Leon's Furniture Releases Financial Results for the Fourth Quarter Ended December 31, 2018

TORONTO, Feb. 27, 2019 /CNW/ - Leon's Furniture Limited ("Leon's" or the "Company") (TSX: LNF), today announced financial results for the fourth quarter 2018.

Highlights – Q4-2018

• Total system wide sales¹ were $726,547,000 in Q4-2018 compared to $723,255,000 in Q4-2017.
• Revenue was $601,660,000 in Q4-2018 compared to $596,851,000 in Q4-2017.
• Adjusted net income¹ increased by 6% to $38,289,000 in Q4-2018 compared to $36,119,000 in Q4-2017
• Adjusted diluted earnings per share¹ grew 4.4% to $0.47 in Q4-2018 compared to $0.45 in Q4-2017.
• Net debt including the convertible debenture totaled $14,259,000 at December 31, 2018 compared to $138,909,000 at December 31, 2017.

 Highlights – Fiscal year 2018

• Total system wide sales¹ grew 1.6% to $2,684,759,000 in fiscal 2018 compared to $2,641,254,000 in fiscal 2017.
• Revenue grew 1.2% to $2,241,437,000 in fiscal 2018 compared to $2,215,379,000 in fiscal 2017.
• Adjusted net income¹ increased by 7.7% to $106,691,000 in fiscal 2018 compared to $99,022,000 in fiscal 2017.
• Adjusted EBITDA¹ increased 2.1% to $188,756,000 in fiscal 2018 compared to $184,798,000 in fiscal 2017.
• Adjusted diluted earnings per share¹ grew 6.5% to $1.31 in fiscal 2018 compared to $1.23 in fiscal 2017.

¹Refer to the non-IFRS financial measures section of this press release

"Despite some weakness in consumer spending across the country, the ongoing execution of our strategy and the combined effort of our entire team led to both record sales and adjusted earnings during 2018", said Edward Leon, Chief Executive Officer and President of Leon's. "This year, we will be pushing forward in an even more concerted way in an attempt to prudently grow market share in all categories, through innovative marketing programs and strong promotional campaigns. We continue to enjoy increased efficiencies in all aspects of our business through our application of best practices between the Company's divisions. As a management team, we are confident that our efforts will continue to translate into the generation of meaningful shareholder value, leveraging: our national retail footprint; a portfolio of industry-leading service businesses; a substantial real estate portfolio; successful and rapidly growing on-line properties; and our dominant national distribution infrastructure."

For a full explanation of the Company's use of non-IFRS financial measures, please refer to the heading "Non-IFRS Financial Measures" in this document

Summary of Financial Highlights

	For the three months ended December  31
(000's of $ except % and per share amounts)	2018		2017		$ Increase/ (Decrease)		% Increase/ (Decrease)
Total system wide sales ^(1)(2)	726,547		723,255		3,292		0.5%
Franchise sales ^(1)	124,887		126,404		(1,517)		(1.2%)
Revenue ^(2)	601,660		596,851		4,809		0.8%
Same store sales ^(1)	587,800		588,398		(598)		(0.1%)
Gross profit margin as a percentage of revenue	44.61%		44.24%
SG&A^(3)	214,734		213,047		1,687		0.8%
SG&A^(3)as a percentage of revenue	35.69%		35.70%
Adjusted EBITDA^(1)	62,362		61,600		762		1.2%
Adjusted net income^(1)	38,289		36,119		2,170		6.0%
Net income	38,785		34,778		4,007		11.5%
Adjusted basic earnings per share^(1)	$	0.50	$	0.48	$	0.02	4.2%
Adjusted diluted earnings per share^(1)	$	0.47	$	0.45	$	0.02	4.4%
Common share dividends declared	$	0.14	$	0.12	$	0.02	16.7%
(1) Non-IFRS financial measures. Refer to "Non-IFRS Financial Measures" section in this press release for additional information.
(2) Reclassified comparative results to conform to the presentation of the three months ended December 31, 2018
(3) Selling, general and administrative expenses

Revenue

For the three months ended December 31, 2018, revenue was $601,660,000 compared to $596,851,000 in the prior year's fourth quarter.  Revenue increased by 0.8% as compared to the prior quarter mainly due to increases in mattress sales and commercial sales. 

