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Executives

Thomas A. Andruskevich - President, Chief Executive Officer, Director

Michael Rabinovitch - Chief Financial Officer, Senior Vice President

Allison Malkin - Integrated Corporate Relations

Analysts

[Andrew Shapiro - Longdale Capital]

Barbara Wyckoff - Buckingham Research

Robert Eckhart - Private Investor

Birks & Mayors Inc. (BMJ) F4Q08 Earnings Call June 24, 2008 4:45 PM ET

Operator

Welcome to the Birks & Mayors, Inc. fourth quarter fiscal 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Allison Malkin of ICR.

Allison Malkin - Integrated Corporate Relations

I hope each of you has received a copy of our earnings release. If for any reason you did not, you may download it from our web site at www.BirksandMayors.com by clicking on Investor Relations on the home page index and then on financial news releases.

Before we get started I'd like to remind you of the company's Safe Harbor language. The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the company's annual report filed on Form 20F and other SEC filings.

And now I'd like to turn the call over to Birks & Mayors President and CEO, Tom Andruskevich.

Thomas A. Andruskevich

Thank you for joining us to discuss the company's fourth quarter and fiscal 2008 results. On the call with me today is Mike Rabinovitch, our Chief Financial Officer. For today's call I'll begin with a brief summary of our fourth quarter and fiscal 2008 results and also discuss our progress toward achieving the priorities that we set as we began the year. Then I'll outline our goals for fiscal 2009. Following this, Mike will provide you with a more detailed review of our fourth quarter and full-year performance followed by our business outlook. Finally, I'll make some closing remarks and then turn the call over to the Operator to begin the question and answer portion of the call.

As anticipated and discussed previously with you during our third quarter call in February, our fourth quarter operating results reflected the continuation of challenging business environments both in the United States and Canada. In the US we continued to experience declines in store traffic which we believe were caused by the consumer reaction to the continuing decline in real estate values, the consumer credit crisis, and weakness in consumer confidence. In Canada declines in store traffic we experienced in the first quarter continued into the fourth quarter. We believe that the strengthening of the Canadian dollar has prompted many Canadian consumers to take advantage of cross-border shopping as well as taking the opportunity to use their disposable income and strong Canadian dollar to travel outside of Canada instead of domestic Canadian retail spending, thus negatively impacting our sales.

However, the strategies we deployed to counter these forces proved successful in growing net sales for the quarter by 16% to $64.2 million which included an increase in comparable store sales of 2%. Specifically, our new pricing strategy in Canada continues to be favorably received by our clients. We're now more competitive in US jewelry retailers following our move in November to reduce prices on certain products at our virtual locations. Importantly we continue to maintain our strong commitment to brand integrity which is evident in our offerings in client service. To offset lower retail prices we've been able to reduce many of our product costs and while higher cost inventory impacted our reported gross profit margin in the quarter, we expect gross profit margins to stabilize as we anniversary the implementation of this strategy in the third quarter of this year. We grew sales with our best clients, especially those that purchased higher-priced point offerings. This consumer group is proving more resilient in economic trends and given positive results we will continue to capitalize on this opportunity in our new fiscal year.

We are pleased that the results of our annual January sale event, which is primarily focused on selling aged or discontinued products and provides us an opportunity to continually improve the quality of our inventory as well as manage comparable store inventory at or below prior year levels. In addition, we are pleased at the progress we made in integrating the two recently acquired Brinkhaus stores. We completed the IT and back office integration bringing them onto our point of sale system, merchandising system, and financial system. In addition, the acquisition added to sales profits and cash flow during the fourth quarter. During the quarter we also reported tax benefits related to reducing our valuation allowance on deferred tax assets. As results of the recognition of these tax benefits, we reported fourth quarter net income as compared to a net loss during the same period last year.

Turning to the full fiscal year, net sales were $314.7 million a 7% increase over the prior year's net sales of $294.3 million. Operating income totaled $11.3 million declining from $20.4 million last year reflecting the impact of our existing business of a challenging economy in both of our geographical markets mitigated somewhat by the acquisition of the Brinkhaus stores and several cost-saving initiatives executed during the year in response to the worsening economic environment. Earnings per share were $0.89 in fiscal 2008 which includes $0.84 related to the income tax benefit as compared to $1.11 per diluted share in fiscal 2007 which included $0.24 related to income tax benefits reported in that year.

Despite the very difficult operating environment in fiscal 2008 I am encouraged with our progress toward achieving our key long-term growth objectives. Free cash flow which we define as cash flow from operations less capital expenditures increased to approximately $2 million a considerable improvement from the use of cash of approximately $18 million in the prior year. This was made possible by ensuring that managing our balance sheet was a critical focus to the organization and I believe is a considerable achievement given the sales patterns the industry experienced during the holiday period.

