Annual Report To Our Shareholders Fiscal 2012 will long be remembered as a most challenging and difficult year. Reitmans is Sales for the year ended January 28, 2012 (“fiscal 2012”) decreased 3.7% to $1,019,397,000. Same store sales decreased 4.3%. Sales were challenging throughout the year as consumer spending on apparel was negatively impacted by reduced discretionary Canada’s leading consumer income and by weak customer traffic as many consumers were faced with high personal debt levels and increased food and gasoline prices. specialty retailer. We are customer driven, value oriented and committed to excellence. By promoting innovation, growth, The Company’s gross margin decreased from 66.9% in fiscal 2011 to 64.4% in fiscal 2012 as a result of increased promotional activity in a highly competitive environment. For fiscal 2012, adjusted EBITDA1 decreased to $126,788,000 as compared with $184,369,000 for fiscal 2011. Net earnings decreased 46.6% to $47,539,000 or $0.72 diluted earnings per share as compared with $88,985,000 or $1.32 diluted earnings per share last year. On October 19, 2011 the Company announced the closure of its 25 Cassis stores of which approximately 12 stores will be converted to other Company banners. In fiscal 2012, the Company recorded costs associated with the Cassis closing including store conversions, closures and severances of approximately $4,400,000 after tax. During the year, the Company opened 30 new stores and closed 56. Accordingly, at January 28, 2012, there were 942 stores in operation, consisting of 362 Reitmans, 150 Smart Set, 66 RW & CO., 76 Thyme Maternity, 152 Penningtons, 116 Addition Elle and 20 Cassis as compared with a total of 968 stores as at January 29, 2011. In fiscal 2013, we expect to open 44 new stores, close 54 stores and remodel 60 stores. We continue to upgrade our technology platform and distribution centre. We continue to invest in our people with skills development and management training programs. Our cash resources and infrastructure allow us to seek out new business opportunities through acquisition and development. development and The Company continues to execute its strategy of delivering fashionable clothing at excellent prices to Canadian consumers. We are proud of our achievements over the past 86 years and most confident of our future. We believe that we have the very best teamwork, we specialty retailing assets in Canada. Our operations are led and staffed by highly motivated, extremely competent professionals. We extend sincere thanks and appreciation to all our associates, suppliers, customers and shareholders. These are the people who strive to serve our have made possible our many years of success and on whom we rely for the continued growth of the Company. customers the best On behalf of the Board of Directors, quality/value (signed) proposition in Jeremy H. Reitman Chairman and Chief Executive Officer the marketplace. Montreal, March 28, 2012 The Year at a Glance Sales $1,019,397,000 - 3.7 % Adjusted EBITDA1 $126,788,000 - 31.2 % Pre-tax earnings $65,872,000 Net earnings $47,539,000 Earnings per share2 $0.72 - 48.5 % - 46.6 % - 45.5 % Cash and investments $268,277,000 - 10.7 % Stores 942 - 2.7 % 1 These highlights include a reference to adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is defined as earnings before income taxes, dividend income, interest income, realized gain on disposal of available-for-sale financial assets, impairment losses on available-for-sale financial assets, interest expense, depreciation, amortization and net impairment losses related to property and equipment. The Company believes this measure provides meaningful information on the Company’s performance and operating results. However, readers should know that such a non-GAAP financial measure has no standardized meaning as prescribed by IFRS and may not be comparable to similar measures presented by other companies. Accordingly, it should not be considered in isolation. 2 Earnings per share on a fully diluted basis. 5-Year Highlights For the years ended: (in thousands except per share amounts) (unaudited) SALES 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total RESULTS FROM OPERATING ACTIVITIES 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total ADJUSTED NET EARNINGS 2 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total ADJUSTED BASIC EARNINGS PER SHARE 2 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total ADJUSTED NET EARNINGS 2 ADJUSTED BASIC EARNINGS PER SHARE 2 SHAREHOLDERS’ EQUITY PER SHARE NUMBER OF STORES DIVIDENDS PAID STOCK PRICE AT YEAR-END CLASS A NON-VOTING COMMON 20121 20111 20101 20091 20081 $ 219,296 286,075 254,072 259,954 $ 1,019,397 $ 235,745 292,026 262,515 268,714 $ 1,059,000 $ 231,652 286,071 270,684 268,120 $ 1,056,527 $ 228,318 289,502 271,240 261,801 $ 1,050,861 $ 230,695 291,942 265,465 269,618 $ 1,057,720 $ $ $ $ $ $ $ $ $ $ 5,018 40,968 10,609 5,224 61,819 624 31,680 10,561 4,674 47,539 0.01 0.48 0.16 0.07 0.72 47,539 0.72 492,852 7.51 942 $ $ $ $ $ $ $ $ $ $ 22,825 53,612 27,819 19,886 124,142 15,770 38,706 20,692 13,817 88,985 0.23 0.58 0.31 0.21 1.33 88,985 1.33 512,800 7.73 968 $ $ $ $ $ $ $ $ $ $ 10,814 38,100 27,076 21,879 97,869 7,801 26,426 18,921 14,088 67,236 0.11 0.38 0.28 0.21 0.98 67,236 0.98 510,166 7.55 977 $ $ $ $ $ $ $ $ 25,372 49,165 33,358 14,852 122,747 18,436 35,385 23,004 8,981 85,806 0.26 0.50 0.33 0.13 1.21 $ $ 23,052 47,801 39,698 38,527 149,078 $ 18,8382 32,5402 27,8692 28,5062 $ 107,7532 $ $ 0.272 0.462 0.402 0.402 1.532 85,806 1.21 $ 107,7532 1.532 $ $ 522,539 7.43 $ $ $ 495,119 6.98 973 958 $ 52,654 $ 51,895 $ 49,351 $ 50,885 $ 46,930 $ $ 14.64 14.98 $ $ 17.81 18.18 $ $ 16.14 15.00 $ $ 10.68 8.75 $ $ 17.12 16.50 1 The years ended 2012 and 2011 are reported under International Financial Reporting Standards (“IFRS”). All other years ended are presented in accordance with previous Canadian generally accepted accounting principles and have not been restated to IFRS. 2 Adjusted net earnings and adjusted basic earnings per share exclude the impact of the retroactive Québec income tax reassessment in 2008. 02 1070 1060 1050 1040 1030 1020 1010 s r a l l o d f o s n o i l l i 1000 m n 990i 120 100 80 60 40 20 s r a l l o d f o s n o i l l i m n 0i 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 SAlES 1 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 25.0 20.0 15.0 10.0 5.0 e g a t n e c r e 0.0p 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 RETuRN oN EquITY 1, 2 20 m n 0i 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 RESulTS FRoM oPERATINg ACTIvITIES 1 525 520 515 510 505 500 495 490 485 480 m n 475i 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 160 140 120 100 80 60 40 54 53 52 51 50 49 48 47 46 s r a l l o d f o s n o i l l i s r a l l o d f o s n o i l l i s r a l l o d f o s n o i l l i 45 m n 44i 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 DIvIDENDS ADjuSTED NET EARNINgS 1, 2 ShAREholDERS’ EquITY 1 1 The years ended 2012 and 2011 are reported under International Financial Reporting Standards (“IFRS”). All other years ended are presented in accordance with previous Canadian generally accepted accounting principles and have not been restated to IFRS. 2 Adjusted net earnings and adjusted basic earnings per share exclude the impact of the retroactive Québec income tax reassessment in 2008. 03 Stores Across Canada s n a m t i e R t e S t r a m S . O C & W R 14 2 19 16 3 3 5 6 1 - 1 3 s n o t g n n n e P i 4 1 e m y h T - - 2 10 1 4 e l l E n o i t i d d A 2 - 2 5 84 40 15 21 24 30 118 53 25 27 55 40 13 12 5 3 2 - 2 2 5 6 4 5 Newfoundland Prince Edward Island Nova Scotia New Brunswick québec ontario Manitoba Saskatchewan Alberta 43 17 8 12 22 16 British Columbia 39 15 11 9 21 12 i s s s a C - - - - 7 9 - - 2 2 - - 24 6 39 35 221 327 31 28 120 109 1 1 Northwest Territories Yukon Total 04 1 1 - - - - - - - - - - 362 150 66 76 152 116 20 942 492 Inspired by role models not supermodels, Reitmans offers affordable, stylish fashions designed to fit everybody and every body. Operating 362 STORES averaging 4,600 sq. ft., Reitmans, Canada’s largest women’s apparel specialty chain and leading fashion brand, has developed strong customer loyalty through superior service, insightful marketing and quality merchandise. Reitmans, designed for real life. Reitmans fashions can also be purchased online at reitmans.com. With 150 STORES, Smart Set is Canada’s fashion destination for young stylish women aged 25 to 35. Averaging 3,400 sq. ft., Smart Set’s energetic environment provides our customer with the fashions she needs to create her own lifestyle wardrobe. Smart Set offers great value in a wide assortment of styles from workwear essentials and accessories, to activewear and city casual clothing. Established in 1999, RW & CO. is a young and energetic fashion lifestyle brand that continues to grow, with 66 STORES across Canada, averaging 4,500 sq. ft. in premium locations in major shopping malls. Focusing on Him and Her ages 25–35, RW & CO. blends style, aspiration, quality and a unique attention to detail into a fashion brand that is unique and incomparable in Canada. Thyme, Canada’s leading maternity fashion brand, offers all pregnant women current maternity styles with expert and friendly staff. Thyme caters to all pregnant women who want to stay fun-loving and stylish throughout their pregnancy. Thyme operates 76 STORES averaging 2,400 sq. ft. in major malls and power centres. Averaging 6,100 sq. ft., Penningtons stores offer a versatile selection of affordable fashion, which includes everyday apparel, lingerie, sleepwear, outerwear, dresses, activewear, swimwear, accessories, hosiery and more – in sizes 14 to 32. At each one of our 152 STORES across Canada, our knowledgeable and friendly sales staff will expertly assist our customer when it comes to selecting clothing that will fit their personal style and suit their shape. Our goal is to make it relaxing and easy for our customers to shop. Visit penningtons.com to learn about our stylish outfits or shop online. At Addition Elle we champion the belief that size shouldn’t limit a woman’s access to fashionable and trend right clothing. Operating 116 STORES across Canada, Addition Elle offers a complete assortment from intimate apparel, polished career to casual fashion denim, trendy MXM, accessories and outerwear that bridges fashion with our notable fits to provide our clientele modern, figure flattering clothing. Averaging 6,200 sq. ft., Addition Elle stores are located in power centres and malls across Canada. Addition Elle fashions can also be purchased online at additionelle.com. 05 MD&A Management’s Discussion and Analysis of Financial Condition and Results of operations For the fiscal year ended January 28, 2012 The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of Reitmans (Canada) Limited (“Reitmans” or the “Company”) should be read in conjunction with the audited financial statements of Reitmans as at and for the fiscal year ended January 28, 2012 and the notes thereto which are available at www.sedar.com. This MD&A is dated March 28, 2012. Effective for the three months ended April 30, 2011, Reitmans began reporting its financial results in accordance with International Financial Reporting Standards (“IFRS”), including comparative information. As a result of the adoption of IFRS a number of areas of financial reporting are impacted by the changeover to IFRS which are highlighted in this MD&A under the heading “Transition to International Financial Reporting Standards” and in note 29 of the audited financial statements. All financial information contained in this MD&A and Reitmans’ audited financial statements have been prepared in accordance with International Financial Reporting Standards, except as otherwise noted, as issued by the International Accounting Standards Board (“IASB”) and with the accounting policies included in the notes to the audited financial statements of Reitmans for the fiscal year ended January 28, 2012. Those accounting policies are based on the IFRS and interpretations made by the International Financial Reporting Interpretations Committee (“IFRIC”). The financial information presented in this MD&A for fiscal 2010, which was prior to the transition date for the Company to IFRS, was prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”) and has not been restated to conform with IFRS. All amounts in this report are in Canadian dollars, unless otherwise noted. The audited financial statements and this MD&A were reviewed by Reitmans’ Audit Committee and were approved by its Board of Directors on March 28, 2012. Additional information about Reitmans is available on the Company’s website at www.reitmans.ca or on the SEDAR website at www.sedar.com. FORWARD-LOOKING STATEMENTS All of the statements contained herein, other than statements of fact that are independently verifiable at the date hereof, are forward-looking statements. Such statements, based as they are on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown, many of which are beyond the Company’s control. Such risks include but are not limited to: the impact of general economic conditions, general conditions in the retail industry, seasonality, weather and other risks included in public filings of the Company. Consequently, actual future results may differ materially from the anticipated results expressed in forward-looking statements. The reader should not place undue reliance on the forward-looking statements included herein. These statements speak only as of the date made and the Company is under no obligation and disavows any intention to update or revise such statements as a result of any event, circumstances or otherwise, except to the extent required under applicable securities law. 06 6 Reitmans (Canada) limited Reitmans (Canada) limited MD&A Management’s Discussion and Analysis NON-GAAP FINANCIAL MEASURES In addition to discussing earnings in accordance with IFRS, this MD&A provides adjusted EBITDA as a supplementary earnings measure, which is defined as earnings before income taxes, dividend income, interest income, realized gain on disposal of available-for-sale financial assets, impairment losses on available-for-sale financial assets, interest expense, depreciation, amortization and net impairment losses related to property and equipment. The Company also discloses same store sales, which are defined as sales generated by stores that have been open for at least one year. The Company believes these measures provide meaningful information on the Company’s performance and operating results. However, readers should know that these non-GAAP financial measures have no standardized meaning as prescribed by IFRS and may not be comparable to similar measures presented by other companies. Accordingly, they should not be considered in isolation. The following table reconciles adjusted EBITDA to earnings before income taxes for the twelve and three months ended January 28, 2012 and January 29, 2011: Earnings before income taxes Dividend income Interest income Realized gain on disposal of available-for-sale financial assets Impairment losses on available-for-sale financial assets Interest expense Depreciation, amortization and net impairment losses related to property and equipment Adjusted EBITDA For the twelve months ended For the three months ended January 28, 2012 January 29, 2011 January 28, 2012 January 29, 2011 $ 65,872,000 (3,462,000) (1,367,000) $ 127,802,000 (2,640,000) (1,225,000) $ 6,700,000 (864,000) (419,000) $ 20,618,000 (699,000) (492,000) – 73,000 682,000 (167,000) 78,000 767,000 – – 162,000 (167,000) 78,000 184,000 64,990,000 $ 126,788,000 59,754,000 $ 184,369,000 16,442,000 22,021,000 $ 15,872,000 35,394,000 $ CORPORATE OVERVIEW Reitmans is a Canadian ladies’ wear specialty apparel retailer. The Company has seven banners: Reitmans, Smart Set, RW & CO., Thyme Maternity, Penningtons, Addition Elle and Cassis. On October 19, 2011 the Company announced the closure of its 25 Cassis stores of which approximately 12 stores will be converted to other banners. Each banner is focused on a particular niche in the retail marketplace with a distinct marketing program as well as a unique website thereby allowing the Company to continue to enhance its brands and strengthen customer loyalty. The Company has several competitors in each niche, including local, regional and national chains of specialty stores and department stores, as well as foreign-based competitors. The Company’s stores are located in malls, retail power centres, strip plazas and on major shopping streets across Canada. The Company continues to enhance all areas of its business by investing in stores, technology and people. The Company continues to offer Canadian consumers affordable fashions and accessories at the best value reflecting price and quality. The Company offers e-commerce website shopping for the Reitmans banner and its plus-size banners (Penningtons and Addition Elle) and is continuing to develop the infrastructure required to launch e-commerce for the other banners. These online channels offer customers convenience, selection and ease of purchase, while enhancing customer loyalty and continuing to build the brands. In the year ended January 28, 2012 the Company opened 10 Thyme Maternity boutiques in select Babies“R”Us locations in Canada, including access to e-commerce website shopping through the Babies“R”Us website. This new retail channel offers Thyme Maternity customers an easy and convenient offering in a 300 to 500 square foot environment. RETAIL BANNERS Number of stores at January 29, Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 January 28, Number of stores at 2011 Openings Closings Openings Closings Openings Closings Openings Closings 2012 Reitmans Smart Set RW & CO. Thyme Maternity 1 Penningtons Addition Elle Cassis Total 364 158 67 75 161 121 22 968 2 2 – 1 – 2 1 8 3 3 – 3 1 1 – 11 1 – – 3 2 – 1 7 1 – – 2 3 1 – 7 5 1 1 3 1 2 1 14 2 – – – 2 – – 4 – 1 – – – – – 1 4 9 2 1 6 7 5 34 362 150 66 76 152 116 20 942 1 Excludes 10 boutiques in Babies“R”Us locations. Reitmans (Canada) limited Reitmans (Canada) limited 07 7 Management’s Discussion and Analysis Store closings take place for a variety of reasons as the viability of each store and its location is constantly monitored and assessed for continuing profitability. In most cases when a store is closed, merchandise at that location is sold off in the normal course of business and any unsold merchandise remaining at the closing date is generally transferred to other stores operating under the same banner for sale in the normal course of business. Pursuant to the plan to close its 25 Cassis stores, the Company is refocusing its sales and merchandising efforts by converting approximately 12 stores to other banners, with a view of enhancing sales in these store locations. For the year ended January 28, 2012 the Company has recorded costs associated with Cassis store conversions and closures, primarily related to fixed asset impairment losses and employee severance costs, of approximately $6,000,000 ($4,400,000 after tax). THREE-YEAR REVIEW OF SELECTED FINANCIAL INFORMATION Sales Earnings before income taxes Net earnings Earnings per share (“EPS”) Basic Diluted Total assets Total non-current liabilities Dividends per share For the fiscal years ended January 28, 2012 January 29, 2011 January 30, 2010 1 $ 1,019,397,000 65,872,000 47,539,000 $ 1,059,000,000 127,802,000 88,985,000 $ 1,056,527,000 99,015,000 67,236,000 0.72 0.72 633,861,000 51,877,000 0.80 1.33 1.32 659,357,000 55,248,000 0.78 0.98 0.98 631,392,000 37,483,000 0.72 1 The selected information that is presented for the year ended January 30, 2010 does not reflect the impact of the adoption of IFRS. In the year ended January 30, 2010 (“fiscal 2010”), the Company began experiencing the impact of the global economic recession as consumer discretionary spending dampened. The effect of downward pressure on retail clothing prices, considered largely due to increased competition along with pressure from value conscious customers, continued into the year ended January 29, 2011 (“fiscal 2011”). Despite consumers’ concerns over economic conditions, in the first six months of fiscal 2011 the Company’s sales improved, however a more challenging retail environment was experienced into the third and fourth quarters of fiscal 2011. Sales for fiscal 2011, reported under IFRS as compared to fiscal 2010 under Canadian GAAP, reflects an adjustment, due to the transition to IFRS, reducing sales by $11,277,000 related to the deferral of revenue associated with customer loyalty programs. The year ended January 28, 2012 (“fiscal 2012”) commenced with disappointing sales in the first quarter, primarily due to poor weather and a difficult retail environment marked by increased promotional activity. Concern over the global economic conditions continued to impact the Company further into fiscal 2012 as consumer confidence levels remained weak. The Company’s gross margin, and ultimately net earnings, can be significantly impacted by fluctuations in the Canadian dollar in relation to the US dollar. In fiscal 2010 the Canadian dollar experienced significant volatility, with spot prices for $1.00 US reaching a high of $1.30, negatively impacting the Company’s gross margin by approximately $10,000,000. In fiscal 2011, significant improvement in the Canadian dollar resulted in a positive impact to the gross margin of approximately $22,000,000. In fiscal 2012 the Canadian dollar traded in ranges comparable to fiscal 2011, however increased promotional activity offset gains from a stronger Canadian dollar. Over the period of the last three fiscal years, significant increases in wage costs and rent expense have impacted net earnings. In addition, in fiscal 2012 the Company incurred costs related to the closure of the Cassis banner of approximately $6,000,000 pre-tax. Despite a challenging retail environment over the past three years, the Company’s balance sheet continues to remain solid. The Company has continued to maintain a strong position in cash, cash equivalents and marketable securities. Inventories, although trending somewhat higher, continue to be closely managed. At the onset of the economic downturn, the Company reduced its capital expenditures and has gradually returned to pre-recession levels for store renovation activity and other discretionary capital expenditures. OPERATING RESULTS FOR FISCAL 2012 AND COMPARISON TO OPERATING RESULTS FOR FISCAL 2011 Sales for fiscal 2012 decreased 3.7% to $1,019,397,000 as compared with $1,059,000,000 for fiscal 2011. Same store sales decreased 4.3%. Sales continued to be challenging for fiscal 2012 as consumer spending on apparel was impacted by reduced discretionary consumer income due to high food and commodity costs. Statistics Canada reported in its January 2012 Consumer Price Index Report that food and energy costs advanced 4.2% and 6.5%, respectively, on a year-over-year basis. Sales for fiscal 2012 as compared to fiscal 2011 were also impacted by weak customer traffic as many consumers were faced with high personal debt levels and concern over economic conditions. The Canadian consumer confidence index improved for January 2012 as compared to the month earlier. However, despite a degree of optimism, consumer confidence remained low as compared to pre-2008 levels. The Bank of Canada in its January 2012 Monetary Policy Report noted that the pace of growth going forward is expected to be more modest than previously envisaged, reflecting the continued weakness of the economy. 