West 49 Inc. Annual Report 2009

West 49 I nc.

annual report 2009

aren’t we all a kid
barreling down the h ill,

testing our
limits.
at
With constantly evolving tastes, the youth

action sports lifestyle
can be a difficult space to operate in.
But we LIVE IT and OWN IT .
T h i s i s OUR s pa c e.
One Company. One Destination. West 49 Inc.

About the
lifestyle

10 to 19 years old

>$4.9B annual
purchasing power

Spend about half on
clothing, footwear and
4.3 million tweens accessories
and teens

Account for 76% of action
sports participants

Multiple sources
of discretionary
income

Skateboarding. Snowboarding. Surfing. BMX. Motocross. Action sports athletes and
enthusiasts often share many similar lifestyle preferences, including tastes in fashion,
apparel, footwear and accessories.

a lucrat
target ive
market
Part-time job. Allowance. Birthday money. Holiday money. Back-to-school money.
Debit card. Gift card. Pre-paid credit card. Mobile banking machine, also known
as a parent.

Our buyers live and breathe the action sports lifestyle. They devote considerable
time and effort to identifying emerging trends in apparel, equipment and brands in
Southern California, as most of the trends in actions sports have their beginning there.

in g
k
a k
T s
r i of
t n
u io
o h
fa s
We understand the lifestyle of our target market. We also spend a lot of time
talking to our customers, in our stores and online, to learn which merchandise
is in demand. Their opinions are the only ones that matter.

Southern
California

20 buyers

More than 600 combined
days per year in Southern
California

1 incredible grassroots
marketing engine

Countless hours per year
spent online talking to
our customers

Understanding
our customers

How we
do retail

200 brands in demand

429 thousand square feet

134 stores

9 provinces

Our brand
ambassadors

Our stores, which are primarily mall-based, carry a variety of high-performance,
premium brand name and private label products that fulfill the action sports lifestyle
needs of Canadian tweens and teens.

foc
app us
roa ed
ch
Throngs of loyal customers. 171,000 loyalty club members.
1,540,637 unique website visitors. 1,800 passionate store associates. 1 Platinum
Club sales incentive program.

vision we will be the
retail destination of
choice for Canadian

tweens and teens
seeking to fulfill their action sports lifestyle needs.

growing our core
business
open new stores
in new and existing markets

EXPAND and relocate stores to more
optimum locations and sizes

Fellow shareholders:

The past year has been a challenging time for West 49 Inc. and for the apparel retail industry at large. The
obstacles to our success were considerable, and included a volatile Canadian currency, cross-border shopping,
minimum wage increases and a troubling economy. These poor operating conditions had a clear and direct
impact on our financial results. However, their brunt was lessened by a number of strategic actions we took
throughout the year to strengthen our business.

Best brands on Earth; lowest prices ever!

To defend against cross-border shopping we worked diligently with our vendors and lowered our prices to be
more in line with U.S. retailers – providing our customers with little reason to go south of the border to shop.
Our Platinum Club store sales incentive program, launched in March, helped drive higher units per transaction
throughout the balance of the year. In Ontario, which seemed particularly affected by cross-border shopping,
we ran a no-tax event in our West 49 stores during April and May, reinvigorating their sales performance. After
a lot of hard work, we had a new value proposition for our customers – “best brands on Earth; lowest prices
ever!” These actions combined to help us preserve market share and grow our comparable store sales during
perhaps the most challenging Back-to-School and Holiday selling periods in the history of our Company.

Strengthening our business

Now, I will be the first to admit, that the actions we took to preserve market share and grow our top line were at
the expense of our margins, and this will not be sustainable. However, we also took actions to strengthen other
elements of our business, which should benefit our margins and bottom line going forward.

We hired a Vice President, GMM in January 2008, who now has a year with us under his belt. He is working
hard to ensure that we get the most out of our vendor relationships and we expect this to translate to improved
product margins.

Our continued focus on expense management yielded further improvement to our selling, general and administrative
expenses as a rate to net sales. During the year, we consolidated our Off The Wall banner’s marketing and
merchandising functions into West 49 and we reduced our head office head count in the fourth quarter.

Difficult but necessary decisions

The success of any retailer is dependent on their ability to ensure that their stores, brands and merchandise
remain relevant and sought after by their target market customers. This has always been a priority of ours and
something that I believe we have demonstrated a pretty good track record of in the past. While you will always
have your misses, the key is to make the difficult decisions when something is not working. By the end of the
year we had to make that decision with our Duke’s Northshore concept. We launched Duke’s as a test concept
in 2006 to cater to what we saw as an under-serviced area of the market. Unfortunately, the few stores we had
opened did not generate the returns we were expecting and the remaining Duke’s locations will be subleased,
returned to the landlord or re-branded under one of our other banners.

We will continue to review our portfolio and will take the necessary action with respect to any stores we deem to
be underperforming. This survival of the fittest approach will enable us to devote more focus to growing our
core business, including our West 49 banner – which importantly, has maintained its market share throughout
these tough times, proving that we remain very relevant to our tween and teen target market customers.

9

Our focus

We remain focused on being the retail destination of choice for Canadian tweens and teens seeking to fulfill
their action sports lifestyle needs. We believe in the strong growth potential of our core business, especially our
West 49 banner. However, in light of the current economic environment, efforts to maximize the value from
existing operations will continue to take precedence over other elements of the Company’s growth strategy over
the near term. That does not mean that we will not open new stores, but that we will continue to be more
selective with respect to potential locations.

