Liquor Stores N.A. Ltd. : Issues Letter to Shareholders Explaining How PointNorth's Plan Will Destroy Value at Liquor Stores

EDMONTON, ALBERTA--(Marketwired - May 25, 2017) -

Editors Note: There is an image associated with this press release.

Liquor Stores N.A. Ltd. (the "Company" or "Liquor Stores") (TSX:LIQ), North America's largest publicly traded liquor retailer, today issued a letter to Liquor Stores shareholders explaining how Toronto-based activist PointNorth Capital will destroy value at Liquor Stores. In the letter, Liquor Stores also outlines how PointNorth's nominees lack successful liquor retailing experience and are not really independent from PointNorth.

Vote the WHITE proxy for Liquor Stores' nominees

Liquor Stores urges shareholders to read its letter to shareholders and the accompanying financial model. Shareholders should also read the Management Information Circular. It highlights the value creation initiatives undertaken by Liquor Stores and its Board over the past few years. All documents are available on the Liquor Stores website at http://www.liquorstoresna.ca/investors.

Liquor Stores recommends that shareholders vote the WHITE proxy for the Board's eight experienced and qualified incumbent nominees.

Voting is a quick and simple process. Your WHITE proxy must be received well in advance of the proxy deadline of 10:00 a.m. (Mountain time) on June 16, 2017. Due to the limited time available, we recommend voting by internet, telephone or fax today or no later than 24 hours before the deadline. For Ease of voting visit our website www.liquorstoresna.ca/investors. Vote today.

The full text of the letter and accompanying appendix follows:

May 25, 2017

Dear shareholders,

The value of your investment is at risk and you have a very important decision to make.

Toronto-based activist PointNorth Capital, a 9.7% shareholder, is seeking to nominate 6 out of 8 Liquor Stores directors, and put in place a strategy that will destroy shareholder value.

That's what happened when PointNorth's key principals had control of SiriusXM, KEYreit, Priszm Income Fund and Mobilicity. And that's what we believe will happen at Liquor Stores unless shareholders vote the WHITE proxy to re-elect the current directors.

Liquor Stores is successfully executing a strategy designed to create sustainable, long-term value for all shareholders. Our plan is working. It is driving year over year growth in sales and improvements in gross margin and operating profit, plus strong returns from 46 store renovations. We have improved our profitability while also reducing our inventory levels.¹

Our plan is making us a better retailer and has laid the groundwork to increase shareholder value. We know that there is more to be done and that recent times have been challenging for shareholders. We are being proactive and that includes a review of our U.S. business that will be completed in the fourth quarter of this year (see page four for further details).

We welcome new perspectives and fresh ideas. To this end, we have tried to understand PointNorth's "New Strategy" for Liquor Stores and find what's good in it. We have come to the conclusion that PointNorth's plan would damage our competitive position and cost our shareholders money.

Using conservative assumptions, we have calculated that by the time PointNorth has finished implementing its plan, it will have reduced operating profits by about $10 million annually which would wipe $2.65 off our share price. You can see for yourself how PointNorth's numbers don't add up in the Appendix at the end of the letter.

Surely, PointNorth doesn't want to destroy value, but that's what will happen if shareholders elect directors who don't have the knowledge or experience to properly oversee our business, and who appear to lack the independence to look after your best interests.

As we discuss in detail later in this letter, PointNorth's nominees have no successful experience in the competitive liquor retailing environment. They also lack meaningful expertise in the critical areas of commercial real estate, information technology and U.S. retail. They do not understand what drives our profitability, or what differentiates us in our key markets. They discount the impact of the economic downturn in Alberta and Alaska. They lack independence from PointNorth.

And perhaps most troubling of all, PointNorth has said publicly that the authors of the so-called "New Strategy," are two executives with poor track records whose only industry experience comes from time spent working for the government-owned Nova Scotia Liquor Corporation (NSLC). This may explain the flaws in PointNorth's thinking. The NSLC is a single-jurisdiction government monopoly. Liquor Stores operates in six distinct and highly-competitive markets. The differences could not be more profound.

PointNorth's Plan is Dangerous

PointNorth's plan will alienate our customers and impair our ability to compete. Customers choose us because we sell the products they want at the right prices in good locations, because we offer high quality products they can't find elsewhere and because there is always a trained staff member ready to help.

PointNorth doesn't understand the problems it will create with its plan to:

• Significantly reduce our product selection
• Stop highly profitable discount purchases from wholesalers (bridge buying)
• Eliminate our U.S regional office and the team that runs our profitable private label business
• Eliminate our private warehouse, used to hold our bridge buy and private label products
• Reduce in-store staffing (while promising to improve customer service!)
• Rush store renovations and overhaul 140 Canadian stores within two years

PointNorth's actions will reduce our gross margin and operating profit. We have calculated that under PointNorth's plan there would be a $10 million decline in operating profit before amortization, or 25% less than we deliver today. See these numbers for yourself in the appendix to this letter.

