Like many specialty and apparel retailers, Danier Leather had a difficult Christmas season this year. Danier reported revenue of $79.3 million for the quarter ended December 27 compared to $86.6 million the previous year. Earnings also declined on a year over year basis to $9.0 million or $1.29 per fully diluted share compared to $11.8 million or $1.67 per fully diluted share. The Company blamed warmer weather and a generally tough operating environment for its performance in the quarter.

We view our holding in Danier Leather as long-term and therefore are not overly concerned with the results. Moreover, we are comfortable with Danier's business model. We were pleased to see that the Company maintained its gross margin at 57% and did not resort to aggressive discounting to drive sales at the expense of profitability. We were also pleased to see that selling, general and administrative expenses increased only 3% despite 7 additional stores and an additional 30,000 square feet of selling space. Finally, we expect that the Company will benefit from the stronger Canadian dollar over next year since raw materials have been purchased with cheaper US dollars.

Another area of comfort is Danier's pristine balance sheet. Danier Leather has no debt and actually holds almost $14 million in cash. The Company's cash position increased to $19 million just after the books were closed due to the timing of bank settlements over the final weekend of the quarter. This equates to cash of $2.72 per fully diluted share. Book value is now $10.53, which should provide solid support for the share price until the Canadian consumer gets back on track.

July 2, 2004

Danier Leather reported third quarter results that were generally in line with expectations. Revenue increased 11% to $46.2 million as comparable stores sales increased 7%. Although the spring and summer are not typically strong selling seasons for leather goods, management suggested that “vibrant leather colours” were a big hit with mall shoppers. Also, sales of higher margin accessories rose 29% to reach 17% of total sales in the quarter. Net earnings for the quarter were $0.53 million or $0.08 per share compared to $0.45 million or $0.07 a year ago. The improvement in net earnings was driven by cost control, as selling, general and administrative expenses as a percentage of sales declined to 44.5% compared to 45.2% last year.

Danier still has a pristine balance sheet with $21.9 million in cash or $3.17 per share. The Company has no long-term debt and has $44.8 million of working capital. Danier is currently trading below its book value of $10.61 per share.

Finally, we must briefly mention that a legal decision went against Danier Leather, which the Company plans to vigorously appeal. The judgment concerned the accuracy and disclosure of information in a forecast issued by the Company during its initial public offering in 1998. We believe that at this point it is difficult to assess the potential outcome or time frame of the legal process. However, the press release stated, “the Company anticipates having sufficient financial resources to pay any award, interest and costs”. We will update the situation as it plays out and note that the market reaction to the news was muted.

November 26, 2004

As the temperature turns colder, Danier Leather is gearing up for its all important winter season. We were impressed with the Company’s progress in the seasonally weak first quarter and are encouraged about Danier’s prospects over Christmas. For the thirteen weeks ended September 25, Danier reported sales growth of 6% to $24.6 million on the back of a 5% increase in comparable store sales. Sales of higher margin accessories increased 9% and represented 22% of total sales. Although the Company lost money in the quarter, again the seasonally softest, gross profit margin improved 350 basis points to 46.9%. Remember that the Company benefits from a stronger Canadian dollar by purchasing raw materials with cheaper US dollars.

The financial strength of the Company is unquestionable, with almost $40 million, or $5.82 per share, of working capital and no long-term debt. Consequently, the Company’s Board of Directors declared an initial quarterly cash dividend of $0.06 per share in August. At current price levels, the stock yields a respectable 1.75%. Perhaps this was the catalyst that has driven Danier shares sharply higher in recent months. Or maybe it was the Company’s new advertising campaign featuring Chris Noth from Sex and the City and Law and Order fame that is expected to generate traffic to Danier stores this winter. In any case, Danier Leather continues to perform well and the Company continues to buy back stock, which is accretive to shareholder value.

June 30, 2005

After a strong run through the Christmas season to a high of $14, shares of Danier Leather have since retreated. For the first three quarters of the current fiscal year revenue has declined 4% to $140.9 million compared to $146.4 million and comparable store sales have decreased 5%. Management has pointed to weak consumer spending on outerwear due to unseasonably warm weather in the second quarter and a lukewarm response to the Company’s promotional activities. Irrespective of the weaker than anticipated financial results, Danier Leather has maintained its pristine balance sheet. Currently, the Company has working capital of $44.8 million and a cash balance of $20.7 million or $3.16 per share.

