West 49 I nc.



annual report 2009
aren’t we all a kid
barreling down the h ill,

testing          our
                 limits.
                             ...
HEART?
About the
                                                                   lifestyle




                     10 to 19 y...
Skateboarding. Snowboarding. Surfing. BMX. Motocross. Action sports athletes and
enthusiasts often share many similar life...
Our buyers live and breathe the action sports lifestyle. They devote considerable
 time and effort to identifying emerging...
Southern
California




               20 buyers




                                                      More than 600 c...
How we
                                                        do retail




         200 brands in demand




           ...
Our stores, which are primarily mall-based, carry a variety of high-performance,
premium brand name and private label prod...
vision                           we will be  the
                                 retail destination of
                  ...
Fellow shareholders:

The past year has been a challenging time for West 49 Inc. and for the apparel retail industry at la...
Our focus

We remain focused on being the retail destination of choice for Canadian tweens and teens seeking to fulfill
th...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

Table of Contents                  ...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

April 21, 2009
1.0 Introduction
The...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

2.0 Company Overview
The Company is...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

3.0 Company Performance
The Company...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

Earnings before interest, income ta...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

Goodwill and Intangible Assets Impa...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

4.2 Selected Quarterly Consolidated...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

4.3 Summary of Results of Operation...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

4.4 Summary of Results of Operation...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

5.1 Liquidity

During the year ende...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

In the fourth quarter of fiscal 200...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

6.0 Policies, Controls and Procedur...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

Future Income Taxes

The Company fo...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

6.3 Future Changes in Accounting Po...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

IFRS Transition Disclosures

As the...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

Management does not intend to remed...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

The Company’s sales also depend on ...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

8.4 Merchandise
Dependence on Manuf...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

8.6 Human Resources

There can be n...
MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

Legal and Regulatory Proceedings

T...
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
West 49 Inc. Annual Report 2009
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West 49 Inc. Annual Report 2009

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West 49 Inc.'s 2009 Annual Report. West 49 Inc. is a leading Canadian specialty retailer of fashion and apparel, footwear, accessories and equipment related to the youth action sports lifestyle. The Company’s common shares are listed on the Toronto Stock Exchange under the symbol WXX.

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West 49 Inc. Annual Report 2009

