Chamberlain Commerce 354

Assignment for Self-Study Danier Part 1: Review of Cost Flows and Cost Terms 1. What are the total product costs for Danier as reflected in the income statement for 2008? What are the total period costs in 2008 as reflected in the income statement? 2. What are the product costs for Danier as reflected in its balance sheet for 2008? 3. What is a variable cost? What is a fixed cost? Why would it be useful to separate variable costs from fixed costs at Danier? 4. Use the information in the excerpted financial statements to estimate the fraction of operating costs in the 2008 income statement that are variable. Show your work. Part 2 Review of Strategy and Value Chain Skim or read the following sections of the first 5 pages of the excerpted annual report for Danier (2008). Contemplate the value chain for Danier. a. Sketch out Danier=s value chain. Annotate the value chain as per the example from Session 2 Brewery. What parts of the value chain are completed by Danier and which parts are out-sourced? b. What is Danier=s value proposition? Explain briefly why you think this is the value proposition. c. Another way to buy a leather coat is to visit the Men=s or Women=s department at The Bay (large clothing deparment store.) How does Danier=s value proposition and position in the market differ from the value proposition and position at The Bay? Is Danier=s strategy a good one? How do you know? What trade-offs is Danier making by selecting its particular position in the market?

Financial Highlights (in thousands of dollars, except earnings per share and shares outstanding)
2008 Sales Gross Profit Earnings (loss) before income tax, restructuring costs and litigation provision Adjusted EBITDA(1) Adjusted Net Earnings (loss)(1) Net Earnings (loss) Earnings (loss) Per Share Basic Diluted Shares Outstanding at year-end Selected Balance Sheet Data Cash Working Capital Total Assets Long-term Debt Shareholders Equity (1) See section entitled MD&A Non-GAAP Measures 163,550 76,185 (2,478) 3,757 (1,828) 12,892 $2.04 $2.03 6,276,429 2007 158,099 78,534 2,601 8,757 1,653 1,653 $0.25 $0.25 6,433,754 2006 148,351 71,398 (6,953) (1,159) (4,586) (5,503) (0.84) (0.84) 6,553,254 2005 166,350 83,487 6,612 12,488 4,849 (185) (0.03) (0.03) 6,546,154 2004 175,270 86,528 8,734 14,487 5,466 (7,097) (1.03) (1.03) 6,944,554

19,882 38,648 73,063 60,133

20,579 26,147 81,746 858 48,709

11,833 36,380 82,210 1,829 47,956

21,193 44,285 83,365 nil 54,937

22,576 44,202 89,869 nil 61,287

Selected Financial Information

2008 Comparable store sales increase/(decrease) Sales ($000) Shopping Mall/Street-Front/Direct Sales Power Centre Total Retail square footage Shopping Mall/Street-Front Power Centre Total Number of stores Shopping Mall/Street-Front Power Centre Total 6% 2007 9% 2006 (11%) 2005 (6%) 2004 (4%)

