Reitmans Canada Limited - Management Reports 2020

==> picture [200 x 58] intentionally omitted <==

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following Management’s Discussion and Analysis ("MD&A") of Reitmans (Canada) Limited and its subsidiaries (“Reitmans” or the “Company”) should be read in conjunction with the audited consolidated financial statements of Reitmans as at and for the fiscal years ended February 1, 2020 and February 2, 2019 and the notes thereto which are available on the SEDAR website at www.sedar.com. This MD&A is dated May 1, 2020.

All financial information contained in this MD&A and Reitmans’ audited consolidated financial statements has been prepared in accordance with International Financial Reporting Standards (“IFRS”), also referred to as Generally Accepted Accounting Principles (“GAAP”), as issued by the International Accounting Standards Board (“IASB”). All monetary amounts shown in the tables in this MD&A are in millions of Canadian dollars unless otherwise indicated, except per share and strike price amounts. The audited consolidated financial statements and this MD&A were reviewed by Reitmans’ Audit Committee and were approved by its Board of Directors on May 1, 2020.

Unless otherwise indicated, all comparisons of results for the 13 weeks ended February 1, 2020 (“fourth quarter of 2020”) are against results for the 13 weeks ended February 2, 2019 (“fourth quarter of 2019”) and all comparisons of results for the 52 weeks ended February 1, 2020 (“fiscal 2020”) are against the results for the 52 weeks ended February 2, 2019 (“fiscal 2019”). The Company’s fiscal year ends on the Saturday closest to the end of January. As outlined in the “New Accounting Policies Adopted in Fiscal 2020” section of this MD&A, the Company adopted IFRS 16 – Leases , using the modified retrospective approach, effective for the annual reporting period beginning on February 3, 2019. Accordingly, comparative figures as at February 2, 2019, for the fourth quarter of 2019, and for the fiscal 2019, have not been restated and continue to be reported under IAS 17 – Leases . For analysis purposes only, this MD&A also shows, where applicable, amounts for the fourth quarter of 2020 and fiscal 2020 as if the Company continued to report under IAS 17 – Leases, and had not adopted IFRS 16.

Current developments

The outbreak of the coronavirus disease (COVID-19) (the “outbreak”), which was declared a pandemic on March 11, 2020 by the World Health Organization, is having significant impacts for the Company. The measures adopted by the Federal and provincial governments in order to mitigate the spread of the outbreak required the Company to close all of its retail locations across the country effective March 17, 2020 until further notice. From March 18, 2020, the Company’s only sales are derived from its e- commerce channel. The duration and impact of the outbreak is unknown and may influence consumer shopping behavior and consumer demand including online shopping. Given all the uncertainty surrounding the outbreak, the Company is currently unable to predict when it will reopen its retail locations. In addition, recent temporary factory closures in China have resulted in disruptions to the Company’s supply chain with delays in the delivery of merchandise and increased freight costs.

For the year ended February 1, 2020, the Company incurred a net loss of $87.4 million. The Company’s current liabilities total $189.7 million as at February 1, 2020 and are comprised primarily of trade payables for the purchase of merchandise and lease liability payments to landlords for rent of retail locations. As at February 1, 2020, the Company held liquid current assets of $89.4 million comprised of cash and cash equivalents. However, based on the Company’s liquidity position as of the date of this MD&A, including the termination and reduction in availabilities under the Company’s credit facilities, and in light of the uncertainty surrounding the outbreak, management estimates that it will need additional financing to meet its current and future financial obligations. In order to conserve cash to

- 1 -

finance its ongoing operations, the Company has suspended the declaration and payment of any dividends, has, subsequent to year end, temporarily laid off 90% of its retail store employees and 30% of its head office employees and is currently minimizing purchases where possible. The Company is actively seeking additional financing and is also exploring various alternatives. The Company is currently in discussions with its banker regarding alternative financing arrangements. Other financing options, such as mortgage financing of the Company’s property, are also being considered. However, there is no assurance that financing can be obtained in the limited time period required and in the quantum needed. If the Company is unable to obtain such financing in the limited time period required, it may be unable to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to resume normal operations, generate future revenues and profitable operations and obtain additional financing. As a result, these events and conditions indicate a material uncertainty exists that may cast significant doubt about the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.

The audited consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The audited consolidated financial statements as at and for the year ended February 1, 2020 do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate. Such adjustments could be material. It is not possible to reliably estimate the length and severity of the outbreak and the impact on the financial results and financial condition of the Company in future periods. In fiscal 2021, the Company will take into consideration the most recent developments and impacts of the outbreak including updated assessments of future cash flows. Any additional impacts resulting from the outbreak will be reflected in the financial results of fiscal 2021, if applicable.

Additional information about Reitmans is available on the Company’s website at www.reitmanscanadalimited.com 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. Consequently, actual future results may differ materially from the anticipated results expressed in forward-looking statements, which reflect the Company’s expectations only as of the date of this MD&A. Forward-looking statements are based upon the Company’s current estimates, beliefs and assumptions, which are based on management’s perception of historical trends, current conditions and currently expected future developments, as well as other factors it believes, are appropriate in the circumstances. This MD&A contains forward-looking statements about the Company’s objectives, plans, goals, aspirations, strategies, financial condition, results of operations, cash flows, performance, prospects, opportunities and legal and regulatory matters. Specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to the Company’s belief in its strategies and its brands and their capacity to generate long-term profitable growth, future liquidity, planned capital expenditures, amount of pension plan contributions, status and impact of systems implementation, the ability of the Company to successfully implement its strategic initiatives and cost reduction and productivity improvement initiatives as well as the impact of such initiatives. These specific forwardlooking statements are contained throughout this MD&A including those listed in the “Operating Risk Management” and “Financial Risk Management” sections of this MD&A. Forward-looking statements are typically identified by words such as “expect”, “anticipate”, “believe”, “foresee”, “could”, “estimate”, “goal”, “intend”, “plan”, “seek”, “strive”, “will”, “may” and “should” and similar expressions, as they relate to the Company and its management.

- 2 -

Numerous risks and uncertainties could cause the Company’s actual results to differ materially from those expressed, implied or projected in the forward-looking statements, including:

changes in economic conditions, including economic recession or changes in the rate of inflation or deflation, employment rates, interest rates, currency exchange rates or derivative prices;
significant economic disruptions caused by global health risks (such as the COVID-19 outbreak) that influence consumer demand and hamper the ability to get merchandise on a timely basis;
heightened competition, whether from current competitors or new entrants to the marketplace;
the changing consumer preferences toward e-commerce, online retailing and the introduction of new technologies;
seasonality and weather;
the inability of the Company’s information technology (“IT”) infrastructure to support the requirements of the Company’s business, or the occurrence of any internal or external security breaches, denial of service attacks, viruses, worms and other known or unknown cyber security or data breaches;
failure to realize benefits from investments in the Company’s new IT systems;
the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrinkage;
failure to realize anticipated results, including revenue growth, anticipated cost savings or operating efficiencies associated with the Company’s major initiatives, including those from restructuring;
changes in the Company’s income, capital, property and other tax and regulatory liabilities,
including changes in tax laws, regulations or future assessments.

This is not an exhaustive list of the factors that may affect the Company’s forward-looking statements. Other risks and uncertainties not presently known to the Company or that the Company presently believes are not material could also cause actual results or events to differ materially from those expressed in its forward-looking statements. Additional risks and uncertainties are discussed in the Company’s materials filed with the Canadian securities regulatory authorities from time to time. The reader should not place undue reliance on any 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.

NON-GAAP FINANCIAL MEASURES

The Company has identified several key operating performance measures and non-GAAP financial measures which management believes are useful in assessing the performance of the Company; however, readers are cautioned that some of these measures may not have standardized meanings under IFRS and, therefore, may not be comparable to similar terms used by other companies.

In addition to discussing earnings in accordance with IFRS, this MD&A provides adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) as a non-GAAP financial measure. Adjusted EBITDA is defined as net earnings before income tax expense/recovery, dividend income, interest income, net change in fair value and loss on disposal of marketable securities, interest expense, impairment of goodwill, depreciation, amortization and net impairment charges. The following table reconciles the most comparable GAAP measure, net earnings or loss, to adjusted EBITDA. Management believes that adjusted EBITDA is an important indicator of the Company’s ability to generate liquidity through operating cash flow to fund working capital needs and fund capital expenditures and uses the metric for this purpose. The exclusion of dividend

- 3 -

income, interest income and expense and the net change in fair value and loss on disposal of marketable securities eliminates the impact on earnings derived from non-operational activities. The exclusion of depreciation, amortization and impairment charges eliminates the non-cash impact. The intent of adjusted EBITDA is to provide additional useful information to investors and analysts. The measure does not have any standardized meaning under IFRS. Although depreciation, amortization and impairment charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, as such, adjusted EBITDA does not reflect any cash requirements for these replacements. Adjusted EBITDA should not be considered either as discretionary cash available to invest in the growth of the business or as a measure of cash that will be available to meet the Company’s obligations. Other companies may calculate adjusted EBITDA differently. From time to time, the Company may exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance. The exclusion of certain items does not imply that they are non-recurring. Adjusted EBITDA should not be used in substitute for measures of performance prepared in accordance with IFRS or as an alternative to net earnings, net cash provided by operating, investing or financing activities or any other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with IFRS. Although adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, it has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of the Company’s results as reported under IFRS.

The Company considers results from operating activities a useful measure of the Company’s performance from its retail operations. Given that the Company has recorded a goodwill impairment charge in fiscal 2020, it has also determined that a useful non-GAAP financial measure would be results from operating activities before impairment of goodwill, as noted in the “OPERATING RESULTS FOR FISCAL 2020 COMPARED TO FISCAL 2019” and “SUMMARY OF QUARTERLY RESULTS” sections of this MD&A. Additionally, (loss) earnings per share excluding impairment of goodwill both on a basic and diluted basis have been presented, which removes the impact of impairment of goodwill on net (loss) earnings used for calculation purposes. Both of these non-GAAP financial measures are considered useful information and should not be considered in isolation or used in substitute for measures of performance prepared in accordance with IFRS.