Our employees are our strongest asset

Our competitive retailing strategies and prudent management of operations have better positioned us for growth
once the economic recovery takes hold. Furthermore, the encouraging results from our Platinum Club sales
incentive program helped remind us that our strongest asset does not show on our balance sheet. Rather, our
strongest asset is our team of 2,000 employees who continually strive to ensure the ongoing viability and
competitiveness of our business from store to store and province to province in challenging and volatile times.
I would like to take this opportunity to personally thank each and every one of them.

In closing, I would like to thank our Board of Directors for their ongoing counsel and guidance, and our Senior
Management team for their contributions and commitment. Finally, I would like to thank our shareholders for
their ongoing support and our loyal customers, whom without we would not exist. I look forward to keeping you
apprised of our progress throughout fiscal 2010.

Sincerely,

Salvatore Baio
President and Chief Executive Officer

10

MANAGEMENT’S DISCUSSION AND ANALYSIS
Of Financial Condition and Results of Operations

Table of Contents Page #

1.0 Introduction 12
1.1 Forward-looking Statements 12
2.0 Company Overview 13
2.1 Store Real Estate Activity 13
2.2 Store Count by Banner and by Province 13
3.0 Company Performance 14
3.1 Seasonality of Results 14
3.2 Key Performance Indicators 14
4.0 Selected Financial Information 15
4.1 Selected Annual Consolidated Results 15
4.2 Selected Quarterly Consolidated Results 17
4.3 Summary of Results of Operations for the Fiscal Year 18
4.4 Summary of Results of Operations for the Fourth Quarter 19
5.0 Liquidity and Cash Flows 19
5.1 Liquidity 20
5.2 Cash Flows 20
5.3 Capital Management 21
5.4 Related Party Transactions 21
6.0 Policies, Controls and Procedures 22
6.1 Significant Accounting Estimates 22
6.2 Impact of New Accounting Pronouncements 23
6.3 Future Changes in Accounting Policies 24
6.4 Disclosure Controls and Procedures 25
6.5 Internal Control Over Financial Reporting 25
7.0 Growth Strategy and Outlook 26
7.1 Growth Strategy 26
7.2 Future Outlook 26
8.0 Risk Management 26
8.1 Economic Conditions 26
8.2 Banking Arrangements 27
8.3 Competition 27
8.4 Merchandise 28
8.5 Information Systems 28
8.6 Human Resources 29
8.7 Relationships with Commercial Landlords 29
8.8 Legal and Policies 29
8.9 Insurance Coverage 30


April 21, 2009
1.0 Introduction
The following Management’s Discussion and Analysis (“MD&A”) provides management’s perspective on the
performance of West 49 Inc. (the “Company”) for the 14 week and 53 week periods ended January 31, 2009
(herein referred to as the fourth quarter and fiscal year 2009 respectively) compared to the 13 week and 52
week periods ended January 26, 2008 (herein referred to as the fourth quarter and fiscal year 2008
respectively). This MD&A is supplemental to, and should be read in conjunction with the information contained
in the audited annual consolidated financial statements and accompanying notes of the Company for the year
ended January 31, 2009. These statements have been prepared in conformity with Canadian generally
accepted accounting principles (“GAAP”) and require management to make estimates and assumptions that
affect amounts reported and disclosed in such financial statements and related notes. All amounts in this MD&A
are expressed in Canadian dollars.

The Board of Directors, on the recommendation of the Audit Committee, approved the contents of this MD&A on
April 21, 2009. Disclosure contained in this document is current to this date, unless otherwise stated. Additional
information on the Company, including the Annual Information Form (“AIF”), is available on the SEDAR website
at www.sedar.com.

1.1 Forward-Looking Statements
Statements contained or incorporated by reference in this document that are not current or historical factual
statements may constitute forward-looking information within the meaning of applicable securities laws. Such
forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially different from any future
results, performance or achievements expressed in or implied by such forward-looking statements. When used
in this document, such statements are such words as “may”, “will”, “expect”, “believe”, “plan”, “anticipate”,
“intend”, “estimate” and other similar terminology. The following includes some of the factors that could cause
actual results, performance or achievements to differ materially from those expressed in or implied by any
forward-looking statements made by or on behalf of the Company: competition, changes in demographic trends,
changes in consumer preferences and discretionary spending patterns, changes in business and economic
conditions, human resource matters, legal proceedings, challenges to intellectual property rights, and changes
in laws, regulations, and accounting policies and practices. The foregoing list of factors is not exhaustive. Also
see “Risk Management” below. In formulating the forward-looking statements contained herein, management
has assumed that business and economic conditions affecting the Company’s operations will continue
substantially in the ordinary course, including without limitation with respect to industry conditions, general levels
of economic activity, laws, regulations (including regarding employees, facilities, consumers, sales, advertising,
competition, manufacturing, safety), taxes, foreign exchange rates, minimum wage rates and interest rates,
weather, that there will be no outbreaks of disease or public safety issues, and that there will be no unplanned
material changes in its facilities, equipment, supplies, with respect to relations with customers, suppliers,
landlords and employees, or with respect to credit availability, among other things. These assumptions, although
considered reasonable by management at the time of preparation, may prove to be incorrect. Except as may
expressly be required by law, the Company disclaims any obligation or undertaking to publicly release any
updates or revisions to any forward-looking statements contained herein to reflect any change in expectations,
estimates and projections with regard thereto or any changes in events, conditions or circumstances on which
any statement is based. In addition to the disclosure contained herein, for more information concerning the
Company’s various risks and uncertainties, please refer to the Company’s periodic public filings, including its
annual information form, all of which are available under the Company’s profile at www.sedar.com. Forward-
looking statements contained in this document reflect management’s current estimates, expectations and
projections, which it believes are reasonable as of the current date. Readers are cautioned that forward-looking
statements are not guarantees of future performance. Readers should not place undue importance on forward-
looking statements and should not rely upon this information as of any other date.