Given the weak financial results and the ongoing litigation issues, it is quite possible that Jeffrey Wortsman, President and CEO, is losing his taste for running a public company. He has recently closed all three U.S. locations, one in New Jersey and two on Long Island. This removes the potential need to access the capital markets in order to fund growth south of the border. Further, the Company has been aggressively buying back stock. During the 39 week period ended March 26, 2005, 402,400 subordinate voting shares were repurchased for $4,583,000. This implies an average price of $11.39 per share, well above the current share price. The Company has also just renewed its normal course issuer bid to acquire up to 421,061 subordinate voting shares, representing approximately 10% of the public float.

What would it take to privatize the entire Company? The Wortsman family owns 100% of the multiple voting shares so they would only have to repurchase the subordinate voting shares. With 5,319,825 shares outstanding, assume it would cost between $65 and $80 million. After using the cash on the balance sheet, the Company would need to add $45 to $60 million in debt to complete the transaction. At today’s low rates, interest payments would amount to no more than $5 million per year. This expense could be easily covered since EBITDA, excluding litigation provisions, has averaged $20.7 million over the past five years. Under these assumptions, the Wortsman family would still make a sufficient return to justify taking the Company private. Therefore we believe that such a transaction would make financial sense for both the founders and current shareholders alike.

December 16, 2005

Danier Leather has finally been vindicated in a long running legal battle with activist shareholders. Yesterday, the Ontario Court of Appeal overturned an earlier judgment against the Company related to Danier’s initial public offering prospectus. Essentially, the justices found that management did not misrepresent the Company’s sales forecast and were not responsible for updating the prospectus after it was filed. Management was also given credit for the fact that the implied financial projections were substantially met.

We believe that the market will react favourably to the decision for two reasons. First, Danier Leather had taken provisions to cover estimated costs and damages in the amount of $18 million pre-tax. Once this provision is reversed, earnings and book value could have a one-time boost of almost $1.90 per share. Second, given the strength of Danier’s balance sheet we believe that this decision removes any impediment to a large share buyback or an eventual privatization of the entire Company. With working capital of $36.4 million, or approximately $5.50 per share and no long-term debt Danier has the financial stability to weather the present challenges of a difficult retail environment.

January 19, 2007

The mild winter has wreaked havoc with weather-sensitive retailers this season. Based on disappointing holiday season sales and margins released by a national sporting-goods chain, we had been expecting the worst from Danier Leather. However, as CEO Jeffrey Wortsman said on the most recent conference call, “it was cold enough to put on a leather jacket this past December”.

Danier’s results, for the 13 and 26 weeks ended December 23, 2006, were simply excellent. Sales in the second quarter of fiscal 2007 increased 9% to $67.6 million from $61.8 million in 2006. Importantly, comparable store sales increased 12%. Year to date, sales increased 8% to $89.5 million and comparable stores sales increased 10%. In the current quarter, EBITDA increased to $13.3 million from $9.0 million in the comparable period last year. The year to date increase in EBITDA was even more impressive, growing to $8.6 million from $1.9 million. Earnings per share were $1.17 versus $0.70 in the second quarter and $0.53 versus a loss of $0.11 in the first six months of the year. It is important to remember that due to the seasonal nature of the business investors should not annualize these numbers to forecast the full year results.

Going through the financial statements, this quarter was “clean”; no unusual gains, assets sales or accounting techniques were used to bolster the results. So how did they do it? We are finally seeing the results of management’s renewed focus on Danier’s core customer. The flashy billboards are gone and the celebrity advertising campaign was not renewed. The Company’s advertising now portrays a more upscale and sophisticated image. From a merchandising perspective, the stores carry fewer styles but greater inventory of essential, timeless products. Management also made the decision to close several underperforming stores and has no plans to expand the store count this year.

Investors and analyst alike applauded these results and sent the shares soaring approximately 40%. We hope that we are just at the beginning of an improving trend after a difficult two year period for the Company.

September 7, 2007

With the release of Danier’s fiscal 2007 fourth quarter and year end results, we believe that the Company has “turned the corner”. Same store sales, one of the most important retail metrics, showed 9% growth after four years of declines. On an absolute basis, the Company generated sales of $158.1 million compared to $148.4 million despite closing five underperforming stores over the course of the year. By concentrating on the Company’s core customer through a more upscale and sophisticated product offering, shoppers have returned.