Selling, general and administrative expenses ("SG&A")

SG&A as a percentage of revenue in the current quarter was down marginally as compared to the prior year's fourth quarter.  This was due to effectively managing overall SG&A expenses throughout the quarter while at the same time increasing advertising spend in the current quarter to drive traffic to both the retail stores and to the Company's websites. 

Adjusted Net Income and Adjusted Diluted Earnings Per Share⁽¹⁾

As we continue to pay down debt, we have reduced our net debt finance charges by $771,000 between the comparative quarters.  As a result of the factors above, adjusted net income for the fourth quarter of 2018 was $38,289,000.  This resulted in an adjusted diluted earnings per share of $0.47 in the quarter (adjusted net income $36,119,000 and $0.45 adjusted diluted earnings per share in 2017).

Consolidated operating results for the year ended December 31, 2018 and December 31, 2017

	For the year ended December 31
(000's of $ except % and per share amounts)	2018		2017		$ Increase		% Increase
Total system wide sales ^(1)(2)	2,684,759		2,641,254		43,505		1.6%
Franchise sales ^(1)	443,322		425,875		17,447		4.1%
Revenue ^(2)	2,241,437		2,215,379		26,058		1.2%
Same store sales ^(1)	2,196,767		2,190,664		6,103		0.3%
Gross profit margin as a percentage of revenue	43.58%		43.07%
SG&A^(3)	825,276		809,025		16,251		2.0%
SG&A^(3)as a percentage of revenue	36.82%		36.52%
Adjusted EBITDA^(1)	188,756		184,798		3,958		2.1%
Adjusted net income^(1)	106,691		99,022		7,669		7.7%
Net income	111,030		96,593		14,437		14.9%
Adjusted basic earnings per share^(1)	$	1.40	$	1.36	$	0.04	2.9%
Adjusted diluted earnings per share^(1)	$	1.31	$	1.23	$	0.08	6.5%
Common share dividends declared	$	0.52	$	0.48	$	0.04	8.3%
(1) Non-IFRS financial measures. Refer to "Non-IFRS Financial Measures" section in this press release for additional information.
(2) Reclassified comparative results to conform to the presentation of the year ended December 31, 2018
(3) Selling, general and administrative expenses

Revenue

For the year ended December 31, 2018, revenue was $2,241,437,000 compared to $2,215,379,000 for the prior year. Revenue increased $26,058,000 or 1.2% for the comparative period mainly due to increases in overall mattress sales.

Selling, general and administrative expenses ("SG&A")

SG&A as a percentage of revenue was higher at 36.82%, an increase of 30 basis points over the prior year, due to increases in minimum hourly wages, advertising expenditures and increases to finance charges related to financed sales.

Adjusted Net Income and Adjusted Diluted Earnings Per Share⁽¹⁾

As we continue to reduce our debt this has enabled us to reduce our net debt finance charges by $3,574,000 between comparative periods.  As a result of the factors above, adjusted net income for the year ended December 31, 2018 was $106,691,000.  This resulted in an adjusted diluted earnings per share of $1.31 (adjusted net income $99,022,000 and $1.23 adjusted diluted earnings per share in 2017), an increase of 6.5%.

Dividends

As previously announced, we paid a quarterly 14¢ dividend on the 7^th day of January 2019. Today we are happy to announce that the Directors have declared a quarterly dividend of 14¢ per common share payable on the 8^th day of April 2019 to shareholders of record at the close of business on the 8^th day of March 2019. As of 2007, dividends paid by Leon's Furniture Limited are "eligible dividends" pursuant to the changes to the Income Tax Act under Bill C-28, Canada.

Outlook

Despite the uncertainty over certain key economic indicators, we believe that the overall economy remains relatively strong, as we were still able to increase sales and profitability in 2018.  Although it is difficult to gauge future consumer confidence and what impact it may have on retail, we remain confident our sales and profitability will increase.  Given the Company's strong financial position, our principal objective is to increase market share and profitability. We remain focused on our commitment to continuously invest in digital innovation that will drive more customers to both our online eCommerce properties and our 303 physical locations across Canada.

Store Network

The Company has 303 retail stores from coast to coast in Canada under the various banners indicated below which also includes 100 franchise locations. Including our franchises, we have over 10,000 employees across Canada.

