Shermag posts 3Q loss as revenues drop 31.9%
3Q performance hurt by the strengthening Canadian dollar
Michael J. Knell -- Furniture Today, February 15, 2006
SHERBROOKE, Quebec — Full-line manufacturer and importer Shermag posted a net loss of C$4.3 million in its third quarter ended Dec. 30, or 32 Canadian cents per share, as net revenues plunged 31.9% to C$46.5 million from last year’s comparable quarter.
In last year’s third quarter, the company had earnings of C$2.3 million, or 17 Canadian cents per share.
President and CEO Jeff Casselman told analysts that third-quarter performance was hurt by the strengthening Canadian dollar and by unusually high shipments in last year’s quarter, including strong sales to a U.S. retailer that weren’t repeated in the latest quarter, and to generally higher shipments last year as Shermag worked off backlogs built up during labour disruptions.
The company budgeted for a 77-cent dollar against the U.S. greenback while reality produced an 81-cent dollar, he said. The U.S.-Canadian exchange rate had a negative impact on sales of about C$2.5 million during the quarter, the company said.
Shermag continues to implement its “business transformation plan” that calls for lower-margin products such as glider rockers to be made in Asia while domestic production consolidates and shifts to a made-to-order model. This resulted in after-tax restructuring charges of C$3.1 million, or 24 Canadian cents per share, in the third quarter.
Gross revenue was C$49 million, compared to C$72.2 million in last year’s third quarter.
Casselman said that “underlying operational performance in the third quarter improved compared to the second quarter this year, as can be seen when the net loss is adjusted for restructuring charges. Excluding restructuring charges, our net loss for the third quarter would have been nine cents per share, compared to a net loss of 12 cents per share for the second quarter this year.
Export sales in the latest quarter were US$27.8 million, a drop of 29.9%. In Canadian dollars, exports fell 34.7% to C$33.6 million, taking into account the weaker U.S. dollar.
Casselman told analysts he expects Shermag’s U.S. business will improve once the changes taking place in the department store sector — particularly at Macy’s, The May Co. and Federated — are completed. “Effective this fall, we will have three of five core bedrooms with May Co.,” he said. “We’re also core with their acquirer (Federated).”
These retailers will represent about 26% of Shermag’s business, he said.
Reflecting a soft retail scene in Canada, the company said domestic sales were down 25.6% to $15.4 million in the third quarter.
Casselman said restructuring has proven more difficult to implement than anticipated. “These difficulties are primarily related to a lower-than-expected learning curve for the integration of new products and production techniques into some of our larger manufacturing facilities,” he said.
During the quarter, Shermag consolidated sawmill operations in Notre-Dame-de-Montauban, Québec, closing its Megabois plant in Lac-Mégantic, Quebec, and laying off about 45 workers.
Shermag will close its Sofas International factory in Saint-Léonard at the end of February and shift all upholstery operations to the Jaymar plant in Terrebonne. Some 70 employees will be laid off. In the third quarter, Shermag laid off 165 employees at other facilities “to better align production output with demand.”
Asian imports should account for about 26% of Shermag’s shipments by the end of the fiscal year on March 31, Casselman said.
“Once concluded, this transformation will result in improved margins,” he said. “Nevertheless, in the short term, the implementation of the plan has, and will continue to, put downward pressure on productivity and margins.”
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Shermag 3Q revenues drop 31.9%
Mar 5, 2006
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