CTU Le Chateau Inc

Le Château Inc. (TSX VENTURE: CTU), today reported financial results for the fourth quarter and year ended January 25, 2020 which reflect the impact of the implementation of IFRS 16, as described below under “Adoption of IFRS 16 – Leases".

Sales for the fourth quarter ended January 25, 2020 amounted to $48.0 million as compared with $51.4 million for the fourth quarter ended January 26, 2019, a decrease of 6.5%, with 10 fewer stores in operation. Comparable store sales, which include online sales, decreased 3.3% versus the same period a year ago, with comparable regular store sales decreasing 4.4% and comparable outlet store sales increasing 6.1% (see non-GAAP measures below). Sales continued to be negatively impacted by reduced mall and store traffic. The Company continues to experience strong growth through its online channel with online sales increasing 28.9% for the fourth quarter.

Net loss for the fourth quarter ended January 25, 2020 amounted to $51.2 million or $(1.71) per share compared to a net loss of $6.1 million or $(0.20) per share for the same period last year. The net loss for the fourth quarter of 2019 included a $42.0 million write-off and impairment of long-term assets, compared with $25,000 for the same period last year.

Adjusted EBITDA (see non-GAAP measures below) for the fourth quarter of 2019 amounted to $1.9 million, compared to $(1.7) million for the same period last year, an improvement of $3.6 million. The improvement in adjusted EBITDA includes a favorable impact of IFRS 16 of $7.3 million. Excluding the $7.3 million impact of IFRS 16, the adjusted EBITDA for the fourth quarter was $(5.4) million compared with $(1.7) million for same period last year. The decrease of $3.7 million in adjusted EBITDA for the fourth quarter of 2019 was primarily attributable to the reduction of $5.8 million in gross margin dollars, partially offset by the decrease in selling, distribution and administrative expenses of $2.1 million. The decrease in selling, distribution and administrative expenses resulted primarily from the reduction in store operating expenses, due mainly to store closures, and a reduction in head office infrastructure costs. The decrease of $5.8 million in gross margin dollars was the result of the 6.5% overall sales decline for the fourth quarter, combined with the decrease in gross margin percentage to 52.0% from 59.9% in 2018. The decline in the gross margin percentage for the fourth quarter was the result of inventory write-downs totaling $4.0 million compared with $1.3 million for the same period last year, combined with increased promotional activity.

Year-end ResultsSales for the year ended January 25, 2020 amounted to $175.9 million as compared with $190.9 million last year, a decrease of 7.8%, with 10 fewer stores in operation. Comparable store sales, which include online sales, decreased 3.8% versus the same period a year ago, with comparable regular store sales decreasing 4.8% and comparable outlet store sales increasing 3.8%. The Company continues to experience strong growth through its online channel with online sales increasing 20.8% for the year.

Net loss for the year ended January 25, 2020 amounted to $69.2 million or $(2.31) per share compared to a net loss of $23.8 million or $(0.79) per share the previous year. The net loss for 2019 included a $42.1 million write-off and impairment of long-term assets, compared with $297,000 the previous year.

Adjusted EBITDA for the year ended January 25, 2020 amounted to $18.1 million, compared to $(5.6) million for the same period last year, an improvement of $23.7 million. The improvement in adjusted EBITDA includes a favorable impact of IFRS 16 of $29.6 million. Excluding the $29.6 million impact of IFRS 16, the adjusted EBITDA for 2019 was $(11.5) million compared with $(5.6) million for same period last year. The decrease of $5.9 million in adjusted EBITDA for 2019 was primarily attributable to the reduction of $16.7 million in gross margin dollars, partially offset by the decrease in selling, distribution and administrative expenses of $10.8 million. The decrease in selling, distribution and administrative expenses resulted primarily from the reduction in store operating expenses, due mainly to store closures, and a reduction in head office infrastructure costs. The decrease of $16.7 million in gross margin dollars was the result of the 7.8% overall sales decline for 2019, combined with the decrease in gross margin percentage to 60.4% from 64.3% in 2018. The decline in the gross margin percentage for 2019 was the result of inventory write-downs totaling $4.0 million compared with $1.7 million for the same period last year, combined with increased promotional activity.

During the year ended January 25, 2020, the Company closed 10 stores. As at January 25, 2020, the Company operated 129 stores (including 12 fashion outlet stores) compared to 139 stores (including 21 fashion outlet stores) as at January 26, 2019.