We continued our strategy and growth through acquisition with the purchase and integration of Brinkhaus adding two luxury jewelry stores, one in Calgary and the other in Vancouver, and as we have mentioned on previous calls this acquisition strengthens our presence in Western Canada, expands our high-end client base, and offers us another platform to sell our Birks brand. For the year we met our objective of their results being accretive to our company. We achieved our store expansion goals by opening two new Mayors stores in Florida, one in Weston and the other in Jacksonville. Although these stores opened during a tough sales environment, we're encouraged by their recent performance and believe both of these locations can become very productive as they mature.

We expanded our marketing efforts to raise awareness for our Birks brand focusing on two primary initiatives. First, during the third quarter we introduced Birks Galleries inside all Mayors stores. These galleries differentiate our Birks product and display them prominently inside each of our Mayors stores. We are pleased with the appearance of these boutiques and hope to build momentum for our Birks brand in Mayors stores in the US over time. Secondly, we increased our marketing budget substantially for fiscal 2008 as we launched a new advertising campaign to cultivate increased Birks brand awareness in the United States and to build increased loyalty to Birks in Canada with an integrated message across all advertising mediums. We're pleased with the execution of these initiatives; however, we have reduced marketing expenditures in fiscal 2009 in light of our current economic conditions to a more normalized level.

In addition, we made progress on several merchandising initiatives. We're pleased with our partnership with Van Cleef & Arpels for which we added three locations this past year and our now offering Van Cleef & Arpels boutiques in five of our stores. We also launched three new product initiatives - our new Birks Destinee and Boutique collections along with the Birks RPM sports photograph watch collection.

Looking ahead we expect the retail environment to remain difficult and as such are managing the business to achieve increased cash flow and improve profitability. Our fiscal 2009 priorities are focused on very modest growth rates in sales and gross margins, tightly controlling expenses, managing inventory to appropriate levels given the soft sales environment while continuing to improve the quality of our merchandise offerings, maintaining our commitment to superior and personal client service while continuing to offer compelling designs and differentiated assortments.

In summary, we're confident that our disciplined approach to running the business in a difficult environment while selectively investing in long-term growth initiatives will make us a stronger and more resilient company in the future.

With that I'd like to turn the call over to Mike to review our financial results in more detail.

Michael Rabinovitch

Before I begin my financial review, I first want to remind you that our results are reported in US dollars and are compared in accordance with US GAAP. I'd also like to remind you that fiscal 2008 was a 52-week period compared with fiscal 2007 which had 53 weeks with the additional week included in the first quarter of the prior year. I'll first discuss our results for the fourth quarter followed by our results for the fiscal year 2008 and then I'll provide our business outlook for fiscal 2009.

For the fourth quarter net sales increased 16% to $54.2 million an increase of $8.9 million over the prior fourth quarter which included $4.1 million of foreign currency translation benefits and $2.6 million of sales associated with the recently acquired Brinkhaus stores. Comparable store sales for the quarter increased 2% as compared to a 3% increase in the prior year's fourth quarter. Comparable store sales increased 5% in the US and decreased 2% in Canada. As Tom mentioned earlier, store traffic continued to be a challenge in the quarter; however, many of our strategies including the successful January winter sale event produced a net increase for the period.

Gross profit increased by approximately 4% to $26.5 million or 41.3% of net sales from $25.4 million or 45.9% of net sales in fiscal 2007. The 460 basis point decline in gross profit margin was primarily related to lowering our Canadian and retail prices due to price disparity with prices in the US in response to the strengthening of the Canadian dollar. A shift in mix of our products sold favoring timepieces in our US business which carries a lower margin in the jewelry and to a lesser extent the addition of the Brinkhaus stores which sell a higher level of timepieces than the company average and therefore produced lower gross margins.

SG&A expense increased $6.1 million to $32.4 million or 50.5% of net sales from $26.3 million or 47.6% of net sales in the prior year's fourth quarter. The increase in SG&A was attributable to several factors including $2.3 million of higher expenses related to foreign currency translation, $800,000 of higher marketing expenses, and $1.2 million of incremental costs related to two new Mayors stores and the two acquired Brinkhaus stores. Interest expense and other financial costs were flat in the quarter at $2.5 million.

The income tax benefit for the fourth quarter was $13.5 million including an $11.8 million income tax benefit associated with the release of the valuation allowance on the surtax assets related to the company's US operations. This compares to the income tax benefit of $3 million in the prior year period which included $2.9 million of income tax benefit related to the reduction of the valuation allowance associated with our Canadian operation. As a result, net income for the fourth quarter fiscal 2008 totaled $3.2 million or $0.28 per diluted share compared to a net loss of $1.9 million or $0.17 loss per diluted share in the prior year period.