86,050 77,500 $ 163,550

79,533 78,566 $ 158,099

72,397 75,954 $ 148,351

81,280 85,070 $ 166, 350

83,283 91,987 $ 175,270

110,658 237,846 348,504

109,378 237,846 347,224

115,438 260,119 375,557

117,309 254,645 371,954

113,476 258,680 372,156

54 37 91

53 37 90

55 40 95

56 39 95

55 40 95

Letter to Shareholders
There is no doubt that the most significant event in fiscal 2008 was the successful conclusion at the Supreme Court of Canada of a 9 year old lawsuit. Winning the suit and collecting costs added back $20 million in pre-tax income, of which $2 million was in cash. Just as important it puts a significant distraction behind us and lets us focus solely on the business. In difficult economic times there is often a run to value and our history has shown, and our belief is, that a leather jacket is expected to, and will last longer, than a non-leather jacket so that there is more value for the money in a well priced leather jacket. In fiscal 2009 we expect to reinforce the brand promise of style, quality and value to our advantage. Our focus is to improve execution on existing strategy by delivering collections that offer customers a selection of good, better and best, by differentiating the Mall Store from the Factory Outlet experience, by improved marketing return, by exciting customers with new and innovative fashions, by growing the International business, and by expanding on the success of our accessories business which saw a 29% increase in gross margin dollars last year. I would like to thank our customers for their continued loyalty; our long term business partner, CIBC for continuing in their long standing Jeffrey Wortsman President and CEO Danier Leather Inc. Yours very truly, relationship with Danier Leather; and our front line Store and Head Office staff for their everyday efforts to delight customers and make them feel good about themselves.

About Danier
Founded in 1972, Danier has been manufacturing and retailing for over a quarter of a century, earning international recognition as a leader in leather and suede design. As a vertically integrated designer, manufacturer and retailer, Danier is able to offer customers exceptional value in addition to outstanding quality. Our in-house design team searches the world for the most inspiring trends and skillfully interprets them into timeless and sophisticated leather clothing and accessories that work in anyones wardrobe. Daniers dedication and commitment to customer satisfaction has earned it the appreciation of those who seek style with quality and value. Danier is passionate about delivering on its mission: To Satisfy our Customers Need to Feel Good about Themselves. Daniers merchandise is marketed exclusively under the well-known Danier brand name and is available only at its 91 shopping mall, street-front and power centre stores across Canada or through its corporate sales division. Daniers products are also available at the Festival City Mall in Dubai. Danier is a public company listed on the Toronto Stock Exchange under the trading symbol DL.

The Danier Brand

To achieve superior brand recognition, Danier ensures that all product lines share three attributes: timeless and sophisticated styling; high quality fabrications and remarkable value. The Danier brand occupies a distinct and carefully cultivated niche in a fragmented and polarized market. There are virtually no major leather and suede specialty retailers outside of North America, and those that exist are largely concentrated at the markets extreme high or low ends. Danier is unique in this regard as Danier appeals to the large segment of the market that desires leather and suede products that offer timelessness and sophistication, high quality, and remarkable value all in one package. The Danier brand is leveraged throughout each of its product lines and is also reinforced at the store level and through frequent and effective advertising and marketing campaigns.

About Danier
Vertical Integration
Danier is rare among large leather retailers in that we are a fully vertically integrated company. In other words, we have a level of expertise that is unparalled in the industry and we control every step of the retailing process from leather sourcing, to product design, to domestic and overseas manufacturing and retailing. There is simply no substitute for experience and our extensive network of contacts and rigorous standards have been the key to our excellent relationships with tanneries. Our size, financial strength, and year-round purchasing have earned us preferred customer status and enable us to select the best quality materials that make their way into Danier products.

Our People and Values

Whether in our stores, manufacturing facility, corporate head office or sourcing office in China, the entire Danier team is dedicated to satisfying our customers need to feel good about themselves. Our core values and beliefs are centred on: Always remembering the customers point of view Having a passion for our customers, products and work Finding ways to do things better Finding solutions to problems veryone should speak freely about ways to improve our business while E also listening to others.

Danier cautions readers that this list of factors is not exhaustive and that should certain risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected. There can be no assurance that the actual results, events or activities anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. Potential investors and other readers are urged to consider these factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on any forward-looking statements. For additional information with respect to certain of these risks or uncertainties, reference should be made to Daniers continuous disclosure materials filed from time to time with Canadian Securities Regulatory Authorities, including the Companys annual information form, quarterly and annual reports, and supplementary information, which are available on SEDAR at www.sedar.com and in the Investor Relations section of the Companys website at www.danier.com. Additional risks and uncertainties not presently known to the Company or that Danier currently believes to be less significant may also adversely affect the Company. Danier disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3. Selectively Open New Store Locations

Danier operates 54 shopping mall and street-front stores and 37 power centre locations (large format stores). Shopping mall, street-front and power centre locations will be selectively added where sales, store profit and return on investment criteria are met.

