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Press release from Marketwire

Danier Leather Reports Fiscal 2014 First Quarter Results

Tuesday, October 22, 2013

Danier Leather Reports Fiscal 2014 First Quarter Results

15:21 EDT Tuesday, October 22, 2013

TORONTO, ONTARIO--(Marketwired - Oct. 22, 2013) - Danier Leather Inc. (TSX:DL) ("Danier" or "the Company") today announced its unaudited interim consolidated financial results for the 13-week period ended September 28, 2013.

FINANCIAL HIGHLIGHTS ($000s, except earnings per share (EPS), square footage and number of stores):

For the 13 Weeks Ended
Sept. 28, 2013 Sept. 29, 2012
Sales $ 24,198 $ 23,098
EBITDA (1) (4,096 ) (4,014 )
Net Loss (3,557 ) (3,458 )
EPS - Basic $ (0.93 ) $ (0.74 )
EPS - Diluted $ (0.93 ) $ (0.74 )
Number of Stores 91 89
Retail Square Footage 287,657 292,836

Sales during the first quarter of fiscal 2014 increased by 5% to $24.2 million compared with $23.1 million during the first quarter last year. Comparable store sales(2) increased by 3%. During the first quarter of fiscal 2014, one new shopping mall store and one new outlet location were opened. Gross profit dollars increased by 4% to $12.1 million compared with $11.6 million during the same period last year.

Selling, general and administrative expenses during the first quarter of fiscal 2014 increased by $0.7 million to $17.1 million, compared with $16.4 million during the first quarter last year. Danier has made several investments to support the growth of its higher margin accessories business and to enhance merchandise planning and sourcing capabilities, as it works to continue implementing its previously announced strategic plan.

A seasonal net loss of approximately $3.6 million during the first quarter of fiscal 2014 is consistent with the net loss of $3.5 million during the first quarter last year.

Danier is holding its Annual General Meeting of Shareholders today, Tuesday, October 22, 2013 at 4:00 p.m. (Toronto time) at Danier's corporate headquarters located at 2650 St. Clair Avenue West in Toronto. Shareholders are encouraged to attend. The meeting will also be webcast live at www.danier.com.

Non-IFRS Financial Measures

The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS"). In order to provide additional insight into the business, the Company has also provided certain non-IFRS data, including EBITDA and comparable store sales, each as defined below. Non-IFRS measures such as EBITDA and comparable store sales are not recognized measures for financial presentation under IFRS. These non-IFRS measures do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with IFRS.

  1. EBITDA is defined as net earnings (loss) before interest expense, interest income, income taxes, impairment loss on property and equipment and amortization. EBITDA is a financial metric used by management and some investors to compare companies on the basis of ongoing operating results before taxes, interest expense, interest income, impairment loss on property and equipment and amortization and its ability to incur and service debt. EBITDA is also used by management to measure performance against internal targets and prior period results. EBITDA is calculated as outlined in the following table:
For the 13 Weeks Ended
Sept 28, 2013 Sept 29, 2012
($000) ($000)
Net loss $ (3,557 ) $ (3,458 )
Add (deduct) impact of the following:
Income tax (1,455 ) (1,320 )
Interest expense 19 18
Interest income (40 ) (66 )
Amortization 937 812
EBITDA $ (4,096 ) $ (4,014 )
  1. Comparable store sales are defined as sales generated by stores that have been open during the full current fiscal year as well as the full prior fiscal year. Comparable store sales is a key indicator used by the Company to measure performance against internal targets and prior period results and excludes sales fluctuations due to new stores, store closings and certain permanent store relocations. This measure is also commonly used by financial analysts and investors to compare Danier to other retailers. Comparable store sales is calculated as outlined in the following table:
For the 13 Weeks Ended
Sept 28, 2013 Sept 29, 2012 % change
($000) ($000)
Comparable stores $ 23,073 $ 22,415 2.9 %
Non-comparable stores & direct-to customer 1,013 547 85.2 %
Alterations revenue 157 141 11.3 %
Sales return provision (net change) (45 ) (5 ) n/m
Revenue $ 24,198 $ 23,098 4.8 %

Forward-Looking Statements

This press release may contain forward-looking information and forward-looking statements which reflect the current view of Danier with respect to the Company's objectives, plans, goals, strategies, future growth, results of operations, financial and operating performance and business prospects and opportunities. Wherever used, the words "may", "will", "anticipate", "intend", "estimate", "expect", "plan", "believe" and similar expressions identify forward-looking statements and forward-looking information. Forward-looking statements and forward-looking information should not be read as guarantees of future events, performance or results, and will not necessarily be accurate indications of whether, or the times at which, such events, performance or results will be achieved. All of the statements in this press release containing forward-looking statements or forward-looking information, if any, are qualified by these cautionary statements.

Forward-looking statements and forward-looking information are based on information available at the time they are made, underlying estimates, opinions and assumptions made by management and management's good faith belief with respect to future events, performance and results and are subject to inherent risks and uncertainties surrounding future expectations generally. For additional information with respect to Danier's inherent risks and uncertainties, reference should be made to Danier's continuous disclosure materials filed from time to time with the Canadian Securities Regulatory Authorities, including the Company's most recent annual information form, quarterly and annual reports and financial statements and notes thereto, and supplementary information, which are available on SEDAR at www.sedar.com and in the Investor Relations section of the Company's website at www.danier.com. Additional risks and uncertainties not presently known to the Company or that Danier currently believes to be less significant may also adversely affect the Company.

Danier cautions readers that such factors and uncertainties are not exhaustive and that should certain risks or uncertainties materialize, or should underlying estimates or assumptions prove incorrect, actual events, performance and results may vary significantly from those expected. There can be no assurance that the actual results, performance, events or activities anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. Potential investors and other readers are urged to consider these factors carefully in evaluating forward-looking information and forward-looking statements and are cautioned not to place undue reliance on any forward-looking information or forward-looking statements. Danier disclaims any intention or obligation to update or revise any forward-looking information or forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable laws.

