Liquor Stores N.A. Ltd.
TSX : LIQ

Liquor Stores N.A. Ltd.

May 18, 2017 08:04 ET

Liquor Stores N.A. Ltd. Highlights Serious Flaws in PointNorth's Analysis and Strategy

Recommends Shareholders Vote the White Proxy in Support of Incumbent Board

EDMONTON, ALBERTA--(Marketwired - May 18, 2017) - Liquor Stores N.A. Ltd. (the "Company" or "Liquor Stores") (TSX:LIQ), North America's largest publicly traded liquor retailer, today highlighted a number of serious flaws in the analysis and strategy of activist shareholder PointNorth Capital.

Liquor Stores' comments follow a preliminary review of PointNorth's dissident circular. PointNorth, a recent 9.7% shareholder of the Company, launched a costly and distracting proxy battle for control of the Board just weeks after rejecting an offer from Liquor Stores for two board seats.

Jim Dinning, Chairman of the Board of Liquor Stores, commented, "Over the past six months, we repeatedly asked PointNorth to share its advice and constructive criticisms so we could either use its insights to improve our operations or help it to better understand our business. PointNorth consistently declined to share its thinking."

"Now we know why: PointNorth's analysis is riddled with flaws," said Mr. Dinning. "The biggest flaw is its assumption that what might have worked in government-controlled provincial monopolies, that by definition have no competitors, would work in our six highly competitive markets. Government monopolies control both wholesale and retail operations, set prices and adjust margins at will without having to compete with discounters – or anyone, for that matter."

Applying a monopoly business strategy to Liquor Stores will erode gross margin and is doomed to fail. Customers don't go to monopolies because they want to. They go because they have no other choice. This flawed analysis is a product of PointNorth's decision to delegate the development of its proposed "New Strategy" for Liquor Stores to two of their nominees, Stephen Barbet and Richard Perkins, both of whom are former executives of Nova Scotia's government-run liquor monopoly. As far as Liquor Stores is aware, neither PointNorth nor its nominees have in-depth experience in the highly competitive liquor retailing sector in which the Company operates.

"Shareholders only have to look at the track records of PointNorth's principals to see the value destruction that occurs from a defective strategy. We urge Liquor Stores shareholders to bear that in mind as they evaluate PointNorth's faulty analysis, misleading claims and wishful thinking. Don't let Liquor Stores suffer the same fate as SiriusXM, Priszm, KEYreit and Mobilicity."

In due course Liquor Stores will provide a detailed review of the serious flaws in PointNorth's analysis. For now, Liquor Stores believes the following points serve as useful and troubling examples:

