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Coast Wholesale Appliances Inc. Reports 2014 Second Quarter Results

Strong builder sales drives record quarterly revenue, twelfth consecutive quarter of year-over-year sales growth

VANCOUVER, BRITISH COLUMBIA -- (Marketwired) -- 08/11/14 -- Coast Wholesale Appliances Inc. (TSX:CWA) (Coast or the company), today reported financial results for the three and six months ended June 30, 2014. The three-month period represents the second quarter of Coast's 2014 fiscal year.


Performance Highlights                                                      
                                                                            
(in thousands of dollars except percentages and per-share amounts)          
                                                                            
                               2014    2013    2012    2014    2013    2012 
                                 Q2      Q2      Q2     YTD     YTD     YTD 
----------------------------------------------------------------------------
Sales                        43,872  41,970  37,729  80,666  76,330  67,765 
Gross profit                  9,437   9,566   8,505  17,040  16,984  15,388 
As a percentage of sales       21.5%   22.8%   22.5%   21.1%   22.3%   22.7%
                                                                            
Net Income                    1,162   1,560   1,124     941   1,919   1,120 
Basic and diluted net income                                                
 per share                     0.12    0.16    0.11    0.09    0.19    0.11 
                                                                            
EBITDA                        2,229   2,658   2,062   2,522   3,728   2,678 
EBITDA margin                   5.1%    6.3%    5.5%    3.1%    4.9%    4.0%
                                                                            
EBITDA per share              0.222   0.265   0.205   0.251   0.372   0.267 
Dividends per share           0.075   0.075   0.105   0.150   0.150   0.210 
                                                                            
EBITDA before other costs                                                   
 (1)                          2,592   2,658   2,062   3,688   3,728   2,678 
                                                                            
(1) Other costs includes one-time legal, Special Committee and financial    
 advisor expenses related to the unsolicited offer by CWAL to acquire all   
 of the issued and outstanding common shares of Coast.                      

Second Quarter Results

For the three months ended June 30, 2014, Coast posted sales of $43.9 million, its highest ever quarterly revenues. This was up by $1.9 million, or 4.5%, from $42.0 million in Q2 2013 and represented the company's 12th consecutive quarter of year-over-year revenue growth. Sales to builders increased by 6.1%, while retail sales were level with Q2 2013 and other revenues improved by 12.4%.

Sales growth was particularly strong in the Greater Toronto Area (GTA) and in Manitoba, with double-digit revenue increases in both markets. Revenues in Alberta, Saskatchewan and British Columbia were either equal to or slightly below last year's levels.

Second quarter gross profit of $9.4 million was down slightly from $9.6 million in 2013, while gross margin percentage dipped to 21.5% from 22.8% in 2013. The decreases were primarily due to ongoing pricing compression as a result of much more competitive market conditions in Coast's core builder business segment. Gross margin percentages on retail sales in Q2 were maintained at the 2013 level.

Coast's second quarter selling, general and administrative, facilities and warehousing expenses (SG&A expenses) rose by $0.3 million to $7.2 million. The increase was primarily due to the $0.4 million in professional fees for legal and financial advice, and Special Committee costs incurred during the quarter. These costs related to Coast's response to the unsolicited cash offer made March 4, 2014 by CWAL Investments Ltd. (CWAL) to purchase all of the issued and outstanding shares of Coast not currently held by CWAL. Without these extraordinary costs, SG&A expenses as a percentage of sales would have been reduced from 16.4% to 15.6%, compared to 16.5% in 2013.

Due primarily to the costs associated with the CWAL take-over bid, second quarter EBITDA decreased by $0.4 million to $2.2 million from the $2.7 million reported in 2013, while EBITDA margin decreased to 5.1% from 6.3% last year. Without the one-time costs, EBITDA would have been $2.6 million and EBITDA margin would have been 5.9%.

"We continue to be very pleased with our builder sales growth and are encouraged that we maintained both our retail revenues and margins in the current competitive consumer sales environment," said Maurice Paquette, President and CEO of Coast. "In the builder segment, we've maintained a steady flow of completed contract sales to single and multi-family homebuilders in our western Canadian and GTA markets, and a healthy backlog of contract orders for future delivery. To help offset the erosion of our builder margins, we are continuing to work to increase our share of the higher-margin retail market."

Six-month Results

Revenues for the first half of 2014 increased to $80.7 million from $76.3 million last year, a $4.3 million, or 5.7%, gain. Sales to builders improved by 6.1%, retail sales were up by 3.4% and other revenues increased by 11.3%.

As with the quarterly result, sales growth was particularly strong in the GTA and in Manitoba, with double-digit revenue gains in both markets. Sales in Alberta, Saskatchewan and British Columbia were either equal to or slightly below last year's levels.