About Danier

Danier Leather Inc. is a leading integrated designer, manufacturer, distributor and retailer of high-quality fashion-oriented leather apparel and accessories. The Company's merchandise is marketed exclusively under the well-known Danier brand name and is available at its 91 shopping mall, street-front and outlet stores. Corporations and other organizations can obtain Danier products for use as incentives and premiums for employees, suppliers and customers through Canada Sportswear Corp. For more information about the Company and our products, visit www.danier.com.

DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(thousands of Canadian dollars, except per share amounts and number of shares) - unaudited
For the 13 Weeks Ended
Sept 28, 2013 Sept 29, 2012
Revenue $ 24,198 $ 23,098
Cost of sales (Note 11) 12,091 11,507
Gross profit 12,107 11,591
Selling, general and administrative expenses (Note 11) 17,140 16,417
Interest income (40 ) (66 )
Interest expense 19 18
Loss before income taxes (5,012 ) (4,778 )
Recovery of income taxes (Note 12) (1,455 ) (1,320 )
Net loss and comprehensive loss $ (3,557 ) $ (3,458 )
Net loss per share:
Basic $ (0.93 ) $ (0.74 )
Diluted $ (0.93 ) $ (0.74 )
Weighted average number of shares outstanding:
Basic 3,832,168 4,646,902
Diluted 3,953,035 4,785,334
Number of shares outstanding at period end 3,832,168 4,646,902

See accompanying notes to the consolidated financial statements

DANIER LEATHER INC.
CONSOLIDATED BALANCE SHEETS
(thousands of Canadian dollars) - unaudited
Sept 28,
2013
Sept 29,
2012
June 29, 2013
ASSETS
Current Assets
Cash $ 8,050 $ 16,584 $ 24,541
Accounts receivable 999 855 1,197
Income taxes recoverable 2,388 2,559 358
Inventories (Note 3) 33,037 35,149 22,810
Prepaid expenses 753 681 803
45,227 55,828 49,709
Non-current Assets
Property and equipment (Note 4) 17,775 16,244 16,034
Computer software (Note 5) 1,504 651 1,143
Deferred income tax asset 2,032 1,903 2,163
$ 66,538 $ 74,626 $ 69,049
LIABILITIES
Current Liabilities
Payables and accruals (Note 7) $ 11,054 $ 9,638 $ 10,101
Deferred revenue 1,562 1,419 1,548
Sales return provision (Note 8) 144 129 99
12,760 11,186 11,748
Non-current Liabilities
Deferred lease inducements and rent liability 1,389 1,384 1,392
14,149 12,570 13,140
SHAREHOLDERS' EQUITY
Share capital (Note 9) 11,533 15,040 11,533
Contributed surplus 991 948 954
Retained earnings 39,865 46,048 43,422
52,389 62,056 55,909
$ 66,538 $ 74,626 $ 69,049

Contingencies, Guarantees and Commitments (Notes 14 and 15)

Approved by the Board of Directors
October 22, 2013

See accompanying notes to the consolidated financial statements

DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(thousands of Canadian dollars) - unaudited
For the 13 Weeks Ended
Sept 28, 2013 Sept 29, 2012
Cash provided by (used in)
OPERATING ACTIVITIES
Net loss $ (3,557 ) $ (3,458 )
Adjustments for:
Amortization of property and equipment 850 724
Amortization of computer software 87 88
Amortization of deferred lease inducements (20 ) (33 )
Straight line rent expense 17 44
Stock-based compensation 37 23
Interest income (40 ) (66 )
Interest expense 19 18
Recovery of income taxes (1,455 ) (1,320 )
Changes in working capital (Note 13) (9,001 ) (11,073 )
Interest received 55 81
Income taxes paid (444 ) (807 )
Net cash used in operating activities (13,452 ) (15,779 )
FINANCING ACTIVITIES
Subordinate voting shares repurchased - -
Net cash used in financing activities - -
INVESTING ACTIVITIES
Acquisition of property and equipment (2,591 ) (1,956 )
Acquisition of computer software (448 ) (13 )
Net cash used in investing activities (3,039 ) (1,969 )
Decrease in cash (16,491 ) (17,748 )
Cash, beginning of period 24,541 34,332
Cash, end of period $ 8,050 $ 16,584

See accompanying notes to the consolidated financial statements

DANIER LEATHER INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(thousands of Canadian dollars) - unaudited
Share Capital Contributed Surplus Accumulated Other Comprehensive Income Retained Earnings Total
Balance - June 29, 2013 $ 11,533 $ 954 $ - $ 43,422 $ 55,909
Net loss - - - (3,557 ) (3,557 )
Stock-based compensation related to stock options - 37 - - 37
Balance - September 28, 2013 $ 11,533 $ 991 $ - $ 39,865 $ 52,389
Share Capital Contributed Surplus Accumulated Other Comprehensive Income Retained Earnings Total
Balance - June 30, 2012 $ 15,040 $ 925 $ - $ 49,526 $ 65,491
Net loss - - - (3,458 ) (3,458 )
Stock-based compensation related to stock options - 23 - - 23
Balance - September 29, 2012 $ 15,040 $ 948 $ - $ 46,068 $ 62,056

See accompanying notes to the consolidated financial statements

DANIER LEATHER IN C.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the 13 week periods ended September 28, 2013 and September 29, 2012
(unless otherwise stated, all amounts are in thousands of Canadian dollars) - unaudited

1. Reporting Entity:

Danier Leather Inc. and its subsidiaries ("Danier" or the "Company") comprise a vertically integrated designer, manufacturer, distributor and retailer of leather apparel and accessories. Danier Leather Inc. is a corporation existing under the Business Corporations Act (Ontario) and is domiciled in Canada. The Company's subordinate voting shares (the "Subordinate Voting Shares") are listed on the Toronto Stock Exchange (the "TSX") under the symbol "DL". The address of its registered head office is 2650 St. Clair Avenue West, Toronto, Ontario, M6N 1M2, Canada.

