The Brick Ltd. Reports 23.3% Increase in Q3 2012 Net Income and Diluted Earnings per Share rose 36.4% to $0.15

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Strong financial performance leveraged from corporate same-store-sales growth of 0.8% and improved capital structure 

EDMONTON, AB, Nov. 14, 2012 /CNW/ - The Brick Ltd. (TSX: BRK) (the "Brick Group" or the "Brick") today announced its results for the three and nine months ended September 30, 2012. Financial statements and Management's Discussion and Analysis are available at thebrick.com and on SEDAR.

Q3 2012 highlights include:

• Net income up 23.3% or $3.5 million to $18.7 million, compared to $15.1 million in Q3 2011.
  
  
• Earnings per share (diluted) of $0.15 increased 36.4% compared to Q3 2011.
  
  
• EBITDA of $35.9 million, up 1.8% or $0.6 million over Q3 2011.
  
  
• Corporate same store sales increased 0.8%.
  
  
• Gross margin rate declined 50 basis points to 43.2%.
  
  
• Third-quarter consolidated operating expenses of $124.4 million were lower by $3.0 million or 2.3%, and as a percentage of sales, reduced 50 basis points to 33.8% as compared to 34.3% in Q3 2011.
  
  
• Cash and cash equivalents totaled $76.3 million at September 30, 2012 (after the April 12, 2012 debenture redemption payment of $88.1 million), compared to $141.1 million at December 31, 2011 and $139.5 million at September 30, 2011. The Brick Group has not borrowed under its asset-based credit facility since the second quarter of 2010.
  
  
• The Brick Ltd. declared a quarterly dividend in the amount of $0.02 per common share, and paid it on October 15, 2012.
  
  
• On August 29, 2012 the Brick concluded its Normal Course Issuer Bid ('NCIB'), which resulted in the repurchase of 4,467,185 shares and 558,423 warrants for a total of approximately $16.0 million, at an average price of $3.40 per share and $1.56 per warrant.

2012 Year to Date highlights include:

• Income, before finance costs related to the April 2012 debenture redemption and income taxes, increased 41.3% to $47.2 million compared to $33.4 million the first nine months of 2011.
  
  
• Earnings per share (diluted), before finance costs related to debentures redeemed, net of related impact to income tax, of $0.23 increased 35.3% compared to $0.17 in the same period of 2011.
  
  
• Corporate same store sales increased 1.0%
  
  
• EBITDA of $82.2 million increased by $4.2 million or 5.4% compared to same period in 2011.
  
  
• Gross margin rate improved 10 basis points to 44.2%, from 44.1% for the first nine months of 2011.
  
  
• Operating expenses have decreased $4.1 million and declined 10 basis points as a percentage of sales, compared to the first nine months of 2011, at 36.2%.

Leon's Acquisition of the Brick:

On November 11, 2012, Leon's Furniture Limited ("Leon's") and the Brick announced that they have entered into a definitive agreement (the "Arrangement Agreement") that provides for the acquisition of the Brick by Leon's by way of plan of arrangement (the "Arrangement") for $5.40 per share, representing a premium of over 54% compared to the $3.50 closing price on Friday November 9, 2012.  Leon's will also acquire all of the outstanding common share purchase warrants of The Brick for $4.40 per warrant.  The total consideration payable to Brick shareholders and warrantholders is approximately $700 million.

It is anticipated that the Arrangement Agreement will be completed during the first quarter of 2013 subject to obtaining shareholder approval, all required governmental and regulatory approvals and satisfying other usual and customary conditions contained in the Arrangement Agreement.

Under the terms of the Arrangement Agreement, there will be no dividends or other distributions declared on Brick Shares pending closing.

The terms and conditions of the Arrangement will be summarized in The Brick's management information and proxy circular, which will be filed and mailed to the Brick's shareholders in late November 2012.

Vi Konkle, President and CEO of the Brick Group commented "This transaction with Leon's, although subject to closing conditions and certain approvals, represents a major milestone in the evolution of our company. Through this transaction, we are also realizing our goal of delivering high value and return to our shareholders. We welcome the opportunity to partner with Leon's, an iconic corporation. By joining forces, we can strengthen both of our businesses, enhancing everything that has made Leon's and the Brick two of Canada's best-known retailers while preserving The Brick's roots in Edmonton, Alberta".

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Ms. Konkle continued "I am also very pleased with the Brick's third quarter results, which represent the first full quarter where continued strong EBITDA performance is more fully translating into greater year-over-year improvements in net income and earnings per share. This is a direct result of our prior initiatives focused on reducing both finance costs and the number of potential shares outstanding. It is also extremely satisfying to see continued performance across the business as a result of initiatives we have been working diligently towards over the past year".

