Danier Leather Inc.
TSX : DL

Danier Leather Inc.

January 25, 2012 14:58 ET

Danier Leather Reports Fiscal 2012 Second Quarter Results

TORONTO, ONTARIO--(Marketwire - Jan. 25, 2012) - Danier Leather Inc. (TSX:DL) today announced its unaudited interim consolidated financial results for the 13 week and 26 week periods ended December 24, 2011.

FINANCIAL HIGHLIGHTS ($000s, except earnings per share (EPS), square footage and number of stores):

For the 13 Weeks Ended For the 26 Weeks Ended
Dec. 24, 2011 Dec. 25, 2010 Dec. 24, 2011 Dec. 25, 2010
Sales $ 59,487 $ 61,442 $ 81,578 $ 84,869
EBITDA(1) 12,642 12,708 9,685 9,609
Net Earnings 8,466 8,170 5,698 5,298
EPS - Basic $ 1.83 $ 1.75 $ 1.23 $ 1.15
EPS - Diluted $ 1.77 $ 1.67 $ 1.19 $ 1.09
Number of Stores 91 91 91 91
Retail Square Footage 306,702 315,623 306,702 315,623

Net earnings during the second quarter of fiscal 2012 increased by 4% to $8.5 million ($1.77 per diluted share) compared with $8.2 million ($1.67 per diluted share) during the second quarter last year. For the year-to-date period, net earnings increased by 8% to $5.7 million ($1.19 per diluted share) compared with net earnings of $5.3 million ($1.09 per diluted share) for the same period last year.

During fiscal 2012, Danier has placed more emphasis on increasing sales generated from accessories. Although unseasonably warm weather contributed to a reduction in outerwear sales, accessory sales continued to perform well, increasing by 8% during the second quarter of fiscal 2012 and increasing by 9% for the year-to-date period, compared to the respective periods last year. The higher margin accessory category represented 30% of total sales during the second quarter of fiscal 2012 compared with 27% during the second quarter last year. For the 26 weeks ended December 24, 2011, accessories represented 32% of total sales compared with 29% during the corresponding period last year.

Mainly due to unseasonably warm weather, total company sales during the second quarter of fiscal 2012 decreased by 3% to $59.5 million compared with $61.4 million during the second quarter last year. Year-to-date sales decreased by 4% to $81.6 million compared with $84.9 million for the corresponding period last year. Comparable store sales(2) decreased by 3% during the second quarter of fiscal 2012 and decreased by 4% for the first half of fiscal 2012, compared to the respective periods last year.

Gross profit as a percentage of revenue during the second quarter of fiscal 2012 decreased by 280 basis points to 55.7% compared with 58.5% during the second quarter last year. Gross profit margin during the first half of fiscal 2012 decreased by 180 basis points to 55.0% compared with 56.8% during the first six months of last year.

Selling, general and administrative expenses during the second quarter of fiscal 2012 decreased by 12% to $21.4 million compared with $24.3 million during the second quarter last year. Year-to-date, selling, general and administrative expenses decreased by 9% to $37.0 million compared with $40.6 million during the corresponding period last year.

Danier continues to maintain a strong balance sheet with cash of $31.8 million compared with $25.4 million at the end of the second quarter last year. In addition, at the end of the second quarter of fiscal 2012, Danier had working capital of $50.5 million, no long-term debt and a book value of $14.49 per outstanding share.

For the 2012 fiscal year, Danier began reporting its financial results in accordance with International Financial Reporting Standards ("IFRS"), including comparative information. Previously reported financial results prepared in accordance with Canadian generally accepted accounting principles have been restated to conform to the new standards adopted. See Note 21 accompanying Danier's second quarter 2012 unaudited interim condensed consolidated financial statements for further information on the transition to IFRS and its impact on Danier's financial position, financial performance and cash flows.

Non-IFRS Financial Measures

The Company prepares its consolidated financial statements in accordance with IFRS. In order to provide additional insight into the business, the Company has also provided non-IFRS data, including EBITDA and comparable store sales as defined below. Non-IFRS measures such as EBITDA and comparable store sales are not recognized measures for financial presentation under IFRS. These non-IFRS measures do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with IFRS.

(1) EBITDA is defined as net earnings before interest expense, interest income, income taxes, impairment loss on property and equipment and amortization. EBITDA is a financial metric used by management and some investors to compare companies on the basis of ongoing operating results before taxes, interest expense, interest income, impairment loss on property and equipment and amortization and its ability to incur and service debt. EBITDA is also used by management to measure performance against internal targets and prior period results. EBITDA is calculated as outlined in the following table:
For the 13 Weeks Ended For the 26 Weeks Ended
Dec 24, 2011 Dec 25, 2010 Dec 24, 2011 Dec 25, 2010
($000) ($000) ($000) ($000)
Net earnings $ 8,466 $ 8,170 $ 5,698 $ 5,298
Add (deduct) impact of the following:
Income tax 3,299 3,472 2,206 2,233
Interest expense 11 23 33 69
Interest income (19 ) (8 ) (57 ) (26 )
Impairment loss on property and equipment 21 35 21 35
Amortization 864 1,016 1,784 2,000
EBITDA $ 12,642 $ 12,708 $ 9,685 $ 9,609
(2) Comparable store sales are defined as sales generated by stores that have been open during the full current fiscal year as well as the full prior fiscal year. Comparable store sales is a key indicator used by the Company to measure performance against internal targets and prior period results and excludes sales fluctuations due to new stores, store closings and certain permanent store relocations. This measure is also commonly used by financial analysts and investors to compare Danier to other retailers.

Forward-Looking Statements

This press release may contain forward-looking information and forward-looking statements which reflect the current view of Danier with respect to the Company's objectives, plans, goals, strategies, future growth, results of operations, financial and operating performance and business prospects and opportunities. Wherever used, the words "may", "will", "anticipate", "intend", "expect", "estimate", "plan", "believe" and similar expressions identify forward-looking statements and forward-looking information. Forward-looking statements and forward-looking information should not be read as guarantees of future events, performance or results, and will not necessarily be accurate indications of whether, or the times at which, such events, performance or results will be achieved. All of the statements in this press release containing forward-looking statements or forward-looking information, if any, are qualified by these cautionary statements.

Forward-looking statements and forward-looking information are based on information available at the time they are made, underlying estimates, opinions and assumptions made by management and management's good faith belief with respect to future events, performance and results and are subject to inherent risks and uncertainties surrounding future expectations generally. For additional information with respect to Danier's inherent risks and uncertainties, reference should be made to Danier's continuous disclosure materials filed from time to time with the Canadian Securities Regulatory Authorities, including the Company's annual information form, quarterly and annual reports and financial statements and notes thereto, and supplementary information, which are available on SEDAR at www.sedar.com and in the Investor Relations section of the Company's website at www.danier.com. Additional risks and uncertainties not presently known to the Company or that Danier currently believes to be less significant may also adversely affect the Company.

Danier cautions readers that such factors and uncertainties are not exhaustive and that should certain risks or uncertainties materialize, or should underlying estimates or assumptions prove incorrect, actual events, performance and results may vary significantly from those expected. There can be no assurance that the actual results, performance, events or activities anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. Potential investors and other readers are urged to consider these factors carefully in evaluating forward-looking information and forward-looking statements and are cautioned not to place undue reliance on any forward-looking information or forward-looking statements. Danier disclaims any intention or obligation to update or revise any forward-looking information or forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

About Danier

Danier Leather Inc. is a leading integrated designer, manufacturer, distributor and retailer of high-quality fashion-oriented leather apparel and accessories. The Company's merchandise is marketed exclusively under the well-known Danier brand name and is available at its 91 shopping mall, street-front and power centre stores. Corporations and other organizations can obtain Danier products for use as incentives and premiums for employees, suppliers and customers through Canada Sportswear Corp. For more information about the Company and our products, see www.danier.com.