First half gross profit of $17.0 million was level with 2013; however, gross margin percentage decreased to 21.1% from 22.3% last year. As with the quarterly result, the drop in gross margin percentage was mainly due to the extremely competitive sales environment that has persisted in Coast's builder business.

Coast's SG&A expenses for the six months ended June 30, 2014 rose by $1.3 million to $14.5 million, due in large part to the $1.2 million in one-time costs associated with the CWAL takeover bid that were incurred during the period. Without these extraordinary costs, SG&A expenses as a percentage of sales would have been reduced from 18.2% to 16.6%, compared to 17.4% in 2013.

EBITDA for the first half of the year decreased by $1.2 million to $2.5 million from $3.7 million last year and EBITDA margin dropped to 3.1% from 4.9%. As with the quarterly result, the reduction was primarily due to costs associated with the CWAL takeover bid. Without the extraordinary costs, first half EBITDA would have been equal to 2013 and EBITDA margin would have been 4.5%.

Operating Highlights

During the second quarter, as part of its ongoing strategy to enhance profitability by increasing sales from its existing stores, Coast began work on showroom updates at its Edmonton North store in Alberta and its Winnipeg, Manitoba location. Both store refreshes are expected to be completed during 2014.

As planned, the company completed major upgrades to its inventory and pricing management systems at the end of June. This IT project came in on time and on budget and has now been implemented across all of Coast's locations. Over time, these new systems will help Coast better manage its gross margins, reduce inventory levels and increase inventory turns.

Dividends

Coast declared monthly dividends of $0.025 per share from April through June of 2014, payable on or about the fifth day of the month following.

Outlook

On June 20, 2014, CWAL announced the successful completion of its bid to acquire Coast, having secured ownership of approximately 80.7% of the company's issued and outstanding common shares. Subsequent to quarter-end, on July 14, 2014, Coast announced that it will hold a special shareholder meeting on August 21, 2014 for the purpose of passing a resolution to approve an arrangement agreement with CWAL for a subsequent acquisition transaction to acquire all of the remaining common shares not owned by CWAL. Upon completion of the transaction, Coast plans to delist the company's common shares from the Toronto Stock Exchange and will apply to cease being a reporting issuer.

A more detailed discussion of Coast's financial results can be found in its 2014 Second Quarter Management's Discussion and Analysis, which will be posted along with the unaudited interim condensed financial statements for the period on Coast's website (www.coastwholesaleappliancesinc.com) and SEDAR (www.sedar.com) on August 11, 2014.

Coast Profile

Coast is a leading independent supplier of major household appliances and accessories to builders and developers of multi-family and single-family housing, and to retail customers. Founded in 1978, Coast operates stores across the four western provinces and in the Greater Toronto Area of Ontario, as well as a network of warehouse distribution centres strategically situated to serve these locations.

Forward-looking Statements

This news release includes forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are identified by the use of terms and phrases such as "anticipate", "believe", "estimate", "expect", "may", "plan", "will", and similar terms and phrases, including references to assumptions. Such statements may involve, but are not limited to, comments with respect to the sustainability of our dividends to shareholders, the application by Coast to delist its common shares from the Toronto Stock exchange and cease being a reporting issuer, the performance of the Canadian economy and our sales expectations.

These forward-looking statements reflect our current expectations regarding future events and operating performance as of the date of this news release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to: sensitivity to general economic conditions; changes in consumer confidence in the economy; maintenance of profitability and management of changes to our business; competition; increases to interest rates; reliance on suppliers and their ability to supply product for sale on a timely basis; changes in consumer preferences; changes in our mix of product sales; fluctuations in fuel and commodity pricing; usage of extended warranty programs and the costs to deliver these services; changes to planning and supply chain processes; lack of long-term supplier agreements; reliance on key personnel; and foreign exchange rates as they relate to imported products.

Although the forward-looking statements contained in this news release are based upon what we believe to be reasonable assumptions, Coast cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements reflect management's current beliefs and are based on information currently available to Coast. They speak only as of the date of this news release and reflect current assumptions regarding future events and operating performance. These assumptions include, without limitation: slow economic growth in 2014 in both Western Canada and the Greater Toronto Area (GTA), our current markets; continued fluctuations in exchange rates; continued low interest rates through 2014; continuing relatively stable credit markets for our major builder customers; and little change in the total number of housing starts in 2014 compared to 2013. These forward-looking statements are made as of the date of this news release and Coast assumes no obligation to update or revise them to reflect new events or circumstances, other than as required by law.

Non-IFRS Financial Measures

EBITDA, EBITDA margin and Adjusted EBITDA are non-IFRS financial measures that are defined in Coast's Second Quarter Management's Discussion and Analysis, to be posted on Coast's website and SEDAR on August 11, 2014.

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