Under an accounting practice common in the retail industry, the Company follows a 52-week reporting cycle which periodically necessitates a fiscal year of 53 weeks. Fiscal 2014 (ending June 28, 2014) and Fiscal 2013 (ended June 29, 2013) each comprise a 52-week fiscal year. The 52-week reporting cycle is divided into four quarters of 13 weeks each.

2. Significant Accounting Policies:

(a) Statement of Compliance

These unaudited interim condensed consolidated financial statements ("unaudited interim financial statements") have been prepared on a going concern basis in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). The unaudited interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting and using accounting policies and methods consistent with those used for the Company's audited annual consolidated financial statements and notes thereto for the fiscal years ended June 29, 2013 and June 30, 2012 (the "2013 Financial Statements"), except for the following new accounting pronouncements which have been adopted. Certain information, in particular the accompanying notes, normally included in the audited annual consolidated financial statements prepared in accordance with IFRS, has been omitted or condensed. Accordingly, these unaudited interim financial statements do not include all the information required for annual consolidated financial statements and, therefore, should be read in conjunction with the 2013 Financial Statements.

  1. On June 30, 2013, the Company adopted IFRS 7, Financial Instruments: Offsetting Financial Assets and Financial Liabilities ("IFRS 7"). Amendments to IFRS 7 increased the disclosure requirements for transactions involving transfers of financial assets. The amendments had no impact on the Company's disclosures as it has no transfer of financial assets.

  2. On June 30, 2013, the Company prospectively adopted IFRS 13, Fair Value Measurement ("IFRS 13"). This standard provides a standard definition of fair value, sets out a framework for measuring fair value and provides for specific disclosures about fair value. IFRS 13 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The Company determined that the adoption of IFRS 13 had no measurement impact on the Company's unaudited interim financial statements. The Company has included the disclosures required by this standard in Note 16.

The unaudited interim financial statements for the 13-week period ended September 28, 2013 (including comparatives) were approved by the Board of Directors on October 22, 2013.

(b) Basis of Measurement

The unaudited interim financial statements have been prepared on a going concern basis under the historical cost convention except for the following items which are measured at fair value:

  • Financial instruments at fair value through profit and loss; and
  • Liabilities for cash-settled share-based payment plans.

(c) Functional and Presentation Currency

These unaudited interim financial statements are presented in Canadian dollars ("$" or "C$"), the Company's functional currency. All financial information is presented in thousands, except per share amounts, which are presented in whole dollars, and number of shares, which are presented as whole numbers.

(d) Seasonality of Interim Operations

Due to the seasonal nature of the retail business and the Company's product lines, the results of operation for any interim period are not necessarily indicative of the results of operation to be expected for the fiscal year. Generally, a significant portion of the Company's sales and earnings are typically generated during the second fiscal quarter, which includes the holiday selling season. Sales are usually lowest and losses are typically experienced during the period from April to September.

(e) Estimates, Judgments and Assumptions

The preparation of these unaudited interim financial statements in accordance with IFRS requires management to make certain estimates, judgments and assumptions in applying the Company's accounting policies which have an effect on the reported amounts and disclosures made in these unaudited interim financial statements and accompanying notes. These estimates, judgments and assumptions are based on historical experience, knowledge of current events and conditions, expectations of the future and other relevant factors that are believed to be reasonable under the circumstances. Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Significant estimates, judgments and assumptions applicable to the preparation of these unaudited interim financial statements are described in the Company's 2013 Financial Statements. Estimates made by management depend upon subjective or complex judgments about matters that may be uncertain, and changes in those estimates could materially impact these unaudited interim financial statements. Illiquid credit markets, volatile equity, foreign currency, and energy markets and declines in consumer spending have combined to increase the uncertainty inherent in estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from the estimates, judgments and assumptions made by management.

(f) Future Changes in Accounting Policies

A number of new standards, and amendments to standards and interpretations, are not yet effective for the 13-week period ended September 28, 2013 and have not been applied in preparing these unaudited interim financial statements. New standards and amendments to standards and interpretations that are currently under review include:

IFRS 9 - Financial Instruments

On November 12, 2009, the IASB issued a new standard, IFRS 9, Financial Instruments ("IFRS 9"), which will ultimately replace IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39"). The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments and the issuance of IFRS 9 is a part of the first phase. This standard originally was to become effective on January 1, 2013 but the mandatory effective date has been amended to January 1, 2015 and must be applied retrospectively.

IAS 32 - Financial Instruments: Presentation ("IAS 32")

The IASB issued an amendment to IAS 32 which provides further guidance on the requirements for offsetting financial instruments. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014 and must be applied retrospectively.

IAS 36 - Impairment of Assets: Recoverable Amount Disclosures for Non-Financial Assets ("IAS 36")

The IASB issued amendments to IAS 36 which reduces the circumstances in which the recoverable amount of assets or cash generating units is required to be disclosed, clarifies the disclosure required and introduces an explicit requirement to disclose the discount rate in determining impairment or reversals where recoverable amount (based on fair value less costs of disposal) is determined using a present value technique. The amendments to IAS 36 are effective for annual periods beginning on or after January 1, 2014 and must be applied retrospectively.

The extent of the impact of adoption of the above noted standards and interpretations on the financial statements of the Company have not yet been determined.

A number of other standards have been adopted by the IASB but currently have no impact on the Company.