Adoption of IFRS 16 - LeasesThe Company adopted IFRS 16 – Leases, replacing IAS 17 – Leases and related interpretations, using the modified retrospective approach, effective for the annual reporting period beginning on January 27, 2019. As a result, the Company's results for the fourth quarter and year ended January 25, 2020 reflect lease accounting under IFRS 16. Comparative figures for the fourth quarter and year ended January 26, 2019 have not been restated and continue to be reported under IAS 17, Leases. Refer to Note 4 of the audited consolidated financial statements for the year ended January 25, 2020 for additional details on the implementation of IFRS 16.

Current developmentsAs disclosed in note 2 of the audited consolidated financial statements, there are material uncertainties that cast significant doubt upon the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.

As described further in notes 6 and 12 of the audited consolidated financial statements, the Company has a $70.0 million asset-based revolving credit facility as well as a three-year $15.0 million subordinated term loan from another lender, both of which were extended subsequent to year-end, on April 1, 2020, from June 9, 2020 to December 31, 2020. As the revolving credit facility and the subordinated term loan agreements have not been renewed, the full amounts drawn under these facilities are presented as current liabilities as at January 25, 2020. For the year ended January 25, 2020, the Company generated a loss of $69.2 million and had a working capital deficiency of $44.3 million as at January 25, 2020 due to the classification of the above facilities as current liabilities.

The going concern uncertainty note in the Company’s annual consolidated financial statements for the fiscal year ended January 25, 2020 causes the Company to be in default under a covenant contained in its credit facility and subordinate term loan agreements. As a result of the breach, the credit facility and subordinated term loan become due on demand. The Company is in discussion with its lenders to amend the credit facility and subordinated term loan agreements to provide for further availability under such agreements.

The above-mentioned default causes a default under the Company’s third-ranking secured loans. As a result, the secured loans are presented as current liabilities. Under the terms of an agreement entered into with the senior lenders, the holders of the third-ranking secured loans do not have the right to exercise their recourses until the senior lenders have been fully repaid

In addition, the outbreak of the coronavirus disease (COVID-19) (the “outbreak”), which was declared a pandemic on March 11, 2020 by the World Health Organization, is having significant impacts for the Company. The measures adopted by the Federal and provincial governments in order to mitigate the spread of the outbreak required the Company to close all of its retail locations across the country effective March 18, 2020. During the period of closure, the Company’s only sales were derived from its e-commerce channel. The duration and impact of the outbreak are unknown and may influence consumer shopping behavior and consumer demand including online shopping. The Company has since opened all of its stores during the period May 4, 2020 to June 26, 2020 in accordance with provincial and regional governmental guidelines. The COVID-19 pandemic will have a material and adverse impact on revenue, operating cash flows and results from operations and the Company is not expecting resumption of normal operations before 2022.

The Company’s ability to continue as a going concern for the next twelve months involves significant judgment and is dependent on its ability to obtain necessary financing, either through an amendment and renewal of its revolving credit facility and refinancing of its subordinated term loan, or from other financing sources; the availability of adequate credit under its revolving credit facility and subordinated term loan; the impact of COVID-19 pandemic and related government restrictions on the Company’s operations and liquidities (including the Company’s ability to resume normal operations); the ability to negotiate favorable amendments to lease rents and other obligations with major landlords; its ability to improve its sales and generate positive cash flow from operations; and the continued support of its suppliers, landlords and other creditors. Management is currently negotiating its financing requirements with its existing lenders and is in discussions with its landlords, and is seeking other potential sources of financing. There can be no assurance that availability under the existing credit facilities will be sufficient to finance the Company’s operations to the maturity date of the credit facilities, that borrowings will be available to the Company, or available on acceptable terms, in an amount sufficient to fund the Company’s needs or that the Company’s suppliers, landlords and other creditors will continue their support of the Company.  The COVID-19 pandemic has further strained the Company’s ability to return to profitability, and therefore there is no assurance that it will be able to generate positive cash flow from operations.

The consolidated financial statements for the year ended January 25, 2020 have been prepared on a going concern basis, which assumes the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. These consolidated financial statements as at and for the year ended January 25, 2020 do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate. Such adjustments could be material.

ProfileLe Château is a Canadian specialty retailer and manufacturer of exclusively designed apparel, footwear and accessories for contemporary and style-conscious women and men, with an extensive network of 124 prime locations across Canada and an e-com platform servicing Canada and the U.S. Le Château, committed to research, design and product development, manufactures approximately 30% of the Company’s apparel in its own Canadian production facilities.