	Number of Stores			Number of Stores
	as at December 31,			as at December 31,
Banner	2017	Opened	Closed	2018
Leon's banner corporate stores	50	—	—	50
Leon's banner franchise stores	36	—	—	36
Appliance Canada banner stores	4	1	—	5
The Brick banner corporate stores^1	114	—	(1)	113
The Brick banner franchise stores	65	—	(1)	64
The Brick Mattress Store banner locations	23	3	(1)	25
Brick Outlet	12	—	(2)	10
Total number of stores	304	4	(5)	303

¹Includes the Midnorthern Appliance banner

Non-IFRS Financial Measures

The Company uses financial measures that do not have standardized meaning under IFRS and may not be comparable to similar measures presented by other entities.  The Company calculates the non-IFRS financial measures by adjusting certain IFRS measures for specific items the Company believes are significant, but not reflective of underlying operations in the period, as detailed below:

Non-IFRS Measure	IFRS Measure
Adjusted net income	Net income
Adjusted income before income taxes	Income before income taxes
Adjusted earnings per share – basic	Earnings per share – basic
Adjusted earnings per share – diluted	Earnings per share – diluted
Adjusted EBITDA	Net income

For a reconciliation of the Company's non-IFRS financial measures please refer to the Company's MD&A for the year ended December 31, 2018, which is available on SEDAR at www.sedar.com.

Adjusted Net Income
Leon's calculates comparable measures by excluding the effect of the mark-to-market adjustments included in the Company's SG&A income statement line item, related to the net effect of USD-denominated forward contracts and an interest rate swap on the Company's term credit facility;

Management believes excluding from income the effect of these mark-to-market valuations and changes thereto, until settlement, better aligns the intent and financial effect of these contracts with the underlying cash flows. 

The following is a reconciliation of reported net income to adjusted net income, basic and diluted earnings per share to adjusted basic and diluted earnings per share:

		For the three months ended				For the year ended
		December 31				December 31
($ in thousands except per share amounts)		2018		2017		2018		2017
Net Income		38,785		34,778		111,030		96,593
After-tax mark-to-market (gain)/loss on financial derivative instruments		(496)		1,341		(4,339)		2,429
Adjusted net income		38,289		36,119		106,691		99,022
Basic earnings per share		$	0.51	$	0.46	$	1.45	$	1.32
Diluted earnings per share		$	0.48	$	0.43	$	1.36	$	1.20
Adjusted basic earnings per share		$	0.50	$	0.48	$	1.40	$	1.36
Adjusted diluted earnings per share		$	0.47	$	0.45	$	1.31	$	1.23

Adjusted EBITDA

Adjusted earnings before interest, income taxes, depreciation and amortization, mark-to-market adjustment due to the changes in the fair value of the Company's financial derivative instruments and non-recurring charges to income ("Adjusted EBITDA") is a non-IFRS financial measure used by the Company.  The Company considers Adjusted EBITDA to be an effective measure of profitability on an operational basis and is commonly regarded as an indirect measure of operating cash flow, a significant indicator of success for many businesses.  Adjusted EBITDA is a non-IFRS financial measure used by the Company.  The Company's Adjusted EBITDA may not be comparable to the Adjusted EBITDA measure of other entities, but in management's view appropriately reflects Leon's specific financial condition.  This measure is not intended to replace net income, which, as determined in accordance with IFRS, is an indicator of operating performance.

The following is a reconciliation of reported net income to adjusted EBITDA:

		For the three months ended		For the year ended
		December 31		December 31
($ in thousands)		2018	2017	2018	2017
Net Income		38,785	34,778	111,030	96,593
Income tax expense		13,995	12,083	39,560	34,836
Net finance costs		1,545	2,316	6,928	10,502
Depreciation and amortization		8,719	10,603	37,156	39,556
Mark-to-market (gain)/loss on financial derivative instruments		(682)	1,820	(5,918)	3,311
Adjusted EBITDA		62,362	61,600	188,756	184,798

Same Store Sales

Same store sales are defined as sales generated by stores that have been open for more than 12 months on a fiscal basis. Same store sales is not an earnings measure recognized by IFRS, and does not have a standardized meaning prescribed by IFRS, but it is a key indicator used by the Company to measure performance against prior period results.  Same store sales as discussed in this press release may not be comparable to similar measures presented by other issuers, however this measure is commonly used in the retail industry.  We believe that disclosing this measure is meaningful to investors because it enables them to better understand the level of growth of our business.