3. Inventories:

September 28, 2013 September 29, 2012 June 29, 2013
Raw materials $ 2,136 $ 3,029 $ 2,594
Work-in-process 344 304 222
Finished goods 30,557 31,816 19,994
$ 33,037 $ 35,149 $ 22,810
13 Weeks Ended
September 28, 2013 September 29, 2012
Cost of inventory recognized as an expense $ 11,998 $ 11,412
Write-downs of inventory due to net realizable value being lower than cost $ 303 $ 140
Write-downs recognized in previous periods that were reversed $ 8 $ 27

4. Property and Equipment:

13 Weeks Ended September 28, 2013
Land Building Roof HVAC Leasehold Improvements Furniture & Equipment Computer Hardware Total
Cost
At June 29, 2013 $ 1,000 $ 6,063 $ 308 $ 840 $ 22,679 $ 9,957 $ 3,348 $ 44,195
Additions - - - - 1,540 992 59 2,591
Disposals - - - - (1,480 ) (65 ) - (1,545 )
At September 28, 2013 $ 1,000 $ 6,063 $ 308 $ 840 $ 22,739 $ 10,884 $ 3,407 $ 45,241
Accumulated amortization and impairment losses
At June 29, 2013 - $ 2,508 $ 216 $ 625 $ 15,322 $ 6,754 $ 2,736 $ 28,161
Amortization for the period - 39 4 12 458 237 100 850
Impairment losses - - - - - - - -
Disposals - - - - (1,480 ) (65 ) - (1,545 )
At September 28, 2013 - $ 2,547 $ 220 $ 637 $ 14,300 $ 6,926 $ 2,836 $ 27,466
Net carrying value
At September 28, 2013 $ 1,000 $ 3,516 $ 88 $ 203 $ 8,439 $ 3,958 $ 571 $ 17,775
At June 29, 2013 $ 1,000 $ 3,555 $ 92 $ 215 $ 7,357 $ 3,203 $ 612 $ 16,034
Capital work in progress included above
At September 28, 2013 - - - - $ 77 $ 5 - $ 82
13 Weeks Ended September 29, 2012
Land Building Roof HVAC Leasehold Improvements Furniture & Equipment Computer Hardware Total
Cost
At June 30, 2012 $ 1,000 $ 6,063 $ 308 $ 793 $ 22,208 $ 9,088 $ 3,386 $ 42,846
Additions - - - - 1,408 520 28 1,956
Disposals - - - - (1,259 ) (127 ) - (1,386 )
At September 29, 2012 $ 1,000 $ 6,063 $ 308 $ 793 $ 22,357 $ 9,481 $ 3,414 $ 43,416
Accumulated amortization and impairment losses
At June 30, 2012 - $ 2,354 $ 201 $ 578 $ 15,875 $ 6,321 $ 2,505 $ 27,834
Amortization for the period - 39 3 12 391 183 96 724
Impairment losses - - - - - - - -
Disposals - - - - (1,259 ) (127 ) - (1,386 )
At September 29, 2012 - $ 2,393 $ 204 $ 590 $ 15,007 $ 6,377 $ 2,601 $ 27,172
Net carrying value
At September 29, 2012 $ 1,000 $ 3,670 $ 104 $ 203 $ 7,350 $ 3,104 $ 813 $ 16,244
At June 30, 2012 $ 1,000 $ 3,709 $ 107 $ 215 $ 6,333 $ 2,767 $ 881 $ 15,012
Capital work in progress included above
At September 29, 2012 - - - - $ 661 $ 160 - $ 821

The Company conducted an impairment test for its property and equipment and noted that there were no indicators of impairment during the 13-week periods ended September 28, 2013 and September 29, 2012.

5. Computer Software:

13 Weeks Ended
September 28, 2013 September 29, 2012
Cost
Beginning of period $ 4,684 $ 3,994
Additions 448 13
Disposals - -
End of period $ 5,132 $ 4,007
Accumulated amortization
Beginning of period $ 3,541 $ 3,268
Amortization for the period 87 88
Impairment losses - -
End of period $ 3,628 $ 3,356
Net carrying value
End of period $ 1,504 $ 651
Beginning of period $ 1,143 $ 726
Capital work in process included above $ 938
-

6. Bank Facilities:

The Company has an operating credit facility for working capital and for general corporate purposes to a maximum amount of $25 million that is committed until June 27, 2014 and bears interest at prime plus 0.75%. Standby fees of 0.50% are paid on a quarterly basis for any unused portion of the operating credit facility. The operating credit facility is subject to certain covenants and other limitations that, if breached, could cause a default and may result in a requirement for immediate repayment of amounts outstanding. Security provided includes a security interest over all personal property of the Company's business and a mortgage over the land and building comprising the Company's head office/distribution facility.

The Company also has an uncommitted letter of credit facility (the "LC Facility") to a maximum amount of $10 million and an uncommitted demand overdraft facility in the amount of $0.5 million to be used exclusively for issuance of letters of credit for the purchase of inventory. Any amounts outstanding under the overdraft facility will bear interest at the bank's prime rate. The LC Facility is secured by the Company's personal property from time to time financed with the proceeds drawn thereunder.

