Liquor Stores N.A. Ltd. (the "Company") (TSX:LIQ), North America's largest publicly traded liquor retailer, today reported its results for the three and nine months ended September 30, 2013.
PRESIDENT AND CHIEF EXECUTIVE OFFICER'S UPDATE
Providing an update on operational initiatives, President and CEO Stephen Bebis said: "Over the past three months we have been building on the strong fundamentals of the business. We are moving ahead with initiatives that enhance our relationships with customers, vendors and employees, including:
Enhancing our employee training programs to strengthen our selling culture;
Implementing new sales, marketing and advertising approaches;
Working with vendors on adopting a more collaborative approach towards product promotions and opportunities for event-driven marketing; and
Strengthening our Merchandising, IT and HR functions to further support our growth plans.
These investments in our business have impacted our adjusted operating margins, however, towards the end of the third quarter we started to see indications that these initiatives are working, which is encouraging as we move forward into the most important quarter for our business. Looking ahead, we will remain focused on the continued enhancement of our current operations and on growth in new and existing markets."
Commenting on the Q3 2013 financial results, Mr. Bebis said: "Our Q3 Canadian same-store sales were good, though the year-over-year reported rate was negatively impacted by:
The opening of our two successful Wine and Beyond stores in Edmonton late in the third quarter a year ago. These two new large format stores have captured market share from competitors, but they have also drawn some customers away from our existing stores in the region, due to their uniqueness in the marketplace and greater selection of product.
The sales tax increase from 13% to 15% in British Columbia on April 1, 2013 also impacted our same-store sales, as we left the product pricing, which has the increased combined tax included, unchanged, to support our competitive position.
Adjusting for these items, we estimate that Canadian same-store sales increased between 0.6% and 0.9% from the third quarter a year ago. U.S. same-store sales, while down as compared to Q3 2012, are an improvement from the last three quarters."
SALES
Total sales increased by $8.4 million or 5.1% to $172.9 million in the third quarter of 2013 (2012 - $164.5 million). The increase is primarily the result of new store expansion in Canada and the United States (8 new stores opened since June 30, 2012).
Same-Store Sales
Canadian same-store sales decreased by $1.3 million or 1.0%. However, when adjusted for the following items Canadian same-store sales increased by between 0.6% and 0.9%.
Same-store sales for the three months ended September 30, 2013 compared to 2012 were impacted by the success of the two Wine and Beyond stores opened by the Company in Edmonton during the last week of September 2012. In addition to drawing customers away from our competitors, these destination-type stores also drew customers away from our convenience-focused stores due to their uniqueness in the marketplace and larger selection of product. We estimate that the impact of Wine and Beyond on Canadian same-store sales was approximately 1.0% to 1.3%.
Same-store sales have been negatively impacted by changes made to the sales tax regime in the British Columbia and increased competition in that province. When the Province made the switch from the Harmonized Sales Tax (HST) of 12% to the combined Provincial Sales Tax (PST)/Goods and Services Tax (GST) of 15% on April 1, 2013, we were determined to remain competitive in the market and therefore we decided to leave prices, which have tax included, unchanged. All else being equal, this has had a negative impact of approximately 2.6% on same-store sales in the province. The estimated impact of this matter on Canadian same-store sales in the quarter was approximately 0.6%. Increased competition in British Columbia, especially for beer and spirits consumers, such as certain competitors increasing their cold beer availability (a previous advantage for our stores) and their in-store marketing/sales prices, has also led to downward pressure on pricing and margin.
U.S. same store sales decreased by $0.4 million or 1.0%.
Same-store sales in the United States have continued to be negatively impacted by certain counties in Kentucky going from 'dry' to 'wet' throughout 2012 (i.e. certain counties in close proximity to the Company's stores that did not previously permit retail package liquor sales are now permitting these sales).
Other Sales
Canadian wholesale sales, which include sales to licensee customers, were $6.0 million for the three months ended September 30, 2013, which is an increase of $0.3 million or 5.9% from the prior year (2012 - $5.7 million) primarily due to adding a select number of wholesale customer accounts during the quarter.