Working down the income statement, Danier reported gross profit of $78.5 million compared to $71.4 million an increase of 10%. The 49.7% gross margin compares favourably to the 48.8% gross margin reported in fiscal 2002, a year when the Company earned $1.57 per share. In fiscal 2007, Danier earned $1.65 million or $0.25 per share compared to a loss of $5.50 million or ($0.84) per share the previous year. Although the Company’s financial results show a marked improvement on a year over year basis, there is still plenty of upside based on historic results.

So how does Danier get back to historic levels of profitability? Easier said than done but management needs to focus on growing sales from existing stores while controlling costs. Note that sales per square foot were just $455 in fiscal 2007 but $560 per square foot in 2002 and $605 per square foot in 2001. SGA (selling, general and administrative) costs were $76.3 million in fiscal 2007 for 90 stores compared to $69.3 million in fiscal 2002 for 87 stores. Rather than cutting expenses to the bone, we would prefer to see management’s efforts directed toward sales growth from the current asset base. Effective advertising, targeted merchandising and the right product mix could potentially lead to tremendous earnings growth.

As a final note, we continue to wait for a resolution to the outstanding litigation. Hopefully, we will have an answer before the end of the year but legal issues always have a tendency of taking longer than expected. In the meantime we look forward to steadily improving financial and operating results from the Company.

October 12, 2007

The Supreme Court of Canada has just released its ruling on the class action lawsuit against Danier Leather. The saga has dragged on for almost ten years after allegations of deliberately misleading forecasts in the Company’s 1998 initial public offering prospectus. Although the plaintiffs won a lower court ruling, the Ontario Court of Appeal overturned the judgment in 2005 and the case was sent to the Supreme Court of Canada.

Shares were halted Friday morning as management and investors awaited the decision. By mid-morning we learned that the case had been unanimously dismissed by the court, which is a huge win for Danier. Essentially, the $18 million litigation provision will flow back through the Company’s financial statements as a one time gain to retained earnings. Assuming the application of a $4.6 million tax provision, the Company’s book value should increase from approximately $7.55 per share to $9.60 per share. In addition, Danier is entitled to recoup its legal expenses and “such costs will be determined at a later date”.

With the elimination of the threat of a large punitive settlement, management has several strategic options available. Although the Company requires a large amount of working capital to make seasonal purchases of inventory, at least a portion of the $20.6 million of cash could be returned to shareholders. We believe that the $0.06 per quarter dividend could be reinstated, which would cost the Company just over $1.5 million per year. The balance could be used to buy back shares, either through a Dutch auction or in the open market. After everything management has been through, a going-private transaction is a definite consideration now that the litigation has been resolved.

February 29, 2008

After grinding through a couple of difficult years, Danier Leather finally made significant progress in fiscal 2007.  Danier reported impressive same store sales growth of 9% for the year, as the Company successfully refocused its merchandise and marketing on its core customer.  Danier was also vindicated by the courts with the dismissal of a class action lawsuit that had dragged on for almost ten years.  We were quite pleased with management’s efforts and the shares responded well to the good news.

Unfortunately, Danier faced a difficult Christmas season, coinciding with the Company’s second quarter of fiscal 2008, this past year.  After adjusting the Company’s second quarter results to include Boxing week in both periods, sales decreased 8% or $6.4 million and same store sales decreased 7%.  Net earnings fell $1.5 million to $6.0 million or $0.94 per fully diluted share compared with $7.5 million or $1.14 per diluted share last year.  In the press release, management pointed to a 5% decline in customer traffic and a 3% reduction in the average sale.  The combination of a slowing economy, strong Canadian dollar and a warm start to the winter resulted in the need to increase markdowns and sales promotions, which negatively impacted the results.

We weren’t too surprised by the tough quarter given the generally weak results across the Canadian retail sector.  Further, the factors that led to the setback in the critical holiday season appear to have been out of management’s control.  On a positive note, we were pleased to see that the Company was active with its normal course issuer bid.  Since the start date of April 23, 2007, Danier has repurchased a total of 292,500 shares.  We think that the financial results for the coming quarter should show some improvement given the colder weather and reduced promotional activity.

At today’s trading price of approximately $8.00, we continue to believe that a takeout or privatization is possible.  With only 6.3 million shares outstanding and approximately $16 million in cash on the balance sheet, the transaction could be completed with an equity partner or with debt financing without much difficulty.