Mr. David Gordey reports

LIQUOR STORES N.A. LTD. REPORTS FOURTH QUARTER AND FISCAL 2014 FINANCIAL RESULTS

Liquor Stores N.A. Ltd. has released its results for the three months and year ended Dec. 31, 2014.

Summary operational results:

Three months ended Dec. 31, 2014:

• Consolidated sales increased 6.9 per cent to $196.7-million (2013: $184.1-million).
• Same-store sales increased by 3.5 per cent in Canada and by 3.6 per cent in the United States.
• Adjusted gross margin percentage increased 50 basis points to 25.8 per cent (2013: 25.3 per cent).
• Adjusted operating margin decreased by $400,000 to $13.7-million (2013: $14.1-million), as a result of the continuing investments related to the execution of the company's seven-point plan to support its business strategies (see the company strategy section of the company's 2014 management's discussion and analysis for further discussion), offset by the increased gross margin from the higher same-store sales and improved gross margin percentages.

Year ended Dec. 31, 2014:

• Consolidated sales increased 5.0 per cent to $694.2-million (2013: $661.0-million).
• Same-store sales increased by 2.5 per cent in Canada and by 1.1 per cent in the U.S.
• Adjusted gross margin increased 20 bps to 25.4 per cent (2013: 25.2 per cent).
• Adjusted operating margin decreased by $8.2-million to $37.9-million (2013: $46.1-million), primarily as a result of:
  • Temporary reductions in gross margin as a percentage of sales in the first four months of 2014, including sales of clearance inventory and the upfront investment to launch the company's new digital marketing program (the Celebration Club);
  • Competitive pressures in certain regions where the company implemented more competitive pricing strategies to gain back market share;
  • Continuing information technology and other investments to support the company's growth and business strategies.

Commenting on the results, Stephen Bebis, president and chief executive officer of the company, said: "We had an excellent fourth quarter, and we are particularly pleased with our same-store sales growth in Canada and Kentucky, and the improvement in gross margin as a percentage of sales compared to the prior year.

"This positive momentum is the result of our continued commitment to executing our seven-point plan," said Mr. Bebis. "During 2014, we made several investments that will strengthen our operating platform and drive long-term growth in profitability, including:

• "Enhancement of our senior leadership team;
• "Improvement of our pricing and marketing strategies to build market share;
• "Introduction of our digital marketing program, called the Celebration Club, and the launch of our social media engagement strategy;
• "Beginning to implement product assortment plans in our stores;
• "Increasing our selection of exclusive and control brands;
• "Launching our formal training program called Liquor Stores University;
• "Starting the planning for our new enterprise resource systems;
• "Improvements to our store network by closing or repositioning certain of our underperforming stores, and renovating 11 of our existing stores;
• "Executing on our growth strategy by opening seven new stores in 2014 and securing our pipeline with new stores in 2015 and beyond.

"We continue to anticipate that the full positive earnings impact from the plan will be achieved starting in 2016," said Mr. Bebis.

                   SUMMARY FINANCIAL RESULTS AND ANALYSIS
  (expressed in thousands of Canadian dollars except per-share amounts)  

                                                       Three months ended      
                                                     Dec. 31,       Dec. 31, 
                                                        2014           2013 

Sales                                         $      196,722 $      184,106 
Operating margin                              $       13,742 $       12,380 
Adjusted operating margin                     $       13,742 $       14,147 
Net earnings/(loss)                           $        6,714 $       (1,106)
Adjusted net earnings                         $        6,714 $        7,789 
Diluted earnings/(loss) per share             $         0.28 $        (0.05)
Adjusted diluted earnings per share           $         0.28 $         0.34 
Cash dividends per share                      $         0.27 $         0.27 
Stores in operation as at Dec. 31                        243            246 

                                                           Year ended          
                                                      Dec. 31,   Dec. 31,
                                                         2014           2013

Sales                                          $      694,186 $      660,979
Operating margin                               $       36,530 $       43,241
Adjusted operating margin                      $       37,916 $       46,077
Net earnings/(loss)                            $       12,949 $       11,483
Adjusted net earnings                          $       13,989 $       20,977
Diluted earnings/(loss) per share              $         0.54 $         0.49
Adjusted diluted earnings per share            $         0.59 $         0.90
Cash dividends per share                       $         1.08 $         1.08
Stores in operation as at Dec. 31                         243            246

The management's discussion and analysis, as well as the consolidated financial statements and notes for the financial statements for the year ended Dec. 31, 2014, are available on the company's website and on the SEDAR website.

