Coast Wholesale Appliances Inc.
TSX : CWA

Coast Wholesale Appliances Inc.

March 20, 2014 16:05 ET

Coast Wholesale Appliances Inc. Reports 2013 Fourth Quarter and Year-End Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - March 20, 2014) - Coast Wholesale Appliances Inc. (TSX:CWA) -

Coast Wholesale Appliances Inc. will host a conference call to discuss its 2013 fourth quarter and year-end financial results today - Thursday, March 20 at 2:30 pm Pacific Time (5:30 pm Eastern). The call can be accessed by dialing: toll-free 1-800-396-7098 or 416-340-8527 (GTA and International).

A replay will be available through 11:00 am Pacific Time on April 3, 2014 at: 1-800-408-3053 or 905-694-9451 - Passcode: 8856159.

Coast Wholesale Appliances Inc. (Coast or the company), today reported financial results for the three and 12 months ended December 31, 2013. The three-month period represents the final quarter of Coast's 2013 fiscal year.

Performance Highlights
(in thousands of dollars except percentages and per-share amounts)
2013 2012 2011 2013 2012 2011
Q4 Q4 Q4 Fiscal year Fiscal year Fiscal year
Sales 40,327 38,533 35,281 160,085 145,196 133,594
Gross profit 9,298 9,300 8,667 35,887 33,493 32,608
As a percentage of sales 23.1 % 24.1 % 24.6 % 22.4 % 23.1 % 24.4 %
Net income before goodwill impairment and related deferred tax recovery 1,256 1,701 1,468 4,892 4,195 3,502
Goodwill impairment net of deferred tax recovery - - (30,375 ) - - (30,375 )
Net income (loss) 1,256 1,701 (28,907 ) 4,892 4,195 (26,873 )
Diluted net income (loss) per share 0.125 0.169 (2.881 ) 0.488 0.418 (2.678 )
EBITDA 2,518 2,862 2,600 9,211 7,969 7,203
EBITDA margin 6.2 % 7.4 % 7.4 % 5.8 % 5.5 % 5.4 %
EBITDA per share 0.251 0.285 0.259 0.918 0.794 0.718
Dividends per share 0.075 0.070 0.105 0.300 0.385 0.385

Fourth Quarter Results

In the three months ended December 31, 2014, Coast delivered its tenth consecutive quarter of year-over-year revenue growth. Sales of $40.3 million were up by $1.8 million, or 4.7%, compared to Q4 2012. Sales to builders increased by 7.8%, while retail sales dipped by 2.2%. Other revenues, generated by warranty sales, freight and installation, and commission sales, were up by 13.8% over the same period last year.

Revenues improved in BC and in the Greater Toronto Area (GTA) of Ontario, where Coast recorded double-digit sales growth. In Alberta, Coast's sales were equal to Q4 2012, while revenues in Saskatchewan and Manitoba were down somewhat year-over-year, due primarily to the impact of harsh winter weather on construction activity.

Fourth quarter gross profit of $9.3 million was level with 2012. Due to the continued shift in Coast's sales mix in favour of contract business, which generates a lower gross margin than its retail sales, the company's gross margin percentage decreased to 23.1% from 24.1% in Q4 2012. Gross margin was also negatively impacted by ongoing compression of pricing across Coast's business as a result of much more competitive market conditions.

Coast's selling, general and administrative, facility and warehouse expenses (SG&A expenses) for the fourth quarter were somewhat higher year-over-year, due in part to the increased sales. In addition, Q4 SG&A included $0.2 million in restructuring costs related to the planned closure of Coast's Red Deer, Alberta store at the end of March 2014. Without this one-time charge, SG&A expenses as a percentage of sales would have been reduced from 16.8% to 16.3%, compared to 16.7% in 2012.

Fourth quarter EBITDA of $2.5 million was down by $0.4 million from the $2.9 million reported in 2012, while EBITDA margin decreased to 6.2% from 7.4% last year. The drop in EBITDA was due mainly to the restructuring charge and the lower gross margin percentage in 2013. Net income was also impacted by the restructuring charge, as well as higher annual bonuses and income tax, decreasing to $1.3 million from $1.7 million in Q4 2012.

"As expected, our sales growth slowed in the final quarter of the year, but we continued to experience a healthy flow of contract sales to single and multi-family homebuilders moving through to completion in our western Canadian and GTA markets," said Maurice Paquette, President and CEO of Coast. "We also continued to strengthen our backlog of contract orders for future delivery."

Mr. Paquette indicated that Coast does not anticipate that the closure of its Red Deer location, the company's smallest store, will have a negative impact on future earnings. "We are continually seeking ways to optimize our sales and distribution network. With the phasing out of this location, we still have the capability of serving customers in the Red Deer market from our much larger Calgary and Edmonton stores."

Full-Year Results

For the 12 months ended December 31, 2013, revenues of $160.1 million were up by $14.9 million, or 10.3%, from the $145.2 million reported for fiscal 2012. Builder sales increased by 16.8%, retail revenues were level and other revenues improved by 9.2%. During the year, revenues increased across all of Coast's geographic markets except Manitoba, with particularly strong sales growth in the GTA and Alberta.

Gross profit for the 12 months increased by 7.1% to $35.9 million from $33.5 million in 2012, while gross margin decreased to 22.4% from 23.1% the prior year. As with the quarterly result, the 0.7% reduction in gross margin percentage was mainly due to sales mix changes and ongoing pricing compression. SG&A expenses for the 12 months rose in dollar terms with the higher revenues but were reduced as a percentage of sales to 16.7% from 17.6% in 2012.