Now I'll turn to the full-year results. For the 52-week period ended March 29, 2008 net sales increased $20.5 million or 7% to $314.7 million. Excluding the $4.3 million of sales related to the extra selling needs in the first quarter of the prior year, net sales in fiscal 2008 rose 8.5%. The increase in net sales was driven by $14.9 million of the foreign currency translation, $3.4 million from the two Mayors stores opened mid-year, and $6.4 million from the two acquired Brinkhaus locations from November forward. Comparable store sales were flat following a 4% gain in fiscal 2007 driven primarily by a decline in store traffic in both of our Canadian and US markets. Comparable store sales in both Canada and the US were also flat. Gross profit increased 2.9% to $146.5 million or 46.5% of net sales from $142.3 million or 48.3% of net sales in fiscal 2007. Gross profit margin declined by 180 basis points driven primarily by a decrease in the retail prices of certain products sold in Canada to reduce price disparity with the US market, the mix of business in the US operation leaning more toward timepieces which generate a lower margin than jewelry, and the inclusion of Brinkhaus stores which operate at lower margins than the company average due to their high concentration of high piece sales.

SG&A expenses were $128.3 million increasing $12.8 million or 11.1% over the prior year. This increase was primarily driven by $6.2 million of increase due to foreign currency translation, $1.4 million in incremental costs associated with operating two Brinkhaus stores acquired in November 2007, $2.6 million in increased marketing expenses due to the company's increased investment in advertising and brand building, $1.3 million in costs associated with operating two new Mayors stores opening mid-year, and $1.3 million of higher variable costs associated with the increase in sales.

Net income for the year was $10.4 million or $0.89 per diluted share on $11.7 million weighted average diluted shares outstanding as compared to net income of $13.1 million or $1.11 per diluted share on $11.8 million weighted average diluted shares outstanding in fiscal 2007. Net income this year included the fact that the recognition of $12.7 million of tax benefits or $1.09 per diluted share related to the reduction of valuation allowance on deferred tax assets versus $2.9 million or $0.25 per diluted share in fiscal 2007.

Now I'll turn to the balance sheet. Working capital defined as current assets less current liabilities increased $6.7 million to $36.7 million from $30 million at the end of fiscal 2007. Inventory increased $23.1 million or 15% to $181.9 million from $158.8 million a year ago. This increase however includes some items worth noting, including a $9.4 million increase due to the effects of translating Canadian inventories into a higher amount of US dollars, $9.4 million related to the inventory acquired in the Brinkhaus acquisition in November 2007, and $5.3 million of inventory relating to the opening of two new Mayors stores. Comparable store inventories were even with the prior year period.

Bank debt at the end of fiscal 2008 increased $10.9 million to $120.1 million from $109.2 million at the end of fiscal 2007. Included in the year-end bank debt is an increase of $11.9 million due to translating our Canadian debt into a higher amount of US dollars, $4.6 million for the initial payment on the Brinkhaus acquisition, and the capital to open two new Mayors stores. Excluding these items our bank debt was $6 million lower than the prior year. As you may be aware our current $160 million credit facility is set to expire in January 2009. We are currently in the early stages of negotiating the renewal of this facility and anticipate finalizing this initiative in the third quarter of fiscal 2009. Our relationship with our lenders is good and we have no information leading us to believe that this renewal will be problematic given the secure nature of the facility.

Capital expenditures for fiscal 2008 totaled approximately $9.4 million which included approximately $2 million for the two new stores. Approximately $5 million of our capital expenditures were funded through the use of our new master leasing line which provides us more flexibility on our existing secured lines of credit.

I'd like to now share with you our business outlook for fiscal 2009. As you know due to the seasonality of the luxury jewelry business, we've historically generated losses in our first, second and fourth quarters which are offset by income generated in our third quarter. For the fiscal 2009 year we are introducing guidance as follows: Net sales are expected to increase in the low single digits. Gross margin is planned to increase albeit very modestly. Capital expenditures are planned between $6 million and $8 million for the year. We expect to finance a large portion of these purchased on our master leasing line which will allow us additional flexibility on our existing secured line of credit.

And now I'd like to turn the call back to Tom for closing remarks.

Thomas A. Andruskevich

In closing we continue to advance our long-term goals despite operating in a difficult economic environment and while we expect the operating environment to remain difficult in fiscal 2009, we believe our disciplined approach to expense control and managing inventory will enable us to maximize profitability while our merchandising and marketing strategies will continue to increase brand preference for our retail and product brands.

And now I'd like to turn the call over to the operator to begin the question and answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Andrew Shapiro - Longdale Capital.

Andrew Shapiro - Longdale Capital

Several questions left if you want to back out in case there's someone else in line but please come back to us. From the top line first, Tom you talked about I think in the intro I think it was fiscal 2008 annual comp store sales and I think you said it was up 2% but it wasn't clear to me if that was overall or that was Canada only. And if it was overall, what is the Brinkhaus percent within the US for the full year?

Thomas A. Andruskevich

Andrew, the 2% that you're remembering was for the quarter and the full year was flat.

Andrew Shapiro - Longdale Capital

Okay. But when you talked about the quarter you had Canada down 2% and US up 5%.

Thomas A. Andruskevich

Yes, that's correct.