7. Payables and Accruals:

September 28, 2013 September 29, 2012 June 29, 2013
Trade payables $ 4,532 $ 2,443 $ 1,840
Accruals 4,393 4,214 4,981
RSU/DSU liability 1,654 2,128 2,516
Commodity and capital taxes 475 420 764
Derivative financial instruments - 433 -
$ 11,054 $ 9,638 $ 10,101

8. Sales Return Provision:

The provision for sales returns primarily relates to customer returns of unworn and undamaged purchases for a full refund within the time period provided by Danier's return policy, which is generally 14 days after the purchase date. Since the time period of the provision is of relatively short duration, all of the provision is classified as current. The following transactions occurred during the 13-week periods ended September 28, 2013 and September 29, 2012 with respect to the sales return provision:

13 Weeks Ended
September 28, 2013 September 29, 2012
Beginning of period $ 99 $ 124
Amount provided during the period 144 129
Utilized or released during the period (99 ) (124 )
End of period $ 144 $ 129

9. Share Capital:

(a) Authorized

1,224,329 Multiple Voting Shares
Unlimited Subordinate Voting Shares
Unlimited Class A and B Preference Shares

(b) Issued

Multiple Voting Shares
Number Consideration
Balance September 29, 2012 1,224,329 Nominal
Balance June 29, 2013 1,224,329 Nominal
Balance September 28, 2013 1,224,329 Nominal
Subordinate Voting Shares
Number Consideration
Balance June 29, 2013 2,607,839 $ 11,533
Shares repurchased - -
Shares issued upon exercising of stock options - -
Balance September 28, 2013 2,607,839 $ 11,533
Balance June 30, 2012 3,422,573 $ 15,040
Shares repurchased - -
Shares issued upon exercising of stock options - -
Balance September 29, 2012 3,422,573 $ 15,040

The Multiple Voting Shares and Subordinate Voting Shares have identical attributes except that the Multiple Voting Shares entitle the holder to 10 votes per share and the Subordinate Voting Shares entitle the holder to one vote per share. Each Multiple Voting Share is convertible at any time, at the holder's option, into one fully paid and non-assessable Subordinate Voting Share. The Multiple Voting Shares are subject to provisions whereby, if a triggering event occurs, then each Multiple Voting Share is converted into one fully paid and non-assessable Subordinate Voting Share. A triggering event may occur if, among other things, Mr. Jeffrey Wortsman, President and Chief Executive Officer: (i) dies; (ii) ceases to be a Senior Officer of the Company; (iii) ceases to own 5% or more of the aggregate number of Multiple Voting Shares and Subordinate Voting Shares outstanding; or (iv) owns less than 918,247 Multiple Voting Shares and Subordinate Voting Shares combined.

(c) Earnings per share

Basic and diluted per share amounts are based on the following weighted average number of shares outstanding:

13 Weeks Ended
September 28, 2013 September 29, 2012
Weighted average number of shares for basic earnings per share calculations 3,832,168 4,646,902
Effect of dilutive options outstanding 120,885 138,432
Weighted average number of shares for diluted earnings per share calculations 3,953,035 4,785,334

The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of Subordinate Voting Shares on the TSX during the period. The number of options excluded was 26,200 as at September 28, 2013 and NIL as at September 29, 2012.

(d) Normal Course Issuer Bids

During the past several years, the Company has from time to time received approval from the TSX to commence various normal course issuer bids ("NCIBs"). On February 11, 2013, the Company announced that the TSX had accepted a notice of its intention to proceed with its sixth NCIB (the "2013 NCIB"). Pursuant to the 2013 NCIB, the Company may purchase for cancellation up to a maximum of 148,211 Subordinate Voting Shares. The maximum number of Subordinate Voting Shares that may be purchased pursuant to the 2013 NCIB represents approximately 10% of the "public float" of the Subordinate Voting Shares outstanding as at the date of the notice of its intention to proceed with the 2013 NCIB. The 2013 NCIB commenced on February 14, 2013 and will terminate on February 13, 2014, or on such earlier date as the Company may complete its purchases under the 2013 NCIB.

During the 13-week period ended September 28, 2013 there were no repurchases of Subordinate Voting Shares under the Company's 2013 NCIB. During the 13-week period ended September 29, 2012 there was no NCIB in effect and, accordingly, there were no repurchases of Subordinate Voting Shares.

10. Share-based Compensation:

The Company's net share-based compensation expense recognized in selling, general and administrative expenses ("SG&A") related to its stock option, restricted share unit ("RSU") and deferred share unit ("DSU") plans is presented below:

13 Weeks Ended
September 28, 2013 September 29, 2012
Stock option plan expense $ 37 $ 23
RSU plan expense 138 306
DSU plan expense 8 70
$ 183 $ 399

The carrying amount of the Company's share-based compensation arrangements including stock option, RSU and DSU plans are recorded on the balance sheet as follows:

September 28, 2013 September 29, 2012 June 29, 2013
Payables and accruals $ 1,654 $ 2,127 $ 2,516
Contributed surplus 991 948 954
$ 2,645 $ 3,075 $ 3,470

(a) Stock option plan

The Company maintains a Stock Option Plan, as amended, for the benefit of directors, officers, employees and service providers, pursuant to which granted options are exercisable for Subordinate Voting Shares. As at September 28, 2013, the Company has reserved 572,100 Subordinate Voting Shares for issuance under its Stock Option Plan. The granting of options and the related vesting periods are at the discretion of the Board of Directors, on the advice of the Governance, Compensation, Human Resources and Nominating Committee of the Board (the "Committee"), at exercise prices determined as the weighted average of the trading prices of the Company's Subordinate Voting Shares on the TSX for the five trading days preceding the effective date of the grant. In general, options granted to officers, employees and service providers under the Stock Option Plan typically vest over a period of between three and four years from the grant date and expire no later than the tenth anniversary of the date of grant (subject to extension in accordance with the Stock Option Plan if the options would otherwise expire during a black-out period).