08 Reitmans (Canada) limited Management’s Discussion and Analysis Gross profit for fiscal 2012 decreased 7.4% to $656,064,000 as compared with $708,329,000 for fiscal 2011. The Company’s gross margin of 64.4% for fiscal 2012 decreased as compared to 66.9% for fiscal 2011. The Canadian dollar showed continued volatility vis-à-vis the US dollar throughout fiscal 2012. Improvement in the gross margin attributable to the strength of the Canadian dollar in fiscal 2012 was offset by increased promotional activity. The average rate for a US dollar in fiscal 2012 was $0.99 Canadian as compared to $1.03 Canadian in fiscal 2011. Spot prices for $1.00 US during fiscal 2012 ranged between a high of $1.06 and a low of $0.94 Canadian ($1.08 and $0.99 respectively in fiscal 2011). For fiscal 2012, adjusted EBITDA decreased by $57,581,000 or 31.2% to $126,788,000 as compared with $184,369,000 for fiscal 2011 principally due to the reduction in sales and gross profit. Selling and distribution expenses for fiscal 2012 increased 3.5% or $18,691,000 to $547,367,000 as compared with $528,676,000 for fiscal 2011. This increase is primarily related to net impairment losses on property and equipment, employee severance costs related to the closure of the Cassis banner and increased marketing and promotional expenses. Administrative expenses for fiscal 2012 decreased 15.6% or $8,633,000 to $46,878,000 as compared with $55,511,000 for fiscal 2011. The Company has an employee performance incentive plan that is based on operating performance targets and the related expense is recorded in relation to the attainment of such targets. The decrease in administrative expenses was mainly due to a reduction in the employee performance incentive plan expense for fiscal 2012. Depreciation and amortization expense, which is included in selling and distribution expenses and administrative expenses, for fiscal 2012 was $64,990,000 compared to $59,754,000 for fiscal 2011. Included in fiscal 2012 is $2,806,000 of write-offs for closed and renovated stores ($1,425,000 for fiscal 2011) and net impairment losses related to property and equipment, net of reversals, of $6,132,000 ($945,000 for fiscal 2011), the majority of which related to the closure of the Cassis banner. Finance income for fiscal 2012 was $5,562,000 as compared to $4,505,000 for fiscal 2011. Dividend income for fiscal 2012 was $3,462,000 as compared to $2,640,000 for fiscal 2011, the increase due to additional dividend income generated on securities purchased in December 2010 and held throughout fiscal 2012. Interest income increased for fiscal 2012 to $1,367,000 as compared to $1,225,000 for fiscal 2011, despite slightly lower balances on short-term investments, due to improved rates of interest during the year. Included in finance income was a foreign exchange gain of $733,000 for fiscal 2012 as compared to a gain of $473,000 for fiscal 2011. This foreign exchange variation is largely attributable to the impact of the fluctuation of the US dollar vis-à-vis the Canadian dollar on US currency held by the Company. Finance costs for fiscal 2012 were $1,509,000 as compared to $845,000 for fiscal 2011. Interest expense on long-term debt decreased to $682,000 for fiscal 2012 from $767,000 for fiscal 2011. This decrease reflects the continued repayment of the mortgage on the Company’s distribution centre. In fiscal 2012, the Company entered into option contracts to purchase call options and sell put options, both on the US dollar, and recorded an expense of $754,000 to recognize the net change in the fair value of the option contracts. Included in finance costs for fiscal 2012 was an impairment loss on available-for-sale financial assets of $73,000 as compared to $78,000 for fiscal 2011. Income taxes for fiscal 2012 amounted to $18,333,000, for an effective tax rate of 27.8%. For fiscal 2011, income taxes were $38,817,000, for an effective tax rate of 30.4%. The reduction in the effective tax rate reflected the impact of changes in substantively enacted tax rates in various tax jurisdictions in Canada. Net earnings for fiscal 2012 decreased 46.6% to $47,539,000 ($0.72 diluted earnings per share) as compared with $88,985,000 ($1.32 diluted earnings per share) for fiscal 2011. The Company in its normal course of business makes long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. In fiscal 2012, these merchandise purchases, payable in US dollars, approximated $239,000,000 US. The Company considers a variety of strategies designed to manage the cost of its continuing US dollar commitments, including spot rate purchases and foreign exchange option contracts with maturities not exceeding six months. Due to the strength of the Canadian dollar in fiscal 2012, the Company satisfied its US dollar requirements primarily through the purchase of US dollars at varying spot rates. OPERATING RESULTS FOR THE THREE MONTHS ENDED JANUARY 28, 2012 (“FOURTH QUARTER OF FISCAL 2012”) AND COMPARISON TO OPERATING RESULTS FOR THE THREE MONTHS ENDED JANUARY 29, 2011 (“FOURTH QUARTER OF FISCAL 2011”) Sales for the fourth quarter of fiscal 2012 decreased 3.3% to $259,954,000 as compared with $268,714,000 for the fourth quarter of fiscal 2011. Same store sales decreased by 1.7%. The fourth quarter of fiscal 2012 sales were disappointing as the business felt the effects of consumers’ restrained spending on apparel. The fourth quarter of fiscal 2012 was marked by weak customer traffic in both malls and shopping centres. The Canadian consumer confidence index improved for January 2012 as compared to the previous month. However, despite a degree of optimism, consumer confidence remained low as compared to pre-2008 levels. Concern over high personal debt levels, high commodity costs and global economic conditions continued to impact Canadian consumer buying behaviours. The Bank of Canada in its January 2012 Monetary Policy Report noted that the pace of growth going forward is expected to be more modest than previously envisaged, reflecting the continued weakness of the economy. Reitmans (Canada) limited 09 Management’s Discussion and Analysis Gross profit for the fourth quarter of fiscal 2012 decreased 9.5% to $156,995,000 as compared with $173,501,000 for the fourth quarter of fiscal 2011. The Company’s gross margin for the fourth quarter of fiscal 2012 decreased to 60.4% from 64.6% for the fourth quarter of fiscal 2011. The Canadian dollar showed continued volatility vis-à-vis the US dollar throughout the fourth quarter of fiscal 2012. Increased promotional activity in the fourth quarter of fiscal 2012 was the major contributor to lower margins. The average rate for a US dollar for the fourth quarter of fiscal 2012 was $1.02 Canadian as compared to $1.01 for the fourth quarter of fiscal 2011. Spot prices for $1.00 US during the fourth quarter of fiscal 2012 ranged between a high of $1.05 and a low of $0.99 Canadian ($1.03 and $0.99 respectively during the fourth quarter of fiscal 2011). In the fourth quarter of fiscal 2012, adjusted EBITDA decreased by $13,373,000 or 37.8% to $22,021,000 as compared with $35,394,000 for the fourth quarter of fiscal 2011. Selling and distribution expenses for the fourth quarter of fiscal 2012 increased 0.6% or $783,000 to $138,420,000 as compared with $137,637,000 for the fourth quarter of fiscal 2011. Administrative expenses for the fourth quarter of fiscal 2012 decreased 16.4% or $2,627,000 to $13,351,000 as compared with $15,978,000 for the fourth quarter of fiscal 2011. The Company has an employee performance incentive plan that is based on operating performance targets and the related expense is recorded in relation to the attainment of such targets. The decrease in administrative expenses was mainly due to a reduction in the employee performance incentive plan expense for the fourth quarter of fiscal 2012. Depreciation and amortization expense, which is included in selling and distribution expenses and administrative expenses, for the fourth quarter of fiscal 2012 was $16,442,000 compared to $15,872,000 for the fourth quarter of fiscal 2011. Included in the fourth quarter of fiscal 2012 was $1,606,000 ($1,305,000 in the fourth quarter of fiscal 2011) of write-offs for closed and renovated stores and net impairment losses related to property and equipment, net of reversals, of $1,069,000 ($945,000 in the fourth quarter of fiscal 2011). Finance income for the fourth quarter of fiscal 2012 was $2,392,000 as compared to $1,358,000 for the fourth quarter of fiscal 2011. Dividend income for the fourth quarter of fiscal 2012 was $864,000 as compared to $699,000 for the fourth quarter of fiscal 2011, the increase due to additional dividend income generated on securities purchased in December 2010 and held throughout the fourth quarter of fiscal 2012. Interest income decreased for the fourth quarter of fiscal 2012 to $419,000 as compared to $492,000 for the fourth quarter of fiscal 2011 due to lower balances in short-term investments. Included in finance income in the fourth quarter of fiscal 2012 was a foreign exchange gain of $1,109,000, while in the fourth quarter of fiscal 2011 there was a foreign exchange loss of $364,000 which was included in finance costs. This foreign exchange variation is largely attributable to the impact of the fluctuation of the US dollar vis-à-vis the Canadian dollar with respect to US currency held by the Company. There were no disposals of available-for-sale financial assets in the fourth quarter of fiscal 2012 as compared to a realized gain on available-for-sale financial assets in the fourth quarter of fiscal 2011 of $167,000. Finance costs for the fourth quarter of fiscal 2012 were $916,000 as compared to $626,000 for the fourth quarter of fiscal 2011. Included in the fourth quarter of fiscal 2012 was interest on long-term debt of $162,000 compared to $184,000 for the fourth quarter of fiscal 2011. This decrease is primarily attributable to the continued repayment of the mortgage on the Company’s distribution centre. In the fourth quarter of fiscal 2012 there was no impairment loss on available-for-sale financial assets as compared to a loss of $78,000 in the fourth quarter of fiscal 2011. Included in the fourth quarter of fiscal 2011 was a foreign exchange loss of $364,000 largely attributable to the impact of the fluctuation of the US dollar vis-à-vis the Canadian dollar on US currency held by the Company. In the fourth quarter of fiscal 2012, the Company entered into option contracts to purchase call options and sell put options, both on the US dollar, and recorded an expense of $754,000 to recognize the net change in the fair value of the option contracts. Income taxes for the fourth quarter of fiscal 2012 amounted to $2,026,000, for an effective tax rate of 30.2%. For the fourth quarter of fiscal 2011, income taxes were $6,801,000, for an effective tax rate of 33.0%. The reduction in the effective tax rate reflected the impact of changes in substantively enacted tax rates in various tax jurisdictions in Canada. Net earnings for the fourth quarter of fiscal 2012 decreased 66.2% to $4,674,000 ($0.07 diluted earnings per share) as compared with $13,817,000 ($0.21 diluted earnings per share) for the fourth quarter of fiscal 2011. The Company in its normal course of business makes long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. In the fourth quarter of fiscal 2012, these merchandise purchases, payable in US dollars, approximated $45,000,000 US. The Company considers a variety of strategies designed to manage the cost of its continuing US dollar commitments, including spot rate purchases and foreign exchange option contracts with maturities not exceeding six months. Due to the strength of the Canadian dollar in the fourth quarter of fiscal 2012, the Company satisfied its US dollar requirements primarily through the purchase of US dollars at varying spot rates. In the fourth quarter of fiscal 2012, the Company entered into transactions with its bank whereby it purchased call options and sold put options, both on the US dollar. These option contracts extend over a period of six months. Purchased call options and sold put options expiring on the same date have the same strike price. Details of the foreign currency option contracts outstanding as at January 28, 2012 are as follows: 10 Reitmans (Canada) limited Management’s Discussion and Analysis Put options sold Call options purchased Notional Amount in US Dollars Derivative Asset Derivative Liability Net $ $ 44,000,000 (100,000,000) (56,000,000) $ $ 751,000 – 751,000 $ $ – (1,505,000) (1,505,000) $ $ 751,000 (1,505,000) (754,000) As at January 29, 2011, there were no foreign currency option contracts outstanding. SUMMARY OF QUARTERLY RESULTS The table below sets forth selected financial data for the eight most recently completed quarters. This unaudited quarterly information has been prepared in accordance with IFRS. January 28, 2012 October 29, 2011 July 30, 2011 April 30, 2011 January 29, 2011 October 30, 2010 July 31, 2010 May 1, 2010 Sales Net Earnings $ 259,954,000 254,072,000 286,075,000 219,296,000 268,714,000 262,515,000 292,026,000 235,745,000 $ 4,674,000 10,561,000 31,680,000 624,000 13,817,000 20,692,000 38,706,000 15,770,000 Earnings per Share $ Basic 0.07 0.16 0.48 0.01 0.21 0.31 0.58 0.23 $ Diluted 0.07 0.16 0.48 0.01 0.21 0.31 0.57 0.23 The retail business is seasonal and results of operations for any interim period are not necessarily indicative of the results of operations for the full fiscal year. Results for the first quarter of fiscal 2012 were significantly impacted by reduced sales primarily resulting from poor weather and a difficult retail environment that resulted in increased promotional activity. BALANCE SHEET COMPARISON OF FINANCIAL POSITION AS AT JANUARY 28, 2012 WITH THE FINANCIAL POSITION AS AT JANUARY 29, 2011 Cash and cash equivalents as at January 28, 2012 amounted to $196,835,000 or 14.4% lower than $230,034,000 as at January 29, 2011. The reduction in cash and cash equivalents of $33,199,000 was mainly attributable to reduced cash generated from operations due to lower sales in fiscal 2012. Marketable securities held by the Company consist primarily of preferred shares of Canadian public companies. At January 28, 2012, marketable securities (reported at fair value) amounted to $71,442,000 as compared with $70,413,000 as at January 29, 2011. The Company’s investment portfolio is subject to stock market volatility. The Company is highly liquid with its cash and cash equivalents and invests on a short-term basis in bank bearer deposit notes and bank term deposits with major Canadian chartered banks and commercial paper rated not less than R1. Trade and other receivables as at January 28, 2012 were $3,033,000 or $167,000 higher than as at January 29, 2011. The Company’s trade and other receivables are essentially the credit card sales from the last few days of the fiscal quarter. In late fiscal 2012, the Company entered into transactions with its bank whereby it purchased call options and sold put options, both on the US dollar. These option contracts extend over a period of six months. Purchased call options and sold put options expiring on the same date have the same strike price. As at January 28, 2012, a net derivative financial liability of $754,000 (January 29, 2011 – nil) was recorded to recognize the net change in the fair value of the option contracts. As at January 28, 2012 income taxes recoverable were $4,735,000, attributable to instalments made in excess of estimated tax liabilities, as compared to income taxes payable of $5,998,000 as at January 29, 2011. Inventories as at January 28, 2012 were $78,285,000 or $5,084,000 higher than as at January 29, 2011, due to softer sales in the fourth quarter of fiscal 2012. Prepaid expenses, consisting mainly of prepaid insurance and maintenance contracts, were $11,902,000 or $589,000 lower than as at January 29, 2011. Reitmans (Canada) limited 11 Management’s Discussion and Analysis The Company invested $59,154,000 in additions to property and equipment and intangible assets in fiscal 2012. This included $44,547,000 in new store construction and existing store renovation costs and $14,607,000 mainly related to information technology system hardware and software enhancements. The Company has embarked on a significant upgrade to its merchandising and supply chain operations, important to the Company’s growth strategy. The technology initiatives, along with warehouse management systems improvements, will support changes and growth across all areas of the Company with improved integration, while enabling the Company to reduce the overall cost of system maintenance and upgrades. The total project, which is being phased in through to completion in fiscal 2014, is estimated to cost approximately $23,000,000. Total trade and other payables as at January 28, 2012 were $74,985,000, comparable with $74,273,000 as at January 29, 2011. The Company’s trade and other payables consist largely of trade payables, personnel liabilities, payables relating to premises and sales tax liabilities. A significantly lower employee performance incentive plan accrual was offset by higher vendor trade balances, primarily due to the timing of certain government payments, and a liability related to the closure of the Cassis banner. Deferred revenue, consisting of unredeemed gift cards and loyalty points and awards granted under customer loyalty programs remained comparable year-over-year. Revenue is recognized when the gift cards, loyalty points and awards are redeemed. Tenant allowances are recorded as deferred lease credits and amortized as a reduction of rent expense over the term of the related leases. As at January 28, 2012 deferred lease credits were $17,317,000 as compared to $19,011,000 as at January 29, 2011. The Company’s long-term debt consists of a mortgage, which is secured by the Company’s distribution centre. As at January 28, 2012 long-term debt was $10,047,000 as compared to $11,431,000 as at January 29, 2011. The Company maintains a contributory defined benefit pension plan (“Plan”). An actuarial valuation for funding purposes was performed as at December 31, 2010. This valuation indicated an unfunded solvency liability for the Plan primarily due to investment losses and the impact of a reduction in the discount rate. In fiscal 2012, the Company made contributions of $4,245,000 to the Plan, including the required funding to satisfy the solvency deficiency. The Company also sponsors a Supplemental Executive Retirement Plan (“SERP”) for certain senior executives. The SERP is unfunded and when the obligation arises to make any payment called for under the SERP (e.g. when an eligible plan member retires and begins receiving payments under the SERP), the payments reduce the accrual amount as the payments are actually made. The funded status of the Plan fluctuates with market conditions and impacts funding requirements. The Company will continue to make contributions to the Plan that, as a minimum, meet pension legislative requirements. Adverse changes to the assumptions used, such as the discount rate and expected long-term rate of return on plan assets, could affect the funded status of the Plan and, as such, could have a significant impact on the cash funding requirements of the Plan. To develop its expected long-term rate of return on Plan assets assumption used in the calculation of total benefit costs applicable to the fair value of Plan assets, the Company considers its past experience and future estimates of long-term investment returns, the expected composition of the Plan’s assets as well as the expected long-term market returns in the future. Pension liability as at January 28, 2012 was $14,877,000 compared to $13,626,000 as at January 29, 2011. The increase is mainly due to $1,490,000 pension expense in fiscal 2012 and actuarial losses of $4,006,000, offset by pension contributions paid. OPERATING RISK MANAGEMENT Economic Environment The Bank of Canada in its January 2012 Monetary Policy Report noted that the pace of growth going forward is expected to be more modest than previously envisaged, reflecting the continued weakness of the economy. The Company believes that consumer demand will remain weak as consumers’ confidence levels continue to be weak amid global uncertainty. The Company closely monitors economic conditions in order to react to consumer spending habits and constraints in developing both its short-term and long-term operating decisions. The Company is in a strong financial position with significant liquidity available and ample financial credit resources to draw upon as deemed necessary. Competitive Environment The apparel business in Canada is highly competitive with competitors including department stores, specialty apparel chains and independent retailers. There is no effective barrier to entry into the Canadian apparel retailing marketplace by any potential competitor, foreign or domestic, as witnessed by the arrival over the past few years of a number of foreign-based competitors and additional foreign retailers which have announced plans to expand into the Canadian marketplace. Additionally, Canadian women have a significant number of e-commerce shopping alternatives available to them on a global basis. The Company believes that it is well positioned to compete with any competitor. The Company operates multiple banners with product offerings that are diversified as each banner is directed to and focused on a different niche in the Canadian women’s apparel market. Our stores, located throughout Canada, offer affordable fashions to consumers. 