Andrew Shapiro - Longdale Capital

Okay. When Tom talked of something, he spoke of up to in his first part of the script. That's what I was trying to clarify.

Thomas A. Andruskevich

Yes, that would be the combined.

Andrew Shapiro - Longdale Capital

Okay, so that was up 2% combined for the full year, right?

Thomas A. Andruskevich

No, no, no. Up 2% combined for the quarter.

Andrew Shapiro - Longdale Capital

Okay, up 2% combined for the quarter. Which would be about [inaudible] and down 2% which included US up 5% and Canada down 2%.

Thomas A. Andruskevich

And then for the year we said the comps were flat for the total company and they were flat in Canada and flat in the US.

Andrew Shapiro - Longdale Capital

Okay. Regarding the sales, moving down a little bit, in Canada for Q4 was it across the board down 2% or were there particular stores or segments that hurt your comp stores - in particular your large Vancouver store has been as we talked about over a few quarters subject to the big subway construction project?

Thomas A. Andruskevich

Yes, that continued to be a challenge in the fourth quarter but I think the fourth quarter comp store sales results in general were pretty much across the board. I don't think we saw any particular region that I can recall now, because it was a little while ago, that seemed to drag down the rest of the group.

Andrew Shapiro - Longdale Capital

Would you agree with that, Mike?

Michael Rabinovitch

Yes.

Andrew Shapiro - Longdale Capital

Okay. And when you talked about the 2009 SG&A coming in at normalized levels versus 08 was a bit higher, can you give a little bit more insight as to what kind of year-over-year reduction we're looking at with respect to that fixed portion that you're kind of alluding to?

Thomas A. Andruskevich

Yes. I think you maybe referring to my comments on marketing. What I indicated is that our marketing expenses in fiscal 2008 were up substantially as part of our strategy but that we would be reducing those expenses in fiscal 09 to more normalized levels. That referred to marketing; not SG&A.

Andrew Shapiro - Longdale Capital

Okay. Well, that being marketing's probably booked and your consolidated SG&A is also somewhat of a fixed dollar amount, can you give a little bit of a scope or range as to how much extra was paid in 08 for these special programs that won't be paid out in 09 as the program's will be back to normalized levels? Are we talking about $1 million, $2 million or more?

Michael Rabinovitch

Yes, Andrew, I think you know - I don't want to characterize it as fixed amounts. What I would say is that we adjusted I think the number was $2.5 million, $2.8 million as extra marketing in fiscal 2008 and what we're suggesting is that we're going to bring that overall expense down to more normalized levels which would be almost that amount left in fiscal year 09.

Andrew Shapiro - Longdale Capital

$2.8 million was some of the extra money spent so -

Thomas A. Andruskevich

In round numbers I'd - just for simplicity - I'd use about $2.5 million more in fiscal year 08 and approximately the same reduction in fiscal year 09.

Andrew Shapiro - Longdale Capital

The Van Cleef & Arpels, you mentioned in five stores. Are those all Mayors or are they across border?

Thomas A. Andruskevich

Four in Canada. One in Mayorstown.

Andrew Shapiro - Longdale Capital

And then your plans for expanding these boutiques in the coming year, is it a rollout plan or how do you decide when and how to roll it out?

Thomas A. Andruskevich

We felt that in the current fiscal year we would just continue to develop the business that we have. In those stores we're going to watch one particular market in Canada and if that market continues to do well, we may look at that as either a late fiscal year 09 opportunity or an early fiscal year 2010 opportunity and we are talking about some additional opportunities for fiscal year 2010.

Andrew Shapiro - Longdale Capital

I haven't seen one of these yet. I haven't been in a store that's had it. What does it really entail? Is it you give up a corner of the store and it's their brand, its little location and creates incremental sales for us?

Thomas A. Andruskevich

Yes, that's right. And I think you know we do use their signature [inaudible] and presentation units and whatnot in Vancouver happens to be in a corner and Calgary is in a corner and [Blue Street] happens to be right in the center of our store and in Sarasota store at Mayors in Florida it actually happens to be a separate room in the store. So it's sort of customized to really fit the environment of each individual store but I think the general theme for us is they're all working quite well. And in the latter I left out is in Montreal; it also tends to be in the center of our store similar to Blue Street.

Andrew Shapiro - Longdale Capital

And is it a CapEx expenditure for Birks and is it a sizable one? What does it kind of entail?

Michael Rabinovitch

I wouldn't say each store can - you know, I wouldn't say it's material. It's in the neighborhood of anywhere from $50,000 to $100,000 per store depending on the nature of the store.

Andrew Shapiro - Longdale Capital

And what it is for us or how you view it is basically SKUs that are being offered there within the store?

Thomas A. Andruskevich

Well, I think it's not just SKUs. I think it's one of the most prestigious plans in the world when it comes to jewelry or eau couture jewelry, I think it establishes us as a retail destination and a retail purveyor of fine luxury goods. I think it perhaps in many cases brings us new clients that haven't been in to see us before. So it's much more than just adding some additional SKUs. It's much more of a strategic partnership that really reinforces our image and our brand image in our retail stores and offers us the opportunity to expand our sales but also our clientele.

