Coast Wholesale Appliances Inc.
TSX : CWA

Coast Wholesale Appliances Inc.

March 17, 2011 16:05 ET

Coast Wholesale Appliances Inc. Reports 2010 Fourth Quarter and Year-End Results

Modest Annual Retail Sales Growth Offset by Reduced Contract Sales; Coast Improves Gross Margin Percentage Year-Over-Year, Strengthens Balance Sheet

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 17, 2011) - Coast Wholesale Appliances Inc. (TSX:CWA) -

Coast Wholesale Appliances Inc. will host a conference call and webcast to discuss its fourth quarter and 12-month financial results on Friday, March 18, 2011 at 8:00 am Pacific Time (11:00 am Eastern). The call can be accessed by dialing: 1-888-340-9655 or 416-340-2219 (GTA).

A replay will be available through April 1, 2011 at: 1-800-408-3053 or 416- 695-5800. Passcode 1701632.

The live and archived webcast, as well as an mp3 download, can be accessed at http://www.investorcalendar.com/IC/CEPage.asp?ID=163811 or on the Fund's website at www.coastwholesaleappliancesinc.com.

Coast Wholesale Appliances Inc. (Coast), formerly Coast Wholesale Appliances Income Fund (the Fund), today reported financial results for the three and 12 months ended December 31, 2010. The three-month period represents the fourth quarter of its 2010 fiscal year.

Performance Highlights

(in thousands of dollars except percentages and per-unit amounts)            
  2010 2009 2008 2010 2009 2008
  Q4 Q4 Q4 Fiscal Year Fiscal Year Fiscal Year
Sales 32,790 35,617 36,077 135,251 144,050 146,750
Gross margin 8,186 8,768 9,200 33,606 34,132 36,766
As a percentage of sales 25.0% 24.6% 25.5% 24.8% 23.7% 25.1%
Income before non-controlling interest 1,212 1,670 1,959 5,621 6,962 8,993
Basic and diluted net income per unit 0.121 0.166 0.195 0.560 0.694 0.896
             
EBITDA before conversion costs 2,099 2,587 3,356 8,919 10,472 12,702
EBITDA margin before conversion costs 6.4% 7.3% 9.3% 6.6% 7.3% 8.7%
EBITDA per unit before conversion costs 0.209 0.258 0.334 0.889 1.044 1.266
             
EBITDA 1,887 2,587 3,356 8,321 10,472 12,702
EBITDA margin 5.8% 7.3% 9.3% 6.2% 7.3% 8.7%
EBITDA per unit 0.188 0.258 0.334 0.829 1.044 1.266
             
Maintenance capital expenditures 124 123 171 280 725 912
Adjusted distributable cash 1,588 2,172 2,876 7,091 8,468 10,731
Adjusted distributable cash per unit 0.158 0.216 0.287 0.707 0.844 1.070
Distribution per unit 0.125 0.166 0.250 0.499 0.582 1.173
Adjusted distribution ratio 78.8% 76.9% 87.2% 70.6% 69.0% 109.6%

Fourth Quarter Operating Results

During the fourth quarter, Coast generated sales revenue of $32.8 million, a 7.9% decrease from the $35.6 million reported in 2009. Retail sales dropped off somewhat from the level achieved in the third quarter and were also down from the robust retail sales recorded in Q4 2009. In the contract segment, Coast continued to see strong sales to builders of single-family homes in the Alberta and Saskatchewan markets. However, its contract business in British Columbia continued to be negatively affected by a generally reduced flow of new projects, particularly in the multi-family sector. As a result, contract sales were down from the 2009 level. Consequently, Coast's sales blend continued to favour retail business.

In British Columbia, the softening of Coast's contract business and moderation of its retail sales brought revenues down considerably from the fourth quarter of 2009. Sales in Alberta and Saskatchewan benefited from the increase in single-family home construction activity, rising above the 2009 levels. Sales in Manitoba decreased slightly from the 2009 level, and sales at Coast's Greater Toronto Area (GTA) store were also below the prior year level.

Coast's fourth quarter gross margin decreased to $8.2 million from $8.8 million in 2009, but increased as a percentage of sales to 25.0% from 24.6% last year. The 0.4% improvement in gross margin percentage was mainly due to the shift in sales mix in favour of retail business, which typically generates a higher margin than contract sales to developers and builders.

The drop in gross margin dollars brought fourth quarter EBITDA, before costs of $0.2 million associated with Coast's conversion to a corporation, down to $2.1 million from $2.6 million in 2009. EBITDA margin for the three months decreased to 6.4% from 7.3% in 2009. EBITDA after conversion costs was $1.9 million, representing an EBITDA margin of 5.8%. The lower gross margin and the conversion costs that were incurred during these three months reduced fourth quarter net income before non-controlling interest to $1.2 million, or 3.7% of sales, from $1.7 million, or 4.7% of sales, in 2009.