12 Reitmans (Canada) limited Management’s Discussion and Analysis Seasonality The Company is principally engaged in the sale of women’s apparel through 942 leased retail outlets operating under seven banners located across Canada. The Company’s business is seasonal and is also subject to a number of factors, which directly impact retail sales of apparel over which it has no control, namely fluctuations in weather patterns, swings in consumer confidence and buying habits and the potential of rapid changes in fashion preferences. Distribution and Supply Chain The Company depends on the efficient operation of its sole distribution centre, such that any significant disruption in the operation thereof (e.g. natural disaster, system failures, destruction or major damage by fire), could materially delay or impair its ability to replenish its stores on a timely basis causing a loss of future sales, which could have a significant effect on the Company’s results of operations. Information Technology The Company depends on information systems to manage its operations, including a full range of retail, financial, merchandising and inventory control, planning, forecasting, reporting and distribution systems. The Company regularly invests to upgrade, enhance, maintain and replace these systems. The Company is presently upgrading its merchandising and supply chain operations and warehouse management systems. Any significant disruptions in the performance of these systems could have a material adverse impact on the Company’s operations and financial results. Government Regulation The Company is structured in a manner that management considers to be most effective to conduct its business across Canada. The Company is therefore subject to all manner of material and adverse changes in government regulation that can take place in any one or more of these jurisdictions as they might impact income and sales, taxation, duties, quota impositions or re-impositions and other legislated or government regulated matters. Merchandise Sourcing Virtually all of the Company’s merchandise is private label. On an annual basis, the Company directly imports approximately 80% of its merchandise, largely from China. In fiscal 2012, no supplier represented more than 7% of the Company’s purchases (in dollars and/or units) and there are a variety of alternative sources (both domestic and offshore) for virtually all of the Company’s merchandise. The Company has good relationships with its suppliers and has no reason to believe that it is exposed to any material risk that would operate to prevent the Company from acquiring, distributing and/or selling merchandise on an ongoing basis. Recent months have seen a reduction in the price of cotton albeit not to levels prior to calendar 2010. Record high prices for cotton in calendar 2010 and into 2011, an important component in clothing fabrication, along with a significant shortage of supply placed strains on certain product margins. A recent slowdown in demand combined with higher production has resulted in bringing cotton prices sharply lower over the past few months, however cotton prices remain higher than they have been over the past ten years. The Company continues to closely monitor this development in an effort to maintain its value pricing proposition. The Company endeavours to be environmentally responsible and recognizes that the competitive pressures for economic growth and cost efficiency must be integrated with sound sustainability management, including environmental stewardship. The Company has adopted sourcing and other business practices to address the environmental concerns of its customers. The Company has established guidelines that require compliance with all applicable environmental laws and regulations. Although the Company requires its suppliers to adhere to these guidelines, there is no guarantee that these suppliers will not take actions that hurt the Company’s reputation, as they are independent third parties that the Company does not control. However, if there is a lack of apparent compliance, it may lead the Company to search for alternative suppliers. This may have an adverse effect on the Company’s financial results, by increasing costs and potentially causing delays in delivery. FINANCIAL RISK MANAGEMENT Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk are provided below. Credit Risk Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company’s financial instruments that are exposed to concentrations of credit risk are primarily cash and cash equivalents, marketable securities, trade and other receivables and foreign currency option contracts. The Company limits its exposure to credit risk with respect to cash and cash equivalents by investing available cash in short-term deposits with Canadian financial institutions and commercial paper with a rating not less than R1. Marketable securities consist primarily of preferred shares of highly-rated Canadian public companies. The Company’s trade and other receivables consist primarily of credit card receivables from the last few days of the fiscal year, which are settled within the first days of the next fiscal year. As at January 28, 2012, the Company’s maximum exposure to credit risk for these financial instruments was as follows: Cash and cash equivalents Marketable securities Trade and other receivables $ $ 196,835,000 71,442,000 3,033,000 271,310,000 Reitmans (Canada) limited 13 Management’s Discussion and Analysis Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. The contractual maturity of the majority of trade and other payables is within six months. As at January 28, 2012, the Company had a high degree of liquidity with $268,277,000 in cash and cash equivalents and marketable securities. In addition, the Company has unsecured credit facilities of $125,000,000, subject to annual renewals. The Company has financed its store expansion through internally-generated funds and its unsecured credit facilities are used to finance seasonal working capital requirements for US dollar merchandise purchases. The Company’s long-term debt consists of a mortgage bearing interest at 6.40%, due November 2017, which is secured by the Company’s distribution centre. Foreign Currency Risk The Company purchases a significant amount of its merchandise with US dollars and as such significant volatility in the US dollar vis-à-vis the Canadian dollar can have an adverse impact on the Company’s gross margin. The Company has a variety of alternatives that it considers to manage its foreign currency exposure on cash flows related to these purchases. This includes, but is not limited to, various styles of foreign currency option or forward contracts, not to exceed six months, and spot rate purchases. A foreign currency option contract represents an option or obligation to buy a foreign currency from a counterparty. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally major Canadian financial institutions. For fiscal 2012, the Company satisfied its US dollar requirements primarily through spot rate purchases. The Company has performed a sensitivity analysis on its US dollar denominated financial instruments, which consist principally of cash and cash equivalents of $27,547,000 and trade payables of $3,840,000 to determine how a change in the US dollar exchange rate would impact net earnings. On January 28, 2012, a 1% rise or fall in the Canadian dollar against the US dollar, assuming that all other variables, in particular interest rates, had remained the same, would have resulted in a $166,000 decrease or increase, respectively, in the Company’s net earnings for fiscal 2012. The Company has performed a sensitivity analysis on its derivative financial instruments, a series of call and put options on US dollars, to determine how a change in the US dollar exchange rate would impact net earnings. On January 28, 2012, a 1% rise or fall in the Canadian dollar against the US dollar, assuming that all other variables had remained the same, would have resulted in a $580,000 decrease or increase, respectively, in the Company’s net earnings for fiscal 2012. Interest Rate Risk Interest rate risk exists in relation to the Company’s cash and cash equivalents, defined benefit pension plan and SERP. Market fluctuations in interest rates impact the Company’s earnings with respect to interest earned on cash and cash equivalents that are invested in bank bearer deposit notes and bank term deposits with major Canadian financial institutions and commercial paper with a rating not less than R1. Overall return in the capital markets and the level of interest rates affect the funded status of the Company’s pension plans. Adverse changes with respect to pension plan returns and the level of interest rates from the date of the last actuarial valuation may have a material adverse effect on the funded status of the retirement benefit plans and on the Company’s results of operations. The Company has unsecured borrowing and working capital credit facilities available up to an amount of $125,000,000 or its US dollar equivalent that it utilizes for documentary and standby letters of credit, and the Company funds the drawings on these facilities as the payments are due. The Company has performed a sensitivity analysis on interest rate risk at January 28, 2012 to determine how a change in interest rates would impact equity and net earnings. For fiscal 2012, the Company earned interest income of $1,367,000 on its cash and cash equivalents. An increase or decrease of 25 basis points in the average interest rate earned during the year would have increased equity and net earnings by $321,000 or decreased equity and net earnings by $235,000, respectively. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The Company has performed a sensitivity analysis as at January 28, 2012 to determine how a change in interest rates, in relation to the Company’s retirement benefit plans, would impact the benefit costs included in other comprehensive income. A one percentage point decrease in the year-end discount rate would have resulted in an increase of approximately $4,300,000 in benefit costs included in other comprehensive income for fiscal 2012, whereas a one percentage point increase would have resulted in a decrease of approximately $3,800,000. The Company’s expected long-term rate of return on Plan assets reflects management’s view of long-term investment returns. The effect of a 1% variation in such rate of return would have a nominal impact on the total benefit costs included in net earnings and total comprehensive income. Equity Price Risk Equity price risk arises from available-for-sale equity securities. The Company monitors the mix of equity securities in its investment portfolio based on market expectations. Material investments within the portfolio are managed on an individual basis and all buy and sell decisions are approved by the Chief Executive Officer. The Company has performed a sensitivity analysis on equity price risk at January 28, 2012, to determine how a change in the market price of the Company’s marketable securities would impact equity and other comprehensive income. The Company’s equity investments consist principally of preferred shares of Canadian public companies. The Company believes that changes in interest rates influence the market price of these securities. A 5% increase or decrease in the market price of the securities at January 28, 2012, would result in a $3,036,000 increase or decrease, respectively, in equity and other comprehensive income for fiscal 2012. The Company’s equity securities are subject to market risk and, as a result, the impact on equity and other comprehensive income may ultimately be greater than that indicated above. 14 Reitmans (Canada) limited Management’s Discussion and Analysis LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES Shareholders’ equity as at January 28, 2012 amounted to $492,852,000 or $7.51 per share (January 29, 2011 – $512,800,000 or $7.73 per share). The Company continues to be in a strong financial position. The Company’s principal sources of liquidity are its cash, cash equivalents and investments in marketable securities of $268,277,000 (January 29, 2011 – $300,447,000). Cash is conservatively invested in short-term deposits with major Canadian financial institutions and commercial paper rated not less than R1. The Company closely monitors its risk with respect to short-term cash investments. The Company has unsecured borrowing and working capital credit facilities available up to an amount of $125,000,000 or its US dollar equivalent. As at January 28, 2012, $52,187,000 (January 29, 2011 – $60,888,000) of the operating lines of credit were committed for documentary and standby letters of credit. These credit facilities are used principally for US dollar letters of credit to satisfy offshore third-party vendors, which require such backing before confirming purchase orders issued by the Company. The Company rarely uses such credit facilities for other purposes. The Company has granted irrevocable standby letters of credit, issued by highly-rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at January 28, 2012, the maximum potential liability under these guarantees was $5,083,000 (January 29, 2011 – $5,060,000). The standby letters of credit mature at various dates during fiscal 2013. The Company has recorded no liability with respect to these guarantees, as the Company does not expect to make any payments for these items. The Company is self-insured on a limited basis with respect to certain property risks and also purchases excess insurance coverage from financially stable third-party insurance companies. The Company maintains comprehensive internal security and loss prevention programs aimed at mitigating the financial impact of theft. The Company continued repayment on its long-term debt, relating to the mortgage on the distribution centre, paying down $1,384,000 in fiscal 2012. The Company paid $0.80 dividends per share totalling $52,654,000 in fiscal 2012 compared to $0.78 dividends per share totalling $51,895,000 in fiscal 2011. In fiscal 2012, the Company invested $59,154,000 on new and renovated stores and information technology system enhancements. The Company has embarked on a significant upgrade to its merchandising and supply chain operations, important to the Company’s growth strategy. The technology initiatives, along with warehouse management systems improvements, will support changes and growth across all areas of the Company, with improved integration while enabling the Company to reduce the overall cost of system maintenance and upgrades. The total project, which is being phased in through to completion in fiscal 2014, is estimated to cost approximately $23,000,000. In the fiscal year ending February 2, 2013, the Company expects to invest approximately $60,000,000 in capital expenditures. These expenditures, together with the payment of cash dividends, the repayments related to the Company’s bank credit facility and long-term debt obligations and purchases of Class A non-voting shares, under a normal course issuer bid approved in November 2011, are expected to be funded by the Company’s existing financial resources and funds derived from its operations. FINANCIAL COMMITMENTS The following table sets forth the Company’s financial commitments, excluding trade and other payables, as at January 28, 2012, the details of which are described in the previous commentary. Contractual Obligations Store & office operating leases 1 Purchase obligations 2 Other operating leases 3 Long-term debt Interest on long-term debt Total contractual obligations Total $ $ 470,919,000 103,080,000 13,378,000 10,047,000 1,987,000 599,411,000 Within 1 year 2 to 4 years 5 years and over $ $ 99,202,000 102,637,000 4,498,000 1,474,000 592,000 208,403,000 $ $ 232,042,000 443,000 8,872,000 5,022,000 1,177,000 247,556,000 $ $ 139,675,000 – 8,000 3,551,000 218,000 143,452,000 1 Represents the minimum lease payments under long-term leases for store locations and office space as at January 28, 2012. 2 Includes amounts pertaining to agreements to purchase goods or services that are enforceable and legally binding on the Company. 3 Includes lease payments for computer equipment, automobiles and office equipment. As at January 28, 2012, the Company had additional long-term liabilities which included pension liability and deferred income tax liabilities. These long-term liabilities have not been included in the table above as the timing and amount of these future payments are uncertain. Reitmans (Canada) limited 15 Management’s Discussion and Analysis OUTSTANDING SHARE DATA At March 28, 2012, 13,440,000 Common shares and 52,145,506 Class A non-voting shares of the Company were issued and outstanding. Each Common share entitles the holder thereof to one vote at meetings of shareholders of the Company. The Company has 1,895,000 share options outstanding at an average exercise price of $14.96. Each share option entitles the holder to purchase one Class A non-voting share of the Company at an exercise price established based on the market price of the shares at the date the option was granted. In November 2011, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid. Under the bid, the Company may purchase up to 2,579,895 Class A non-voting shares of the Company, representing 5% of the issued and outstanding Class A non-voting shares as at November 14, 2011. The average daily trading volume for the six month period preceding November 1, 2011 was 77,593 shares. In accordance with Toronto Stock Exchange rules, a maximum daily repurchase of 25% of this average may be made, representing 19,398 shares. The bid commenced on November 28, 2011 and may continue to November 27, 2012. The shares will be purchased on behalf of the Company by a registered broker through the facilities of the Toronto Stock Exchange or alternative Canadian trading platforms. The Company may also purchase Class A non-voting shares for cancellation by way of private agreements under an issuer bid exemption order issued by a securities regulatory authority. Purchases made by way of private agreements under an issuer bid exemption order issued by a securities regulatory authority will be at a discount to the prevailing market price as provided in the exemption order. The price paid for the shares will be the market price at the time of acquisition, and the number of shares purchased and the timing of any such purchases will be determined by the Company’s management. All shares purchased by the Company will be cancelled. For fiscal 2012, the Company purchased, under the prior year’s normal course issuer bid, 1,445,000 Class A non-voting shares having a book value of $780,000 for a total cash consideration of $22,410,000. The excess of the purchase price over book value of the shares in the amount of $21,630,000 was charged to retained earnings. OFF-BALANCE SHEET ARRANGEMENTS Derivative Financial Instruments The Company in its normal course of business must make long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. Most of these purchases must be paid for in US dollars. The Company considers a variety of strategies designed to manage the cost of its continuing US dollar long-term commitments, including spot rate purchases and foreign currency option contracts with maturities not exceeding six months. In order to satisfy its US dollar requirements through to the second quarter of fiscal 2013, the Company has purchased US dollars at varying spot rates and in the fourth quarter of fiscal 2012, the Company entered into transactions with its bank whereby it purchased call options and sold put options, both on the US dollar. These derivative financial option contracts extend over a period of six months. Purchased call options and sold put options expiring on the same date have the same strike price. As at January 29, 2011 the Company had no outstanding foreign currency option contracts. A foreign currency option contract represents an option or obligation to buy a foreign currency from a counterparty at a predetermined date and amount. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally Canadian chartered banks. The Company does not use derivative financial instruments for speculative purposes. Included in the determination of the Company’s net earnings for fiscal 2012 are net foreign exchange gains of $733,000 (fiscal 2011 – $473,000). RELATED PARTY TRANSACTIONS Transactions with Key Management Personnel Only members of the Board of Directors are deemed to be key management personnel. It is the Board of Directors who has the responsibility for planning, directing and controlling the activities of the Company. The Directors participate in the share option plan, as described in note 17 to the audited financial statements for fiscal 2012. Compensation expense for key management personnel is as follows: Salaries and short-term benefits Post-employment benefits Share-based compensation costs Further information about the remuneration of individual Directors is provided in the annual Management Proxy Circular. For the fiscal years ended January 28, 2012 January 29, 2011 $ $ 2,088,000 (63,000) 190,000 2,215,000 $ $ 2,899,000 178,000 200,000 3,277,000 16 Reitmans (Canada) limited Management’s Discussion and Analysis Other Related-Party Transactions The Company leases two retail locations which are owned by companies controlled by the major shareholders of the Company. For fiscal 2012, the rent expense under these leases was, in the aggregate, approximately $198,000 (fiscal 2011 – $190,000). The Company incurred $584,000 in fiscal 2012 (fiscal 2011 – $606,000) with professional service firms connected to outside directors of the Company for fees in conjunction with general legal advice and other consultation. These transactions are recorded at the amount of consideration paid as established and agreed to by the related parties. FINANCIAL INSTRUMENTS The Company’s significant financial instruments consist of cash and cash equivalents along with marketable securities. The Company uses its cash resources to fund ongoing store construction and renovations along with working capital needs. Financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company reduces its credit risks by investing available cash in bank bearer deposit notes and bank term deposits with major Canadian financial institutions. The Company closely monitors its risk with respect to short-term cash investments. Marketable securities consist primarily of preferred shares of Canadian public companies. The Company’s investment portfolio is subject to stock market volatility. The Company is highly liquid with its cash and cash equivalents and invests on a short-term basis in term deposits with major Canadian financial institutions and commercial paper rated not less than R1. The volatility of the Canadian dollar impacts earnings and while the Company considers a variety of strategies designed to manage the cost of its continuing US dollar commitments, such as spot rate purchases and foreign exchange option contracts, this volatility can result in exposure to risk. CRITICAL ACCOUNTING ESTIMATES Deferred Income Tax Assets Management is required to make subjective assessments to determine the amount of deferred income tax assets to be recognized. Deferred income tax assets are recorded to the extent that it is probable that there will be adequate taxable income in the future against which they can be utilized. Pension Plans The Company maintains a contributory, defined benefit plan and sponsors a SERP. The costs of the defined benefit plan and SERP are determined periodically by independent actuaries. Pension expense is included in the results of operations. Assumptions used in developing the net pension expense and projected benefit obligation include a discount rate, rate of increase in salary levels and expected long-term rate of return on plan assets. Based upon the most recently filed actuarial valuation report as at December 31, 2010, the defined benefit plan, despite being fully funded on a going concern basis, had a solvency deficiency. The Company has funded the required amounts as at January 28, 2012. The SERP is an unfunded pay as you go plan. Sales Returns The Company provides for the possibility that merchandise already sold may be returned by customers. To this end, the Company has made certain assumptions based on the quantity of merchandise returned in the past. Share-Based Compensation The Company accounts for share-based compensation and other share-based payments using the fair value base method. Share options granted result in an expense over their vesting period based on their estimated fair values on the date of grant, determined using the Black-Scholes option pricing model. In computing the compensation cost related to share option awards under the fair value based method, various assumptions are used to determine the expected option life, risk-free interest rate, expected share price volatility and average dividend yield. The use of different assumptions could result in a share compensation expense that differs from that which the Company has recorded. Gift Cards / Loyalty Points and Awards Gift cards sold are recorded as deferred revenue and revenue is recognized when the gift cards are redeemed. An estimate is made of gift cards not expected to be redeemed based on the terms of the gift cards and historical redemption patterns. Loyalty points and awards granted under customer loyalty programs are recognized as a separate component of revenue and are deferred at the date of initial sale. Revenue is recognized when the loyalty points and awards are redeemed and the Company has fulfilled its obligation. The amount of revenue deferred is measured based on the fair value of loyalty points and awards granted, taking into consideration the estimated redemption percentage. Inventory Valuation The Company uses the retail inventory method in arriving at cost. Merchandise inventories are valued at the lower of cost and net realizable value. Excess or slow moving items are identified and a write-down is taken using management’s best estimate. In addition, a provision for shrinkage is also recorded using historical rates experienced. Given that inventory and cost of sales are significant components of the financial statements, any changes in assumptions and estimates could have a material impact on the Company’s financial position and results of operations. Reitmans (Canada) limited 17 Management’s Discussion and Analysis Asset Impairment The Company must assess the possibility that the carrying amounts of tangible and intangible assets may not be recoverable. Management is required to make significant judgments related to future cash flows to determine the amount of asset impairment that should be recognized. Goodwill Goodwill is measured at the acquisition date as the fair value of the consideration transferred less the net identifiable assets of the acquired company or business activities. Goodwill is not amortized and is carried at cost less accumulated impairment losses. Fair Value of Derivative Financial Instruments Derivative financial instruments are carried in the balance sheet at fair value estimated by using valuation techniques. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED A number of new standards, and amendments to standards and interpretations, are not yet effective for fiscal 2012 and have not been applied in preparing the financial statements. New standards and amendments to standards and interpretations that impact the Company include: IFRS 9 – Financial Instruments This standard becomes mandatory for the years commencing on or after January 1, 2015 with earlier application permitted. IFRS 9 is a new standard which will ultimately replace IAS 39, Financial Instruments: Recognition and Measurement. The extent of the impact on the financial statements of the Company has not yet been determined. IFRS 13 – Fair Value Measurement This standard provides new guidance on fair value measurement and disclosure requirements, which becomes effective for annual periods commencing on or after January 1, 2013. The extent of the impact on the financial statements of the Company has not yet been determined. IAS 1 – Presentation of Financial Statements Amendments to IAS 1, Presentation of Financial Statements enhance the presentation of Other Comprehensive Income (“OCI”) in the financial statements, primarily by requiring the components of OCI to be presented separately for items that may be reclassified to the statement of earnings in the future from those that would never be reclassified to the statement of earnings. The amendments are effective for annual periods beginning on or after July 1, 2012. The extent of the impact on the financial statements of the Company has not yet been determined. IAS 19 – Employee Benefits Amendments to IAS 19, Employee Benefits include the elimination of the option to defer the recognition of gains and losses, enhancing the guidance around measurement of plan assets and defined benefit obligations, streamlining the presentation of changes in assets and liabilities arising from defined benefit plans and the introduction of enhanced disclosures for defined benefit plans. The amendments are effective for annual periods beginning on or after January 1, 2013. The extent of the impact on the financial statements of the Company has not yet been determined. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS The Canadian Accounting Standards Board requires that publicly accountable enterprises adopt IFRS, for interim and annual reporting purposes, beginning on or after January 1, 2011, which for the Company is the fiscal year ended January 28, 2012. The Company began reporting under IFRS for the quarter ended April 30, 2011. Reconciliations prepared in accordance with IFRS 1, First-Time Adoption of International Financial Reporting Standards are provided in note 29 to the January 28, 2012 audited financial statements, including IFRS 1 reconciliations for the statement of earnings and statement of comprehensive income for fiscal 2011 and the opening IFRS balance sheet as at January 31, 2010 and balance sheet as at January 29, 2011. DISCLOSURE CONTROLS AND PROCEDURES Disclosure controls and procedures are designed to provide reasonable assurance that all material information related to the Company is gathered and reported to senior management, including the Chairman and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was conducted as of January 28, 2012. Based on this evaluation, the CEO and the CFO have concluded that, as of January 28, 2012, the disclosure controls and procedures, as defined by National Instrument 52-109, were appropriately designed and were operating effectively. 18 Reitmans (Canada) limited Management’s Discussion and Analysis 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 in accordance with IFRS. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. An evaluation of the effectiveness of the design and operation of the Company’s internal control over financial reporting was conducted as of January 28, 2012. Based on that evaluation, the CEO and the CFO concluded that the internal control over financial reporting, as defined by National Instrument 52-109, was appropriately designed and was operating effectively. The evaluations were conducted in accordance with the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), a recognized control model, and the requirements of National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings. The Company’s internal controls were not materially affected by the transition to IFRS. There have been no changes in the Company’s internal controls over financial reporting during fiscal 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. OUTLOOK Concern over the global economic conditions continued to impact Canadian consumer buying behaviours as consumer confidence levels remained weak. The Bank of Canada in its January 2012 Monetary Policy Report indicated that the economy was estimated to have grown by 2.4% in calendar 2011 as compared to its earlier projection of 2.1%. Additionally, it revised its projected growth for the economy in calendar 2012 upward from 1.9% projected in October 2011 to 2.0%. The pace of growth is predicted to be modest, reflecting continued weakness of the economy and diminished consumer confidence. The strength of the Canadian dollar favours importers, however it creates a drag on the economic activity of other sectors in Canada. The apparel marketplace has been faced with high cotton prices. The price of cotton, an important component in clothing fabrication, had risen to record high prices and along with a significant shortage of supply placed strains on certain product margins. A slowdown in demand, primarily due to the economic uncertainty in Europe, along with improved cotton harvests has resulted in bringing cotton prices sharply lower over the past few months, however cotton prices remain higher than historical levels. The Company continues to closely monitor this development in an effort to maintain its value pricing proposition. We believe that we remain poised to strengthen the Company’s market position in all of our market niches by offering a broad assortment of quality merchandise at affordable prices. The Company has virtually no debt and has liquid cash reserves which provide us with the ability to act when opportunities present themselves in whatever format including merchandising, store acquisition/construction, system replacements/upgrading or expansion by acquisition. The Company’s Hong Kong office continues to serve the Company well, with over 120 full-time employees dedicated to seeking out the highest quality, affordable and fashionable apparel for all of our banners. We believe that our merchandise offerings will continue to remain attractive values to the consumer. The Company has a strong balance sheet, with excellent liquidity and borrowing capacity. Its systems, including merchandise procurement, inventory control, planning, allocation and distribution, distribution centre management, point-of-sale, financial management and information technology are fully integrated. The Company is committed to continue to invest in training for all levels of its employees. Reitmans (Canada) limited 19 Management’s Responsibility for Financial Statements The accompanying financial statements and all the information in the annual report are the responsibility of management and have been approved by the Board of Directors of Reitmans (Canada) Limited. These financial statements have been prepared by management in conformity with International Financial Reporting Standards and include amounts that are based on best estimates and judgments. The financial information used elsewhere in the annual report is consistent with that in the financial statements. Management of the Company has developed and maintains a system of internal accounting controls. Management believes that this system of internal accounting controls provides reasonable assurances that financial records are reliable and form a proper basis for the preparation of the financial statements and that assets are properly accounted for and safeguarded. The Board of Directors carries out its responsibility for the financial statements in this annual report principally through its Audit Committee, consisting of all outside directors. The Audit Committee reviews the Company’s annual financial statements and recommends their approval to the Board of Directors. The auditors appointed by the shareholders have full access to the Audit Committee, with and without management being present. These financial statements have been examined by the auditors appointed by the shareholders, KPMG LLP, Chartered Accountants and their report is presented hereafter. (signed) (signed) Jeremy H. Reitman Chairman and Chief Executive Officer March 28, 2012 Eric Williams, CA Vice-President, Finance and Chief Financial Officer 20 20 Reitmans (Canada) limited Reitmans (Canada) limited Independent Auditors’ Report To the Shareholders of Reitmans (Canada) Limited We have audited the accompanying financial statements of Reitmans (Canada) Limited, which comprise the balance sheets as at January 28, 2012, January 29, 2011 and January 31, 2010, the statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for the years ended January 28, 2012 and January 29, 2011, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Reitmans (Canada) Limited as at January 28, 2012, January 29, 2011 and January 31, 2010, and its financial performance and its cash flows for the years ended January 28, 2012 and January 29, 2011 in accordance with International Financial Reporting Standards. Chartered Accountants Montreal, Canada March 28, 2012 * CA Auditor Permit no. 23443 KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP. Reitmans (Canada) limited Reitmans (Canada) limited 21 21 Statements of Earnings (in thousands of Canadian dollars except per share amounts) Balance Sheets (in thousands of Canadian dollars) Sales Cost of goods sold (note 7) Gross profit Selling and distribution expenses Administrative expenses Results from operating activities Finance income (note 19) Finance costs (note 19) Earnings before income taxes Income taxes (note 11) Net earnings Earnings per share (note 20): Basic Diluted The accompanying notes are an integral part of these financial statements. For the years ended January 28, 2012 January 29, 2011 $ 1,019,397 363,333 656,064 547,367 46,878 61,819 5,562 1,509 65,872 18,333 $ 1,059,000 350,671 708,329 528,676 55,511 124,142 4,505 845 127,802 38,817 $ 47,539 $ 88,985 $ 0.72 0.72 $ 1.33 1.32 Statements of Comprehensive Income (in thousands of Canadian dollars) Net earnings Other comprehensive income: Net change in fair value of available-for-sale financial assets (net of tax of $79; 2011 – $427) (note 19) Reclassification of realized gains on available-for-sale financial assets to net earnings (net of tax of $22) (note 19) Reclassification of impairment loss on available-for-sale financial assets to net earnings (net of tax of $9; 2011 – $11) (note 19) Defined benefit actuarial losses (net of tax of $1,041; 2011 – $272) (note 15) Total comprehensive income The accompanying notes are an integral part of these financial statements. For the years ended January 28, 2012 January 29, 2011 $ 47,539 $ 88,985 530 – 64 (2,965) 2,866 (145) 67 (777) $ 45,168 $ 90,996 22 Reitmans (Canada) limited ASSETS CURRENT ASSETS Cash and cash equivalents (note 5) Marketable securities Trade and other receivables Derivative financial asset (note 6) Income taxes recoverable Inventories (note 7) Prepaid expenses Total Current Assets NON-CURRENT ASSETS Property and equipment (note 8) Intangible assets (note 9) Goodwill (note 10) Deferred income taxes (note 11) Total Non-Current Assets Total Assets LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Trade and other payables (note 12) Derivative financial liability (note 6) Deferred revenue (note 13) Income taxes payable Current portion of long-term debt (note 14) Total Current Liabilities NON-CURRENT LIABILITIES Other payables (note 12) Deferred revenue (note 13) Deferred lease credits Long-term debt (note 14) Pension liability (note 15) Total Non-Current Liabilities SHAREHOLDERS’ EQUITY Share capital (note 16) Contributed surplus Retained earnings Accumulated other comprehensive income (note 16) Total Shareholders’ Equity Balance Sheets (in thousands of Canadian dollars) January 28, 2012 January 29, 2011 January 31, 2010 $ 196,835 71,442 3,033 751 4,735 78,285 11,902 366,983 184,221 17,057 42,426 23,174 266,878 $ 230,034 70,413 2,866 – – 73,201 12,491 389,005 193,064 13,841 42,426 21,021 270,352 $ 228,577 48,026 2,926 – – 63,127 11,010 353,666 208,362 9,964 42,426 18,313 279,065 $ 633,861 $ 659,357 $ 632,731 $ 63,875 1,505 22,278 – 1,474 89,132 11,110 – 17,317 8,573 14,877 51,877 39,890 5,158 439,067 8,737 492,852 $ 64,093 – 19,834 5,998 1,384 91,309 10,180 2,384 19,011 10,047 13,626 55,248 29,614 6,266 468,777 8,143 512,800 $ 54,684 – 18,122 4,677 1,300 78,783 9,105 2,686 20,609 11,431 11,865 55,696 25,888 5,164 461,845 5,355 498,252 Total Liabilities and Shareholders’ Equity $ 633,861 $ 659,357 $ 632,731 Commitments (note 18) The accompanying notes are an integral part of these financial statements. On behalf of the Board, (signed) Jeremy H. Reitman, Director (signed) Stephen J. Kauser, Director Reitmans (Canada) limited 23 Statements of Changes in Shareholders’ Equity (in thousands of Canadian dollars) Statements of Cash Flows (in thousands of Canadian dollars) SHARE CAPITAL Balance, beginning of the year Cash consideration on exercise of share options (note 16) Ascribed value credited to share capital from exercise of share options (note 16) Cancellation of shares pursuant to share repurchase program (note 16) Balance, end of the year CONTRIBUTED SURPLUS Balance, beginning of the year Share-based compensation costs (note 17) Ascribed value credited to share capital from exercise of share options (note 16) Balance, end of the year RETAINED EARNINGS Balance, beginning of the year Net earnings Dividends (note 16) Premium on repurchase of Class A non-voting shares (note 16) Defined benefit actuarial losses (net of tax of $1,041; 2011 – $272) (note 15) Balance, end of the year ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of the year Net change in fair value of available-for-sale financial assets (net of tax of $79; 2011 – $427) (note 19) Reclassification of realized gains on available-for-sale financial assets to net earnings (net of tax of $22) (note 19) Reclassification of impairment loss on available-for-sale financial assets to net earnings (net of tax of $9; 2011 – $11) (note 19) Balance, end of the year (note 16) Total Shareholders’ Equity The accompanying notes are an integral part of these financial statements. For the years ended January 28, 2012 January 29, 2011 $ 29,614 8,828 2,228 (780) 39,890 6,266 1,120 (2,228) 5,158 468,777 47,539 (52,654) (21,630) (2,965) 439,067 8,143 530 – 64 8,737 $ 25,888 3,569 888 (731) 29,614 5,164 1,990 (888) 6,266 461,845 88,985 (51,895) (29,381) (777) 468,777 5,355 2,866 (145) 67 8,143 $ 492,852 $ 512,800 24 Reitmans (Canada) limited Statements of Cash Flows (in thousands of Canadian dollars) For the years ended January 28, 2012 January 29, 2011 $ 47,539 $ 88,985 64,990 1,120 (4,635) 2,941 (4,245) 1,490 – 73 754 2,942 (4,147) (682) 1,316 3,460 18,333 131,249 (114) (5,084) 589 504 60 127,204 793 (31,060) 96,937 (420) – (59,154) (59,574) (52,654) (22,410) (1,384) 8,828 (67,620) (2,942) (33,199) 230,034 59,754 1,990 (4,956) 3,358 (629) 1,341 (167) 78 – (31) (3,068) (797) 1,273 2,546 38,817 188,494 106 (10,074) (1,481) 9,073 1,410 187,528 6,040 (46,388) 147,180 (20,803) 1,709 (46,922) (66,016) (51,895) (30,112) (1,300) 3,569 (79,738) 31 1,457 228,577 CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net earnings Adjustments for: Depreciation, amortization and impairment losses Share-based compensation costs Amortization of deferred lease credits Deferred lease credits Pension contribution Pension expense Realized gain on sale of marketable securities Impairment loss on available-for-sale financial assets Net change in fair value of derivatives Foreign exchange loss (gain) Interest and dividend income, net Interest paid Interest received Dividends received Income taxes Changes in: Trade and other receivables Inventories Prepaid expenses Trade and other payables Deferred revenue Cash generated from operating activities Income taxes received Income taxes paid Net cash flows from operating activities CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES Purchases of marketable securities Proceeds on sale of marketable securities Additions to property and equipment and intangible assets Cash flows used in investing activities CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES Dividends paid Purchase of Class A non-voting shares for cancellation Repayment of long-term debt Proceeds from exercise of share options Cash flows used in financing activities FOREIGN EXCHANGE (LOSS) GAIN ON CASH HELD IN FOREIGN CURRENCY NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS, END OF THE YEAR $ 196,835 $ 230,034 Supplementary cash flow information (note 25) The accompanying notes are an integral part of these financial statements. Reitmans (Canada) limited 25 Notes to Financial Statements (all amounts in thousands of Canadian dollars except per share amounts) 1. REPoRTINg ENTITY Reitmans (Canada) Limited (the “Company”) is a company domiciled in Canada and is incorporated under the Canada Business Corporations Act. The address of the Company’s registered office is 3300 Highway #7 West, Suite 702, Vaughan, Ontario L4K 4M3. The principal business activity of the Company is the sale of women’s wear at retail. 2. BASIS oF PRESENTATIoN a) Statement of Compliance These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These are the Company’s first annual financial statements prepared under IFRS in accordance with IFRS 1, First-time adoption of IFRS. The first date at which IFRS was applied was January 31, 2010 (“Transition Date”). In accordance with IFRS 1, the Company has: • Provided comparative financial information • Applied the same accounting policies throughout all periods presented • Retroactively applied all effective IFRS standards as at January 28, 2012, as required; and • Applied certain optional exemptions and certain mandatory exceptions as applicable for first-time IFRS adopters. The Company’s financial statements were previously prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”). An explanation of how the transition from Canadian GAAP to IFRS as at the transition date has affected the reported earnings, balance sheet and cash flows for the Company, including the mandatory exception and optional exemptions under IFRS 1, is provided in note 29. These financial statements were authorized for issue by the Board of Directors on March 28, 2012. b) Basis of Measurement These financial statements have been prepared on the historical cost basis except for the following material items: • available-for-sale financial assets are measured at fair value through other comprehensive income; • the pension liability is recognized as the present value of the defined benefit obligation less the total of the fair value of the plan assets and the unrecognized past service cost; and • derivative financial instruments are measured at fair value. c) d) Functional and Presentation Currency These financial statements are presented in Canadian dollars, which is the Company’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand, except per share amounts. Estimates, Judgments and Assumptions The preparation of the financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, the disclosure of contingent assets and contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the period. These estimates and assumptions are based on historical experience, other relevant factors and expectations of the future and are reviewed regularly. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Actual results may differ from these estimates. The following is a summary of areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements: 26 Reitmans (Canada) limited Notes to Financial Statements Deferred Income Tax Assets Management is required to make subjective assessments to determine the amount of deferred income tax assets to be recognized. Deferred income tax assets are recorded to the extent that it is probable that there will be adequate taxable income in the future against which they can be utilized. Pension Plans The cost of defined benefit pension plans is determined by means of actuarial valuations, which involve making assumptions about discount rates, the expected long-term rate of return on plan assets, future salary increases, mortality rates and the future increases in pensions. Because of the long-term nature of the plans, such estimates are subject to a high degree of uncertainty. Sales Returns The Company provides for the possibility that merchandise already sold may be returned by customers. To this end, the Company has made certain assumptions based on the quantity of merchandise returned in the past. Share-Based Compensation In computing the compensation cost related to share option awards under the fair value based method, various assumptions are used to determine the expected option life, risk-free interest rate, expected share price volatility and average dividend yield. The use of different assumptions could result in a share compensation expense that differs from that which the Company has recorded. Gift Cards / Loyalty Points and Awards Gift cards sold are recorded as deferred revenue and revenue is recognized when the gift cards are redeemed. An estimate is made of gift cards not expected to be redeemed based on the terms of the gift cards and historical redemption patterns. Loyalty points and awards granted under customer loyalty programs are recognized as a separate component of revenue and are deferred at the date of initial sale. Revenue is recognized when the loyalty points and awards are redeemed and the Company has fulfilled its obligation. The amount of revenue deferred is measured based on the fair value of loyalty points and awards granted, taking into consideration the estimated redemption percentage. Slow-Moving Inventory The Company has set up provisions for merchandise in inventory that may have to be sold below cost. For this purpose, the Company has developed assumptions regarding the quantity of merchandise sold below cost. Asset Impairment The Company must assess the possibility that the carrying amounts of tangible and intangible assets may not be recoverable. Management is required to make significant judgments related to future cash flows to determine the amount of asset impairment that should be recognized. Fair Value of Derivative Financial Instruments Derivative financial instruments are carried in the balance sheet at fair value estimated by using valuation techniques. 3. SIgNIFICANT ACCouNTINg PolICIES The accounting policies set out below have been applied consistently to all periods presented in these financial statements. a) Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate at that date. Other balance sheet items denominated in foreign currencies are translated into Canadian dollars at the exchange rates prevailing at the respective transaction dates. Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at average rates of exchange prevailing during the period. The resulting gains or losses on translation are included in the determination of net earnings. b) Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, bank balances and short-term deposits with original maturities of three months or less. c) Financial Instruments All financial instruments are classified into one of the following five categories: financial assets and financial liabilities at fair value through profit or loss, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are included on the balance sheet and are initially measured at fair value. The Company accounts for transaction costs related to financial instruments, other than those classified as fair value through profit or loss and for derivative instruments, in the initial measurement of the instrument. Subsequent measurement depends on their initial classification. Financial instruments and financial liabilities classified as financial assets and liabilities at fair value through profit or loss are subsequently measured at fair value and all gains and losses are included in net earnings in the period in which they arise. Available-for-sale financial instruments are subsequently measured at fair value and changes therein, other than impairment losses, are recognized in other comprehensive income. When an investment is derecognized, the cumulative gain or loss in other comprehensive income is transferred to net earnings. Loans and receivables, held-to-maturity investments and other financial liabilities, are subsequently measured at amortized cost using the effective interest rate method, less impairment losses. Reitmans (Canada) limited 27 Notes to Financial Statementss Financial assets and liabilities measured at fair value use a fair value hierarchy to prioritize the inputs used in measuring fair value. Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company has classified its cash and cash equivalents and its trade and other receivables as loans and receivables and its marketable securities as available-for-sale financial assets. Trade and other payables and long-term debt have been classified as other financial liabilities and are measured at amortized cost. Financial assets and liabilities are offset and the net amount is presented in the balance sheet when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Derivative instruments are recorded at their fair value except under the own use exemption. Certain derivatives embedded in other contracts must also be measured at fair value. All changes in the fair value of derivatives are recognized in net earnings unless specific hedge criteria are met, which requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company considers the use of foreign currency option contracts, with maturities not exceeding six months, to manage its US dollar exposure. Foreign currency option contracts are not designated as hedges. Derivative financial instruments are not used for trading or speculative purposes. d) Property and Equipment Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset, including any costs directly attributable to bringing the asset to a working condition for its intended use. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Depreciation is recognized in net earnings on a straight-line basis over the estimated useful lives of each component of an item of property and equipment. Land is not depreciated. Leasehold improvements are depreciated over the lesser of the estimated useful life of the asset and the lease term. Assets not in service include expenditures incurred to-date for equipment not yet available for use. Depreciation of assets not in service begins when they are ready for their intended use. Depreciation is calculated over the depreciable amount, which is the cost of an asset, less its residual value. The estimated useful lives for the current and comparative periods are as follows: Buildings Fixtures and equipment Leasehold improvements 10 to 50 years 3 to 20 years 6.7 to 10 years Depreciation methods, useful lives and residual values are reviewed at each annual reporting date and adjusted prospectively, if appropriate. Gains and losses on disposal of items of property and equipment are recognized in net earnings. e) Goodwill Goodwill is measured at the acquisition date as the fair value of the consideration transferred less the net identifiable assets of the acquired company or business activities. Goodwill is not amortized and is carried at cost less accumulated impairment losses. f) Intangible Assets Intangible assets that are acquired by the Company and have finite useful lives are measured at cost less accumulated amortization and accumulated impairment losses. Amortization is calculated over the cost of the asset less its residual value. Amortization is recognized in net earnings on a straight-line basis over the estimated useful lives of the intangible assets. Amortization of intangible assets not in service begins when they are ready for their intended use. The estimated useful lives for the current and comparative periods are as follows: Software 3 to 5 years Amortization methods, useful lives and residual values are reviewed at each annual reporting date and adjusted prospectively, if appropriate. 28 Reitmans (Canada) limited Notes to Financial Statements g) Leased Assets Leases are classified as either operating or finance, based on the substance of the transaction at inception of the lease. Classification is re-assessed if the terms of the lease are changed. Leases in which a significant portion of the risks and rewards of ownership are not assumed by the Company are classified as operating leases. The Company carries on its operations in premises under leases of varying terms, which are accounted for as operating leases. Payments under an operating lease are recognized in net earnings on a straight-line basis over the term of the lease. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and, consequently, records the difference between the recognized rental expense and the amounts payable under the lease as deferred rent, which is included in trade and other payables on the balance sheet. Contingent (sales-based) rentals are recognized in net earnings in the period in which they are incurred. Tenant allowances are recorded as deferred lease credits and amortized as a reduction of rent expense over the term of the related leases. Inventories Merchandise inventories are measured at the lower of cost, determined on an average basis using the retail inventory method, and net realizable value. Costs include the cost of purchase, transportation costs that are directly incurred to bring inventories to their present location and condition, and certain distribution centre costs related to inventories. The Company estimates net realizable value as the amount that inventories are expected to be sold, in the ordinary course of business, less the estimated costs necessary to make the sale, taking into consideration fluctuations of retail prices due to seasonality. Impairment i) Non-Financial Assets All non-financial assets are reviewed at each reporting date for indications that the carrying amount may not be recoverable. When there is evidence of impairment, an impairment test is carried out. Goodwill is tested for impairment at least annually at the year-end reporting date, and whenever there is an indication that the asset may be impaired. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (defined as “cash-generating unit” or “CGU”). Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amount of the other assets in the CGU. An impairment loss is recognized in net earnings if the carrying amount of an asset or its related CGU exceeds its estimated recoverable amount. The recoverable amount is the higher of the value-in-use and the fair value less costs to sell. The value-in-use is the present value of estimated future cash flows, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. The fair value less costs to sell is the amount for which an asset or CGU can be sold in a transaction under normal market conditions between knowledgeable and willing contracting parties, less costs to sell. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to the CGUs that are expected to benefit from the synergies of the combination. This allocation reflects the lowest level at which goodwill is monitored for internal reporting purposes. The Company’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGUs to which the corporate asset belongs. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. ii) Financial Assets For an investment in an equity security, a significant or prolonged decline in its fair value below cost is objective evidence of impairment. Impairment losses on available-for-sale financial assets are recognized by reclassifying losses accumulated in accumulated other comprehensive income to net earnings. The cumulative loss that is reclassified from accumulated other comprehensive income is the difference between the acquisition cost and the current fair value, less any impairment losses recognized previously in net earnings. Any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. Employee Benefits i) Pension Benefit Plans The Company maintains a contributory defined benefit plan (“Plan”) that provides benefits to employees based on length of service and average earnings in the best five consecutive years of employment. The Company also sponsors a Supplemental Executive Retirement Plan (“SERP”), which is neither registered nor pre-funded. The costs of these retirement benefit plans are determined periodically by independent actuaries. h) i) j) Reitmans (Canada) limited 29 Notes to Financial Statementss Benefits are also given to employees through defined contribution plans administered by the Federal and Québec governments. Company contributions to these plans are recognized in the periods when the services are rendered. Pension expense/income is included in the determination of net earnings according to the following policies: • The present value of the defined benefit obligation is actuarially determined using the projected unit credit method. • For the purpose of calculating expected return on plan assets, the valuation of those assets is based on quoted market values at the year-end date. • The discount rate used to value the defined benefit obligation is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. • Unrecognized past service costs related to benefits are amortized on a straight-line basis over the average period until vesting. To the extent that the benefits vest immediately, the expense is recognized immediately in net earnings. The Company recognizes all actuarial gains and losses from the Plan and SERP immediately in other comprehensive income, and reports them in retained earnings. Expenses related to defined contribution plans are recognized in net earnings in the periods in which they occur. The net obligation in respect of the Plan and SERP is the amount of future benefits that members have earned in return for their service in the current and prior periods discounted to its present value, less any unrecognized past service costs and the fair value of the plan assets. ii) Short-Term Employee Benefits Short-term employee benefit obligations, which include wages, salaries, compensated absences and bonuses, are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. iii) Share-Based Compensation Some employees receive part of their compensation in the form of share-based payments which are recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The Company accounts for share-based compensation using the fair value based method. Compensation expense is measured at the fair value at the date of grant and the fair value of each award is recognized over its respective vesting period, which is normally five years. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service conditions are expected to be met. k) Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Where discounting is used, the unwinding of the discount is recognized as finance cost. l) Revenue Revenue is recognized from the sale of merchandise when a customer purchases and takes delivery of the merchandise. Reported sales are net of returns and estimated possible returns and exclude sales taxes. Gift cards sold are recorded as deferred revenue and revenue is recognized when the gift cards are redeemed. An estimate is made of gift cards not expected to be redeemed based on the terms of the gift cards and historical redemption patterns. Loyalty points and awards granted under customer loyalty programs are recognized as a separate component of revenue, and are deferred at the date of initial sale. Revenue is recognized when the loyalty points and awards are redeemed and the Company has fulfilled its obligation. The amount of revenue deferred is measured based on the fair value of loyalty points and awards granted, taking into consideration the estimated redemption percentage. m) Finance Income and Finance Costs Finance income comprises interest and dividend income, realized gains on sale of marketable securities, changes in the fair value of derivatives as well as foreign exchange gains. Finance costs comprise interest expense, realized losses on sale of marketable securities, changes in the fair value of derivatives as well as foreign exchange losses. Interest income is recognized on an accrual basis and interest expense is recorded using the effective interest method. Dividend income is recognized when the right to receive payment is established. Foreign exchange gains and losses and changes in the fair value of derivatives are reported on a net basis. 30 Reitmans (Canada) limited Notes to Financial Statements n) Income Tax Income tax expense comprises current and deferred taxes. Current income taxes and deferred income taxes are recognized in net earnings except for items recognized directly in equity or in other comprehensive income. The Company’s income tax expense is based on tax rules and regulations that are subject to interpretation and require estimates and assumptions that may be challenged by taxation authorities. Current income tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to taxes payable in respect of previous years. The Company’s estimates of current income tax assets and liabilities are periodically reviewed and adjusted as circumstances warrant, such as for changes to tax laws and administrative guidance, and the resolution of uncertainties through either the conclusion of tax audits or expiration of prescribed time limits within the relevant statutes. The final results of government tax audits and other events may vary materially compared to estimates and assumptions used by management in determining the income tax expense and in measuring current income tax assets and liabilities. Deferred income tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax assets and liabilities are measured using enacted or 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 deferred income tax assets and liabilities of a change in tax rates is included in net earnings in the period that includes the enactment date, except to the extent that it relates to an item recognized either in other comprehensive income or directly in equity in the current or in a previous period. The Company only offsets income tax assets and liabilities if it has a legally enforceable right to offset the recognized amounts and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. A deferred income tax asset is recognized to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Deferred income tax assets and liabilities are recognized on the balance sheet under non-current assets or liabilities, irrespective of the expected date of realization or settlement. o) Earnings per Share The Company presents basic and diluted earnings per share (“EPS”) data for its shares. Basic EPS is calculated by dividing the net earnings of the Company by the weighted average number of Class A non-voting and Common shares outstanding during the period. Diluted EPS is determined by adjusting the weighted average number of shares outstanding to include additional shares issued from the assumed exercise of share options, if dilutive. The number of additional shares is calculated by assuming that the proceeds from such exercises, as well as the amount of unrecognized share-based compensation, are used to purchase Class A non-voting shares at the average market share price during the reporting period. p) Share Capital Class A non-voting shares and Common shares are classified as equity. Incremental costs directly attributable to the issue of these shares and share options are recognized as a deduction from equity, net of any tax effects. When share capital recognized as equity is purchased for cancellation, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from equity. The excess of the purchase price over the carrying amount of the shares is charged to retained earnings. q) New Standards and Interpretations Not Yet Adopted A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended January 28, 2012 and have not been applied in preparing these financial statements. New standards and amendments to standards and interpretations that are currently under review include: IFRS 9 – Financial Instruments This standard becomes mandatory for the years commencing on or after January 1, 2015 with earlier application permitted. IFRS 9 is a new standard which will ultimately replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 13 – Fair Value Measurement This standard provides new guidance on fair value measurement and disclosure requirements, which becomes effective for annual periods commencing on or after January 1, 2013. Reitmans (Canada) limited 31 Notes to Financial Statementss IAS 1 – Presentation of Financial Statements Amendments to IAS 1, Presentation of Financial Statements enhance the presentation of Other Comprehensive Income (“OCI”) in the financial statements, primarily by requiring the components of OCI to be presented separately for items that may be reclassified to the statement of earnings in the future from those that would never be reclassified to the statement of earnings. The amendments are effective for annual periods beginning on or after July 1, 2012. IAS 19 – Employee Benefits Amendments to IAS 19, Employee Benefits include the elimination of the option to defer the recognition of gains and losses, enhancing the guidance around measurement of plan assets and defined benefit obligations, streamlining the presentation of changes in assets and liabilities arising from defined benefit plans and the introduction of enhanced disclosures for defined benefit plans. The amendments are effective for annual periods beginning on or after January 1, 2013. The extent of the impact of adoption of the above noted standards and interpretations on the financial statements of the Company has not yet been determined. 