Sales for the Other Canadian and U.S. stores have increased compared to 2012 primarily as a result of the eight (8) new stores opened since June 30, 2012, including the two Wine and Beyond stores opened in Canada during the last week of September 2012, offset by four store closures in Canada (Q1 2013: one store; Q2 2013: three stores).
MARGINS
For the three months ended September 30, 2013, gross margin was $43.7 million, up 4.3% from $41.9 million for the same period last year. Gross margin as a percentage of sales of 25.3% was maintained at a rate consistent with that achieved in the comparative period (2012 - 25.5%). Pressures on gross margin percentages in some regions were offset by the initial changes made to our marketing strategies which have resulted in overall increases in gross margin percentages and dollars.
Operating margin was $12.9 million for the three months ended September 30, 2013, an increase of 2.3% from $12.6 million in 2012. After normalizing for the adjusting items in Q3 2013 and 2012, adjusted operating margin decreased 5.9% from the comparative period and, as a percentage of total sales, was 7.9%, down from 8.9%.
Canadian operating margin was $10.9 million or 8.2% as a percentage of Canadian sales (2012 - $10.2 million or 8.0% as a percentage of sales). Normalizing for the adjusting items referenced above, adjusted Canadian operating margin in Q3 2012 was $11.7 million or 8.8% as a percentage of sales (2012 - $12.2 million or 9.5%). The decrease was as a result of a decline in same-store sales, loss of operating margin from stores closed subsequent to September 30, 2012, an increase in operating expenses and investments being made in the Company's information technology infrastructure and head office staffing complement to support the Company's growth strategy, offset by increases in operating margin from same-stores and new stores opened in 2012. The seven additional stores added in Canada since June 30, 2012 are still in their ramp up phase (i.e. these stores have been opened for less than one year) and may take between 24 and 36 months to mature and fully contribute to operating margin.
The U.S. operating margin for the second quarter of 2013 was $2.0 million or 5.1% as a percentage of U.S. sales compared with $2.4 million and 6.6% as a percentage of U.S. sales for the comparable period in 2012. The decrease in the United States was primarily due to the decline in U.S. same-store sales and an increase in operating expenses. To a lesser extent, the decrease was also due to the two additional stores added in the U.S. since June 30, 2012, which have not yet fully matured.
EARNINGS AND EARNINGS PER SHARE
Net earnings for the three months ended September 30, 2013 were $5.8 million compared to $6.5 million for the same period in 2012. The decrease in net earnings in 2013 is primarily the result of the decline in Canadian and U.S. same-store sales, increase in operating expenses, and investments being made in the Company's information technology infrastructure and head office staffing complement to support the Company's growth strategy, increases to amortization expense and the $0.3 million change in the mark-to-market adjustments on the interest rate swap. These decreases in earnings were offset by the $1.2 million net change in operating and administrative expenses.
Basic and diluted earnings per share for the three months ended September 30, 2013 were $0.25 (2012 - $0.28). Basic and diluted earnings per share decreased as a result of the same factors that impacted net earnings, as noted above.
CASH FLOW AND DIVIDENDS
For the three months ended September 30, 2013, cash provided by operating activities before changes in non-cash working capital and adjusting items was $11.8 million ($0.51 per share), a decrease of $1.2 million compared to $13.0 million ($0.57 per share) for the same quarter in 2012. The decrease was attributable to a decline in same-store sales, inflation of operating expenses, and investments being made in the Company's information technology infrastructure and head office staffing complement to support the Company's growth strategy, which were offset by an increase in operating margin from Canadian same-stores and new stores added in 2012, and a decrease in pre-opening costs associated with new store openings and cash interest expense.
During the three months ended September 30, 2013 the Company declared dividends of $0.27 per share. The Company's current annual dividend is $1.08. The Company has declared a monthly dividend consecutively since going public in 2004.