Andrew Shapiro - Longdale Capital

And your CapEx for the 09 is $6 million to $8 million in CapEx. This is what, primarily remodels now?

Michael Rabinovitch

Yes, there would be no new stores in there. That's a remodel existing locations. In one or two locations we are relocating a store from one location to another within the same mall or within a close proximity.

Andrew Shapiro - Longdale Capital

So what portion of the store base has not already been recently remodeled and what is your pace that you're projecting for your remodels where the $6 million to $8 million accounts for two stores, five stores so again, what else is left in the overall programs thereafter?

Michael Rabinovitch

Andrew, I think that across the chain our stores are in various stages of their leases but I think we should probably speak in terms of modern concept, more up-to-date concept, most of our stores with fit that criteria; there are a few that don't that are probably out one or two years. But for the most part, most of the stores in there, the gear will cover four or five major remodels and those are some important stores and will probably have that amount or maybe a few less in the two years following.

Thomas A. Andruskevich

I think with the two major ones this year in Florida will be our Linux mall store and our Miami International store and they are really the last two stores that are old concept, particularly the Linux mall store. So those two renovations which will be actually major renovations, Linux will be a relocation and Miami International will be a renovation in an existing mall or an existing location. We'll really pretty much complete the major work at Mayors and then in Canada there's a couple of stores in I would say smaller markets in Canada that are not, do not reflect the current store design concept but there's literally two or three left and that's it.

Michael Rabinovitch

Andrew, if it's okay, you offered to drop out and come back.

Andrew Shapiro - Longdale Capital

I was just going to do that.

Operator

Our next question comes from Barbara Wyckoff - Buckingham Research.

Barbara Wyckoff - Buckingham Research

I got on the call a little bit late so hopefully this is new but could you kind of talk generally, what's working in the mix, what's not working, how's your engagement business? I've heard that gold is doing well kind of across the United States as well as sort of more high-end, less classic but for the more visual high-end fashion jewelry. Is this consistent with your performance? And then I guess secondly, if you could do the quarter over or the year over, what might you have done differently?

Michael Rabinovitch

Are all these comments, Barbara, referring to our most recently ended fiscal year?

Barbara Wyckoff - Buckingham Research

Well, yes.

Michael Rabinovitch

Okay. I think when it comes to product mix the strength of our business by far in fiscal year 2008 were timepieces, particularly high-end timepieces. I would say that engagement rings in general were soft last year. I am happy to report that that has picked up a little bit. I'm not sure that that's true in the industry but in our stores its true and I think that's due to some specific strategic initiatives that we've taken that I will not elaborate on for competitive reasons. Our gold business and in particular our Roberto Coin business was very good last year and continues to be good. Not every aspect of the gold business was good but I think those product designs that reflected lighter airier value-driven propositions and I think more contemporary designs were the parts of our gold business that did well. As we move into this new fiscal year, I would say that the time piece business in general because of I think the fact that it did so well last year and because of so many brands increased their prices this year, it's a little sluggish right now. And actually our fine jewelry business and our bridal or engagement ring business is faring somewhat better than it did a year ago.

If we had to do one thing differently last year, what would it be? I'm not sure we would have - inasmuch as I believe the marketing dollars really helped build our brand long-term, I'm not sure that they did a lot for us last year in the third fiscal quarter or in the holiday season because the consumer just wasn't there. So I think that's probably the one thing I would have done differently.

Barbara Wyckoff - Buckingham Research

And just one last question about the timepiece business, you said it's a little sluggish now. Are you having trouble or have you seen in the last year, trouble getting deliveries? I've heard that the movements are hard to come by?

Thomas A. Andruskevich

That is true. There was a blockage in movements in Switzerland. I think certain deliveries were late last year. I'm not going to say that that dramatically affected our business. I do think that the sluggishness in the watch industry this year is pretty much, at least from anecdotally other companies I've spoken with, I think that's pretty much the case across the State of Florida and what we've been able to gather in other markets as well.

Operator

Our next question comes from Andrew Shapiro - Longdale Capital.

Andrew Shapiro - Longdale Capital

You described this master leasing line as something that helps release collateral or gives you more room under your secured line. Can you remind us, because you probably did describe this in your 10K or elsewhere, remind us again of this extra separate line and how it works?

Thomas A. Andruskevich

Sure, Andrew. The way this works is - first, in the absence of the master leasing line, when we make our capital expenditures, the funds have come out of our operating line of credit, the secured facility. With the existence of the master lease line what we're doing is we're entering into capital leases on these fixed assets. By entering into capital leases on them there's no disbursement for them and therefore relieving the line of the burden that would otherwise be present for paying for these capital expenditures. The assets are leased over a period of three to five years depending on the nature of the asset. The rates are very competitive. They're just slightly above our own operating line so it provides us a lot of flexibility especially in a difficult economy.