Investors and analysts are invited to participate in a conference call today at 4:00 PM Eastern Time to discuss the results. Please dial 416-340-2216 in the Toronto area or 1-866-226-1792 (rest of Canada and the U.S.) and quote the Danier Leather Inc. conference call with Chairperson Jeffrey Wortsman at least five minutes prior to the call. The call will also be webcast at http://www.danier.com/ or at http://www.marketwire.com/.
DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
(thousands of Canadian dollars, except per share amounts and number of shares) - unaudited
For the 13 Weeks Ended For the 26 Weeks Ended
December 24,
2011
December 25,
2010
December 24,
2011
December 25,
2010
Revenue $ 59,487 $ 61,442 $ 81,578 $ 84,869
Cost of sales (Note 13) 26,328 25,500 36,729 36,666
Gross profit 33,159 35,942 44,849 48,203
Selling, general and administrative expenses (Note 13) 21,402 24,285 36,969 40,629
Interest income (19 ) (8 ) (57 ) (26 )
Interest expense 11 23 33 69
Earnings before income taxes 11,765 11,642 7,904 7,531
Provision for income taxes 3,299 3,472 2,206 2,233
Net earnings and comprehensive earnings $ 8,466 $ 8,170 $ 5,698 $ 5,298
Net earnings per share:
Basic $ 1.83 $ 1.75 $ 1.23 $ 1.15
Diluted $ 1.77 $ 1.67 $ 1.19 $ 1.09
Weighted average number of shares outstanding:
Basic 4,629,878 4,656,321 4,643,017 4,614,433
Diluted 4,777,651 4,894,548 4,796,672 4,856,890
Number of shares outstanding at period end 4,631,835 4,702,068 4,631,835 4,702,068
DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(thousands of Canadian dollars) - unaudited
Dec 24,
2011
Dec 25,
2010
June 25, 2011
ASSETS
Current Assets
Cash and cash equivalents (Note 5) $ 31,803 $ 25,406 $ 28,698
Accounts receivable 1,686 391 385
Inventories (Note 6) 36,789 41,163 28,964
Prepaid expenses 426 381 901
70,704 67,341 58,948
Non-current Assets
Property and equipment (Note 7) 15,315 15,808 14,404
Computer software (Note 8) 891 1,166 1,054
Deferred income tax asset (Note 14) 1,786 1,777 1,678
$ 88,696 $ 86,092 $ 76,084
LIABILITIES
Current Liabilities
Payables and accruals (Note 10) $ 16,010 $ 19,650 $ 11,024
Deferred revenue 2,135 2,353 1,489
Sales return provision (Note 11) 1,451 1,306 47
Income taxes payable 583 1,097 278
20,179 24,406 12,838
Non-current Liabilities
Deferred lease inducements and rent liability 1,392 1,414 1,318
21,571 25,820 14,156
SHAREHOLDERS' EQUITY
Share capital (Note 12) 14,959 15,001 15,160
Contributed surplus 945 1,136 934
Retained earnings 51,221 44,135 45,834
67,125 60,272 61,928
$ 88,696 $ 86,092 $ 76,084
Commitments and Contingencies (Notes 16 and 17)
Approved by the Board
January 25, 2012
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(thousands of Canadian dollars) - unaudited
For the 13 Weeks Ended For the 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Cash provided by (used in)
OPERATING ACTIVITIES
Net earnings $ 8,466 $ 8,170 $ 5,698 $ 5,298
Adjustments for:
Amortization of property and equipment 774 840 1,605 1,700
Amortization of computer software 90 176 179 300
Impairment loss on property and equipment 21 35 21 35
Amortization of deferred lease inducements (36 ) (46 ) (76 ) (99 )
Proceeds from deferred lease inducement 128 155 128 155
Straight line rent expense 17 6 22 13
Stock-based compensation 2 20 17 60
Interest income (19 ) (8 ) (57 ) (26 )
Interest expense 11 23 33 69
Provision for income taxes 3,299 3,472 2,206 2,233
Changes in working capital (Note 15) 9,388 4,548 (1,649 ) (4,444 )
Interest paid - - (12 ) (100 )
Interest received 12 3 69 21
Income taxes paid (934 ) (1,041 ) (2,008 ) (5,091 )
Net cash generated from operating activities 21,219 16,353 6,176 124
FINANCING ACTIVITIES
Subordinate voting shares issued 12 607 12 649
Subordinate voting shares repurchased - - (530 ) -
Net cash (used in) generated from financing activities 12 607 (518 ) 649
INVESTING ACTIVITIES
Acquisition of property and equipment (1,502 ) (874 ) (2,537 ) (1,881 )
Acquisition of computer software (16 ) (10 ) (16 ) (49 )
Net cash used in investing activities (1,518 ) (884 ) (2,553 ) (1,930 )
Increase (decrease) in cash and cash equivalents 19,713 16,076 3,105 (1,157 )
Cash and cash equivalents, beginning of period 12,090 9,330 28,698 26,563
Cash and cash equivalents, end of period $ 31,803 $ 25,406 $ 31,803 $ 25,406
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(thousands of Canadian dollars) - unaudited
Share Capital Contributed
Surplus
Accumulated Other Comprehensive Income Retained Earnings Total
Balance - June 25, 2011 $ 15,160 $ 934 $ - $ 45,834 $ 61,928
Net earnings - - - 5,698 5,698
Stock-based compensation related to stock options - 17 - - 17
Exercise of stock options 18 (6 ) - - 12
Share repurchases (219 ) - - (311 ) (530 )
Balance - December 24, 2011 $ 14,959 $ 945 $ - $ 51,221 $ 67,125
Share
Capital
Contributed
Surplus
Accumulated Other
Comprehensive
Income
Retained
Earnings
Total
Balance - June 27, 2010 $ 14,176 $ 1,252 $ - $ 38,837 $ 54,265
Net earnings - - - 5,298 5,298
Stock-based compensation related to stock options - 60 - - 60
Exercise of stock options 825 (176 ) - - 649
Share repurchases - - - - -
Balance - December 25, 2010 $ 15,001 $ 1,136 $ - $ 44,135 $ 60,272
See accompanying notes to the consolidated financial statements
DANIER LEATHER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 week and 26 week periods ended December 24, 2011 and December 25, 2010
(unless otherwise stated, all amounts are in thousands of Canadian dollars) - unaudited
  1. General Information:

Danier Leather Inc. and its subsidiaries ("Danier" or the "Company") comprise a vertically integrated designer, manufacturer, distributor and retailer of leather apparel and accessories. Danier Leather Inc. is a corporation existing under the Business Corporations Act (Ontario) and is domiciled in Canada. The Company's Subordinate Voting Shares are listed on the Toronto Stock Exchange (TSX:DL). The address of its registered head office is 2650 St. Clair Avenue West, Toronto, Ontario, M6N 1M2, Canada.

  1. Significant Accounting Policies:

(a) Statement of Compliance

These unaudited condensed interim consolidated financial statements ("interim consolidated financial statements") have been prepared in accordance with International Financial Reporting Standards ("IFRS") applicable to the preparation of interim financial statements, including International Accounting Standard ("IAS") 34, Interim Financial Reporting and by IFRS 1, First-time Adoption of IFRS ("IFRS 1"), as issued by the International Accounting Standards Board ("IASB").

The policies applied in these interim consolidated financial statements are based on IFRS standards issued and outstanding as of January 25, 2012, the date the interim consolidated financial statements were approved and authorized for issuance by the Company's Board of Directors. Any subsequent changes to IFRS that are given effect in the Company's annual consolidated financial statements for the financial year ending June 30, 2012 could result in restatement of these interim consolidated financial statements, including transition adjustments recognized on change-over to IFRS.

The interim consolidated financial statements should be read in conjunction with the Company's annual financial statements for the year ended June 25, 2011 prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). In addition, for supplemental annual disclosures, see note 21 and note 22 of the Company's 2012 first quarter unaudited condensed interim consolidated financial statements and notes ("Q1 2012 interim consolidated financial statements"). An explanation of how the transition from Canadian GAAP to IFRS as at June 27, 2010 ("transition date") has affected the reported financial position, financial performance and cash flows of the Company, including mandatory exceptions and optional exemptions under IFRS 1 is provided in the Q1 2012 interim consolidated financial statements.

(b) Basis of Presentation

These interim consolidated financial statements have been prepared on a historical cost basis except for the following items which are measured at fair value:

  • Financial instruments at fair value through profit and loss; and
  • Liabilities for cash-settled share-based payment plans.

The significant accounting policies as disclosed in note 3 of the Company's Q1 2012 interim consolidated financial statements have been applied consistently in the preparation of these interim consolidated financial statements.

(c) Functional and presentation currency

These interim consolidated financial statements are presented in Canadian dollars ("C$"), the Company's functional currency. All financial information is presented in thousands, except per share amounts which are presented in whole dollars and number of shares, which are presented as whole numbers.