Sales

Total sales increased by $12.6-million or 6.9 per cent to $196.7-million in the fourth quarter of 2014 (fourth quarter 2013: $184.1-million). The increase is primarily the result of the sales contribution from same-store and new-store expansion in the United States and Canada offsetting store closures in Canada (three new stores opened in the United States, five new stores opened in Canada and 11 stores closed since Sept. 30, 2013), and a $4.3-million positive change in foreign exchange on the translation of U.S.-dollar-denominated sales to Canadian dollars.

Same-store sales:

• Canadian same-store sales increased by $4.4-million, or 3.5 per cent.
  • The increase in Canadian same-store sales in fourth quarter 2014 was primarily the result of changes to its pricing and marketing strategies. Historically, the company has relied almost exclusively on price promotion through a flyer circulation program to drive customers to its stores and remain competitive. Consistent with its seven-point plan, it has taken the initial steps to implement new pricing and promotion strategies, improve customer loyalty with the introduction of the Celebration Club, and increase brand promotion. In 2014, as part of this strategy, it placed more emphasis on the use of various forms of media that were not historically fully utilized by the company. It believes that the use of multiple forms of media allows it to better target its customers and will allow it, in time, to focus more on brand promotion and customer loyalty programs. However, it will take time to realize the full benefits from these changes, and the company anticipates that its same-store-sales growth in the interim may vary from quarter to quarter as it transitions from flyers to these other form of media and promotion.
  • The increase in Canadian same-store sales is also attributable to: (i) increased sales contribution from those stores that have been renovated over the last 18 months, and (ii) newer stores that are now included in same-store sales (that is, those that have been opened for 13 months to 36 months) contributing higher than average sales increases as they continue to mature.
• U.S. same-store sales increased by $1.6-million or 3.6 per cent.
  • Same-store sales in the United States have been positively impacted by same-store-sales growth in Kentucky. While the company continues to be impacted by certain counties in Kentucky that have gone from dry to wet in recent periods, it believes that changes to its pricing and marketing strategies and the introduction of store-level training programs during the latter half of 2013 and early 2014 have assisted in counteracting this challenge to the business and allowed it to compete more effectively. Same-store sales in Alaska increased slightly during the quarter. Subsequent to year-end, the local leadership team in the Alaska region was replaced, and the company continues to enhance its pricing and marketing strategies to more effectively respond to increased competition in this market.

Margins

For the three months ended Dec. 31, 2014, gross margin was $50.7-million, up 11.2 per cent from $45.6-million for the same period last year. Gross margin as a percentage of sales for the period has increased to 25.8 per cent (2013: 24.8 per cent). Excluding adjusting items in 2013 of $1.1-million primarily related to costs associated with an inventory writedown for expired/unsellable product, adjusted gross margin in 2013 was $46.7-million, and adjusted gross margin as a percentage of sales in 2013 was 25.3 per cent.

The increase in adjusted gross margin of $4.0-million or 8.7 per cent was primarily attributable to the improvement in same-store sales ($1.6-million), an improvement in gross margin as a percentage of sales ($1.0-million), the sales increase from new stores net of store closures ($400,000) and a positive change in foreign exchange on translation of U.S.-dollar-denominated gross margin to Canadian dollars ($1.0-million).

Adjusted operating margin for the three months ended Dec. 31, 2014, decreased by $400,000 from $14.1-million in fourth quarter 2013, primarily due to the increases in operating expenses and continuing investments in the company's store-level training programs, customer relationship management strategies and tools, branding strategies, information technology infrastructure, and additional head office staff to support the company's business strategies, which were partially offset by increases in gross margin as explained herein. Adjusted operating margin as a percentage of sales was 7.0 per cent, down from 7.7 per cent.

