Sterling Shoes Income Fund
TSX : SSI.UN

Sterling Shoes Income Fund

August 14, 2006 08:00 ET

Sterling Shoes Income Fund: Sales Increase 24% During Second Quarter 2006

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Aug. 14, 2006) - Sterling Shoes Income Fund (TSX:SSI.UN) -

HIGHLIGHTS:

- Monthly distributions increased 17% to $0.105 per Unit effective May 1, 2006.

- Second-quarter 2006 sales increased 24% over the same period in 2005.

- Same-store sales grew 9% during the second-quarter of 2006 over the same period in 2005.

Sterling Shoes Income Fund today reported its financial results for the three and six-month periods ended June 30, 2006.

"We increased sales by 24% during the second quarter of 2006 compared to the same period in 2005, which included same-store sales growth of 9% during that period. Year-to-date, overall sales and same-store sales have increased 21% and 8%, respectively. Our Ontario expansion continues to unfold as planned. We expect to open our 24th store in Ontario in September," said Jeremy Horwitz, President and Chief Executive Officer.

"In view of the Fund's strong financial performance and our operational success, we felt confident in increasing our cash distributions to our unitholders, which we did effective May 1, 2006, raising our monthly cash distributions by 17.2% from $0.08958 to $0.105 per trust unit. It has now been 13 months since the Fund completed its initial public offering. We currently have 113 stores open with another 11 stores expected to open in time for the peak Fall selling season."

"Our strategy in terms of financing our growth is to use our credit facilities in order to deliver as much of our net income as possible directly to our Unitholders. We have not yet had to access any of the credit facilities designated for capital expenditure, despite opening 14 new stores (13 net openings), renovating 4 stores and relocating 3 stores since July 12, 2005, as at August 11, 2006. This is due to the increasing profitability and cash flow from our existing and recently opened stores."

Financial Results for the three and six-month periods ended June 30, 2006

During the second quarter of 2006, sales rose 24% to $25.2 million from $20.2 million a year earlier, as same-store sales increased by 9%. For the six-month period ended June 30, 2006, sales increased to $44.2 million, or 21%, including same-store sales growth of 8% over the same period in 2005.

Cost of sales as a percentage of sales for the three and six-month periods ended June 30, 2006 were 48.8% and 45.6% respectively, compared to 46.7% and 50.1% for the same periods during 2005. Cost of sales for the corresponding three and six-month periods in 2005 are not comparable as it was the practice of the predecessor company, Sterling Shoes Inc. at that time to record its product obsolescence provision for the fiscal year-ended January 31 in the month of January.

Store and selling expenses for the three and six-month periods ended June 30, 2006 were 33.2% and 34.8% of sales respectively, compared to 33.1% and 34.6% for the same periods during 2005. Store and selling expenses have a fixed underlying core, but are largely variable as a percentage of sales. These costs are highest as a percentage of sales during the first quarter of the year and gradually fall (as a percentage of sales year-to-date) over the course of the year.

General and administrative ("G&A") expenses for the three and six-month periods ended June 30, 2006 were 5.6% and 6.0% of sales respectively, compared to 3.2% and 25.3% during the same periods in 2005. After removing management fees and bonuses and normalizing management salaries relating to the fiscal year ended January 31, 2005, G&A expenses were 4.1% for the six-months ended June 30, 2005. On that basis, increases included additional management personnel, additional professional service fees related to being a reporting issuer and the adjustment to market of management's compensation arrangements, including bonuses and the Fund's obligations under its long-term incentive plan.

Income before non-controlling interest for the first quarter of 2006 was $2.4 million, or $0.37 per unit (diluted - $0.37 per unit). Income before non-controlling interest for the six-month period ended June 30, 2006 was $4.5 million, or $0.68 per unit (diluted - $0.68 per unit).