  1. 1. West 49 I nc. annual report 2009
  2. 2. aren’t we all a kid barreling down the h ill, testing our limits. at With constantly evolving tastes, the youth action sports lifestyle can be a difficult space to operate in. But we LIVE IT and OWN IT . T h i s i s OUR s pa c e. One Company. One Destination. West 49 Inc.
  3. 3. HEART?
  4. 4. About the lifestyle 10 to 19 years old >$4.9B annual purchasing power Spend about half on clothing, footwear and 4.3 million tweens accessories and teens Account for 76% of action sports participants Multiple sources of discretionary income
  5. 5. Skateboarding. Snowboarding. Surfing. BMX. Motocross. Action sports athletes and enthusiasts often share many similar lifestyle preferences, including tastes in fashion, apparel, footwear and accessories. a lucrat target ive market Part-time job. Allowance. Birthday money. Holiday money. Back-to-school money. Debit card. Gift card. Pre-paid credit card. Mobile banking machine, also known as a parent.
  6. 6. Our buyers live and breathe the action sports lifestyle. They devote considerable time and effort to identifying emerging trends in apparel, equipment and brands in Southern California, as most of the trends in actions sports have their beginning there. in g k a k T s r i of t n u io o h fa s We understand the lifestyle of our target market. We also spend a lot of time talking to our customers, in our stores and online, to learn which merchandise is in demand. Their opinions are the only ones that matter.
  7. 7. Southern California 20 buyers More than 600 combined days per year in Southern California 1 incredible grassroots marketing engine Countless hours per year spent online talking to our customers Understanding our customers
  8. 8. How we do retail 200 brands in demand 429 thousand square feet 134 stores 9 provinces Our brand ambassadors
  9. 9. Our stores, which are primarily mall-based, carry a variety of high-performance, premium brand name and private label products that fulfill the action sports lifestyle needs of Canadian tweens and teens. foc app us roa ed ch Throngs of loyal customers. 171,000 loyalty club members. 1,540,637 unique website visitors. 1,800 passionate store associates. 1 Platinum Club sales incentive program.
  10. 10. vision we will be the retail destination of choice for Canadian tweens and teens seeking to fulfill their action sports lifestyle needs. growing our core business open new stores in new and existing markets EXPAND and relocate stores to more optimum locations and sizes
  11. 11. Fellow shareholders: The past year has been a challenging time for West 49 Inc. and for the apparel retail industry at large. The obstacles to our success were considerable, and included a volatile Canadian currency, cross-border shopping, minimum wage increases and a troubling economy. These poor operating conditions had a clear and direct impact on our financial results. However, their brunt was lessened by a number of strategic actions we took throughout the year to strengthen our business. Best brands on Earth; lowest prices ever! To defend against cross-border shopping we worked diligently with our vendors and lowered our prices to be more in line with U.S. retailers – providing our customers with little reason to go south of the border to shop. Our Platinum Club store sales incentive program, launched in March, helped drive higher units per transaction throughout the balance of the year. In Ontario, which seemed particularly affected by cross-border shopping, we ran a no-tax event in our West 49 stores during April and May, reinvigorating their sales performance. After a lot of hard work, we had a new value proposition for our customers – “best brands on Earth; lowest prices ever!” These actions combined to help us preserve market share and grow our comparable store sales during perhaps the most challenging Back-to-School and Holiday selling periods in the history of our Company. Strengthening our business Now, I will be the first to admit, that the actions we took to preserve market share and grow our top line were at the expense of our margins, and this will not be sustainable. However, we also took actions to strengthen other elements of our business, which should benefit our margins and bottom line going forward. We hired a Vice President, GMM in January 2008, who now has a year with us under his belt. He is working hard to ensure that we get the most out of our vendor relationships and we expect this to translate to improved product margins. Our continued focus on expense management yielded further improvement to our selling, general and administrative expenses as a rate to net sales. During the year, we consolidated our Off The Wall banner’s marketing and merchandising functions into West 49 and we reduced our head office head count in the fourth quarter. Difficult but necessary decisions The success of any retailer is dependent on their ability to ensure that their stores, brands and merchandise remain relevant and sought after by their target market customers. This has always been a priority of ours and something that I believe we have demonstrated a pretty good track record of in the past. While you will always have your misses, the key is to make the difficult decisions when something is not working. By the end of the year we had to make that decision with our Duke’s Northshore concept. We launched Duke’s as a test concept in 2006 to cater to what we saw as an under-serviced area of the market. Unfortunately, the few stores we had opened did not generate the returns we were expecting and the remaining Duke’s locations will be subleased, returned to the landlord or re-branded under one of our other banners. We will continue to review our portfolio and will take the necessary action with respect to any stores we deem to be underperforming. This survival of the fittest approach will enable us to devote more focus to growing our core business, including our West 49 banner – which importantly, has maintained its market share throughout these tough times, proving that we remain very relevant to our tween and teen target market customers. 9
  12. 12. Our focus We remain focused on being the retail destination of choice for Canadian tweens and teens seeking to fulfill their action sports lifestyle needs. We believe in the strong growth potential of our core business, especially our West 49 banner. However, in light of the current economic environment, efforts to maximize the value from existing operations will continue to take precedence over other elements of the Company’s growth strategy over the near term. That does not mean that we will not open new stores, but that we will continue to be more selective with respect to potential locations. Our employees are our strongest asset Our competitive retailing strategies and prudent management of operations have better positioned us for growth once the economic recovery takes hold. Furthermore, the encouraging results from our Platinum Club sales incentive program helped remind us that our strongest asset does not show on our balance sheet. Rather, our strongest asset is our team of 2,000 employees who continually strive to ensure the ongoing viability and competitiveness of our business from store to store and province to province in challenging and volatile times. I would like to take this opportunity to personally thank each and every one of them. In closing, I would like to thank our Board of Directors for their ongoing counsel and guidance, and our Senior Management team for their contributions and commitment. Finally, I would like to thank our shareholders for their ongoing support and our loyal customers, whom without we would not exist. I look forward to keeping you apprised of our progress throughout fiscal 2010. Sincerely, Salvatore Baio President and Chief Executive Officer 10
  13. 13. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations Table of Contents Page # 1.0 Introduction 12 1.1 Forward-looking Statements 12 2.0 Company Overview 13 2.1 Store Real Estate Activity 13 2.2 Store Count by Banner and by Province 13 3.0 Company Performance 14 3.1 Seasonality of Results 14 3.2 Key Performance Indicators 14 4.0 Selected Financial Information 15 4.1 Selected Annual Consolidated Results 15 4.2 Selected Quarterly Consolidated Results 17 4.3 Summary of Results of Operations for the Fiscal Year 18 4.4 Summary of Results of Operations for the Fourth Quarter 19 5.0 Liquidity and Cash Flows 19 5.1 Liquidity 20 5.2 Cash Flows 20 5.3 Capital Management 21 5.4 Related Party Transactions 21 6.0 Policies, Controls and Procedures 22 6.1 Significant Accounting Estimates 22 6.2 Impact of New Accounting Pronouncements 23 6.3 Future Changes in Accounting Policies 24 6.4 Disclosure Controls and Procedures 25 6.5 Internal Control Over Financial Reporting 25 7.0 Growth Strategy and Outlook 26 7.1 Growth Strategy 26 7.2 Future Outlook 26 8.0 Risk Management 26 8.1 Economic Conditions 26 8.2 Banking Arrangements 27 8.3 Competition 27 8.4 Merchandise 28 8.5 Information Systems 28 8.6 Human Resources 29 8.7 Relationships with Commercial Landlords 29 8.8 Legal and Policies 29 8.9 Insurance Coverage 30
  14. 14. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations April 21, 2009 1.0 Introduction The following Management’s Discussion and Analysis (“MD&A”) provides management’s perspective on the performance of West 49 Inc. (the “Company”) for the 14 week and 53 week periods ended January 31, 2009 (herein referred to as the fourth quarter and fiscal year 2009 respectively) compared to the 13 week and 52 week periods ended January 26, 2008 (herein referred to as the fourth quarter and fiscal year 2008 respectively). This MD&A is supplemental to, and should be read in conjunction with the information contained in the audited annual consolidated financial statements and accompanying notes of the Company for the year ended January 31, 2009. These statements have been prepared in conformity with Canadian generally accepted accounting principles (“GAAP”) and require management to make estimates and assumptions that affect amounts reported and disclosed in such financial statements and related notes. All amounts in this MD&A are expressed in Canadian dollars. The Board of Directors, on the recommendation of the Audit Committee, approved the contents of this MD&A on April 21, 2009. Disclosure contained in this document is current to this date, unless otherwise stated. Additional information on the Company, including the Annual Information Form (“AIF”), is available on the SEDAR website at www.sedar.com. 1.1 Forward-Looking Statements Statements contained or incorporated by reference in this document that are not current or historical factual statements may constitute forward-looking information within the meaning of applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed in or implied by such forward-looking statements. When used in this document, such statements are such words as “may”, “will”, “expect”, “believe”, “plan”, “anticipate”, “intend”, “estimate” and other similar terminology. The following includes some of the factors that could cause actual results, performance or achievements to differ materially from those expressed in or implied by any forward-looking statements made by or on behalf of the Company: competition, changes in demographic trends, changes in consumer preferences and discretionary spending patterns, changes in business and economic conditions, human resource matters, legal proceedings, challenges to intellectual property rights, and changes in laws, regulations, and accounting policies and practices. The foregoing list of factors is not