Chief Executive Officer’s Message
RECORD FINANCIAL RESULTS
System-wide sales reached $2.68 billion including $443 million of franchise sales, compared to $2.64 billion including $426 million of franchised sales in 2017. These results reflect a solid operating performance at Leon’s and The Brick despite subdued consumer spending throughout the year, as well as growing contributions from our online retail channels and other complementary businesses. Within this environment, we also continued to grow adjusted net income — which increased 8% to a record $107 million or $1.31 adjusted diluted earnings per share — at a faster pace. This performance was the result of a traditional focus on expense control, continued synergies from the optimization of our store and distribution networks, an increasing contribution from our fast-growing eCommerce business and lower financing costs as a result of debt reduction.
As the political and economic volatility of the past year reminds us, the performance of our business depends on many external factors, including the pace of economic and population growth, and the degree of consumer confidence, in the country. Over the past 109 years, the environmental conditions in which we operate have always been changing, yet we have consistently managed to outperform our industry peers. We have done so by giving our customers the best combination of selection, service and value in the marketplace, and by constantly embracing change and innovation. As we look ahead, this formula for success will continue to guide our efforts as we leverage our retailing and distribution networks to create more value for everyone touched by our business.
Over the past year, we continued to advance a multichannel marketing strategy aimed at optimizing the combined potential of our traditional store network and our fast-growing furniture.ca, leons.ca and thebrick.com eCommerce sites. In October, we completed the seamless transfer of our underlying eCommerce platform to a new third-party specialist (Shopify Plus), a move that has and will continue to deliver better performance at significantly lower cost. Equally important, this change has allowed us to focus our time and money on the development of a talented team of in-house eCommerce experts. They are focused on creating new applications to elevate the online customer experience and better align our in-store and online sales and marketing efforts. We can expect to see many new innovations in the months and years ahead, such as virtual reality tools that allow customers to see exactly how our products will look in their homes, prior to purchase.
These initiatives rest on a solid foundation. Over the past 10 years, we have increased our eCommerce revenue at a compound annual growth rate of more than 45 percent. What’s more, it is profitable in the present; EBITDA margins in our eCommerce business were more than double those achieved in our conventional retail network in 2018. An important source of revenue growth in its own right, our eCommerce businesses also continue to drive traffic into our stores. In conjunction with our distribution and service networks, they give LFL Group an unmatched ability to display, sell, distribute and service a rapidly expanding product line of furniture, home furnishings, mattresses, appliances and home electronics almost anywhere in Canada.
EXPANSION AND ACQUISITION
With 303 stores from coast to coast, we have an unequalled geographic presence in Canada. Yet we still see opportunity to grow our retail network through both expansion and acquisition. One of the attractions of combining Leon’s and The Brick was the complementary footprint of their respective operations. While debt reduction has taken priority during the past years, we have and will continue to build out the Leon’s network, especially in British Columbia where the banner is under-represented, and by the same token, we have and will continue to expand our network of Brick stores in eastern Canada.
We will also continue to assess other expansion and acquisition opportunities as our industry — which is still highly fragmented — continues to consolidate. This process of consolidation will continue to be driven by the impact of eCommerce and the growing strength of full-service, multichannel competitors such as LFL Group.
THIRD PARTY DISTRIBUTION
Just over a year ago, we opened an advanced distribution centre in Delta, British Columbia to serve the combined needs of our Brick and Leon’s divisions. In addition, this facility has been designed to provide cost-effective fulfillment to unrelated online retailers without their own distribution capabilities.
While the operating efficiency of the Delta distribution centre has validated our expectations, it has also been designed to support the build out of a new generation of stores that reflect our emerging multichannel strategy. In the years ahead, we see smaller scale showrooms that rely on new technologies to dramatically expand customer choice and provide a more fluid experience between our in-store and online sales channels. We also envision a more efficient and capable distribution network with growing capacity to track and manage shipto-home distribution from our suppliers.
Our experience in the Delta facility has given us confidence to extend this distribution model to eastern Canada where a new facility in Halifax is expected to meet the needs of established Leon’s stores, as well as the build out of The Brick banner, starting in 2021.
Through TransGlobal Service (TGS), LFL Group is the largest provider of after-sales service for major appliances in Canada. TGS fulfils the installation, repair and service requirements for Leon’s and The Brick, as well as a growing number of independent retail and wholesale businesses. The growth of this business continues to be fuelled by a growing trend for manufacturers and retailers to outsource warranty work as well as the rapid growth of direct-to-customer sales though eCommerce.
With its unmatched scale, geographic presence and industry-leading technology, TGS is positioned for strong growth in its existing business, yet we see enormous potential to expand its breadth of capabilities. One of the effects of the rapid growth of eCommerce has been a corresponding decline in the availability of after-sales service through traditional retailers. At the same time, time-pressed consumers are unsure of their options when something goes wrong with the growing range of large ticket items purchased online. We believe that the TGS model is well suited to provide installation and repair services for a wide range of additional home products and systems and continue to assess attractive growth opportunities in this area.
At the end of 2018, LFL Group owned a commercial real estate portfolio of 4.2 million square feet, most of it located in the heart of Canada’s largest and fastest growing communities. While this portfolio is carried on Leon’s balance sheet at historical cost, we are fully aware that it represents billions of dollars in potential residential and mixed-use development. Over the past year, we have continued to assess properties for their potential and explore opportunities with prospective development and investment partners to monetize the value of our real estate portfolio. One such property, the 40-acre site that is home to our head office and showroom in west Toronto, has been an obvious focal point in our considerations. This is a deliberate process with many facets, including necessary approvals, but we look forward to sharing any news on this front when the time is appropriate.
THE YEAR AHEAD
The difficult market conditions encountered in 2018 may well continue into the year ahead. System-wide revenue growth is expected to be modest given the recent slowdown in Canada’s economy, high levels of household debt and growing consumer uncertainty. Amid this environment, we will continue to focus on efficiently executing our marketing and merchandising programs to maximize market share, generating cost efficiency in our operations and reducing debt. As we have throughout our history, we will also continue to invest in and advance the strategic initiatives that will ensure sustainable growth in the years ahead. LFL Group has built an enviable position in the Canadian retailing landscape, with unmatched retail and distribution networks and abundant opportunity for growth in five key areas complementary to our business. After more than a century in business, we have successfully grown and adapted through many economic environments. I am confident this process will continue and that the best days of this storied organization are yet to come.
In closing, I wish to extend my appreciation to the executive leadership of Leon’s and The Brick, their talented corporate and franchised management teams, and the valued associates at all of our businesses for helping to make 2018 another record year for the company. On behalf of the entire executive leadership team, I would also like to thank Terry Leon, who retired in October as CEO after 16 years at the helm, a period of unprecedented growth. Terry has been instrumental in ensuring a smooth transition in leadership over the past year and continues to serve as Vice Chairman of the Board of Directors.
With your continued support, I look forward to reporting on our progress in the year ahead.
"Edward F. Leon"Edward F. Leon President and Chief Executive Officer LFL Group