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

Sterling Shoes Income Fund

November 16, 2009 18:55 ET

Sterling Shoes Income Fund (TSX:SSI.UN): Fund Announces Third Quarter 2009 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 16, 2009) - Sterling Shoes Income Fund (the "Fund") (TSX:SSI.UN)(TSX:SSI.DB) today reported its financial results for the quarter ended September 30, 2009.

"The continuing recession resulted in weaker sales within our industry and increased promotional activity due to reduced consumer discretionary spending. The Fund's performance followed the same pattern. Rising unemployment rates in our key markets, most notably British Columbia, Ontario and Alberta, as well as unseasonable weather conditions throughout most of Canada, negatively impacted sales," said Jeremy Horwitz, President and Chief Executive Officer.

"Management is continuing its efforts to conserve cash through aggressive cost reductions and inventory management. During the third quarter 2009, we improved our inventory position by approximately 12%, 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."

The Fund today announced that its Board of Trustees has approved a cash distribution of $0.01862 per trust unit for the period from November 1, 2009 to November 30, 2009, payable on December 15, 2009 to unitholders of record at the close of business on November 30, 2009. Sterling Shoes is continuing to pay equivalent distributions to the exchangeable LP units of the Partnership.

Financial Results for the three months ended September 30, 2009

During the three months ended September 2009, sales decreased 6.5% to $31.7 million from $33.9 million in the same period last year. Same store sales fell by 12.8% for the three-month period ended September 30, 2009 compared to the same period in 2008. Sales reductions reflect current weak economic conditions.

Cost of sales as a percentage of sales for the three months ended September 30, 2009 was 59.3% compared to 51.1% for the same period during 2008. Due to unfavourable economic conditions during the quarter-ended September 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 either directly or indirectly. During the three and nine-month periods ended September 30, 2009, approximately 54% and 47% of product purchases were denominated in U.S. dollars, respectively. During the quarter ended September 30, 2009 the Canadian dollar was worth approximately 12% less against the U.S. dollar than during the same period in 2008 which increased purchase prices, inventory valuation and cost of sales.

Store and selling expenses for the three months ended September 30, 2009 were 36.3% of sales, compared to 35.7% 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 September 30, 2009 were 6.0% of sales, compared to 5.1% from the same period in 2008 largely due to higher computer maintenance costs this year. We continue to review business processes to seek ways to reduce overall costs.

Adjusted EBITDA for the three-months ended September 30, 2009 was negative $0.6 million compared to $2.6 million for the same period during 2008 for the reasons cited above.

During 2008 and 2009, the global economic and financial crisis has significantly impacted the Canadian economy. This crisis has resulted in reduced liquidity in the financial markets, increased unemployment rates, decreased consumer confidence and adversely affected the retail industry. The erosion of the Fund's valuation is primarily a result of these factors, future economic uncertainty and the higher cost of capital assumptions in the valuation methodology contributed to the impairment charges against the Fund's goodwill and intangible asset balances at September 30, 2009.

The Fund undertook a detailed analysis in its determination of the fair value of its intangible assets. As a result of this analysis, the Fund incurred an impairment charge of $33.2 million for the three-months ended September 30, 2009. This is a non-cash charge.

Financial Results for the nine months ended September 30, 2009

For the nine-month period ended September 30, 2009, sales rose 2.0% to $90.0 million from $88.2 million in the same period last year. Same store sales fell by 5.7% for the nine-month period ended September 30, 2009 compared to the same period in 2008.

Cost of sales as a percentage of sales for the nine months ended September 30, 2009 was 56.8% compared to 51.7% for the same period during 2008, for reasons similar to those impacting the three-month period ending September 30, 2009.

Store and selling expenses for the nine months ended September 30, 2009 were 37.9% of sales, compared to 37.8% for the same period during 2008. This stabilization reflects our focus on reducing store payroll.

General and administrative ("G&A") expenses for the nine-months ended September 30, 2009 were 5.8% of sales, compared to 6.1% 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 nine-months ended September 30, 2009 was negative $1.0 million compared to $3.6 million for the same period during 2008 due to weaker gross margins.



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

ASSETS

CURRENT
Cash $ - $ -
Accounts receivable 649 885
Inventory 43,005 39,892
Prepaid expenses and deposits 400 484
-------------------------------------------------------------- ----------
44,054 41,261

LEASEHOLDS AND EQUIPMENT 20,479 19,996
GOODWILL - 828
INTANGIBLE ASSETS 16,623 49,041
-------------------------------------------------------------- ----------
$ 81,156 $ 111,126
-------------------------------------------------------------- ----------
-------------------------------------------------------------- ----------

LIABILITIES AND UNITHOLDERS' EQUITY

CURRENT
Bank indebtedness $ 6,781 $ 467
Accounts payable and accrued liabilities 18,346 14,951
Distributions payable 124 221
-------------------------------------------------------------- ----------
25,251 15,639

FUTURE INCOME TAXES 2,364 7,000
TERM LOAN 5,000 5,000
CONVERTIBLE DEBENTURES 22,343 21,847
DEFERRED LEASE INDUCEMENTS 1,972 2,234

UNITHOLDERS' EQUITY 24,226 59,406
-------------------------------------------------------------- ----------
$ 81,156 $ 111,126
-------------------------------------------------------------- ----------
-------------------------------------------------------------- ----------


