Coast Wholesale Appliances Inc.
TSX : CWA

Coast Wholesale Appliances Inc.

August 08, 2011 16:05 ET

Coast Wholesale Appliances Inc. Reports 2011 Second Quarter Results

Modest Year-Over-Year Retail Sales Growth Partially Offsets Drop in Contract Sales to Builders and Developers, Contract Order Backlog Continues to Strengthen

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 8, 2011) - Coast Wholesale Appliances Inc. (TSX:CWA) will host a conference call and webcast to discuss its second quarter financial results on Tuesday, August 9, 2011 at 8:00 am Pacific Time (11:00 am Eastern). The call can be accessed by dialing: 1-887-440-9795 or 416-340-8527 (GTA).

A replay will be available through August 23, 2011 at: 1-800-408-3053 or 905-694-9451 Passcode 5050000.

The live and archived webcast, as well as an mp3 download, can be accessed at http://www.investorcalendar.com/IC/CEPage.asp?ID=165498 or on Coast's website at www.coastwholesaleappliancesinc.com.

Coast Wholesale Appliances Inc. (Coast or the Corporation), formerly Coast Wholesale Appliances Income Fund (the Fund), today reported financial results for the three and six months ended June 30, 2011. The three-month period represents the second quarter of Coast's 2011 fiscal year.

Performance Highlights

(in thousands of dollars except percentages and per-share / unit amounts) 2011
Q2
2010
Q2
2009
Q2
2011
YTD
2010
YTD
2009
YTD
Sales 34,225 37,061 37,913 62,311 67,514 71,092
Gross profit 8,349 9,375 8,828 15,101 16,845 16,551
As a percentage of sales 24.4% 25.3% 23.3% 24.2% 25.0% 23.3%
Net income 1,081 3,776 1,301 594 2,487 1,984
Diluted net income per share / unit 0.108 0.420 0.199 0.059 0.335 0.304
EBITDA before other costs 2,074 2,916 2,780 2,836 4,399 4,769
EBITDA margin before other costs 6.1% 7.9% 7.3% 4.6% 6.5% 6.7%
EBITDA per unit before other costs 0.207 0.291 0.277 0.283 0.438 0.475
EBITDA 2,074 2,571 2,780 2,031 4,013 4,769
EBITDA margin 6.1% 6.9% 7.3% 3.3% 5.9% 6.7%
EBITDA per share / unit 0.207 0.256 0.277 0.202 0.400 0.475

Second Quarter Operating Results

During the second quarter, Coast generated sales revenue of $34.2 million, a 7.7% decrease from the $37.1 million it reported in 2010. The reduction was due to slower contract sales to developers and builders. Revenues in this segment of Coast's business declined by 18.6% from the prior year. Retail sales for the three months improved by 1.8%, shifting the Corporation's business mix for the period in favour of the retail market.

In British Columbia, sales remained soft in both the contract and retail segments of Coast's business, bringing overall BC revenues down below the 2010 level. In Saskatchewan and Manitoba, strong single-family home construction activity continued to drive sales up year-over-year. In Alberta, revenues were down from the second quarter of 2010, due both to slower retail sales and reduced single-family building starts. Finally, sales at Coast's Greater Toronto Area (GTA) store were somewhat lower than expected. Due mainly to delivery delays on contract projects, sales in Southern Ontario did not rise from the 2010 level as anticipated.

Coast's second quarter gross profit decreased to $8.3 million, or 24.4% of sales, from $9.4 million, or 25.3% in 2010. The drop was primarily due to a year-over-year reduction in volume-related supplier rebates, as the required buying thresholds were not achieved in 2011. In addition, Coast's gross profit continued to be eroded by more competitive retail pricing across all its regional markets.

The $1.1 million gross profit shortfall brought second quarter EBITDA down to $2.1 million from $2.6 million in 2010 and reduced Coast's EBITDA margin to 6.1% from 6.9% last year. Net income for the three months, after deferred tax of $0.4 million, was $1.1 million. This compares to net income before non-controlling interest of $1.9 million in 2010 or, as restated under IFRS, after distributions to the exchangeable units and the increase in fair value of the exchangeable units, net income of $3.8 million.

Six-Month Operating Results

Revenue for the six months ended June 30, 2011 was $62.3 million, down by 7.7% from $67.5 million in 2010. Contract sales for the first half decreased by 12.1% year-over-year, while retail sales dipped by a more modest 5.1%. Gross profit of $15.1 million, or 24.2% of sales, was down from $16.8 million, or 25.0% of sales, in 2010. As with the quarterly result, Coast's six-month gross profit was negatively affected by the reduction in supplier rebates and more competitive retail pricing.

First-half EBITDA of $2.0 million was down by $2.0 million from the $4.0 million reported in 2010, reducing the Corporation's EBITDA margin to 3.3% from 5.9% in 2010. The decrease in six-month EBITDA was mainly due to the revenue decline and resulting $1.7 million gross profit shortfall. In addition, EBITDA was impacted by other costs, as the $0.8 million of severance paid to Coast's former CEO during the first half of 2011 was double the $0.4 million of other costs recorded in 2010 in relation to Coast's conversion to a corporation.