exhaustive. Also see “Risk Management” below. In formulating the forward-looking statements contained herein, management has assumed that business and economic conditions affecting the Company’s operations will continue substantially in the ordinary course, including without limitation with respect to industry conditions, general levels of economic activity, laws, regulations (including regarding employees, facilities, consumers, sales, advertising, competition, manufacturing, safety), taxes, foreign exchange rates, minimum wage rates and interest rates, weather, that there will be no outbreaks of disease or public safety issues, and that there will be no unplanned material changes in its facilities, equipment, supplies, with respect to relations with customers, suppliers, landlords and employees, or with respect to credit availability, among other things. These assumptions, although considered reasonable by management at the time of preparation, may prove to be incorrect. Except as may expressly be required by law, the Company disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein to reflect any change in expectations, estimates and projections with regard thereto or any changes in events, conditions or circumstances on which any statement is based. In addition to the disclosure contained herein, for more information concerning the Company’s various risks and uncertainties, please refer to the Company’s periodic public filings, including its annual information form, all of which are available under the Company’s profile at www.sedar.com. Forward- looking statements contained in this document reflect management’s current estimates, expectations and projections, which it believes are reasonable as of the current date. Readers are cautioned that forward-looking statements are not guarantees of future performance. Readers should not place undue importance on forward- looking statements and should not rely upon this information as of any other date. WEST 49 INC. – FISCAL 2009 MD&A 12
  15. 15. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 2.0 Company Overview The Company is a leading Canadian specialty retailer of fashion and apparel, footwear, accessories and equipment related to the youth action sports lifestyle. The Company’s stores, which are primarily mall-based, carry a variety of high-performance, premium brand name and private label products that fulfill the lifestyle needs of identified target markets, primarily active tweens and teens. At January 31, 2009, the Company operated 134 stores in nine provinces under seven banners, consistent with the prior year. The Company also operated online at www.boardzone.com and www.shop.west49.com. 2.1 Store Real Estate Activity The following chart outlines the store opening and closing activity by banner for the fiscal year ended January 31, 2009 and the fiscal year ended January 26, 2008: Banner Opened Closed FY2009 FY2008 West 49 1 - 72 71 Billabong - - 6 6 Off The Wall 1 - 17 16 D-Tox - - 19 19 Amnesia/Arsenic - 1 17 18 Duke's Northshore - 1 3 4 Total 2 2 134 134 During fiscal 2009, the Company opened two new stores and closed two stores (fiscal 2008 – opened 12 new stores and closed three stores). In addition, the Company relocated five stores in the year (fiscal 2008 – nine stores). This has resulted in a 1.5% increase in the total gross square footage of stores in fiscal 2009 (fiscal 2008 – 12.6%). The Company intended to scale back its expansion plans in fiscal 2009 to manage capital and focus on existing operations. 2.2 Store Count by Banner and by Province The following chart outlines the store locations across Canada by province as at January 31, 2009 and January 26, 2008: Amnesia/ Duke's FY2009 FY2008 Province West 49 Billabong Off The Wall D-Tox Arsenic Northshore Total Total Alberta 11 2 2 2 - - 17 16 British Columbia 13 1 11 - - 1 26 25 Manitoba 3 1 - - - - 4 4 New Brunswick 3 - - 1 - - 4 4 Newfoundland 1 - - - - - 1 1 Nova Scotia 2 - - 1 - - 3 3 Ontario 37 2 4 6 - 2 51 52 Quebec - - - 9 17 - 26 27 Saskatchewan 2 - - - - - 2 2 Total 72 6 17 19 17 3 134 134 WEST 49 INC. – FISCAL 2009 MD&A 13
  16. 16. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 3.0 Company Performance The Company’s financial results in the earlier part of fiscal 2009 were impacted by a higher Canadian dollar and the Company’s strategic actions to help mitigate the pronounced threat of cross-border shopping. These strategic actions included lowering the Company’s retail price points on many goods to be competitive with like retailers on both sides of the Canadian-U.S. border. While the lower prices were partly achieved through successfully negotiating lower list prices from the Company’s vendors, the Company also sacrificed margins to preserve market share, drive higher units per transaction and protect comparable store sales. In the latter part of the year, the Company’s performance was impacted by the current economic downturn, which on a broader scale, resulted in reduced consumer confidence and spending. The Company’s merchandising and pricing strategies focused on offering exceptional brands at competitive prices. This strategy helped the Company defend its market share and was largely responsible for reclaiming comparable store sales during the key Back-to-School and Holiday selling periods. It should also be noted that the financial results for the fiscal year and fourth quarter ended January 31, 2009 include contributions from one additional week compared to the corresponding periods in fiscal 2008, due to the Company’s floating year end. 3.1 Seasonality of Results Revenues vary by quarter due to the seasonality of the retail industry. Retail sales are traditionally higher in the third and fourth quarters due to the Back-to-School period and the Holiday season. In addition, fourth quarter earnings are usually reduced by post Holiday season sale promotions. Variable costs can be adjusted to match the revenue pattern, but costs such as occupancy are fixed, leading the Company to report a disproportionate level of earnings in the third and fourth quarters. This business seasonality results in quarterly performance that is not necessarily indicative of the year’s performance. 3.2 Key Performance Indicators Management evaluates the following items, which it considers to be key performance indicators, in assessing the performance of the Company: Comparable store sales provide a measure of sales growth for current stores opened for at least one year. A store is included in comparable store sales in the thirteenth month of operation and includes a relocated or expanded store. Management considers comparable store sales to be a good indicator of the Company’s current performance, helping leverage certain costs such as store payroll, store occupancy, general and administrative expenses and other costs that are generally fixed. Positive comparable store sales results could generate improved operating leverage while negative comparable store sales results could negatively impact operating leverage. Net sales per average gross square foot is a common retail metric used to measure the sales productivity of the retail locations. The net sales per average gross square foot is calculated using net sales for the year, excluding online sales, divided by the simple average of the beginning and ending gross square footage for the year. Management considers net sales per average gross square foot a good indicator of the Company’s performance relative to its competitors. Gross margin measures whether the Company is appropriately optimizing the price and inventory levels of merchandise. Gross margin is the difference between net sales and cost of sales. Cost of sales includes cost of goods sold, shrink, freight, buying, distribution and occupancy costs. An inability to obtain acceptable levels of initial markups or a significant increase in the use of markdowns could have an adverse effect on the Company’s gross margin and results of operations. Selling, general and administrative expenses (“SG&A”) include compensation costs associated with store and head office locations, advertising and promotional expenses and other administrative costs. Management views SG&A as a rate to net sales to be a key indicator of success as a multi-banner retailer. The ability to leverage and control operating costs directly impacts the operating results of the Company. WEST 49 INC. – FISCAL 2009 MD&A 14
  17. 17. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations Earnings before interest, income taxes, dividends, depreciation and amortization (“EBITDA”) is a non-GAAP performance measure used by the Company. EBITDA does not have a standardized meaning prescribed by GAAP and management cautions investors that EBITDA should not replace net income or loss or cash flows from operating, investing and financing activities (as determined in accordance with GAAP), as an indicator of the Company’s performance. The Company’s method of calculating EBITDA may differ from the methods used by other issuers. Therefore, the Company’s EBITDA may not be comparable to similar measures presented by other issuers. Management believes that EBITDA is a useful supplementary measure of operating performance as it is a commonly used metric by investors. The primary drivers of EBITDA are total net sales, gross margin and the Company’s ability to control operating costs. Cash flow and liquidity are used by management to evaluate cash flow from operations, investing and financing to determine the sufficiency of the Company’s cash position. Management believes that cash flow from operations, along with leveraging the Company’s credit facilities throughout the year, will be sufficient to fund anticipated capital expenditures and working capital requirements. 4.0 Selected Financial Information 4.1 Selected Annual Consolidated Results The following table sets forth selected financial data and operating information for the Company for the 53 week period ended January 31, 2009 and the 52 week periods ended January 26, 2008 and January 27, 2007. (In thousands, except per share amounts and other operating information) FY2009 FY2008 FY2007 Summary of Operations: Net sales $ 210,417 $ 204,894 $ 195,268 Gross margin 46,829 52,408 53,543 SG&A 43,470 43,605 40,504 EBITDA (9,529) 4,418 12,539 Net income (loss) $ (12,341) $ (2,405) $ 4,137 Income (loss) per Share: Basic and diluted $ (0.19) $ (0.04) $ 0.07 Weighted average common shares - basic 63,605,190 63,323,829 62,198,635 Weighted average common shares - diluted 63,605,190 63,323,829 63,110,717 Balance Sheet: Cash and cash equivalents $ 6,788 $ 8,369 $ 5,413 Working capital 3,039 9,592 6,335 Total assets 94,747 103,110 102,066 Long-term obligations including current portion 21,301 22,370 21,018 Shareholders' equity $ 45,654 $ 56,923 $ 58,685 Other Operating Information: Number of stores 134 134 125 Net sales per average gross square foot $ 490 $ 509 $ 566 Average gross square footage per store 3,203 3,155 3,002 Total gross square footage 429,197 422,716 375,308 Adjustments to Normalize The results in the above table outlining selected financial information are based on GAAP, except for EBITDA and other operating information. However, the discussions throughout the MD&A on results of operations are based on the Company’s GAAP results excluding transactions that, in management’s opinion, do not arise as part of the normal day-to-day operations and by excluding these items management believes readers are provided with a more meaningful comparison of results for the fiscal years 2009, 2008 and 2007. WEST 49 INC. – FISCAL 2009 MD&A 15