(d) Use of Estimates and Judgments

The preparation of these interim consolidated financial statements in accordance with IFRS requires management to make certain judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the interim consolidated financial statements, and the reported amounts of revenues and expenses during the period.

Judgment is commonly used in determining whether a balance or transaction should be recognized in the interim consolidated financial statements, and estimates and assumptions are more commonly used in determining the measurement of recognized transactions and balances. However, judgments and estimates are often interrelated.

Management has applied its judgment in its assessment of the classification of leases and financial instruments, the recognition of tax provisions, determining the tax rates used for measuring deferred taxes, and identifying the indicators of impairment of property and equipment and computer software.

Estimates are used when estimating the useful lives of property and equipment and computer software for the purposes of depreciation and amortization, when accounting for or measuring items such as inventory provisions, gift card breakage, assumptions underlying income taxes, sales and use taxes and sales return provisions, certain fair value measures including those related to the valuation of share-based payments and financial instruments and when testing assets for impairment. These estimations depend upon subjective and complex judgments about matters that may be uncertain, and changes in those estimates could materially impact the interim consolidated financial statements. Illiquid credit markets, volatile equity, foreign currency and energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results may differ significantly from such estimates and assumptions.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

  1. Future Accounting Standards:

A number of new standards, amendments to standards and interpretations have been issued but are not yet effective for the financial year ending June 30, 2012, and accordingly, have not been applied in preparing these interim consolidated financial statements:

(a) IFRS 7: Financial Instruments - Disclosures

The IASB has issued an amendment to IFRS 7, "Financial Instruments: Disclosures", requiring incremental disclosures regarding transfers of financial assets. This amendment is effective for annual periods beginning on or after July 1, 2011. The Company will apply the amendment for its fiscal year beginning July 1, 2012 and does not expect the implementation to have a significant impact on the Company's disclosures.

The IASB has issued two further amendments to IFRS 7 related to enhanced disclosure requirements for offsetting of financial assets and liabilities and additional disclosures on transition from IAS 39 to IFRS 9. The amendment related to offsetting of financial assets and liabilities is effective for annual periods beginning on or after January 1, 2013 and the amendment related to additional disclosures on transition from IAS 39 to IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Company has yet to assess the impact of these further amendments on its consolidated financial statements.

(b) IFRS 9: Financial Instruments

The IASB has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments and the issuance of IFRS 9 is a part of the first phase. This standard originally was to become effective on January 1, 2013 but the mandatory effective date has been amended to January 1, 2015. The Company has yet to assess the impact of the new standard on its statements of financial position, earnings and disclosures.

(c) IFRS 13: Fair Value Measurement

The IASB has issued a new standard, IFRS 13, "Fair Value Measurement" ("IFRS 13"), which is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard is effective for annual periods beginning on or after January 1, 2013 and clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and, in many cases, does not reflect a clear measurement basis or consistent disclosures. The Company does not believe that this new standard will have a material impact on its consolidated financial statements.

(d) IAS 32: Financial Instruments - Presentation

The IASB has issued an amendment to standard IAS 32, "Financial Instruments - Presentation" ("IAS 32"). The amendment is effective for annual periods beginning on or after January 1, 2014 and clarifies the requirements for offsetting financial assets and financial liabilities. The Company has yet to assess the impact of this amendment on its consolidated financial statements.

(e) Other Standards

On May 12, 2011, the IASB issued a package of five new standards, all of which are effective for annual periods beginning on or after January 1, 2013. Early adoption is permitted but IFRS 10, IFRS 11 and IFRS 12 (all discussed below) must all be adopted at the same time. The Company has yet to fully assess the impact of the new standards and amendments on its consolidated financial statements. The following is a list of these new standards and amendments.

  • IFRS 10, "Consolidated Financial Statements" ("IFRS 10") - This standard replaces the portions of IAS 27, "Consolidated and Separate Financial Statements" that pertain to consolidated reporting and also SIC-12, "Consolidation - Special Purpose Entities". This new standard establishes standards for the presentation and preparation of consolidated financial statements when an entity controls one or more entities. IFRS 10 establishes a single control model that applies to all entities.
  • IFRS 11, "Joint Arrangement" ("IFRS 11") - This standard replaces IAS 31, "Interests in Joint Ventures" and SIC-13, "Jointly-controlled Entities - Non-Monetary Contributions by Venturers", and requires that a party in a joint arrangement assess its rights and obligations to determine the type of joint arrangement and account for those rights and obligations accordingly. IFRS 11 removes the option to account for jointly controlled entities using proportionate consolidation. Instead, jointly controlled entities that meet the definition of a joint venture must be accounted for using the equity method.
  • IFRS 12, "Disclosure of Interests in Other Entities" ("IFRS 12") - This standard supplements existing disclosure requirements about interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. It focuses on the nature of, and risk associated with, such interests in other entities and the effects of such interests on its statements of financial position, earnings (loss) and cash flows.
  1. Future Accounting Standards (continued):
  • IAS 27, "Separate Financial Statements" and IAS 28 "Investments in Associates and Joint Venturers" are both being amended as a direct consequence of the above new standards and deal with accounting in separate, or unconsolidated, financial statements, as well as the mechanics of equity accounting for joint ventures.
  1. Seasonality of retail operations:

Due to the seasonal nature of the retail business and the Company's product lines, the results of operation for any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. Generally, a significant portion of the Company's sales and earnings are typically generated during the second fiscal quarter, which includes the holiday selling season. Sales are usually lowest and losses are typically experienced during the period from April to September.

  1. Cash and cash equivalents:

The components of cash and cash equivalents are as follows:

December 24, 2011 December 25, 2010 June 25, 2011
Cash $ 3,333 $ 6,432 $ 4,625
Bankers acceptances 28,470 18,974 24,073
Cash and cash equivalents $ 31,803 $ 25,406 $ 28,698
  1. Inventories:
December 24, 2011 December 25, 2010 June 25, 2011
Raw materials $ 1,817 $ 3,188 $ 2,655
Work-in-process 175 180 265
Finished goods 34,797 37,795 26,044
$ 36,789 $ 41,163 $ 28,964
13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Cost of inventory recognized as an expense $ 26,070 $ 25,188 $ 36,352 $ 36,214
Write-downs of inventory due to net realizable value being lower than cost $ 443 $ 330 $ 588 $ 439
Write-downs recognized in previous periods that were reversed - - $ 3 $ 21
  1. Property and Equipment:
26 Weeks Ended December 24, 2011
Land Building Roof HVAC Leasehold Improvements Furniture & Equipment Computer Hardware Total
Cost
At June 25, 2011 $ 1,000 $ 6,063 $ 308 $ 753 $ 23,453 $ 8,985 $ 3,180 $ 43,742
Additions - - - 40 1,762 638 97 2,537
Disposals - - - - (1,470 ) (346 ) - (1,816 )
At December 24, 2011 $ 1,000 $ 6,063 $ 308 $ 793 $ 23,745 $ 9,277 $ 3,277 $ 44,463
Accumulated amortization and impairment losses
At June 25, 2011 - $ 2,198 $ 184 $ 531 $ 17,968 $ 6,232 $ 2,225 $ 29,338
Amortization for the period - 77 9 23 845 483 168 1,605
Impairment losses - - - - 21 - - 21
Disposals - - - - (1,470 ) (346 ) - (1,816 )
At December 24, 2011 - $ 2,275 $ 193 $ 554 $ 17,364 $ 6,369 $ 2,393 $ 29,148
Net carrying value
At December 24, 2011 $ 1,000 $ 3,788 $ 115 $ 239 $ 6,381 $ 2,908 $ 884 $ 15,315
At June 25, 2011 $ 1,000 $ 3,865 $ 124 $ 222 $ 5,485 $ 2,753 $ 955 $ 14,404
Capital work in progress included above
At December 24, 2011 - - - - $ 270 $ 59 - $ 329
26 Weeks Ended December 25, 2010
Land Building Roof HVAC Leasehold Improvements Furniture & Equipment Computer Hardware Total
Cost
At June 27, 2010 $ 1,000 $ 6,063 $ 308 $ 693 $ 23,574 $ 8,504 $ 3,110 $ 43,252
Additions - - - 25 836 613 407 1,881
Disposals - - - - - - - -
At December 25, 2010 $ 1,000 $ 6,063 $ 308 $ 718 $ 24,410 $ 9,117 $ 3,517 $ 45,133
Accumulated amortization and impairment losses
At June 27, 2010 - $ 2,036 $ 169 $ 481 $ 17,068 $ 5,684 $ 2,152 $ 27,590
Amortization for the period - 81 8 23 1,059 326 203 1,700
Impairment losses - - - - - 35 - 35
Disposals - - - - - - - -
At December 25, 2010 - $ 2,117 $ 177 $ 504 $ 18,127 $ 6,045 $ 2,355 $ 29,325
Net carrying value
At December 25, 2010 $ 1,000 $ 3,946 $ 131 $ 214 $ 6,283 $ 3,072 $ 1,162 $ 15,808
At June 27, 2010 $ 1,000 $ 4,027 $ 139 $ 212 $ 6,506 $ 2,820 $ 958 $ 15,662
Capital work in progress included above
At December 25, 2010 - - - - - - - -

