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

Sterling Shoes Income Fund

August 10, 2009 08:00 ET

Sterling Shoes Income Fund Announces Second Quarter 2009 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 10, 2009) - Sterling Shoes Income Fund (the "Fund") (TSX:SSI.UN)(TSX:SSI.DB) today reported its financial results for the quarter ended June 30, 2009.

"This quarter's results reflect the difficult retail sales environment that we are operating in," said Jeremy Horwitz, President and Chief Executive Officer.

"The continuing recession has resulted in lower sales due to consumers cutting back on discretionary spending. In response to consumer and competitive pressures the retail atmosphere has become more promotional than previous seasons. Management is continuing its efforts to conserve cash through aggressive cost reductions and inventory management. During the second quarter 2009, we improved our inventory position by approximately 8%, on a units per store basis, compared to the same time last year. We believe our efforts will steer Sterling towards sustainable long-term earnings and growth once economic conditions stabilize."

Financial Results for the three months ended June 30, 2009

During the second quarter of 2009, sales rose 4.1% to $30.6 million from $29.4 million in the same period last year. Same store sales fell by 4.6% for the three-month period ended June 30, 2009 compared to the same period in 2008.

Cost of sales as a percentage of sales for the three months ended June 30, 2009 was 54.4% compared to 49.0% for the same period during 2008. Due to unfavourable economic conditions during the quarter-ended June 30, 2009 more promotional activity took place during that quarter than during the same period in 2008 which contributed to weaker gross margin.

Cost of sales was also impacted by the deterioration of the Canadian dollar versus the U.S. dollar earlier in 2009. Substantially all footwear sold in Canada is manufactured outside of Canada. Consequently, the cost of substantially all of our purchases is exposed to currency fluctuations. During the three and six-month periods ended June 30, 2009, approximately 43% and 34% of product purchases were denominated in U.S. dollars, respectively. During the quarter ended June 30, 2009 the Canadian dollar was worth approximately 16% less against the U.S. dollar than during the same period in 2008. This has increased purchase prices, inventory valuation and cost of sales.

Store and selling expenses for the three months ended June 30, 2009 were 37.1% of sales, compared to 36.6% 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. General and administrative ("G&A") expenses for the three-months ended June 30, 2009 were 5.4% of sales, no change from the same period in 2008. We continue to review business processes to seek ways to reduce overall costs.

Adjusted EBITDA for the three-months ended June 30, 2009 was 2.2% of sales compared to 8.8% for the same period during 2008.

Financial Results for the six months ended June 30, 2009

For the six-month period ended June 30, 2009, sales rose 7.2% to $58.3 million from $54.4 million in the same period last year. Same store sales fell by 2.1% for the six-month period ended June 30, 2009 compared to the same period in 2008.

Cost of sales as a percentage of sales for the six months ended June 30, 2009 was 55.5% compared to 52.0% for the same period during 2008, for reasons similar to those impacting the three-month period ending June 30, 2009.

Store and selling expenses for the six months ended June 30, 2009 were 38.8% of sales, compared to 39.2% for the same period during 2008. Store and selling expenses have fallen as a percentage of sales year-to-date as a result of management's actions to reduce costs. Reducing store payroll costs, as a percentage of sales is a key area of focus in this current economic climate.

General and administrative ("G&A") expenses for the six-months ended June 30, 2009 were 5.7% of sales, compared to 6.7% for the same period in 2008. G&A expenses have been reduced in nearly all cost categories as a result of our comprehensive review of business processes to manage the business through the current economic volatility.

Adjusted EBITDA for the six-months ended June 30, 2009 was negative 0.8% of sales compared to 2.0% for the same period during 2008. The decrease in adjusted EBITDA over the same period in the previous year is due to the decline in profitability discussed.



STERLING SHOES INCOME FUND
Consolidated Balance Sheets As at As at
(Unaudited - Expressed in thousands of dollars, June December
except per unit and number of unit figures.) 30, 2009 31, 2008
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ASSETS

CURRENT
Cash $ - $ -
Accounts receivable 313 885
Inventory 39,185 39,892
Prepaid expenses and deposits 436 484
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39,934 41,261
LEASEHOLDS AND EQUIPMENT 20,420 19,996
GOODWILL 828 828
INTANGIBLE ASSETS 49,041 49,041
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$ 110,223 $ 111,126
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LIABILITIES AND UNITHOLDERS' EQUITY

CURRENT
Bank indebtedness $ 3,658 $ 467
Accounts payable and accrued liabilities 14,993 14,951
Distributions payable 124 221
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18,775 15,639
FUTURE INCOME TAXES 7,000 7,000
TERM LOAN 5,000 5,000
CONVERTIBLE DEBENTURES 22,174 21,847
DEFERRED LEASE INDUCEMENTS 1,881 2,234

UNITHOLDERS' EQUITY 55,393 59,406
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$ 110,223 $ 111,126
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STERLING SHOES INCOME FUND
Consolidated Statements of
Income and Comprehensive
Income Three-month period Six-month period
(Unaudited - Expressed in ended ended
thousands of dollars, ---------------------- ----------------------
except per unit and June 30, June 30, June 30, June 30,
number of unit figures.) 2009 2008 2009 2008
--------------------------------------- ---------- ---------- ----------
--------------------------------------- ---------- ---------- ----------