The Company uses a key performance indicator (“KPI”), comparable sales, to assess store performance and sales growth. The Company engages in an omnichannel approach in connecting with its customers by appealing to their shopping habits through either online or store channels. This approach allows customers to shop online for home delivery, purchase in any of our store locations or ship to home from another store when the products are unavailable in a particular store. Due to customer cross-channel behaviour, the Company reports a single comparable sales metric, inclusive of store and e-commerce channels. Comparable sales are defined as sales generated by stores that have been continuously open during both of the periods being compared and include e-commerce sales. Comparable sales exclude sales from wholesale accounts. The comparable sales metric compares the same calendar days for each period. Although this KPI is expressed as a ratio, it is a non-GAAP financial measure that does not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures used by other companies. Management uses comparable sales in evaluating the performance of stores and online sales and considers it useful in helping to determine what portion of new sales has come from sales growth and what portion can be attributed to the opening of new stores. Comparable sales is a measure widely used amongst retailers and is considered useful information for both investors and analysts. Comparable sales should not be considered in isolation or used in substitute for measures of performance prepared in accordance with IFRS.

- 4 -

The following table reconciles net (loss) earnings to adjusted EBITDA:

	For the fourth quarter of For fiscal
	2020 2020 Excluding impact of IFRS 16 (1) 2019 2020 2020 Excluding impact of IFRS 16 (1) 2019
Net (loss) earnings	$ (51.7) $ (51.4) $ (8.9) $(87.4) $(84.3) $ 6.8
Depreciation, amortization and net impairment losses	24.6 8.0 9.1 103.0 33.5 37.9
Dividend income	- - (0.7) (1.4) (1.4) (2.5)
Interest income	(0.4) (0.4) (0.7) (1.7) (1.7) (2.2)
Impairment of goodwill	- - - 11.8 11.8 -
Net change in fair value and loss on disposal of marketable securities	- - 8.5 8.3 8.3 12.3
Interest expense on lease liabilities	1.8 - - 7.5 - -
Income tax expense (recovery)	29.2 29.3 (0.3) 22.9 24.0 5.4
Adjusted EBITDA	$ 3.5 $ (14.5) $ 7.0 $ 63.0 $ (9.8) $ 57.7
Adjusted EBITDA as % of sales	1.5% (6.3%) 3.1% 7.2% (1.1%) 6.3%

1 Adjusted EBITDA for the fourth quarter of 2020 and fiscal 2020 excluding impact of IFRS 16 assumes the Company continued to report under IAS 17 – Leases and did not adopt IFRS 16. Under IFRS 16, the nature and timing of expenses related to operating leases have changed as the straightline operating lease expenses have been replaced with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Accordingly, IFRS 16 had a favourable impact of approximately $18.0 million and $72.8 million on adjusted EBITDA for the fourth quarter of 2020 and for fiscal 2020, respectively, as operating lease expenses have been replaced with depreciation and interest expenses, which are not included in the calculation of adjusted EBITDA.

OVERVIEW

The Company has a single reportable segment that derives its revenue primarily from the sale of women’s specialty apparel to consumers through its retail banners. The Company’s stores are primarily located in malls and retail power centres across Canada while also offering e-commerce website shopping for all of its banners. The online channels provide customers convenience, selection and ease of purchase, while enhancing customer loyalty and continuing to build the brands. The Company currently operates under the following banners:

==> picture [107 x 46] intentionally omitted <==

The Reitmans banner, operating stores averaging 4,600 sq. ft., is one of Canada’s largest women’s apparel specialty chains and a leading fashion brand. Reitmans has developed strong customer loyalty through superior service, insightful marketing and quality merchandise.

==> picture [115 x 38] intentionally omitted <==

Penningtons is a leader in the Canadian plus-size market, offering trend-right styles and affordable quality for plus-size fashion sizes 12–32. Penningtons operates stores averaging 6,000 sq. ft. in power centres across Canada.

- 5 -

==> picture [137 x 28] intentionally omitted <==

Addition Elle is a fashion destination for plus-size women with a focus on fashion, quality and fit delivering the latest trends to updated fashion essentials in an inspiring shopping environment. Addition Elle operates stores averaging 6,000 sq. ft. in major malls and power centres nationwide.

==> picture [90 x 33] intentionally omitted <==

RW & CO. operates stores averaging 4,500 sq. ft. in premium locations in major shopping malls, catering to a customer with an urban mindset by offering fashions for men and women.

==> picture [101 x 48] intentionally omitted <==

Thyme Maternity is a leading fashion brand for moms-to-be, offering current styles for every aspect of life, from casual to work, plus a complete line of nursing fashions and accessories. Thyme operates stores averaging 2,000 sq. ft. in major malls and power centres across Canada.

RETAIL BANNERS

Reitmans Penningtons Addition Elle RW & CO. Thyme Maternity Total	Number of stores at February 2, 2019 Q1 Closings Q2 Closings Q3 Openings Q3 Closings Q4 Closings Number of stores at February 1, 2020
	263 (4) (1) 3 (1) - 260 115 - (1) - (2) (1) 111 81 (1) - - (1) (2) 77 83 (1) (1) - - (1) 80 58 - - - (3) (1) 54
	600 (6) (3) 3 (7) (5) 582

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.

- 6 -

THREE-YEAR REVIEW OF SELECTED FINANCIAL INFORMATION

Total stores at end of fiscal year Sales Gross profit (Loss) earnings before income taxes Net (loss) earnings (Loss) earnings per share Basic Diluted Total assets2 Total non-current liabilities2 Dividends per share	Fiscal 2020 Fiscal 20191 Fiscal 2018 1
	582 600 642 $ 869.5 $ 923.0 $ 964.4 444.4 509.5 524.3 (64.5) 12.2 (16.6) (87.4) 6.8 (16.0) (1.56) 0.11 (0.25) (1.56) 0.11 (0.25) 560.2 492.8 499.7 176.7 34.0 34.3 $ 0.15 $ 0.20 $ 0.20

1 The Company adopted IFRS 16 – Leases, using the modified retrospective approach, effective for fiscal 2020, beginning on February 3, 2019. Accordingly, comparative figures for fiscal 2019 and fiscal 2018 have not been restated and continue to be reported under IAS 17. See note 3(a) in the audited consolidated financial statements for fiscal 2020.

2 As a result of the adoption of IFRS 16, Fiscal 2020 total assets and total non-current liabilities include $198.1 of right-of-use assets and $152.3 of lease liabilities, respectively.

The Canadian retail marketplace reflects consumers shopping behaviours that include traditional instore purchases and online shopping. To enhance the customers’ online and in-store experiences, the Company invests significantly in improvements in e-commerce fulfillment and technology. The Company is well positioned in an omnichannel shopping environment with a store portfolio that is located in highly desirable major malls and power centres across Canada and a compelling e- commerce offering.

The value of the Canadian dollar vis-à-vis the U.S. dollar is a significant factor that can impact profitability of the retail operations. A focus on improved sourcing practices and reducing costs, while maintaining a value proposition for customers, along with managing foreign exchange market risks through U.S. dollar foreign exchange forward contract purchases allows the Company to mitigate any negative impact.

Sales

In fiscal 2018, despite the reduced number of stores, sales increased over the previous fiscal year with sales growth driven primarily through e-commerce and wholesale channels. Fiscal 2018 included an additional week of sales due to the Company’s floating year-end. Stores continued to be a significant factor in responding to customers shopping behaviours in an omnichannel environment, offering a powerful, positive brand experience that capitalizes on the unique advantage of a strong network of stores.

In fiscal 2019, the Company continued its execution of an optimal mix of stores (including closure of all Hyba store locations) in an omnichannel retail landscape and investing in its e-commerce growth, by leveraging the inventory in its network of stores via its ship from store initiative. The reduction in sales in fiscal 2019 when compared to fiscal 2018 was due to the inclusion of an additional week of sales in fiscal 2018 and the continued execution of a strategy to close underperforming stores to optimize overall operating results.

- 7 -

In fiscal 2020, the reduction in sales is primarily due to lower sales performance in the Company’s plus-size banners and the reduced number of stores. Strategic brand initiatives in the plus-size banners implemented early in the fiscal year failed to resonate with their customer base, negatively affecting sales. Although a variety of corrective measures was implemented, the implementation of these corrective strategies occurred late in fiscal 2020 and did not have a positive impact for the fiscal 2020. In the first half of fiscal 2020, the Company completed the deployment of its ship from store initiative across all banners, enhancing the availability of inventory across all channels.

Gross Profit

Overall, the Company’s gross profit and net earnings over the past three fiscal years have been significantly impacted by weakness in the Canadian dollar in relation to the U.S. dollar. The weakening of the Canadian dollar has resulted in increased merchandise costs as virtually all merchandise payments are settled in U.S. dollars. Gross profit for fiscal 2018 was negatively impacted by higher promotional activity and foreign exchange. In fiscal 2019, the Company’s gross profit declined due to the inclusion of an extra week of operating results in fiscal 2018 and from higher promotional activity, despite a positive foreign exchange impact on merchandise costs in cost of goods sold resulting from the purchase of foreign exchange forward contracts with more favorable rates. In fiscal 2020, the Company’s gross profit declined primarily due to lower sales and higher promotional activity in the Company’s plus-size banners despite a positive foreign exchange impact on U.S. dollar denominated purchases included in cost of goods sold.

Summary

As at February 1, 2020, the Company’s liquidity position consisted of $ 89.4 million (February 2, 2019 - $112.5 million) in cash and cash equivalents, a positive working capital position and no long-term debt (other than its lease liabilities). As at the end of fiscal 2020, inventory levels were approximately the same as compared to the end of fiscal 2019, whereas inventory levels at the end of fiscal 2019 were higher as compared to the end of fiscal 2018 due to planned earlier receipts of spring merchandise. The Company manages its capital expenditures, which were $27.0 million in fiscal 2018, $26.1 million in fiscal 2019 and $23.5 million in fiscal 2020. These capital expenditures are primarily investments related to digital technology and retail system upgrades, distribution and handling system improvements and existing store renovations and new store builds. Subsequent to the end of fiscal 2020, there were significant changes to the Company’s cash reserves and available credit facilities as outlined in “current developments” section of this MD&A and in notes 2b and 26 to the audited consolidated financial statements.