Full-Year Operating Results

Revenue for the 12 months ended December 31, 2010 was $135.3 million, down by 6.1% from $144.1 million in 2009. Gross margin declined modestly to $33.6 million from $34.1 million, but improved as a percentage of sales to 24.8% from 23.7% in 2009. As with the quarterly result, the annual improvement was driven by the shift in Coast's business mix in favour of retail sales.

Before the $0.6 million of conversion costs that were incurred in 2010, EBITDA for the 12 months was $8.9 million. This was down by $1.6 million from the $10.5 million reported in 2009. EBITDA margin decreased to 6.6% from 7.3% in 2009. The reduction in full-year EBITDA was due to the decrease in gross margin dollars and increased selling, warehouse, facility, and general and administrative (SG&A) expenses in 2010. The higher SG&A expenses related mainly to sales and marketing initiatives at Coast's GTA store, the relocation of its Edmonton North store, rent increases in conjunction with lease renewals at six stores and the consolidation of its Vancouver and Burnaby warehouses. EBITDA after conversion costs was $8.3 million, representing an EBITDA margin of 6.2%.

Net income before non-controlling interest was $5.6 million, or 4.2% of sales, compared to $7.0 million, or 4.8% of sales, in 2009. The reduction in net income was mainly due to the decrease in gross margin dollars, the increase in SG&A expenses and the conversion costs.

During 2010, Coast expanded its product offering with the introduction of the Bosch and Thermador brands at selected locations. It expects that the addition of these products will generate incremental revenues in both the contract and retail segments of its business. As part of its ongoing strategy to enhance profitability by increasing sales from its existing stores, Coast completed a minor upgrade to its Calgary South location in the fourth quarter of 2010.

Coast also strengthened its balance sheet in 2010 by repaying the $2.0 million remaining balance on its acquisition term debt in the second quarter and reducing its term debt by an additional $2.0 million in the third quarter. The $4.0 million debt repayment resulted in decreased interest expense in the second half of the year and will reduce interest costs going forward.

"Our results for 2010 reflect the year's generally uncertain business environment and the slowing of the economic recovery in Canada in the second half," said Harlow Burrows, interim President and CEO of Coast and a member of its Board of Directors. "Consumer confidence declined significantly through the third and fourth quarters, considerably reducing the levels of retail traffic in our stores, particularly in BC. In the contract segment, while we have benefited from increased sales to single-family projects in some markets, the reduced rate of economic growth has slowed the development of some larger multi-family projects."

Cash Distributions

For each of the months from January through November 2010, the Fund declared and paid distributions in the amount of $0.0416 per unit. In addition, a special one-time distribution in the same amount was declared in November 2010. From its inception in June 2005 to December 31, 2010, the Fund paid a total of 65 consecutive monthly cash distributions to its public unitholders, and equivalent cash distributions to the non-controlling interest retained by CWAL Investments Ltd. (CWAL), the previous owner of the business.

During the fourth quarter, the Fund generated adjusted distributable cash (before non-controlling interest) of $1.6 million, or $0.16 per unit. This compares to $2.2 million, or $0.22 per unit, in 2009. The reduction was mainly due to the one-time costs incurred in relation to Coast's conversion to a corporate structure. The amount distributed and accrued for payment to unitholders and the non-controlling interest decreased to $1.3 million, or $0.13 per unit, from $1.7 million, or $0.17 per unit, in the Q4 2009.

For the full year, adjusted distributable cash (before non-controlling interest) of $7.1 million, or $0.71 per unit, was down from $8.5 million, or $0.84 per unit, in 2009. With the February 2009 reduction in the per-unit monthly distribution amount, 12-month distributions decreased in 2010 to $5.0 million, or $0.50 per unit, from $5.8 million, or $0.58 per unit, in 2009.

The Fund's adjusted payout ratio for the fourth quarter increased to 78.8% from 76.9% in 2009, while its adjusted payout ratio for the 12 months increased to 70.6% from 69.0% in 2009. On a cumulative basis, from the Fund's inception to its conversion to a dividend-paying corporation on January 1, 2011, the Fund's adjusted payout ratio was 90.2%.

Conversion to a Corporation

Under the plan of arrangement for the Fund's conversion, unitholders received common shares of Coast on a one-for-one basis for each unit of the Fund held. Similarly, CWAL received one share of Coast for each combined exchangeable unit of Coast Wholesale Appliances LP and special voting unit of the Fund held. The common shares of Coast were listed and posted for trading on the Toronto Stock Exchange on January 6, 2011 under the symbol "CWA" in substitution for the units of the Fund, previously traded under the symbol "CWA.UN", which were delisted at that time. The Fund and its direct and indirect subsidiaries were wound up or dissolved as applicable and the business continued under Coast.