Operating and administrative expenses for the three months ended Dec. 31, 2014, were $37.0-million, up 10.4 per cent from $33.5-million a year earlier. Excluding adjusting items of $900,000 in the prior year ($700,000 provision related to the early termination of a lease in conjunction with a store closure in 2014, and $200,000 in payments made to former members of the senior management team upon their departure from the company), these expenses increased by 13.5 per cent or $4.4-million.

• The increases related to the operation of the company's stores include: rent escalations related to the renewal of long-term lease arrangements in the past 12 months ($400,000), increases in operating costs associated with running same-stores, including the use of additional forms of media in its marketing plans ($1.6-million), and an increase in operating expenses as a result of the foreign exchange on translation of U.S.-dollar-denominated expenses to Canadian dollars ($700,000).
• Administrative expenses have increased by approximately $1.7-million over the prior year. This increase is primarily attributable to increased costs associated with the execution of its seven-point plan, including investments in store-level training programs, customer relationship management strategies and tools, branding strategies, efforts to remodel certain stores, information technology infrastructure, and additional head office staff to support the company's growth and other business strategies.

Earnings and earnings per share

For the three months ended Dec. 31, 2014, net earnings of $6.7-million were recorded (fourth quarter 2013: $1.1-million net loss). The increase in net earnings in fourth quarter 2014 is primarily the result of the increases in adjusted gross margin in the current period ($4.0-million), no impairment losses being recorded in the period (2013: $9.8-million) and a $2.0-million decline in adjusting items as discussed herein, being offset by an increase in operating and administrative expenses (inflationary increases and investments to support the company's growth and business strategies), increased amortization expense, and increased income tax expense.

Basic and diluted earnings per share for the three months ended Dec. 31, 2014, were 28 cents per share (fourth quarter 2013: five-cent loss). Basic and diluted earnings per share decreased as a result of the same factors that impacted net earnings, as noted herein.

Cash flow and dividends

For the three months ended Dec. 31, 2014, cash provided by operating activities before changes in non-cash working capital and adjusting items was $11.1-million (47 cents per share), declining $1.3-million from the prior year primarily as a result of the decline in operating margin.

During the three months ended Dec. 31, 2014, the company declared dividends of 27 cents per share, representing an annualized dividend of $1.08 per share. The company has declared a monthly dividend consecutively since going public in 2004.

The company has a dividend reinvestment plan to provide eligible shareholders with a convenient means of reinvesting monthly dividends into additional common shares. For further information about the DRIP and DRIP enrolment, please visit the company's website.

Conference call

Liquor Stores will host an analyst and investor conference call on March 5, 2015, to discuss results for the three months and year ended Dec. 31, 2014. The conference call will take place at 8 a.m. (MT). Participants on the call will include Mr. Bebis, president and chief executive officer, and David Gordey, senior vice-president and chief financial officer.

To participate in the call, please dial 1-416-340-2216 or toll-free at 1-866-355-4959. An archived recording of the conference call will be available approximately one hour after the completion of the call until March 12, 2015, by dialling 1-905-964-9451 or toll-free 1-800-408-3053 (passcode is 6675991).

Approval of advance notice bylaw

The company also announces the adoption of an advance notice bylaw, which is intended to provide a transparent and fair process for the nomination of directors of the company at annual or special meetings of shareholders. Among other things, the bylaw fixes a deadline by which shareholders must submit director nominations to Liquor Stores prior to any annual or special meeting of shareholders and sets forth the specific information that a shareholder must include in the written notice to Liquor Stores for an effective nomination to occur. No person will be eligible for election as a director of the company unless nominated in accordance with the provisions of the bylaw.

Notice of director nominations must be given to the company not fewer than 30 days prior to the date of an annual meeting (including an annual and special meeting) of shareholders unless the annual meeting is held on a date that is fewer than 50 days following public announcement of the date of the meeting, in which case notice must be given to the company no later than the close of business on the 10th day following the date of such public announcement.

For a special meeting of shareholders (which is not also an annual meeting), notice to the company must be given not later than the close of business on the 15th day following the day on which public announcement of the date of the special meeting was made.

Shareholders will be asked to confirm and ratify the bylaw at the next annual meeting of shareholders. If the bylaw is not confirmed by ordinary resolution of the shareholders at such annual meeting, it will cease to be effective at the termination of the meeting. A copy of the bylaw is available under the company's profile on SEDAR.

We seek Safe Harbor.