The Company conducted an impairment test for its property and equipment and determined that there was an impairment of $21 for the 13 week and 26 week periods ended December 24, 2011 ($35 - 13 week and 26 week periods ended December 25, 2010). The recoverable amount of the cash generating unit ("CGU") was estimated based on value-in-use calculations as this was determined to be higher than fair value less costs to sell. These calculations use cash flow projections based on actual performance during the past 12 months which are then extrapolated over each CGU's remaining lease term and then discounted using an estimated discount rate. The key assumptions for the value-in-use calculations include discount rates, growth rates and expected cash flows. Management estimates discount rates using pre-tax rates that reflect current market assessment of the time value of money and the risks specific to the CGUs. Changes in revenues and direct costs are based on past experience and expectations of future changes in the market.

The pre-tax discount rate used to calculate value-in-use range is 11% and is dependent on the specific risks in relation to the CGU. The discount rate is derived from retail industry comparable post-tax weighted average cost of capital.

If management's cash flow estimate were to decrease by 10% or if the discount rate were to increase by 100 basis points, the impairment for the 13 week and 26 week periods ended December 24, 2011 would increase by $6.

  1. Computer Software:
26 Weeks Ended
December 24, 2011 December 25, 2010
Cost
Beginning of fiscal year $ 4,041 $ 4,169
Additions 16 49
Disposals - -
End of period $ 4,057 $ 4,218
Accumulated amortization
Beginning of fiscal year $ 2,987 $ 2,752
Amortization for the period 179 300
Impairment losses - -
End of period $ 3,166 $ 3,052
Net carrying value
End of period $ 891 $ 1,166
Beginning of fiscal year $ 1,054 $ 1,417
  1. Bank Facilities:

The Company has an operating credit facility for working capital and for general corporate purposes to a maximum amount of $25 million that is committed until June 27, 2014 and bears interest at prime plus 0.75%. Standby fees of 0.50% are paid on a quarterly basis for any unused portion of the operating credit facility. The operating credit facility is subject to certain covenants and other limitations that, if breached, could cause a default and may result in a requirement for immediate repayment of amounts outstanding. Security provided includes a security interest over all personal property of the Company's business and a mortgage over the land and building comprising the Company's head office/distribution facility.

The Company also has an uncommitted letter of credit facility (the "LC Facility") to a maximum amount of $10 million and an uncommitted demand overdraft facility in the amount of $0.5 million (the "LC Facility") to be used exclusively for issuance of letters of credit for the purchase of inventory. Any amounts outstanding under the overdraft facility will bear interest at the bank's prime rate. The LC Facility is secured by the Company's personal property from time to time financed with the proceeds drawn thereunder.

  1. Payables and Accruals:
December 24, 2011 December 25, 2010 June 25, 2011
Trade payables $3,199 $4,923 $1,633
Accruals 6,344 7,714 6,693
RSU/DSU liability 1,950 2,804 1,897
Commodity and capital taxes 4,517 4,209 777
Other current liabilities - - 24
$16,010 $19,650 $11,024
  1. Sales Return Provision:

The provision for sales returns primarily relates to customer returns of unworn and undamaged purchases for a full refund within the time period provided by Danier's return policy, which is generally 14 days after the purchase date. Since the time period of the provision is of relatively short duration, all of the provision is classified as current. The following transactions occurred during the 13 week and 26 week periods ended December 24, 2011 and December 25, 2010 with respect to the sales return provision:

13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Beginning of period $ 126 $ 206 $ 47 $ -
Amount provided during the period 1,451 1,306 1,577 1,512
Released during the period (126 ) (206 ) (173 ) (206 )
End of period $ 1,451 $ 1,306 $ 1,451 $ 1,306
  1. Share Capital:

(a) Authorized

1,224,329 Multiple Voting Shares
Unlimited Subordinate Voting Shares
Unlimited Class A and B Preference Shares

(b) Issued

Multiple Voting Shares
Number Consideration
Balance June 27, 2010 1,224,329 Nominal
Balance December 25, 2010 1,224,329 Nominal
Balance, June 25, 2011 1,224,329 Nominal
Balance December 24, 2011 1,224,329 Nominal
Subordinate Voting Shares
Number Consideration
Balance June 25, 2011 3,453,806 $15,160
Shares repurchased (50,000 ) (219 )
Shares issued upon exercising of stock options 3,700 18
Balance December 24, 2011 3,407,506 $14,959
Balance June 27, 2010 3,343,840 $14,176
Shares repurchased - -
Shares issued upon exercising of stock options 133,899 825
Balance December 25, 2010 3,477,739 $15,001

The Multiple Voting Shares and Subordinate Voting Shares have identical attributes except that the Multiple Voting Shares entitle the holder to ten votes per share and the Subordinate Voting Shares entitle the holder to one vote per share. Each Multiple Voting Share is convertible at any time, at the holder's option, into one fully paid and non-assessable Subordinate Voting Share. The Multiple Voting Shares are subject to provisions whereby, if a triggering event occurs, then each Multiple Voting Share is converted into one fully paid and non-assessable Subordinate Voting Share. A triggering event may occur if, among other things, Mr. Jeffrey Wortsman, President and Chief Executive Officer: (i) dies; (ii) ceases to be a Senior Officer of the Company; (iii) ceases to own 5% or more of the aggregate number of Multiple Voting Shares and Subordinate Voting Shares outstanding; or (iv) owns less than 918,247 Multiple Voting Shares and Subordinate Voting Shares combined.

(c) Earnings per share

Basic and diluted per share amounts are based on the following weighted average number of shares outstanding:

13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Weighted average number of shares for basic earnings per share calculations 4,629,878 4,656,321 4,643,017 4,614,433
Effect of dilutive options outstanding 147,773 238,227 153,655 242,457
Weighted average number of shares for diluted earnings per share calculations 4,777,651 4,894,548 4,796,672 4,856,890

The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of Subordinate Voting Shares on the TSX during the period. The number of options excluded was 62,000 as at December 24, 2011 and 58,000 as at December 25, 2010.

(d) Normal Course Issuer Bids

During the past several years, the Company has received approval from the TSX to commence various normal course issuer bids ("NCIBs"). On May 5, 2011, the Company received approval from the TSX to commence its fifth normal course issuer bid (the "2011 NCIB"). The Company's previous normal course issuer bid expired on May 6, 2011 (the "2010 NCIB"). The 2011 NCIB permits the Company to acquire up to 176,440 Subordinate Voting Shares, representing approximately 5% of the Company's issued and outstanding Subordinate Voting Shares at the date of acceptance of the notice of intention in respect of the 2011 NCIB filed with the TSX, during the period from May 9, 2011 to May 8, 2012, or such earlier date as the Company may complete its purchases under the 2011 NCIB. During the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012, the Company repurchased an aggregate of 125,000 Subordinate Voting Shares for cancellation at a weighted average price of $11.44, leaving 51,440 Subordinate Voting Shares available for repurchase by the Company under the 2011 NCIB.

During the 13 week and 26 week period ended December 24, 2011 and December 25, 2010, repurchases of Subordinate Voting Shares under the Company's NCIBs outstanding during the applicable period is presented below.