WEST 49 INC. – FISCAL 2009 MD&A
12


2.0 Company Overview
The Company is a leading Canadian specialty retailer of fashion and apparel, footwear, accessories and
equipment related to the youth action sports lifestyle. The Company’s stores, which are primarily mall-based,
carry a variety of high-performance, premium brand name and private label products that fulfill the lifestyle
needs of identified target markets, primarily active tweens and teens. At January 31, 2009, the Company
operated 134 stores in nine provinces under seven banners, consistent with the prior year. The Company also
operated online at www.boardzone.com and www.shop.west49.com.

2.1 Store Real Estate Activity

The following chart outlines the store opening and closing activity by banner for the fiscal year ended January 31,
2009 and the fiscal year ended January 26, 2008:

Banner Opened Closed FY2009 FY2008

West 49 1 - 72 71
Billabong - - 6 6
Off The Wall 1 - 17 16
D-Tox - - 19 19
Amnesia/Arsenic - 1 17 18
Duke's Northshore - 1 3 4
Total 2 2 134 134

During fiscal 2009, the Company opened two new stores and closed two stores (fiscal 2008 – opened 12 new
stores and closed three stores). In addition, the Company relocated five stores in the year (fiscal 2008 – nine
stores). This has resulted in a 1.5% increase in the total gross square footage of stores in fiscal 2009 (fiscal
2008 – 12.6%). The Company intended to scale back its expansion plans in fiscal 2009 to manage capital and
focus on existing operations.

2.2 Store Count by Banner and by Province

The following chart outlines the store locations across Canada by province as at January 31, 2009 and January 26, 2008:

Amnesia/ Duke's FY2009 FY2008
Province West 49 Billabong Off The Wall D-Tox Arsenic Northshore Total Total

Alberta 11 2 2 2 - - 17 16
British Columbia 13 1 11 - - 1 26 25
Manitoba 3 1 - - - - 4 4
New Brunswick 3 - - 1 - - 4 4
Newfoundland 1 - - - - - 1 1
Nova Scotia 2 - - 1 - - 3 3
Ontario 37 2 4 6 - 2 51 52
Quebec - - - 9 17 - 26 27
Saskatchewan 2 - - - - - 2 2
Total 72 6 17 19 17 3 134 134

13


3.0 Company Performance
The Company’s financial results in the earlier part of fiscal 2009 were impacted by a higher Canadian dollar and
the Company’s strategic actions to help mitigate the pronounced threat of cross-border shopping. These
strategic actions included lowering the Company’s retail price points on many goods to be competitive with like
retailers on both sides of the Canadian-U.S. border. While the lower prices were partly achieved through
successfully negotiating lower list prices from the Company’s vendors, the Company also sacrificed margins to
preserve market share, drive higher units per transaction and protect comparable store sales.

In the latter part of the year, the Company’s performance was impacted by the current economic downturn,
which on a broader scale, resulted in reduced consumer confidence and spending. The Company’s
merchandising and pricing strategies focused on offering exceptional brands at competitive prices. This
strategy helped the Company defend its market share and was largely responsible for reclaiming comparable
store sales during the key Back-to-School and Holiday selling periods.

It should also be noted that the financial results for the fiscal year and fourth quarter ended January 31, 2009
include contributions from one additional week compared to the corresponding periods in fiscal 2008, due to the
Company’s floating year end.

3.1 Seasonality of Results

Revenues vary by quarter due to the seasonality of the retail industry. Retail sales are traditionally higher in the
third and fourth quarters due to the Back-to-School period and the Holiday season. In addition, fourth quarter
earnings are usually reduced by post Holiday season sale promotions. Variable costs can be adjusted to match
the revenue pattern, but costs such as occupancy are fixed, leading the Company to report a disproportionate
level of earnings in the third and fourth quarters. This business seasonality results in quarterly performance that
is not necessarily indicative of the year’s performance.

3.2 Key Performance Indicators

Management evaluates the following items, which it considers to be key performance indicators, in assessing
the performance of the Company:

Comparable store sales provide a measure of sales growth for current stores opened for at least one year. A
store is included in comparable store sales in the thirteenth month of operation and includes a relocated or
expanded store. Management considers comparable store sales to be a good indicator of the Company’s
current performance, helping leverage certain costs such as store payroll, store occupancy, general and
administrative expenses and other costs that are generally fixed. Positive comparable store sales results could
generate improved operating leverage while negative comparable store sales results could negatively impact
operating leverage.

Net sales per average gross square foot is a common retail metric used to measure the sales productivity of the
retail locations. The net sales per average gross square foot is calculated using net sales for the year, excluding
online sales, divided by the simple average of the beginning and ending gross square footage for the year.
Management considers net sales per average gross square foot a good indicator of the Company’s performance
relative to its competitors.

Gross margin measures whether the Company is appropriately optimizing the price and inventory levels of
merchandise. Gross margin is the difference between net sales and cost of sales. Cost of sales includes cost of
goods sold, shrink, freight, buying, distribution and occupancy costs. An inability to obtain acceptable levels of
initial markups or a significant increase in the use of markdowns could have an adverse effect on the
Company’s gross margin and results of operations.

Selling, general and administrative expenses (“SG&A”) include compensation costs associated with store and
head office locations, advertising and promotional expenses and other administrative costs. Management views
SG&A as a rate to net sales to be a key indicator of success as a multi-banner retailer. The ability to leverage
and control operating costs directly impacts the operating results of the Company.

