reduced inventory levels, changed our product mix, restricted maintenance and capital expenditures, and suspended distributions to Unitholders."

"These actions have improved our cost competitiveness and reduced our net debt, thereby providing us with greater business flexibility. We believe that our business is currently in a much better position to weather future economic volatility than it was twelve months ago. We are also positioning Sterling for sustainable long-term earnings and growth once economic conditions stabilize."

Financial Results for the three months ended December 31, 2009

During the three months ended December 31, 2009, sales declined 3% to $41.2 million from $42.5 million a year earlier. Same store sales declined by 5.6% compared to the same period during 2008.

Cost of sales as a percentage of sales for the three months ended December 31, 2009 was 43.7% compared to 44.0% for the same period during 2008. Efforts to reduce inventory levels during the first three quarters of 2009 allowed Sterling to make room for higher margin inventory, which contributed to higher margins during the three month period ended December 31, 2009. These efforts were offset in part by the cost of heavy promotional activity required to generate sales, clear inventory and respond to competitive forces.

Store and selling expenses for the three months ended December 31, 2009 were 30.7% of sales, compared to 31.5% for the same period during 2008. Store and selling expenses have a fixed underlying core with a large variable component, primarily consisting of expenses relating to occupancy and employee costs. The Fund undertook a comprehensive review of business processes during earlier months which resulted in greater operating flexibility and a reduction of store and selling expenses in the last quarter of 2009. The Fund did not open any new stores during the three months ended December 31, 2009.

General and administrative ("G&A") expenses for the three months ended December 31, 2009 were 5.8% of sales, compared to 6.2% during the same periods in 2008. G&A expenses have been reduced in nearly all cost categories as a result of the Fund's comprehensive review of business processes to manage the business through the current economic volatility.

Net income was $6.2 million for the three months ended December 31, 2009 compared to $6.5 million during the same period in 2008.

Financial Results for the year ended December 31, 2009

Sales for full year 2009 were $131.2 million, an increase of 0.3% over the $130.8 million for 2008. Same store sales declined by 5.7% compared to 2008.

Cost of sales as a percentage of sales for the year ended December 31, 2009 was 52.7% compared to 49.2% in 2008. The following factors contributed to this increase:

- Consumer confidence and the overall retail market (fashion and apparel in particular) were weak. The Fund continued its promotional activity to generate sales, reduce inventory and respond to competitive forces.

- Greater promotional activity in 2009 contributed to weaker gross margins.

- Cost of sales was negatively impacted by the weakness of the Canadian dollar versus the US dollar compared to 2008;

Store and selling expenses for the year ended December 31, 2009 were 35.7% of sales, compared to 35.8% for 2008. The Fund's review of business processes included changes in all areas of our cost structure, particularly store payroll costs.

G&A expenses for the year ended December 31, 2009 were 5.8% of sales, compared to 6.1% during 2008. As mentioned above G&A expenses have been reduced in nearly all cost categories as a result of the Fund's comprehensive review of business processes.

Net loss was $27.6 million for the year ended December 31, 2009 compared to net income of $6.7 million in 2008. This loss was primarily attributed to a $33.2 million non-recurring, non-cash impairment charge to the carrying value of the Fund's goodwill & intangible assets, partially offset by a $4.6 million non-recurring, non-cash recovery of future income taxes.. Excluding these items, the Fund earned net income of $1.0 million in 2009.



STERLING SHOES INCOME FUND
Consolidated Balance Sheets As at As at
(Expressed in thousands of dollars, except per December December
unit and number of unit figures.) 31, 2009 31, 2008
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ASSETS

CURRENT
Cash $ 4,119 $ -
Accounts receivable 195 885
Inventory 36,446 39,892
Prepaid expenses and deposits 187 484
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40,947 41,261
LEASEHOLDS AND EQUIPMENT 19,595 19,996
GOODWILL - 828
INTANGIBLE ASSETS 16,623 49,041
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$77,165 $111,126
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LIABILITIES AND UNITHOLDERS' EQUITY

CURRENT
Bank indebtedness $ - $ 467
Accounts payable and accrued liabilities 15,006 14,951
Distributions payable 0 221
Term loan 5,000 0
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20,006 15,639
FUTURE INCOME TAXES 2,364 7,000
TERM LOAN 0 5,000
CONVERTIBLE DEBENTURES 22,520 21,847
DEFERRED LEASE INDUCEMENTS 2,057 2,234