- 8 -

STRATEGIC INITIATIVES

The Company has undertaken a number of strategic initiatives to enhance its brands, improve productivity and profitability at all levels through system advances and foster a culture of process improvements.

Ongoing and new Company initiatives include:

improvements. Ongoing and new Company initiatives include:
INITIATIVES	STATUS
With the poor operating results of its plus-size banners during fiscal 2020, the Company re-organized its plus-size leadership team in the third quarter of fiscal 2020.	The new leadership team has reviewed all strategic aspects of the plus-size banners and corrective action has been taken to improve operating results, including aligning resources by focusing on the target market of each plus-size banner.
Related to the growth of its e-commerce business, the Company planned to optimally fulfill orders by leveraging the inventory in its network of stores throughout Canada (ship from store). This initiative includes enhancing inventory visibility and availability across all channels to improve speed of delivery, accuracy of allocation and profitability.	In fiscal 2020, the Company completed the deployment of its retail system upgrades and distribution and handling systems. Under its initiative to optimally fulfill online and in-store orders and minimize split shipments, system improvements to enhance the availability of inventory across all channels was completed in the third quarter of fiscal 2020, while system and process improvements aimed at minimizing split shipments was completed near the end of fiscal 2020.
The Company is committed to deliver best-in-class digital customer experiences. Strategically, the Company has adopted a digital-first approach, to facilitate rapid and sustainable growth in the digital and omnichannel retail environment. This includes continued improvement to the customer’s mobile experience along with an initiative to provide a more personalized shopping experience for its customers utilizing improved data quality to deliver a more individualized and relevant product offering.	The Company continues to enhance its core e-commerce platform, evolve its customer relationship management and marketing automation infrastructure and optimize its customer data management capabilities.
With the objective of improving the customer’s shopping experience, the Company will replace its current point-of- sale system (“POS”) in all stores.	As a consequence of the current economic environment, the rollout of the new POS is being postponed.

- 9 -

OPERATING RESULTS FOR FISCAL 2020 COMPARED TO FISCAL 2019

The poor results from operating activities for fiscal 2020 are primarily attributed to the disappointing results from the plus-size banners. Strategic brand initiatives implemented early in the fiscal year failed to resonate with their customer base. Although a variety of corrective measures were implemented to improve profitability, the implementation of these corrective strategies occurred late in fiscal 2020 and did not have a positive impact on the operating results for fiscal 2020.

Sales Cost of goods sold Gross profit Gross profit % Selling, distribution and administrative expenses Results from operating activities before impairment of goodwill Impairment of goodwill Results from operating activities Net finance costs (Loss) earnings before income taxes Income tax expense Net (loss) earnings Adjusted EBITDA (Loss) earnings per share: Basic Diluted (Loss) earnings per share excluding impairment of goodwill: Basic Diluted		Excluding Impact of IFRS 16(1)
	Fiscal 2020 Fiscal 2019 $ Change	Fiscal 2020 Fiscal 2019 $ Change
	$ 869.5 $ 923.0 $ (53.5) 425.1 413.5 11.6	$ 869.5 $ 923.0 $ (53.5) 425.1 413.5 11.6
	444.4 509.5 (65.1) 51.1% 55.2% 484.1 491.3 (7.2)	444.4 509.5 (65.1) 51.1% 55.2% 487.4 491.3 (3.9)
	(39.7) 18.2 (57.9) 11.8 - 11.8	(43.0) 18.2 (61.2) 11.8 - 11.8
	(51.5) 18.2 (69.7) (13.0) (6.0) (7.0)	(54.8) 18.2 (73.0) (5.5) (6.0) 0.5
	(64.5) 12.2 (76.7) 22.9 5.4 17.5	(60.3) 12.2 (72.5) 24.0 5.4 18.6
	$ (87.4) $ 6.8 $ (94.2)	$ (84.3) $ 6.8 $(91.1)
	$ 63.0 $ 57.7 $ 5.3	$ (9.8) $ 57.7 $ (67.5)
	$ (1.56) $ 0.11 $ (1.67) (1.56) 0.11 (1.67) $ (1.35) $ 0.11 $ (1.46) (1.35) 0.11 (1.46)	$ (1.51) $ 0.11 $ (1.62) (1.51) 0.11 (1.62) $ (1.29) $ 0.11 $ (1.40) (1.29) 0.11 (1.40)

1 Excluding impact of IFRS 16 assumes the Company continued to report under IAS 17 – Leases in fiscal 2020 and did not adopt IFRS 16.

Sales

Sales for fiscal 2020 decreased by $53.5 million or 5.8% to $869.5 million, primarily attributable to lower sales in the plus-size banners, a net reduction of 18 stores and unseasonable weather conditions that were prevalent during the early portion of fiscal 2020. The Company continues to execute on its plan of selling in the omnichannel retail environment by reducing its store presence in select markets while enhancing its e-commerce capabilities.

Comparable sales, which include in-store and e-commerce sales, decreased 1.3%. The decrease was primarily due to store traffic being down by 2.2% for fiscal 2020.The Company continues to experience strong growth through its online channel.

Gross Profit

Gross profit for fiscal 2020 decreased $65.1 million or 12.8%, to $444.4 million as compared with $509.5 million for fiscal 2019 primarily attributable to lower sales and a net reduction of 18 stores. Gross profit as a percentage of sales for fiscal 2020 decreased to 51.1% from 55.2% for fiscal 2019 primarily due to increased promotional activity mainly in the plus-size banners, partially offset by a

- 10 -

positive foreign exchange impact on U.S. dollar denominated purchases included in cost of goods sold.

Selling, Distribution and Administrative Expenses

Total selling, distribution and administrative expenses for fiscal 2020 decreased 1.5%, or $7.2 million to $484.1 million. This decrease is primarily attributable to a reduction in store operating costs due to fewer stores, lower non-IFRS 16 related depreciation, amortization and net impairment losses (i.e. excluding depreciation and net impairment losses on right-of-use assets) and decreases in employee performance incentive and termination costs, partially offset by increases in freight and advertising costs.

Total selling, distribution and administrative expenses for fiscal 2020, excluding the impact of IFRS 16, amounted to $487.4 million. IFRS 16 had a favourable impact of $3.3 million, as depreciation expense related to the right-of-use assets is lower than the previous operating lease expenses under IAS 17.

Impairment of Goodwill

Following a review of the profitability of the Addition Elle banner, the Company’s impairment testing concluded that the carrying value of goodwill exceeded the recoverable amount (refer to note 9 of the audited consolidated financial statements for fiscal 2020). As a result, the Company recorded a goodwill impairment charge of $11.8 million in fiscal 2020.

Net Finance Costs

Net finance costs were $13.0 million for fiscal 2020 as compared to $6.0 million for fiscal 2019. This change of $7.0 million is primarily attributable to the following:

an increase of $7.5 million in interest expense on lease liabilities due to the impact of the adoption of IFRS 16;
a foreign exchange loss of $0.5 million for fiscal 2020 compared to a gain of $1.5 million for fiscal 2019, largely attributable to the foreign exchange impact on U.S. denominated monetary assets and liabilities;
a $1.6 million decrease in finance income resulting from a $1.1 million decrease in dividend income for fiscal 2020 due to the disposal of the marketable securities portfolio, combined with a $0.5 million decrease in interest income due to lower cash balances held throughout fiscal 2020; partially offset by
a $4.0 million decrease in finance costs due to the $8.3 million net change in fair value and loss on disposal of marketable securities for fiscal 2020 compared to the $12.3 million net change in fair value and loss on disposal of marketable securities for fiscal 2019;

Excluding the $7.5 million increase in interest expense due to the impact of IFRS 16, net finance costs were $5.5 million for fiscal 2020 as compared to $6.0 million for fiscal 2019.

Income Taxes

The income tax expense for fiscal 2020 amounted to $22.9 million for an effective tax rate of 35.5%. The effective tax rate was negatively impacted by unrecognized deferred tax assets on temporary timing differences, including operating losses carry forward and $8.3 million of capital losses on marketable securities, as well as the impact of the non-deductible goodwill impairment charge of $11.8 million. The Company’s effective tax rates include the impact of changes in substantively enacted tax rates in various tax jurisdictions in Canada.

- 11 -

Net Loss

Net loss for fiscal 2020 was $87.4 million ($1.56 basic and diluted loss per share) as compared with $6.8 million net earnings ($0.11 basic and diluted earnings per share) for fiscal 2019. This unfavourable change of $94.2 million included an unfavourable impact of IFRS 16 of $3.1 million. Excluding this $3.1 million impact of IFRS 16, the deterioration in net earnings of $91.1 million is primarily attributable to lower sales, the decrease in gross profit, the goodwill impairment charge and an increase in income tax expense, partially offset by reduced store operating costs.

Excluding the impact of the impairment of goodwill in fiscal 2020, net loss for fiscal 2020 was $75.6 million ($1.35 basic and diluted loss per share) compared to $6.8 million net earnings ($0.11 basic and diluted earnings per share) for fiscal 2019.

Adjusted EBITDA

Adjusted EBITDA for fiscal 2020 was $63.0 million as compared with $57.7 million for fiscal 2019. The increase in adjusted EBITDA includes a favourable impact from the adoption of IFRS 16 of $72.8 million. Excluding this $72.8 million impact of IFRS 16, adjusted EBITDA for fiscal 2020 was ($9.8) million as compared with $57.7 million for fiscal 2019, a decrease of $67.5 million. The decrease is primarily attributable to the decrease in gross profit, as noted above.