Non-GAAP MeasuresIn addition to discussing earnings measures in accordance with IFRS, this press release provides adjusted EBITDA as a supplementary earnings measure, which is defined as earnings (loss) before interest, income taxes, depreciation, amortization, write-off and impairment of long-term assets and accretion of First Preferred shares series 1 (“Adjusted EBITDA”). Adjusted EBITDA is provided to assist readers in determining the ability of the Company to generate cash from operations and to cover financial charges. It is also widely used for valuation purposes for public companies in our industry.

The following table reconciles adjusted EBITDA to loss before income taxes disclosed in the consolidated statements of loss for the fourth quarters and years ended January 25, 2020 and January 26, 2019:

	For the three months ended
(Unaudited) (In thousands of Canadian dollars)	January 25, 2020(Excluding impactof IFRS 16) (1)			IFRS 16 impacts			January 25, 2020 (Including impactof IFRS 16)			January 26, 2019
Loss before income taxes	$	(51,125)		$	(87)		$	(51,212)		$	(6,146)
Depreciation and amortization		1,623			5,983			7,606			1,992
Write-off and impairment of long-term assets		41,865			157			42,022			25
Finance costs		2,232			1,241			3,473			1,740
Accretion of First Preferred shares series 1		-			-			-			722
Adjusted EBITDA	$	(5,405)		$	7,294		$	1,889		$	(1,667)
	For the year ended
(Unaudited) (In thousands of Canadian dollars)	January 25, 2020 (Excluding impactof IFRS 16) (1)			IFRS 16 impacts			January 25, 2020 (Including impactof IFRS 16)			January 26, 2019
Loss before income taxes	$	(69,172)		$	(43)		$	(69,215)		$	(23,809)
Depreciation and amortization		7,101			24,292			31,393			8,545
Write-off and impairment of long-term assets		41,920			143			42,063			297
Finance costs		8,646			5,213			13,859			6,613
Accretion of First Preferred shares series 1		-			-			-			2,769
Adjusted EBITDA	$	(11,505)		$	29,605		$	18,100		$	(5,585)

(1) Adjusted EBITDA for the fourth quarter and year ended January 25, 2020 excluding the impact of IFRS 16 assumes the Company continued to report under IAS 17, Leases and did not adopt IFRS 16, other than for differences related to testing long-lived assets for impairment and accounting for onerous store leases pursuant to the guidance of IAS 37, Provisions, contingent liabilities and contingent assets, which could have had an impact on the EBITDA and net loss of the Company under accounting standards applicable prior to January 27, 2019. Under IFRS 16, the nature and timing of expenses related to operating leases have changed as the straight-line operating lease expenses have been replaced with a depreciation charge for right-of use assets and interest expense on lease liabilities. Accordingly, IFRS 16 had a favorable impact of approximately $7.3 million and $29.6 million, respectively, on adjusted EBITDA for the fourth quarter and year ended January 25, 2020 as operating leases expenses have been replaced with depreciation and interest expenses, which are not included in the calculation of adjusted EBITDA.

The Company also discloses comparable store sales which are defined as sales generated by stores that have been open for at least one year on a comparable week basis. Online sales are included in comparable store sales.

The following table reconciles comparable store sales to total sales disclosed in the consolidated statements of loss for the fourth quarters and years ended January 25, 2020 and January 26, 2019:

(Unaudited)	For the three months ended					For the year ended
(In thousands of Canadian dollars)	January 25, 2020			January 26, 2019			January 25, 2020			January 26, 2019
Comparable store sales – Regular stores	$	40,386		$	42,263		$	148,441		$	155,849
Comparable store sales – Outlet stores		5,391			5,080			20,528			19,774
Total comparable store sales		45,777			47,343			168,969			175,623
Non-comparable store sales		2,237			4,011			6,925			15,227
Total sales	$	48,014		$	51,354		$	175,894		$	190,850

The above measures do not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.

Forward-Looking StatementsThis news release may contain forward-looking statements relating to the Company and/or the environment in which it operates that are based on the Company’s expectations, estimates and forecasts. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and/or are beyond the Company’s control. A number of factors may cause actual outcomes and results to differ materially from those expressed. These factors also include those set forth in other public filings of the Company. Therefore, readers should not place undue reliance on these forward-looking statements. In addition, these forward-looking statements speak only as of the date made and the Company disavows any intention or obligation to update or revise any such statements as a result of any event, circumstance or otherwise except to the extent required under applicable securities law.