14


Earnings before interest, income taxes, dividends, depreciation and amortization (“EBITDA”) is a non-GAAP
performance measure used by the Company. EBITDA does not have a standardized meaning prescribed by
GAAP and management cautions investors that EBITDA should not replace net income or loss or cash flows
from operating, investing and financing activities (as determined in accordance with GAAP), as an indicator of
the Company’s performance. The Company’s method of calculating EBITDA may differ from the methods used
by other issuers. Therefore, the Company’s EBITDA may not be comparable to similar measures presented by
other issuers. Management believes that EBITDA is a useful supplementary measure of operating performance
as it is a commonly used metric by investors. The primary drivers of EBITDA are total net sales, gross margin
and the Company’s ability to control operating costs.

Cash flow and liquidity are used by management to evaluate cash flow from operations, investing and financing
to determine the sufficiency of the Company’s cash position. Management believes that cash flow from
operations, along with leveraging the Company’s credit facilities throughout the year, will be sufficient to fund
anticipated capital expenditures and working capital requirements.

4.0 Selected Financial Information
4.1 Selected Annual Consolidated Results

The following table sets forth selected financial data and operating information for the Company for the 53 week
period ended January 31, 2009 and the 52 week periods ended January 26, 2008 and January 27, 2007.

(In thousands, except per share amounts and other
operating information) FY2009 FY2008 FY2007
Summary of Operations:
Net sales $ 210,417 $ 204,894 $ 195,268
Gross margin 46,829 52,408 53,543
SG&A 43,470 43,605 40,504
EBITDA (9,529) 4,418 12,539
Net income (loss) $ (12,341) $ (2,405) $ 4,137
Income (loss) per Share:
Basic and diluted $ (0.19) $ (0.04) $ 0.07
Weighted average common shares - basic 63,605,190 63,323,829 62,198,635
Weighted average common shares - diluted 63,605,190 63,323,829 63,110,717
Balance Sheet:
Cash and cash equivalents $ 6,788 $ 8,369 $ 5,413
Working capital 3,039 9,592 6,335
Total assets 94,747 103,110 102,066
Long-term obligations including current portion 21,301 22,370 21,018
Shareholders' equity $ 45,654 $ 56,923 $ 58,685
Other Operating Information:
Number of stores 134 134 125
Net sales per average gross square foot $ 490 $ 509 $ 566
Average gross square footage per store 3,203 3,155 3,002
Total gross square footage 429,197 422,716 375,308

Adjustments to Normalize

The results in the above table outlining selected financial information are based on GAAP, except for EBITDA
and other operating information. However, the discussions throughout the MD&A on results of operations are
based on the Company’s GAAP results excluding transactions that, in management’s opinion, do not arise as
part of the normal day-to-day operations and by excluding these items management believes readers are
provided with a more meaningful comparison of results for the fiscal years 2009, 2008 and 2007.

15


Goodwill and Intangible Assets Impairment

The Company completed its annual goodwill and intangible asset impairment test during the fourth quarter of
fiscal 2009, as required by GAAP. As a result of the depressed capital markets and the current macroeconomic
environment, which had a negative impact on the Company’s performance, the Company recognized a non-
cash, goodwill and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million; fiscal 2007 -
$0.5 million) in accordance with the Canadian Institute of Chartered Accountants (“CICA”) Section 3062:
“Goodwill and Other Intangible Assets”. The impairment charge does not affect the Company’s day-to-day
business operations or cash position. Given the size of the impairment, the Company has separately disclosed
this non-cash impairment in its statement of earnings and has also presented normalized results to exclude this
non-cash charge.

Store Restructuring Costs

During fiscal 2009, the Company evaluated the performance of its test concept, Duke’s Northshore (“Duke’s”),
and decided to take strategic action to close all four stores. One of the Duke’s stores was closed in the second
quarter of fiscal 2009, with non-cash provisions taken in the fourth quarter of $0.7 million on the remaining three
Duke’s stores, which will either be closed or rebranded in fiscal 2010. The total non-cash provision on these
four stores for fiscal 2009 was $0.9 million, of which $0.5 million was recorded as capital asset impairments and
$0.4 million as a provision for lease penalties and other exit costs. As at January 31, 2009, the balance in
accounts payable and accrued liabilities remained unchanged at $0.4 million, and will be paid out by the
Company in subsequent periods. Given the size of the Duke’s strategic restructuring, the Company has
separately disclosed the provision in its statement of earnings and has also presented normalized results to
exclude this non-cash, non-recurring charge.

Corporate Restructuring Costs

During fiscal 2008, the Company recorded corporate restructuring costs of $0.9 million as a result of centralizing
its finance, human resources, information technology, store operations and store development functions. The
majority of these costs related to termination benefits. The remainder of these costs were related to consulting,
legal and other administrative expenses. Given the size of this restructuring, the Company has separately
disclosed this charge in its statement of earnings and has also presented normalized results to exclude this non-
recurring charge.

The following table reconciles the Company’s actual results to a normalized basis:

Net
(In thousands) EBITDA Income (Loss)

Actual results FY2009 (9,529) (12,341)
FY2008 4,418 (2,405)
FY2007 12,539 4,137

Goodwill and intangible assets impairment FY2009 12,000 9,108
FY2008 3,500 3,361
FY2007 500 500

Store restructuring costs FY2009 888 604
FY2008 - -
FY2007 - -

Corporate restructuring costs FY2009 - -
FY2008 885 576
FY2007 - -

Normalized results FY2009 3,359 (2,629)
FY2008 8,803 1,532
FY2007 13,039 4,637

16


4.2 Selected Quarterly Consolidated Results

The table below includes selected data for the eight most recently completed quarters. This unaudited quarterly
information has been prepared on the same basis as the annual consolidated financial statements. The
operating results for any quarter are not necessarily indicative of the results to be expected for any future period.