4. DETERMINATIoN oF FAIR vAluES A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair value estimates are made at a specific point in time, using available information about the asset or liability. These estimates are subjective in nature and often cannot be determined with precision. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. a) Financial Assets The Company has determined that the carrying amount of its short-term financial assets approximates fair value at the reporting date due to the short-term maturity of these instruments. The fair value of the Company’s available-for-sale financial assets is determined by reference to their quoted closing prices in active markets at the reporting date, which is considered Level 1 input in the fair value hierarchy. b) Non-Derivative Financial Liabilities The fair value of the Company’s long-term debt bearing interest at a fixed rate, which is determined for disclosure purposes, is calculated using the present value of future payments of principal and interest discounted at the current market rates of interest available to the Company for the same or similar debt instruments with the same remaining maturity. c) Deferred Revenue The amount of revenue deferred with respect to the Company’s customer loyalty reward programs is estimated by reference to the fair value of the merchandise for which the loyalty rewards could be redeemed. The fair value takes into account the expected redemption rate and the timing of such expected redemptions. d) Derivative Financial Instruments The fair value of foreign currency option contracts is determined through a standard option valuation technique used by the counterparty based on Level 2 inputs. e) Share-Based Payment Transactions The fair values of the employee share options are measured based on the Black-Scholes valuation model. Measurement inputs include share price on measurement date, exercise price of the share option, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the share option (based on historic experience and general option holder behaviour), expected dividends, and risk-free interest rate (based on government bonds). 5. CASh AND CASh EquIvAlENTS Cash on hand and with banks Short-term deposits, bearing interest at 0.9% (January 29, 2011 – 0.7%; January 31, 2010 – 0.3%) January 28, 2012 January 29, 2011 January 31, 2010 $ $ 12,563 184,272 196,835 $ $ 4,634 225,400 230,034 $ $ 4,677 223,900 228,577 32 Reitmans (Canada) limited Notes to Financial Statements 6. FINANCIAl INSTRuMENTS Derivative Financial Instruments During the year, the Company entered into transactions with its bank whereby it purchased call options and sold put options, both on the US dollar (“USD”). These option contracts extend over a period of six months. Purchased call options and sold put options expiring on the same date have the same strike price. Details of the foreign currency option contracts outstanding as at January 28, 2012 are as follows: Put options sold Call options purchased Notional Amount in USD Derivative Asset Derivative Liability $ $ 44,000 (100,000) (56,000) $ $ 751 – 751 $ $ – (1,505) (1,505) $ $ Net 751 (1,505) (754) As at January 29, 2011 and January 31, 2010, there were no foreign currency option contracts outstanding. 7. INvENToRIES During the year ended January 28, 2012, inventories recognized as cost of goods sold amounted to $361,319 (January 29, 2011 – $348,716). In addition, $2,014 (January 29, 2011 – $1,955) of write-downs of inventory as a result of net realizable value being lower than cost was recognized in cost of goods sold, and no inventory write-downs recognized in previous periods were reversed. 8. PRoPERTY AND EquIPMENT Cost Balance at January 31, 2010 Additions Disposals Balance at January 29, 2011 Balance at January 30, 2011 Additions Disposals Balance at January 28, 2012 Accumulated depreciation and impairment losses Balance at January 31, 2010 Depreciation Impairment loss Reversal of impairment loss Disposals Balance at January 29, 2011 Balance at January 30, 2011 Depreciation Impairment loss Reversal of impairment loss Disposals Balance at January 28, 2012 Net carrying amounts At January 31, 2010 At January 29, 2011 At January 28, 2012 Land Buildings Fixtures and Equipment Leasehold Improvements $ $ $ $ $ $ $ $ $ $ $ 5,860 – – 5,860 5,860 – – 5,860 – – – – – – – – – – – – 5,860 5,860 5,860 $ $ $ $ $ $ $ $ $ $ $ 52,411 400 (886) 51,925 51,925 2,291 (53) 54,163 17,946 2,410 – – (886) 19,470 19,470 2,601 – – (53) 22,018 34,465 32,455 32,145 $ $ $ $ $ $ $ $ $ $ $ 177,874 19,107 (21,595) 175,386 175,386 25,079 (37,346) 163,119 97,398 26,062 – – (21,580) 101,880 101,880 25,599 2,296 – (37,346) 92,429 80,476 73,506 70,690 $ $ $ $ $ $ $ $ $ $ $ 194,782 21,591 (21,468) 194,905 194,905 24,818 (37,650) 182,073 107,221 26,708 1,724 (779) (21,212) 113,662 113,662 26,699 4,427 (591) (37,650) 106,547 87,561 81,243 75,526 Total 430,927 41,098 (43,949) 428,076 428,076 52,188 (75,049) 405,215 222,565 55,180 1,724 (779) (43,678) 235,012 235,012 54,899 6,723 (591) (75,049) 220,994 208,362 193,064 184,221 $ $ $ $ $ $ $ $ $ $ $ Reitmans (Canada) limited 33 Notes to Financial Statementss During the year, the Company tested for impairment certain items of property and equipment for which there were indications that their carrying amounts may not be recoverable and recognized an impairment loss of $6,723 (January 29, 2011 – $1,724). The recoverable amounts of the CGUs tested for impairment were based on their value-in-use which was determined using a pre-tax discount rate of 11% (January 29, 2011 – 12%). During the year, $591 of impairment losses were reversed following an improvement in the profitability of certain CGUs (January 29, 2011 – $779). Depreciation expense and net impairment losses for the year have been recorded in selling and distribution expenses and administrative expenses in the statements of earnings. Property and equipment includes an amount of $8,414 (January 29, 2011 – $3,548) that is not being depreciated. Depreciation will begin when the assets are available for use. 9. INTANgIBlE ASSETS Balance at January 31, 2010 Additions / amortization Disposals Balance at January 29, 2011 Balance at January 30, 2011 Additions / amortization Disposals Balance at January 28, 2012 Cost 17,072 7,506 (2,394) 22,184 22,184 7,175 (1,105) 28,254 $ $ $ $ Accumulated amortization Net carrying amounts $ $ $ $ 7,108 3,629 (2,394) 8,343 8,343 3,959 (1,105) 11,197 $ $ $ $ 9,964 3,877 – 13,841 13,841 3,216 – 17,057 The amortization of intangibles has been recorded in selling and distribution expenses and administrative expenses in the statements of earnings. Software includes an amount of $10,846 (January 29, 2011 – $6,930) that is not being amortized. Amortization will begin when the software is put into service. 10. gooDWIll Goodwill is tested for impairment as described in note 3 i). For impairment testing purposes the Company uses the value-in-use approach. Value-in-use is determined by discounting the future cash flows generated from the continuing use of the respective CGU. Management’s key assumptions for cash flow projections are based on the most recent annualized operating results, assuming a series of cash flows in perpetuity. Projected cash flows are discounted using a pre-tax rate of 10% (January 29, 2011 – 11%) which reflects the specific risks and weighted average cost of capital for a company of similar size and industry. Based upon the impairment tests as at January 28, 2012, January 29, 2011 and January 31, 2010, the value-in-use was determined to be higher than the carrying values. As a result, no impairment losses were recognized. 34 Reitmans (Canada) limited Notes to Financial Statements For the years ended January 28, 2012 January 29, 2011 $ 19,840 (307) 19,533 $ 42,409 (740) 41,669 (1,771) 319 252 (1,200) 18,333 $ (3,990) 494 644 (2,852) 38,817 $ 11. INCoME TAX Income Tax Expense The Company’s income tax expense is comprised as follows: Current Tax Expense Current period Adjustment for prior years Current tax expense Deferred Tax Expense Recognition and reversal of temporary differences Changes in tax rates Adjustment for prior years Deferred tax expense Total income tax expense Income Tax Recognized in Other Comprehensive Income January 28, 2012 Tax (expense) benefit Before Tax For the years ended Net of Tax (expense) Before Tax January 29, 2011 Tax (expense) benefit Net of Tax (expense) Available-for-sale financial assets Defined benefit plan actuarial losses $ $ 682 (4,006) (3,324) $ $ (88) 1,041 953 $ $ 594 (2,965) (2,371) $ $ 3,204 (1,049) 2,155 $ $ (416) 272 (144) $ $ 2,788 (777) 2,011 Reconciliation of Effective Tax Rate Earnings before income taxes Income tax using the Company’s statutory tax rate Changes in tax rates Non-deductible expenses and other adjustments Tax exempt income Over provided in prior periods Recognized Deferred Tax Assets and Liabilities Deferred tax assets and liabilities are attributable to the following: For the years ended January 28, 2012 January 29, 2011 $ $ 65,872 18,642 319 393 (966) (55) 18,333 28.30% 0.48% 0.60% (1.47%) (0.08%) 27.83% $ $ 127,802 38,583 391 658 (719) (96) 38,817 30.19% 0.31% 0.51% (0.56%) (0.08%) 30.37% Assets Liabilities Net January 28, 2012 January 29, 2011 January 28, 2012 January 29, 2011 January 28, 2012 January 29, 2011 Property, equipment and intangible assets Prepaid expenses Marketable securities Inventories Trade and other payables Pension liability Other $ $ 17,364 – – – 3,461 3,868 42 24,735 $ $ 12,984 214 – – 5,644 3,534 46 22,422 $ $ – – 379 1,144 – – 38 1,561 $ $ – – 299 1,082 – – 20 1,401 $ $ 17,364 – (379) (1,144) 3,461 3,868 4 23,174 $ $ 12,984 214 (299) (1,082) 5,644 3,534 26 21,021 Reitmans (Canada) limited 35 Notes to Financial Statementss Changes in Deferred Tax Balances During the Year Balance January 31, 2010 Recognized in Net Earnings Recognized in Other Comprehensive Income Balance January 29, 2011 Recognized in Net Earnings Recognized in Other Comprehensive Income Balance January 28, 2012 Property, equipment and intangible assets Prepaid expenses Marketable securities Inventories Trade and other payables Pension liability Other $ $ 10,626 257 121 (1,039) 5,260 3,076 12 18,313 $ $ 2,358 (43) (4) (43) 384 186 14 2,852 $ $ – – (416) – – 272 – (144) $ $ 12,984 214 (299) (1,082) 5,644 3,534 26 21,021 $ $ 4,380 (214) 8 (62) (2,183) (707) (22) 1,200 $ $ – – (88) – – 1,041 – 953 $ $ 17,364 – (379) (1,144) 3,461 3,868 4 23,174 12. TRADE AND oThER PAYABlES Trade payables Non-trade payables due to related parties Other non-trade payables Personnel liabilities Payables relating to premises Provision for sales returns Less non-current portion January 28, 2012 January 29, 2011 January 31, 2010 $ $ 26,155 56 10,553 23,053 14,398 770 74,985 11,110 63,875 $ $ 16,457 66 11,817 31,457 13,630 846 74,273 10,180 64,093 $ $ 15,148 90 4,437 30,615 12,630 869 63,789 9,105 54,684 The non-current portion of trade and other payables, which is included in payables relating to premises, represents the portion of deferred rent to be amortized beyond the next twelve months. 13. DEFERRED REvENuE Deferred revenue consists of the following: Loyalty points and awards granted under loyalty programs Unredeemed gift cards Less amounts expected to be redeemed in the next twelve months Deferred revenue – non-current 14. loNg-TERM DEBT Mortgage payable Less current portion 36 Reitmans (Canada) limited January 28, 2012 January 29, 2011 January 31, 2010 $ $ 10,979 11,299 22,278 22,278 – $ $ 10,984 11,234 22,218 19,834 2,384 $ $ 10,142 10,666 20,808 18,122 2,686 January 28, 2012 January 29, 2011 January 31, 2010 $ $ 10,047 1,474 8,573 $ $ 11,431 1,384 10,047 $ $ 12,731 1,300 11,431 Notes to Financial Statements The mortgage, bearing interest at 6.40%, is payable in monthly instalments of principal and interest of $172. It is due November 2017 and is secured by the Company’s distribution centre having a carrying value of $18,306 (January 29, 2011 – $19,282; January 31, 2010 – $20,304). As at January 28, 2012, principal repayments on long-term debt are as follows: Within 1 year Within 2 years Within 3 years Within 4 years Within 5 years Subsequent years $ 1,474 1,570 1,672 1,780 1,896 1,655 $ 10,047 As at January 28, 2012, the fair value of long-term debt was $10,882 (January 29, 2011 – $12,247; January 31, 2010 – $13,045) compared to its carrying value of $10,047 (January 29, 2011 – $11,431; January 31, 2010 – $12,731). 15. PENSIoN lIABIlITY The following tables present reconciliations of the pension obligations, the plan assets and the funded status of the retirement benefit plans: Funded Status As at January 28, 2012 Plan SERP Total As at January 29, 2011 Plan SERP Total As at January 31, 2010 Plan SERP Total Fair value of plan assets Defined benefit obligation Funded status Unamortized non-vested past service cost Pension asset (liability) $ $ $ $ $ $ 15,727 – 15,727 11,936 – 11,936 10,369 – 10,369 $ $ $ $ $ $ 15,318 15,540 30,858 12,717 13,184 25,901 11,399 11,259 22,658 $ $ $ $ $ $ 409 (15,540) (15,131) (781) (13,184) (13,965) (1,030) (11,259) (12,289) $ $ $ $ $ $ – 254 254 – 339 339 – 424 424 $ $ $ $ $ $ 409 (15,286) (14,877) (781) (12,845) (13,626) (1,030) (10,835) (11,865) Reitmans (Canada) limited 37 Notes to Financial Statementss Plan January 28, 2012 SERP For the years ended Total Plan January 29, 2011 SERP Total Movement in the present value of the defined benefit obligation Defined benefit obligation, beginning of year Current service cost Interest cost Employee contributions Actuarial losses Benefits paid Defined benefit obligation, end of year Movement in the fair value of plan assets Fair value of plan assets, beginning of year Expected return on assets Investment (loss) gain Employer contributions Employee contributions Benefits paid Fair value of plan assets, end of year $ $ $ $ 12,717 596 684 144 1,778 (601) 15,318 11,936 808 (677) 4,117 144 (601) 15,727 $ $ $ $ 13,184 239 695 – 1,550 (128) 15,540 – – – 128 – (128) – $ $ $ $ 25,901 835 1,379 144 3,328 (729) 30,858 11,936 808 (677) 4,245 144 (729) 15,727 $ $ $ $ 11,399 480 646 140 567 (515) 12,717 10,369 729 712 501 140 (515) 11,936 $ $ $ $ 11,259 232 628 – 1,193 (128) 13,184 – – – 128 – (128) – $ $ $ $ 22,658 712 1,274 140 1,760 (643) 25,901 10,369 729 712 629 140 (643) 11,936 The Company has determined that, in accordance with the terms and conditions of the defined benefit plan, and in accordance with statutory requirements (such as minimum funding requirements) of the plans of the respective jurisdictions, the present value of refunds or reductions in the future contributions is not lower than the balance of the total fair value of the plan assets less the total present value of the obligations. As such, no decrease in the defined benefit plan asset is necessary at January 28, 2012 (January 29, 2011 and January 31, 2010 – no decrease in defined benefit plan asset). The asset allocation of the major asset categories in the Plan for each of the years was as follows: Equity securities Debt securities Cash and cash equivalents The Company’s pension expense was as follows: January 28, 2012 January 29, 2011 January 31, 2010 60% 38% 2% 100% 62% 36% 2% 100% 61% 37% 2% 100% Pension costs recognized in net earnings Current service cost Interest cost Expected return on plan assets Past service cost Pension expense Plan 596 684 (808) – 472 $ $ January 28, 2012 SERP For the years ended Total Plan January 29, 2011 SERP Total $ $ 239 695 – 84 1,018 $ $ 835 1,379 (808) 84 1,490 $ $ 480 646 (729) – 397 $ $ 232 628 – 84 944 $ $ 712 1,274 (729) 84 1,341 Pension expense is recognized in administration expenses in the statements of earnings. 38 Reitmans (Canada) limited Notes to Financial Statements The following table presents the change in the actuarial gains and losses recognized in other comprehensive income: Cumulative amount in retained earnings at the beginning of the year Recognized during the year Cumulative amount in retained earnings at the end of the year Recognized during the year net of tax Plan (144) 2,456 2,312 $ $ Actuarial Assumptions Principal actuarial assumptions used were as follows: Accrued benefit obligation: Discount rate Salary increase Employee benefit expense: Discount rate Expected return on plan assets Salary increase January 28, 2012 SERP For the years ended Total Plan January 29, 2011 SERP $ $ 1,193 1,550 2,743 $ $ $ 1,049 4,006 5,055 2,965 $ $ – (144) (144) $ $ – 1,193 1,193 Total – 1,049 1,049 777 $ $ $ For the years ended January 28, 2012 January 29, 2011 4.30% 5.00% 5.20% 6.50% 3.00% 5.20% 3.00% 5.50% 7.00% 3.00% Expected rates of return on plan assets are based on external historical and forecast market information. The Company expects $1,046 in employer contributions to be paid to the Plan and SERP in the year ending February 2, 2013. The Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes at year-end. The most recent actuarial valuation for funding purposes was as of December 31, 2010 and the next required valuation will be as of December 31, 2011. 16. ShARE CAPITAl AND oThER CoMPoNENTS oF EquITY The change in share capital for each of the periods listed was as follows: Common shares Balance at beginning and end of the year Class A non-voting shares Balance at beginning of the year Shares issued pursuant to exercise of share options Shares purchased under issuer bid Balance at end of the year Total share capital For the years ended January 28, 2012 January 29, 2011 Number of shares Carrying amount Number of shares Carrying amount 13,440 52,869 722 (1,445) 52,146 65,586 $ $ $ $ 482 13,440 29,132 11,056 (780) 39,408 39,890 54,160 292 (1,583) 52,869 66,309 $ $ $ $ 482 25,406 4,457 (731) 29,132 29,614 Reitmans (Canada) limited 39 Notes to Financial Statementss Authorized Share Capital The Company has authorized for issuance an unlimited number of Common shares and Class A non-voting shares. Both Common shares and Class A non-voting shares have no par value. All issued shares are fully paid. The Common shares and Class A non-voting shares of the Company rank equally and pari passu with respect to the right to receive dividends and upon any distribution of the assets of the Company. However, in the case of share dividends, the holders of Class A non-voting shares shall have the right to receive Class A non-voting shares and the holders of Common shares shall have the right to receive Common shares. Issuance of Class A Non-Voting Shares During the year ended January 28, 2012, a total of 722 (January 29, 2011 – 292) Class A non-voting shares were issued as a result of the exercise of vested options arising from the Company’s share option program. The amounts credited to share capital from the exercise of share options include a cash consideration of $8,828 (January 29, 2011 – $3,569), as well as an ascribed value from contributed surplus of $2,228 (January 29, 2011 – $888). Purchase of Shares for Cancellation For the year ended January 28, 2012, the Company purchased, under the prior year’s normal course issuer bid, 1,445 (January 29, 2011 – 1,583) Class A non-voting shares having a book value of $780 (January 29, 2011 – $731) for a total cash consideration of $22,410 (January 29, 2011 – $30,112). The excess of the purchase price over the book value of the shares in the amount of $21,630 (January 29, 2011 – $29,381) was charged to retained earnings. In November 2011, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid. Under the bid, the Company may purchase up to 2,580 Class A non-voting shares of the Company, representing 5% of the issued and outstanding Class A non-voting shares as at November 14, 2011. The bid commenced on November 28, 2011 and may continue to November 27, 2012. No Class A non-voting shares were purchased under this new program. Accumulated Other Comprehensive Income (“AOCI”) AOCI is comprised of the following: Net change in fair value of available-for-sale financial assets, net of taxes $ 8,737 $ 8,143 $ 5,355 January 28, 2012 January 29, 2011 January 31, 2010 Dividends The following dividends were declared and paid by the Company: Common shares and Class A non-voting shares 17. ShARE-BASED PAYMENTS a) Description of the Share-Based Payment Arrangements For the years ended January 28, 2012 January 29, 2011 $ 52,654 $ 51,895 The Company has a share option plan that provides that up to 10% of the Class A non-voting shares outstanding, from time to time, may be issued pursuant to the exercise of options granted under the plan to key management and employees. The granting of options and the related vesting period, which is normally up to 5 years, are at the discretion of the Board of Directors and the options have a maximum term of 10 years. The exercise price payable for each Class A non-voting share covered by a share option is determined by the Board of Directors at the date of grant, but may not be less than the closing price of the Company’s shares on the trading day immediately preceding the effective date of the grant. 