OPERATING RESULTS FOR THE FOURTH QUARTER OF 2020 COMPARED TO THE FOURTH QUARTER OF 2019

Sales Cost of goods sold Gross profit Gross profit % Selling, distribution and administrative expenses Results from operating activities Net finance (costs) income (Loss) earnings before income taxes Income tax expense (recovery) Net (loss) earnings Adjusted EBITDA (Loss) earnings per share: Basic Diluted		Excluding Impact of IFRS 16(1)
	Fiscal 2020 Fiscal 2019 $ Change	Fiscal 2020 Fiscal 2019 $ Change
	$ 229.2 $ 226.9 $ 2.3 125.2 107.8 17.4	$ 229.2 $ 226.9 $ 2.3 125.2 107.8 17.4
	104.0 119.1 (15.1) 45.4% 52.5% 125.1 121.0 4.1	104.0 119.1 (15.1) 45.4% 52.5% 126.5 121.0 5.5
	(21.1) (1.9) (19.2) (1.4) (7.3) 5.9	(22.5) (1.9) (20.6) 0.4 (7.3) 7.7
	(22.5) (9.2) (13.3) 29.2 (0.3) 29.5	(22.1) (9.2) (12.9) 29.3 (0.3) 29.6
	$ (51.7) $ (8.9) $ (42.8)	$ (51.4) $ (8.9) $ (42.5)
	$ 3.5 $ 7.0 $ (3.5)	$ (14.5) $ 7.0 $ (21.5)
	$ (1.06) $ (0.14) $ (0.92) (1.06) (0.14) (0.92)	$ (1.06) $ (0.14) $ (0.92) (1.06) (0.14) (0.92)

1 Excluding impact of IFRS 16 assumes the Company continued to report under IAS 17 – Leases, in the fourth quarter of 2020 and did not adopt IFRS 16.

Sales

Sales for the fourth quarter of 2020 increased by $2.3 million or 1.0% to $229.2 million, primarily attributable to sales growth in the Company’s e-commerce channel, despite a net reduction of 18 stores. The Company continues to execute against a plan of selling in the omnichannel retail environment by reducing its store presence in select markets while enhancing its e-commerce capabilities.

- 12 -

Comparable sales, which include in-store and e-commerce sales, increased 5.0%. This increase was primarily due to the overall number of transactions increasing by 3.1%. The Company continues to experience strong growth through its online channel.

Gross Profit

Gross profit for the fourth quarter of 2020 decreased $15.1 million or 12.7%, to $104.0 million as compared with $119.1 million for the fourth quarter of 2019. Gross profit as a percentage of sales for the fourth quarter of 2020 decreased to 45.4% from 52.5% for the fourth quarter of 2019 primarily due to increased promotional activity mainly in the plus-size banners, partially offset by a positive foreign exchange on U.S. dollar denominated purchases included in cost of goods sold.

Selling, Distribution and Administrative Expenses

Total selling, distribution and administrative expenses for the fourth quarter of 2020 increased 3.4%, or $4.1 million to $125.1 million. The increase is primarily attributable to increases in freight and advertising costs, partially offset by reductions in store operating costs due to fewer stores. As the Company leveraged the inventory in its network of stores throughout Canada with its ship from store initiative, freight costs increased. The Company’s initiative to minimize split shipments was completed near the end of the fourth quarter of 2020.

Total selling, distribution and administrative expenses for the fourth quarter of 2020, excluding the impact of IFRS 16, would have been $126.5 million. IFRS 16 had a favourable impact of $1.4 million, as depreciation expense related to the right-of-use assets is lower than the previous operating lease expenses under IAS 17.

Net Finance Costs

Net finance costs were $1.4 million for the fourth quarter of 2020 as compared to $7.3 million for the fourth quarter of 2019. The decrease in net finance costs is primarily attributable to the following:

a $8.5 million decrease due to the absence of mark-to-market adjustments in the fourth quarter of 2020 as the marketable securities portfolio was disposed of prior to the fourth quarter of fiscal 2020; partially offset by
an increase of $1.8 million in interest expense on lease liabilities due to the impact of the adoption of IFRS 16;
a $1.0 million decrease in finance income resulting from a $0.7 million decrease in dividend income for fiscal 2020 due to the disposal of the marketable securities portfolio prior to the fourth quarter of fiscal 2020, combined with a $0.3 million decrease in interest income due to lower cash balances held throughout the fourth quarter of fiscal 2020.

Excluding the $1.8 million increase in interest expense due to the impact of IFRS 16, net finance income was $0.4 million for the fourth quarter of 2020 as compared to net finance costs of $7.3 million for the fourth quarter of 2019.

Income Taxes

The income tax expense for the fourth quarter of 2020 amounted to $29.2 million and was negatively impacted by unrecognized deferred tax assets on temporary timing differences and operating losses carry forward.

- 13 -

Net Loss

Net loss for the fourth quarter of 2020 was $51.7 million ($1.06 basic and diluted loss per share) as compared with an $8.9 million net loss ($0.14 basic and diluted loss per share) for the fourth quarter of 2019. The unfavourable change of $42.8 million included an unfavourable impact of IFRS 16 of $0.3 million. Excluding this $0.3 million impact of IFRS 16, the deterioration in net earnings of $42.5 million is primarily attributable to the increase in income tax expense, a decrease in gross profit and an increase in selling, distribution and administrative costs, partially offset by a decrease in net finance costs, as noted above.

Adjusted EBITDA

Adjusted EBITDA for the fourth quarter of 2020 was $3.5 million as compared with $7.0 million for the fourth quarter of 2019, a decrease of $3.5 million. The decrease in adjusted EBITDA includes a favourable impact from the adoption of IFRS 16 of $18.0 million. Excluding this $18.0 million impact of IFRS 16, adjusted EBITDA for the fourth quarter of 2020 was ($14.5) million as compared with $7.0 million for the fourth quarter of 2019, a decrease of $21.5 million. The decrease is primarily attributable to the decrease in gross profit, as noted above.

FOREIGN EXCHANGE CONTRACTS

The Company imports a majority of its merchandise purchases from foreign vendors, with lead times in some cases extending twelve months. The Company enters into foreign exchange forward contracts to hedge a significant portion of its exposure to fluctuations in the value of the U.S. dollar, generally up to twelve months in advance. The Company’s policy is to satisfy at least 80% of projected U.S. dollar denominated merchandise purchases in any given fiscal year by way of foreign exchange forward hedge contracts, with any additional requirements being met through spot U.S. dollar purchases. In fiscal 2020, merchandise purchases, payable in U.S. dollars, approximated $236 million U.S.

Details of the foreign exchange forward contracts outstanding, all of which are designated as cash flow hedges are as follows:

low hedges are as follows:
February 1, 2020 February 2, 2019	Average Strike Price Notional Amount in U.S. Dollars Derivative Financial Asset Derivative Financial Liability Net
	$ 1.318 $ 175.0 $ 1.1 $ (0.3) $ 0.8 $ 1.299 $ 155.0 $ 1.9 $ (1.0) $ 0.9

- 14 -

SUMMARY OF QUARTERLY RESULTS

Due to seasonality and the timing of holidays, the results of operations for any quarter are not necessarily indicative of the results of operations for the fiscal year. The table below presents selected consolidated financial data for the eight most recently completed quarters. All references to “2020” are to the Company’s fiscal year ended February 1, 2020 and “2019” are to the Company’s fiscal year ended February 2, 2019.

Sales Net (loss) earnings (Loss) earnings per share Basic Diluted Net (loss) earnings before impairment of goodwill (Loss) earnings per share excluding impairment of goodwill Basic Diluted	Fourth Quarter	Third Quarter	Second Quarter	First Quarter
	20201 2019 (13 weeks) (13 weeks)	2020 1 2019 (13 weeks) (13 weeks)	2020 1 2019 (13 weeks) (13 weeks)	2020 1 2019 (13 weeks) (13 weeks)
	$ 229.2 $ 226.9 (51.7) (8.9) $ (1.06) $ (0.14) (1.06) (0.14) $ (51.7) $ (8.9) $ (1.06) $ (0.14) (1.06) (0.14)	$ 222.3 $ 239.7 (23.1) 2 8.9 $ (0.47) 2 $ 0.14 (0.47) 2 0.14 $ (11.3) $ 8.9 $ (0.23) $ 0.14 (0.23) 0.14	$ 232.8 $ 248.8 (0.1) 10.0 $ (0.00) $ 0.16 (0.00) 0.16 $ (0.1) $ 10.0 $ (0.00) $ 0.16 (0.00) 0.16	$ 185.2 $ 207.6 (12.6) (3.2) $ (0.20) $ (0.05) (0.20) (0.05) $ (12.6) $ (3.2) $ (0.20) $ (0.05) (0.20) (0.05)

1 Includes the impact of the adoption of IFRS 16.

2 Includes the impact of an impairment of goodwill of $11.8 million.

BALANCE SHEET

Selected line items from the Company’s balance sheets as at February 1, 2020 and February 2, 2019 are presented below:

Cash and cash equivalents Marketable securities Trade and other receivables Net derivative financial asset Inventories Prepaid expenses Property and equipment & intangible assets Right-of-use assets Goodwill Deferred income taxes Trade and other payables (current and long-term) Deferred revenue Income taxes payable Pension liability Deferred lease credits Lease liabilities (current and non-current) Share capital	2020 2019 $ Change % Change
	$ 89.4 $ 112.5 $ (23.1) (20.5%) - 49.7 (49.7) (100.0%) 6.3 7.9 (1.6) (20.3%) 0.8 0.9 (0.1) (11.1%) 147.4 146.8 0.6 0.4% 9.4 19.8 (10.4) (52.5%) 108.4 117.6 (9.2) (7.8%) 198.1 - 198.1 - - 11.8 (11.8) (100.0%) - 24.8 (24.8) (100.0%) 109.7 104.0 5.7 5.5% 15.0 15.2 (0.2) (1.3%) 3.2 4.2 (1.0) (23.8%) 24.2 21.0 3.2 15.2% - 7.8 (7.8) (100.0%) 213.9 - 213.9 - 27.4 38.4 (11.0) (28.6%)

Cash and cash equivalents
Marketable securities
Trade and other receivables
Net derivative financial asset
Inventories
Prepaid expenses
Property and equipment & intangible assets
Right-of-use assets
Goodwill
Deferred income taxes
Trade and other payables (current and long-term)
Deferred revenue
Income taxes payable
Pension liability
Deferred lease credits
Lease liabilities (current and non-current)
Share capital

