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> Executive's Message
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Leon’s achieved record financial results during another challenging year in the Canadian retail industry. System-wide sales reached $2.53 billion, including $388 million of franchise sales, compared to $2.41 billion, including $376 million of franchise sales, in 2015. As a result of strong merchandising and promotional activity, same-store sales increased by 4.1 percent, despite slow growth in the Canadian economy and continued weakness in consumer spending. Earnings outpaced sales growth, rising 9.1 percent to record net income of $83.6 million or $1.17 per share, as we took advantage of our enterprise information system continued to gain efficiencies and minimize expenses. We also continued to strengthen the balance sheet, retiring $50 million in long-term debt associated with the acquisition of The Brick.
2016 IN REVIEW
One of the year’s most signifiant developments was the quickening pace of the integration that has taken place since Leon’s acquired The Brick in 2013. We have favoured a deliberately measured approach to the union of these two Canadian retailing icons, taking our time to get to know each other, share best practices, and foster input and buy-in for our strategic initiatives. At the same time, we have been careful to preserve the qualities that distinguish Leon’s and The Brick in the marketplace by ensuring both divisions continue tooperate independently with regard to merchandising and marketing strategies.
This pace of integration began to pickup momentum in 2016, as we were ableto leverage the benefits of the enterpriseinformation system completed at the end of 2015. With the full benefit of this system,we have gained a unified perspective on ourbusiness and a common language to use inthe way we measure and manage it. This hashelped us build a stronger corporate culturein support of key objectives and allowedus to work more effectively to improve ourfinancial and operating performance.
Yet greater potential synergies still lie ahead in the integration of our distribution system. Our vision is to create a unified national network that will efficiently serve customers of both divisions, including our online operations. In August 2017, we are scheduled to open a 434,000 sq. ft. distribution centre in Delta, British Columbia. This state-of-the-art facility will represent our first trial of the shared distribution concept, meeting the needs of 35 Brick locations in the province as well as our first four Leon’s stores in British Columbia.
These new Leon’s locations in Abbottsford, Langley, Richmond and Victoria were the result of a transaction in which we acquired eight leases from Sears Canada in February 2016. Also related to this transaction were three new Leon’s locations, one Appliance Canada location which opened in the Greater Toronto Area, and one Brick store which opened in Moncton, New Brunswick during the year. All of these new stores are well located in busy and growing communities.
Today, we are proud to have the most expansive retail network in the industry. It now includes 305 stores from Vancouver Island to Newfoundland and Labrador.
We are also Canada’s #1 commercial retailer of conventional and luxury appliances through our Appliance Canada and Midnorthern Appliance stores. Despite this unprecedented scale, Leon’s has abundant room to grow.
Although we are Canada’s largest retailer of furniture, appliances and home electronics, we hold less than a 20 percent share of our market. Ours is still a highly fragmented industry, comprised of hundreds of regional and independent operators, and it will continue to consolidate in the years ahead. We also see opportunity to expand Leon’s in Western Canada and The Brick in Atlantic Canada where these banners are relatively unrepresented.
Supporting this store network is our increasingly important online presence through leons.ca, thebrick.com, and furniture.ca, which now features more than 16,000 stylish home décor products. These popular websites are part of an omni-channel marketing strategy that is making it easy for customers to deal with us wherever, whenever and however they choose.
Complementing our retail networks are several related businesses that allow our customers to get everything related to their purchases from Leon’s, including financing insurance, warranty protection and after-sales service and repair. TransGlobal Service "TGS", formerly the service and repair division of The Brick, is now the largest operation of its kind in Canada, servicing and repairing appliances for all major manufacturers across the country. In 2016, TGS expanded into the fast growing direct-to-consumer market.
All of our closely related businesses are profitable and well positioned in their respective industries with the potential to make growing contributions to the Company’s earnings in the years ahead. Through subsidiary Murlee Holdings Limited and Leon’s Holdings (1967) Limited, we also possess 271 acres of land and a 3.6 million square foot portfolio of commercial real estate, much of it in prime urban locations, with enormous unrealized value and development potential.
THE YEAR AHEAD
Our expectations for the Canadian economy in 2017 are continued slow growth given high levels of consumer debt and continued relative weakness in commodity prices. The U.S. economy will likely be stronger, which could serve a catalyst for the Canadian economy later in the year. Whatever the macroeconomic climate, we will continue todevelop our business where it matters most to our customers. For the past 107 years, through many economic cycles, we have always tried to deliver the best combination of selection, service and value to our customers. In 2017, that commitment will be reflected in all that we do, from our distinctive marketing and merchandising programs to the many initiatives aimed at surfacing incremental efficiencies in our retail businesses. We will also continue to invest in the complementary distribution channels and services that have helped make Leon’s the most complete retailer in our industry.
In closing, on behalf of our President of the LFL Group Eddy Leon, and myself, we would like to thank our many talented and dedicated executives, including Mr. Mike Walsh, whose presidential leadership continues to improve our Leon’s Division and Mr. Dave Freeman, who was appointed President of The Brick in November 2016. A 35-year veteran of the Company, Dave is an experienced retailer who served most recently as Senior Vice President of Operations. We would also like to extend our appreciation to the corporate and franchise store management teams and all of the associates throughout our businesses. Thanks to their dedication, we are gaining momentum as a single,culturally integrated organization with the two most powerful brands in the business. We still have further to go in this journey but with your continued support, we look forward to reporting on our progress in the months ahead.
“Terrence T. Leon”
Terrence T. Leon
Chief Executive Officer