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(In thousands, except per share amounts) FY2009 FY2009 FY2009 FY2009 FY2008 FY2008 FY2008 FY2008

Summary of Operations:
Net sales $ 64,759 $ 61,723 $ 45,019 $ 38,916 $ 62,389 $ 59,082 $ 42,426 $ 40,997
EBITDA - normalized 3,306 4,844 (474) (4,317) 4,702 5,754 904 (2,557)
EBITDA (9,409) 4,844 (647) (4,317) 1,062 5,711 836 (3,191)
Net income (loss) - normalized 1,127 2,074 (1,636) (4,194) 2,233 2,619 (545) (2,775)
Net income (loss) $ (8,467) $ 2,074 $ (1,754) $ (4,194) $ (1,219) $ 2,591 $ (589) $ (3,188)

Income (loss) per Share: (1)
Basic - normalized $ 0.02 $ 0.03 $ (0.03) $ (0.07) $ 0.04 $ 0.04 $ (0.01) $ (0.04)
Basic and diluted $ (0.13) $ 0.03 $ (0.03) $ (0.07) $ (0.02) $ 0.04 $ (0.01) $ (0.05)

(1)
The sum of the quarters may not equal the fiscal year totals due to rounding and changes in weighted average shares outstanding.

The table below is a reconciliation of the Company’s normalized EBITDA to net income (loss):

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(In thousands) FY2009 FY2009 FY2009 FY2009 FY2008 FY2008 FY2008 FY2008

EBITDA - normalized $ 3,306 $ 4,844 $ (474) $ (4,317) $ 4,702 $ 5,754 $ 904 $ (2,557)
Less:
Corporate restructuring costs - - - - 140 43 68 634
Store restructuring costs 715 - 173 - - - - -
Goodwill and intangible assets impairment 12,000 - - - 3,500 - - -
EBITDA (9,409) 4,844 (647) (4,317) 1,062 5,711 836 (3,191)
Less:
Amortization 1,415 1,405 1,508 1,534 1,362 1,302 1,368 1,447
Interest and dividends on preferred shares 203 235 302 213 276 224 391 154
Income taxes (2,560) 1,130 (703) (1,870) 643 1,594 (334) (1,604)

Net income (loss) $ (8,467) $ 2,074 $ (1,754) $ (4,194) $ (1,219) $ 2,591 $ (589) $ (3,188)

The table below is a reconciliation of the Company’s normalized net income (loss) to reported net income (loss):

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(In thousands) FY2009 FY2009 FY2009 FY2009 FY2008 FY2008 FY2008 FY2008

Net income (loss) - normalized $ 1,127 $ 2,074 $ (1,636) $ (4,194) $ 2,233 $ 2,619 $ (545) $ (2,775)
Less (net of income tax):
Corporate restructuring costs - - - - 91 28 44 413
Store restructuring costs 486 - 118 - - - - -
Goodwill and intangible asset impairment 9,108 - - - 3,361 - - -

Net income (loss) $ (8,467) $ 2,074 $ (1,754) $ (4,194) $ (1,219) $ 2,591 $ (589) $ (3,188)

17


4.3 Summary of Results of Operations for the Fiscal Year
Net Sales

Net sales increased $5.5 million, or 2.7%, to $210.4 million for the 53 weeks ended January 31, 2009 from
$204.9 million for the 52 weeks ended January 26, 2008. Comparable store sales for the Company for
comparable 53 week periods decreased 0.4% while the West 49 banner experienced an increase of 0.1%. This
compares to a 1.3% decrease in comparable store sales in the prior year for the Company and growth of 0.5%
for the West 49 banner.

The first quarter of fiscal 2009 was very disappointing with an 8.1% decrease in comparable store sales for the
Company. Since then, the Company has reaffirmed its merchandising and pricing strategies, improved
merchandise flow and fought to regenerate sales in an increasingly challenging economy. This culminated in
positive comparative store sales of 1.3% for both the Company’s Back-to-School selling season in the third
quarter, as well as the Holiday selling season in the fourth quarter.

Gross Margin

Gross margin decreased $5.6 million to $46.8 million in the 53 weeks ended January 31, 2009 from $52.4
million in the 52 weeks ended January 26, 2008. As a rate to net sales, gross margin declined by 340 basis
points to 22.2% in the 53 weeks ended January 31, 2009 from 25.6% in the 52 weeks ended January 26, 2008.
The decline in gross margin was primarily due to reduced product margins and increased supply chain costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”), decreased $0.1 million to $43.5 million for the 53 weeks
ended January 31, 2009 from $43.6 million during the 52 weeks ended January 26, 2008. As a rate to net
sales, SG&A expenses were 20.7% for the 53 weeks ended January 31, 2009 compared to 21.3% in the 52
weeks ended January 26, 2008. The 60 basis point decrease in SG&A as a rate to net sales was mainly due to
the continued focus on expense management.

Earnings before Interest, Income Taxes, Dividends, Depreciation and Amortization

On a normalized basis, excluding all restructuring costs of $0.9 million (2008 - $0.9 million) and the goodwill and
intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million), EBITDA was $3.4 million during
the 53 weeks ended January 31, 2009 from $8.8 million, for the 52 weeks ended January 26, 2008. The
decrease in EBITDA is almost entirely due to the reductions in gross margin.

Amortization Expense

Amortization expense was $5.9 million in the 53 weeks ended January 31, 2009 up from $5.5 million in the 52
weeks ended January 26, 2008. The increase of $0.4 million in amortization expense was primarily the result of
a full year of amortization of new, expanded and relocated stores from the prior year’s growth.