4. Corporate Sales
Sales of Danier products to corporations and other organizations for use as incentives and premiums for employees, suppliers and customers offer an incremental sales opportunity. Danier believes incremental sales can be achieved by providing corporate customers with unique, innovative and exciting merchandise. Daniers strong brand and expertise in leather design and manufacturing provide a solid foundation for the development of a successful corporate sales business.

5. International
Licensing opportunities for countries outside of North America will continue to be explored. Danier currently has one store under license in Dubai in the United Arab Emirates.

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Business Overview
Danier has been in the leather apparel business for more than 35 years and is one of the largest publicly traded specialty-apparel leather retailers in the world. As a vertically integrated designer, manufacturer and retailer, Danier is able to offer its customers high-quality, timeless and sophisticated leather clothing and accessories at exceptional value. Daniers products are sold exclusively at its 91 shopping mall stores, street-front stores and large format power centre locations in Canada and through its corporate sales division. Daniers products are also available at Festival City Mall in Dubai. Daniers business strategy over the next several years will include:

1. Its Core Business of Leather Garments

As the leader in leather outerwear and sportswear in Canada, Danier will continue to focus on being the dominant destination for better leather outerwear and sportswear. During 2008, outerwear represented approximately 63% of Daniers total sales and sportswear represented another 15% of Daniers total sales.

2. Continued Growth of Accessories

Accessory sales represented 22% of total Company revenue during 2008 compared with 19% during 2007. Daniers long-term objective is to continue to grow this line of business.

Consolidated Financial Statements

For the Years Ended June 28, 2008 and June 30, 2007

Consolidated Statements of Earnings and Comprehensive Earnings (thousands of dollars, except per share amounts and number of shares)
For the Year Ended Revenue Cost of sales (Note 9) Gross profit Selling, general and administrative expenses (Note 9) Interest expense (income) net Earnings (loss) before undernoted item and income taxes Litigation provision (recovery) and related expenses (Note 11) Earnings before income taxes Provision for (recovery of) income taxes (Note 10) Current Future Net earnings and comprehensive earnings Net earnings per share: Basic Diluted Weighted average number of shares outstanding: Basic Diluted Number of shares outstanding at period end See accompanying notes to the consolidated financial statements. $ 192 4,454 4,646 12,892 $ 1,168 (220) 948 1,653 June 28, 2008 $ 163,550 87,365 76,185 78,582 81 (2,478) (20,016) 17,538 June 30, 2007 $ 158,099 79,565 78,534 76,360 (427) 2,601 2,601

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$2.04 $2.03

$0.25 $0.25

6,313,583 6,335,873 6,276,429

6,532,680 6,547,416 6,433,754

Consolidated Balance Sheets (thousands of dollars)

June 28, 2008 June 30, 2007

Assets
Current Assets Cash Accounts receivable Income taxes recoverable Inventories (Note 4) Prepaid expenses Future income tax asset (Note 10) Other Assets Property and equipment (Note 5) Goodwill Future income tax asset (Note 10) $ $ 19,882 755 8 27,404 1,242 562 49,853 21,312 342 1,556 73,063 $ $ 20,579 724 28,561 1,446 5,112 56,422 23,575 342 1,407 81,746

Liabilities
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Current Liabilities Accounts payable and accrued liabilities Income taxes payable Current portion of capital lease obligation (Note 7) Accrued litigation provision and related expenses (Note 11) Future income tax liability (Note 10) Capital lease obligation (Note 7) Deferred lease inducements and rent liability Future income tax liability (Note 10) $ 9,845 858 502 11,205 1,675 50 12,930 $ 9,387 1,473 971 18,000 444 30,275 858 1,849 55 33,037

Shareholders Equity
Share capital (Note 8) Contributed surplus Retained earnings $ See accompanying notes to the consolidated financial statements. 21,409 548 38,176 60,133 73,063 $ 22,044 431 26,234 48,709 81,746