UNITHOLDERS' EQUITY 30,218 59,406
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$77,165 $111,126
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STERLING SHOES INCOME FUND
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Expressed in
thousands of
dollars, except
per unit and Three-month period ended Twelve-month period ended
number of unit ------------------------- -------------------------
figures.) Dec 31, 2009 Dec 31, 2008 Dec 31, 2009 Dec 31, 2008
----------------------------------- ------------ ------------ ------------


SALES $ 41,195 $ 42,520 $ 131,170 $ 130,767
COST OF SALES 18,011 18,703 69,127 64,306
----------------------------------- ------------ ------------ ------------
GROSS MARGIN 23,184 23,817 62,043 66,461
----------------------------------- ------------ ------------ ------------

EXPENSES
Store and selling 12,664 13,384 46,785 46,784
General and
administrative 2,383 2,646 7,616 8,016
----------------------------------- ------------ ------------ ------------
15,047 16,030 54,401 54,800
----------------------------------- ------------ ------------ ------------
Income before interest,
amortization and
non-controlling
interest 8,137 7,787 7,642 11,661
Interest expense 669 676 2,637 2,322
Loss (Gain) on
disposal of
leaseholds and
equipment 367 - 627 333
Impairment of goodwill
and intangible assets - - 33,246 -
Amortization of
leaseholds and equipment 863 658 3,401 3,006
----------------------------------- ------------ ------------ ------------
INCOME / (LOSS)
BEFORE TAXES 6,238 6,453 (32,269) 6,000

Future income taxes
recovery - - (4,636) (724)
----------------------------------- ------------ ------------ ------------
NET INCOME / (LOSS) AND
COMPREHENSIVE INCOME /
(LOSS) 6,238 6,453 (27,633) 6,724
----------------------------------- ------------ ------------ ------------

Basic net income /
(loss) per unit $ 0.94 $ 0.97 $ (4.16) $ 1.06
Diluted net income /
(loss) per unit 0.82 0.90 (4.16) 1.06

Basic weighted average
number of units
outstanding 6,641,860 6,641,860 6,641,860 6,328,217
Diluted weighted
average number of
units outstanding 7,823,885 7,823,885 7,823,885 7,510,242


STERLING SHOES INCOME FUND
Consolidated Statements of Unitholders' Equity
For the years ended December 31, 2009 and December 31, 2008
(Expressed in thousands of dollars, except per unit and number
of unit figures.)
---------------------------------------------------------------------------
Equity
com-
ponent Accum-
Unit- of Accum- ulated Accum-
holders' Deben- ulated distri- ulated
capital tures earnings butions deficit Total
---------------------------------------------------------------------------

BALANCE,
December 31, 2007 $47,847 2,657 18,909 (22,444) (3,535) $46,969
Reclassification of
Class D LP units from
non-controlling
interest 11,962 4,801 (5,611) (810) 11,152
Re-valuation of
inventory per CICA
Handbook s.3031 3,306 3,306 3,306
Net income for the period 6,724 6,724 6,724
Distributions declared (8,745) (8,745) (8,745)
---------------------------------------------------------------------------
BALANCE,
December 31, 2008 $59,809 2,657 33,740 (36,800) 3,393 $59,406
Net loss for the period (27,633) (27,633) (27,633)
Distributions declared (1,555) (1,555) (1,555)
---------------------------------------------------------------------------
BALANCE,
December 31, 2009 $59,809 2,657 6,108 (38,355) (25,794) $30,218
---------------------------------------------------------------------------
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STERLING SHOES INCOME FUND Three-month Twelve-month
Consolidated Statements of Cash Flows period ended period ended
(Expressed in thousands of dollars, ------------------ ------------------
except per unit and number of unit Dec 31, Dec 31, Dec 31, Dec 31,
figures.) 2009 2008 2009 2008
--------------------------------------------- -------- -------- --------

OPERATING ACTIVITIES
Net Income (Loss) $ 6,238 $ 6,453 $(27,633) $ 6,724
Items not involving cash
Impairment of goodwill and
intangible assets - - 33,246 -
Future income taxes recovery - - (4,636) (724)
Amortization of leaseholds and
equipment 863 658 3,401 3,006
Loss on disposal of leaseholds and
equipment 367 - 627 333
Amortization of deferred lease
inducements (11) (77) (550) (359)
Accreted interest expense 175 158 673 604
Revaluation of inventory per
CICA HB S3031 - - - 3,306
---------------------------------------------------------------------------
7,632 7,192 5,128 12,890
Change in non-cash working capital
balances related to operations
Accounts receivable 456 (373) 690 (112)
Inventory 6,560 5,762 3,445 (10,858)
Prepaid expenses and deposits 213 316 297 524
Accounts payable and accrued
liabilities (3,340) (8,193) 55 (3,464)
---------------------------------------------------------------------------
3,889 (2,488) 4,487 (13,910)
---------------------------------------------------------------------------
Cash provided by / (used in)
operating activities 11,521 4,704 9,615 (1,020)
---------------------------------------------------------------------------