The Company’s ability to continue as a going concern for the next twelve months involves significant judgment and is dependent on, among other things, its ability to obtain necessary financing, either through an amendment and renewal of its revolving credit facility and refinancing of its subordinated term loan, or from other financing sources; the availability of adequate credit under the revolving credit facility and subordinated term loan; the impact of COVID-19 pandemic and related government restrictions on the Company’s operations and liquidities (including the Company’s ability to resume normal operations); the ability to negotiate favorable amendments to lease rents and other obligations with major landlords; the Company’s ability to improve its sales and generate positive cash flow from operations; and the continued support of its suppliers, landlords and other creditors. Management is currently negotiating its financing requirements with its existing lenders and is in discussions with its landlords, and is seeking other potential sources of financing. There can be no assurance that availability under the existing credit facilities will be sufficient to finance the Company’s operations to the maturity date of the credit facilities, that borrowings will be available to the Company or available on acceptable terms, in an amount sufficient to fund the Company’s needs or that the Company’s suppliers, landlords and other creditors will continue their support of the Company (see note 2 of the Company’s annual audited consolidated financial statements).

Factors which could cause actual results or events to differ materially from current expectations include, among other things: the ability of the Company to continue as a going concern; public health crises & economic downturn; liquidity risks; general economic conditions and normal business uncertainty; the ability of the Company to successfully implement its business initiatives and whether such business initiatives will yield the expected benefits; competitive conditions in the businesses in which the Company participates; changes in consumer spending; seasonality; changes in the Company’s relationship with its suppliers; inventory management; extreme changes in weather; lease renewals and obligations; information technology security and loss of customer data; fluctuations in foreign currency exchange rates; interest rate fluctuations and changes in laws, rules and regulations applicable to the Company. The foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results.

The Company’s audited consolidated financial statements and Management’s Discussion and Analysis for the year ended January 25, 2020 are available online at www.sedar.com.

For further information

Emilia Di Raddo, CPA, CA, President (514) 738-7000Johnny Del Ciancio, CPA, CA, Vice-President, Finance, (514) 738-7000MaisonBrison:  Pierre Boucher, (514) 731-0000Source:  Le Château Inc.

CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands of Canadian dollars)	As at January 25, 2020 (2)				As at January 26, 2019 (1)
ASSETS
Current assets
Accounts receivable	$	870			$	1,031
Income taxes refundable		426				440
Inventories		76,093				86,487
Prepaid expenses		1,678				1,976
Total current assets		79,067				89,934
Deposits		485				485
Property and equipment		7,883				21,648
Intangible assets		621				1,831
Right-of-use assets		45,810				-
	$	133,866			$	113,898
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Bank indebtedness	$	1,064			$	489
Current portion of credit facility		43,525				19,093
Trade and other payables		27,200				20,437
Deferred revenue		1,646				2,402
Current portion of lease liabilities		19,609				-
Current portion of long-term debt		30,369				-
Current portion of provision for onerous leases		-				240
Total current liabilities		123,413				42,661
Credit facility		-				29,901
Long-term debt		-				29,684
Lease liabilities		79,707				-
Deferred lease credits		-				6,490
Total liabilities		203,120				108,736
Shareholders' equity (deficiency)
Share capital		73,573				73,573
Contributed surplus		15,354				14,132
Deficit		(158,181)				(82,543)
Total shareholders' equity (deficiency)		(69,254)				5,162
	$	133,866			$	113,898

(1) The Company has initially applied IFRS 16 as at January 27, 2019. Under the transition method chosen, comparative information is not restated.(2) See note 2, Going concern uncertainty, in the audited consolidated financial statements for the year ended January 25, 2020.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)	For the three months ended						For the year ended
(In thousands of Canadian dollars, except per share information)	January 25, 2020			January 26, 2019 (1)			January 25, 2020			January 26, 2019 (1)
Sales	$	48,014		$	51,354		$	175,894		$	190,850
Cost of sales and expenses
Cost of sales		23,038			20,573			69,654			68,096
Selling and distribution		63,573			28,835			138,949			115,000
Administrative		9,142			5,630			22,647			22,181
		95,753			55,038			231,250			205,277
Results from operating activities		(47,739)			(3,684)			(55,356)			(14,427)
Finance costs		3,473			1,740			13,859			6,613
Accretion of First Preferred shares series 1		-			722			-			2,769
Loss before income taxes		(51,212)			(6,146)			(69,215)			(23,809)
Income tax recovery		-			-			-			-
Net loss and comprehensive loss	$	(51,212)		$	(6,146)		$	(69,215)		$	(23,809)
Net loss per share
Basic	$	(1.71)		$	(0.20)		$	(2.31)		$	(0.79)
Diluted		(1.71)			(0.20)			(2.31)			(0.79)
Weighted average number of shares outstanding ('000)		29,964			29,964			29,964			29,964