Andrew Shapiro - Longdale Capital

Okay. Now in light of the consumer slowdown and you know the economy as bad as it is, other retailers and jewelers in particular have certainly hit you know tough times and they aren't as skilled of course as you guys are and so there may be some opportunities and some assets out there that are available for acquisition and now at more realistic valuation levels. Have you seen more acquisition opportunities present themselves and are they at more realistic levels and what are yours and the Board's view about the company's capital allocation plan?

Thomas A. Andruskevich

Well, I think in general I think there's a lot more jewelry companies that are, how should I say it, encountering difficulties, some of them are available, some of them are in restructuring Chapter 11, and we monitor that very closely. I can't say that the types of companies that we're interested in have become available and I can't say that I've seen a dramatic increase in companies for sale that we would be interested in. I've seen a couple more but not I would say a dramatic increase. And then maybe specific Andrew to remembering that we're focusing our acquisition view on a very specific kind of candidate which would be at the higher end of the market and very dominant in its local market. So those tend to be, those less often tend to be the ones you're reading about.

As far as what's our view about all this, we do believe that opportunities will become available. We believe that they'll become available at better prices than we've perhaps seen in the past. And I think our plan is to just be patient, to continue to let people know that our long-term strategy is to grow both through our general growth and through growth through acquisitions, and just keep our ears to the ground and make sure if opportunities are available we're aware of them and that we hopefully can get a shot at considering them. Our primary goal this year, however, is to focus on our current business and to try to keep it simple. And whether or not we have the capital to pursue an acquisition I think depends on each and every individual opportunity and how we, you know, the terms we negotiate and how we choose to finance that. So it's hard to answer that question in general terms because each opportunity tends to be a unique and special situation that you have to evaluate on a case-by-case basis.

Andrew Shapiro - Longdale Capital

Okay, well that's helpful. Now it seems the US dollar and the Canadian dollar have found a new level that it's like staying around at now. What type of reaction have you seen to your reduction in the Canadian prices that you took towards the end of last, the calendar year, and what are your thoughts or plans with respect to I guess recouping or regaining the margin? Are there opportunities available or how do you kind of address it?

Thomas A. Andruskevich

I think right now, Andrew, we're priced appropriately with the US-Canadian dollar hovering around the level it's at, whether it's parity or one of five Canadian dollars to the US dollar, that's what we anticipated in our business and at that level I think we're priced appropriately and I think we'll continue to see margin deterioration this year versus last year until we anniversary the price reductions that we took in Canada. We are taking advantage of margin opportunities whenever we can in terms of either making our own product or pricing products appropriately and when all the watch companies increased their prices earlier this year, we obviously benefit from the existing inventory that we have that we bought at lower prices. So overall for the year, as both Mike and I indicated, we expect gross margins to increase albeit very modestly but in the earlier months of the year I think we're going to probably see deterioration as a result of the situation in Canada. If the Canadian dollar were to dramatically strengthen, excuse me, dramatically weaken against the US dollar, I think we'd come back and re-evaluate our pricing policies. But given where the exchange rates are at and have found a home, we feel we're priced appropriately right now.

Andrew Shapiro - Longdale Capital

And when does that currency policy or pricing policy anniversary?

Thomas A. Andruskevich

November 1.

Andrew Shapiro - Longdale Capital

November. Okay. And I asked about the Vancouver subway project as it related to comp store sales, but what is the status of the project and when it gets to a point of maturation where it starts to benefit you rather than it's obviously current status that hurts?

Thomas A. Andruskevich

Yes. Well that's a good question actually. I think the project is due to be completed in April of 2009 and when it's completed we will actually I think benefit quite importantly from that because it'll be, as I understand it, it's the last stop on that subway line and everyone will get out right there. And that includes new points of travel for cruise ships, airport travelers and whatnot so that's due to end in April. But the good news is that the Vancouver store and the strength of some very very individual sales of high-end jewelry has performed very well in our new fiscal year for the months of April and May. So we're quite pleased about the efforts that that team is putting forth in spite of the obstacles that they face.

Andrew Shapiro - Longdale Capital

Now in light of the fact that there is less than a year - in fact it's almost nine months now in the project - are there phases of the project left that you would expect to further hinder the store or are you at a stable state until of course the project is over?

Thomas A. Andruskevich

It doesn't get any - if you were there and you saw it, you would understand that it can't get any worse.

Andrew Shapiro - Longdale Capital

That's what I wanted to know.

Thomas A. Andruskevich

And my understanding is that it's going to stay that way until the very end because since it's at the end of the line so to speak that's the part that they patch up last.

Andrew Shapiro - Longdale Capital

Okay. In terms of your traffic trends, do you feel that you in Florida started to bottom out and that its anniversary declines?