13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Number of shares repurchased under NCIBs - - 50,000 -
Amount charged to share capital $ - $ - $ 219 $ -
Amount charged to retained earnings representing the excess over the average paid-in value $ - $ - $ 311 $ -
Total cash consideration $ - $ - $ 530 $ -

(e) Stock option plan

The Company maintains a Stock Option Plan for the benefit of directors, officers, employees and service providers, pursuant to which granted options are exercisable for Subordinate Voting Shares. As at December 24, 2011, the Company has reserved 635,234 Subordinate Voting Shares for issuance under its Stock Option Plan. The granting of options and the related vesting periods are at the discretion of the Board of Directors, on the advice of the Governance, Compensation, Human Resources and Nominating Committee of the Board (the "Committee") at exercise prices determined as the weighted average of the trading prices of the Company's Subordinate Voting Shares on the TSX for the five trading days preceding the effective date of the grant. In general, options granted under the Stock Option Plan vest over a period of three years from the grant date and expire no later than the tenth anniversary of the date of grant (subject to extension in accordance with the Stock Option Plan if the options would otherwise expire during a black-out period).

A summary of the status of the Company's Stock Option Plan as of December 24, 2011 and December 25, 2010 and changes during the 26 week periods ended on those dates is presented below:

December 24, 2011 December 25, 2010
Stock Options Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price
Outstanding at beginning of period 348,434 $ 6.65 553,400 $ 6.13
Granted - - - -
Exercised (3,700 ) $ 3.15 (133,899 ) $ 4.85
Forfeited - - (20,000 ) $ 10.40
Outstanding at end of period 344,734 $ 6.69 399,501 $ 6.43
Options exercisable at end of period 338,067 $ 6.74 274,079 $ 7.75

The following table summarizes the distribution of these options and the remaining contractual life as at December 24, 2011:

Options Outstanding Options Exercisable
Exercise Prices # Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price # of Shares Exercisable Weighted Average Exercise Price
$3.15 166,067 6.9 years $3.15 166,067 $3.15
$3.97 6,667 7.4 years $3.97 - $3.97
$6.25 50,000 6.5 years $6.25 50,000 $6.25
$7.80 45,000 5.1 years $7.80 45,000 $7.80
$8.68 15,000 5.4 years $8.68 15,000 $8.68
$10.96 4,000 1.6 years $10.96 4,000 $10.96
$15.85 58,000 0.6 years $15.85 58,000 $15.85
344,734 5.4 years $6.69 338,067 $6.74

During the 13 week and 26 week periods ended December 24, 2011 and December 25, 2010, there were no stock options granted.

The compensation expense recorded for the 13 week and 26 week periods ended December 24, 2011 in respect of stock options was $2 and $17, respectively (13 week and 26 week periods ended December 25, 2010 - $20 and $60, respectively). The counterpart is recorded as contributed surplus. Any consideration paid by optionees on the exercise of stock options is credited to share capital.

(f) Deferred Share Unit Plan

The cash-settled Deferred Share Unit ("DSU") Plan, as amended, was established for non-management directors. Under the DSU Plan, non-management directors of the Company may receive an annual grant of DSUs at the discretion of the Board of Directors on the advice of the Committee, and can also elect to receive their annual retainers and meeting fees in DSUs. A DSU is a notional unit equivalent in value to one Subordinate Voting Share of the Company based on the five-day average trading price of the Company's Subordinate Voting Shares on the TSX immediately prior to the date on which the value of the DSU is determined.

After retirement from the Board of Directors, a participant in the DSU Plan receives a cash payment equal to the market value of the accumulated DSUs in their account. The fair value of the liability is measured at each financial position date by applying the Black-Scholes Option Pricing Model until the award is settled.

The following transactions occurred during each of the 13 week and 26 week periods ended December 24, 2011 and December 25, 2010 with respect to the DSU Plan:

13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Outstanding at beginning of period 103,920 103,920 103,920 103,920
Granted - - - -
Redeemed - - - -
Outstanding at end of period 103,920 103,920 103,920 103,920
Danier stock price at end of period $ 10.15 $ 13.60 $ 10.15 $ 13.60
Liability at end of period $ 1,055 $ 1,413 $ 1,055 $ 1,413
Compensation expense recorded in SG&A $ (36 ) $ 178 $ (88 ) $ 492

(g) Restricted Share Unit Plan

The Company has established a cash-settled Restricted Share Unit ("RSU") Plan, as amended, as part of its overall compensation plan. An RSU is a notional unit equivalent in value to one Subordinate Voting Share of the Company. The RSU Plan is administered by the Board of Directors, with the advice of the Committee. Under the RSU Plan, certain eligible employees and directors of the Company are eligible to receive a grant of RSUs that generally vest over periods not exceeding three years, as determined by the Committee. Upon the exercise of the vested RSUs, a cash payment equal to the market value of the exercised vested RSUs will be paid to the participant. RSU expense is recognized on a graded vesting schedule and is determined based on the fair value of the liability incurred at each financial position date until the award is settled. The fair value of the liability is measured by applying the Black-Scholes Option Pricing Model, taking into account the extent to which participants have rendered services to date.

The following transactions occurred during each of the 13 week and 26 week periods ended December 24, 2011 and December 25, 2010 with respect to the RSU Plan:

13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Outstanding at beginning of period 166,770 227,779 122,300 105,479
Granted - - 61,100 122,300
Redeemed - (31,782 ) (16,130 ) (31,782 )
Forfeited - (1,000 ) (500 ) (1,000 )
Outstanding at end of period 166,770 194,997 166,770 194,997
RSU vested at end of period 16,300 60,907 16,300 60,907
Liability at end of period $ 895 $ 1,390 $ 895 $ 1,390
Compensation expense recorded in SG&A $ 155 $ 454 $ 314 $ 921
  1. Amortization:

Amortization, which includes impairment loss on property and equipment, included in cost of sales and SG&A is summarized as follows:

13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Cost of sales $ 50 $ 48 $ 96 $ 91
SG&A 835 1,003 1,709 1,944
$ 885 $ 1,051 $ 1,805 $ 2,035
  1. Income Taxes:

The estimated average annual effective rate was 27.9% during the 26 weeks ended December 24, 2011 compared with 29.7% estimated rate for the 26 weeks ended December 25, 2010 and 29.3% for the fiscal year ended June 25, 2011. The difference between the rate for the 26 weeks ended December 24, 2011 and the rate for the 26 weeks ended December 25, 2010 and the fiscal year ended June 25, 2011 is due to a reduction in the statutory tax rates as well as the effect of certain non-deductible expenses on estimated earnings and the effect of changes in future federal and provincial rates on deferred taxes.

Deferred income tax asset is summarized as follows:

December 24, 2011 December 25, 2010 June 25, 2011
Amortization $ 847 $ 891 $ 825
Deferred lease inducements and rent liability 339 347 337
Stock based compensation 552 539 516
Other 48 - -
$ 1,786 $ 1,777 $ 1,678

The Company's effective income tax rate consists of the following:

26 Weeks Ended
December 24, 2011 December 25, 2010
Combined basic federal and provincial average statutory rate 27.2 % 29.1 %
Non-deductible expenses 0.6 % 1.0 %
Future federal and provincial rate changes 0.4 % 0.2 %
Other (0.3 %) (0.6 %)
27.9 % 29.7 %
  1. Change in Working Capital Items:
13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Decrease (increase) in:
Accounts receivable $ (593 ) $ 357 $ (1,301 ) $ 152
Inventories 2,986 (4,750 ) (7,825 ) (14,624 )
Prepaid expenses 341 608 441 790
Increase (decrease) in:
Payables and accruals 4,650 6,517 4,986 7,207
Deferred revenue 679 716 646 725
Sales return provision 1,325 1,100 1,404 1,306
$ 9,388 $ 4,548 $ (1,649 ) $ (4,444 )
  1. Contingencies and Guarantees:

(a) Legal proceedings

In the course of its business, the Company from time to time becomes involved in various claims and legal proceedings. In the opinion of management, all such claims and suits are adequately covered by insurance, or if not so covered, the results are not expected to materially affect the Company's financial position.