We believe that PointNorth's destruction of value will occur because its flawed analysis discounts the value of the following strategies we use to drive profitability:

PointNorth doesn't understand the value of bridge-buying. This strategy enables us to routinely procure top selling spirits like Smirnoff Vodka, Crown Royal and popular wine brands such as Kim Crawford, Apothic and Barefoot at an average discount of approximately 10% off wholesale prices. As PointNorth points out, this strategy comes with financing and warehouse costs. Those costs, however, total about 1.5% of wholesale prices². Put another way, we pay about $1.50 to increase profits by $10. We think that's a pretty good strategy, particularly effective against smaller and low cost competitors.

PointNorth's Plan would kill our Private Label business – a highly profitable strategy that differentiates us from our competitors. PointNorth would eliminate the highly-skilled team that runs this business from our U.S. regional office, and close the low-cost private warehouse we use to store this inventory. It is simply not possible to organize "just-in-time" private label deliveries to each store from, for example, a winery in France. Our private label program has also become a draw for customers who can't find these products anywhere else, and then also buy other merchandise in our stores.

PointNorth's $80 million inventory cut would drive customers to our competitors. Customers shop with us for our broad selection of high-quality products. PointNorth's plan would cut our inventory by 57% and focus on selling our top 300 items, completely missing the point that competitors focus on these top products too, typically as loss leaders. To achieve PointNorth's desired inventory cuts, we would significantly reduce our product assortment which would reduce our gross margin (we generate a significantly higher gross margin on items outside of the top 300). What's worse is that we would also lose the customers looking for products that they can't find elsewhere.

In addition to these profit eroding strategies, PointNorth's renovation rush will significantly dilute returns. Under the Company's current strategy, management has been able to generate average returns of 10 - 20% on the stores we renovate. We've achieved these returns by selecting stores for renovation in a very strategic manner, and by pacing the renovations to minimize disruptions to our customers and operations (and opportunities for disruptive marketing by our competitors). PointNorth wants to upend this successful strategy by charging ahead with renovations across our entire Canadian network at essentially the same time. We believe PointNorth's renovation strategy would drive away customers, especially when combined with their plans to reduce our product selection and cut staff.

PointNorth's recent comparison of Liquor Stores to government-owned BC Liquor is flawed. BC Liquor runs a discount pricing model, which generates lower gross margins at the expense of profitability. We outperform BC Liquor on the metric that matters – profitability. Consider this: BC Liquor makes $8 million, or 20%, less operating profit before amortization than we do despite having $572 million more in sales.³ Higher sales are the only reason certain BC Liquor metrics such as inventory turns and operating expenses as a percentage of sales look better than ours. Looking at these metrics in isolation without also considering profits is a critical flaw in PointNorth's plan.

PointNorth's Nominees Are Unqualified and Lack Independence from PointNorth

Overseeing the complexities of our business, especially during the current challenging economic downturn in our key Alberta market requires a Board with deep experience and the right qualifications. For Liquor Stores that means experience in competitive retail, experience in managing commercial real estate and implementing IT systems, experience in U.S. retail, among other things. It also means a Board that has perspective, judgment and sound business acumen.

The lack of U.S retail experience is troubling because PointNorth wants to reevaluate our U.S business (not a new idea, we do this as part of the normal course of business). However, PointNorth's nominees lack any U.S retail experience and are not equipped to lead a strategic review of our U.S operations. In sharp contrast, a veteran U.S. retailer is leading our current review of the U.S business, in conjunction with a third party financial advisor.

The incumbent Board has the right qualifications. To view how PointNorth's nominees simply do not measure up, please visit the following link:

To view the image entitled "PointNorth Nominees Lack Qualifications", please visit the following link: http://www.marketwire.com/library/20170525-1095690_liquor_stores_may25_fig01.jpg

PointNorth's nominees are tied to PointNorth and may not really be independent. PointNorth claims that its dissident nominees are independent, but 16 times in its circular, PointNorth states that "the renewed board will" take certain actions. By already agreeing to implement PointNorth's strategy, without so much as a conversation with any members of the incumbent Board or Management to better understand our business, these directors have agreed to act for PointNorth, and not for the Company and all shareholders.