Thomas A. Andruskevich

Unfortunately I wish I could say that were the case but our traffic trends in Florida continue to be difficult and actually traffic trends in Canada are difficult as well. I think the difference is Canada has done a better job in the new fiscal year with high-end sales; they're doing quite well with sales over $20,000 and sales between 10 and 20, whereas I think at Mayors we've held our own with high-end sales but the sales at the lower end of the spectrum are weak. Although our transactions are down in Florida, transactions are down in Canada in the new fiscal but our average sale in Canada is up quite a bit whereas in Mayors it's only up modestly.

Michael Rabinovitch

Andrew, our traffic declines in the prior year at Mayors started in June and in Birks in Canada they were starting later which was more towards August and September.

Andrew Shapiro - Longdale Capital

I have more questions but I'll back out of the queue in case you've got more people to ask questions here. Then come back to me.

Operator

Our next question comes from Robert Eckhart - Private Investor.

Robert Eckhart - Private Investor

The only question that I have is that along the way you mentioned that results were based on 11.7 million shares outstanding in 2008 versus 11.8 million shares outstanding in 2007. So the company has brought in about 100,000 shares of stock?

Michael Rabinovitch

That's the weighted average shares outstanding which includes the diluted effect of common stick equivalents outstanding so if stock options were exercised or if the stock price goes up or down that would include or exclude a different amount of shares. For clarity, the company is not bought back any shares.

Robert Eckhart - Private Investor

And I assume you probably don't have any intentions of doing so?

Michael Rabinovitch

No, we don't.

Operator

Our next question comes from Andrew Shapiro - Longdale Capital.

Andrew Shapiro - Longdale Capital

One of my questions I'll move up here to follow up on what this gentleman has asked about. Part of the change in this year weighted average shares outstanding is of course related to this substantial decline in the stock price we've encountered has many factors but there's been some overhang in the markets, not just from a bad stock case in this economy but from what we understand to be the prime [SA] one of your largest investors have been trying to [shop] this large block of stock. Is there any update year-end as to whether this stock has been placed? Does the company management or other principal investors have any interest in buying this block if it were made available?

Thomas A. Andruskevich

You know, Andrew, that's a difficult question to answer given that we're not the holder of those shares. I think that question could more appropriately be answered by that investor and so I don't think that we could provide you much information on that.

Andrew Shapiro - Longdale Capital

I'll try to better clarify to questions that you might be able to answer. [inaudible] one of the largest investors have approached you with no whether or not they had sold it or placed it and so to your knowledge, they still own it?

Thomas A. Andruskevich

I'm not aware of any transaction.

Andrew Shapiro - Longdale Capital

And if that block were made available at the best prices, would that be something that you would take to the Board as possibly accretive and of interest to the company to consider retiring?

Michael Rabinovitch

Andrew, I think if that option were presented to us the Board would evaluate it. I can't tell you whether or not the management team and the Board would make the recommendation to deploy capital in that matter given the kind of economy that we're in but those decisions would be made when those opportunities presented themselves.

Andrew Shapiro - Longdale Capital

So you're not prepared to say that you and Tom would mortgage your homes to go buy the block yourselves if the opportunity at these prices presented itself?

Michael Rabinovitch

You're assuming I have home equity.

Andrew Shapiro - Longdale Capital

I'll move on to another question. There was a $900,000 payment I think to be made to the Brinkhaus owners as part of the sale and consideration but I don't remember the timing of it if it was in the fourth quarter that was just reported in March or before then or if it was in the current quarter that you're operating in right now.

Michael Rabinovitch

Andrew, the contract calls for the second payment to take place in April 2008 which is in the new fiscal year. The payment was to be also offset by or increased by any post-closing adjustments or operating activities between the two companies that needed to be settled up. We made that evaluation in June and the payment was executed; however, the payment was much lower than the original amount.

Andrew Shapiro - Longdale Capital

Okay. Much lower?

Michael Rabinovitch

Due to reconciling items.

Andrew Shapiro - Longdale Capital

But the payment's been made in June. What contingent payments if any remain and when are they out or how are they measured?

Michael Rabinovitch

Andrew, the remaining payments are not contingent; they're contractual; they're notes. And they're due in September of each - I'm drawing a blank; I apologize. There's one each year for the next three years.

Andrew Shapiro - Longdale Capital

On the anniversary date?

Michael Rabinovitch

Yes, I think they're in September.

Andrew Shapiro - Longdale Capital

Aren't they scheduled after [inaudible]?

Michael Rabinovitch

[inaudible] I apologize. I'm drawing a blank. I think they're $1.7 million or $1.5 million a piece for each of them in the next three years.

Andrew Shapiro - Longdale Capital

And does the value of these payments and the one that you just made in June, do they go into the balance sheet subsequent as good will or some other item or are they already in the balance sheet and its note payables?

Michael Rabinovitch

Exactly, Andrew, the latter. The purchases have been fully accounted for and reported as the notes payable on the balance sheet.

