Leons Furniture Reports Sales & Earnings Increases

Furniture World Magazine

Leon's Furniture reported that for the three months ended September 30, 2008, total Leon's sales were $259,204,000 including $56,219,000 of franchise sales ($216,225,000 including $50,434,000 franchise sales in 2007), an increase of 19.9%. Net income was $17,499,000, 25 cents per common share ($16,174,000, 23 cents per common share in 2007), an increase of 8.7% per common share. For the nine months ended September 30, 2008, total Leon's sales were $680,333,000 including $146,045,000 of franchise sales ($586,459,000 including $134,925,000 of franchise sales in 2007), an increase of 16.0% and net income was $40,185,000, 57 cents per common share ($36,884,000, 52 cents per common share in 2007), an increase of 9.6% per common share. Comments And Additional Information From Leon's Furniture: Leon's was able to continue to improve both sales and profits in the third quarter of 2008 compared to the prior year. This was achieved through strong efforts put forth by both the merchandising and marketing departments. We believe that we are gaining market share and are well positioned to continue to do so during these difficult times. Renovations have just been completed at our Mississauga, Ontario store with a grand re-opening now taking place. A major renovation to our Laval, Quebec showroom and warehouse store is well on its way and is scheduled to be complete by the spring of 2009. Progress is continuing with a new downtown Toronto, Ontario store known as the "Roundhouse" and we anticipate a grand opening in 2009. We are also pleased with the year-to-date performance of Appliance Canada which was acquired effective January 1, 2008. The Directors have declared a quarterly dividend of 7 cents per common share payable on the 12th day of January 2009 to shareholders of record at the close of business on the 12th day of December 2008. In addition, the annual dividend on the convertible non-voting series shares of 14 cents, will be payable on January 12th, 2009 to the shareholders of record at the close of business on December 12th, 2008. As stated in our press release dated February 20, 2007, as of 2006, dividends paid by Leon's Furniture Limited are "eligible dividends" and for further clarification, all future dividends are eligible dividends unless otherwise stated. Introduction Leon's Furniture Limited has been in the furniture retail business for close to 100 years. The company's 35 corporate and 29 franchise stores can be found across Canada. Main product lines sold at retail include furniture, appliances and electronics. Revenues and Expenses For the three months ended September 30, 2008, total Leon's sales were $259,204,000 including $56,219,000 of franchise sales ($216,225,000 including $50,434,000 of franchise sales in 2007), an increase of 19.9%. Leon's corporate sales of $202,985,000 in the third quarter of 2008, increased by $37,194,000 or 22.4%, compared to the third quarter of 2007. In this quarter, we continued to experience strong corporate sales growth across the country with same store corporate sales being up 7.9% compared to the prior year. The balance of the sales increase in the third quarter was the result of the acquisition of Appliance Canada, which took effect January 1, 2008. Leon's franchise sales of $56,219,000 in the third quarter of 2008, increased by $5,785,000, or 11.5% store for store, compared to the third quarter of 2007. Similar to the previous quarters, we experienced strong franchise sales growth in Eastern and Central Canada with flat sales in Western Canada compared to the same quarter the prior year. Our gross margin of 39.0% for the third quarter 2008 decreased 2.9% from the third quarter 2007. The drop in gross margin was mainly attributable to Appliance Canada sales whose margins are substantially lower than a typical Leon's store. Appliance Canada is involved in the wholesale of appliances to the building and apartment trades as well as some retail of high end appliances to the public. Net operating expenses of $52,531,000 were up $8,028,000 or 18.0% for the third quarter 2008 compared to the third quarter 2007. Payroll and commission costs were up 20.5% in the third quarter compared to the prior year. The increase was the result of three key factors: the inclusion of Appliance Canada effective January 1, 2008; higher payroll costs associated with the increase in sales over the prior year; and the continuation of a trend started in 2007 where higher than normal wage cost increases continue in Western Canada where they have experienced a labour shortage. We saw advertising expenses increase by $187,000 or 2.8% for the third quarter compared to the prior year, which is well within budget. As a result of the above, net income for the third quarter 2008 was $17,499,000, 25 cents per common share (as compared to $16,174,000, 23 cents per common share in 2007), an increase of 8.7% per common share. For the nine months ended September 30, 2008, total Leon's sales were $680,333,000 including $146,045,000 of franchise sales ($586,459,000 including $134,925,000 of franchise sales in 2007), an increase of 16.0% and net income was $40,185,000, 57 cents per common share ($36,884,000, 52 cents per common share in 2007), an increase of 9.6% per common share. Cash and marketable securities (including restricted marketable securities) increased by $11,255,000 in the quarter mainly as a result of net income and the net change in non-cash working capital balances in the quarter. Marketable securities consist of over 80% fixed income investments, the majority of which are denominated in Canadian currency. These fixed income investments consist primarily of Canadian and International bonds with maturities not exceeding nine years with an interest rate range of 4.0% to 7.75%. The Company has minimal exposure to U.S. financial companies effected by the credit crisis and corporate failures and the Company does not own any asset backed commercial paper in its portfolio. Marketable securities are stated at market value. As part of the warranty reinsurance agreement with a subsidiary, the Company has pledged assets, which are part of the investment portfolio. The pledged assets are for the benefit of the primary insurance company for the purposes of insuring customer product warranty sales. The assets are in the form of a trust with a financial institution amounting to $17,168,000. Inventory increased by $12,086,000 