Provision for Income Taxes

The provision for income taxes was a recovery of $4.0 million for the 53 weeks ended January 31, 2009 as
compared to a provision of $0.3 million in the 52 weeks ended January 26, 2008. The reduction in the provision
for income taxes was based on the net loss adjusted for permanent and other differences, including the goodwill
and intangible assets impairment.

Net Income (Loss)

The net loss for fiscal 2009, excluding the after-tax impact of the restructuring costs of $0.6 million (fiscal 2008 -
$0.6 million) and the goodwill and intangible assets impairment charge of $9.1 million (fiscal 2008 - $3.4 million)
was $2.6 million, or a $0.04 loss per share, compared to a normalized net income of $1.5 million, or $0.02 per
share for fiscal 2008. The per share amounts have been calculated based on a weighted average of
63,605,190 common shares during the 53 weeks ended January 31, 2009 compared to a weighted average of
63,323,829 common shares during the 52 weeks ended January 26, 2008.
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4.4 Summary of Results of Operations for the Fourth Quarter
Net Sales

Net sales increased $2.4 million, or 3.8%, to $64.8 million in the 14 weeks ended January 31, 2009 from $62.4
million in the 13 weeks ended January 26, 2008. The increase was mostly attributable to the additional week in
the quarter. Comparable store sales for the Company for the comparable 14 week period decreased by 0.5%,
with the West 49 banner experiencing an increase of 0.3%. This compares to a 4.5% decrease in comparable
store sales in the prior year for the Company and a 2.4% decrease for the West 49 banner.

Despite the volatile and uncertain economy, which was especially disappointing in November and early December,
the Company executed well during the peak Holiday season with merchandising and pricing strategies producing
positive comparative store sales of 1.3% during the five week selling period ended January 3, 2009. This has
allowed the Company to maintain its customer base in a shrinking economy, while ensuring its product is current
and proving that the Company remains very relevant to its customer.

Gross Margin

Gross margin decreased $1.1 million, to $16.3 million in the 14 weeks ended January 31, 2009 from $17.4
million in the 13 weeks ended January 26, 2008. As a rate to net sales, gross margin decreased by 270 basis
points to 25.2% in the 14 weeks ended January 31, 2009 from 27.9% in the 13 weeks ended January 26, 2008.
The decline in gross margin was primarily due to lower product margins and increased supply chain costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $13.0 million during the 14 weeks ended January 31, 2009,
up $0.3 million from $12.7 million during the 13 weeks ended January 26, 2008. The increase is largely due to
the additional week. As a rate to net sales, normalized SG&A expenses were 20.1% for the 14 weeks ended
January 31, 2009, compared to 20.4% in the 13 weeks ended January 26, 2008. The decrease of 30 basis
points in SG&A as a rate to net sales was mainly attributable to the continued focus on expense management.

Earnings before Interest, Income Taxes, Dividends, Depreciation and Amortization

On a normalized basis, excluding restructuring costs of $0.7 million (fiscal 2008 – $0.1 million), and the goodwill
and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million), EBITDA was $3.3 million
during the 14 weeks ended January 31, 2009 compared to $4.7 million, during the 13 weeks ended January 26,
2008. The decline in EBITDA for the quarter was mainly due to lower gross margins.

Net Income

The net income, excluding the after-tax impact of restructuring costs and the goodwill and intangible assets
impairment charge, for the 14 weeks ended January 31, 2009 was $1.1 million, or $0.02 per share compared to
normalized net income of $2.2 million, or $0.04 per share in the 13 weeks ended January 26, 2008. The
normalized net income per share has been calculated based on a weighted average of 63,773,369 common
shares during the 14 weeks ended January 31, 2009 compared to a weighted average of 63,517,071 common
shares during the 13 weeks ended January 26, 2008.

Subsequent Events

Subsequent to January 31, 2009, the Company opened a West 49 store at the Milton Centre, in Milton, Ontario.
In addition, the company closed two stores: an Off The Wall store at Lougheed Town Centre, in Burnaby, British
Columbia, due to lease expiry; and a Duke’s store at Park Royal Shopping Centre, in West Vancouver, British
Columbia as part of the Company’s strategic decision to close this test concept.

5.0 Liquidity and Cash Flows
The Company’s principal capital requirements are to fund working capital needs, open new stores and expand
and relocate existing stores in connection with its strategic plans. These capital requirements have generally
been satisfied by a combination of cash flows from operations and borrowings under its credit facilities.
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5.1 Liquidity

During the year ended January 31, 2009, operations generated cash of $2.3 million (fiscal 2008 - $7.1 million).
The decrease in cash from operations from the prior year was largely due to lower earnings during fiscal 2009,
mainly due to lower gross margins. Investing activities used cash of $4.2 million (fiscal 2008 – $6.8 million)
which were largely due to capital asset additions, partially offset by cash inducements from landlords. Capital
asset additions were mainly for new store growth, relocations and expansions of some existing stores, as well
as the first phase of a new retail merchandising system. Financing activities were essentially flat, as the
incremental borrowing of $2.0 million in fiscal 2009 was largely offset by debt repayments. This compares to the
prior year of net cash generated from financing activities of $2.6 million. Overall, cash balances ended for fiscal
2009 at $6.8 million, compared to $8.4 million in the prior year.

Due to the seasonality of the retail industry, working capital balances tend to fluctuate significantly throughout
the year. Cash and cash equivalents are generally highest in the fourth quarter, and inventory and accounts
payable balances tend to be considerably higher during the second and third quarters due to the Company’s
merchandise purchase patterns in preparation for the Back-to-School and Holiday selling periods. The
Company’s credit facilities are designed to support these seasonal fluctuations with a seasonal adjustment.

