Coast Wholesale Appliances Income Fund reported financial results for the three and six months ended June 30, 2008. The three-month period represents the second quarter of its 2008 fiscal year.
The Fund holds a 65% indirect interest in Coast Wholesale Appliances LP (Coast), a leading independent supplier of major household appliances, and its results are entirely dependent upon Coast's operating results. The remaining 35% interest is held by the former owner, CWAL Investments Ltd. (CWAL).
Second Quarter Operating Results
Coast's revenues for the three months ended June 30, 2008 were $38.3 million, up by $1.5 million, or 3.9%, from the record $36.8 million reported in the second quarter of 2007. The company continued to see robust growth in its contract business with developers and builders, most notably in Alberta, where Coast again experienced strong contract sales completions. As in the first quarter, the company's business mix was skewed slightly in favour of contract sales. Due to more cautious consumer spending, retail sales were down somewhat from the particularly high levels experienced in the second quarter of 2007.
Second quarter cost of sales was $28.8 million, or 75.4% of sales. This resulted in a gross margin of $9.4 million, or 24.6% of sales. By comparison, in the second quarter of 2007, cost of sales was $27.6 million, or 74.9% of sales, resulting in a gross margin of $9.2 million, or 25.1% of sales. Although Coast achieved a modest year-over-year improvement in its gross margin percentage on product sales, the gain was more than offset by the impact of rapidly increasing fuel prices on its inbound and outbound freight costs. These increased costs eroded second quarter gross margin by 0.5%.
Coast's second quarter EBITDA of $3.5 million was down from $3.9 million in 2007, while its EBITDA margin of 9.3% was down from 10.5% in the prior year. The reduction in EBITDA was due to the small reduction in Coast's gross margin percentage and generally higher expenses year-over-year. Net income before non-controlling interest was $2.7 million, or 7.2% of sales, down from $3.2 million, or 8.7% of sales, in the second quarter of 2007. The net income decrease was due to Coast's higher expenses and lower gross margin in 2008.
First-Half Operating Results
Revenues for the six months ended June 30, 2008 were $72.1 million, up by $4.1 million, or 6.1%, from $68.0 million in the first half of 2007. At comparable stores - locations open for more than a year - sales grew by $3.0 million, or 4.4%, over the first half of 2007.
Cost of sales for the first half of 2008 was $54.2 million, or 75.2% of sales. This resulted in a gross margin of $17.9 million, or 24.8% of sales. For the first half of 2007, cost of sales was $51.0 million, or 75.0% of sales, providing a gross margin of $17.0 million, or 25.0% of sales. As with the quarterly result, the slight erosion in six-month gross margin of 0.3% was mainly due to the higher freight costs.
First half EBITDA was $6.4 million, down from $6.7 million in the same period in 2007. EBITDA margin for the six months was 8.9%, down from 9.8% in 2007. The EBITDA margin reduction was mainly due to Coast's increased expenses and decreased gross margin. The new stores Coast opened in Alberta during 2007 have contributed positively to the company's total EBITDA, but have negatively impacted its EBITDA margin. As volume grows in these stores, Coast expects the increase in total gross margin dollars will result in an increase to its EBITDA margin. Net income before non-controlling interest was $4.7 million, or 6.5% of sales, down from $5.2 million or 7.7% of sales, in the first half of 2007.
"We are pleased with our continued sales growth in the first half of the year, particularly given that our second quarter gain was on top of the record 19.5% sales increase we achieved in the second quarter of last year," said Blain Lawson, President and CEO of Coast. "We remain focussed on enhancing profitability by streamlining our non-selling functions and working to increase sales from our existing stores. We have also adjusted our freight rates to reflect higher fuel costs."
As part of its strategy to drive up comparable store sales, Coast relocated its Abbotsford, BC store to a new facility in a higher-traffic area at the end of the first quarter of 2008. The new location marked its official grand opening on April 19, 2008. A similar relocation of Coast's store in Regina, Saskatchewan is scheduled for September 2008, with a grand opening the following month. In addition, Coast has upgraded its inventory management and computer systems to support the future growth of its business. The new inventory management system was rolled-out across Coast's British Columbia stores and distribution network during the second quarter. The new system will be implemented across the balance of Coast's locations over the next few months.
Cash distributions
Distributions in the amount of $0.1025 per unit were paid for each of April, May and June 2008. This represents an annualized distribution rate of $1.23 per unit. From its inception until the end of the second quarter, the Fund had paid a total of 36 consecutive monthly cash distributions to its public unitholders, as well as 11 consecutive quarterly cash distributions and three monthly cash distributions to the non-controlling interest held by CWAL. Effective with the April 2008 distribution, all cash distributions to both public unitholders and the non-controlling interest are now paid monthly.
During the second quarter, the Fund earned $2.9 million, or $0.29 per unit, in adjusted distributable cash (before the non-controlling interest). This was down from $3.5 million, or $0.35 per unit, in the same period of 2007. With the per-unit monthly distribution increase introduced in October 2007, the amount distributed and accrued for payment to unitholders and the non-controlling interest increased in 2008 to $3.1 million, or $0.31 per unit, from $3.0 million, or $0.30 per unit, in 2007.
For the first half, adjusted distributable cash (before the non-controlling interest) was $5.3 million, or $0.53 per unit, down from $6.1 million, or $0.61 per unit, in 2007. The amount distributed and accrued for payment to unitholders and the non-controlling interest increased to $6.2 million, or $0.62 per unit, from $6.0 million, or $0.60 per unit, in 2007.
The Fund's adjusted payout ratio for the second quarter was 106.2%, up from 85% in 2007, but slightly lower than the 106.7% reported in 2006. On a 12-month trailing basis to June 30, 2008, its adjusted payout ratio increased to 105.3% from 88.5% a year ago and 100.1% two years ago. The higher payout ratios in 2008 were due to reduced cash flow from operations before changes in non-cash working capital, increased maintenance capital expenditures and the higher monthly distribution amount. First-half capital expenditures were primarily for the Abbotsford, BC store relocation, necessary building improvements and other planned expenditures required for normal operations as well as to support the future growth of the business. On a cumulative basis, from the Fund's inception, its adjusted payout ratio is 96.8%. -- www.cnxmarketlink.com
Comment and add to the story without registration, but keep the comments meaningful please. Links are not accepted.