(b) Guarantees

The Company has provided the following guarantees to third parties and no amounts have been accrued in the consolidated financial statements for these guarantees:

  1. In the ordinary course of business, the Company has agreed to indemnify its lenders under its credit facilities against certain costs or losses resulting from changes in laws and regulations or from a default in repaying a borrowing. These indemnifications extend for the term of the credit facilities and do not provide any limit on the maximum potential liability. Historically, the Company has not made any indemnification payments under such agreements.
  1. In the ordinary course of business, the Company has provided indemnification commitments to certain counterparties in matters such as real estate leasing transactions, director and officer indemnification agreements and certain purchases of non-inventory assets and services. These indemnification agreements generally require the Company to compensate the counterparties for costs or losses resulting from legal action brought against the counterparties related to the actions of the Company. The terms of these indemnification agreements will vary based on the contract and generally do not provide any limit on the maximum potential liability.
  1. The Company sublet one location during the first quarter of fiscal 2011 and provided the landlord with a guarantee in the event the sub-tenant defaults on its obligations under the lease. The guarantee terminates at the time of lease expiry, which is March 31, 2013, and the Company's maximum exposure is approximately $176.
  1. Commitments:

(a) Operating leases:

The Company leases various store locations, a distribution warehouse and equipment under non-cancellable operating lease agreements. The leases are classified as operating leases since there is no transfer of risks and rewards inherent to ownership.

The leases have varying terms, escalation clauses and renewal rights. Minimum lease payments are recognized on a straight-line basis. Leases run for varying terms that generally do not exceed 10 years, with options to renew (if any) that do not exceed 5 years. The majority of leases are net leases, which require additional payments for the cost of insurance, taxes, common area maintenance and utilities. Certain rental agreements include contingent rent, which is based on revenue exceeding a minimum amount. Minimum rentals, excluding rentals based upon revenue, are as follows:

Not later than one year $ 10,360
Later than one year and not later than five years $ 25,202
Later than 5 years $ 11,130
Total $ 46,692
13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Minimum lease payments recognized as an expense $ 2,840 $ 2,821 $ 5,573 $ 5,531
Contingent rentals recognized as an expense $ 243 $ 246 $ 242 $ 219
Sublease payments recognized as an expense - - - -

(b) Letters of credit:

The Company had outstanding letters of credit in the amount of $6,342 (December 25, 2010 - $7,896) for the importation of finished goods inventories to be received.

  1. Financial Instruments:

(a) Fair value disclosure

The following table presents the carrying amount and the fair value of the Company's financial instruments.

December 24, 2011 December 25, 2010
Classification Maturity Carrying value Fair value Carrying value Fair value
Cash and cash equivalents Loans and receivables Short-term $ 31,803 $ 31,803 $ 25,406 $ 25,406
Accounts receivable Loans and receivables Short-term $ 1,682 $ 1,682 $ 391 $ 391
Payables and accruals Financial liabilities Short-term $ 16,010 $ 16,010 $ 19,578 $ 19,578
Sales return provision Financial liabilities Short-term $ 1,451 $ 1,451 $ 1,306 $ 1,306
Derivative financial instruments(1) Held for trading Short-term $ 4 $ 4 $ (72 ) $ (72 )
(1)Included in accounts receivable as at December 24, 2011 and included in payables and accruals as at December 25, 2010.

The fair value of a financial instrument is the estimated amount that the Company would receive or pay to settle the financial assets and financial liabilities as at the reporting date. These estimates are subjective in nature, often involve uncertainties and the exercise of significant judgment and are made at a specific point in time, using available information about the financial instrument and may not reflect fair value in the future. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies.

The methods and assumptions used in estimating the fair value of the Company's financial instruments are as follows:

  • The derivative financial instruments, which consist of foreign exchange contracts, have been marked-to-market and are categorized as Level 2 in the fair value hierarchy. Factors included in the determination of fair value include the spot rate, forward rates, estimates of volatility, present value factor, strike prices, credit risk of the Company and credit risk of counterparties. As at December 24, 2011, a $4 unrealized gain was recorded in selling, general and administrative expenses for the foreign exchange contracts outstanding.
  • The fair value of cash is determined using Level 2 inputs in the fair value hierarchy which include interest rates for similar instruments which are obtained from independent publications and market exchanges.
  • Given their short-term maturity, the fair value of cash and cash equivalents, accounts receivable, payables and accruals and sales return provision approximate their carrying values.

(b) Financial instrument risk management

Exposure to foreign currency risk, interest rate risk, equity price risk, liquidity risk and credit risk arise in the normal course of the Company's business and are discussed further below:

Foreign Currency Risk

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. The Company purchases a significant portion of its leather and finished goods inventory from foreign vendors with payment terms in U.S. dollars. The Company uses a combination of foreign exchange contracts and spot purchases to manage its foreign exchange exposure on cash flows related to these purchases. A foreign exchange contract represents an option with a counterparty to buy or sell a foreign currency to meet its obligations. Credit risk exists in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties such as major Canadian financial institutions.

During the 13 week and 26 periods ended December 24, 2011 and December 25, 2010, the Company entered into foreign exchange contracts with a major Canadian financial institution as counterparty with U.S. dollar notional amounts as listed below. Foreign exchange contracts outstanding as at December 24, 2011 expire at various times between January 3, 2012 and March 16, 2012 and the foreign exchange contracts that were outstanding as at December 25, 2010 expired between January 7, 2011 and December 1, 2011.

13 Weeks Ended 26 Weeks Ended
December 24, 2011 December 25, 2010 December 24, 2011 December 25, 2010
Outstanding at beginning of period $ 10,500 $ 15,000 $ 18,500 $ 15,000
Foreign exchange contracts entered into during the period 4,000 5,000 4,000 15,500
Foreign exchange contracts expired during the period (10,500 ) (12,000 ) (18,500 ) (22,500 )
Outstanding at end of period $ 4,000 $ 8,000 $ 4,000 $ 8,000
Fair value of foreign exchange contracts - gain/(loss) $ 4 $ (72 ) $ 4 $ (72 )

As at December 24, 2011, a sensitivity analysis was performed on the Company's U.S. dollar denominated financial instruments, which principally consist of US$0.3 million of cash, to determine how a change in the U.S. dollar exchange rate would impact net earnings. A 500 basis point rise or fall in the Canadian dollar against the U.S. dollar, assuming that all other variables, in particular interest rates, remained the same, would have resulted in a $2 and $4 decrease or increase in the Company's net earnings for the 13 week and 26 week periods ended December 24, 2011, respectively.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's exposure to interest rate fluctuations is primarily related to cash borrowings under its existing credit facility, which bears interest at floating rates, and interest earned on its cash balances. The Company has performed a sensitivity analysis on interest rate risk at December 24, 2011 to determine how a change in interest rates would have impacted net earnings. As at December 24, 2011, the Company's cash and cash equivalents available for investment was approximately $31.8 million. A 100 basis point change in interest rates would have increased or decreased net earnings by approximately $56 and $111 for the 13 week and 26 week periods ended December 24, 2011, respectively. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.

Equity Price Risk

Equity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market equity prices. The Company's exposure to equity price fluctuations is primarily related to the RSU and DSU liability included in payables and accruals. The value of the vested DSU and RSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares on the TSX. The Company has performed a sensitivity analysis on equity price risk as at December 24, 2011 to determine how a change in the price of the Company's Subordinate Voting Shares would have impacted net earnings. As at December 24, 2011, a total of 166,770 RSUs and 103,920 DSUs have been granted and are outstanding. An increase or decrease of $1.00 in the market price of the Company's Subordinate Voting Shares would have increased or decreased net earnings by approximately $189 for the 13 week and 26 week periods ended December 24, 2011. This analysis assumes that all RSUs and DSUs were fully vested and other variables remain constant.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company's approach to managing liquidity risk is to ensure, to the extent possible, that it will have sufficient liquidity to meet its liabilities when due. As at December 24, 2011, the Company had $31.8 million of cash and cash equivalents; an operating credit facility of $25 million that is committed until June 27, 2014; and a $10 million uncommitted letter of credit facility which includes an uncommitted demand overdraft facility in the amount of $0.5 million related thereto. The credit facilities are used to finance seasonal working capital requirements for merchandise purchases and other corporate purposes. The Company expects that the majority of its payables and accruals and deferred revenue will be discharged within 90 days.

Credit Risk

Credit risk is the risk that a customer or counterparty to a financial instrument will cause a financial loss to the Company by failing to meet its obligations. The Company's financial instruments that are exposed to concentrations of credit risk are primarily cash and cash equivalents (which includes cash and money market investments with maturities of three months or less), accounts receivable and foreign exchange option contracts. The Company limits its exposure to credit risk with respect to cash and money market investments by investing in short-term deposits and bankers' acceptances with major Canadian financial institutions and Government of Canada treasury bills. The Company's accounts receivable consist primarily of credit card receivables from the last few days of the fiscal period end, which are settled within the first few days of the new fiscal period. Accounts receivable also consist of accounts receivable from licensees, distributors and corporate customers. Accounts receivable are net of applicable allowance for doubtful accounts, which is established based on the specific credit risks associated with the licensee, distributor, each corporate customer and other relevant information. The allowance for doubtful accounts is assessed on a quarterly basis. Concentration of credit risk with respect to accounts receivable from licensees, distributors and corporate customers is limited due to the relatively insignificant balances outstanding and the number of different customers comprising the Company's customer base.