Total System Wide Sales

Total system wide sales refer to the aggregation of revenue recognized in the Company's consolidated financial statements plus the franchise sales occurring at franchise stores to their customers which are not included in the revenue figure presented in the Company's consolidated financial statements. Total system wide sales is not a measure recognized by IFRS, and does not have a standardized meaning prescribed by IFRS, but it is a key indicator used by the Company to measure performance against prior period results. Therefore, total system wide sales as discussed in this press release may not be comparable to similar measures presented by other issuers.  We believe that disclosing this measure is meaningful to investors because it serves as an indicator of the strength of the Company's overall store network, which ultimately impacts financial performance.

Franchise Sales

Franchise sales figures refer to sales occurring at franchise stores to their customers which are not included in the revenue figures presented in the Company's consolidated financial statements, or in the same store sales figures in this press release. Franchise sales is not a measure recognized by IFRS, and does not have a standardized meaning prescribed by IFRS, but it is a key indicator used by the Company to measure performance against prior period results. Therefore, franchise sales as discussed in this press release may not be comparable to similar measures presented by other issuers.  Once again we believe that disclosing this measure is meaningful to investors because it serves as an indicator of the strength of the Company's brands, which ultimately impacts financial performance.

Selected Consolidated Financial Information

The summary financial information set out below has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, for the three months and year ended December 31, 2018 and 2017. The unaudited financial information presented has been prepared on a basis consistent with our audited consolidated financial statements for Fiscal 2017. The information presented herein does not contain disclosures required by IFRS and should be read in conjunction with the Company's audited consolidated financial statements available under the Company's profile on SEDAR at www.sedar.com.

Leon's Furniture Limited
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
	As at December 31	As at December 31
($ in thousands)	2018	2017
ASSETS
Current assets
Cash and cash equivalents	90,267	36,207
Restricted marketable securities	5,994	13,778
Debt securities	54,759	41,128
Equity securities	33,862	26,199
Trade receivables	122,131	138,516
Income taxes receivable	8,413	2,042
Inventories	329,317	317,914
Deferred acquisition costs	7,899	5,841
Deferred financing costs	276	541
Prepaid expenses and other assets	8,335	6,382
Total current assets	661,253	588,548
Other assets	484	-
Deferred acquisition costs	11,751	14,632
Loan receivable	13,191	-
Property, plant and equipment	321,597	336,748
Investment properties	17,072	17,529
Intangibles	300,896	306,286
Goodwill	390,120	390,120
Deferred income tax assets	7,208	7,592
Total assets	1,723,572	1,661,455
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade and other payables	247,136	234,478
Provisions	11,687	8,791
Income taxes payable	7,338	7,517
Customers' deposits	146,362	128,078
Finance lease liability	1,415	1,421
Dividends payable	10,690	9,140
Deferred warranty plan revenue	38,180	24,979
Loans and borrowings	144,712	-
Other liabilities	-	5,434
Total current liabilities	607,520	419,838
Loans and borrowings	-	194,439
Convertible debentures	48,435	48,004
Finance lease liability	7,784	9,053
Deferred warranty plan revenue	110,126	122,773
Redeemable share liability	13	157
Deferred rent liabilities and lease inducements	11,021	10,791
Deferred income tax liabilities	81,311	83,352
Total liabilities	866,210	888,407
Shareholders' equity attributable to the shareholders of the Company
Common shares	111,956	93,392
Equity component of convertible debentures	3,546	3,555
Retained earnings	743,399	674,883
Accumulated other comprehensive income	(1,539)	1,218
Total shareholders' equity	857,362	773,048
Total liabilities and shareholders' equity	1,723,572	1,661,455