1. Our strategy is working: PointNorth is wrong to assert that our proven strategy is a response to its announcement of its investment in Liquor Stores six months ago. As PointNorth and all of our shareholders know, we have been proactively executing our Seven Point Plan for three years – and we have the results to show for it. These results, delivered during the worst recession in decades in two of our major markets, include year over year sales growth, growth in operating profit before amortization, and the strong returns we've earned from the 46 store renovations completed to date.
2. PointNorth's strategy shows a fundamental lack of understanding of how the business operates in a highly competitive jurisdiction like Alberta, where consumers have more choice than almost anywhere in Canada. In Ontario, consumers must buy from the Liquor Control Board of Ontario and the Beer Store and a limited number of licensees that have serious restrictions on what products they can carry and/or at what prices. Nova Scotians have the monopoly Nova Scotia Liquor Corporation, where PointNorth's key advisors and dissident nominees Richard Perkins and Kenneth Barbet, used to work.
3. PointNorth's strategy dismisses the customer – the heart of any competitive retail business. Our strategy is to attract customers with a satisfying shopping experience, tailored pricing, and a consistent and compelling assortment of liquor products, including our high margin private label line that our staff are trained to sell. We have invested strategically to enhance this in-store experience. PointNorth's dramatic cutbacks on our product selection and staff would kill the qualities that differentiate us and pit us against the likes of Costco and Loblaws-operated Real Canadian Liquor Stores and independent price discounters, leaving Liquor Stores with nothing to compete on except price. That's the kind of thinking you'd expect from government liquor monopoly "experts" but it's not appropriate for the markets in which we operate.
4. PointNorth doesn't understand how to manage inventory in a competitive environment. PointNorth doesn't understand the value of our private warehouse. It is a strategic asset that holds only 7% of our inventory and pays for itself many times over every single year. We need it for the large-order purchases of high-margin private label products and high-margin discounted, limited time-offer wholesale products. PointNorth wrongly refers to this as "minor gross margin enhancements". The gains are significant and a distinctive competitive advantage in a highly competitive market like Alberta.
5. PointNorth wants us to accelerate the implementation of our ERP system. Going fast always sounds good, but countless companies have created massive problems by getting these software installations wrong. Speed kills. Surprisingly, none of PointNorth's nominees are described as having any meaningful Information Technology expertise for a business of a comparable complexity to Liquor Stores. The Company is moving ahead with an appropriately sized ERP system and implementation plan, with guidance from incumbent directors with extensive IT and grocery retail expertise. The Company is following a reasonable timeline that will not put the Company and our shareholders at risk.
6. PointNorth wants its nominees to re-evaluate our U.S. business, but we already do that in the normal course and none of their nominees have U.S. retail liquor experience, or U.S. retail experience of any kind. PointNorth's nominees would not be qualified to lead that review. Further, PointNorth's suggestion is not a new idea. Management and the Board, including a veteran U.S. grocery and liquor retailer, regularly examine the return on capital from all our business segments, including our U.S. operations. The Board has even engaged outside financial and strategic advisors for assistance. After our latest review of a wide array of strategic alternatives last year, the Board and its advisors concluded that there was greater value for shareholders in continuing to run these profitable U.S. assets. However, we will continue our regular examination of our business components including our U.S. operations.
7. PointNorth's plan to remove our U.S. regional office is shortsighted. That regional office makes a significant contribution to our gross margin with only 11 people on staff and at a nominal cost of less than $150,000 per year for office space. What PointNorth misses is that in addition to running our U.S. operations, our U.S.-based team leads our successful high-margin private label program for the U.S. and Canada. This is another troubling example of how PointNorth doesn't understand our business.
8. PointNorth disregards the importance of real estate to our business. Two things are true about any retail business: (1) retail is detail, a point that eludes PointNorth with its poor understanding of basic market dynamics; and (2) location, location, location. With 252 stores in over 14 markets across 2 provinces and 4 states, understanding real estate is important to the success of our business. Our Board's collective deep real estate experience is far superior to that of PointNorth's nominees. It has enabled us to secure prime real estate locations and ensure that our stores are conveniently located on competitive terms with advantageous tenants. Two of our current Board members work full time in the real estate industry and have over 65 years of combined experience in Canada and the U.S.
9. Each of the two PointNorth nominees who "authored" its "New Strategy" stand to receive exclusive payouts from PointNorth less than 18 months after the Annual Meeting. This is the very definition of a "Golden Leash", which Investopedia defines as follows: "A golden leash is designed to offer an incentive to the nominee directors to act in the interests of the major shareholder…"
PointNorth is trying to convince you this isn't the case, despite the plain meaning of its own disclosure. Here's what it said on page 50 of its Dissident Circular:
PointNorth entered into an advisory agreement with certain individuals having liquor retailing expertise, including two of the nominees, Kenneth G. Barbet and Richard D. Perkins, whereby such individuals agreed to provide advisory services to PointNorth. Pursuant to the agreement, the advisors will, in certain circumstances, receive a specified percentage of the net profits earned by PointNorth on the shares held by PointNorth, such payment to be made on the earlier of (i) PointNorth having sold all of the shares it owns and (ii) November 15, 2018.
Now PointNorth is contradicting its own circular. In a news release issued yesterday, PointNorth claims it will not really be compensating Mr. Barbet and Mr. Perkins if they are elected. The only way to clear up this contradiction is for PointNorth to disclose the full terms of its agreements with Mr. Barbet and Mr. Perkins.

"The question is whether PointNorth truly doesn't understand our business, or is trying to mislead shareholders into giving up control by electing their majority slate," said Mr. Dinning. "Shareholders should stay tuned for further communications from us in the days ahead. This will come down to who you can trust to be good stewards of your investment."

Vote the WHITE proxy for Liquor Stores' nominees

Liquor Stores urges shareholders to read its Management Information Circular, available on the Liquor Stores website at http://www.liquorstoresna.ca/investors and under the Liquor Stores profile at www.sedar.com. The circular highlights the value creation initiatives undertaken by Liquor Stores and its Board over the past few years. The Circular also outlines the strategic importance of Liquor Stores' market diversification and work underway to improve inventory management to free up more cash flow to invest in the business.

Liquor Stores recommends that shareholders vote the WHITE proxy for the Board's eight experienced and qualified incumbent nominees. Vote today.