  18. 18. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations Goodwill and Intangible Assets Impairment The Company completed its annual goodwill and intangible asset impairment test during the fourth quarter of fiscal 2009, as required by GAAP. As a result of the depressed capital markets and the current macroeconomic environment, which had a negative impact on the Company’s performance, the Company recognized a non- cash, goodwill and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million; fiscal 2007 - $0.5 million) in accordance with the Canadian Institute of Chartered Accountants (“CICA”) Section 3062: “Goodwill and Other Intangible Assets”. The impairment charge does not affect the Company’s day-to-day business operations or cash position. Given the size of the impairment, the Company has separately disclosed this non-cash impairment in its statement of earnings and has also presented normalized results to exclude this non-cash charge. Store Restructuring Costs During fiscal 2009, the Company evaluated the performance of its test concept, Duke’s Northshore (“Duke’s”), and decided to take strategic action to close all four stores. One of the Duke’s stores was closed in the second quarter of fiscal 2009, with non-cash provisions taken in the fourth quarter of $0.7 million on the remaining three Duke’s stores, which will either be closed or rebranded in fiscal 2010. The total non-cash provision on these four stores for fiscal 2009 was $0.9 million, of which $0.5 million was recorded as capital asset impairments and $0.4 million as a provision for lease penalties and other exit costs. As at January 31, 2009, the balance in accounts payable and accrued liabilities remained unchanged at $0.4 million, and will be paid out by the Company in subsequent periods. Given the size of the Duke’s strategic restructuring, the Company has separately disclosed the provision in its statement of earnings and has also presented normalized results to exclude this non-cash, non-recurring charge. Corporate Restructuring Costs During fiscal 2008, the Company recorded corporate restructuring costs of $0.9 million as a result of centralizing its finance, human resources, information technology, store operations and store development functions. The majority of these costs related to termination benefits. The remainder of these costs were related to consulting, legal and other administrative expenses. Given the size of this restructuring, the Company has separately disclosed this charge in its statement of earnings and has also presented normalized results to exclude this non- recurring charge. The following table reconciles the Company’s actual results to a normalized basis: Net (In thousands) EBITDA Income (Loss) Actual results FY2009 (9,529) (12,341) FY2008 4,418 (2,405) FY2007 12,539 4,137 Goodwill and intangible assets impairment FY2009 12,000 9,108 FY2008 3,500 3,361 FY2007 500 500 Store restructuring costs FY2009 888 604 FY2008 - - FY2007 - - Corporate restructuring costs FY2009 - - FY2008 885 576 FY2007 - - Normalized results FY2009 3,359 (2,629) FY2008 8,803 1,532 FY2007 13,039 4,637 WEST 49 INC. – FISCAL 2009 MD&A 16
  19. 19. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 4.2 Selected Quarterly Consolidated Results The table below includes selected data for the eight most recently completed quarters. This unaudited quarterly information has been prepared on the same basis as the annual consolidated financial statements. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period. Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 (In thousands, except per share amounts) FY2009 FY2009 FY2009 FY2009 FY2008 FY2008 FY2008 FY2008 Summary of Operations: Net sales $ 64,759 $ 61,723 $ 45,019 $ 38,916 $ 62,389 $ 59,082 $ 42,426 $ 40,997 EBITDA - normalized 3,306 4,844 (474) (4,317) 4,702 5,754 904 (2,557) EBITDA (9,409) 4,844 (647) (4,317) 1,062 5,711 836 (3,191) Net income (loss) - normalized 1,127 2,074 (1,636) (4,194) 2,233 2,619 (545) (2,775) Net income (loss) $ (8,467) $ 2,074 $ (1,754) $ (4,194) $ (1,219) $ 2,591 $ (589) $ (3,188) Income (loss) per Share: (1) Basic - normalized $ 0.02 $ 0.03 $ (0.03) $ (0.07) $ 0.04 $ 0.04 $ (0.01) $ (0.04) Basic and diluted $ (0.13) $ 0.03 $ (0.03) $ (0.07) $ (0.02) $ 0.04 $ (0.01) $ (0.05) (1) The sum of the quarters may not equal the fiscal year totals due to rounding and changes in weighted average shares outstanding. The table below is a reconciliation of the Company’s normalized EBITDA to net income (loss): Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 (In thousands) FY2009 FY2009 FY2009 FY2009 FY2008 FY2008 FY2008 FY2008 EBITDA - normalized $ 3,306 $ 4,844 $ (474) $ (4,317) $ 4,702 $ 5,754 $ 904 $ (2,557) Less: Corporate restructuring costs - - - - 140 43 68 634 Store restructuring costs 715 - 173 - - - - - Goodwill and intangible assets impairment 12,000 - - - 3,500 - - - EBITDA (9,409) 4,844 (647) (4,317) 1,062 5,711 836 (3,191) Less: Amortization 1,415 1,405 1,508 1,534 1,362 1,302 1,368 1,447 Interest and dividends on preferred shares 203 235 302 213 276 224 391 154 Income taxes (2,560) 1,130 (703) (1,870) 643 1,594 (334) (1,604) Net income (loss) $ (8,467) $ 2,074 $ (1,754) $ (4,194) $ (1,219) $ 2,591 $ (589) $ (3,188) The table below is a reconciliation of the Company’s normalized net income (loss) to reported net income (loss): Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 (In thousands) FY2009 FY2009 FY2009 FY2009 FY2008 FY2008 FY2008 FY2008 Net income (loss) - normalized $ 1,127 $ 2,074 $ (1,636) $ (4,194) $ 2,233 $ 2,619 $ (545) $ (2,775) Less (net of income tax): Corporate restructuring costs - - - - 91 28 44 413 Store restructuring costs 486 - 118 - - - - - Goodwill and intangible asset impairment 9,108 - - - 3,361 - - - Net income (loss) $ (8,467) $ 2,074 $ (1,754) $ (4,194) $ (1,219) $ 2,591 $ (589) $ (3,188) WEST 49 INC. – FISCAL 2009 MD&A 17
  20. 20. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 4.3 Summary of Results of Operations for the Fiscal Year Net Sales Net sales increased $5.5 million, or 2.7%, to $210.4 million for the 53 weeks ended January 31, 2009 from $204.9 million for the 52 weeks ended January 26, 2008. Comparable store sales for the Company for comparable 53 week periods decreased 0.4% while the West 49 banner experienced an increase of 0.1%. This compares to a 1.3% decrease in comparable store sales in the prior year for the Company and growth of 0.5% for the West 49 banner. The first quarter of fiscal 2009 was very disappointing with an 8.1% decrease in comparable store sales for the Company. Since then, the Company has reaffirmed its merchandising and pricing strategies, improved merchandise flow and fought to regenerate sales in an increasingly challenging economy. This culminated in positive comparative store sales of 1.3% for both the Company’s Back-to-School selling season in the third quarter, as well as the Holiday selling season in the fourth quarter. Gross Margin Gross margin decreased $5.6 million to $46.8 million in the 53 weeks ended January 31, 2009 from $52.4 million in the 52 weeks ended January 26, 2008. As a rate to net sales, gross margin declined by 340 basis points to 22.2% in the 53 weeks ended January 31, 2009 from 25.6% in the 52 weeks ended January 26, 2008. The decline in gross margin was primarily due to reduced product margins and increased supply chain costs. Selling, General and Administrative Expenses Selling, general and administrative expenses (“SG&A”), decreased $0.1 million to $43.5 million for the 53 weeks ended January 31, 2009 from $43.6 million during the 52 weeks ended January 26, 2008. As a rate to net sales, SG&A expenses were 20.7% for the 53 weeks ended January 31, 2009 compared to 21.3% in the 52 weeks ended January 26, 2008. The 60 basis point decrease in SG&A as a rate to net sales was mainly due to the continued focus on expense management. Earnings before Interest, Income Taxes, Dividends, Depreciation and Amortization On a normalized basis, excluding all restructuring costs of $0.9 million (2008 - $0.9 million) and the goodwill and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million), EBITDA was $3.4 million during the 53 weeks ended January 31, 2009 from $8.8 million, for the 52 weeks ended January 26, 2008. The decrease in EBITDA is almost entirely due to the reductions in gross margin. Amortization Expense Amortization expense was $5.9 million in the 53 weeks ended January 31, 2009 up from $5.5 million in the 52 weeks ended January 26, 2008. The increase of $0.4 million in amortization expense was primarily the result of a full year of amortization of new, expanded and relocated stores from the prior year’s growth. Provision for Income Taxes The provision for income taxes was a recovery of $4.0 million for the 53 weeks ended January 31, 2009 as compared to a provision of $0.3 million in the 52 weeks ended January 26, 2008. The reduction in the provision for income taxes was based on the net loss adjusted for permanent and other differences, including the goodwill and intangible assets impairment. Net Income (Loss) The net loss for fiscal 2009, excluding the after-tax impact of the restructuring costs of $0.6 million (fiscal 2008 - $0.6 million) and the goodwill and intangible assets impairment charge of $9.1 million (fiscal 2008 - $3.4 million) was $2.6 million, or a $0.04 loss per share, compared to a normalized net income of $1.5 million, or $0.02 per share for fiscal 2008. The per share amounts have been calculated based on a weighted average of 63,605,190 common shares during the 53 weeks ended January 31, 2009 compared to a weighted average of 63,323,829 common shares during the 52 weeks ended January 26, 2008. WEST 49 INC. – FISCAL 2009 MD&A 18
  21. 21. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 4.4 Summary of Results of Operations for the Fourth Quarter Net Sales Net sales increased $2.4 million, or 3.8%, to $64.8 million in the 14 weeks ended January 31, 2009 from $62.4 million in the 13 weeks ended January 26, 2008. The increase was mostly attributable to the additional week in the quarter. Comparable store sales for the Company for the comparable 14 week period decreased by 0.5%, with the West 49 banner experiencing an increase of 0.3%. This compares to a 4.5% decrease in comparable store sales in the prior year for the Company and a 2.4% decrease for the West 49 banner. Despite the volatile and uncertain economy, which was especially disappointing in November and early December, the Company executed well during the peak Holiday season with merchandising and pricing strategies producing positive comparative store sales of 1.3% during the five week selling period ended January 3, 2009. This has allowed the Company to maintain its customer base in a shrinking economy, while ensuring its product is current and proving that the Company remains very relevant to its customer. Gross Margin Gross margin decreased $1.1 million, to $16.3 million in the 14 weeks ended January 31, 2009 from $17.4 million in the 13 weeks ended January 26, 2008. As a rate to net sales, gross margin decreased by 270 basis points to 25.2% in the 14 weeks ended January 31, 2009 from 27.9% in the 13 weeks ended January 26, 2008. The decline in gross margin was primarily due to lower product margins and increased supply chain costs. Selling, General and Administrative Expenses Selling, general and administrative expenses were $13.0 million during the 14 weeks ended January 31, 2009, up $0.3 million from $12.7 million during the 13 weeks ended January 26, 2008. The increase is largely due to the additional week. As a rate to net sales, normalized SG&A expenses were 20.1% for the 14 weeks ended January 31, 2009, compared to 20.4% in the 13 weeks ended January 26, 2008. The decrease of 30 basis points in SG&A as a rate to net sales was mainly attributable to the continued focus on expense management. Earnings before Interest, Income Taxes, Dividends, Depreciation and Amortization On a normalized basis, excluding restructuring costs of $0.7 million (fiscal 2008 – $0.1 million), and the goodwill and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million), EBITDA was $3.3 million during the 14 weeks ended January 31, 2009 compared to $4.7 million, during the 13 weeks ended January 26, 2008. The decline in EBITDA for the quarter was mainly due to lower gross margins. Net Income The net income, excluding the after-tax impact of restructuring costs and the goodwill and intangible assets impairment charge, for the 14 weeks ended January 31, 2009 was $1.1 million, or $0.02 per share compared to normalized net income of $2.2 million, or $0.04 per share in the 13 weeks ended January 26, 2008. The normalized net income per share has been calculated based on a weighted average of 63,773,369 common shares during the 14 weeks ended January 31, 2009 compared to a weighted average of 63,517,071 common shares during the 13 weeks ended January 26, 2008. Subsequent Events Subsequent to January 31, 2009, the Company opened a West 49 store at the Milton Centre, in Milton, Ontario. In addition, the company closed two stores: an Off The Wall store at Lougheed Town Centre, in Burnaby, British Columbia, due to lease expiry; and a Duke’s store at Park Royal Shopping Centre, in West Vancouver, British Columbia as part of the Company’s strategic decision to close this test concept. 