Leon's Furniture Limited
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
	Year ended December 31st
(Amounts in thousands of Canadian dollars except shares outstanding and earnings per share)	2018		2017
Revenue	2,241,437		2,215,379
Cost of sales	1,264,561		1,261,112
Gross profit	976,876		954,267
Operating expenses
Selling, general and administrative expenses	825,276		809,025
Operating profit	151,600		145,242
Finance costs	(9,396)		(11,952)
Finance income	2,468		1,450
Change in fair value of derivative instruments	5,918		(3,311)
Net income before income tax	150,590		131,429
Income tax expense	39,560		34,836
Net income for the year	111,030		96,593
Earnings per share
Basic	$	1.45	$	1.32
Diluted	$	1.36	$	1.20

Leon's Furniture Limited
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
	Year ended December 31
($ in thousands)	2018	2017
OPERATING ACTIVITIES
Net income for the year	111,030	96,593
Add (deduct) items not involving an outlay of cash
Depreciation of property, plant and equipment and investment properties	30,628	33,231
Amortization of intangible assets	6,528	6,325
Amortization of deferred warranty plan revenue	(64,376)	(58,771)
Net finance costs	7,122	10,502
Deferred income taxes	(1,611)	(6,043)
(Gain)/loss on sale of property, plant and equipment and investment properties	(315)	286
Gain on sale of debt and equity instruments	-	123
	89,006	82,246
Net change in non-cash working capital balances related
to operations	28,138	12,962
Cash received on warranty plan sales	64,930	61,395
Cash provided by operating activities	182,074	156,603
INVESTING ACTIVITIES
Purchase of property, plant and equipment and investment properties	(19,650)	(55,041)
Purchase of intangible assets	(1,138)	(1,164)
Proceeds on sale of property, plant and equipment and investment properties	4,950	748
Purchase of debt and equity instruments	(42,614)	(53,530)
Proceeds on sale of debt and equity instruments	25,843	29,639
Interest received	2,468	1,325
Cash used in provided by investing activities	(30,141)	(78,023)
FINANCING ACTIVITIES
Repayment of finance leases	(1,193)	(1,346)
Dividends paid	(38,166)	(33,179)
Decrease of employee loans-redeemable shares	3,151	4,004
Repurchase of common shares	(3,058)	-
Repayment of term loan	(50,000)	(45,000)
Finance costs paid	-	(56)
Interest paid	(8,607)	(10,781)
Cash used in financing activities	(97,873)	(86,358)
Net increase (decrease) in cash and cash equivalents
during the year	54,060	(7,778)
Cash and cash equivalents, beginning of year	36,207	43,985
Cash and cash equivalents, end of year	90,267	36,207

About Leon's Furniture Limited

Leon's Furniture Limited is the largest retailer of furniture, appliances and electronics in Canada. Our retail banners include: Leon's; The Brick; Brick Outlet; and The Brick Mattress Store.  Finally, with The Brick's Midnorthern Appliance banner alongside with the Appliance Canada banner, this makes the Company the country's largest commercial retailer of appliances to builders, developers, hotels and property management companies. The Company has 303 retail stores from coast to coast in Canada under various banners. The Company operates three main websites: leons.ca, thebrick.com and furniture.ca.

Forward-Looking Statements

Information in this press release that is not current or historical factual information may constitute forward-looking information within the meaning of securities laws, including future-oriented financial information and financial outlooks. This information is based on certain assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While the Company considers these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. Forward-looking information is subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what the Company currently expects. These risks, uncertainties and other factors include, but are not limited to: credit, market, currency, operational, liquidity and funding risks, including changes in economic conditions, interest rates or tax rates, the timing and market acceptance of future products, and competition in the Company's markets.

To the extent any forward-looking information in this press release constitutes future-oriented financial information or financial outlooks, within the meaning of securities laws, such information is being provided to demonstrate the potential of the Company and readers are cautioned that this information may not be appropriate for any other purpose. Future-oriented financial information and financial outlooks, as with forward-looking information generally, are based on assumptions and subject to risks, uncertainties and other factors. Actual results may differ materially from what the Company currently expects. Other than as required under applicable securities laws, the Company does not undertake to update any forward-looking information at any particular time. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. All forward-looking information contained in this press release is expressly qualified in its entirety by this cautionary statement.

SOURCE Leon's Furniture Limited

Constantine Pefanis, CFO, Leon's Furniture Limited, Tel: [phone]; Jonathan Ross, LodeRock Advisors, Leon's Investor Relations, [email protected], Tel: [phone]

Related Links

www.leons.ca