As at December 24, 2011, the Company's exposure to credit risk for these financial instruments was cash and cash equivalents of $31.8 million and accounts receivable of $1.7 million. Cash and cash equivalents included $28.5 million of short-term deposits.

  1. Capital Disclosure:

The Company defines its capital as shareholders' equity. The Company's objectives in managing capital are to:

  • Ensure sufficient liquidity to support its current operations and execute its business plans;
  • Enable the internal financing of capital projects; and
  • Maintain a strong capital base so as to maintain investor, creditor and market confidence.

The Company's primary uses of capital are to finance non-cash working capital along with capital expenditures for new store additions, existing store renovation or relocation projects, information technology software and hardware purchases and production machinery and equipment purchases. The Company maintains a $25 million operating credit facility and a $10 million uncommitted letter of credit facility that it uses to finance seasonal working capital requirements for merchandise purchases and other corporate purposes. The Company does not have any long-term debt and therefore net earnings generated from operations are available for reinvestment in the Company. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year-over-year sustainable profitable growth. On a quarterly basis, the Board of Directors monitors share repurchase program activities. Decisions on whether to repurchase shares are made on a specific transaction basis and depend on the Company's cash position, estimates of future cash requirements, market prices and regulatory restrictions. The Company does not currently pay dividends.

Externally imposed capital requirements include a debt-to-equity ratio covenant as part of the operating credit facility. The Company was in compliance with this covenant as at December 24, 2011 and December 25, 2010. There has been no change with respect to the overall capital risk management strategy during the 26 week period ended December 24, 2011.

  1. Segmented Information:

Management has determined that the Company operates in one operating segment which involves the design, manufacture, distribution and retail of fashion leather and suede.

  1. Transition to IFRS:

The Company has adopted IFRS effective June 26, 2011, with a transition date of June 27, 2010 (the "Transition Date"). Prior the adoption of IFRS, the Company presented its consolidated financial statements in accordance with Canadian GAAP. The Company will prepare its first annual consolidated financial statements prepared in accordance with IFRS for the fiscal year ending June 30, 2012 by applying IFRS that are in effect as at that date. However, the opening Consolidated Balance Sheet and financial statements for the fiscal year ended June 25, 2011 and the fiscal year ending June 30, 2012 may differ from these financial statements if new standards are subsequently enacted and effective prior to the end of June 30, 2012.

The Company's significant accounting policies presented in note 3 of the Company's Q1 2012 interim consolidated financial statements have been applied in preparing the unaudited interim condensed consolidated financial statements for the 13 week and 26 week periods ended December 24, 2011 and December 25, 2010 and the 52 week period ended June 25, 2011.

IFRS 1 requires an entity to adopt IFRS in its first annual financial statements prepared under IFRS by making an explicit and unreserved statement in those financial statements of compliance with IFRS. IFRS 1 also generally requires that an entity apply all IFRS standards effective at the end of the first IFRS reporting year retrospectively. However, IFRS 1 does include certain mandatory exemptions and limited optional exemptions from this general requirement. The Company has provided a detailed explanation of the impacts of its IFRS transition, including a discussion of IFRS exemptions and exceptions, in notes 21 and 22 of its Q1 2012 interim consolidated financial statements.

An explanation of how the transition from Canadian GAAP to IFRS has affected the Company's financial position, financial performance and cash flows as at December 25, 2010 and for the 13 week and 26 week periods ended December 25, 2010 is set out in the following reconciliations and in the notes accompanying the reconciliations.

Material Adjustments to Consolidated Statements of Cash Flow

IFRS requires cash flows from interest received, interest paid and income taxes paid to be disclosed directly in the consolidated statements of cash flow. Under Canadian GAAP, the Company disclosed interest and income taxes paid as supplementary cash flow information. This has resulted in a change to the presentation of the consolidated statements of cash flow for all periods presented in these interim consolidated financial statements. There are no other material differences between the Company's statements of cash flow presented under IFRS and the statements of cash flow presented under Canadian GAAP.

Reconciliation of Consolidated Statements of Financial Position as previously reported under Canadian GAAP to IFRS
June 25, 2011 December 25, 2010
Notes Cdn GAAP Adj IFRS Cdn GAAP Adj IFRS
Assets
Current assets
Cash 28,698 - 28,698 25,406 - 25,406
Accounts receivable 385 - 385 391 - 391
Inventories 28,964 - 28,964 41,163 - 41,163
Prepaid expenses 901 - 901 381 - 381
Deferred income tax asset d 422 (422 ) - 48 (48 ) -
59,370 (422 ) 58,948 67,389 (48 ) 67,341
Non-current assets
Property and equipment b,c 15,061 (657 ) 14,404 16,500 (692 ) 15,808
Computer software 1,054 - 1,054 1,166 - 1,166
Deferred income tax asset d,e 992 686 1,678 1,538 239 1,777
76,477 (393 ) 76,084 86,593 (501 ) 86,092
Liabilities
Current liabilities
Payables and accruals a,f 12,217 (1,193 ) 11,024 23,071 (3,421 ) 19,650
Deferred revenue f - 1,489 1,489 - 2,353 2,353
Sales return provision g - 47 47 - 1,306 1,306
Income tax payable 278 - 278 1,097 - 1,097
Deferred income tax liability d - - - 54 (54 ) -
12,495 343 12,838 24,222 184 24,406
Non-current liabilities
Deferred lease inducements and rent liability 1,318 - 1,318 1,414 - 1,414
13,813 343 14,156 25,636 184 25,820
Equity
Share capital 15,160 - 15,160 15,001 - 15,001
Contributed surplus a 898 36 934 1,041 95 1,136
Retained earnings h 46,606 (772 ) 45,834 44,915 (780 ) 44,135
62,664 (736 ) 61,928 60,957 (685 ) 60,272
76,477 (393 ) 76,084 86,593 (501 ) 86,092
Reconciliation of Consolidated Statement of Earnings and Comprehensive Earnings as previously reported under Canadian GAAP to IFRS
13 Weeks Ended 26 Weeks Ended
December 25, 2010 December 25, 2010
Notes Cdn GAAP Adj IFRS Cdn GAAP Adj IFRS
Revenue 61,442 - 61,442 84,869 - 84,869
Cost of sales c 25,495 5 25,500 36,656 10 36,666
Gross profit 35,947 (5 ) 35,942 48,213 (10 ) 48,203
Selling, general and administrative expenses a,b,c 24,200 85 24,285 40,513 116 40,629
Interest income (8 ) - (8 ) (26 ) - (26 )
Interest expense 23 - 23 69 - 69
Earnings before income taxes 11,732 (90 ) 11,642 7,657 (126 ) 7,531
Provision for income tax e 3,506 (34 ) 3,472 2,281 (48 ) 2,233
Net earnings and comprehensive earnings for the period 8,226 (56 ) 8,170 5,376 (78 ) 5,298
Earnings per share:
Basic $1.77 $1.75 $1.17 $1.15
Diluted $1.68 $1.67 $1.11 $1.09
Reconciliation of Shareholders' Equity as previously reported under Canadian GAAP to IFRS
Notes June 25, 2011 December 25, 2010
Total Shareholders' Equity as reported under previous Canadian GAAP $ 62,664 $ 60,957
Transitional adjustments:
Share-based payments a $ (343 ) $ (238 )
Impairment b $ (316 ) $ (368 )
Property and equipment c $ (341 ) $ (324 )
Income taxes a,b,c $ 264 $ 245
Total Shareholders' Equity as reported under IFRS $ 61,928 $ 60,272

Notes to the Reconciliations

The preceding are reconciliations of the financial statements previously presented under Canadian GAAP to the amended financial statements prepared under IFRS. Items in the "Adj" columns included IFRS adjustments that are required as the accounting treatment under Canadian GAAP differs from the treatment under IFRS, as well as IFRS reclassifications which are solely presentation reclassifications required to present the previous Canadian GAAP financial statement line items on a consistent basis with that of the IFRS presentation. Details on the nature of both IFRS adjustments and IFRS reclassifications are described below.

