Sterling Shoes Income Fund
TSX : SSI.UN

Sterling Shoes Income Fund

May 09, 2008 17:00 ET

Sterling Shoes Income Fund: Fund Announces First Quarter 2008 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - May 9, 2008) - Sterling Shoes Income Fund (TSX:SSI.UN) -

HIGHLIGHTS:

- Overall sales grew 4.2% during first quarter 2008 over first quarter 2007.

- Same-store sales grew 1.4% during first quarter 2008 over first quarter 2007.

- Distributions for the first quarter of 2008 were $0.375 per unit, 4% over first quarter 2007.

- A supplementary special dividend of $0.06 per unit was declared.

- 5 new stores opened to date in 2008, bringing the number of stores in operation to 146.

Sterling Shoes Income Fund today reported its financial results for the quarter ended March 31, 2008.

Sales for the quarter ended March 31, 2008 were $24.9 million, 4.2% higher than first quarter 2007. First quarter same store sales grew 1.4 % over last year.

"Our expansion strategy continues to unfold as planned," said Jeremy Horwitz, President and Chief Executive Officer. We have opened 5 new stores since January 1, 2008 bringing the total number of stores in operation to 146 compared to 100 at the time of the company's IPO in July 2005. We expect to open a total of 18 stores during 2008."

"We have been taking steps to build our infrastructure and position the business for sustainable long-term earnings growth. In this context, we are adding resources to plan and implement new information technology systems, have bolstered our purchasing and distribution capability, and added field management to support our retail store expansion."

Distributions for first quarter 2008 totaled $0.375 per unit, a 4% increase over the same period last year.

The Fund declared a supplementary special distribution of $0.06 per unit applying to 2007 fiscal year business bringing the total distribution relating to that year to $1.86 per unit, a 16 cent increase over the prior year.

Financial Results for the fourth quarter and year-ended December 31, 2007

During the first quarter of 2008, sales rose 4.2% to $24.9 million from $23.9 million a year earlier, as same-store sales increased by 1.4%.

Cost of sales as a percentage of sales for the quarter ended March 31, 2008 was 55.6% compared to 41.1% for the same period in 2007. On January 1, 2008 the Fund implemented a new inventory valuation standard, as required by CICA Handbook Section 3031, "Inventories". The change in cost of sales as a percentage of sales was largely due to this change. Inventory mark-downs were previously recognized in the period that markdowns were made; they are now recognized in the period of sale. Management believes that over the course of the year, gross margins under the new inventory valuation standard and the previous inventory valuation model should be similar, the difference being related to timing. Please refer to the Fund's MD&A for additional details on the change of inventory evaluation methodology.

Store and selling expenses for the quarter were $10.5 million or 42.2% of sales compared to $9.3 million or 38.7% for the same period during 2007. Store and selling expenses have a fixed underlying core with a large variable component. The Fund opened 2 new stores during the first quarter of 2008. New stores have a higher rent profile than the average store base, which has resulted in higher occupancy charges. The Fund also employed additional resources in those stores to ensure that new staff were properly trained and that new stores opened smoothly. These start up costs coupled with pressure on labour costs, especially in Western Canada, contributed to higher store and selling expenses.

General and administrative ("G&A") expenses for the quarter ended March, 2008 were $2.1 million or 8.3% of sales compared to $1.7 million or 6.9% of sales during the same period in 2007. This increase was due to additional head office employees, an increase of general overhead and infrastructure expenditures and investment in processes and systems improvement initiatives to keep pace with the current and future growth of the business.

Net loss for the first quarter of 2008 was $2.0 million, or $0.37 loss per unit (diluted - $0.37 loss per unit) compared to net income for the same period last year of $1.8 million, or $0.34 per unit (diluted - $0.34 per unit). In addition to the impact of the change in inventory valuation methodology, higher store and selling expense and higher G&A costs noted above, this period's loss was partially offset by a non-cash charge of $0.7 million to reflect the change in the estimated future income tax liability resulting from the Government of Canada enacting legislation to impose a tax on distributions paid by publicly traded income trusts in Canada, commencing in 2011.

Cash used in operating activities was $1.6 million for the quarter ended March 31, 2008 compared to $0.8 million for the same period in 2007. The change arose from increases in general and administrative expenses and increases in store and selling expenses offset by net changes in non-cash working capital balances related to operations.