"Our management team recognizes that the Brick Group continues to operate in an uncertain and uneven economic environment. We are aware of both the future challenges and opportunities and are working together to offer our customers stylish home solutions at exceptional value, backed by unbeatable quality and end-to-end service. The pending combination of the Brick and Leon's will not cause us to change our focus during the fourth quarter of 2012 and into 2013.  By continuing to focus on our key initiatives, I am confident that the Brick Group is well prepared and positioned for the future", added Ms. Konkle.

Consolidated Results Summary:

Segmented Results Summary:

For the Quarter

Sales

For the quarter ended September 30, 2012, consolidated sales of $368.5 million were lower by $2.4 million or 0.6% as compared to the same quarter of 2011.  In the retail segment, sales of $348.6 million decreased by $1.4 million or 0.4% and were partially impacted by store closures.  We ended the third quarter with 162 corporate stores compared to 173 corporate stores at the end of the same quarter in 2011.  Third-quarter same store sales increased by 0.8% while in the same quarter of 2011 same store sales increased by 1.3%.  In the financial services segment, sales of $19.9 million were lower by $1.0 million or 4.7% as growth in the insurance companies' Brick Card business was more than offset by a decrease in third-party insurance business.

Franchise Sales

Compared to the same quarter a year ago, sales at franchise stores increased by 1.6% to $48.9 million due to the addition of new franchise locations.  We began the quarter with 64 franchise stores and ended with 66, while in 2011 we began the quarter with 58 franchise stores and ended with 60. Third-quarter 2012 same store sales for franchise stores decreased by 7.5% while in the same quarter of 2011 same store sales increased by 8.1%.  In 2011, third-quarter sales at franchise stores were increased by sales to replace home furnishings of homes damaged by forest fires in Slave Lake, Alberta.  Excluding the impact of those sales in 2011, the third-quarter 2012 decrease in same store sales at franchise stores would have been 6.7%, with the decrease coming from certain franchise stores in Ontario, Quebec and the Maritimes.

Gross Margin

Compared to the same quarter in 2011, consolidated gross margin percentage decreased by 0.5% from 43.7% to 43.2% as the impact of declines in retail gross margin percentage exceeded improvement in financial services gross margin percentage.  The 0.5% decrease in consolidated gross margin percentage combined with the 0.6% decrease in consolidated sales resulted in a decrease in gross margin earned of $2.7 million. Our retail gross margin rate was impacted by a reduced mix of higher margin furniture sales, shifting to a greater mix of lower margin appliance sales. In the financial services segment, improvement in gross margin percentage was partially attributable to a $0.7 million recovery of premium tax and reduced claims expense in the warranty business.  The premium tax recovery resulted from a favourable judgement and reassessments in respect of premium tax paid in prior years by Trans Global Warranty Corp.  As well, decreases in low-margin third-party insurance sales and increases in higher-margin Brick Card insurance sales also contributed to improved gross margin percentage in this segment.

Operating Expenses

Third-quarter consolidated operating expenses of $124.4 million were lower by $3.0 million or 2.3%, and as a percentage of sales were 50 basis points lower at 33.8% as compared to 34.3% in the same quarter of 2011.  Essentially all of The Brick's operating expenses are incurred in the retail segment.

EBITDA

The Brick's financial results for the quarter ended September 30, 2012 reflect continued strength in EBITDA performance. Third-quarter consolidated EBITDA of $35.9 million improved by $0.6 million or 1.8% compared to the same quarter of 2011.  By segment and compared to the same quarter of 2011, retail segment EBITDA of $29.7 million was lower by $0.2 million or 0.8%, and financial services segment EBITDA of $6.2 million was higher by $0.8 million or 16.3%.

In the retail segment, reductions to operating expenses were more than offset by a decrease in gross margin earned resulting in lower EBITDA.

In the financial services segment, EBITDA improvement was attributable to a reduced sales mix of lower-margin third-party insurance sales and an increased sales mix of higher-margin Brick Card business, and also benefited from a $0.7 million recovery of premium tax and reduced claims expenses in the warranty company.

Finance Costs

Third-quarter finance costs of $4.0 million were lower by $3.2 million as compared to $7.2 million in the same quarter of 2011. This $3.2 million reduction is attributable primarily to the reduced balance of Debentures outstanding subsequent to the Debenture redemption which occurred on April 12, 2012. Substantially all of The Brick's finance costs relate to the Debentures and finance lease obligations.

