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Michael Knell

Leon's third-quarter earnings decline 15% as costs outpace sales

TORONTO — After announcing its blockbuster decision earlier this week to acquire its archrival The Brick, retailer Leon's Furniture posted a 15% decline in net profit for the recently ended third quarter, attributing the fall to increased operating costs in a time of flat sales growth.

Leon's system-wide revenue in the quarter ended Sept. 30 was C$223.7 million, essentially unchanged from the third quarter of 2011.

Corporate store sales were down 0.1% to C$174.2 million, which the company said "reflected a continuation of waning consumer confidence, a decrease in housing starts, and an overall increase in consumer debt resulting in reduced consumer spending."

Corporate same-store sales decreased 3.3%.

Meanwhile, sales by Leon's growing franchise network were up 0.5% year-over-year to C$49.5 million.

Net income for the quarter 2012 was C$13.1 million or 19 cents per share, compared with C$15.3 million or 22 cents per share a year earlier, a drop of 13.6% on a per-share basis.

The company said its gross margin fell 1.5 points to 40.9%, mainly because a weakening Canadian dollar hiked the cost of imported product. Operating expenses were also up 3.1% for the quarter due to a C$1.2 million uptick in marketing and C$858,000 in expenses related to the costs of opening four new stores in the fourth quarter of 2011.

For the nine months ended Sept. 30, system wide sales were C$632 million, up 1.2% from a year earlier. Corporate store sales were up 0.9% to C$493.7 million while franchise store sales were up 2% to C$138.4 million.

Net income was C$30.7 million or 44 cents per share, a decrease of 17% per share.

During the third quarter, Leon's opened renovated stores in Sault Ste. Marie and Sudbury, Ontario, as well as its third Appliance Canada showroom in Toronto.

In October, Leon's opened a replacement franchise store in St. John, New Brunswick while securing sites for four corporate stores in Orangeville and Brantford, Ontario; Sherbrooke, Quebec; and Rocky View County, Alberta, which is just north of Calgary. The company intends to open most of these stores by the second quarter of 2013.

Looking out to the rest 2012 and beyond, Leon's isn't suggesting that sales will rebound.

"The slowdown in the economy continues to affect our results and we do not see any immediate signs of improvement," President and CEO Terry Leon said in a note to shareholders. "As such, we anticipate that consumer discretionary spending will remain soft for the balance of 2012.

"To help counter this, we will continue our strong marketing and merchandising campaign," he added. "The opening of four new stores in the latter part of 2011 should also aid our sales in the fourth quarter of 2012. Even with these measures in place, growing profits for the remainder of 2012 will be challenging."

At the end of October, Leon's operated a total of 72 corporate and franchise stores in every Canadian province except British Columbia.

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