Adjusted EBITDA during the second quarter of 2006 was $3.0 million, or 12.1% of sales. This represents $0.46 per unit. Adjusted EBITDA during the six-month period ended June 30, 2006 was $5.7 million, or 13.0% of sales. This represents $0.86 per unit.

Distributable cash generated during the three and six-month periods ended June 30, 2006 was $2.1 million and $4.4 million, respectively, from which the Fund declared distributions totaling $2.0 million and $3.8 million, or $0.30 per unit and $0.57 per unit, respectively.

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.



STERLING SHOES INCOME FUND
Interim Consolidated Balance Sheet As at As at
(unaudited) June 30, December 31,
2006 2005
------------------------------------------------------ -------------
------------------------------------------------------ -------------

ASSETS

CURRENT
Cash $ - $ 3,710,066
Accounts receivable 166,825 96,709
Inventory 18,398,101 15,338,152
Prepaid expenses and deposits 396,529 242,567
------------------------------------------------------ ------------
18,961,455 19,387,494
LEASEHOLDS AND EQUIPMENT 11,375,465 9,602,058
DEFERRED FINANCING COSTS 72,707 90,631
GOODWILL 827,809 827,809
INTANGIBLE ASSETS 49,041,000 49,041,000
------------------------------------------------------ -------------
$ 80,278,435 $ 78,948,992
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LIABILITIES AND UNITHOLDERS' EQUITY

CURRENT
Operating loan $ 167,224 $ -
Accounts payable and accrued liabilities 12,437,515 10,969,899
Distributions payable 955,870 1,895,667
------------------------------------------------------ -------------
13,560,609 12,865,566
TERM LOAN 5,000,000 5,000,000
DEFERRED LEASE INDUCEMENTS 1,159,832 1,260,257

NON-CONTROLLING INTEREST 12,121,042 11,964,635
UNITHOLDERS' EQUITY 48,436,952 47,858,534
------------------------------------------------------ -------------
$ 80,278,435 $ 78,948,992
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STERLING SHOES INCOME FUND
Interim Consolidated Statement of Income Three-month Six-month
(unaudited) period ended period ended
June 30, 2006 June 30, 2006
------------------------------------------------------ -------------
------------------------------------------------------ -------------

SALES $ 25,158,978 $ 44,204,625
COST OF SALES 12,278,628 20,233,363
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GROSS MARGIN 12,880,350 23,971,262
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EXPENSES
Store and selling 8,350,826 15,396,204
General and administrative 1,402,457 2,660,768
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9,753,283 18,056,972
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Income before interest, amortization and
non-controlling interest 3,127,067 5,914,290
Interest expense 75,206 143,014
Loss on disposal of leaseholds
and equipment 0 42,981
Amortization of leaseholds and equipment 614,085 1,201,761
Amortization of deferred financing costs 8,963 17,925
------------------------------------------------------ -------------
INCOME BEFORE NON-CONTROLLING INTEREST 2,428,814 4,508,609

NON-CONTROLLING INTEREST 489,146 910,429
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NET INCOME $ 1,939,668 $ 3,598,180
------------------------------------------------------ -------------
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Basic and diluted net income per unit $ 0.37 $ 0.68

Basic weighted average number of
units outstanding 5,313,488 5,313,488
Diluted weighted average number of
units outstanding 6,641,860 6,641,860

See accompanying notes


STERLING SHOES INCOME FUND
Interim Consolidated Statement of Unitholders' Equity
For the six-month period ended June 30, 2006
(unaudited)
--------------------------------------------------------------------
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Fund Units Cumulative Cumulative
(Note 8) earnings distributions Total
--------------------------------------------------------------------

Balance,
beginning
of period $ 47,846,787 3,548,895 (3,537,148)$ 47,858,534
Net income
for the
period - 3,598,180 - 3,598,180
Distributions
declared - - (3,019,762) (3,019,762)
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BALANCE,
END OF
PERIOD $ 47,846,787 7,147,075 (6,556,910)$ 48,436,952
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STERLING SHOES INCOME FUND
Interim Consolidated Statement
of Cash Flows Three-month Six-month
(unaudited) period ended period ended
June 30, 2006 June 30, 2006
------------------------------------------------------ -------------
------------------------------------------------------ -------------