5.0 Liquidity and Cash Flows The Company’s principal capital requirements are to fund working capital needs, open new stores and expand and relocate existing stores in connection with its strategic plans. These capital requirements have generally been satisfied by a combination of cash flows from operations and borrowings under its credit facilities. WEST 49 INC. – FISCAL 2009 MD&A 19
  22. 22. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 5.1 Liquidity During the year ended January 31, 2009, operations generated cash of $2.3 million (fiscal 2008 - $7.1 million). The decrease in cash from operations from the prior year was largely due to lower earnings during fiscal 2009, mainly due to lower gross margins. Investing activities used cash of $4.2 million (fiscal 2008 – $6.8 million) which were largely due to capital asset additions, partially offset by cash inducements from landlords. Capital asset additions were mainly for new store growth, relocations and expansions of some existing stores, as well as the first phase of a new retail merchandising system. Financing activities were essentially flat, as the incremental borrowing of $2.0 million in fiscal 2009 was largely offset by debt repayments. This compares to the prior year of net cash generated from financing activities of $2.6 million. Overall, cash balances ended for fiscal 2009 at $6.8 million, compared to $8.4 million in the prior year. Due to the seasonality of the retail industry, working capital balances tend to fluctuate significantly throughout the year. Cash and cash equivalents are generally highest in the fourth quarter, and inventory and accounts payable balances tend to be considerably higher during the second and third quarters due to the Company’s merchandise purchase patterns in preparation for the Back-to-School and Holiday selling periods. The Company’s credit facilities are designed to support these seasonal fluctuations with a seasonal adjustment. 5.2 Cash Flows Cash Flows Provided by Operating Activities For the 53 weeks ended January 31, 2009, cash flows provided by operating activities were $2.3 million compared to $7.1 million in the same period last year. The $4.8 million change from last year was due mainly to the decrease in earnings from the prior year, adjusted for non-cash items, and a decreased investment in non-cash working capital. Cash flows provided by operating activities were $11.0 million in the fourth quarter of fiscal 2008 compared to $12.4 million in the same period last year. The $1.4 million change from last year was mainly due to the decreased earnings in the period, adjusted for non-cash items, and a decreased investment in non-cash working capital. Cash Flows Provided by Financing Activities For the 53 weeks ended January 31, 2009, cash flows provided by financing activities were $0.3 million compared to $2.6 million in the same period last year. The change was mainly due to the reduced draw on the CAPEX credit facility of $2.0 million in the year, compared to a $4.2 million draw in the prior year. Cash flows provided by financing activities were $0.9 million in the fourth quarter of fiscal 2009 compared to a use of funds of $0.1 million in the same period last year. The change was mainly due to the repayments on the CAPEX credit facility of $1.2 million in the quarter offset by a $2.0 million increase in long term debt. Cash Flows Used by Investing Activities For the 53 weeks ended January 31, 2009, cash flows used by investing activities were $4.2 million compared to $6.8 million in the same period last year. The change was mainly due to purchases of capital assets of $5.4 million compared to $7.7 million in the same period last year, combined with increased tenant inducements of $0.3 million. For the fourth quarter of fiscal 2009, cash flows used by investing activities increased by $0.2 million to $1.4 million in the fourth quarter of fiscal 2009 compared to $1.2 million in the same period last year. The change was mainly due to purchases of capital assets of $1.6 million, less tenant inducement received of $0.2 million compared to $1.2 million of capital asset purchases in the same period last year. Net Change in Cash and Cash Equivalents For the 53 weeks ended January 31, 2009, the net result of the Company’s operating, financing and investing activities was a decrease in cash and cash equivalents balance of $1.6 million compared to an increase of $3.0 million in the same period last year. WEST 49 INC. – FISCAL 2009 MD&A 20
  23. 23. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations In the fourth quarter of fiscal 2009, the net change in the Company’s operating, financing and investing activities was an increase in cash and cash equivalents balance of $10.5 million compared to an increase of $11.0 million in the same period last year. The table below sets out various categories of contractual obligations of the Company and the amounts due for each period as of January 31, 2009: Within (In thousands) Total 1 year 2 - 3 years 4 - 5 years Thereafter Long term debt $ 6,843 $ 1,322 $ 4,228 $ 1,293 $ - Operating leases 96,211 16,897 29,486 23,696 26,132 Preferred shares 5,223 33 5,190 - - Total contractual obligations $ 108,277 $ 18,252 $ 38,904 $ 24,989 $ 26,132 5.3 Capital Management During fiscal 2009, the sources of capital included a $10.0 million revolving credit facility with a seasonal adjustment increase to $15.0 million from April 1 to September 30. In addition, a revolving term loan facility of $8.5 million has been available since August 29, 2008, previously at $6.5 million. Interest rates on these facilities were at prime plus 1.25% and 1.75%, respectively. These facilities are secured by general security agreements against all existing and future acquired assets of the Company, including a pledge of the shares West 49 Inc. holds in its subsidiaries. The Company is subject to certain restrictions and covenants in respect of its credit facilities, including a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth. As at January 31, 2009, the Company was in violation of one of its bank covenants. Subsequent to January 31, 2009, the Company obtained a waiver for the default retroactive to January 31, 2009. The waiver obtained has the following conditions set forth based on historical operating needs: the maximum limit on the Company’s operating credit facility was reduced to $6.0 million from $10.0 million; the seasonal increase available on the operating line from April 1 to September 30 has been lowered to $12.0 million from $15.0 million; the term loan facility has been capped at $6.8 million, down from $8.5 million; and the credit facilities have also been changed to a demand basis from a 364-day committed line. Interest rates on these facilities are at prime plus 4.0% and 4.75%, respectively. With uncertainties in the current economic environment, it is not uncommon for banks to remove unutilized credit facilities. Throughout the year, the Company has had varying amounts of unutilized credit facilities. The bank indebtedness on the operating credit facility ranged from nil to $9.0 million at the peak of the seasonal period. Management believes that the Company’s revised credit facilities, along with cash generated from operations, will be sufficient to fund its operations and anticipated capital expenditures during fiscal 2010. In addition, subsequent to January 31, 2009, the Company completed an amalgamation of various corporate entities that will allow it to realize a significant amount of non-capital tax losses carried forward from prior years which will reduce the amount of tax instalments by $1.7 million in fiscal 2010. The Company’s credit facility renewal date is June 30, 2009. The Company anticipates that it may be in violation of another covenant at the end of the first quarter. The Company’s bank is aware of this, and the Company has already begun a full renewal process with the bank to negotiate mutually acceptable terms and anticipates this to be completed during the second quarter of fiscal 2010. 5.4 Related Party Transactions During the year, the Company, in the normal course of operations, provided administrative, payroll and distribution services to 6271235 Canada Inc. (Prudhommes Factory Outlet, a clothing retailer) and considers these to be related party transactions on account that a Director of the Company wholly owns 6271235 Canada Inc. The outstanding amount due from 6271235 Canada Inc, as at January 31, 2009 was $10.0 thousand (2008 – $138.0 thousand), does not bear interest and has no specific terms of repayment. During the year, the Company earned $36.0 thousand (2008 - $45.0 thousand) in management fees for providing these services, which are included as other income in SG&A. WEST 49 INC. – FISCAL 2009 MD&A 21