2020
2019
$ Change
% Change

$
89.4
$ 112.5
$ (23.1)
(20.5%)
-
49.7
(49.7)
(100.0%)
6.3
7.9
(1.6)
(20.3%)
0.8
0.9
(0.1)
(11.1%)
147.4
146.8
0.6
0.4%
9.4
19.8
(10.4)
(52.5%)
108.4
117.6
(9.2)
(7.8%)
198.1
-
198.1
-
-
11.8
(11.8)
(100.0%)
-
24.8
(24.8)
(100.0%)
109.7
104.0
5.7
5.5%
15.0
15.2
(0.2)
(1.3%)
3.2
4.2
(1.0)
(23.8%)
24.2
21.0
3.2
15.2%
-
7.8
(7.8)
(100.0%)
213.9
-
213.9
-
27.4
38.4
(11.0)
(28.6%)

- 15 -

Changes in selected line items from the Company’s balance sheets at February 1, 2020 as compared to February 2, 2019 were primarily due to the following:

cash and cash equivalents decreased $23.1 million due to reduction of cash generated from operations primarily from weaker sales performance, payments pursuant to the substantial issuer bid, investments made in property and equipment and dividend payments, partially offset by the receipt of proceeds of $41.4 million from the disposal of the marketable securities portfolio in fiscal 2020;
the Company disposed of its marketable securities portfolio in fiscal 2020;
trade and other receivables decreased primarily due to lower wholesale accounts receivable and payments received for an insurance claim for damages relating to in-transit inventories. Trade and other receivables are typically comprised of credit card sales from the last few days of the fiscal quarter, wholesale account receivables and government incentive program receivables;
the change in the net derivative position is attributable to the impact of mark-to-market adjustments on foreign exchange forwards contracts;
inventories are comparable and are recognized at the lower of cost and net realizable value;
prepaid expenses are typically comprised of prepaid maintenance contracts and realty and business taxes. The decrease is primarily due to lease payments of approximately $6.3 million previously recognized as prepaid expenses under IAS 17, which were applied to right-of-use assets under IFRS 16 at February 3, 2019 (see note 3 of the audited consolidated financial statements for fiscal 2020 for additional details),and the timing of payments of other costs related to store leases;
the Company continues to closely manage its investment in property and equipment and intangible assets. The decrease reflects the reduction in the number of stores. For fiscal 2020, $23.5 million ($26.1 million in fiscal 2019) was invested mainly in digital technology and retail system upgrades, distribution and handling system improvements and existing store renovations and new store builds. Depreciation, amortization and net impairment losses of $33.0 million were recognized in fiscal 2020 ($37.9 million in fiscal 2019);
right-of-use assets of $212.4 million were recognized with the adoption of IFRS 16 as at February 3, 2019 and mainly represent the right to use the Company’s retail stores and certain equipment over their lease terms. Right-of-use assets further increased by $55.7 million due to lease additions during fiscal 2020 offset by depreciation, amortization and net impairment losses on right-of-use assets of $70.0 million recognized in fiscal 2020;
the reduction of goodwill is attributable to the recognition of an impairment of goodwill of $11.8 million;
deferred income taxes decreased by $24.8 million largely due to unrecognized deferred tax assets on temporary timing differences as it was not probable that sufficient future taxable income will be available to the Company to utilize the benefits arising from such temporary timing differences;
trade and other payables, which consist largely of trade payables, personnel liabilities and sales tax liabilities, increased primarily due to timing of payments. Trade and other payables were impacted by approximately $5.5 million arising from deferred rent liabilities and provisions for onerous contracts previously recognized as trade and other payables under IAS 17, which were applied against right-of-use assets under IFRS 16 at February 3, 2019 (see note 3 of the audited consolidated financial statements for fiscal 2020 for additional details);
deferred revenue was comparable and consists of unredeemed gift cards, loyalty points and awards granted under customer loyalty programs. Revenue is recognized when the gift cards, loyalty points and awards are redeemed;

- 16 -

income taxes payable consists of estimated tax liabilities, net of installment payments;
deferred lease credits were applied against right-of-use assets under IFRS 16 at February 3, 2019 (see note 3 of the audited consolidated financial statements for fiscal 2020 for additional details);
lease liabilities of $220.0 million were recognized with the adoption of IFRS 16 as at February 3, 2019 and represent the present value of the Company’s obligations to make lease payments for its store and equipment leases (see note 3 of the audited consolidated financial statements for fiscal 2020 for additional details). In fiscal 2020, lease liabilities further increased by lease additions of $55.7 million and interest expense of $7.5 million, offset by lease payments of $69.3 million;
pension liability increased largely due to actuarial losses. The pension liability is primarily related to the unfunded Supplemental Executive Retirement Plan (“SERP”);
share capital decreased by $11.0 million as the Company entered into a substantial issuer bid and purchased 14.5 million Class A non-voting shares for an aggregate consideration of $43.7 million, with the excess of $35.4 million (including tax of $2.6 million) being recognized as a reduction to retained earnings in fiscal 2020.

OPERATING RISK MANAGEMENT

Uncertainty about the Company’s Ability to Continue as a Going Concern

Based on the Company’s liquidity position as of the date of this MD&A, including the termination and reduction in availabilities under the Company’s credit facilities, and in light of the uncertainty surrounding the COVID-19 outbreak, management estimates that it will need additional financing to meet its current and future financial obligations. In order to conserve cash to finance its ongoing operations, the Company has suspended the declaration and payment of any dividends, has, subsequent to year end, temporarily laid off 90% of its retail store employees and approximately 30% of its head office employees and is currently minimizing purchases where possible. The Company is actively seeking additional financing and is also exploring various alternatives. The Company is currently in discussions with its banker regarding alternative financing arrangements. Other financing options, such as mortgage financing of the Company’s property, are also being considered. However, there is no assurance that financing can be obtained in the limited time period required and in the quantum needed. If the Company is unable to obtain such financing in the limited time period required, it may be unable to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to resume normal operations, generate future revenues and profitable operations and obtain additional financing.

Economic Environment

Economic factors that influence consumer-spending patterns could deteriorate or remain unpredictable due to global, national or regional economic volatility. These factors could negatively affect the Company’s revenue and margins. Inflationary trends are unpredictable and changes in the rate of inflation or deflation will affect consumer prices, which in turn could negatively affect the financial performance of the Company. 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.

Competitive Environment

The retail apparel business in Canada is highly competitive with competitors including department stores, specialty apparel chains and independent retailers. If the Company is ineffective in responding to consumer trends or in executing its strategic plans, its financial performance could be

- 17 -

negatively affected. 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 years of a number of foreign-based competitors and additional foreign retailers continuing to expand into the Canadian marketplace. Additionally, Canadian consumers 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. The Company’s stores, located throughout Canada, offer affordable fashions to consumers. The Company also offers an e-commerce alternative for shoppers through each of the banner’s websites. The e-commerce retail landscape is highly competitive with both domestic and foreign competition. The Company has invested significantly in its e-commerce websites and social media to drive consumers to the websites and believes that it is positioned well to compete in this environment.

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. global supply chain delays, natural disaster, system failures, destruction or major damage by fire), could materially delay or impair the Company’s ability to replenish its stores on a timely basis or satisfy e-commerce demand causing a loss of sales and potential dissatisfaction amongst its customers, which could have a significant effect on the results of operations.

Loyalty Programs

The Company’s loyalty programs are a valuable offering to customers and provide a key marketing tool for the business. The marketing, promotional and other business activities related to possible changes to the loyalty programs must be well managed and coordinated to preserve positive customer perception. Any failure to successfully manage the loyalty programs may negatively affect the Company’s reputation and financial performance.

Leases

All of the Company’s stores are held under leases, most of which can be renewed for additional terms at the Company’s option. Any factor that would have the effect of impeding or affecting, in a material way, the Company’s ability to lease prime locations or re-lease and/or renovate existing profitable locations, or delay the Company’s ability to close undesirable locations could adversely affect the Company’s operations. As a result of the forced closure of all its retail stores, the Company has not paid its April and May 2020 rent obligations to its retail landlords.

Consumer Shopping Patterns

Changes in customer shopping patterns could affect sales. Many of the Company’s stores are located in enclosed shopping malls. The ability to sustain or increase the level of sales depends in part on the continued popularity of malls as shopping destinations and the ability of malls, tenants and other attractions to generate a high volume of customer traffic. Many factors that are beyond the control of the Company may decrease mall traffic, including economic downturns, closing of anchor department stores, weather, concerns of terrorist attacks, construction and accessibility, alternative shopping formats such as e-commerce, discount stores and lifestyle centres, among other factors. Any changes in consumer shopping patterns could adversely affect the Company’s financial condition and operating results.

Natural Disasters, Adverse Weather, Pandemic Outbreaks, Boycotts and Geopolitical Events

The occurrence of one or more natural disasters, such as earthquakes and hurricanes, unusually adverse weather, pandemic outbreaks, boycotts and geopolitical events, such as civil unrest in countries in which suppliers are located and acts of terrorism, or similar disruptions could materially

- 18 -

adversely affect the Company’s business and financial results. Furthermore, the impact of any such events on its business and financial results could be exacerbated if they occur during the Company’s peak selling seasons.

These events could result in physical damage to one or more of the Company’s properties, increases in fuel or other energy prices, the temporary or permanent closure of its distribution centre or of one or more of its stores, delays in opening new stores, the temporary lack of an adequate workforce in a market, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transportation of goods from overseas, delays in the delivery of goods to the distribution centre or stores, the temporary reduction in the availability of products in stores, the temporary reduction of store traffic and disruption to information systems. These factors could materially adversely affect the Company’s business and financial results.

The recent outbreak of the COVID-19 (Pandemic) has caused global travel restrictions and factory closures in China resulting in temporary disruptions to the Company’s supply chain, increased merchandise freight costs and merchandise delivery delays. In addition, containment protocols implemented in Canada will have an impact on consumer shopping patterns and behavior that could have further negative consequences to the Company in fiscal 2021.