STERLING SHOES INCOME FUND
Consolidated Balance Sheets As at As at
(Unaudited - expressed in thousands of dollars, March March
except per unit and number of unit figures.) 31, 2008 31, 2007
---------------------------------------------------------- ----------

ASSETS

CURRENT
Cash $ 5,475 $ -
Accounts receivable 292 1,006
Inventory 36,750 27,434
Prepaid expenses and deposits 955 731
---------------------------------------------------------- ----------
43,472 29,171
LEASEHOLDS AND EQUIPMENT 17,491 14,092
GOODWILL 828 828
INTANGIBLE ASSETS 49,041 49,041
---------------------------------------------------------- ----------
$ 110,832 $ 93,132
---------------------------------------------------------- ----------
---------------------------------------------------------- ----------

LIABILITIES AND UNITHOLDERS' EQUITY

CURRENT
Bank indebtedness $ - $ 5,060
Accounts payable and accrued liabilities 22,587 19,539
Distributions payable 1,162 1,116
---------------------------------------------------------- ----------
23,749 25,715
FUTURE INCOME TAXES 7,000 -
CONVERTIBLE DEBENTURES 21,377 -
TERM LOAN - 5,000
DEFERRED LEASE INDUCEMENTS 1,770 1,460

NON-CONTROLLING INTEREST - 12,214
UNITHOLDERS' EQUITY 56,936 48,743
---------------------------------------------------------- ----------
$ 110,832 $ 93,132
---------------------------------------------------------- ----------
---------------------------------------------------------- ----------


STERLING SHOES INCOME FUND
Consolidated Statements of Income and
Comprehensive Income
(Unaudited - expressed in thousands of Three-month period ended
dollars, except per unit and number of ----------------------------
unit figures.) Mar 31, 2008 Mar 31, 2007
---------------------------------------------------------- ------------
---------------------------------------------------------- ------------

SALES $ 24,948 $ 23,950
COST OF SALES 13,875 9,851
---------------------------------------------------------- ------------
GROSS MARGIN 11,073 14,098
---------------------------------------------------------- ------------

EXPENSES
Store and selling 10,522 9,275
General and administrative 2,060 1,663
---------------------------------------------------------- ------------
12,582 10,937
---------------------------------------------------------- ------------
(Loss) / Income before interest, amortization
and non-controlling interest (1,509) 3,161
Interest expense 463 109
(Gain) Loss on disposal of leaseholds and
equipment - (4)
Amortization of leaseholds and equipment 751 788
---------------------------------------------------------- ------------
(LOSS) / INCOME BEFORE NON-CONTROLLING
INTEREST AND TAXES (2,723) 2,268

Future income taxes (724) -
---------------------------------------------------------- ------------
(LOSS) / INCOME BEFORE NON-CONTROLLING
INTEREST (1,999) 2,268

NON-CONTROLLING INTEREST - 462
---------------------------------------------------------- ------------
NET (LOSS) / INCOME $ (1,999) $ 1,806
---------------------------------------------------------- ------------
---------------------------------------------------------- ------------

Basic and diluted net (loss) / income per
unit $ (0.37) $ 0.34

Basic weighted average number of units
outstanding 5,387,286 5,313,488
Diluted weighted average number of units
outstanding 6,569,311 6,641,860


STERLING SHOES INCOME FUND
Consolidated Statements of Unitholders' Equity
For the three month period ended March 31, 2008
(Unaudited - expressed in thousands of dollars, except per unit and
number of unit figures.)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Equity Cumul-
Unit- component Cumul- ative
holders' of Deben- ative distri-
capital tures earnings butions Total
----------------------------------------------------- --------- --------
BALANCE,
March 31, 2007 $ 47,847 - 15,370 (14,474) $ 48,743
Option on
convertible
debentures - 2,657 - - 2,657
Net income for
the period - 3,540 - 3,540
Distributions
declared - - - (7,970) (7,970)
---------------------------------------------------------------- --------
BALANCE,
December 31, 2007 $ 47,847 2,657 18,909 (22,444) $ 46,968
Elimination of
non-controlling
interest 11,962 - 4,801 (5,611) 11,152
Re-valuation of
inventory per CICA
HB S.3031 3,306 3,306
Net loss for the
period - - (1,999) - (1,999)
Distributions
declared - - - (2,491) (2,491)
---------------------------------------------------------------- --------
BALANCE,
March 31, 2008 $ 59,809 2,657 25,016 (30,546) $ 56,936
--------------------------------------------------------------------------
--------------------------------------------------------------------------