Andrew Shapiro - Longdale Capital

How about the June payment which had some contingencies with it?

Michael Rabinovitch

That would have been - that was in our - the closing amounts of our March 08 year reflected the adjusted payment in June. We were able to close the books simultaneously.

Andrew Shapiro - Longdale Capital

Okay. I noticed from looking at prior quarters' balance sheet and this most recently balanced sheet that's in the press release that the tangibles and good will amount dropped sequentially significantly from last quarter. Can you detail or comment what happened here and also reconcile the flat depreciation and amortization that I would have thought would have dropped a bit more on that reduction unless I guess it's all good will?

Michael Rabinovitch

Let me answer the question first and then tell me if you still have a question on the amortization. The good will adjustment - the adjustment in good will is essentially three items, two of which are small. First we had a very small amount of good will reported with the Brinkhaus acquisition and that would have been additive so it was approximately $1 million. Secondly we had a higher translation from November to March of the good will so that's insignificant. But the final item is very significant as when we reported the tax benefits related to reducing the valuation allowance from the US tax content about two-thirds of those tax assets were realized on our balance sheet but two-thirds of them went to reduce good will and about one-third went through the P&L. So using round numbers, we reported about a $28 million asset by reducing the valuation allowance. But based on the accounting principles that needed to be followed, we had to essentially revalue the good will that was established on the initial acquisition of Mayors. As a result of that we reduced the good will because the assets became valuable and there is a portion that ran through the P&L which is what you see in the year-end results. Does that help answer the question?

Andrew Shapiro - Longdale Capital

It certainly answers the D&A question. And so it's Mayors' good will that got written down -

Michael Rabinovitch

You used a better word, but yes.

Andrew Shapiro - Longdale Capital

As part of the recognition of the present value of the NOL which your analysis now provides that you will believe will get recognized and utilized in future years?

Michael Rabinovitch

That's correct. We don't present value it. It's the actual value of the tax assets and so you're correct.

Andrew Shapiro - Longdale Capital

Okay. And then can you remind us what is the size of the NOL?

Michael Rabinovitch

We now have $36 million of tax on the balance sheet that will more likely than not be realized through future taxable income. Approximately $7 million of that is in Canada and about $28 million, $29 million is in the United States.

Andrew Shapiro - Longdale Capital

Okay. And then does the surtax asset in any way infer a timing as to the recognition of the NOL?

Michael Rabinovitch

It doesn't infer a timing other than each of the assets has their own expiration date and it was our responsibility to determine whether or not we could utilize them through those years. Many of the assets have up to 12 years left.

Andrew Shapiro - Longdale Capital

Well I guess that's some form of internal projection of profitability here, which is good. And then you had an inventory reduction this quarter especially after you reversed out a variety of items that you broke out for us. You said at the last conference call after the third quarter that your inventory going into the fourth quarter was higher than you wanted and that you were planning on bringing that fourth quarter inventory down. My query is: Did you bring the fourth quarter inventory levels down consistent with your own expectations that you thought post holiday season or do you have more to go in the Q1 period?

Michael Rabinovitch

Andrew, referring to the prior what you said third quarter, I don't recall saying that we had more inventory than we wanted. I think what I may have - I think I did a very similar reconciliation backing out Brinkhaus and foreign exchange stating that comps inventory was appropriate given sale. But to answer the more important question, we don’t' feel that we have a significant amount of inventory that we need to work through. We're very comfortable with the level of inventory that we currently have. However, given the consumer environment we need to watch inventory very carefully as we approach the holiday season to make sure that we maintain this appropriate level of inventory to sale.

Andrew Shapiro - Longdale Capital

I appreciate these conference calls and you providing as much time as necessary for the Q&A and we certainly throw our fair share of questions at you and you give us some thorough and detailed answers and such. And it's a tough market environment. Can you give any insight as to any other we'll call it investor relation sell-side, buy-side, activities that you think you may be doing in the coming year to I guess we'll call it spread the word a bit? It's nice to have a few other people on the call asking questions with me and it would also be nice to have a few other shareholders in here as well because we probably have all that we'd like to eat of the stock and the valuations here seem quite depressed.

Michael Rabinovitch

Andrew, as usual if we do make any plans to attend any conferences and speak, we'll be announcing those in due course. We'll continue our investor relations effort which includes looking at conferences that are appropriate but as you mentioned earlier we also need to be very cognizant of managing the business in a very difficult environment. We have last year and will continue to have one-on-one calls with potential investors [inaudible] appropriate and I also do travel once in a while to meetings with both the buy-side and the sell-side. So that is something that we will continue.

Operator

There are no further questions in the queue at this time. I'd like to hand it back over to management for any closing comments.

Thomas A. Andruskevich

Thank you all for joining us today. We look forward to speaking with you when we report first quarter results in August if we don't speak to you sooner. Thank you very much.

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Source: Birks & Mayors Inc. F4Q08 (Quarter End 03/29/2008) Earnings Call Transcript
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