INVESTING ACTIVITIES
Acquisition of leaseholds and
equipment (346) (1,160) (3,626) (6,687)
Lease inducements received 96 676 374 809
---------------------------------------------------------------------------
Cash used in investing activities (250) (484) (3,252) (5,878)
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FINANCING ACTIVITIES
Term loan 5,000 5,000
Operating loan (6,781) (7,338) (467) 467
Payment of distributions (371) (1,882) (1,777) (12,429)
---------------------------------------------------------------------------
Cash used in financing activities (7,152) (4,220) (2,244) (6,962)
---------------------------------------------------------------------------

CASH INFLOW / (OUTFLOW) DURING THE
PERIOD 4,119 - 4,119 (13,860)

CASH, BEGINNING OF PERIOD - - - 13,860
---------------------------------------------------------------------------
CASH, END OF PERIOD $ 4,119 $ - $ 4,119 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $ 906 $ 817 $ 1,963 $ 1,749
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Conference Call Notification

Please note the Fund's conference call will take place at 9:00 am Pacific standard time (12:00 pm EST) on Friday, March 19, 2010. The number to participate in the teleconference is Toll-free: 866-226-1792 or 416-340-2216. To ensure your participation, please call in about five minutes before the start of the call. For those unable to participate, a telephone replay will be available until April 2, 2010 using the passcode 3471300 at 800-408-3053 or 416-695-5800.

Forward-looking statements

Certain statements in this press release may constitute "forward-looking" statements that involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this press release, such statements often use, but are not limited to, such words as "may", "will", "expect", "should", "believe", "intend", "plan", "anticipate", "potential", and other similar terminology. These statements reflect current expectations of management regarding future events and operating performance and speak only as of the date of this press release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved.
A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the following factors: general economic conditions and markets and, in particular, the potential impact of the current economic downtown, the cost and availability of capital, the possibility of deterioration in the Company's working capital position, the impact on the Company's liquidity if it were to go offside of the covenants in its debt facilities, our ability to maintain profitability and manage growth, risks associated with leasing and expansion, competition, inventory and sourcing risk, ability to identify and respond to changing consumer fashion preferences, risks associated with international purchasing, reliance on key personnel, dependence on consumer spending, unseasonable weather conditions, uncertainties arising from world events, intellectual property risks, foreign exchange fluctuations on imported merchandise, labour relations, seasonality and fluctuations in cash distributions, fluctuations in distributable cash based on our performance, restrictions on potential growth, future issuances of Units by the Fund or future disposition of Units held by SSI Investments Inc., income tax matters, and increases in interest rates. The actual timing of and number of additional store openings could differ materially from what is described herein if Sterling is unable to reach timely and satisfactory agreements with the various landlords as to the final lease documentation, to secure adequate labour and materials to construct the stores, to deliver sufficient inventory, to adapt its operational systems, or to hire, train and integrate employees. Although the forward-looking statements contained in this press release are based upon what our management believes to be reasonable assumptions, we cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this press release and we assume no obligation to update or revise them to reflect new events or circumstances.

About Sterling Shoes Income Fund

Sterling is a leading Vancouver-based footwear retailer offering a broad selection of private label and brand name shoes and accessories in five Canadian provinces through its six separate retail banners: Sterling, Joneve, Shoe Warehouse, Freedman Shoes and Gia. Since 1987, Sterling Shoes has grown from five shopping mall locations to 162 stores (as at March 18, 2010 located in high-traffic, high-visibility locations within enclosed shopping malls, on high streets and in strip malls. The Fund currently employs over 1,300 employees. The Fund's units are listed on the Toronto Stock Exchange under the symbol SSI.UN. The Fund's convertible debentures are listed on the Toronto Stock Exchange under the symbol SSI.DB.

For further information, please visit us at www.SterlingShoesIncomeFund.com.

Additional information about Sterling Shoes Income Fund can be found in the disclosure documents filed by Sterling Shoes Income Fund with the securities regulatory authorities, available at www.sedar.com.

Contact Information