5.2 Cash Flows
Cash Flows Provided by Operating Activities

For the 53 weeks ended January 31, 2009, cash flows provided by operating activities were $2.3 million compared to
$7.1 million in the same period last year. The $4.8 million change from last year was due mainly to the decrease in
earnings from the prior year, adjusted for non-cash items, and a decreased investment in non-cash working capital.

Cash flows provided by operating activities were $11.0 million in the fourth quarter of fiscal 2008 compared to
$12.4 million in the same period last year. The $1.4 million change from last year was mainly due to the decreased
earnings in the period, adjusted for non-cash items, and a decreased investment in non-cash working capital.

Cash Flows Provided by Financing Activities

For the 53 weeks ended January 31, 2009, cash flows provided by financing activities were $0.3 million
compared to $2.6 million in the same period last year. The change was mainly due to the reduced draw on the
CAPEX credit facility of $2.0 million in the year, compared to a $4.2 million draw in the prior year.

Cash flows provided by financing activities were $0.9 million in the fourth quarter of fiscal 2009 compared to a
use of funds of $0.1 million in the same period last year. The change was mainly due to the repayments on the
CAPEX credit facility of $1.2 million in the quarter offset by a $2.0 million increase in long term debt.

Cash Flows Used by Investing Activities

For the 53 weeks ended January 31, 2009, cash flows used by investing activities were $4.2 million compared to
$6.8 million in the same period last year. The change was mainly due to purchases of capital assets of $5.4 million
compared to $7.7 million in the same period last year, combined with increased tenant inducements of $0.3 million.

For the fourth quarter of fiscal 2009, cash flows used by investing activities increased by $0.2 million to $1.4
million in the fourth quarter of fiscal 2009 compared to $1.2 million in the same period last year. The change was
mainly due to purchases of capital assets of $1.6 million, less tenant inducement received of $0.2 million
compared to $1.2 million of capital asset purchases in the same period last year.

Net Change in Cash and Cash Equivalents

For the 53 weeks ended January 31, 2009, the net result of the Company’s operating, financing and investing
activities was a decrease in cash and cash equivalents balance of $1.6 million compared to an increase of $3.0
million in the same period last year.

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In the fourth quarter of fiscal 2009, the net change in the Company’s operating, financing and investing activities
was an increase in cash and cash equivalents balance of $10.5 million compared to an increase of $11.0 million
in the same period last year.
The table below sets out various categories of contractual obligations of the Company and the amounts due for
each period as of January 31, 2009:

Within
(In thousands) Total 1 year 2 - 3 years 4 - 5 years Thereafter

Long term debt $ 6,843 $ 1,322 $ 4,228 $ 1,293 $ -
Operating leases 96,211 16,897 29,486 23,696 26,132
Preferred shares 5,223 33 5,190 - -

Total contractual obligations $ 108,277 $ 18,252 $ 38,904 $ 24,989 $ 26,132

5.3 Capital Management

During fiscal 2009, the sources of capital included a $10.0 million revolving credit facility with a seasonal
adjustment increase to $15.0 million from April 1 to September 30. In addition, a revolving term loan facility of
$8.5 million has been available since August 29, 2008, previously at $6.5 million. Interest rates on these
facilities were at prime plus 1.25% and 1.75%, respectively. These facilities are secured by general security
agreements against all existing and future acquired assets of the Company, including a pledge of the shares
West 49 Inc. holds in its subsidiaries.
The Company is subject to certain restrictions and covenants in respect of its credit facilities, including a
minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth.
As at January 31, 2009, the Company was in violation of one of its bank covenants. Subsequent to January 31,
2009, the Company obtained a waiver for the default retroactive to January 31, 2009. The waiver obtained has the
following conditions set forth based on historical operating needs: the maximum limit on the Company’s operating
credit facility was reduced to $6.0 million from $10.0 million; the seasonal increase available on the operating line
from April 1 to September 30 has been lowered to $12.0 million from $15.0 million; the term loan facility has been
capped at $6.8 million, down from $8.5 million; and the credit facilities have also been changed to a demand basis
from a 364-day committed line. Interest rates on these facilities are at prime plus 4.0% and 4.75%, respectively.
With uncertainties in the current economic environment, it is not uncommon for banks to remove unutilized
credit facilities. Throughout the year, the Company has had varying amounts of unutilized credit facilities. The
bank indebtedness on the operating credit facility ranged from nil to $9.0 million at the peak of the seasonal
period. Management believes that the Company’s revised credit facilities, along with cash generated from
operations, will be sufficient to fund its operations and anticipated capital expenditures during fiscal 2010. In
addition, subsequent to January 31, 2009, the Company completed an amalgamation of various corporate
entities that will allow it to realize a significant amount of non-capital tax losses carried forward from prior years
which will reduce the amount of tax instalments by $1.7 million in fiscal 2010.
The Company’s credit facility renewal date is June 30, 2009. The Company anticipates that it may be in violation
of another covenant at the end of the first quarter. The Company’s bank is aware of this, and the Company has
already begun a full renewal process with the bank to negotiate mutually acceptable terms and anticipates this
to be completed during the second quarter of fiscal 2010.
5.4 Related Party Transactions

During the year, the Company, in the normal course of operations, provided administrative, payroll and
distribution services to 6271235 Canada Inc. (Prudhommes Factory Outlet, a clothing retailer) and considers
these to be related party transactions on account that a Director of the Company wholly owns 6271235 Canada
Inc. The outstanding amount due from 6271235 Canada Inc, as at January 31, 2009 was $10.0 thousand (2008
– $138.0 thousand), does not bear interest and has no specific terms of repayment. During the year, the
Company earned $36.0 thousand (2008 - $45.0 thousand) in management fees for providing these services,
which are included as other income in SG&A.