Two of PointNorth's nominees are tied to PointNorth by what governance experts criticize as a "Golden Leash". Two of PointNorth's nominees, Ken Barbet and Rick Perkins, are slated to receive "Golden Leash" payments from PointNorth. These are payments from a shareholder to corporate directors based on that shareholder's profits over a very short time. (Specifically, the two Golden Leash nominees will receive their pay outs on or before November 15, 2018 or when PointNorth liquidates all of its Liquor Stores shares, whichever comes first.) That means these two individuals' personal financial interests are tied to what PointNorth stands to gain for itself in the very short term – and not to the interests of all shareholders, as should be the case.

Mr. Barnett has past business dealings with PointNorth's Bitove that are not disclosed. PointNorth's biography for Mr. Barnett fails to mention that Mr. Barnett and Mr. Bitove served together on the Board of failed Mobilicity. Why doesn't PointNorth want you to know about this relationship?

PointNorth is Already Selling Down its Stake in Liquor Stores. If PointNorth really believed its strategy would create value, why has it already sold approximately $700,000 of Liquor Stores shares? And why didn't they disclose those share sales in the proxy circular they sent to you?

Dissident nominees have little skin in the game. Each of the current board members has a personal holding of Liquor Stores shares and on average they hold or control 101,560 shares, with a current value of more than $1.1 million, apiece. Compare that with the dissident nominees. Four of them own no shares at all and on average they own 14,222 shares with a current value of less than $155,000, which hardly aligns their interests with shareholders.

Four of the six Dissident nominees have sobering track records

PointNorth provides glowing biographies of its dissident nominees. Our research tells a different story. Read on for a cautionary tale not just about the credibility of PointNorth's disclosure but also the business track record of some of its nominees.

PointNorth's Golden Leash nominee Ken Barbet destroyed value at Big Rock Brewery. Ken Barbet has just three years of public company experience. All of that was as President and CEO of Calgary-based Big Rock Brewery, where his track record speaks for itself. During his tenure, the stock price fell by 18.6%, amid plummeting net income, revenue and EBITDA. And this was when Alberta's economy was in high gear, with the price of oil soaring to US$115.26 per barrel when he left in March 2008.

Here's what one equity research analyst had to say about Barbet's performance at Big Rock:

Mr. Barbet didn't fare much better when he was free of competitive pressures at government-owned Nova Scotia Liquor Corp. (NSLC). During the 2002-2005 period that Mr. Barbet was in charge, NSLC increased sales by 18.2% but the actual volume of product sold only went up 7.6%, which begs the question of whether price increases drove a significant piece of the increase in revenue. Over the same period, store operating expenses went up 27.8%. Even PointNorth's exaggerated biography for Mr. Barbet can't disguise his history of poor performance⁴.

PointNorth's Golden Leash nominee Rick Perkins also had a questionable record at NSLC. Rick Perkins has no disclosed experience as a director of a public company. He did spend a decade at the NSLC, but a review of NSLC's annual reports indicates that most of its strategy was to increase expenses and prices.

As spokesman for NSLC, a provincial crown corporation, Mr. Perkins engaged in a heated public exchange with an important provincial politician, calling into question Mr. Perkins' judgment. Even worse, Mr. Perkins oversaw an IT system that lead to a damaging price blunder⁵ just two weeks after Mr. Perkins abruptly left NSLC. The latter is no small matter given PointNorth's desire to "accelerate" the implementation of a complex ERP system at Liquor Stores. Mr. Perkins appears to be the only PointNorth nominee with "IT experience".

We believe Mr. Perkins is unsuitable to serve on Liquor Stores' Board of Directors, or in any capacity. That's also why we turned him down twice when he asked Liquor Stores for a job. We urge Liquor Stores shareholders to do the same.

John Barnett gave away Molson's market share and was involved in a bankruptcy at Mosaic. John Barnett served as CEO of Molson Breweries from 1995 to 1998. That sounds impressive until you consider that in each fiscal year he was in charge, Molson lost meaningful market share and reported declines in operating profit. Mr. Barnett was on the Board of Directors of Mosaic Group Inc., a marketing outsourcing company, when it filed for bankruptcy in 2002. This dismal performance was omitted from PointNorth's biography, along with Mr. Barnett's Mobilicity board relationship with Mr. Bitove.

James Burns put his own beer company into receivership. As President and a director of Niagara's Best Beer, Mr. Burn's took his own microbrewery and restaurant into insolvency. Niagara's Best Beer was placed into receivership in October 2010.

ACT NOW TO PROTECT THE VALUE OF YOUR INVESTMENT – VOTE THE WHITE PROXY

In summary, we urge shareholders not to fall for PointNorth's flawed strategy, captive nominees and wishful thinking.