Approved by the Board

Edwin F. Hawken, Director

Jeffrey Wortsman, Director

Consolidated Statements of Cash Flow (thousands of dollars)

For the Years Ended June 28, 2008 June 30, 2007

Operating Activities
Net earnings Items not affecting cash: Amortization (Note 9) Amortization of deferred lease inducements and other Straight line rent expense Stock based compensation Accrued litigation provision (recovery) and related expenses (Note 11) Future income taxes Net change in non-cash working capital items (Note 12) Proceeds from deferred lease inducements Repayment of deferred lease inducement Cash flows from operating activities 6,154 (453) 116 117 (18,000) 4,454 363 107 5,750 6,583 (493) 172 156 (220) 5,626 (59) 13,418 $ 12,892 $ 1,653

Financing Activities
Subordinate voting shares issued (Note 8) Subordinate voting shares repurchased (Note 8) Repayment of obligations under capital lease Cash flows used in financing activities 80 (1,665) (971) (2,556) 24 (1,080) (911) (1,967)

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Investing Activities
Acquisition of capital assets Proceeds from sublease Cash flows used in investing activities Increase (decrease) in cash Cash, beginning of period Cash, end of period Supplementary cash flow information: Interest paid Income taxes paid See accompanying notes to the consolidated financial statements. $ (3,891) (3,891) (697) 20,579 19,882 $ (2,865) 160 (2,705) 8,746 11,833 20,579

414 1,679

280 -

Notes to Consolidated Financial Statements

For the Years Ended June 28, 2008 and June 30, 2007 (dollar amounts in thousands except per share amounts and where otherwise indicated)

Danier Leather Inc. (Danier or the Company) is incorporated under the Business Corporations Act (Ontario) and is a vertically integrated designer, manufacturer and retailer of leather apparel and accessories.

(d)

Cash: Cash consists of cash on hand, bank balances, and money market investments with maturities of three months or less.

Note 1: Summary of Significant Accounting Policies

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). (a) Basis of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary companies. On consolidation, all intercompany transactions and balances have been eliminated. (b) Year-end: The fiscal year end of the Company consists of a 52 or 53 week period ending on the last Saturday in June each year. The fiscal year for the consolidated financial statements presented is the 52week period ended June 28, 2008, and comparably the 53-week period ended June 30, 2007. (c) Revenue recognition: Revenue includes sales to customers through stores operated by the Company, sales to corporate customers through the Companys direct sales division and sales to third party licensees. Sales to customers through stores operated by the Company are recognized at the time the transaction is entered into the point-of-sale register net of returns. Sales to corporate customers and third party licensees are recognized at the time of shipment. Revenue from gift cards is recognized at the time of redemption. When a customer purchases a gift card a liability is recorded based on the dollar value of the gift card purchased. Unredeemed balances on gift cards that are more than two years old from the date of issuance (or breakage) are recorded in the consolidated statement of earnings. Historically, breakage has not been material.

(e)

Inventories: Inventories are valued at the lower of cost or market. Cost is determined using the weighted average cost method. For raw materials, cost includes invoice cost, duties, freight and brokerage. For finished goods purchased from third party vendors, cost includes invoice cost, overhead, duties, freight and brokerage. For finished goods manufactured by the Company, cost includes raw materials, labour and overhead. For finished goods and work-in-process, market is defined as the expected selling price; for raw materials, market is defined as replacement cost. In addition, a provision is recorded to reduce the cost of inventories for obsolete, damaged and slow moving items to their estimated net realizable values.

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(f)

Property and equipment: Property and equipment are recorded at cost and annual amortization is provided at the following rates: Building ...............................................................................................................4% declining balance Furniture and equipment ..........................................................................20% declining balance Computer hardware and software ........................................................30% declining balance Computer hardware and software under capital lease ................30% declining balance Visual merchandising equipment ................................................................. 2 years straight line Leasehold improvements are amortized on a straight line basis over the term of the lease, unless the Company has decided to terminate the lease, at which time the unamortized balance is written off.