A summary of the status of the Company's Stock Option Plan as of September 28, 2013 and September 29, 2012 and changes during the 13-week periods ended on those dates is presented below:

September 28, 2013 September 29, 2012
Stock Options Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price
Outstanding at beginning of period 277,900 $ 6.45 357,767 $ 7.14
Granted - - - -
Exercised - - - -
Forfeited - - 58,000 $ 15.85
Outstanding at end of period 277,900 $ 6.45 299,767 $ 5.45
Options exercisable at end of period 232,966 $ 5.37 271,667 $ 4.91

The following table summarizes the distribution of these options and the remaining contractual life as at September 28, 2013:

Options Outstanding Options Exercisable
Exercise Prices # Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price # of Shares Exercisable Weighted Average Exercise Price
$3.15 113,600 5.1 years $ 3.15 113,600 $ 3.15
$6.25 50,000 4.7 years $ 6.25 50,000 $ 6.25
$7.80 45,000 3.3 years $ 7.80 45,000 $ 7.80
$8.68 15,000 3.6 years $ 8.68 15,000 $ 8.68
$10.68 28,100 8.7 years $ 10.68 9,366 $ 10.68
$12.97 26,200 9.4 years $ 12.97 - $ 12.97
277,900 5.4 years $ 6.45 232,966 $ 5.37

There were no stock options granted during the 13-week periods ended September 28, 2013 and September 29, 2012.

(b) Restricted Share Unit Plan

The Company has established a cash-settled RSU Plan, as amended, as part of its overall compensation plan. An RSU is a notional unit equivalent in value to one Subordinate Voting Share of the Company. The RSU Plan is administered by the Board of Directors, with the advice of the Committee. Under the RSU Plan, certain eligible officers, employees and directors of the Company are eligible to receive a grant of RSUs that generally vest over periods not exceeding three years, as determined by the Committee. Upon the exercise of the vested RSUs, a cash payment equal to the market value of the exercised vested RSUs will be paid to the participant. The market value is based on the five-day average daily closing prices of the Subordinate Voting Shares on the TSX immediately prior to the applicable payment date. RSU expense is recognized on a graded vesting schedule and is determined based on the fair value of the liability incurred at each financial position date until the award is settled. The fair value of the liability is measured by applying the Black-Scholes Option Pricing Model, taking into account the extent to which participants have rendered services to date.

The following transactions occurred during each of the 13-week periods ended September 28, 2013 and September 29, 2012, respectively, with respect to the RSU Plan:

13 Weeks Ended
September 28, 2013 September 29, 2012
Outstanding at beginning of period 174,605 167,536
Granted 20,000 25,000
Redeemed (86,567 ) (35,897 )
Forfeited (167 ) -
Outstanding at end of period 107,871 156,639
RSUs vested at end of period 12,666 37,931
Liability at end of period $ 706 $ 1,191

c. Deferred Share Unit Plan

The cash-settled DSU Plan, as amended, was established for non-management directors. Under the DSU Plan, non-management directors of the Company may receive an annual grant of DSUs at the discretion of the Board of Directors on the advice of the Committee, and can also elect to receive their annual retainers and meeting fees in DSUs. A DSU is a notional unit equivalent in value to one Subordinate Voting Share of the Company based on the five-day average daily closing prices of the Subordinate Voting Shares on the TSX immediately prior to the date on which the value of the DSU is determined. The fair value of the liability is measured at each financial position date by applying the Black-Scholes Option Pricing Model until the award is settled.

The following transactions occurred during each of the 13-week periods ended September 28, 2013 and September 29, 2012, respectively, with respect to the DSU Plan:

13 Weeks Ended
September 28, 2013 September 29, 2012
Outstanding at beginning of period 83,136 103,920
Granted - -
Redeemed - (20,784 )
Outstanding at end of period 83,136 83,136
Danier stock price at end of period $ 11.40 $ 11.26
Liability at end of period $ 948 $ 936

11. Amortization:

Amortization included in cost of sales and SG&A is summarized as follows:

13 Weeks Ended
September 28, 2013 September 29, 2012
Cost of sales $ 41 $ 41
SG&A 896 771
$ 937 $ 812

12. Income Taxes:

The Company's income tax expense is comprised as follows:

13 Weeks Ended
September 28, 2013 September 29, 2012
Current period income tax recovery $ (1,586 ) $ (1,326 )
Adjustment for prior years taxes - -
Current income tax recovery $ (1,586 ) $ (1,326 )
Deferred tax expense 131 6
Income tax recovery $ (1,455 ) $ (1,320 )

The estimated average annual effective rate was 29.0% during the 13 weeks ended September 28, 2013 compared with the 27.6% estimated rate for the 13 weeks ended September 29, 2012 and 28.8% for the fiscal year ended June 29, 2013. The difference between the rate for the 13 weeks ended September 28, 2013 and the rate for the 13 weeks ended September 29, 2012 is mainly due to the effect of certain non-deductible expenses on estimated earnings.

The Company's effective income tax rate consists of the following:

13 Weeks Ended
September 28, 2013 September 29, 2012
Combined basic federal and provincial average statutory rate 26.5 % 26.4 %
Non-deductible expenses 2.5 % 1.1 %
Other - 0.1 %
29.0 % 27.6 %

13. Change in Working Capital Items:

13 Weeks Ended
September 28, 2013 September 29, 2012
Decrease (increase) in:
Accounts receivable $ 198 $ (338 )
Inventories (10,227 ) (10,258 )
Prepaid expenses 16 85
Increase (decrease) in:
Payables and accruals 953 (523 )
Deferred revenue 14 (44 )
Sales return provision 45 5
$ (9,001 ) $ (11,073 )

14. Contingencies and Guarantees:

(a) Legal proceedings

In the course of its business, the Company from time to time becomes involved in various claims and legal proceedings. In the opinion of management, all such claims and suits are adequately covered by insurance, or if not so covered, the results are not expected to materially affect the Company's financial position.

(b) Guarantees

The Company has provided the following guarantees to third parties and no amounts have been accrued in the unaudited interim financial statements for these guarantees:

  1. In the ordinary course of business, the Company has agreed to indemnify its lenders under its credit facilities against certain costs or losses resulting from changes in laws and regulations or from a default in repaying a borrowing. These indemnifications extend for the term of the credit facilities and do not provide any limit on the maximum potential liability. Historically, the Company has not made any indemnification payments under such agreements.