• PointNorth's strategy is flawed and will destroy long-term shareholder value to the tune of $2.65 per share. If shareholders elect PointNorth's nominees and they implement PointNorth's government monopoly-inspired strategy, they will damage Liquor Stores' business and destroy shareholder value, just as PointNorth's key principals did at SiriusXM, KEYreit, Priszm and Mobilicity.

• PointNorth's nominees are simply not qualified to govern a competitive liquor retailer.

• Our strategy is working and we are positioned for long-term growth. We have shown that we can deliver results during the worst recession in decades in two of our key markets. We are confident that we will continue to deliver and are well positioned for future upside.

We urge you to protect your investment and support the Liquor Stores director nominees by voting FOR the Liquor Stores director nominees on the WHITEProxy today.

Voting is a quick and simple process. Your WHITE proxy must be received well in advance of the proxy deadline of 10:00 a.m. (Mountain time) on June 16, 2017. Due to the limited time available, we recommend voting by internet, telephone or fax today or no later than 24 hours before the deadline. For ease of voting visit our website www.liquorstoresna.ca/investors

Your vote is extremely important regardless of the number of shares you hold. Please discard any proxy or related materials you may have received from PointNorth and vote using only the control number on the WHITE form of proxy.

Jim Dinning, Chairman

Liquor Stores N.A. Ltd.

Appendix 1

Impact of PointNorth Strategy on Liquor Stores' Profitability and Value

The following analysis is illustrative and based on the implementation of PointNorth's strategy as publicly disclosed by PointNorth. The analysis however, does not reflect several additional risk factors in implementing PointNorth's strategy that could potentially further negatively impact Liquor Stores results, including:

• Impact of lost sales from reduced customer traffic as a result of ongoing construction activity from renovations
• Increased competitive pressures and potential lost market share during mass store renovations
• Potential lost sales from damage to our brand and customer loyalty from reduced product selection
• Lost sales from reduction in staffing levels and reduced customer service
• Potential business disruption and lost sales from accelerating the implementation of our planned ERP system

Meeting Details

The record date for the Annual Meeting was the close of business on April 21, 2017 (the "Record Date"). All registered shareholders of record as at the Record Date are invited to attend the Meeting which is taking place at Meeting Place 1 at the Hyatt Place Edmonton-West located at 18004 100 Ave NW, Edmonton, Alberta, on Tuesday, June 20, 2017, at 10:00 a.m. (Edmonton time). Shareholders are advised to vote only the WHITE form of proxy today, or no later than 10:00 a.m. (Mountain Time) or Noon (Eastern Time) on Friday, June 16, 2017.

ABOUT LIQUOR STORES N.A. LTD.

The Company operates 252 retail liquor stores in Alberta, British Columbia, Alaska, Kentucky, New Jersey, and Connecticut. Liquor Stores' retail brands include: Liquor Depot, Liquor Barn, and Wine and Beyond in Alberta (178 stores); Liquor Depot and Liquor Barn in British Columbia (34 stores); Brown Jug in Alaska (22 stores); Liquor Barn "The Ultimate Party Source" and Liquor Barn Express in Kentucky (15 stores), Joe Canals Discount Outlet in New Jersey (2 stores), and LQR MKT in Connecticut (one store). The Company's common shares and convertible subordinated debentures trade on the Toronto Stock Exchange under the symbols "LIQ" and "LIQ.DB.B", respectively.