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 continues to undertake investments in new IT systems to improve the operating effectiveness of the organization. Failure to successfully migrate from legacy systems to new IT systems or a significant disruption in the Company’s IT systems in general could result in a lack of accurate data to enable management to effectively manage day-to-day operations of the business or achieve its operational objectives, causing significant disruptions to the business and potential financial losses. The Company also depends on relevant and reliable information to operate its business. As the volume of data being generated and reported continues to increase across the Company, data accuracy, quality and governance are required for effective decision-making.

Failure to successfully adopt or implement appropriate processes to support the new IT systems, or failure to effectively leverage or convert data from one system to another, may preclude the Company from optimizing its overall performance and could result in inefficiencies and duplication in processes, which in turn could adversely affect the reputation, operations or financial performance of the Company. Failure to realize the anticipated strategic benefits including revenue growth, anticipated cost savings or operating efficiencies associated with the new IT systems could adversely affect the reputation, operations or financial performance of the Company.

Laws and Regulations

The Company is structured in a manner that management considers most effective to conduct its business. The Company is subject to material and adverse changes in government regulation that might affect income and sales, taxation, duties, quota impositions or re-impositions and other legislated or government regulated matters.

Changes to any of the laws, rules, regulations or policies (collectively, “laws”) applicable to the Company’s business, including income, capital, property and other taxes, and laws affecting the importation, distribution, packaging and labelling of products, could have an adverse impact on the financial or operational performance of the Company. In the course of complying with such changes, the Company could incur significant costs. Changing laws or interpretations of such laws or enhanced enforcement of existing laws could restrict the Company’s operations or profitability and thereby threaten the Company’s competitive position and ability to efficiently conduct business. Failure by the Company to comply with applicable laws and orders in a timely manner could subject the Company to civil or regulatory actions or proceedings, including fines, assessments, injunctions,

- 19 -

recalls or seizures, which in turn could negatively affect the reputation, operations and financial performance of the Company.

The Company is subject to tax audits from various government and regulatory agencies on an ongoing basis. As a result, from time to time, taxing authorities may disagree with the positions and conclusions taken by the Company in its tax filings or laws could be amended or interpretations of current laws could change, any of which events could lead to reassessments. These reassessments could have a material impact on the Company’s financial position, operating results or cash flows in future periods.

Merchandise Sourcing

Virtually all of the Company’s merchandise is private label. On an annual basis, the Company directly imports over 90% of its merchandise, largely from Asia. In fiscal 2020, no supplier represented more than 10% of the Company’s purchases (in dollars and/or units) and there is a variety of alternative sources (both domestic and international) 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 prevent the Company from acquiring, distributing and/or selling merchandise on an ongoing basis. Nevertheless, as evidenced with the recent outbreak of the COVID-19 (Pandemic), factory closures in China has resulted in temporary disruptions to the Company’s supply chain, increased merchandise freight costs and merchandise delivery delays. Furthermore, in an effort to conserve cash, the Company has deferred payments, which may have an impact on its relationship with suppliers.

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 could 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.

Cyber Security, Privacy and Protection of Personal Information

The Company is subject to various laws regarding the protection of personal information of its customers, cardholders and employees and has adopted a Privacy Policy setting out guidelines for the handling of personal information. The Company’s IT systems contain personal information of customers, cardholders and employees. Any failures or vulnerabilities in these systems or noncompliance with laws or regulations, including those in relation to personal information belonging to the Company’s customers and employees, could negatively affect the reputation, operations and financial performance of the Company.

The Company depends on the uninterrupted operation of its IT systems, networks and services including internal and public internet sites, data hosting and processing facilities, cloud-based services and hardware, such as point-of-sale processing at stores, to operate its business. In the ordinary course of business, the Company collects, processes, transmits and retains confidential, sensitive and personal information (“Confidential Information”) regarding the Company and its employees, vendors, customers and credit card holders. Some of this Confidential Information is held and managed by third party service providers. As with other large and prominent companies, the Company is regularly subject to cyber attacks and such attempts are occurring more frequently, are constantly evolving in nature and are becoming more sophisticated.

- 20 -

The Company has implemented security measures, including employee training, monitoring and testing, maintenance of protective systems and contingency plans, to protect and to prevent unauthorized access of Confidential Information and to reduce the likelihood of disruptions to its IT systems. The Company also has security processes, protocols and standards that are applicable to its third party service providers. Despite these measures, all of the Company’s information systems, including its back-up systems and any third party service provider systems that it employs, are vulnerable to damage, interruption, disability or failures due to a variety of reasons, including physical theft, fire, power loss, computer and telecommunication failures or other catastrophic events, as well as from internal and external security breaches, denial of service attacks, viruses, worms and other known or unknown disruptive events.

The Company or its third party service providers may be unable to anticipate, timely identify or appropriately respond to one or more of the rapidly evolving and increasingly sophisticated means by which computer hackers, cyber terrorists and others may attempt to breach the Company’s security measures or those of our third party service providers’ information systems. As cyber threats evolve and become more difficult to detect and successfully defend against, one or more cyber threats might defeat the Company’s security measures or those of its third party service providers. Moreover, employee error or malfeasance, faulty password management or other irregularities may result in a breach of the Company’s or its third party service providers’ security measures, which could result in a breach of employee, customer or credit card holder privacy or Confidential Information.

If the Company does not allocate and effectively manage the resources necessary to build and sustain reliable IT infrastructure, fails to timely identify or appropriately respond to cyber security incidents, or the Company’s or its third party service providers’ information systems are damaged, destroyed, shut down, interrupted or cease to function properly, the Company’s business could be disrupted and the Company could, among other things, be subject to: transaction errors; processing inefficiencies; the loss of existing customers or failure to attract new customers; the loss of sales; the loss or unauthorized access to Confidential Information or other assets; the loss of or damage to intellectual property or trade secrets; damage to its reputation; litigation; regulatory enforcement actions; violation of privacy, security or other laws and regulations; and remediation costs.

Legal Proceedings

In the ordinary course of business, the Company is involved in and potentially subject to legal proceedings. The proceedings may involve landlords, suppliers, customers, regulators, tax authorities or other persons. The potential outcome of legal proceedings and claims is uncertain and could result in a material adverse effect on the Company’s reputation, operations or financial condition or performance.

Merchandising, Electronic Commerce and Disruptive Technologies

The Company may have inventory that customers do not want or need, is not reflective of current trends in customer tastes, habits or regional preferences, is priced at a level customers are not willing to pay or is late in reaching the market. In addition, the Company’s operations, specifically inventory levels, sales, volume and product mix, are impacted to some degree by seasonality, including certain holiday periods in the year. If merchandising efforts are not effective or responsive to customer demand, it could adversely affect the Company’s financial performance.

Customers expect innovative concepts and a positive customer online experience, including a userfriendly website, safe and reliable processing of payments and a well-executed merchandise pick up or delivery process. If systems are damaged or cease to function properly, capital investment may be required. The Company is also vulnerable to various additional uncertainties associated with e- commerce including website downtime and other technical failures, changes in applicable federal and provincial regulations, security breaches, and consumer privacy concerns. If these technology-

- 21 -

based systems do not function effectively, the Company’s ability to grow its e-commerce business could be adversely affected. The Company has increased its investment in improving the digital customer experience, but there can be no assurances that the Company will be able to recover the costs incurred to date.

The retail landscape demands an efficient and seamless digitally influenced shopping experience. The emergence of disruptive technologies and the effect of increasing digital advances could have an impact on the physical space requirements of retail businesses. Although the importance of a retailer’s physical presence has been demonstrated, the size requirements and locations may be subject to further disruption. Any failure to adapt the business models to recognize and manage this shift in a timely manner could adversely affect the Company’s operations or financial performance.

Key Management and Ability to Attract and/or Retain Key Personnel

The Company’s success depends upon the continued contributions of key management, some of whom have unique talents and experience and would be difficult to replace in the short term. The loss or interruption of the services of a key executive could have a negative effect on the Company during the transitional period that would be required for a successor to assume the responsibilities of the key management position. The Company’s success will also depend on the ability to attract and retain other key personnel. The Company may not be able to attract or retain these employees, which could negatively affect the business.

FINANCIAL RISK MANAGEMENT

The Company is exposed to a number of financial risks, including those associated with financial instruments, which have the potential to affect its operating and financial performance. The Company uses derivative instruments to offset certain of these risks. The Company’s policies and guidelines prohibit the use of any derivative instrument for trading or speculative purposes. The fair value of derivative instruments is subject to changing market conditions that could adversely affect the financial performance of the Company.

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, trade and other receivables and foreign currency forwards exchange contracts. The Company limits its exposure to credit risk with respect to cash and cash equivalents and foreign currency forwards contracts by dealing with major Canadian financial institutions. 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. Due to the nature of the Company’s activities and the low credit risk of the Company’s trade and other receivables as at February 1, 2020 and February 2, 2019, expected credit loss on these financial assets is not significant.

- 22 -

As at February 1, 2020, the Company’s maximum exposure to credit risk for these financial instruments was as follows:

Cash and cash equivalents $ 89.4 Trade and other receivables 6.3 Derivative financial asset 1.1 $ 96.8

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 twelve months. In addition, payments on lease liabilities occur mainly at the beginning of each calendar month. As at February 1, 2020, the Company’s liquidity position consisted of $89.4 million (February 2, 2019 - $112.5 million) in cash and cash equivalents. In addition, as at February 1, 2020 the Company had unsecured demand credit facilities of $65.0 million (or its U.S. dollar equivalent), which was comprised of a maximum overdraft protection of $25.0 million and $40.0 million was restricted to securing letters of credit (February 2, 2019- $75.0 million of which a maximum $35.0 million was for overdraft protection and $40.0 million was for securing letters of credit). Subsequent to the end of fiscal 2020, the demand credit facilities for overdraft protection were terminated by the banks and the credit facilities to secure letters of credit were reduced to a maximum of $1.0 million. As indicated in section “Current Developments” of this MD&A, the Company is currently in discussions with its banker regarding alternative financing arrangements. Other financing options, such as mortgage financing of the Company’s property, are also being considered.