  2. In the ordinary course of business, the Company has provided indemnification commitments to certain counterparties in matters such as real estate leasing transactions, director and officer indemnification agreements and certain purchases of non-inventory assets and services. These indemnification agreements generally require the Company to compensate the counterparties for costs or losses resulting from legal action brought against the counterparties related to the actions of the Company. The terms of these indemnification agreements will vary based on the contract and generally do not provide any limit on the maximum potential liability.

15. Commitments:

(a) Operating leases:

The Company leases various store locations, a distribution warehouse and equipment under non-cancellable operating lease agreements. The leases are classified as operating leases since there is no transfer of risks and rewards inherent to ownership.

The leases have varying terms, escalation clauses and renewal rights. Minimum lease payments are recognized on a straight-line basis. Leases run for varying terms that generally do not exceed 10 years, with options to renew (if any) that do not exceed 5 years. The majority of leases are net leases, which require additional payments for the cost of insurance, taxes, common area maintenance and utilities. Certain rental agreements include contingent rent, which is based on revenue exceeding a minimum amount. Minimum rentals, excluding rentals based upon revenue, are as follows:

Not later than one year $ 11,079
Later than one year and not later than five years $ 30,334
Later than five years $ 14,125
Total $ 55,538

Minimum lease payments, contingent rentals and sublease payments recognized as an expense are summarized as follows:

13 Weeks Ended
September 28, 2013 September 29, 2012
Minimum lease payments recognized as an expense $ 2,866 $ 2,805
Contingent rentals recognized as an expense $ 38 $ 18

(b) Letters of credit:

As at September 28, 2013, the Company had outstanding letters of credit in the amount of $17,102 (September 29, 2012 - $16,311) for purchases of inventory to be received.

16. Financial Instruments:

(a) Fair value disclosure

The following table presents the carrying amount and the fair value of the Company's financial instruments:

September 28, 2013 September 29, 2012
Classification Maturity Carrying value Fair value Carrying value Fair value
Cash Loans and receivables Short-term $ 8,050 $ 8,050 $ 16,584 $ 16,584
Accounts receivable Loans and receivables Short-term $ 808 $ 808 $ 855 $ 855
Payables and accruals Financial liabilities Short-term $ 11,054 $ 11,054 $ 9,205 $ 9,205
Sales return provision Financial liabilities Short-term $ 144 $ 144 $ 129 $ 129
Derivative financial instruments(1) Fair value through profit and loss Short-term $ 191 $ 191 $ (433 ) $ (433 )

(1) Included in accounts receivable for the 13-week period ended September 28, 2013 and included in payables and accruals for the 13-week period ended September 29, 2012.

The fair value of a financial instrument is the estimated amount that the Company would receive to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants as at the reporting date. These estimates are subjective in nature, often involve uncertainties and the exercise of significant judgment and are made at a specific point in time, using available information about the financial instrument and may not reflect fair value in the future. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies.

The methods and assumptions used in estimating the fair value of the Company's financial instruments are as follows:

- The derivative financial instruments, which consist of foreign exchange contracts, have been marked-to-market and are categorized as Level 2 in the fair value hierarchy. Factors included in the determination of fair value include the spot rate, forward rates, estimates of volatility, present value factor, strike prices, credit risk of the Company and credit risk of counterparties. As at September 28, 2013, a $191 unrealized gain (September 29, 2012 - $433 unrealized loss) was recorded in SG&A for the foreign exchange contracts outstanding.

- Given their short-term maturity, the fair value of cash, accounts receivable, payables and accruals and sales return provision approximates their carrying values.

(b) Financial instrument risk management

Exposure to foreign currency risk, interest rate risk, equity price risk, liquidity risk and credit risk arise in the normal course of the Company's business and are discussed further below:

Foreign Currency Risk

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. The Company purchases a significant portion of its leather and finished goods inventory from foreign vendors with payment terms in U.S. dollars. The Company uses a combination of foreign exchange contracts and spot purchases to manage its foreign exchange exposure on cash flows related to these purchases. A foreign exchange contract represents an option with a counterparty to buy or sell a foreign currency to meet its obligations. Credit risk exists in the event of a failure by a counterparty to fulfill its obligations. The Company reduces this risk by mainly dealing with highly-rated counterparties such as major Canadian financial institutions.

During the 13-week periods ended September 28, 2013 and September 29, 2012, the Company entered into foreign exchange contracts with Canadian financial institutions as counterparties with U.S. dollar notional amounts as listed below. Foreign exchange contracts outstanding as at September 28, 2013 expire at various times between September 30, 2013 and August 29, 2014 and the foreign exchange contracts that were outstanding as at September 29, 2012 expired or will expire between October 5, 2012 and December 16, 2013.

13 Weeks Ended
September 28, 2013 September 29, 2012
Notional amount outstanding at beginning of period (US$000) $ 32,700 $ 21,000
Notional amount of foreign exchange contracts entered into during the period (US$000) - 15,500
Notional amount of foreign exchange contracts expired during the period (US$000) (8,000 ) (8,000 )
Notional amount outstanding at end of period (US$000) $ 24,700 $ 28,500
Maturing in less than 1 year (US$000) $ 24,700 $ 22,500
Maturing between 1 year and 2 years (US$000) - $ 6,000
Fair value of foreign exchange contracts - gain/(loss) (C$000) $ 191 $ (433 )

As at September 28, 2013, a sensitivity analysis was performed on the Company's U.S. dollar denominated financial instruments, which principally consist of US$0.5 million of cash, to determine how a change in the U.S. dollar exchange rate would impact net earnings. A 500 basis point rise or fall in the Canadian dollar against the U.S. dollar, assuming that all other variables, in particular interest rates, remained the same, would have resulted in a $5 decrease or increase, respectively, in the Company's net loss for the 13-week period ended September 28, 2013.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's exposure to interest rate fluctuations is primarily related to cash borrowings under its existing credit facility, which bears interest at floating rates, and interest earned on its cash balances. The Company has performed a sensitivity analysis on interest rate risk as at September 28, 2013 to determine how a change in interest rates would have impacted net loss. As at September 28, 2013, the Company's cash balance available for investment was approximately $8.1 million. A 100 basis point change in interest rates would have increased or decreased net loss by approximately $14 for the 13-week period ended September 28, 2013. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.