from the second quarter 2008. Inventory levels increased to support the promotional campaigns for the fourth quarter. At the present time all funding for all new store projects, renovations, dividends and working capital needs are scheduled to come from our existing cash resources. In the third quarter of 2008, the Company generated $29,941,000 cash from operating activities, contributing to the Company's strong liquidity position. Common Shares At September 30, 2008 there were 70,593,177 common shares issued and outstanding. During the third quarter of 2008, 7,819 convertible, non-voting series 1998 shares (2007 - 20,844) and 20,424 convertible non-voting series 2002 shares (2007 - nil) were converted into common shares. The Company repurchased 201,800 (2007 - 342,800) of its common shares in the open market at an average price of $11.91. Pursuant to the terms and conditions of Normal Course Issuer Bids, all shares repurchased by the Company have been cancelled. For the nine-month period ending September 30, 2008, the Company repurchased 395,800 (2007 - 565,600) common shares at an average price of $11.79 and 46,618 convertible, non-voting series 1998 shares (2007 - 384,340) and 228,827 convertible, non-voting series 2002 shares (2007 - nil) were converted to common shares. In addition, 49,992 convertible, non voting series 2005 shares were cancelled. Under the terms of its Management Share Purchase Plan, the Company advanced non-interest bearing loans to certain of its employees in 1998, 2002 and 2005 allowing them to acquire convertible, non-voting, series 1998 shares, series 2002 shares and series 2005 shares, respectively, of the Company. These loans are repayable through the application against the loans of any dividends on the shares, with any remaining balance repayable on the date the shares are converted to common shares. Each issued and fully paid for series 1998, 2002 and 2005 share may be converted into one common share at any time after the fifth anniversary date of the issue of these shares and prior to the tenth anniversary of such issue. Each series 1998 and 2002 shares may also be redeemed at the option of the holder or by the Company at any time after the fifth anniversary date of the issue of these shares and prior to the tenth anniversary of such issue. The series 2005 shares were redeemable at the option of the holder for a period of one business day following the date of issue of such shares. The Company has the option to redeem the series 1998, series 2002 and series 2005 shares at any time after the fifth anniversary date of the issue of these shares and must redeem prior to the tenth anniversary of such issue. The redemption price is equal to the original issue price of the shares adjusted for subsequent subdivisions of shares plus accrued and unpaid dividends. The purchase prices of the shares are $4.40 per series 1998 share, $7.19 per series 2002 share and $9.44 per series 2005 share. Dividends paid to holders of series 1998, 2002, 2005 shares of approximately $329,000 (2007 - $365,000) have been used to reduce the respective shareholder loans. During the third quarter of 2008, 7,819 convertible, non-voting, series 1998 shares (2007 - 20,844) and 20,424 convertible, non-voting series 2002 shares were converted into common shares with a stated value of $34,000 (2007 - $92,000) and $147,000 (2007 - nil) respectively. For the nine month period, 46,618 convertible, non-voting, series 1998 shares (2007 - 384,340) and 228,827 convertible, non-voting series 2002 shares (2007 - nil) were converted into common shares with a stated value of $205,000 (2007 - $1,691,000) and $1,645,000 (2007 - nil) respectively. During the three month period ended September 30, 2008, 11,538 convertible, non-voting series 2002 shares were cancelled (2007 - nil) in the amount of $109,000. For the nine month period, 49,992 convertible, non-voting series 2002 shares were cancelled (2007 - 3,905) in the amount of $472,000 (2007 - $37,000). Revenue Recognition Sales are recognized as revenue for accounting purposes upon the customer either picking up the merchandise or when merchandise is delivered to the customers' home. The Company offers customers the option to finance purchases through various third party financing companies. In situations where a customer elects to take advantage of delayed payment terms, the costs of financing these sales are deducted from sales. Finance costs deducted from sales for the third quarter 2008 were down slightly when compared to the same period for 2007. The cost decrease is a result of the decrease in the prime lending rate. The current credit crisis has not hindered the Company in providing third party financing to its customers during the third quarter. We expect our finance costs to drop slightly going forward as the prime lending rates have continued to fall. Warranty Revenue Warranty revenues are deferred and taken into income on a straight-line basis over the life of the warranty period. Warranty revenues included in sales year to date for 2008 are $10,827,000 compared to $9,957,000 in 2007. Warranty expenses deducted through costs of goods sold year to date 2008 are $3,864,000 compared to $3,317,000 in 2007. Franchise Royalties Leon's franchisees operate as independent owners. The Company charges the franchisee a royalty fee based primarily on a percentage of the franchisees gross sales. This royalty income is recorded by the Company on an accrual basis under the heading "Other income" and is up 8.5% year to date for 2008 compared to 2007 which is in line with the increase in franchise sales for the year. Volume Rebates The Company receives vendor rebates on certain products based on the volume of purchases made during specified periods. The rebates are deducted from the inventory value of goods received and are recognized as a reduction of cost of goods sold as sales occur. Outlook During the first three quarters of 2008 very strong merchandising and marketing efforts enabled us to increase sales and profits over the comparable period for the prior year. As of late, we have seen signs of a slowdown in consumer spending and as such we expect the final quarter of 2008 to show a moderation in sales growth as compared to last year. Despite these concerns, our Company's previous experience in dealing with economic slowdowns, our strong financial position, and our constant effort to improve productivity have well positioned us to adapt to these changing market conditions.