Property and equipment are reviewed for impairment at least annually or when events or circumstances indicate their carrying value exceeds the sum of the undiscounted cash flows expected from their use and eventual disposal. For purposes of annually reviewing store assets for impairment, asset groups are reviewed at their lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. Therefore, store net cash flows are grouped together by regional areas where a number of stores operate within close proximity to one another. An impairment loss is recognized when the carrying amount of property and equipment is not recoverable and exceeds its estimated fair value. (g) Goodwill: Goodwill represents the excess of the cost of acquisition over the fair market value of the identifiable assets acquired. Goodwill is not amortized, but is tested for impairment at least annually at year-end. If required, any impairment in the value of goodwill would be written off against earnings. (h) Deferred lease inducements and rent liability: Deferred lease inducements represent cash benefits received from landlords pursuant to store lease agreements. These lease inducements are amortized against rent expense over the term of the lease, not exceeding 10.5 years. Rent liability represents the difference between minimum rent as specified in the lease and rent calculated on a straight line basis. (i) Store opening costs: Expenditures associated with the opening of new stores, other than furniture and fixtures, equipment, and leasehold improvements are expensed as incurred. (j) Prepaid advertising production costs: Advertising production costs for newspaper flyer inserts and other media are generally incurred several months before the advertising occurs. These expenses are deferred and expensed the first time the advertising occurs. Prepaid advertising production costs were $332 as at June 28, 2008 (June 30, 2007 - $480) and are included in prepaid expenses on the consolidated balance sheet. (k) Income taxes: Income taxes are determined using the asset and liability method of accounting. This method recognizes future tax assets and liabilities that arise from differences between the accounting basis of the Companys assets and liabilities and their corresponding tax basis. Future taxes are measured at the balance sheet date using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled. The Company provides a valuation allowance (o) (n) (m) (l)

for future tax assets when it is more likely than not that some or all of the future tax assets will not be realized. Earnings per share: Basic earnings per share is calculated by dividing the net earnings available to shareholders by the weighted average number of shares outstanding during the year (see Note 8). Diluted earnings per share is calculated using the treasury stock method, which assumes that all outstanding stock options with an exercise price below the average monthly market price are exercised and the assumed proceeds are used to purchase the Companys shares at the average monthly market price during the fiscal year. Translation of foreign currencies: Accounts in foreign currencies are translated into Canadian dollars. Monetary balance sheet items are translated at the rates of exchange in effect at year-end and non-monetary items are translated at historical exchange rates. Revenues and expenses are translated at the rates in effect on the transaction dates or at the average rates of exchange for the reporting period. The resulting net gain or loss is included in the consolidated statement of earnings. Stock option plan: The Company has a Stock Option Plan which is described in Note 8 where options to purchase Subordinate Voting Shares are issued to directors, officers and employees. Effective with the commencement of its 2004 fiscal year, the Company accounts for stock-based compensation using the fair-value method. The fair value of options granted are estimated at the date of grant using the Black-Scholes Option Pricing Model and is recognized as an expense over the vesting period of the stock option with an offsetting credit to contributed surplus. When stock options are subsequently exercised, share capital is increased by the sum of the consideration paid together with the related portion previously added to contributed surplus when compensation costs were charged against income. The Company continues to use settlement accounting to account for stock options granted prior to June 29, 2003. Restricted Share Units and Deferred Share Units: The Company has restricted share unit (RSU) and deferred share unit (DSU) Plans, which are described in Note 8. RSU and DSU Plans are settled in cash and are recorded as liabilities. The measurement of the compensation expense and corresponding liability for these awards is based on the fair value of the award, and is recorded as a charge to selling, general and administrative (SG&A) expense over the vesting period of the award. At the end of each financial period, changes in the Companys payment obligation due to changes in the market value of the Subordinate Voting Shares are recorded as a charge to SG&A expense. Dividend equivalent grants are recorded as a charge to SG&A in the period the dividend is paid.