Equity Price Risk

Equity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market equity prices. The Company's exposure to equity price fluctuations is primarily related to the RSU and DSU liability included in payables and accruals. The value of the vested DSU and RSU liability is adjusted to reflect changes in the market value of the Company's Subordinate Voting Shares on the TSX. The Company has performed a sensitivity analysis on equity price risk as at September 28, 2013 to determine how a change in the price of the Subordinate Voting Shares would have impacted net loss. As at September 28, 2013, a total of 107,871 RSUs and 83,136 DSUs have been granted and are outstanding. An increase or decrease of $1.00 in the market price of the Company's Subordinate Voting Shares would have increased or decreased net loss by approximately $134 for the 13-week period ended September 28, 2013. This analysis assumes that all RSUs and DSUs were fully vested and other variables remain constant.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company's approach to managing liquidity risk is to ensure, to the extent possible, that it will have sufficient liquidity to meet its liabilities when due. As at September 28, 2013, the Company had $8.1 million of cash; an operating credit facility of $25 million that is committed until June 27, 2014; and a $10 million uncommitted letter of credit facility which includes an uncommitted demand overdraft facility in the amount of $0.5 million related thereto. The credit facilities are used to finance seasonal working capital requirements for merchandise purchases and other corporate purposes. The Company expects that the majority of its payables and accruals and deferred revenue will be discharged within 90 days.

Credit Risk

Credit risk is the risk that a customer or counterparty to a financial instrument will cause a financial loss to the Company by failing to meet its obligations. The Company's financial instruments that are exposed to concentrations of credit risk are primarily cash, accounts receivable and foreign exchange option contracts. The Company limits its exposure to credit risk with respect to cash and money market investments by investing in short-term deposits and bankers' acceptances with major Canadian financial institutions. The Company's accounts receivable, excluding derivative financial instruments, consist primarily of credit card receivables from the last few days of the fiscal period end, which are settled within the first few days of the new fiscal period. Accounts receivable also consist of accounts receivable from distributors and corporate customers. Accounts receivable are net of applicable allowance for doubtful accounts, which is established based on the specific credit risks associated with the distributor, each corporate customer and other relevant information. The allowance for doubtful accounts is assessed on a quarterly basis. Concentration of credit risk with respect to accounts receivable from distributors and corporate customers is limited due to the relatively insignificant balances outstanding and the number of different customers comprising the Company's customer base. Credit risk for foreign exchange contracts exists in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by mainly dealing with highly-rated counterparties such as major Canadian financial institutions.

As at September 28, 2013, the Company's exposure to credit risk for these financial instruments was cash of $8.1 million, accounts receivable of $1.0 million and foreign exchange option contracts that had a notional amount of US$24.7 million.

17. Capital Disclosure:

The Company defines its capital as shareholders' equity. The Company's objectives in managing capital are to:

  • Ensure sufficient liquidity to support its current operations and execute its business plans;
  • Enable the internal financing of capital projects; and
  • Maintain a strong capital base so as to maintain investor, creditor and market confidence.

The Company's primary uses of capital are to finance non-cash working capital along with capital expenditures for new store additions, existing store renovation or relocation projects, information technology software and hardware purchases and production machinery and equipment purchases. The Company maintains a $25 million operating credit facility and a $10 million uncommitted letter of credit facility that it uses to finance seasonal working capital requirements for merchandise purchases and other corporate purposes. The Company does not have any long-term debt and therefore net earnings generated from operations are available for reinvestment in the Company. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year-over-year sustainable profitable growth. On a quarterly basis, the Board of Directors monitors share repurchase program activities. Decisions on whether to repurchase shares are made on a specific transaction basis and depend on the Company's cash position, estimates of future cash requirements, market prices and regulatory restrictions, among other factors. The Company does not currently pay dividends.

Externally imposed capital requirements include a debt-to-equity ratio covenant as part of the operating credit facility. The Company was in compliance with this covenant as at September 28, 2013 and September 29, 2012. There has been no change with respect to the overall capital risk management strategy during the 13-week period ended September 28, 2013.

18. Expenses by Nature:

13 Weeks Ended
September 28, 2013 September 29, 2012
Selling and retail operating expenses 12,565 11,704
General and administrative expenses 4,575 4,713
$ 17,140 $ 16,417

Selling and retail operating expenses comprise costs incurred to operate the Company's stores including wages and benefits for store personnel, rent and occupancy, marketing and advertising, credit card fees, amortization of property and equipment and computer software and other store operating expenses.

General and administrative expenses include the cost of design, merchandising, sourcing, merchandise planning, marketing, store administrative support, finance, loss prevention, information technology, human resources and executive functions.

19. Segmented Information:

Management has determined that the Company operates in one dominant industry which involves the design, manufacture, distribution and retail of fashion leather clothing and accessories.

FOR FURTHER INFORMATION PLEASE CONTACT:

Contact Information:
Investor Relations Contact:
Danier Leather Inc.
Bryan Tatoff, Executive Vice-President,
Chief Financial Officer & Secretary
(416) 762-8175 ext. 328
bryan@danier.com


Danier Leather Inc.
Jeffrey Wortsman
President and Chief Executive Officer
(416) 762-8175 ext. 302
jeffreyw@danier.com
www.danier.com

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