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A couple walks past a Le Chateau store in Montreal on July 7, 2020.Christinne Muschi/The Globe and Mail

Clothing retailer and shopping mall staple Le Château is negotiating with its current lenders and seeking new sources of financing, as it cautions that the company’s future could be at risk.

The Montreal-based company reported its annual results on Monday evening, and included a statement about “material uncertainties that cast significant doubt upon the company’s ability to continue as a going concern.”

Companies prepare financial statements on the assumption they will remain in business as a “going concern”; they or their auditors are required to advise shareholders if there is meaningful doubt about that. Le Château Inc. reported that this warning caused it to default on some the covenants under a $70-million revolving credit facility and a $15-million loan. Management is now negotiating with lenders and is “seeking other potential sources of financing,” the company said in a statement on Monday.

Like many retailers, Le Château has been hit hard by mandated shutdowns caused by the COVID-19 pandemic. All of its 115 regular-priced stores are in shopping malls, which were slower to reopen than street-facing stores. The company also has nine outlet stores, mostly in strip malls.

Le Château was already in the midst of reconfiguring its business long before the pandemic, however. At its peak, the chain had 243 locations, roughly half of which have been closed in the past five years. Over the past 5 to 7 years, the company has invested $10-million to improve its e-commerce platform, spokesperson Pierre Boucher said.

E-commerce sales increased 20.8 per cent in the fiscal year ended Jan. 25, compared with the year before, but did not make up for decreases in store sales for the year. Le Château’s comparable store sales – an important metric that does not include the impact of store openings or closings – decreased 3.8 per cent compared with the year before. That figure includes both retail store and e-commerce sales.

Le Château reported total sales of $175.9-million in the year ended Jan. 25, compared with $190.9-million in the prior year. Its net loss widened to $69.2-million, or $2.31 a share, compared with a net loss of $23.8-million, or 79 cents, the year before.

“They sold fast fashion before fast fashion became so widespread. But they could not compete with the H&Ms and Zaras of the world,” said Randy Harris, president of market research firm Trendex North America. Le Château responded by moving into more mid-market fashion and raising its prices, he added, and has done the right thing in closing unprofitable stores and boosting e-commerce operations.

However, the pandemic now creates significant uncertainty for the retail market in Canada, and has put some clothing and footwear retailers that were already attempting to reshape their businesses in peril.

Other companies, including Reitmans Canada Ltd. and Aldo Group, both filed for creditor protection in May. Montreal-based clothing retailer Frank and Oak’s parent company, Modasuite Inc., filed a “notice of intention” in June to allow it to restructure operations, closing some stores and refocusing on e-commerce.

While many stores have reopened across Canada, retailers are preparing for a rocky year ahead. Trendex estimates that retail apparel sales in Canada will contract by 28 per cent to 32 per cent in 2020.

“If that is true, and we assume normal growth rates, it will take us until the end of 2023 to get back to where we were last year,” Trendex’s Mr. Harris said. “We don’t know exactly how reticent the consumer will be to go back into these stores to shop – and whether financially they have the wherewithal to spend money on discretionary items.”

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