OPERATING ACTIVITIES
Net Income $ 1,939,668 $ 3,598,180
Items not involving cash
Amortization of leaseholds
and equipment 614,085 1,201,761
Amortization of deferred
financing costs 8,963 17,925
Amortization of deferred
lease inducements (81,134) (178,650)
Loss on disposal of leaseholds
and equipment 0 42,981
Non-controlling interest 489,146 910,429
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2,970,727 5,592,626
Change in non-cash working capital
balances related to operations
Accounts receivable 57,394 (70,116)
Inventory 2,736,856 (3,059,949)
Prepaid expenses and deposits (21,065) (153,962)
Accounts payable and accrued liabilities (1,981,501) 1,468,533
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791,684 (1,815,494)
------------------------------------------------------ -------------
Cash provided by operating activities 3,762,411 3,777,132
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INVESTING ACTIVITIES
Acquisition of leaseholds and equipment (1,592,826) (3,018,149)
Lease inducements received 0 78,225
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Cash used in investing activities (1,592,826) (2,939,924)
------------------------------------------------------ -------------

FINANCING ACTIVITIES
Operating loan (note 6) (302,717) 167,224
Payment of distributions (1,866,867) (4,714,499)
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Cash used in financing activities (2,169,584) (4,547,275)
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CASH INFLOW (OUTFLOW) DURING THE PERIOD 0 (3,710,067)

CASH, BEGINNING OF PERIOD 0 3,710,067
------------------------------------------------------ -------------
CASH, END OF PERIOD $ 0 $ (0)
------------------------------------------------------ -------------
------------------------------------------------------ -------------

Supplemental cash flow information
Interest paid $ 75,206 $ 143,014
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Additional details are available in the Fund's annual Management's Discussion and Analysis and Financial Statements filed on SEDAR (www.sedar.com) and on the Fund's website at www.sterlingshoesincomefund.com.

Conference Call Notification

Please note the Fund's conference call will take place at 11:00 am Pacific time (2:00 pm EDT) on Monday, August 14, 2006. The number to participate in the teleconference is Toll-free: 877-888-3490 or 416-695-9757. 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 August 28, 2006 at 888-509-0081.

Note: "EBITDA" and "Adjusted EBITDA" are not financial measures recognized by Canadian generally accepted accounting principals ("GAAP") and do not have standardized meanings prescribed by GAAP. Management cautions investors that EBITDA and Adjusted EBITDA should not replace net income or loss as an indicator of performance, or cash flows from operating, investing, and financing activities as a measure of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA and Adjusted EBITDA may differ from the methods used by other issuers. See "Reconciliation of Net Income to EBITDA and Adjusted EBITDA" in Management's Discussion and Analysis for reconciliation of EBITDA and Adjusted EBITDA to the most directly comparable measure calculated in accordance with GAAP. See also "Non-GAAP Measures" in the Fund's Management's Discussion and Analysis filed on SEDAR (www.sedar.com).

Distributable cash is a non-GAAP measure generally used by Canadian income funds as an indicator of financial performance. The Fund defines distributable cash as Adjusted EBITDA less interest expense and less maintenance capital expenditures. The method of calculating the Fund's distributable cash may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to distributable cash as reported by such entities.

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 five separate retail banners: Sterling, Joneve, Shoe Warehouse, Freedman's and Gia. Since 1987, Sterling Shoes has grown from five shopping mall locations to 113 stores (as at August 14, 2006) located in high-traffic, high-visibility locations within enclosed shopping malls, on high streets and in strip malls. The Fund currently employs over 900 employees, and sales of the business for the 12 month period ended June 30, 2006 were $90.1 million. The Fund's units are listed on the Toronto Stock Exchange under the symbol SSI.UN.

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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