  24. 24. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 6.0 Policies, Controls and Procedures 6.1 Significant Accounting Estimates Estimates The preparation of the Company’s consolidated financial statements, in accordance with Canadian generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Due to the inherent uncertainties in making such estimates, and the current economic environment, actual results reported in the near term could differ from those estimates. Estimates are used when accounting for items such as inventory valuation, estimated returns and allowances, amortization, gift card liability, impairment of long-lived assets, future income taxes and assumptions used when assessing goodwill and intangible assets. Management reviews these estimates on an ongoing basis, and believes that the most critical estimates and assumptions are in the following areas: Revenue Recognition Revenue includes sales to customers through stores operated by the Company. Sales are recognized at the time of sale and receipt of merchandise by the customer, net of any returns. Allowances for customer returns are estimated using the historical return patterns. Upon the purchase of a gift card or issuance of a gift certificate, a liability is established for the cash value of the gift card or gift certificate. Revenue is recognized when the gift card or gift certificate is redeemed for merchandise. Gift card breakage is recognized by the Company when, based on historical patterns of redemption, the Company determines the cards or certificates will not be redeemed. Inventories Inventories, which consist of fashion and apparel, footwear, accessories and equipment related to music, youth culture and action sports, are valued at the lower of cost and net realizable value with cost being determined on the weighted average basis. The cost of inventories includes the cost of purchases and estimates of the capitalized portion of other costs incurred in bringing the inventories to their present location and condition. Inventories owned by the Company are generally located at its warehouses and its retail locations. The Company records valuation adjustments to inventories based on the aging of inventories and estimated expected markdowns. The estimated reserve can be affected by changes in the Company’s markdown strategies and selling patterns that could result in a fluctuation in gross margin. Impairment of Long-lived Assets Management evaluates the ongoing value of assets associated with the Company’s retail stores. Long-lived assets are tested for recoverability on an annual basis or more frequently as events or changes in circumstances indicate that their carrying value exceeds the total undiscounted cash flows expected from their use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the assets over their fair value. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the fair market value of the net identifiable assets of the acquired business. Goodwill and intangible assets are assessed for impairment on an annual basis or more frequently as events or circumstances change that indicate goodwill or intangible assets of a reporting unit may be impaired. When the carrying amount exceeds the fair value, an impairment charge is recognized in earnings in an amount equal to the excess of the carrying value over its fair market value WEST 49 INC. – FISCAL 2009 MD&A 22
  25. 25. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations Future Income Taxes The Company follows the liability method of accounting for income taxes. Under this method, future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using the enacted and substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the substantively enacted dates. Future income tax assets are recognized to the extent that it is more likely than not that they will be realized. 6.2 Impact of New Accounting Pronouncements The Canadian Institute of Chartered Accountants (“CICA”) amended section 1400 “General Standards of Financial Statement Presentation” to include requirements to assess an entity’s ability to continue as a going concern. The new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. Accordingly, the Company adopted the amendment to this standard on January 27, 2008. The adoption of this amendment did not have an impact on the Company’s consolidated financial statements. The CICA issued four new accounting standards that became effective for the Company’s first quarter of fiscal 2009: Section 1535 “Capital Disclosures”, Section 3031 “Inventories”, Section 3862 “Financial Instruments – Disclosures” and Section 3863 “Financial Instruments – Presentation”. The Company applied these new accounting standards at the beginning of its 2009 fiscal year. Capital Management Disclosures Section 1535 “Capital Disclosures” establishes standards for disclosing information about an entity’s capital and how it is managed. Required disclosure includes information that enables users of an entity’s financial statements to evaluate its objectives, policies and processes for managing capital. This disclosure includes a description of capital under management, and disclosure of externally imposed capital requirements to which the entity is subject. The adoption of this standard did not have an impact on the Company’s consolidated financial statements. Inventories Section 3031 replaces Section 3030 “Inventories”. The objective of this new section is to prescribe the accounting treatment for inventories. This section requires inventories to be measured at the lower of cost and net realizable value and also provides guidance on the appropriate methods of determining cost and the impact of any write-downs to net realizable value. Reversals of previous write-downs to net realizable value where there is a subsequent increase in the value of inventories is now required. This reversal is limited to the extent of the initial write-down. Under this new accounting standard, the cost of inventories includes the cost of purchases and other costs incurred in bringing the inventories to their present location and condition. The Company implemented this new accounting standard at the beginning of its 2009 fiscal year, on a retrospective basis, without restatement of prior periods. As a result of the retrospective application of this new standard, the opening deficit for fiscal 2009 has been adjusted by the difference in the measurement of opening inventories. The impact of this transitional adjustment was an increase in opening inventories of $1.2 million, an increase in current future income taxes payable of $0.4 million, and a decrease of $0.8 million to the opening deficit. As at January 31, 2009, the costs capitalized to inventory totaled $1.6 million. Financial Instruments Disclosure and Presentation Sections 3862 and 3863 replaced Section 3861 “Financial Instruments – Disclosure and Presentation”, with the exception of accounting for insurance contracts, which may still be accounted for in accordance with Section 3861. Section 3862 requires disclosure that enables financial statement users to evaluate the significance of financial instruments for an entity’s financial position and performance, the nature and extent of risks arising from financial instruments to which the entity is exposed, and the entity’s process for managing such risks. Section 3863 enhances a financial statement user’s understanding of the significance of financial instruments to an entity’s financial position, performance and cash flows by establishing standards for presentation of financial instruments and non-financial derivatives. The adoption of this standard did not have an impact on the Company’s consolidated financial statements. WEST 49 INC. – FISCAL 2009 MD&A 23
  26. 26. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 6.3 Future Changes in Accounting Policies In February 2008, the CICA amended Section 1000 “Financial Statement Concepts” to clarify the criteria for recognition of an asset and the timing of recognition of expenses. This amendment is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will apply this amendment at the beginning of its fiscal 2010 year. The Company is currently evaluating the impact that the adoption of this amendment will have on its consolidated financial statements. In February 2008, the CICA issued Section 3064 “Goodwill and Intangible Assets”. Section 3064 replaced Section 3062 “Goodwill and Other Intangible Assets” and Section 3450 “Research and Development”. This new section provides additional guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets. This standard is effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008. Accordingly, the Company will apply this new standard at the beginning of its fiscal 2010 year. The Company is currently evaluating the impact that the adoption of this Section will have on its consolidated financial statements. In February 2008, the CICA announced that the Canadian Accounting Standards Board confirmed that the changeover to International Financial Reporting Standards (“IFRS”) from Canadian GAAP will be required for publicly accountable enterprises’ interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011. Companies will be required to provide comparative information under IFRS for the previous fiscal year. The implementation of IFRS will be applicable for the Company for the first quarter of fiscal 2012, for which the current and comparative financial information will be presented in accordance with IFRS. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Company’s reported financial results. In addition, the International Accounting Standards Board has projects underway that are expected to result in new pronouncements that continue to evolve IFRS, and as a result, IFRS as at the transition date is expected to differ from its current form. Preliminary IFRS Impact Assessment An initial evaluation or impact assessment has been completed to analyze potential significant differences between current IFRS and Canadian GAAP as they apply to the Company. The results of the assessment identified the following: Preliminary analysis of all Canadian GAAP to IFRS differences and IFRS 1 elections, including a prioritization of high, medium and low impact areas for the Company; Preliminary resource requirements; Preliminary training requirements; and Preliminary IFRS Transition Plan. The initial assessment has identified some standards as having a higher likelihood for generating accounting differences including Intangible Assets (IAS 38), Impairment of Assets (IAS 36) and Business Combinations (IFRS 3), as well as the more extensive presentation and disclosure requirements under IFRS. The Company continues to analyze available accounting policy choices including IFRS 1 elections, and is therefore unable to quantify the exact impact of IFRS on the Company’s financial statements at this time. IFRS Transition Plan During fiscal 2010, the Company will finalize and implement a formal IFRS Transition Plan. This plan will include the following: An established project structure and governance practices; Detailed timetable for fiscal 2010; Identification and allocation of resources (internal and external); Development and execution of a training program; Detailed analysis of all Canadian GAAP to IFRS differences; Detailed analysis and selection of all IFRS 1 elections; and Assessment of impact on data systems, internal controls over financial reporting, and business activities, such as financing and compensation arrangements. WEST 49 INC. – FISCAL 2009 MD&A 24