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acquired or internally developed. The new standard is applicable to fiscal years beginning on or after October 1, 2008. The Company has evaluated the new section and currently does not expect the implementation of this new section to have a significant impact on its consolidated financial statements. International Financial Reporting Standards (IFRS) The Canadian Accounting Standards Board has confirmed that the use of IFRS will be required for publicly accountable profit-oriented enterprises. IFRS will replace Canadian GAAP for those enterprises. These new standards are applicable to fiscal years beginning on or after January 1, 2011 with comparative figures presented on the same basis. The Company is currently working on a conversion plan towards IFRS but it is too early to assess the financial impact of the conversion at this point.

Note 4: Inventories
Raw materials Work-in-process Finished goods June 28, 2008 $ 3,332 892 23,180 $ 27,404 June 30, 2007 $ 2,389 989 25,183 $ 28,561

Note 5: Property and Equipment

Cost Land Building Leasehold improvements Furniture and equipment Computer hardware and software Computer hardware and software under capital lease $ 1,000 7,064 24,315 10,415 4,014 2,920 $ 49,728 June 28, 2008 Accumulated Amortization $ 1,981 15,861 6,994 1,876 1,704 $ 28,416 Net Book Value $ 1,000 5,083 8,454 3,421 2,138 1,216 $ 21,312 Cost $ 1,000 7,064 24,013 10,736 7,578 2,920 $ 53,311 June 30, 2007 Accumulated Amortization $ 1,769 14,980 7,192 4,613 1,182 $ 29,736 Net Book Value $ 1,000 5,295 9,033 3,544 2,965 1,738 $ 23,575

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Note 6: Bank Facilities

Effective June 27, 2008, the Company amended and renewed its credit agreement. The renewed credit agreement provides for an operating facility for working capital and for general corporate purposes to a maximum amount of $25 million, bearing interest at prime plus 0.75%. Standby fees of 0.50% are paid on a quarterly basis on the unused portion of the facility. The operating facility is committed until June 29, 2009. The Company is required to comply with covenants regarding financial performance. Security provided includes a security interest over all personal property of the Companys business and a mortgage over the land and building comprising the Companys head office/distribution facility.

Subsequent to June 28, 2008, the Company also obtained an uncommitted letter of credit facility (the LC Facility) in the amount of $10 million to be used exclusively for issuance of letters of credit for the purchase of inventory and an uncommitted demand overdraft facility in the amount of $0.5 million related thereto. Amounts outstanding under the overdraft facility bear interest at the banks prime rate. The LC Facility is secured by the Companys personal property from time to time financed with the proceeds drawn thereunder.

The following transactions occurred with respect to the RSU Plan: Year Ended Outstanding at beginning of period Granted Redeemed Forfeited Outstanding at end of period Liability at the end of period Compensation expense recorded in SG&A June 28, 2008 50,201 123,300 (38,534) (1,667) 133,300 $411 $512 June 30, 2007 15,238 40,000 (5,037) 50,201 $234 $220

Note 9: Amortization
Amortization included in cost of sales and SG&A is summarized as follows: Year Ended Cost of sales SG&A June 28, 2008 $ 583 5,571 $ 6,154 June 30, 2007 $ 509 6,074 $ 6,583

Note 10: Income Taxes

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Future income tax asset (liability) is summarized as follows: Amortization Deferred lease inducements and rent liability Capital lease obligation Litigation provision and related expenses Stock based compensation Other $ Recorded in the consolidated balance sheets as follows: Future income tax asset current portion Future income tax asset long term portion Future income tax liability current portion Future income tax liability long term portion Net future tax asset $ June 28, 2008 $ 562 1,556 (502) (50) 1,566 $ June 30, 2007 $ 5,112 1,407 (444) (55) 6,020 June 28, 2008 $ 395 504 276 233 158 1,566 $ June 30, 2007 $ 18 605 611 4,617 194 (25) 6,020