Foreign Currency Risk

The Company purchases a significant amount of its merchandise with U.S. dollars and as such significant volatility in the U.S. dollar vis-à-vis the Canadian dollar can have an adverse impact on the Company’s gross profit. The Company has a variety of alternatives that it considers to manage its foreign currency exposure on cash flows related to these purchases. These include, but are not limited to, various styles of foreign currency option or forward contracts, normally not to exceed twelve months, and spot rate purchases. A foreign currency option contract represents an option or obligation to buy a foreign currency from a counterparty. A foreign currency forward contract is a contractual agreement to buy or sell a specified currency at a specific price and date in the future. The Company enters into certain qualifying foreign exchange contracts that it designated as cash flow hedging instruments. This has resulted in mark-to-market foreign exchange adjustments, for qualifying hedged instruments, being recorded as a component of other comprehensive income. The foreign exchange contracts that were settled during fiscal 2020 were designated as cash flow hedges and qualified for hedge accounting. The underlying risk of the foreign exchange contracts is identical to the hedged risk, and accordingly the Company established a ratio of 1:1 for all foreign exchange hedges.

The Company has performed a sensitivity analysis on its U.S. dollar denominated financial instruments, which consist principally of cash and cash equivalents of $9.0 million U.S., trade receivables of $0.5 million U.S. and trade payables of $41.4 million U.S. to determine how a change in the U.S. dollar exchange rate would affect net earnings. On February 1, 2020, a 10% rise or fall in the Canadian dollar against the U.S. dollar, assuming that all other variables, in particular interest rates, had remained the same, would have resulted in a $5.7 million increase or decrease, respectively, in the Company’s net earnings for fiscal 2020.

The Company has performed a sensitivity analysis on its derivative financial instruments (which are all designated as cash flow hedges), to determine how a change in the U.S. dollar exchange rate

- 23 -

would affect other comprehensive income. On February 1, 2020, a 10% rise or fall in the Canadian dollar against the U.S. dollar, assuming that all other variables had remained the same, would have resulted in a $15.4 million decrease or $16.5 million increase, respectively, in the Company’s other comprehensive income for fiscal 2020.

Interest Rate Risk

Interest rate risk exists in relation to the Company’s cash and cash equivalents. Market fluctuations in interest rates impacts the Company’s earnings with respect to interest earned on cash and cash equivalents that are invested mainly with major Canadian financial institutions. As at February 1, 2020, the Company had unsecured demand credit facilities available up to an amount of $65 million (or its U.S. dollar equivalent), which was comprised of a maximum overdraft protection of $25.0 million and $40.0 million was restricted to securing letters of credit (February 2, 2019 - $75.0 million of which a maximum $35.0 million was for overdraft protection and $40.0 million was for securing letters of credit). Subsequent to the end of fiscal 2020, the demand credit facilities for overdraft protection were terminated by the banks and the credit facilities to secure letters of credit were reduced to a maximum of $1.0 million. As indicated in section “current developments” of this MD&A, the Company is currently in discussions with its banker regarding alternative financing arrangements. Other financing options, such as mortgage financing of the Company’s property, are also being considered.

The Company has performed a sensitivity analysis on interest rate risk at February 1, 2020 to determine how a change in interest rates would affect net earnings. For fiscal 2020, the Company earned interest income of $1.7 million on its cash and cash equivalents. An increase or decrease of 100 basis points in the average interest rate earned during the year would have increased or decreased net earnings by $1.0 million, respectively. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.

LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES

The Company primarily uses funds for working capital requirements and capital expenditures. Shareholders’ equity as at February 1, 2020 amounted to $193.8 million or $3.97 per share (February 2, 2019 - $339.6 million or $5.36 per share). As at February 1, 2020, the Company had cash and cash equivalents of $89.4 million (February 2, 2019 - $112.5 million) and no long-term financing debt (other than its lease liabilities). Cash and cash equivalents are held in interest bearing accounts mainly with major Canadian financial institutions. The Company closely monitors its risk with respect to cash investments. Subsequent to the end of fiscal 2020, and at the date of this MD&A the Company’s cash reserves had decreased to approximately half of what they were as at February 1, 2020 and it had no operating lines of credit facilities with the bank other than $1.0 million for use in securing letters of credit. The Company is currently in discussions with its banker regarding alternative financing arrangements. Other financing options, such as mortgage financing of the Company’s property, are also being considered. The Company has also taken measures to preserve cash to the extent possible, including reducing headcount through temporary layoffs, reducing discretionary expenditures, deferring payments, suspending the quarterly dividend and deferring capital expenditures as discussed below.

The Company purchases 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 paid $0.15 dividends per share in fiscal 2020 totalling $8.8 million, compared to $0.20 per share in fiscal 2019 totalling $12.7 million. In order to conserve cash, the Board of Directors has suspended the quarterly dividend, due to the Company’s current operating performance.

- 24 -

In fiscal 2020, the Company invested $23.5 million in capital expenditures, on a cash basis, primarily in digital technology and retail system upgrades, distribution and handling system improvements and existing store renovations and new store builds. Under the current economic conditions, the Company has cancelled or delayed significant investments in capital expenditures for the remainder of fiscal 2021.

FINANCIAL COMMITMENTS

The following table sets forth the Company’s financial commitments, excluding trade and other payables, as at February 1, 2020:

Contractual Obligations	Total Within 1year 2 to 4 years 5 years and over
Lease obligations1	$ 232.5 $ 68.6 $ 118.6 $ 45.3
Purchase obligations2	130.8 122.1 8.6 0.1
Other service contracts	1.6 1.2 0.4 -
Total contractual obligations	$ 364.9 $ 191.9 $ 127.6 $ 45.4

1 Represents the minimum lease payments for leases of retail locations and office equipment recognized on the consolidated balance sheet as lease liabilities under IFRS 16.

2 Includes amounts pertaining to agreements to purchase goods or services that are enforceable and legally binding on the Company.

As at February 1, 2020, the Company’s pension liability has not been included in the table above as the timing and amount of future payments are uncertain. Refer to note 13 in the audited consolidated financial statements for fiscal 2020.

OUTSTANDING SHARE DATA

On June 17, 2019, the Company announced the terms of a substantial issuer bid (the “Offer”) to purchase for cancellation up to 15,000,000 of its issued and outstanding Class A non-voting shares at a price of $3.00 per share. The Offer commenced on June 20, 2019 and expired on July 26, 2019. The Offer resulted in the Company purchasing 14,462,944 Class A non-voting shares, which were subsequently cancelled, for an aggregate consideration of $43.7 million including related transaction costs of $0.3 million.

At May 1, 2020, 13,440,000 Common shares and 35,427,322 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 1,727,000 share options outstanding at an average exercise price of $8.24. 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.

- 25 -

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 twelve months. Most of these purchases must be paid for in U.S. dollars. The Company considers a variety of strategies designed to manage the cost of its continuing U.S. dollar long-term commitments, including spot rate purchases and foreign currency forward hedge contracts with maturities generally not exceeding twelve months.

Details of the foreign currency contracts outstanding as at February 1, 2020 are included in the “Foreign Exchange Contracts” section of this MD&A.

A forward foreign exchange contract is a contractual agreement to buy or sell a specified currency at a specific price and date in the future. 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 chartered banks. The Company does not use derivative financial instruments for speculative purposes.

RELATED PARTY TRANSACTIONS

Transactions with Key Management Personnel

Key management personnel are those persons (both executive and non-executive) who have the authority and responsibility for planning, directing and controlling the activities of the entity - directly or indirectly. The Board of Directors (which includes the Chief Executive Officer and President) has the responsibility for planning, directing and controlling the activities of the Company and are considered key management personnel. The members of the Board of Directors participate in the share option plan, as described in note 15 to the audited consolidated financial statements for fiscal 2020.

Compensation expense for key management personnel is as follows:

Salaries, Directors’ fees and short-term benefits Share-based compensation costs	Fiscal 2020 Fiscal 2019
	$ 1.6 $ 1.6 - 0.1
	$ 1.6 $ 1.7

Other Related-Party Transactions

The Company incurred $0.4 million in fiscal 2020 (fiscal 2019 - $0.3 million) for consulting fees paid to a director of the Company and legal services rendered by a law firm connected to certain members of the Board of Directors.

These transactions are recorded at the amount of consideration paid as established and agreed to by the related parties.

- 26 -

FINANCIAL INSTRUMENTS

The Company uses its cash resources to fund ongoing working capital needs along with capital expenditures. Financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, trade and other receivables and foreign currency contracts. The Company reduces this risk by dealing only with highly-rated counterparties, normally major Canadian financial institutions. The Company closely monitors its risk with respect to short-term cash investments.

The volatility of the U.S. dollar vis-à-vis the Canadian dollar impacts earnings and while the Company considers a variety of strategies designed to manage the cost of its continuing U.S. dollar commitments, such as spot rate purchases and foreign exchange contracts, this volatility can result in exposure to risk.

For further disclosure of the Company’s financial instruments, their classification, their impact on financial statements, and determination of fair value refer to note 23 of the audited consolidated financial statements for fiscal 2020.

CRITICAL ACCOUNTING ESTIMATES, JUDGMENTS AND ASSUMPTIONS

The preparation of the consolidated 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 consolidated 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.

Following are the most important accounting policies subject to such judgments and the key sources of estimation uncertainty that the Company believes could have the most significant impact on the reported results and financial position.

Key Sources of Estimation Uncertainty

Pension Plans

The cost of defined benefit pension plans is determined by means of actuarial valuations, which involve making assumptions about discount rates, future salary increases and mortality rates. Because of the long-term nature of the plans, such estimates are subject to a high degree of uncertainty.