Net income for the six months, after the $0.8 million of other costs and $0.2 million in deferred taxes, was $0.6 million. This compares to net income before non-controlling interest of $2.6 million in 2010 or, as restated under IFRS after distributions to the exchangeable units and the increase in fair value of the exchangeable units, net income of $2.5 million.

"The business environment remains challenging for wholesale distributors and retailers across our industry," said Maurice E. Paquette, who became President and CEO of Coast on August 3, 2011. "Given the current extremely competitive consumer market, we are pleased with the improvement in our retail sales. In the contract segment, we have continued to benefit from strong single-family building activity in certain markets. While sales to larger, multi-family projects have lagged due to the slowing of construction in this sector, our backlog of multi-family orders has strengthened significantly. We expect to see a corresponding upswing in our multi-family contract revenues in the second half of this year and into 2012 as we begin to deliver on these orders."

Dividends

During the second quarter, monthly dividends of $0.035 per share were declared on each of April 13, 2011, May 18, 2011 and June 15, 2011, payable on or about the fifth day of the month following. Going forward, subject to the discretion of its Board of Directors, Coast expects to continue to pay cash dividends of $0.035 per share on a monthly basis, equivalent to $0.42 per share per annum.

Amendment to First Quarter 2011 Reporting

In conjunction with releasing its second quarter results, Coast filed a restatement of its unaudited interim financial statements for the three months ended March 31, 2011. The original first quarter unaudited interim financial statements and MD&A filed on SEDAR on May 24, 2011 have been amended and restated to correct the treatment of the non-controlling interest in the conversion from GAAP to IFRS. The only change to the first quarter 2011 financial statements as a result of this correction was the reallocation of $14,652,109 from share capital to retained earnings. The following changes were made to historical information for 2010:

  • Under IFRS, the exchangeable units of Coast Wholesale Appliances LP that were outstanding in 2010 are considered liabilities and are required to be recorded at fair value. As a result, Coast recorded an exchangeable units liability of $16,142,000, a reduction of non-controlling interest of $30,580,164 and an increase in retained earnings of $14,438,164 in its statement of financial position as at January 1, 2010.

  • For the period ended March 31, 2010, the change in the fair value of the exchangeable units of $1,579,000, and distribution to the exchangeable units of $437,944 were recorded as expenses in the statement of comprehensive (loss) income. The allocation of income to the non controlling interest of $254,684 was eliminated.

  • On the December 31, 2010 statement of financial position, Coast recorded exchangeable units liability of $16,142,000, reduction of non-controlling interest of $30,794,109, and an increase in retained earnings of $14,652,109.

The amended unaudited interim financial statements for the first quarter of 2011 will be available on Coast's website (www.coastwholesaleappliancesinc.com) and SEDAR (www.sedar.com) on or before August 9, 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, while second quarter sales exceeded the 2010 level, Coast expects that consumers will remain careful about making major purchases and that unusually competitive retail pricing will persist through the second half of the year, putting downward pressure on sales and margins. In the contract segment, based on the increase in multi-family building activity it saw in the second half of 2010 and first half of 2011, Coast expects to begin to see an improvement in this business in the third quarter.

"Given the sales orders from our larger builder and developer customers we currently have in our backlog, we remain confident that our contract revenues will increase in the second half of the year," said Paquette. "Although economic growth is expected to remain sluggish through 2011 in all of our geographic markets, Canadian credit markets continue to be relatively stable, providing our builder and developer customers with reasonable access to financing for current and future projects."

As previously announced, to support the growth of its contract business in Western Canada and the GTA, Coast strengthened its sales management infrastructure with four senior appointments. Effective July 11, 2011, Stephen J. Raben was promoted to Senior Vice President, Sales and Marketing, Single-Family; Michael Fiorini was promoted to Vice President, Multi-Family Sales, Eastern Canada; Bradley S. Romo rejoined Coast as Vice President, Multi-Family Sales, British Columbia; and Jamie Willoughby was promoted to Vice President, Multi-Family Sales, Prairies.

A more detailed discussion of Coast's financial results can be found in its 2011 second quarter Management's Discussion and Analysis, which will be posted with unaudited interim financial statements for the period on Coast's website (www.coastwholesaleappliancesinc.com) and SEDAR (www.sedar.com) on or before August 9, 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 GTA 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, economic performance in Canada and its sales expectations. Forward-looking statements are included in, but not limited to, the sections titled Second Quarter and Six-Month Operating Results, Dividends and Outlook.

These forward-looking statements reflect current expectations of 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 through the second half of 2011 in both Western Canada and the Greater Toronto Area (Coast's current market areas); continued fluctuations in exchange rates with the Canadian dollar trading at or above par with the US dollar; 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 housing starts improving somewhat in 2011 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-IFRS Financial Measures

EBITDA and EBITDA margin are non-IFRS financial measures that are defined in the 2011 second quarter Management's Discussion and Analysis to be posted on Coast's website and SEDAR on or before August 9, 2011.

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