In conjunction with the conversion, Coast established new credit facilities with a three-year term commencing January 1, 2011, reducing its term debt to $13 million and increasing the limit on its operating line of credit to $20 million.

Coast declared its first monthly cash dividend on February 16, 2011 in the amount of $0.035 per share, which was paid March 7, 2011 to shareholders of record on February 28, 2011. A second monthly cash dividend in the same amount was declared on March 15, 2011, payable April 5, 2011 to shareholders of record on March 29, 2011.

Outlook

The following discussion is qualified in its entirety by the forward-looking statements report at the end of this news release.

The outlook for Coast's business continues to be cautious. On the retail side, Coast expects that consumers will remain careful about major purchases and that the retail pricing environment will remain extremely competitive, putting downward pressure on sales and margins. In the contract segment, while the numbers of building permits issued and new housing starts have improved year-over-year, Coast does not anticipate any significant improvement in its contract sales until the second half of 2011.

"We expect that economic growth in Canada will remain sluggish through 2011," said Burrows. "However, on the plus side, Canadian credit markets remain fairly stable, improving the ability of our builder and developer customers to finance both their current and future projects."

Burrows added that Coast expects to continue to benefit from strong sales to single-family builders in Alberta and Saskatchewan in 2011, and to begin to see a return from its added investment in sales and marketing in the GTA in the latter part of the year. "We remain confident in our ability to grow our business when market conditions improve and to continue to deliver solid returns for our investors," he said.

Coast is currently conducting a replacement search for former President and CEO Blain Lawson, who left the company on February 18, 2011. Burrows, who is one of the original founders of the Coast business and its former President and CEO, will serve as interim President and CEO until a permanent replacement is named.

A more detailed discussion of Coast's financial results can be found in its 2010 year-end Management's Discussion and Analysis, which will be posted with the consolidated financial statements on Coast's website (www.coastwholesaleappliancesinc.com) and SEDAR (www.sedar.com) on or before March 18, 2011.

Coast Profile

Coast is a leading independent supplier of major household appliances and accessories to developers and builders of multi-family and single-family housing, and to retail customers. Founded in 1978, Coast currently operates 15 stores across the four western provinces and one store in the Greater Toronto Area of Ontario, as well as a network of warehouse distribution centres strategically situated to serve these locations.

Forward-looking Statements

This news release includes forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause 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. These forward-looking statements are identified by the use of terms and phrases such as "anticipate", "believe", "estimate", "expect", "may", "plan", "will", and similar terms and phrases, including references to assumptions. Such statements may involve, but are not limited to, comments with respect to the sustainability of Coast's dividends to shareholders. Forward-looking statements are included in, but not limited to, the sections titled Full-Year Operating Results and Outlook.

These forward-looking statements reflect current expectations of the Coast's management regarding future events and operating performance as of the date of this news 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: sensitivity to general economic conditions; changes in consumer confidence in the economy; maintenance of profitability and management of changes to Coast's business; competition; increases to interest rates; reliance on suppliers and their ability to supply product for sale on a timely basis; changes in consumer preferences; changes in the mix of product sales; fluctuations in fuel and commodity pricing, which may impact freight and other costs; usage of extended warranty programs and the costs to deliver these services; changes to planning and supply chain processes; lack of long-term supplier agreements; reliance on key personnel; and foreign exchange rates as they relate to imported products.

Although the forward-looking statements contained in this news release are based upon what management believes to be reasonable assumptions, Coast cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements reflect management's current beliefs and are based on information currently available to Coast. They speak only as of the date of this news release, and reflect current assumptions regarding future events and operating performance. These assumptions include, without limitation: slow economic growth during 2011 in both Western Canada and the Greater Toronto Area (Coast's current market areas); continued fluctuations in exchange rates; low but increasing interest rates through 2011;continuing cautious credit markets for Coast's major builder customers to obtain financing for their current and future building activities; weak consumer confidence due to the slow economic recovery, which may be reflected in lower retail sales; and modest growth in new home construction activity in 2011, reflected in higher levels of new building permits issued and housing starts compared to 2010. These forward-looking statements are made as of the date of this news release and Coast assumes no obligation to update or revise them to reflect new events or circumstances, other than as required by law.

Non-GAAP Financial Measures

EBITDA, EBITDA margin and adjusted distributable cash are non-GAAP financial measures that are defined in the 2010 year-end Management's Discussion and Analysis to be posted on Coast's website and SEDAR on or before March 18, 2011.

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