SALES $ 30,618 $ 29,405 $ 58,290 $ 54,353
COST OF SALES 16,667 14,395 32,341 28,270
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GROSS MARGIN 13,951 15,008 25,949 26,083
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EXPENSES
Store and selling 11,364 10,768 22,620 21,289
General and administrative 1,654 1,574 3,342 3,634
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13,018 12,340 25,962 24,922
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Income before interest,
amortization and
non-controlling interest 933 2,668 (13) 1,161
Interest expense 644 690 1,296 1,152
Loss (Gain) on disposal of
leaseholds and equipment 168 333 232 333
Amortization of leaseholds
and equipment 772 779 1,535 1,530
--------------------------------------- ---------- ---------- ----------
(LOSS) / INCOME BEFORE TAXES (651) 866 (3,076) (1,856)

Future income taxes recovery - - - (724)
--------------------------------------- ---------- ---------- ----------
NET (LOSS) / INCOME AND
COMPREHENSIVE (LOSS) / INCOME (651) 866 (3,076) (1,132)
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Basic and diluted net
(loss) / income per unit $ (0.10) $ 0.13 $ (0.46) $ (0.19)

Basic weighted average
number of units
outstanding 6,641,860 5,313,488 6,641,860 5,313,488
Diluted weighted average
number of units
outstanding 7,823,885 6,641,860 7,823,885 6,641,860


STERLING SHOES INCOME FUND
Consolidated Statements of Unitholders' Equity For the six month period
ended June 30, 2009
(Unaudited - expressed in thousands of dollars, except per unit and number
of unit figures.)
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Equity Accumu-
Unit- component Accumu- lated Accumu-
holders' of Deben- lated distri- lated
capital tures earnings butions deficit Total
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BALANCE,
December 31,
2007 $ 47,847 2,657 18,909 (22,444) (3,535) $ 46,968
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
(note 2) 3,306 0 3,306 3,306
Net loss for
the period (1,131) - (1,131) (1,131)
Distributions
declared - (4,981) (4,981) (4,981)
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BALANCE, June
30, 2008 $ 59,809 2,657 25,885 (33,037) (7,152) $ 55,314
Net income for
the period - - 7,855 - 7,855 7,855
Distributions
declared - - - (3,764) (3,764) (3,764)
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BALANCE,
December 31,
2008 $ 59,809 2,657 33,740 (36,800) (3,060) $ 59,406
Net loss for
the period - - (3,076) - (3,076) (3,076)
Distributions
declared - - - (937) (937) (937)
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BALANCE, June
30, 2009 $ 59,809 2,657 30,665 (37,738) (7,073) $ 55,393
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STERLING SHOES INCOME FUND
Consolidated Statements of
Cash Flows Three-month period Six-month period
(Unaudited - Expressed in ended ended
thousands of dollars, ---------------------- ----------------------
except per unit and June 30, June 30, June 30, June 30,
number of unit figures.) 2009 2008 2009 2008
--------------------------------------- ---------- ---------- ----------
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OPERATING ACTIVITIES
Net (Loss) Income $ (651) $ 866 $ (3,076) $ (1,131)
Items not involving cash
Future income taxes
recovery - - - (724)
Amortization of leaseholds
and equipment 772 779 1,535 1,530
Loss on disposal of
leaseholds and equipment 168 333 232 -
Amortization of deferred
lease inducements (250) (95) (438) (184)
Accreted interest expense 167 295 327 429
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206 2,178 (1,420) 253

Change in non-cash working
capital balances related to
operations
Accounts receivable 151 75 572 556
Inventory 5,087 (14) 707 (7,730)
Revaluation of inventory
per CICA HB S3031 (note 2) - - - 3,306
Prepaid expenses and deposits 170 (76) 48 (23)
Accounts payable and accrued
liabilities (5,046) (4,763) 42 (594)
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362 (4,778) 1,369 (4,485)
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Cash provided by / (used in)
operating activities 568 (2,600) (51) (4,232)
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INVESTING ACTIVITIES
Acquisition of leaseholds
and equipment (991) (2,095) (2,190) (3,689)
Lease inducements received 53 58 85 132
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Cash used in investing
activities (938) (2,037) (2,105) (3,557)
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FINANCING ACTIVITIES
Operating loan 741 1,985 3,191 1,985
Payment of distributions (371) (2,823) (1,035) (8,056)
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Cash provided by / (used in)
financing activities 370 (838) 2,156 (6,071)
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CASH INFLOW OUTFLOW DURING
THE PERIOD - (5,475) - (13,860)

CASH, BEGINNING OF PERIOD - 5,475 - 13,860
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CASH, END OF PERIOD $ - $ - $ - $ -
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Supplemental cash flow
information
Interest paid $ 876 $ 932 $ 961 $ 932
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Conference Call Notification

Please note the Fund's conference call will take place at 11:00 am Pacific standard time (2:00 pm EDT) on Tuesday, August 11, 2009. The number to participate in the teleconference is Toll-free: 866-223-7781 or 416-641-6124. 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 August 25, 2009 using the passcode 5156106 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, changes in accounting standards, including the transition to IFRS, 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 160 stores (as at August 7, 2009) located in high-traffic, high-visibility locations within enclosed shopping malls, on high streets and in strip malls. The Fund currently employs over 1,000 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.

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.

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