Gift Cards / Loyalty Points and Awards

Gift cards sold are recorded as deferred revenue and revenue is recognized when the gift cards are redeemed. If the Company expects to be entitled to a breakage amount for the gift cards, it recognizes the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer. Breakage is an estimate of the amount of gift cards that will never be redeemed. The breakage rate is reviewed on an ongoing basis and is estimated based on historical redemption patterns. Loyalty points and awards granted under customer loyalty award programs are recorded as deferred revenue until the loyalty points and awards are redeemed by the customer. The allocation of revenue that is deferred in relation to its customer loyalty award programs is allocated between the loyalty program awards and the goods on which the awards were earned, based on their relative stand-alone selling prices. The estimated stand-alone selling prices of the loyalty points are determined based on the various program reward thresholds.

- 27 -

Inventories

Inventories are valued at the lower of cost and net realizable value. Estimates are required in relation to forecasted sales and inventory balances. In situations where excess inventory balances are identified, estimates of net realizable values for the excess inventory are made. The Company has set up provisions for merchandise in inventory that may have to be sold below cost. The Company has developed assumptions regarding the quantity of merchandise to be sold below cost based on historical patterns of sales. In addition, as part of inventory valuations, provisions are accrued for inventory shrinkage for lost or stolen items based on historical trends from actual physical inventory counts.

Asset Impairment

The Company must assess the possibility that the carrying amounts of tangible and intangible assets (including goodwill) may not be recoverable. Impairment testing is performed whenever there is an indication of impairment, except for goodwill and intangible assets with indefinite useful lives for which impairment testing is performed at least once per year. Significant management estimates are required to determine the recoverable amount of the cash-generating unit (“CGU”) including estimates of fair value, selling costs or the discounted future cash flows related to the CGU. Differences in estimates could affect whether tangible and intangible assets (including goodwill) are in fact impaired and the dollar amount of that impairment.

Leases

In determining the carrying amount of right-of-use assets and lease liabilities, the Company is required to estimate the incremental borrowing rate specific to each leased asset if the interest rate implicit in the lease is not readily determinable. Management determines the incremental borrowing rate of each leased asset by incorporating the Company's creditworthiness, the security, term and value of the underlying leased asset, and the economic environment in which the leased asset operates in. The incremental borrowing rates are subject to change mainly due to macroeconomic changes in the environment.

Critical Judgments in Applying Accounting Policies

Operating Segments

The Company uses judgment in assessing the criteria used to determine the aggregation of operating segments. In order to identify the Company’s reportable segments, the Company uses the process outlined in IFRS 8, Operating Segments, which includes the identification of the Chief Operating Decision Maker (“CODM”), being the Chief Executive Officer, the identification of operating segments and the aggregation of operating segments. The Company’s operating segments, before aggregation, have been identified as the Company’s five banners: Reitmans, Penningtons, Addition Elle, RW & CO. and Thyme Maternity. Each operating segment is reviewed by the CODM in reviewing their profitability so that the information can be used to ensure adequate resources are allocated to that part of the Company’s operations. The CODM reviews the profitability of the banner as a whole, which includes both the store and online channels. This is consistent with the omnichannel strategy adopted by the Company whereby customers can shop seamlessly in retail stores and online. The Company has aggregated its operating segments into one reportable segment because of their similar economic characteristics, customers (mainly female) and nature of products (mainly women’s specialty apparel). The similarity in economic characteristics reflects the fact that the Company’s operating segments operate mainly in the women apparel business, primarily in Canada and are therefore subject to the same economic market pressures. The Company’s operating segments are subject to similar competitive pressures such as price and product innovation and assortment from existing competitors and new entrants into the marketplace. The operating segments also share centralized, common functions such as distribution and information technology.

- 28 -

Leases

Management exercises judgment in determining the appropriate lease term on a lease by lease basis. Management considers all facts and circumstances that create an economic incentive to exercise a renewal option or to not exercise a termination option, including investments in major leaseholds and store performances. The periods covered by renewal options are only included in the lease term if management is reasonably certain to renew.

Management considers reasonably certain to be a high threshold. Changes in the economic environment or changes in the retail industry may impact management’s assessment of lease term, and any changes in management’s estimate of lease terms may have a material impact on the Company’s consolidated balance sheet and consolidated statement of earnings.

Deferred tax assets

Deferred tax assets are recognized only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse and a judgment as to whether there will be sufficient taxable profits available against which they can be utilized.

NEW ACCOUNTING POLICIES ADOPTED IN FISCAL 2020

The new accounting policies set out below have been adopted in the audited consolidated financial statements for fiscal 2020:

IFRS 16 – Leases
Plan Amendment, Curtailment or Settlement (Amendments to IAS 19)

Further information on these new accounting policies can be found in note 3 of the audited consolidated financial statements for fiscal 2020.

DISCLOSURE CONTROLS AND PROCEDURES

Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company and its subsidiaries is gathered and reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure.

As required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have caused the effectiveness of the disclosure controls and procedures to be evaluated. Based on that evaluation, they have concluded that the design and operation of the system of disclosure controls and procedures were effective as at February 1, 2020 in ensuring that information required to be disclosed by the Company in its corporate filings is recorded, processed, summarized and reported within the required time period for the year then ended.

- 29 -

INTERNAL CONTROLS OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reports for external purposes in accordance with IFRS.

As required by NI 52-109, the CEO and the CFO have caused the effectiveness of the internal controls over financial reporting to be evaluated using the framework established in ‘Internal Control – Integrated Framework (COSO Framework)’ published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO), 2013. Based on that evaluation, they have concluded that the design and operation of the Company’s internal controls over financial reporting were effective as at February 1, 2020 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS.

In designing such controls, it should be recognized that due to inherent limitations, any controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect misstatements. Projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Additionally, management is required to use judgment in evaluating controls and procedures.

As reported previously, the Company has selected a lease accounting software to gather its lease information and to quantify the required components of IFRS 16. The Company finalized the process of implementing this lease accounting software and finalized the development of new reports to capture information required for presentation and disclosure under IFRS 16 during the first quarter of fiscal 2020. Accordingly, internal controls processes and procedures have been put in place and updated in order to ensure proper internal controls over financial reporting, and disclosure controls and procedures have been updated to capture information required for presentation and disclosure under IFRS 16.

During the fourth quarter of 2020, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

- 30 -

OUTLOOK

The disappointing operating results in fiscal 2020 are primarily attributed to the Company’s plus-size banners. Sales and the operating results from the plus-size banners were well below expectations as the strategic initiatives implemented early in the fiscal year in these banners failed to resonate with their customer base. A variety of measures were implemented late in fiscal 2020 to improve profitability, including new leadership focused on enhancing the product offerings and improving the customer experience both in stores and online to meet customer demands. Despite these efforts, the Company, the retail industry and the economy in general, are facing some significant headwinds in fiscal 2021. The impact of COVID-19 is significant. Containment protocols, including a complete closure of retail stores, job losses and social distancing have influenced consumer shopping behavior and consumer demand.

The financial fallout of these events has been extremely difficult for the Company. As revenue streams continue to decrease significantly during this time, it is expected that the Company’s costcurtailment efforts will not be sufficient to enable the Company to self-fund its operations. The Company must obtain financing to meet its current and future financial obligations in the normal course of business and is also exploring various alternatives.

This an evolving situation. The Company continues to work on strategies to address the challenges brought about from COVID-19 requirements. Workforce protection, supply-chain stabilization and consumer communication are priorities. Business contingency processes and protocols have been put in place within the organization to assist in the curtailment of the virus and to deliver the necessary support to our employees and customers. The Company’s procurement team is driving supply-chain efforts while minimizing merchandise purchases where possible. The Company’s sales and marketing teams are working on customer communications, currently through its e-commerce channel, and the Company as a whole is focused on the health and safety of our employees.

- 31 -

AI assistant

Reitmans Canada Limited — Management Reports 2020

42834_rns_2020-05-01_5cfd37c6-aeb0-49e7-9c5d-ae7ad516d650.pdf

MANAGEMENT’S DISCUSSION AND ANALYSIS

Current developments

FORWARD-LOOKING STATEMENTS

NON-GAAP FINANCIAL MEASURES

The following table reconciles net (loss) earnings to adjusted EBITDA:

OVERVIEW

RETAIL BANNERS

Sales

Gross Profit

Summary

STRATEGIC INITIATIVES

Sales

Gross Profit

Selling, Distribution and Administrative Expenses

Impairment of Goodwill

Net Finance Costs

Income Taxes

Net Loss

Adjusted EBITDA

Sales

Gross Profit

Selling, Distribution and Administrative Expenses

Net Finance Costs

Income Taxes

Net Loss

Adjusted EBITDA

FOREIGN EXCHANGE CONTRACTS

SUMMARY OF QUARTERLY RESULTS

BALANCE SHEET

OPERATING RISK MANAGEMENT

Uncertainty about the Company’s Ability to Continue as a Going Concern

Economic Environment

Competitive Environment

Distribution and Supply Chain

Loyalty Programs

Leases

Consumer Shopping Patterns

Information Technology

Laws and Regulations

Merchandise Sourcing

Cyber Security, Privacy and Protection of Personal Information

Legal Proceedings

Merchandising, Electronic Commerce and Disruptive Technologies

Key Management and Ability to Attract and/or Retain Key Personnel

FINANCIAL RISK MANAGEMENT

Credit Risk

Liquidity Risk

Foreign Currency Risk

Interest Rate Risk

LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES

FINANCIAL COMMITMENTS

OUTSTANDING SHARE DATA

Derivative Financial Instruments

RELATED PARTY TRANSACTIONS

Transactions with Key Management Personnel

Compensation expense for key management personnel is as follows:

Other Related-Party Transactions

FINANCIAL INSTRUMENTS

CRITICAL ACCOUNTING ESTIMATES, JUDGMENTS AND ASSUMPTIONS

Key Sources of Estimation Uncertainty

Pension Plans

Gift Cards / Loyalty Points and Awards

Inventories

Asset Impairment

Leases

Critical Judgments in Applying Accounting Policies

Operating Segments

Leases

Deferred tax assets

NEW ACCOUNTING POLICIES ADOPTED IN FISCAL 2020

DISCLOSURE CONTROLS AND PROCEDURES

More from Reitmans Canada Limited

Reitmans Canada Limited Management Reports 2020