Index to the Notes to the Reconciliations

a) Share based payments
b) Impairment of property and equipment
c) Components of property and equipment
d) Deferred income tax reclassification
e) Deferred income tax adjustments
f) Deferred revenue reclassification
g) Sales return provision reclassification
h) Retained earnings

IFRS Adjustments

(a) Under IFRS, the Company accrues the cost of employee stock options and RSUs over the vesting period using the graded vesting method of amortization rather than the straight-line method, which was the Company's policy under Canadian GAAP. The effect of this change in accounting is summarized below:

Effect on Consolidated Statements of Financial Position:

As At
Increase/(Decrease) June 27,
2010
Sept 25,
2010
Dec 25,
2010
Mar 26,
2011
June 25,
2011
Deferred income tax asset $ 19 $ 37 $ 66 $ 83 $ 94
Payables and accruals $ 66 $ 132 $ 238 $ 302 $ 343
Contributed surplus $ 146 $ 131 $ 95 $ 66 $ 36
Retained earnings $ (193 ) $ (226 ) $ (267 ) $ (285 ) $ (285 )

Effect on Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss):

13 Week Periods Ended 26 Weeks
Ended
Year
Ended
Increase/(Decrease) Sept 25,
2010
Dec 25,
2010
Mar 26,
2011
June 25,
2011
Dec 25,
2010
June 25,
2011
SG&A $ 51 $ 70 $ 35 $ 11 $ 121 $ 167
Deferred tax expense $ (18 ) $ (29 ) $ (17 ) $ (11 ) $ (47 ) $ (75 )

(b) IFRS requires asset groups to be tested for impairment at the independent CGU level based on the generation of cash flows which the Company has determined to be at the individual store level. Canadian GAAP allows assets to be grouped together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities for impairment testing purposes. Since impairment testing under IFRS is conducted at the individual store level compared with a higher level under Canadian GAAP, impairment losses were recognized in selling, general and administrative expenses as summarized below:

Effect on Consolidated Statements of Financial Position:

As At
Increase/(Decrease) June 27,
2010
Sept 25,
2010
Dec 25,
2010
Mar 26,
2011
June 25, 2011
Property and equipment (impairments) $ (381 ) $ (381 ) $ (416 ) $ (479 ) $ (479 )
Property and equipment (accumulated amortization) - $ 24 $ 48 $ 74 $ 163
Deferred income tax asset $ 99 $ 93 $ 96 $ 105 $ 82
Retained earnings $ (282 ) $ (264 ) $ (272 ) $ (300 ) $ (234 )

Effect on Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss):

13 Week Periods Ended 26 Weeks
Ended
Year
Ended
Increase/(Decrease) Sept 25,
2010
Dec 25,
2010
Mar 26,
2011
June 25,
2011
Dec 25,
2010
June 25,
2011
SG&A - Impairments - $ 35 $ 63 - $ 35 $ 98
SG&A - Amortization $ (24 ) $ (24 ) $ (26 ) $ (89 ) $ (48 ) $ (163 )
Deferred tax expense $ 6 $ (3 ) $ (9 ) $ 23 $ 3 $ 17

(c) IFRS requires separate amortization for each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item. The Company has reviewed the significant components of its head office building and has determined that its head office building includes major components consisting of the roof and HVAC equipment, which have shorter estimated useful lives than the building. The effect of this change on transition is summarized below:

Effect on Consolidated Statements of Financial Position:

As At
Increase/(Decrease) June 27, 2010 Sept 25, 2010 Dec 25, 2010 Mar 26, 2011 June 25, 2011
Property and equipment $ (306 ) $ (315 ) $ (324 ) $ (333 ) $ (341 )
Deferred income tax asset $ 79 $ 81 $ 83 $ 86 $ 88
Retained earnings $ (227 ) $ (234 ) $ (241 ) $ (247 ) $ (253 )

Effect on Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss):

13 Week Periods Ended 26 Weeks
Ended
Year
Ended
Increase/(Decrease) Sept 25,
2010
Dec 25,
2010
Mar 26,
2011
June 25,
2011
Dec 25,
2010
June 25,
2011
Cost of sales $ 5 $ 5 $ 5 $ 4 $ 10 $ 19
SG&A $ 4 $ 4 $ 4 $ 4 $ 8 $ 16
Deferred tax expense $ (2 ) $ (2 ) $ (3 ) $ (2 ) $ (4 ) $ (9 )

(d) Under IFRS, it is not appropriate to classify deferred income tax asset balances as current, irrespective of the classification of the assets or liabilities to which the deferred income tax asset relates or the expected timing of reversal. Under Canadian GAAP, deferred income tax relating to current assets or current liabilities must be classified as current. Accordingly, current deferred income tax asset reported under Canadian GAAP of $48 at December 25, 2010 ($422 at June 25, 2011) has been reclassified as non-current deferred tax asset under IFRS. In addition, current deferred income tax liability reported under Canadian GAAP of $54 at December 25, 2010 ($Nil at June 25, 2011) has been reclassified as non-current deferred tax asset under IFRS.

(e) Deferred income tax expense has been adjusted to give effect to adjustments as follows:

Effect on Consolidated Statements of Financial Position:

As At
Increase/(Decrease) Notes June 27, 2010 Sept 25, 2010 Dec 25, 2010 Mar 26, 2011 June 25, 2011
Stock-based compensation a $ 19 $ 37 $ 66 $ 83 $ 94
Property and equipment b $ 99 $ 93 $ 96 $ 105 $ 82
Property and equipment c $ 79 $ 81 $ 83 $ 86 $ 88
$ 197 $ 211 $ 245 $ 274 $ 264

Effect on Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss):

13 Week Periods Ended 26 Weeks Ended Year Ended
Increase/(Decrease) Notes Sept 25, 2010 Dec 25, 2010 Mar 26, 2011 June 25, 2011 Dec 25, 2010 June 25, 2011
Stock-based compensation a $ (18 ) $ (29 ) $ (17 ) $ (11 ) $ (47 ) $ (75 )
Property and equipment b $ 6 $ (3 ) $ (9 ) $ 23 $ 3 $ 17
Property and equipment c $ (2 ) $ (2 ) $ (3 ) $ (2 ) $ (4 ) $ (9 )
$ (14 ) $ (34 ) $ (29 ) $ 10 $ (48 ) $ (67 )

(f) Under IFRS, the Company has chosen to present unredeemed gift cards as deferred revenue on the statement of financial position. Under Canadian GAAP, unredeemed gift cards were presented as accounts payable and accrued liabilities. Accordingly, accounts payable and accrued liabilities under Canadian GAAP of $2,353 at December 25, 2010 ($1,489 at June 25, 2011) have been reclassified as deferred revenue under IFRS.

(g) Under IFRS, the Company has chosen to present the sales return provision as a separate line item on the statement of financial position. Under Canadian GAAP, the sales return provision was presented as part of accounts payable and accrued liabilities. Accordingly, accounts payable and accrued liabilities under Canadian GAAP of $1,306 at December 25, 2010 ($47 at June 25, 2011) have been reclassified as sales return provision under IFRS.

(h) The following is a summary of transition adjustments to the Company's retained earnings from Canadian GAAP to IFRS:

As at
Notes June 27, 2010 Sept 25, 2010 Dec 25, 2010 Mar 26, 2011 June 25, 2011
Retained earnings as reported under Canadian GAAP $ 39,539 $ 36,689 $ 44,915 $ 47,449 $ 46,606
IFRS adjustments increase (decrease)
Stock-based compensation a $ (193 ) $ (226 ) $ (267 ) $ (285 ) $ (285 )
Property and equipment b $ (282 ) $ (264 ) $ (272 ) $ (300 ) $ (234 )
Property and equipment c $ (227 ) $ (234 ) $ (241 ) $ (247 ) $ (253 )
Retained earnings as reported under IFRS $ 38,837 $ 35,965 $ 44,135 $ 46,617 $ 45,834

Contact Information

  • Investor Relations Contact:
    Danier Leather Inc.
    Bryan Tatoff
    Senior Vice-President, Chief Financial Officer & Secretary
    (416) 762-8175 ext. 328
    bryan@danier.com

    Danier Leather Inc.
    Jeffrey Wortsman
    President and Chief Executive Officer
    (416) 762-8175 ext. 302
    jeffreyw@danier.com
    www.danier.com