  27. 27. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations IFRS Transition Disclosures As the Company transitions from Canadian GAAP to IFRS, it is required to qualitatively disclose its implementation impacts. As the IFRS Transition Plan progresses, disclosure on accounting policy differences is expected to increase. In January, 2009, the CICA issued Sections 1582 “Business Combinations”, 1601 “Consolidated Financial Statements” and 1602 “Non-Controlling Interests”, which replaced Sections 1581 “Business Combinations” and 1600 “Consolidated Financial Statements”. These new Sections harmonize Canadian accounting with the International Accounting Standards Board’s (IASB) International Financial Reporting Standard 3 “Business Combinations”. These new standards are to be applied prospectively for business combinations in the first annual reporting period beginning on or after January 1, 2011. The Company intends to apply these Sections at the beginning of its fiscal 2012 year, although earlier application is permitted. Assets and liabilities that arose from business combinations which precede the application date will not be adjusted upon adoption of the new standards. The Non-Controlling Interests standard is not applicable to the Company at this time. 6.4 Disclosure Controls and Procedures Management is responsible for establishing and maintaining a system of controls and procedures over the public disclosure of financial and non-financial information regarding the Company. Disclosure controls and procedures are designed to seek to ensure that information required to be disclosed in reports filed with Canadian securities regulatory authorities is recorded, processed, summarized and reported on a timely basis, and is accumulated and communicated to senior management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. The Company’s system of disclosure controls and procedures includes, but is not limited to, a Disclosure Policy, a Code of Business Conduct, the effective functioning of a Disclosure Committee and internal controls over financial reporting. The Company’s management, including the CEO and the CFO, does not expect that the disclosure controls will prevent or detect all misstatements due to error or fraud. Because of the inherent limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute, assurance that all control issues and instances of fraud or error, if any, have been detected. The Company is continually seeking to evolve and enhance its system of controls and procedures. Based on the evaluation of the disclosure controls and procedures which included documentation review, enquiries and other procedures considered by management to be appropriate in the circumstances, the CEO and CFO have concluded that, to their knowledge, as at January 31, 2009, except for the weakness identified below in the internal control over financial reporting, the disclosure controls and procedures are designed and operating effectively. 6.5 Internal Control over Financial Reporting Management is also responsible for establishing and maintaining appropriate internal controls over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal controls over financial reporting include, but are not limited to, policies and procedures related to accounting and reporting, and controls over systems that process transactions. The Company’s procedures for financial reporting also include the involvement of qualified financial professionals, senior management and the Company’s Audit Committee. During fiscal 2009, management engaged the services of external consultants, independent of the Company’s external auditor, to provide additional advice and technical expertise relating to internal controls over financial reporting. During the process of management's review and evaluation of the design and operational effectiveness of the Company's internal control over financial reporting, the CEO and CFO have concluded that, as at January 31, 2009, the internal controls over financial reporting are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP with the exception of the previously disclosed design weakness. As is indicative of many small companies, management has identified the existence of full competencies in the complex areas of taxation as an area requiring improvement. Risks associated with this weakness have the potential to result in material misstatements in the Company’s consolidated financial statements among other things. Senior management seeks to mitigate these risks by consulting with external experts to assist management in their analysis. WEST 49 INC. – FISCAL 2009 MD&A 25
  28. 28. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations Management does not intend to remediate the Company’s lack of in-house tax expertise as it does not believe it to be economically beneficial at this time and that the established procedures are sufficient at this time. It should be noted that a control system, no matter how well conceived or operated, can only provide reasonable assurance, not absolute assurance, that the objectives of the control system are met. Management has evaluated whether there were changes in internal controls over financial reporting during the quarter ended January 31, 2009 that materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting. Management has determined that no material changes occurred during in the fourth quarter. 7.0 Growth Strategy and Outlook 7.1 Growth Strategy The Company’s vision is to be the retail destination of choice for Canadian tweens and teens seeking to fulfill their action sports lifestyle needs. The Company will fulfill its vision and achieve its objectives through executing a growth strategy which is primarily focused on maximizing returns at existing locations (through improving gross margins; leveraging expenses; and driving comparable store sales) as well as growing its stores across Canada (by opening new stores in existing markets and expanding into new markets). 7.2 Future Outlook The economic downturn that began in 2008 has continued to evolve into a global economic meltdown, negatively impacting consumer confidence across Canada. While spending by the Company’s tween and teen target market consumers has historically been thought of as recession resistant, the effects have been far more reaching and volatile than the past, and Canadian youth are looking to make their dollars go further. Management and the Board of Directors continue to believe in the strong growth potential of the Company over the next several years. However, in light of the current macroeconomic environment and constraints in the capital markets, management will continue to be prudent and definitive in the actions taken to preserve and grow market share and strengthen the profitability of the Company. This means that maximizing the value from existing operations will continue to take precedence over other elements of our growth strategy over the near term. As such, store growth will likely be limited to four or five new stores and only a few major renovation/relocations in fiscal 2010. In addition, the Company will continue to reassess underperforming stores, and intends to close two to four stores in fiscal 2010 as opportunities to exit leases arise. 8.0 Risk Management The Company attempts to mitigate and manage risks wherever possible through various tactics including continuous monitoring of its internal and external environments for threats and opportunities, planning for the risk with contingency plans and protecting against the risk of loss with insurance, where applicable. The risks described below are inherent in the Company’s normal course of business and have the potential to impact the financial performance of the Company. The risks included here are not exhaustive. The Company operates in a very competitive and rapidly changing environment. New risk factors may emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company. 8.1 Economic Conditions Current Economic Downturn The apparel retail industry can be affected by macroeconomic factors, including changes in national, regional, and local economic conditions, employment levels, salary and wage levels, interest and currency exchange rates, taxation and consumer spending patterns. The current global economic downturn has adversely impacted the Canadian retail landscape primarily in the form of reduced consumer confidence and could negatively affect consumers’ willingness to purchase the Company’s products as they reduce their discretionary spending. Moreover, current economic conditions may adversely affect the ability of the Company’s manufacturers and/or suppliers to obtain the credit necessary to fund their working capital needs, which could negatively impact their ability to continue to provide products to the Company. If the current economic conditions persist or deteriorate, sales of the Company’s products could be adversely affected and the Company may face obsolescence issues with its inventory, either of which could have a material adverse impact on its operating results and financial condition. WEST 49 INC. – FISCAL 2009 MD&A 26
  29. 29. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations The Company’s sales also depend on the continuing popularity of malls as shopping and leisure-time destinations for tweens and teens. The current economic recession and uncertain economic outlook in Canada may further lower consumer spending levels and cause a decrease in mall traffic or new mall development, each of which could adversely affect the Company. Currency Exchange Rates The Company’s foreign currency exchange rate risk is generally limited to currency fluctuations between the Canadian and United States (U.S.) dollar. The Company is exposed to foreign exchange rate variability on its merchandise purchases in U.S. dollars. Pricing is determined in advance with considerable lead times, and significant fluctuations in foreign exchange rates could have an impact on the Company’s operating results and financial condition. The Company does not currently engage in any foreign currency hedging activities due to the relatively small volume of transactions in U.S. dollars. A significant portion of the Company’s merchandise purchases are made through Canadian distributors of U.S. suppliers. Similar to the above, pricing is determined in advance with considerable lead times, and significant fluctuations in foreign exchange rates could have immediate positive or negative affects on the Company’s ability to be price competitive. Since the Company’s pricing is locked in for longer periods of time, this competitive pricing delay can be adjusted by the Company in the short-term through markdowns or other means, which could have significant positive or negative effects on the Company’s operating results and financial condition. 8.2 Banking Arrangements Aside from cash flows from operations, the Company is dependent on borrowings under its credit facilities to support its seasonal cash requirements. The current global financial market downturn has resulted in severe restrictions on credit availability in most parts of the world, including Canada. Credit contraction in financial markets may hurt the Company's ability to borrow funds to meet its anticipated cash needs and access credit in the event that it identifies an acquisition opportunity or some other opportunity that would require a significant investment in resources. A significant decrease in the operating results of the Company could adversely affect the Company’s ability to maintain required financial ratios under the Company’s credit facilities. Required financial ratios include a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth. The Company is also subject to a maximum amount of capital expenditure per annum. If these financial ratios are not maintained or the capital expenditure limit is exceeded, the lender will have the option to terminate the facilities and require immediate repayment of all amounts outstanding under the credit facilities. If the Company were unable to obtain waivers or renegotiate acceptable lending terms, there can be no guarantee that the Company would be able to obtain a new credit agreement with another bank or group of lenders on similar terms or at all and this could have an adverse effect on the Company. 8.3 Competition The Canadian retail apparel and accessory industry is highly competitive. The Company competes with other retailers for manufacturers and/or suppliers, customers, suitable store locations, qualified associates and management personnel. In addition, given the close proximity of many of the Company’s stores to the U.S., cross-border shopping also presents a constant risk. The Company currently competes directly with street-level alternative stores located primarily in metropolitan areas as well as with other mall-based teenage-focused retailers such as, but not limited to: Bluenotes™, American Eagle Outfitters™, Old Navy™, Below the Belt™, The GAP™ and boathouse™. The Company may also experience increased competition from additional non- Canadian retailers moving into the Canadian marketplace. Among the other retailers who could enter the Canadian marketplace are PacSun™ (Pacific Sunwear™), Zumiez™ and Hot Topic™. Some of the Company’s competitors are larger and may have greater resources than the Company. Direct competition with these and other retailers may increase significantly in the future, which could require the Company, among other things, to lower its prices. Failure to develop and implement appropriate competitive strategies could have an adverse effect on the Company. WEST 49 INC. – FISCAL 2009 MD&A 27