Meeting Details

The record date for the Annual Meeting was the close of business on April 21, 2017 (the "Record Date"). All registered shareholders of record as at the Record Date are invited to attend the Meeting which is taking place at Meeting Place 1 at the Hyatt Place Edmonton-West located at 18004 100 Ave NW, Edmonton, Alberta, on Tuesday, June 20, 2017, at 10:00 a.m. (Edmonton time). Shareholders are advised to vote only the WHITE form of proxy today, or no later than 10:00 a.m. (Mountain Time) or Noon (Eastern Time) on Friday, June 16, 2017.

If shareholders have any questions or require any assistance in executing your proxy or voting instruction form, please call D.F. King Canada at:

• North American Toll Free Number: 1-800-301-9627

• Outside North America, Banks, Brokers and Collect Calls: 1-201-806-7301

• Email: inquiries@dfking.com

• North American Toll Free Facsimile: 1-888-509-5907

• Facsimile: 1-647-351-3176

ABOUT LIQUOR STORES N.A. LTD.

The Company operates 252 retail liquor stores in Alberta, British Columbia, Alaska, Kentucky, New Jersey, and Connecticut. Liquor Stores' retail brands include: Liquor Depot, Liquor Barn, and Wine and Beyond in Alberta (178 stores); Liquor Depot and Liquor Barn in British Columbia (34 stores); Brown Jug in Alaska (22 stores); Liquor Barn "The Ultimate Party Source" and Liquor Barn Express in Kentucky (15 stores), Joe Canals Discount Outlet in New Jersey (2 stores), and LQR MKT in Connecticut (one store). The Company's common shares and convertible subordinated debentures trade on the Toronto Stock Exchange under the symbols "LIQ" and "LIQ.DB.B", respectively.

FORWARD-LOOKING STATEMENTS

This press release contains forward looking statements or information (collectively "forward‐looking statements") within the meaning of the "safe harbour" provisions of applicable securities legislation. All statements and information other than statements of historical fact contained in this press release are forward‐looking statements. In particular, this press release contains forward‐looking statements with respect to: Liquor Stores' strategy, the implementation of our ERP system, and our continued regular examination of our U.S. business. Forward‐looking statements reflect our current plans, intentions, and expectations, which are based on management's perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. Our plans, intentions, and expectations are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and as such, are subject to change. There is no assurance that the plans, intentions, or expectations upon which these forward‐looking statements are based will occur. Forward-looking statements are subject to risks, uncertainties and assumptions, including, but not limited to, those discussed elsewhere in this press release and our other filings made with Canadian securities regulatory authorities and available on SEDAR at www.sedar.com.
Although Management believes that the expectations represented in such forward-looking statements are reasonable there can be no assurance that such expectations will prove to be correct and such forward‐looking statements should not be unduly relied upon. Some of the factors that could affect future results and could cause results to differ materially from those expressed in the forward-looking statements contained herein include, but are not limited to: risks relating to government regulation and changes thereto (whether by court decisions, citizen referenda, or otherwise); competition; the state of the economy including general economic conditions in Canada (including Alberta) and the U.S.; the unpredictability and volatility of Liquor Stores' common share price; restrictions on potential growth; availability of sufficient financial resources to fund the Company's capital expenditures; changes in commodity tax rates and government mark‐ ups; risks relating to future acquisitions and development of new stores; the ability of management to execute the Company's business and strategic plans; Liquor Stores' ability to locate and secure acceptable store sites and to adapt to changing market conditions; poor weather conditions; dependence on key personnel; labour costs, shortages and labour relations including Liquor Stores' ability to hire and retain staff at current wage levels and the risk of possible future unionization; supply interruption or delays; dependence on suppliers; reliance on information and control systems; income tax changes; leverage and restrictive covenants in agreements relating to current and future indebtedness of Liquor Stores; and credit risks arising from operations. These factors should not be construed as exhaustive. The information contained in this press release, and as disclosed in other filings made by the Company with Canadian securities regulatory authorities and available on SEDAR at www.sedar.com, identifies additional factors that could affect the operating results and performance of Liquor Stores. Readers are cautioned that this list of risk factors should not be construed as exhaustive. The forward looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward looking statements included in this press release are made as of the date hereof and Liquor Stores assumes no obligation to update or revise them to reflect new events or circumstances except as expressly required by applicable securities law.

Contact Information

  • Investors
    Liquor Stores N.A. Ltd.
    Matthew Rudd
    Senior Vice President and Chief Financial Officer
    (780) 702-7389

    Media
    Longview Communications
    Louise Kozier
    (604) 694 6033