EBITDA for 2013 improved to $9.2 million, a $1.2 million increase from the $8.0 million reported for 2012, and EBITDA margin increased to 5.8% from 5.5% in the prior year. The gains were driven by Coast's strong sales performance and greater selling efficiency. Adjusted EBITDA was $9.4 million, an 18.2% improvement over 2012. Net income for the year benefitted from Coast's stronger sales and gross profit performance, particularly in the first three quarters, increasing by 17% to $4.9 million from $4.2 million in 2012. Results reported today are unchanged from the preliminary unaudited financial results released on March 10, 2014, outside of the impact on net income of a $0.2 million increase in deferred income taxes.

"We are very pleased with our continued progress in implementing our proven business strategy, as reflected in the sales momentum we gained in the builder segment during 2013," said Mr. Paquette. "On the retail side, our ability to deliver both in-demand brand name products and a value-added service offering to consumers has allowed us to preserve our strong revenue base in an extremely difficult sales environment."

Fiscal Year Operating Highlights

During 2013, as part of its ongoing strategy to enhance profitability by increasing sales from its existing stores, Coast completed major showroom renovations at its Calgary South store in Alberta and its Saskatoon, Saskatchewan location. Approximately 70% of the company's stores have been renovated or relocated to updated facilities since the beginning of 2011.

During the year, Coast continued to sharpen its focus on higher-margin, added-value products. In tandem with ongoing refinement of its product offering, the company also continued to streamline its supplier base in order to maximize its purchasing leverage. By focusing on the leading multi-brand manufacturers, Coast can concentrate its buying power while still providing customers with a wide selection of the products they want.

At the end of the second quarter of the year, Coast began work on major upgrades to its inventory and pricing management systems. Implementation proceeded on schedule and on budget through the second half of the year, and phased testing will continue into the second quarter of 2014, with the upgraded systems expected to be fully operational by mid-year. These systems will help Coast better manage its gross margins, reduce inventory levels and increase inventory turns.

As expected, inventory remained at somewhat higher than normal levels through the year, both to support the increased sales volumes and accommodate recent changes to Coast's product offering. At year-end, inventory stood at $26.2 million, compared to $25.8 million at December 31, 2012. During the year, Coast continued to focus on the clearance of eliminated and discontinued products through dedicated clearance centres in all its markets.

Dividends

Coast declared monthly dividends of $0.025 per share from January through December of 2013, payable on or about the fifth day of the month following. This dividend rate equates to $0.30 per share on an annualized basis, representing a yield of approximately 7% per annum at recent Coast share trading prices. With its annual dividend payout ratio for 2013 decreasing to 48.5% from 70.8% in 2012, the company is comfortable that the current level of dividends is sustainable for the foreseeable future. Coast's Board of Directors closely monitors the company's dividend level on a continuous basis.

Outlook

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

The outlook for Coast's business in 2014 remains cautious. In the builder segment, the company anticipates that its revenues will continue to grow as projects in its order backlog move into the final stages of development, particularly in the multi-family sector, but at a slower rate than in 2013. Total Canadian housing starts were down year-over-year in 2013 and are not expected to increase in 2014. Given the lagging impact of housing starts on sales of major home appliances, Coast anticipates that the sustained decrease in total starts will be reflected in its revenues going forward. The company also expects that very competitive market conditions will continue to compress unit prices and hence margins on its builder sales for the foreseeable future. On the retail side, it anticipates that market conditions and pricing will remain similarly competitive through 2014 as consumers continue to be extremely careful about making major purchases. Nonetheless, Coast believes that opportunities exist for the company to increase its share of the retail market. To help boost sales to consumers, Coast is refining its marketing and promotional strategies.

"Our financial results and the recent uplift in Coast's share price are encouraging; however, the economic environment in Canada remains far from ideal," said Mr. Paquette. "Coast remains vulnerable to changes in the level of housing activity, and any significant economic setbacks could have a negative impact on our sales to both builder and retail customers. To counteract this impact, we intend to continue to build on our historical strengths in order to expand our share of both the builder and consumer markets while working diligently to increase operating efficiency."

Mr. Paquette added that, based on Coast's current order backlogs, the company anticipates that its revenue growth in 2014 will be concentrated in the GTA and Alberta markets.

A more detailed discussion of Coast's financial results can be found in its 2013 Year-End Management's Discussion and Analysis, which will be posted along with the audited financial statements for the period on Coast's website (www.coastwholesaleappliancesinc.com) and SEDAR (www.sedar.com) on March 20, 2014.

Coast Profile

Coast is a leading independent supplier of major household appliances and accessories to builders and developers of multi-family and single-family housing, and to retail customers. Founded in 1978, Coast operates stores across the four western provinces and 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, the performance of the Canadian economy and the company's sales expectations. Forward-looking statements are included in most sections of this news release.

These forward-looking statements reflect current expectations of 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 Coast's mix of product sales; fluctuations in fuel and commodity pricing; 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 2014 in both Western Canada and the Greater Toronto Area (GTA), our current markets; continued fluctuations in exchange rates; continued low interest rates through 2014; continuing relatively stable credit markets for our major builder customers; and a slight softening of total housing starts in 2014 compared to 2013. 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, EBITDA margin and Adjusted EBITDA are non-IFRS financial measures that are defined in the Year-End Management's Discussion and Analysis to be posted on Coast's website and SEDAR on March 20, 2014.

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