Net Income and Earnings per Share

For the quarter ended September 30, 2012, net income of $18.7 million increased by $3.5 million or 23.3% as compared to the same quarter of 2011.  As a result of the Debenture redemption settled on April 12, 2012, third quarter net income benefited from $3.2 million of reduced finance costs.  Third-quarter basic earnings per share were 16 cents or 33.3% higher than the 12 cents per share for the same quarter of 2011. Third quarter diluted earnings per share were 15 cents or 36.4% higher than the third quarter of 2011 at 11 cents each.  The third-quarter improvement in earnings per share reflects the impact of past balance sheet restructuring initiatives such as the 2011 cashless exercise of warrants, the repurchase of shares and warrants under The Brick's normal course issuer bids since August 2010, and the December 2011 and April 2012 Debenture redemptions.  These initiatives have reduced the number of potential shares outstanding from a peak in the second quarter of 2009 of 179.5 million comprising 124.9 million warrants and 54.6 million shares, to 134.0 million at September 30, 2012 comprising 6.6 million warrants, 121.6 million shares and 5.8 million share-based compensation plan units.

Cash Position

Subsequent to the April 12, 2012 Debenture redemption payment of $88.1 million, The Brick's cash and cash equivalents at September 30, 2012 were $76.3 million as compared to $141.1 million at December 31, 2011 and $139.5 million at September 30, 2011.  The Brick has not borrowed under the Asset-Based Credit Facility since the second quarter of 2010.  Borrowing capacity under The Brick's $100.0 million Asset-Based Credit Facility at September 30, 2012 was $100.0 million.

Year to Date

Sales

For the nine months ended September 30, 2012, consolidated sales of $985.9 million decreased by $3.3 million or 0.3% as compared to the same period of 2011.  In the retail segment, sales of $926.4 million were flat as compared to the same period of 2011 reflecting improved same store sales growth as the number of corporate stores has decreased.  Same store sales growth for the nine months ended September 30, 2012 was positive 1.0% compared to negative 1.6% in the same period of 2011.  During the first three quarters of 2012, the corporate store count has decreased from 172 to 162, while in the same period of 2011 the corporate store count decreased from 183 to 173.  In the financial services segment, sales of $59.5 million decreased by $3.4 million or 5.5% as growth in the insurance companies' Brick Card business was more than offset by decreases in their third-party insurance business.

Franchise Sales

Compared to the same period in 2011, year-to-date sales at franchise stores increased by 5.0% to $135.8 million due to the addition of new franchise stores.  We began the period with 60 franchise stores and ended with 66, while in 2011 we began the period with 54 franchise stores and ended with 60. Year-to-date 2012 same store sales for franchise stores decreased by 3.8% while in the same period of 2011 same store sales increased by 4.4%.  In 2011, year-to-date sales at franchise stores were increased by sales to replace home furnishings of homes damaged by forest fires in Slave Lake, Alberta. Excluding the impact of those sales in 2011, the year-to-date 2012 decrease in same store sales for franchise stores would have been 2.7%.

Gross Margin

Compared to the same period in 2011, consolidated gross margin percentage improved from 44.1% to 44.2% as lower gross margin percentage in the retail segment was more than offset by stronger gross margin percentage in the financial services segment.

Consolidated gross margin earned was lower by $0.5 million reflecting a $2.0 million decrease in the retail segment which was partially offset by a $1.5 million increase in the financial services segment.

In the retail segment, the $2.0 million decrease in gross margin earned resulted primarily from reduced gross margin percentage as sales in the retail segment were flat as compared to 2011.

In the financial services segment, the $1.5 million increase in gross margin earned was attributable to improvement in gross margin percentage as sales in this segment decreased by 5.5%.  Improvement in gross margin percentage was attributable to reduced claims expenses in the warranty business, and also to a reduced sales mix of lower-margin third-party insurance sales and an increased sales mix of higher-margin Brick Card business in the insurance business.

Operating Expenses

Year-to-date consolidated operating expenses were lower by $4.1 million or 1.1% and were lower as a percentage of sales at 36.2% as compared to 36.4% for the same period of 2011.  Essentially all of The Brick's SG&A expenses are incurred in the retail segment.

EBITDA

The Brick's financial results for the nine months ended September 30, 2012 reflect continued strength in EBITDA performance.  Year-to-date consolidated EBITDA of $82.2 million increased by $4.2 million or 5.4% as compared to the same period of 2011.  By segment and compared to the same period of 2011, retail segment EBITDA of $65.5 million was higher by $3.7 million or 5.9%, while financial services segment EBITDA increased by $0.6 million or 3.6% to $16.7 million.