STERLING SHOES INCOME FUND
Consolidated Statements of Income and Comprehensive Income
(Unaudited -
Expressed
in thousands of
dollars, except Three-month period ended Nine-month period ended
per unit ------------------------ ---------------------------
and number of Sept 30, Sept 30, Sept 30, Sept 30,
unit figures.) 2009 2008 2009 2008
------------------------------- --------- ----------- ------------

SALES $ 31,685 $ 33,895 $ 89,975 $ 88,248
COST OF SALES 18,777 17,333 51,117 45,603
------------------------------- --------- ----------- ------------
GROSS MARGIN 12,908 16,561 38,858 42,646
------------------------------- --------- ----------- ------------

EXPENSES
Store and selling 11,502 12,112 34,122 33,400
General and
administrative 1,892 1,736 5,232 5,370
------------------------------- --------- ----------- ------------
13,394 13,846 39,354 38,769
------------------------------- --------- ----------- ------------
Income before
interest, amortization
and non-controlling
interest (486) 2,714 (496) 3,877
Interest expense 672 494 1,968 1,647
Loss (Gain) on
disposal of leaseholds
and equipment 26 - 260 333
Impairment of goodwill
and intangible assets 33,246 - 33,246 -
Amortization of
leaseholds and
equipment 1,002 818 2,538 2,348
------------------------------- --------- ----------- ------------
(LOSS) / INCOME BEFORE
TAXES (35,432) 1,402 (38,508) (452)

Future income taxes
recovery (4,636) - (4,636) (724)
------------------------------- --------- ----------- ------------
NET (LOSS) / INCOME
AND COMPREHENSIVE
(LOSS) / INCOME (30,796) 1,402 (33,872) 272
------------------------------- --------- ----------- ------------
------------------------------- --------- ----------- ------------

Basic and diluted net
(loss) / income per
unit $ (4.64) $ 0.21 $ (5.10) $ 0.04

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 nine month period ended September 30, 2009
(Unaudited - 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
(note 2) 3,306 3,306 3,306
Net income for the
period 271 - 271 271
Distributions declared - (7,472) (7,472) (7,472)
---------------------------------------------------------------------------
BALANCE,
September 30, 2008 $59,809 2,657 27,287 (35,527) (8,240) $54,226
Net income for the
period - - 6,453 - 6,453 6,453
Distributions declared - - - (1,273) (1,273) (1,273)
---------------------------------------------------------------------------
BALANCE,
December 31, 2008 $59,809 2,657 33,740 (36,800) (3,060) $59,406
Net loss for the period - - (33,872) - (33,872) (33,872)
Distributions declared - - - (1,308) (1,308) (1,308)
---------------------------------------------------------------------------
BALANCE,
September 30, 2009 $59,809 2,657 (132) (38,108) (38,240) $24,226
---------------------------------------------------------------------------
---------------------------------------------------------------------------


STERLING SHOES INCOME FUND
Consolidated Statements
of Cash Flows Three-month Nine-month
(Unaudited - Expressed in period ended period ended
thousands of dollars, ------------------ ------------------
except per unit and Sept 30, Sept 30, Sept 30, Sept 30,
number of unit figures.) 2009 2008 2009 2008
---------------------------------------------------------------------------
---------------------------------------------------------------------------

OPERATING ACTIVITIES
Net (Loss) Income $(30,796) $ 1,402 $(33,872) $ 271
Items not involving cash
Impairment of goodwill and
intangible assets 33,246 - 33,246 -
Future income taxes recovery (4,636) - (4,636) (724)
Amortization of leaseholds and
equipment 1,002 818 2,538 2,348
Loss on disposal of leaseholds
and equipment 26 - 260
Amortization of deferred lease
inducements (101) (97) (539) (282)
Accreted interest expense 169 17 496 446
---------------------------------------------------------------------------
(1,090) 2,140 (2,507) 2,392
Change in non-cash working
capital balances
related to operations
Accounts receivable (336) (295) 236 261
Inventory (3,820) (8,889) (3,114) (16,620)
Revaluation of inventory
per CICA HB S3031 - - - 3,306
Prepaid expenses and deposits 36 231 84 207
Accounts payable and accrued
liabilities 3,353 5,322 3,395 4,729
---------------------------------------------------------------------------
(767) (3,631) 601 (8,117)
---------------------------------------------------------------------------
Cash (used in) / provided by
operating activities (1,857) (1,491) (1,906) (5,725)
---------------------------------------------------------------------------

INVESTING ACTIVITIES
Acquisition of leaseholds
and equipment (1,087) (1,840) (3,279) (5,527)
Lease inducements received 192 0 277 132
---------------------------------------------------------------------------
Cash used in investing activities (895) (1,840) (3,002) (5,395)
---------------------------------------------------------------------------

FINANCING ACTIVITIES
Operating loan 3,123 5,822 6,314 7,807
Payment of distributions (371) (2,491) (1,406) (10,547)
---------------------------------------------------------------------------
Cash provided by / (used in)
financing activities 2,752 3,331 4,908 (2,740)
---------------------------------------------------------------------------

CASH OUTFLOW DURING THE PERIOD - - - (13,860)
-
CASH, BEGINNING OF PERIOD - - - 13,860
---------------------------------------------------------------------------
CASH, END OF PERIOD $ - $ - $ - $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $ 96 $ 71 $ 1,142 $ 932
----------------------------------------------------------------------------


Conference Call Notification

Please note the Fund's conference call will take place at 11:00 am Pacific standard time (2:00 pm EST) on Tuesday, November 17, 2009. 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 December 1, 2009 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, 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 162 stores (as at November 16, 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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