STERLING SHOES INCOME FUND
Consolidated Statement of Cash Flows
(Unaudited - expressed in thousands of Three-month period ended
dollars, except per unit and number of ----------------------------
unit figures.) Mar 31, 2008 Mar 31, 2007
---------------------------------------------------------- ------------
---------------------------------------------------------- ------------

OPERATING ACTIVITIES
Net (Loss) / Income $ (1,999) $ 1,806
Items not involving cash
Future income taxes (724) -
Amortization of leaseholds and equipment 751 788
Accreted interest expense 134 -
Amortization of deferred lease inducements (89) (74)
Loss on disposal of leaseholds and equipment - -
Non-controlling interest (note 6) - 462
Revaluation of inventory per CICA HB S3031
(note 2) 3,306 -
--------------------------------------------------------------------------
1,379 2,982

Change in non-cash working capital balances
related to operations
Accounts receivable 481 (541)
Inventory (7,716) (8,794)
Prepaid expenses and deposits 53 (106)
Accounts payable and accrued liabilities 4,172 5,645
--------------------------------------------------------------------------
(3,010) (3,796)
--------------------------------------------------------------------------
Cash used in operating activities (1,631) (814)
--------------------------------------------------------------------------

INVESTING ACTIVITIES
Acquisition of leaseholds and equipment (1,594) (1,602)
Proceeds from disposal of assets - 4
Lease inducements received 74 0
--------------------------------------------------------------------------
Cash used in investing activities (1,520) (1,599)
--------------------------------------------------------------------------

FINANCING ACTIVITIES
Payment of distributions (5,234) (5,493)
--------------------------------------------------------------------------
Cash used in financing activities (5,234) (5,493)
--------------------------------------------------------------------------

CASH OUTFLOW DURING THE PERIOD (8,385) (7,905)

CASH, BEGINNING OF PERIOD 13,860 2,845
--------------------------------------------------------------------------
CASH, END OF PERIOD $ 5,475 $ (5,060)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $ - $ 109
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Conference Call Notification

Please note the Fund's conference call will take place at 10:00 am Pacific standard time (1:00 pm EST) on Monday, May 12, 2008. The number to participate in the teleconference is Toll-free: 866-542-4238 or 416-641-6127. To ensure your participation, please call in about five minutes before the start of the call. For those unable to participate, a telephone replay will be available until May 26, 2008 using the passcode 3260624 at 800-408-3053 or 416-695-5800.

Forward-looking statements

Certain statements in this press release may constitute "forward-looking" statements that involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this press release, such statements often use, but are not limited to, such words as "may", "will", "expect", "should", "believe", "intend", "plan", "anticipate", "potential", and other similar terminology. These statements reflect current expectations of management regarding future events and operating performance and speak only as of the date of this press release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the following factors: competitive and economic environment, impact of changes to tax treatment of income trusts or dividend tax credits, foreign exchange, seasonality, fluctuation of cash distributions and nature of Units. The actual timing of and number of additional store openings could differ materially from what is described herein if Sterling is unable to reach timely and satisfactory agreements with the various landlords as to the final lease documentation, to secure adequate labour and materials to construct the stores, to deliver sufficient inventory, to adapt its operational systems, or to hire, train and integrate employees. Although the forward-looking statements contained in this press release are based upon what our management believes to be reasonable assumptions, we cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this press release and we assume no obligation to update or revise them to reflect new events or circumstances.

About Sterling Shoes Income Fund

Sterling is a leading Vancouver-based footwear retailer offering a broad selection of private label and brand name shoes and accessories in five Canadian provinces through its six separate retail banners: Sterling, Joneve, Shoe Warehouse, Freedman Shoes and Gia. Since 1987, Sterling Shoes has grown from five shopping mall locations to 145 stores (as at May 9, 2008) located in high-traffic, high-visibility locations within enclosed shopping malls, on high streets and in strip malls. The Fund currently employs over 1,000 employees, and sales of the business for the twelve month period-ended March 31, 2008 were $119.8 million. The Fund's units are listed on the Toronto Stock Exchange under the symbol SSI.UN. The Fund's convertible debentures are listed on the Toronto Stock Exchange under the symbol SSI.DB.

For further information, please visit us at www.SterlingShoesIncomeFund.com.

Additional information about Sterling Shoes Income Fund can be found in the disclosure documents filed by Sterling Shoes Income Fund with the securities regulatory authorities, available at www.sedar.com.

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