40 Reitmans (Canada) limited b) Disclosure of Equity-Settled Share Option Plan Changes in outstanding share options were as follows: Outstanding, at beginning of year Granted Exercised Forfeited Outstanding, at end of year Options exercisable, at end of year Notes to Financial Statements January 28, 2012 January 29, 2011 For the years ended Weighted Average Exercise Price $ $ $ 14.58 – 12.23 16.33 15.07 18.81 Options 3,095 – (722) (428) 1,945 238 Weighted Average Exercise Price $ $ $ 14.14 18.02 12.23 14.50 14.58 13.74 Options 3,207 215 (292) (35) 3,095 935 The weighted average share price at the date of exercise for share options exercised in the year was $15.44 (January 29, 2011 – $18.21). There were no share option awards granted during the year ended January 28, 2012. Compensation cost related to share option awards granted during the year ended January 29, 2011 under the fair value based approach was calculated using the following assumptions: For the year ended January 29, 2011 15 Options Granted June 2, 2010 100 Options Granted January 14, 2011 100 Options Granted April 7, 2010 Expected option life Risk-free interest rate Expected stock price volatility Average dividend yield Weighted average fair value of options granted Share price at grant date 6.5 years 3.59% 47.18% 4.00% 6.22 18.00 $ $ 4.9 years 2.44% 37.40% 4.38% 4.25 18.26 $ $ 6.5 years 2.90% 33.52% 4.44% 4.05 18.00 $ $ The following table summarizes information about share options outstanding at January 28, 2012: Range of Exercise Prices $14.50 $15.90 – $18.26 $19.23 – $22.02 Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life 5.0 years 2.4 0.7 4.5 years Number Outstanding 1,675 115 155 1,945 Weighted Average Exercise Price $ $ 14.50 16.75 20.00 15.07 Number Exercisable – 83 155 238 Weighted Average Exercise Price $ $ – 16.58 20.00 18.81 c) Employee Expense For the year ended January 28, 2012, the Company recognized compensation costs of $1,120 relating to share-based payment arrangements ($1,990 for the year ended January 29, 2011), with a corresponding credit to contributed surplus. Reitmans (Canada) limited 41 Notes to Financial Statementss 18. CoMMITMENTS As at January 28, 2012, financial commitments for minimum lease payments under operating leases for retail stores, offices, automobiles and equipment, as well as amounts pertaining to agreements to purchase goods or services that are enforceable and legally binding on the Company, exclusive of additional amounts based on sales, taxes and other costs are payable as follows: Within 1 year Within 2 years Within 3 years Within 4 years Within 5 years Subsequent years Total Store and Office Operating Leases $ $ 99,202 88,467 77,563 66,012 49,802 89,873 470,919 Purchases Obligations Other Operating Leases $ $ 102,637 326 117 – – – 103,080 $ $ 4,498 3,723 2,672 2,477 8 – 13,378 Total 206,337 92,516 80,352 68,489 49,810 89,873 587,377 $ $ The Company leases retail stores and offices under operating leases. The Company does not sublet any of its leased properties. The leases have varying terms, escalation clauses and renewal rights. Generally, the leases run for a period that does not exceed 10 years, with options to renew that do not exceed 5 years, if at all. The majority of the leases require additional payments for the cost of insurance, taxes, maintenance and utilities. Certain rental agreements include contingent rent, which is generally based on revenue exceeding a minimum amount. For the year ended January 28, 2012, $181,998 was recognized as an expense in net earnings with respect to operating leases ($181,868 for the year ended January 29, 2011), of which $179,149 ($179,328 for the year ended January 29, 2011) represents minimum lease payments and $2,849 ($2,540 for the year ended January 29, 2011) represents contingent rents. 19. FINANCE INCoME AND FINANCE CoSTS Recognized in Net Earnings Dividend income from available-for-sale financial assets Interest income from loans and receivables Realized gain on disposal of available-for-sale financial assets Foreign exchange gain Finance income Interest expense – mortgage Net change in fair value of derivatives (note 6) Impairment loss on available-for-sale financial assets Finance costs Net finance income recognized in net earnings Recognized in Other Comprehensive Income For the years ended January 28, 2012 January 29, 2011 $ 3,462 1,367 – 733 5,562 682 754 73 1,509 $ 2,640 1,225 167 473 4,505 767 – 78 845 $ 4,053 $ 3,660 For the years ended January 28, 2012 January 29, 2011 Net change in fair value of available-for-sale financial assets arising during the year (net of tax of $79; 2011 – $427) Finance income recognized in other comprehensive income (net of tax) $ $ 530 530 $ $ 2,866 2,866 42 Reitmans (Canada) limited Notes to Financial Statements 20. EARNINgS PER ShARE The calculation of basic and diluted earnings per share is based on net earnings for the year ended January 28, 2012 of $47,539 ($88,985 for the year ended January 29, 2011). The number of shares used in the earnings per share calculation is as follows: Weighted average number of shares per basic earnings per share calculations Effect of dilutive share options outstanding Weighted average number of shares per diluted earnings per share calculations For the years ended January 28, 2012 January 29, 2011 65,975 126 66,101 66,771 484 67,255 As at January 28, 2012, a total of 1,945 (January 29, 2011 – 398) share options were excluded from the calculation of diluted earnings per share as these options were deemed to be anti-dilutive, because the exercise prices were greater than the average market price of the shares during the period. The average market value of the Company’s shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding. 21. RElATED PARTIES Transactions with Key Management Personnel Only members of the Board of Directors are deemed to be key management personnel. It is the Board of Directors who has the responsibility for planning, directing and controlling the activities of the Company. The Directors participate in the share option plan, as described in note 17. Compensation expense for key management personnel is as follows: Salaries and short-term benefits Post-employment benefits Share-based compensation costs For the years ended January 28, 2012 January 29, 2011 $ $ 2,088 (63) 190 2,215 $ $ 2,899 178 200 3,277 Further information about the remuneration of individual Directors is provided in the annual Management Proxy Circular. Other Related-Party Transactions The Company leases two retail locations which are owned by companies controlled by the major shareholders of the Company. For the year ended January 28, 2012, the rent expense under these leases was, in the aggregate, approximately $198 (January 29, 2011 – $190). The Company incurred $584 in the year ended January 28, 2012 (January 29, 2011 – $606) with professional service firms connected to outside directors of the Company for fees in conjunction with general legal advice and other consultation. These transactions are recorded at the amount of consideration paid as established and agreed to by the related parties. 22. PERSoNNEl EXPENSES Wages, salaries and employee benefits Expenses related to defined benefit plans Share-based compensation costs For the years ended January 28, 2012 January 29, 2011 $ $ 248,208 1,490 1,120 250,818 $ $ 251,702 1,341 1,990 255,033 Reitmans (Canada) limited 43 Notes to Financial Statementss 23. CREDIT FACIlITY At January 28, 2012, the Company had unsecured operating lines of credit available with Canadian chartered banks to a maximum of $125,000 or its US dollar equivalent. As at January 28, 2012, $52,187 (January 29, 2011 – $60,888) of the operating lines of credit were committed for documentary and standby letters of credit. 24. guARANTEES The Company has granted irrevocable standby letters of credit, issued by highly-rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at January 28, 2012, the maximum potential liability under these guarantees was $5,083 (January 29, 2011 – $5,060). The standby letters of credit mature at various dates during the year ending February 2, 2013. The contingent portion of the guarantee is recorded when the Company considers it probable that a payment relating to the guarantee has to be made to the other party of the contract or guarantee. The Company has recorded no liability with respect to these guarantees as the Company does not expect to make any payments for these items. Management believes that the fair value of the non-contingent obligations requiring performance under the guarantees in the event that specified triggering events or conditions occur approximates the cost of obtaining the standby letters of credit. 25. SuPPlEMENTARY CASh FloW INFoRMATIoN Non-cash transactions: Additions to property and equipment and intangible assets included in trade and other payables Ascribed value credited to share capital from exercise of share options $ $ 3,028 2,228 $ $ 2,819 888 January 28, 2012 January 29, 2011 26. FINANCIAl RISK MANAgEMENT The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. Disclosures relating to the Company’s exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk are provided below. Credit Risk Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company’s financial instruments that are exposed to concentrations of credit risk are primarily cash and cash equivalents, marketable securities, trade and other receivables and foreign currency option contracts. The Company limits its exposure to credit risk with respect to cash and cash equivalents by investing available cash in short-term deposits with Canadian financial institutions and commercial paper with a rating not less than R1. Marketable securities consist primarily of preferred shares of highly-rated Canadian public companies. The Company’s trade and other receivables consist primarily of credit card receivables from the last few days of the fiscal year, which are settled within the first days of the next fiscal year. As at January 28, 2012, the Company’s maximum exposure to credit risk for these financial instruments was as follows: Cash and cash equivalents Marketable securities Trade and other receivables $ $ 196,835 71,442 3,033 271,310 Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. The contractual maturity of the majority of trade and other payables is within six months. As at January 28, 2012, the Company had a high degree of liquidity with $268,277 in cash and cash equivalents, and marketable securities. In addition, the Company has unsecured credit facilities of $125,000 subject to annual renewals. The Company has financed its store expansion through internally-generated funds and its unsecured credit facilities are used to finance seasonal working capital requirements for US dollar merchandise purchases. The Company’s long-term debt consists of a mortgage bearing interest at 6.40%, due November 2017, which is secured by the Company’s distribution centre. 44 Reitmans (Canada) limited Notes to Financial Statements Foreign Currency Risk The Company purchases a significant amount of its merchandise with US dollars and as such significant volatility in the US dollar vis-à-vis the Canadian dollar can have an adverse impact on the Company’s gross margin. The Company has a variety of alternatives that it considers to manage its foreign currency exposure on cash flows related to these purchases. This includes, but is not limited to, various styles of foreign currency option or forward contracts, not to exceed six months, and spot rate purchases. A foreign currency option contract represents an option or obligation to buy a foreign currency from a counterparty. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly-rated counterparties, normally major Canadian financial institutions. For the year ended January 28, 2012, the Company satisfied its US dollar requirements primarily through spot rate purchases. The Company has performed a sensitivity analysis on its US dollar denominated financial instruments, which consist principally of cash and cash equivalents of $27,547 and trade payables of $3,840 to determine how a change in the US dollar exchange rate would impact net earnings. On January 28, 2012, a 1% rise or fall in the Canadian dollar against the US dollar, assuming that all other variables, in particular interest rates, had remained the same, would have resulted in a $166 decrease or increase, respectively, in the Company’s net earnings for the year ended January 28, 2012. The Company has performed a sensitivity analysis on its derivative financial instruments, a series of call and put options on US dollars, to determine how a change in the US dollar exchange rate would impact net earnings. On January 28, 2012, a 1% rise or fall in the Canadian dollar against the US dollar, assuming that all other variables had remained the same, would have resulted in a $580 decrease or increase, respectively, in the Company’s net earnings for the year ended January 28, 2012. Interest Rate Risk Interest rate risk exists in relation to the Company’s cash and cash equivalents, defined benefit pension plan and SERP. Market fluctuations in interest rates impacts the Company’s earnings with respect to interest earned on cash and cash equivalents that are invested in bank bearer deposit notes and bank term deposits with major Canadian financial institutions and commercial paper with a rating not less than R1. Overall return in the capital markets and the level of interest rates affect the funded status of the Company’s pension plans. Adverse changes with respect to pension plan returns and the level of interest rates from the date of the last actuarial valuation may have a material adverse effect on the funded status of the retirement benefit plans and on the Company’s results of operations. The Company has unsecured borrowing and working capital credit facilities available up to an amount of $125,000 or its US dollar equivalent that it utilizes for documentary and standby letters of credit, and the Company funds the drawings on these facilities as the payments are due. The Company has performed a sensitivity analysis on interest rate risk at January 28, 2012 to determine how a change in interest rates would impact equity and net earnings. For the year ended January 28, 2012, the Company earned interest income of $1,367 on its cash and cash equivalents. An increase or decrease of 25 basis points in the average interest rate earned during the year would have increased equity and net earnings by $321 or decreased equity and net earnings by $235, respectively. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The Company has performed a sensitivity analysis at January 28, 2012 to determine how a change in interest rates, in relation to the Company’s retirement benefit plans, would impact the benefit costs included in other comprehensive income. A one percentage point decrease in the year-end discount rate would have resulted in an increase of approximately $4,300 in benefit costs included in other comprehensive income for the year ended January 28, 2012, whereas a one percentage point increase would have resulted in a decrease of approximately $3,800. The Company’s expected long-term rate of return on Plan assets reflects management’s view of long-term investment returns. The effect of a 1% variation in such rate of return would have a nominal impact on the total benefit costs included in net earnings and total comprehensive income. Equity Price Risk Equity price risk arises from available-for-sale equity securities. The Company monitors the mix of equity securities in its investment portfolio based on market expectations. Material investments within the portfolio are managed on an individual basis and all buy and sell decisions are approved by the Chief Executive Officer. The Company has performed a sensitivity analysis on equity price risk at January 28, 2012, to determine how a change in the market price of the Company’s marketable securities would impact equity and other comprehensive income. The Company’s equity investments consist principally of preferred shares of Canadian public companies. The Company believes that changes in interest rates influence the market price of these securities. A 5% increase or decrease in the market price of the securities at January 28, 2012, would result in a $3,036 increase or decrease, respectively, in equity and other comprehensive income for the year ended January 28, 2012. The Company’s equity securities are subject to market risk and, as a result, the impact on equity and other comprehensive income may ultimately be greater than that indicated above. 27. CAPITAl MANAgEMENT The Company’s objectives in managing capital are: • • • to ensure sufficient liquidity to enable the internal financing of capital projects thereby facilitating its expansion; to maintain a strong capital base so as to maintain investor, creditor and market confidence; to provide an adequate return to shareholders. Reitmans (Canada) limited 45 Notes to Financial Statementss The Company’s capital is composed of long-term debt, including the current portion and shareholders’ equity. The Company’s primary uses of capital are to finance increases in non-cash working capital along with capital expenditures for new store additions, existing store renovation projects and office and distribution centre improvements. The Company currently funds these requirements out of its internally-generated cash flows. The Company’s long-term debt constitutes a mortgage on the distribution centre facility. The Company maintains unsecured operating lines of credit that it uses to satisfy commitments for US dollar denominated merchandise purchases. The Company does not have any long-term debt, other than the mortgage related to the distribution centre, and therefore net earnings generated from operations are available for reinvestment in the Company or distribution to the Company’s shareholders. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year over year sustainable profitable growth. On a quarterly basis, the Board of Directors also reviews the level of dividends paid to the Company’s shareholders and monitors the share repurchase program activities. The Company does not have a defined share repurchase plan and decisions are made on a specific transaction basis and depend on market prices and regulatory restrictions. The Company is not subject to any externally imposed capital requirements. 28. CoMPARATIvE FIguRES Certain comparative figures have been reclassified to conform to the current year’s presentation. 29. EXPlANATIoN oF TRANSITIoN To IFRS As stated in note 2 a), these are the Company’s first annual financial statements prepared in accordance with IFRS. The Company has applied IFRS 1 and the accounting policies set out in note 3 have been applied in preparing the financial statements for the year ended January 28, 2012, the comparative information presented in these financial statements for the year ended January 29, 2011 and in the preparation of the opening IFRS balance sheet at January 31, 2010, which is the Company’s date of transition. In preparing these financial statements in accordance with IFRS 1, the Company has adjusted amounts reported previously in the financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has affected the Company’s previously published financial statements as at and for the year ended January 29, 2011 and as at January 31, 2010 is set out in the following tables and the notes that accompany the tables. IFRS 1 requires first-time adopters to retrospectively apply all effective IFRS standards as of the reporting date of its first annual financial statements. However, it also provides for certain optional exemptions and prescribes certain mandatory exceptions for first-time adopters. Set forth below are the IFRS 1 applicable exemptions and exceptions applied in the Company’s conversion from Canadian GAAP to IFRS. a) IFRS Exemption Options i) Business Combinations The Company elected not to retrospectively apply IFRS 3 Business Combinations to business combinations that occurred prior to its Transition Date and such business combinations have not been restated. Under the business combinations exemption, the carrying amounts of the assets acquired and liabilities assumed under Canadian GAAP at the date of the acquisition became their deemed carrying amounts under IFRS at that date. Notwithstanding this exemption, the Company was required at the Transition Date, to evaluate whether the assets acquired and liabilities assumed meet the recognition criteria in the relevant IFRS, and whether there are any assets acquired or liabilities assumed that were not recognized under Canadian GAAP for which recognition would be required under IFRS. The requirements of IFRS were then applied to the assets acquired and liabilities assumed from the date of acquisition to the Transition Date. The application of this exemption did not result in an IFRS transition adjustment to the opening balance sheet at January 31, 2010. In addition, under the business combinations exemption, the Company tested goodwill for impairment at the Transition Date and determined that there was no impairment of the carrying value of goodwill as of that date. ii) Employee Benefits IFRS 1 provides the option to apply IAS 19 Employee Benefits paragraph 120A(p), retrospectively or prospectively from the Transition Date. The retrospective basis would require the disclosure of selected information of the defined benefit plans for the current annual period and previous four annual periods. The Company elected to disclose the amounts required by paragraph 120A(p) of IAS 19 as the amounts are determined for each accounting period prospectively from the Transition Date to IFRS. b) IFRS Mandatory Exceptions Set forth below are the applicable IFRS 1 exceptions applied in the conversion from Canadian GAAP to IFRS. i) Estimates Hindsight is not used to create or revise estimates. The estimates previously made by the Company under Canadian GAAP were not revised for application of IFRS except where necessary to reflect any difference in accounting policies. In preparing its opening IFRS balance sheet, the Company has adjusted amounts reported previously in the financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has affected the Company’s balance sheets, statements of earnings, comprehensive income and cash flows is set out in the following tables and the notes that accompany the tables. 