  30. 30. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 8.4 Merchandise Dependence on Manufacturers and/or Suppliers The Company’s financial results also depend on its ability to maintain access to manufacturers and/or suppliers who develop and sell current action sport, fashion, music and pop culture related merchandise as well as the Company’s ability to purchase merchandise in sufficient quantities and to do so at competitive prices. Although the Company acquires its merchandise from various manufacturers and/or suppliers, many of them limit the quantity of merchandise produced and sold to the Company as a result of capacity limitations and other factors. There is no guarantee that the Company will be able to maintain its relationships with its manufacturers and/or suppliers on current terms or that the Company will obtain the quantity of merchandise it seeks at competitive prices in the future. Any inability to acquire suitable merchandise, or the loss of one or more key manufacturers and/or suppliers could have an adverse effect on the Company. Unfavourable trends or developments, including among others, fluctuations in the price of raw materials, the unavailability of certain products, the loss of or inability to obtain leased premises on reasonable terms, transportation disruptions, strikes, lock-outs, labour unrest and/or financial difficulties affecting the Company’s manufacturers and/or suppliers, may cause a significant reduction in the availability or quality of products and services purchased by the Company. There can be no assurance that the Company will be able to find alternate manufacturers and/or suppliers which could have an adverse impact on the Company. As a diverse and multi-channel retailer, the Company promotes many brands as part of its normal course of business. Damage to the reputation of any of these brands or the reputation of the manufacturers and/or suppliers of these brands could negatively impact consumer opinions of the Company and/or its related products and have an adverse effect on the Company. Private Label Merchandise The Company’s private label merchandise generally carries higher margins than its other merchandise. Accordingly, if the Company fails to anticipate, identify and react to trends with its private label merchandise, particularly the ideal mix of private label versus branded merchandise, then it could have an adverse effect on the Company. Merchandise Sourcing A significant portion of merchandise sold by the Company is sourced from manufacturers and/or suppliers requiring advance notice periods in order to supply the quantities that the Company requires. Lead times may adversely impact the Company’s ability to respond to changing consumer preferences, resulting in inventory levels that are insufficient to meet demand or in merchandise that may have to be sold at lower prices. The inability of a manufacturer and/or supplier to ship orders in a timely manner could also cause the Company to fail to meet the merchandise requirements of its stores, which could result in lost sales and dissatisfied customers. Interruptions in the Company’s sourcing could have an adverse effect on the Company and inappropriate inventory levels may negatively impact the Company’s performance. In addition, a significant portion of the Company’s private label merchandise is manufactured outside of Canada, principally in Asia and the United States, through arrangements with distributors and agents. The Company’s distributors and agents are subject to the risks generally associated with doing business abroad, including foreign government regulations, political instability, the imposition of additional regulations relating to imports, the imposition of additional duties, taxes and other charges on imports, significant fluctuations in the value of the dollar against foreign currencies or restrictions on the transfer of funds. 8.5 Information Systems The Company has experienced significant growth over the last several years. While the Company regularly evaluates its information systems capabilities and requirements, there can be no assurance that its existing information systems will be adequate to support future growth or will remain adequate to support the existing needs of the Company’s business. In order to support future growth, and to consolidate the many different platforms across the Company’s business areas, the Company has begun to undertake a significant information system implementation for all banners. One banner was completed in fiscal 2009. The Company intends to convert all banners to the new common point-of-sale and merchandising system. Such projects include inherent risks associated with replacing existing systems, such as system disruptions and the failure to accurately capture data, among others. Information system disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on the Company. WEST 49 INC. – FISCAL 2009 MD&A 28
  31. 31. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations 8.6 Human Resources There can be no assurance that the Company will be able to maintain key personnel at either the senior management or retail level. The success of the Company depends upon the efforts of key personnel and, accordingly, its ability to retain and attract qualified personnel, maintain good relations with its personnel, and to continue to successfully grow the business. The loss of the services of one or more of these individuals, or the lack of certain in-house specialized expertise (for example, in tax and other areas), could have an adverse effect on the Company, and could lead to disclosure errors among other things. 8.7 Relationships with Commercial Landlords The Company operates its stores with the majority situated in urban malls and other similar urban centres on premises leased to the Company by various commercial landlords. While the Company is able to change its merchandise mix and relocate stores in order to maintain its competitiveness, it may be restricted from vacating a current store location without breaching its contractual obligations and incurring, for example, lease related expenses up to the remaining term of the lease. In some cases, the long-term nature of the leases may limit the Company’s ability to respond to changes in the demographics or retail environment at any location. As at January 31, 2009, the remaining terms of the various leases ranged from less than one year to ten years, with the average remaining term of the lease being approximately five years. The Company’s financial results, business and operations are impacted by the Company’s relationships with its numerous commercial landlords and their agents and representatives. There can be no assurance that the Company will maintain positive working relationships with such persons and entities which, if compromised, could impact the Company’s ability to operate its stores, open new stores and to renew leases on existing stores, among other things. This could, accordingly, have an adverse effect on the Company. 8.8 Legal and Policies Laws and Regulations Changes to laws, regulations, policies, rules, orders, practices, methods and similar, including but not limited to accounting adjustments and changes in accounting policies and methods (collectively, “Laws and Practices”), as well as changes in the interpretation, implementation or enforcement of Laws and Practices, could adversely affect the Company. The Company may also incur significant costs in the course of complying with any changes to applicable Laws and Practices. The Company’s failure to comply with applicable Laws and Practices could result in judgments, sanctions and/or financial penalties against the Company which could adversely impact the Company in a number of ways, including potential negative impacts on its reputation. Intellectual Property If the Company fails to enforce or maintain any of its intellectual property rights, it may be unable to capitalize on its efforts to establish and maintain brand equity. All registered trade-marks in Canada can be challenged pursuant to provisions of the Trade-marks Act (Canada) and if any of the Company’s intellectual property is ever successfully challenged, this may have an adverse impact on the Company. There can also be no assurance that any of the Company’s efforts to register or protect its intellectual property will be successful. The use of unregistered trade-marks, registered trade-marks and licensed trade-marks, among other things, can also be challenged. Moreover, it is possible that the Company’s licenses to use certain intellectual property will be terminated or not renewed. The loss of any brand could have an adverse effect on the Company. In non-Canadian jurisdictions the Company may not own or have the right to use identical or similar trade- marks, licenses and other intellectual property owned by the Company in Canada. Third parties may also use such intellectual property in jurisdictions other than Canada in a manner that diminishes its value. If this occurs, the value of the Company’s intellectual property may suffer and net sales of the Company could decline. Similarly, negative publicity or events associated with such intellectual property in jurisdictions both in and outside of Canada may negatively affect the image and reputation of the Company, resulting in a decline in net sales of the Company. WEST 49 INC. – FISCAL 2009 MD&A 29
  32. 32. MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations Legal and Regulatory Proceedings The Company may be subject to legal proceedings including those related to product liability, intellectual property infringement and any other proceedings arising out of its business. Such potential liability may be material to the Company and may adversely affect its ability to continue operations. In addition, the Company may be subject to actions by governmental or regulatory authorities in connection with its operations. Such actions may result in fines or penalties, revocations of consents, permits, approvals or licenses or other similar actions, which could be material and may adversely impact the results of operations of the Company. The Company’s current insurance coverage may not be adequate to cover any or all of the potential losses, liabilities and damages that could result from the actions referred to above. Publicity resulting from any allegations may also adversely affect the Company, regardless of whether such allegations are true or whether the Company is ultimately held liable. 8.9 Insurance Coverage The Company uses its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view of maintaining appropriate insurance coverage on its assets at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, may not be sufficient to cover the full market value or current replacement cost of its assets. This could, accordingly, have an adverse effect on the Company. WEST 49 INC. – FISCAL 2009 MD&A 30

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