 (1) The Company has initially applied IFRS 16 as at January 27, 2019. Under the transition method chosen, comparative information is not restated.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIENCY)
(Unaudited)	For the three months ended						For the year ended
(In thousands of Canadian dollars)		January 25, 2020			January 26, 2019 (1)			January 25, 2020			January 26, 2019 (1)
SHARE CAPITAL
Balance, beginning of period	$	73,573		$	47,967		$	73,573		$	47,967
Reclassification from First Preferred shares series 1 liability		-			25,606			-			25,606
Balance, end of period	$	73,573		$	73,573		$	73,573		$	73,573
CONTRIBUTED SURPLUS
Balance, beginning of period	$	15,354		$	14,131		$	14,132		$	9,600
Transitional adjustments on adoption of new accounting standards		-			-			-			4,502
Adjusted balance, beginning of period		15,354			14,131			14,132			14,102
Fair value adjustment of long-term debt		-			-			1,221			-
Stock-based compensation expense		-			1			1			30
Balance, end of period	$	15,354		$	14,132		$	15,354		$	14,132
DEFICIT
Balance, beginning of period	$	(106,969)		$	(76,397)		$	(82,543)		$	(57,367)
Transitional adjustments on adoption of new accounting standards		-			-			(6,423)			(1,367)
Adjusted balance, beginning of period		(106,969)			(76,397)			(88,966)			(58,734)
Net loss		(51,212)			(6,146)			(69,215)			(23,809)
Balance, end of period	$	(158,181)		$	(82,543)		$	(158,181)		$	(82,543)
Total shareholders’ equity (deficiency)	$	(69,254)		$	5,162		$	(69,254)		$	5,162

(1) The Company has initially applied IFRS 16 as at January 27, 2019. Under the transition method chosen, comparative information is not restated.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)	For the three months ended						For the year ended
(In thousands of Canadian dollars)	January 25, 2020			January 26, 2019 (1)			January 25, 2020			January 26, 2019 (1)
OPERATING ACTIVITIES
Net loss	$	(51,212)		$	(6,146)		$	(69,215)		$	(23,809)
Adjustments to determine net cash from operating activities
Depreciation and amortization		7,606			1,992			31,393			8,545
Write-off and impairment of long-term assets		42,022			25			42,063			297
Amortization of deferred lease credits		-			(421)			-			(1,586)
Lease incentives		126			120			151			965
Stock-based compensation		-			1			1			30
Provision for onerous leases		-			(120)			-			(1,260)
Finance costs		3,473			1,740			13,859			6,613
Accretion of First Preferred shares series 1		-			722			-			2,769
Interest paid		(1,098)			(1,178)			(4,357)			(4,299)
		917			(3,265)			13,895			(11,735)
Net change in non-cash working capital items related to operations		19,956			8,450			15,153			4,023
Income taxes refunded		-			-			230			240
Cash flows related to operating activities		20,873			5,185			29,278			(7,472)
FINANCING ACTIVITIES
Increase (decrease) in credit facility		(11,652)			(6,811)			(5,841)			10,079
Payment of lease liabilities		(10,533)			-			(23,183)			-
Other finance costs		(452)			-			(1,520)			-
Proceeds from long-term debt		-			-			1,000			-
Cash flows related to financing activities		(22,637)			(6,811)			(29,544)			10,079
INVESTING ACTIVITIES
Additions to property and equipment and intangible assets		(100)			(141)			(309)			(2,835)
Cash flows related to investing activities		(100 )			(141)			(309 )			(2,835)
Decrease in cash / increase in bank indebtedness		(1,864)			(1,767)			(575)			(228)
Cash (bank indebtedness), beginning of period		800			1,278			(489)			(261)
Bank indebtedness, end of period	$	(1,064)		$	(489)		$	(1,064 )		$	(489)

(1) The Company has initially applied IFRS 16 as at January 27, 2019. Under the transition method chosen, comparative information is not restated.