In the retail segment, the $3.7 million EBITDA increase comprised a $2.0 million decrease in gross margin earned offset by a reduction in operating expenses of $4.2 million, and an increase of approximately $1.5 million in other income which was driven by de-recognition of finance leases.  Consistent with The Brick's franchise growth strategy, where certain Brick store locations are being converted to franchise operations, lease extension options are not being exercised resulting in de-recognition of the associated finance lease. A total of four corporate locations have been converted to franchise locations in 2012.

In the financial services segment, 2011 year-to-date EBITDA included the reversal of a $0.6 million commodity tax provision which was recorded upon receipt of a favourable decision from the relevant tax authority.  Excluding the impact of this item, 2012 year-to-date EBITDA in the financial services segment would have been approximately $1.2 million higher as compared to the same period of 2011.

Finance Costs and Finance Costs Related to Debentures Redeemed

Year-to-date finance costs of $15.1 million were lower by $6.4 million as compared to $21.5 million in the same period of 2011.  Substantially all of this $6.4 million reduction is attributable to the reduced balance of Debentures outstanding subsequent to the Debenture redemption which was settled on April 12, 2012.

Finance costs incurred to redeem $77.3 million aggregate principal amount of Debentures on April 12, 2012 were $17.1 million and included a premium of $10.8 million reflecting the amount paid in excess of the principal value, and $6.3 million in respect of accelerated accretion, de-recognition of deferred financing fees, and transaction fees.

Substantially all of The Brick's finance costs relate to the Debentures and finance lease obligations.

Net Income and Earnings per Share

Year-to-date net income of $20.3 million includes the non-recurring finance costs of $17.1 million related to the Debenture tender offer discussed above.  Normalized to exclude this amount and the related impact on income tax expense, year-to-date net income would have been $29.4 million as compared to $22.7 million in the same period of 2011.

As a result of the Debenture redemption settled on April 12, 2012, reductions to continuing Debenture related finance costs have amounted to $5.9 million for the nine month period ended September 30, 2012.

The year-to-date basic and diluted earnings per share were 17 cents and 16 cents, respectively, compared to basic earnings per share of 29 cents and diluted earnings per share of 17 cents for the same period of 2011. Normalized to exclude the $17.1 million of finance costs related to the Debenture redemption and the related impact on income tax expense, 2012 year-to-date basic and diluted earnings per share would have been 24 cents and 23 cents, respectively. Accordingly, normalized diluted earnings per share of 23 cents, represents an increase of 35.3% over 17 cents in the same period of 2011.

The Brick Group will hold an investor conference event on Thursday, November 15, 2012 at 10:00 a.m. Eastern Time (8:00 a.m. Alberta Time), hosted by Vi Konkle, President & CEO and Ken Grondin, CFO & President, Financial Operations, to discuss Q3 2012 financial results.

To access the call, dial 647-427-7450 or 1-888-231-8191. Conference call ID: 59365720.

For a listen-only webcast, log on to http://www.newswire.ca/en/webcast/detail/1059843/1152177 prior to the scheduled meeting time.

A telephone replay of the call will be available until November 22, 2012, at 11:59 p.m. Eastern Time. To access it, dial either 416-849-0833 or 1-855-859-2056 and enter passcode 59365720, followed by the number sign.

Previous financial statements and Management's Discussion and Analysis are available on the investor relations page of Brick Group's website at www.thebrick.com.

About the Brick Group

The Brick Group, together with its subsidiaries, is one of Canada's largest volume retailers of household furniture, mattresses, appliances and home electronics, operating under four banners: The Brick, United Furniture Warehouse, The Brick Mattress Store, and Urban Brick. In addition, through its corporate sales division, the Brick Group services the subdivision, condominium, hospitality and high-rise builder market. The Brick Group's retail and franchise operations are located in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Prince Edward Island, Nova Scotia, New Brunswick, the Northwest Territories and Yukon.

Forward-Looking Statements

This news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws, including (but not limited to) statements about the Brick's consolidated sales and operating revenue, consolidated EBITDA, consolidated net loss, sales and operating revenue in the financial services and retail segments, same store sales growth and goodwill and indefinite life intangible asset impairment charges, the financial flexibility and capital resources necessary to manage the business in the current economic environment, and similar statements concerning anticipated future events, results, circumstances, performance or expectations, that reflect management's current expectations and are based on information currently available to management of the Brick and its subsidiaries. The words "may", "will", "should", "believe", "expect", "plan", "anticipate", "intend", "estimate", "predict", "potential", "continue" or the negative of these terms, or other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking matters. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Brick to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements. The Brick undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by applicable law.

SOURCE: The Brick Ltd.