46 Reitmans (Canada) limited Notes to Financial Statements Reconciliation of Balance Sheet as at january 31, 2010 (Transition Date) (in thousands of Canadian dollars) Note Canadian GAAP Accounts Canadian GAAP IFRS Adjustments IFRS Reclassifications IFRS IFRS Accounts a) b), c) k) d) d) d) e), f) l) m) ASSETS CURRENT ASSETS Cash and cash equivalents Marketable securities Accounts receivable Inventories Prepaid expenses Future income taxes Total Current Assets CAPITAL ASSETS Property and equipment Intangible assets Total Capital Assets GOODWILL FUTURE INCOME TAXES $ 228,577 48,026 2,926 63,127 11,873 2,395 356,924 210,612 9,964 220,576 42,426 11,466 $ – – – – (863) – (863) (2,250) – (2,250) – 4,452 $ – – – – – (2,395) (2,395) – – – – 2,395 ASSETS CURRENT ASSETS Cash and cash equivalents Marketable securities Trade and other receivables Inventories Prepaid expenses Total Current Assets NON-CURRENT ASSETS Property and equipment Intangible assets Goodwill Deferred income taxes Total Non-Current Assets $ 228,577 48,026 2,926 63,127 11,010 – 353,666 208,362 9,964 42,426 18,313 279,065 $ 631,392 $ 1,339 $ – $ 632,731 Total Assets LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and accrued items $ Income taxes payable Current portion of long-term debt Total Current Liabilities DEFERRED LEASE CREDITS LONG-TERM DEBT ACCRUED PENSION LIABILITY SHAREHOLDERS’ EQUITY Share capital Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Total Shareholders’ Equity 77,766 – 4,677 1,300 83,743 – – 20,609 11,431 5,443 25,888 5,164 480,622 (1,508) 510,166 $ (3,311) 7,456 – – 4,145 – 2,686 – – 6,422 9,108 – – (18,777) 6,863 (11,914) LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Trade and other payables Deferred revenue Income taxes payable Current portion of long-term debt Total Current Liabilities NON-CURRENT LIABILITIES Other payables Deferred revenue Deferred lease credits Long-term debt Pension liability Total Non-Current Liabilities SHAREHOLDERS’ EQUITY Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Total Shareholders’ Equity Total Liabilities and 54,684 18,122 4,677 1,300 78,783 9,105 2,686 20,609 11,431 11,865 55,696 25,888 5,164 461,845 5,355 498,252 $ $ (19,771) 10,666 – – (9,105) 9,105 – – – – 9,105 – – – – – – $ 631,392 $ 1,339 $ $ 632,731 Shareholders’ Equity Reitmans (Canada) limited 47 Notes to Financial Statementss Reconciliation of Balance Sheet as at january 29, 2011 (in thousands of Canadian dollars) Note Canadian GAAP Accounts Canadian GAAP IFRS Adjustments IFRS Reclassifications IFRS IFRS Accounts ASSETS CURRENT ASSETS Cash and cash equivalents Marketable securities Accounts receivable Inventories Prepaid expenses Future income taxes Total Current Assets CAPITAL ASSETS Property and equipment Intangible assets Total Capital Assets GOODWILL FUTURE INCOME TAXES $ 230,034 70,413 2,866 73,201 13,258 2,001 391,773 194,612 13,841 208,453 42,426 14,972 $ – – – – (767) – (767) (1,548) – (1,548) – 4,048 $ – – – – – (2,001) (2,001) – – – – 2,001 ASSETS CURRENT ASSETS Cash and cash equivalents Marketable securities Trade and other receivables Inventories Prepaid expenses Total Current Assets NON-CURRENT ASSETS Property and equipment Intangible assets Goodwill Deferred income taxes Total Non-Current Assets $ 230,034 70,413 2,866 73,201 12,491 – 389,005 193,064 13,841 42,426 21,021 270,352 $ 657,624 $ 1,733 $ – $ 659,357 Total Assets LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and accrued items $ Income taxes payable Current portion of long-term debt Total Current Liabilities DEFERRED LEASE CREDITS LONG-TERM DEBT ACCRUED PENSION LIABILITY SHAREHOLDERS’ EQUITY Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Total Shareholders’ Equity 88,372 – 5,998 1,384 95,754 – – 19,011 10,047 9,112 29,614 6,266 486,367 1,453 523,700 $ (2,865) 8,600 – – 5,735 – 2,384 – – 4,514 6,898 – – (17,590) 6,690 (10,900) $ $ (21,414) 11,234 – – (10,180) LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Trade and other payables Deferred revenue Income taxes payable Current portion of long-term debt Total Current Liabilities NON-CURRENT LIABILITIES Other payables Deferred revenue Deferred lease credits Long-term debt Pension liability Total Non-Current Liabilities SHAREHOLDERS’ EQUITY Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Total Shareholders’ Equity Total Liabilities and 64,093 19,834 5,998 1,384 91,309 10,180 2,384 19,011 10,047 13,626 55,248 29,614 6,266 468,777 8,143 512,800 $ 659,357 Shareholders’ Equity 10,180 – – – – 10,180 – – – – – – a) b), c) k) d) d) d) e), f) l) m) $ 657,624 $ 1,733 $ 48 Reitmans (Canada) limited Notes to Financial Statements Reconciliation of Statement of Earnings for the year ended january 29, 2011 (in thousands of Canadian dollars except per share amounts) Canadian GAAP IFRS Adjustments IFRS Reclassifications IFRS IFRS Accounts $ 1,070,277 $ (11,277) $ – $ 1,059,000 Sales Note Canadian GAAP Accounts d) Sales Cost of goods sold and selling, general and administrative expenses a), b), c), d) c), e), f), g) h) h) j) Depreciation and amortization Operating earnings before the undernoted Investment income Interest on long-term debt Earnings before income taxes Income taxes: Current Future 887,673 182,604 – – 60,456 122,148 3,756 767 125,137 41,669 (3,553) 38,116 – (11,277) (10,683) (3,061) – 2,467 276 78 2,665 701 Net earnings $ 87,021 $ 1,964 $ Earnings per share: Basic Diluted $ 1.30 1.29 (537,002) 537,002 539,359 58,572 (60,456) (473) 473 – – – – 350,671 708,329 528,676 55,511 – Cost of goods sold Gross profit Selling and distribution expenses Administrative expenses 124,142 Results from operating activities 4,505 845 127,802 Finance income Finance costs Earnings before income taxes 38,817 Income taxes $ 88,985 Net earnings Earnings per share: $ 1.33 1.32 Basic Diluted Reconciliation of Statement of Comprehensive Income for the year ended january 29, 2011 (in thousands of Canadian dollars) Note Canadian GAAP Accounts Canadian GAAP IFRS Adjustments IFRS Reclassifications IFRS IFRS Accounts Net earnings $ 87,021 $ 1,964 $ – $ 88,985 Net earnings Other comprehensive income: Net unrealized gain on available-for-sale financial assets arising during the year (net of tax of $427) Reclassification of losses on available-for-sale financial assets to net earnings (net of tax of $14) h) h) g) 2,866 95 – – – (240) 67 (777) Comprehensive income $ 89,982 $ 1,014 $ Other comprehensive income: Net change in fair value of available-for-sale financial assets (net of tax of $427) Reclassification of realized gains on available-for-sale financial assets to net earnings (net of tax of $22) Reclassification of impairment loss on available-for-sale financial assets to net earnings (net of tax of $11) Defined benefit actuarial losses (net of tax of $272) 2,866 (145) 67 (777) $ 90,996 Total comprehensive income – – – – – Reitmans (Canada) limited 49 Notes to Financial Statementss Material Adjustments to the Statements of Cash Flows IFRS requires cash flows from interest and dividends received and paid, and income taxes paid, to be disclosed directly in the statement of cash flows. Under Canadian GAAP, the Company disclosed interest and income taxes paid in the notes to the financial statements. This has resulted in a change to the presentation of the statements of cash flows for all periods presented in these financial statements. There are no other material differences between the Company’s statements of cash flows presented under IFRS and the statements of cash flows presented under Canadian GAAP. Notes to the Reconciliations The preceding are reconciliations of the financial statements previously presented under Canadian GAAP to the amended financial statements prepared under IFRS. Items identified as “IFRS adjustments” are required as the accounting treatment under Canadian GAAP differs from the treatment under IFRS. Items identified as “IFRS reclassifications” are solely presentation reclassifications required to present the previous Canadian GAAP financial statements line items on a consistent basis with that of the IFRS presentation. Details on the nature of both types of changes are described below. Index to the Notes to the Reconciliations a ) Advertising Expenses b ) Impairment of Property and Equipment c ) Components of Property and Equipment d ) Customer Loyalty Programs e ) Past Service Costs of a Defined Benefit Plan f ) Measurement Date of a Defined Benefit Plan g ) Recognition of Actuarial Gains/Losses h ) i ) Re-Measurement of Tax Assets and Liabilities j ) k ) Deferred Income Taxes l ) Retained Earnings m ) Accumulated Other Comprehensive Income Financial Instruments Income Tax Expense IFRS Adjustments a) Advertising Expenses Under IFRS, in accordance with IAS 38 Intangible Assets, advertising costs must be recognized as an expense at the time the expense is incurred. Canadian GAAP allowed for advertising costs to be deferred (as prepaid items) and expensed at the time the advertising occurs. The impact arising from the change is summarized as follows: For the year ended January 29, 2011 $ $ (96) 96 January 31, 2010 January 29, 2011 $ $ (863) 257 (606) $ $ (767) 214 (553) STATEMENT OF EARNINGS Decrease in selling and distribution expenses Increase in earnings before income taxes BALANCE SHEET Decrease in prepaid expenses Increase in deferred income tax assets Decrease in retained earnings 50 Reitmans (Canada) limited Notes to Financial Statements b) Impairment of Property and Equipment For purposes of assessing impairment of property and equipment in accordance with IAS 36 Impairment of Assets, the Company identified CGU’s based on the smallest group of assets that are capable of generating largely independent cash inflows. In addition, the recoverable amount for impairment analysis is based on the higher of its value-in-use, which is based on discounted cash flows, and fair value less costs to sell. Under Canadian GAAP, property and equipment was allocated to asset groups defined as the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. As a result of the impairment test performed as of the Transition Date, the Company recognized an impairment loss of $3,803 (before tax) for certain stores in which the recoverable amount did not exceed the carrying amount of the assets. The recoverable amount was based on the value in use of the assets belonging to the CGU and takes into account expected future cash flows deriving from the use of these assets. The cash flows were discounted at a pre-tax rate of 10%. The effect was to decrease Property and Equipment by $3,803 at January 31, 2010. For the year ended January 29, 2011, due to the impairment charge of $3,803 recorded at the Transition Date, depreciation expense was reduced by $1,385. For the year ended January 29, 2011, an additional impairment loss of $1,724 was recorded, while $779 of the opening impairment loss was reversed. The impact arising from the change is summarized as follows: STATEMENT OF EARNINGS Decrease in selling and distribution expenses Increase in earnings before income taxes BALANCE SHEET Decrease in property and equipment Increase in deferred income tax assets Decrease in retained earnings c) Components of Property and Equipment For the year ended January 29, 2011 $ $ (440) 440 January 31, 2010 January 29, 2011 $ $ (3,803) 986 (2,817) $ $ (3,363) 872 (2,491) Under IFRS, in accordance with IAS 16 Property, Plant and Equipment, each component of an item of property and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately, over its respective estimated useful life. Canadian GAAP was less specific about the level at which component accounting was required. As a result, the Company’s buildings were broken down into components, with useful lives varying from 10 to 50 years. The impact arising from the change is summarized as follows: STATEMENT OF EARNINGS Decrease in selling and distribution expenses Decrease in administrative expenses Increase in earnings before income taxes BALANCE SHEET Increase in property and equipment Decrease in deferred income tax assets Increase in retained earnings For the year ended January 29, 2011 $ $ (158) (104) 262 January 31, 2010 January 29, 2011 $ $ 1,553 (403) 1,150 $ $ 1,815 (471) 1,344 Reitmans (Canada) limited 51 Notes to Financial Statementss d) Customer Loyalty Programs Under IFRS, in accordance with IFRIC 13 Customer Loyalty Programs, the fair value of loyalty points and awards granted under customer loyalty programs are recognized as a separately identifiable component of the initial sales transaction, and deferred until the Company has fulfilled its obligation. The Company’s practice under Canadian GAAP was not to defer any revenue associated with customer loyalty programs. The impact arising from the change is summarized as follows: STATEMENT OF EARNINGS Decrease in sales Decrease in selling and distribution expenses Decrease in earnings before income taxes BALANCE SHEET Increase in deferred revenue Decrease in trade and other payables Increase in deferred income tax assets Decrease in retained earnings For the year ended January 29, 2011 $ $ (11,277) (9,989) (1,288) January 31, 2010 January 29, 2011 $ $ 10,142 (3,311) 1,947 (4,884) $ $ 10,984 (2,865) 2,263 (5,856) e) Past Service Costs of a Defined Benefit Plan Under IFRS, in accordance with IAS 19 Employee Benefits, liabilities and expenses for vested past service costs under a defined benefit plan are recognized immediately in the statement of earnings. Under Canadian GAAP, the Company recognized past service costs under the Plan and SERP over the expected average remaining service period. The impact arising from the change is summarized as follows: STATEMENT OF EARNINGS Decrease in administrative expenses Increase in earnings before income taxes BALANCE SHEET Increase in pension liability Increase in deferred income tax assets Decrease in retained earnings For the year ended January 29, 2011 $ $ (590) 590 January 31, 2010 January 29, 2011 $ $ 5,320 1,379 (3,941) $ $ 4,730 1,226 (3,504) 52 Reitmans (Canada) limited Notes to Financial Statements f) Measurement Date of a Defined Benefit Plan Under IFRS, in accordance with IAS 19 Employee Benefits, defined benefit obligations and plan assets are measured annually at the reporting date and revisited at each reporting date. Under Canadian GAAP, the Company measured defined benefit obligations and plan assets as of December 31st. The impact arising from the change is summarized as follows: STATEMENT OF EARNINGS Decrease in administrative expenses Increase in earnings before income taxes BALANCE SHEET Increase (decrease) in pension liability Increase (decrease) in deferred income tax assets Increase (decrease) in retained earnings g) Recognition of Actuarial Gains/Losses For the year ended January 29, 2011 $ $ (1,318) 1,318 January 31, 2010 January 29, 2011 $ $ 1,102 286 (816) $ $ (216) (56) 160 On transition to IFRS, as permitted under IAS 19 Employee Benefits, the Company has chosen as its accounting policy for its Plan and SERP to recognize actuarial gains or losses directly into other comprehensive income rather than through net earnings. The impact arising from the change is summarized as follows: STATEMENT OF EARNINGS Decrease in administrative expenses Increase in earnings before income taxes STATEMENT OF COMPREHENSIVE INCOME Decrease in comprehensive income, before tax Tax effect Decrease in comprehensive income For the year ended January 29, 2011 $ $ (1,049) 1,049 January 29, 2011 $ $ (1,049) 272 (777) Reitmans (Canada) limited 53 Notes to Financial Statementss h) Financial Instruments Under IFRS, in accordance with IAS 39 Financial Instruments: Recognition and Measurement, impairment testing for available-for-sale financial assets (marketable securities), which are measured at fair value, is determined by objective evidence indicating “prolonged or significant” declines in fair value. Canadian GAAP referred to “other than temporary” declines. Due to the change in determination of impairment from “other than temporary” to “prolonged or significant” and based on the impairment test performed as of the Transition Date, the Company recognized an impairment loss of $7,249 (before tax) for certain available-for-sale equity securities considered to have a significant or prolonged decline in their fair values. As at January 29, 2011 the Company recognized an additional impairment loss of $78 (before tax) for certain available- for-sale securities. For the year ended January 29, 2011, due to the impairment loss recorded at the Transition Date, there was an additional realized gain on the disposal of certain available-for-sale securities. The impact arising from the change is summarized as follows: STATEMENT OF EARNINGS Increase in finance costs Increase in finance income Increase in earnings before income taxes BALANCE SHEET Increase in accumulated other comprehensive income Decrease in accumulated other comprehensive income – tax effect Decrease in retained earnings For the year ended January 29, 2011 $ $ 78 276 198 January 31, 2010 January 29, 2011 $ $ 7,249 (940) (6,309) $ $ 7,051 (915) (6,136) i) Re-Measurement of Tax Assets and Liabilities Under IFRS, if a deferred income tax asset or liability is re-measured subsequent to initial recognition, the impact of re-measurement is recorded in earnings, unless it relates to an item originally recognized in equity, in which case the change would also be recorded in equity. The practice of tracking the re-measurement of taxes back to the item which originally triggered the recognition is commonly referred to as “backwards tracing”. Canadian GAAP prohibits backwards tracing except in relation to business combinations and financial reorganizations. The impact arising from the change is summarized as follows: BALANCE SHEET Increase in accumulated other comprehensive income Decrease in retained earnings j) Income Tax Expense The above changes increased (decreased) the income tax expense as follows: Advertising expenses Impairment of property and equipment Components of property and equipment Customer loyalty programs Past service costs of a defined benefit plan Measurement date of a defined benefit plan Recognition of actuarial gains/losses Financial instruments Increase in income tax expense 54 Reitmans (Canada) limited January 31, 2010 January 29, 2011 $ $ 554 (554) $ $ 554 (554) For the year ended January 29, 2011 $ $ 43 114 68 (316) 153 342 272 25 701 Note a ) b ) c ) d ) e ) f ) g ) h ) Notes to Financial Statements k) Deferred Income Taxes The above changes increased (decreased) deferred income tax assets as follows: Advertising expenses Impairment of property and equipment Components of property and equipment Customer loyalty programs Past service costs of a defined benefit plan Measurement date of a defined benefit plan Increase in deferred income tax assets l) Retained Earnings The above changes increased (decreased) retained earnings as follows: Advertising expenses Impairment of property and equipment Components of property and equipment Customer loyalty programs Past service costs of a defined benefit plan Measurement date of a defined benefit plan Financial instruments Re-measurement of tax assets and liabilities Decrease in retained earnings m) Accumulated Other Comprehensive Income The above changes increased (decreased) accumulated other comprehensive income as follows: Financial instruments Financial instruments – tax effect Re-measurement of tax assets and liabilities Increase in accumulated other comprehensive income Note January 31, 2010 January 29, 2011 a ) b ) c ) d ) e ) f ) $ $ 257 986 (403) 1,947 1,379 286 4,452 $ $ 214 872 (471) 2,263 1,226 (56) 4,048 Note January 31, 2010 January 29, 2011 a ) b ) c ) d ) e ) f ) h ) i ) $ $ (606) (2,817) 1,150 (4,884) (3,941) (816) (6,309) (554) (18,777) $ $ (553) (2,491) 1,344 (5,856) (3,504) 160 (6,136) (554) (17,590) Note January 31, 2010 January 29, 2011 h ) h ) i ) $ $ 7,249 (940) 554 6,863 $ $ 7,051 (915) 554 6,690 IFRS RECLASSIFICATIONS Deferred Income Taxes Under IFRS, in accordance with IAS 1 Presentation of Financial Statements, deferred income tax assets and liabilities cannot be classified as current. Under Canadian GAAP, when assets and liabilities were segregated between current and non-current, the future income tax assets and liabilities were segregated. The effect as at January 29, 2011 was to reclassify $2,001 ($2,395 at January 31, 2010) of deferred income tax assets from current to non-current. Deferred Revenue Under IFRS, the Company has chosen to present unredeemed gift cards as deferred revenue on the balance sheet. Under Canadian GAAP, unredeemed gift cards were presented as accounts payable and accrued items. Trade and Other Payables Under IFRS, in accordance with IAS 1 Presentation of Financial Statements, certain non-trade payables have been re-classified from current to non-current liabilities on the balance sheet. Statement of Earnings Under IFRS, in accordance with IAS 1 Presentation of Financial Statements, an analysis of expenses is required, either by nature or by function, on the face of the statement of earnings. The Company has elected to present the analysis of expenses by function. Depreciation and amortization expenses are allocated within each function to which it relates. Under Canadian GAAP, there was no requirement for expenses to be classified according to their nature or function. Reitmans (Canada) limited 55 Directors and Officers Directors H. Jonathan Birks Stephen J. Kauser Max Konigsberg officers CORPORATE Jeremy H. Reitman Chairman and Chief Executive Officer Stephen F. Reitman President and Chief Operating Officer Eric Williams, CA Vice-President – Finance and Chief Financial Officer Henry Fiederer Senior Vice-President Diane Archibald Vice-President – Store Design and Development Domenic Carbone Vice-President – Distribution and Logistics Doug Edwards Vice-President – Shared Services, Online Marketing and Sales Jeffrey Kadanoff Vice-President – Strategic Planning and Development Claude Martineau Vice-President – Information Technology Alain Murad Vice-President – Legal and Secretary Isabelle Oliva Vice-President – Human Resources Diane Randolph Vice-President – Chief Information Officer Allen F. Rubin Vice-President – Operations Saul Schipper Vice-President – Real Estate Richard Wait, CGA Vice-President – Comptroller 56 Reitmans (Canada) limitée 56 Reitmans (Canada) limited Samuel Minzberg Jeremy H. Reitman Stephen F. Reitman Howard Stotland John J. Swidler Robert S. Vineberg Suzana Vovko President – RW & CO. Cathryn Adeluca Vice-President – RW & CO. Fiona Horgan Vice-President – RW & CO. Walter Lamothe President – Penningtons / Addition Elle Fredéric Boivin Vice-President – Penningtons Ginette Harnois Vice-President – Penningtons Jeff Ronald Vice-President – Penningtons Rhonda Sandler Vice-President – Penningtons Richard Dumont Vice-President – Addition Elle Roslyn Griner Vice-President – Addition Elle Janice Leclerc Vice-President – Addition Elle DIVISIONS Nadia Cerantola President – Reitmans Stephanie Bleau Vice-President – Reitmans Donna Flynn Vice-President – Reitmans Bruce MacKeracher Vice-President – Reitmans Stefanie Ravenda Vice-President – Reitmans Jacqueline Tardif Vice-President – Reitmans Kimberly Schumpert President – Smart Set Cathy Cockerton Vice-President – Smart Set Sylvain Forest Vice-President – Smart Set Danielle Vallières Vice-President – Smart Set Jonathan Plens President – Thyme Maternity Mimi Cohen Vice-President – Thyme Maternity Marie Frenneaux Vice-President – Thyme Maternity Fernanda Sousa Vice-President – Thyme Maternity Corporate Information Reitmans (Canada) limited Administration Office 250 Sauvé Street West, Montreal, Québec H3L 1Z2 Telephone: Fax: E-mail: Corporate Website: (514) 384-1140 (514) 385-2669 info@reitmans.com reitmans.ca Registered Office 3300 Highway #7 West, Suite 702, Vaughan, Ontario L4K 4M3 Telephone: Fax: (905) 761-2830 (905) 761-8922 Transfer Agent and Registrar Computershare Investor Services Inc. Montreal, Toronto, Calgary, Vancouver Stock Symbols THE TORONTO STOCK EXCHANGE Common Class A non-voting RET.A RET Une version française de ce rapport peut être obtenue en écrivant au secrétaire de Reitmans (Canada) Limitée, 250, rue Sauvé ouest, Montréal, Québec H3L 1Z2 Reitmans Smart Set RW & CO. Thyme Penningtons Addition Elle Cassis Design and production: Communications Marilyn Gelfand Inc.