FORWARD-LOOKING STATEMENTS

This press release contains forward looking statements or information (collectively "forward-looking statements") within the meaning of the "safe harbour" provisions of applicable securities legislation. All statements and information other than statements of historical fact contained in this press release are forward-looking statements. In particular, this press release contains forward-looking statements with respect to among others: the Company's assessment of PointNorth's and its principals' and director nominees' motivations, qualifications and capabilities, the anticipated outcomes of PointNorth's actions and strategy for Liquor Stores and the potential consequences for Liquor Stores and its business and share price of the election of PointNorth's director nominees and the implementation of its strategy; the successful execution of our strategy; our ability to grow sales and profits, create sustainable, long-term value, year over year growth in sales and improvements in gross margin and operating profit, and generate strong returns from store renovations; our plans to implement a new enterprise resource planning (ERP) system and the timing thereof; our plans to renovate additional stores and the timing thereof; the gross margins generated from our bridge buying and private label products; and matters with respect to the upcoming Meeting, including the scheduled date and time of the Meeting and the cut off time for proxies. Forward-looking statements reflect our current plans, intentions, and expectations, which are based on management's perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. Our plans, intentions, and expectations are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and as such, are subject to change. There is no assurance that the plans, intentions, or expectations upon which these forward‐looking statements are based will occur. Forward-looking statements are subject to risks, uncertainties and assumptions, including, but not limited to, those discussed elsewhere in this press release and our other filings made with Canadian securities regulatory authorities and available on SEDAR at www.sedar.com.
Although Management believes that the expectations represented in such forward-looking statements are reasonable there can be no assurance that such expectations will prove to be correct and such forward‐looking statements should not be unduly relied upon. Some of the factors that could affect future results and could cause results to differ materially from those expressed in the forward-looking statements contained herein include, but are not limited to: risks relating to government regulation and changes thereto (whether by court decisions, citizen referenda, or otherwise); competition; the state of the economy including general economic conditions in Canada (including Alberta) and the U.S.; the unpredictability and volatility of Liquor Stores' common share price; restrictions on potential growth; availability of sufficient financial resources to fund the Company's capital expenditures; changes in commodity tax rates and government mark‐ ups; risks relating to future acquisitions and development of new stores; the ability of management to execute the Company's business and strategic plans; Liquor Stores' ability to locate and secure acceptable store sites and to adapt to changing market conditions; poor weather conditions; dependence on key personnel; labour costs, shortages and labour relations including Liquor Stores' ability to hire and retain staff at current wage levels and the risk of possible future unionization; supply interruption or delays; dependence on suppliers; reliance on information and control systems; income tax changes; leverage and restrictive covenants in agreements relating to current and future indebtedness of Liquor Stores; and credit risks arising from operations. These factors should not be construed as exhaustive. The information contained in this press release, and as disclosed in other filings made by the Company with Canadian securities regulatory authorities and available on SEDAR at www.sedar.com, identifies additional factors that could affect the operating results and performance of Liquor Stores. Readers are cautioned that this list of risk factors should not be construed as exhaustive. The forward looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward looking statements included in this press release are made as of the date hereof and Liquor Stores assumes no obligation to update or revise them to reflect new events or circumstances except as expressly required by applicable securities law.

NON-IFRS FINANCIAL MEASURES

Adjusted operating profit before amortization represents the aggregate of gross margin and other income, less selling and distribution expenses and administrative expenses, and adjusted for unusual, non-recurring or non-operating factors on both a consolidated and segmented basis. This financial measure is not recognized by International Financial Reporting Standards (IFRS) and does not have a standardized meaning prescribed by IFRS. Readers are cautioned that adjusted operating profit before amortization should not replace net earnings or loss (as determined in accordance with IFRS) as an indicator of the Company's performance, of its cash flows from operating, investing and financing activities or as a measure of its liquidity and cash flows. The Company's method of calculating adjusted operating profit before amortization may differ from the methods used by other issuers and as such may not be comparable to similar measures presented by other issuers. Management believes the presentation of adjusted operating profit before amortization provides for useful information to readers as it provides increased transparency and predictive value of our recurring financial results. Management also uses adjusted operating profit before amortization to set targets and assess performance of the Company. Please see "Non-IFRS Financial Measures" in the Company's most recently filed Management's Discussion & Analysis for a reconciliation of adjusted operating profit before amortization to operating profit before amortization.

¹ We reduced our same store inventories by over $15 million from March 31, 2016 to March 31, 2017. We did so in a measured way to free up capital without jeopardizing product selection and availability.

² We typically bridge buy between 60-90 days worth of product. The costs represent 60-90 days of interest (approximately 1%) and our total costs of warehousing, shipping and handling product of about 0.50% of goods sold.

³ Operating profit before amortization has been calculated based on $1,390.0 million of sales to retail customers at a gross margin percentage of 17.2% generated by the BC Liquor Stores per Appendix A of the 2015/2016 BC Liquor Distribution Branch Annual Report. We have used the estimate of operating and administrative expenses as a % of sales of 15.4% from the PointNorth information circular, with a reduction of 0.5% of sales for amortization expense. This results in Operating Profit before Amortization of $32 million (or 2.3% of sales) for the BC Liquor Stores, compared to $40 million (or 4.9% of sales) for LIQ for the year-ended December 31, 2016.

⁴ PointNorth is trying to make up for Mr. Barbet's lack of leadership experience by exaggerating his time as CEO of NSLC, claiming he was CEO from 2002 - 2005. In fact, he was VP of Operations & Development in 2002 and was only appointed to President and CEO in 2004.

⁵ On April 2, 2013 NSLC admitted that 1,000 prices were increased two days before a scheduled price hike. This resulted in overcharging customers by nearly $30K. While this mistake may have not been overly costly to a monopoly government liquor store, this type of scandal would be detrimental to retaining Liquor Stores' customers and would damage our brand.