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6.0 Policies, Controls and Procedures
6.1 Significant Accounting Estimates
Estimates

The preparation of the Company’s consolidated financial statements, in accordance with Canadian generally
accepted accounting principles, requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and expenses during the reporting
period. Due to the inherent uncertainties in making such estimates, and the current economic environment,
actual results reported in the near term could differ from those estimates. Estimates are used when accounting
for items such as inventory valuation, estimated returns and allowances, amortization, gift card liability,
impairment of long-lived assets, future income taxes and assumptions used when assessing goodwill and
intangible assets. Management reviews these estimates on an ongoing basis, and believes that the most critical
estimates and assumptions are in the following areas:

Revenue Recognition

Revenue includes sales to customers through stores operated by the Company. Sales are recognized at the
time of sale and receipt of merchandise by the customer, net of any returns. Allowances for customer returns
are estimated using the historical return patterns.

Upon the purchase of a gift card or issuance of a gift certificate, a liability is established for the cash value of the
gift card or gift certificate. Revenue is recognized when the gift card or gift certificate is redeemed for
merchandise. Gift card breakage is recognized by the Company when, based on historical patterns of
redemption, the Company determines the cards or certificates will not be redeemed.

Inventories

Inventories, which consist of fashion and apparel, footwear, accessories and equipment related to music, youth
culture and action sports, are valued at the lower of cost and net realizable value with cost being determined on
the weighted average basis. The cost of inventories includes the cost of purchases and estimates of the
capitalized portion of other costs incurred in bringing the inventories to their present location and condition.
Inventories owned by the Company are generally located at its warehouses and its retail locations. The
Company records valuation adjustments to inventories based on the aging of inventories and estimated
expected markdowns. The estimated reserve can be affected by changes in the Company’s markdown
strategies and selling patterns that could result in a fluctuation in gross margin.

Impairment of Long-lived Assets

Management evaluates the ongoing value of assets associated with the Company’s retail stores. Long-lived
assets are tested for recoverability on an annual basis or more frequently as events or changes in
circumstances indicate that their carrying value exceeds the total undiscounted cash flows expected from their
use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying
value of the assets over their fair value.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair market value of the net identifiable assets of
the acquired business. Goodwill and intangible assets are assessed for impairment on an annual basis or more
frequently as events or circumstances change that indicate goodwill or intangible assets of a reporting unit may
be impaired. When the carrying amount exceeds the fair value, an impairment charge is recognized in earnings
in an amount equal to the excess of the carrying value over its fair market value

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Future Income Taxes

The Company follows the liability method of accounting for income taxes. Under this method, future income
taxes are recognized for the future income tax consequences attributable to differences between the carrying
values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities
are measured using the enacted and substantively enacted income tax rates expected to apply to taxable
income in the years in which temporary differences are expected to be recovered or settled. The effect on
future income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that
includes the substantively enacted dates. Future income tax assets are recognized to the extent that it is more
likely than not that they will be realized.
6.2 Impact of New Accounting Pronouncements

The Canadian Institute of Chartered Accountants (“CICA”) amended section 1400 “General Standards of Financial
Statement Presentation” to include requirements to assess an entity’s ability to continue as a going concern. The
new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or
after January 1, 2008. Accordingly, the Company adopted the amendment to this standard on January 27, 2008.
The adoption of this amendment did not have an impact on the Company’s consolidated financial statements.
The CICA issued four new accounting standards that became effective for the Company’s first quarter of fiscal
2009: Section 1535 “Capital Disclosures”, Section 3031 “Inventories”, Section 3862 “Financial Instruments –
Disclosures” and Section 3863 “Financial Instruments – Presentation”. The Company applied these new
accounting standards at the beginning of its 2009 fiscal year.
Capital Management Disclosures

Section 1535 “Capital Disclosures” establishes standards for disclosing information about an entity’s capital and how
it is managed. Required disclosure includes information that enables users of an entity’s financial statements to
evaluate its objectives, policies and processes for managing capital. This disclosure includes a description of capital
under management, and disclosure of externally imposed capital requirements to which the entity is subject. The
adoption of this standard did not have an impact on the Company’s consolidated financial statements.
Inventories

Section 3031 replaces Section 3030 “Inventories”. The objective of this new section is to prescribe the
accounting treatment for inventories. This section requires inventories to be measured at the lower of cost and
net realizable value and also provides guidance on the appropriate methods of determining cost and the impact
of any write-downs to net realizable value. Reversals of previous write-downs to net realizable value where
there is a subsequent increase in the value of inventories is now required. This reversal is limited to the extent
of the initial write-down. Under this new accounting standard, the cost of inventories includes the cost of
purchases and other costs incurred in bringing the inventories to their present location and condition.
The Company implemented this new accounting standard at the beginning of its 2009 fiscal year, on a
retrospective basis, without restatement of prior periods. As a result of the retrospective application of this new
standard, the opening deficit for fiscal 2009 has been adjusted by the difference in the measurement of opening
inventories. The impact of this transitional adjustment was an increase in opening inventories of $1.2 million, an
increase in current future income taxes payable of $0.4 million, and a decrease of $0.8 million to the opening
deficit. As at January 31, 2009, the costs capitalized to inventory totaled $1.6 million.
Financial Instruments Disclosure and Presentation

Sections 3862 and 3863 replaced Section 3861 “Financial Instruments – Disclosure and Presentation”, with the
exception of accounting for insurance contracts, which may still be accounted for in accordance with Section
3861. Section 3862 requires disclosure that enables financial statement users to evaluate the significance of
financial instruments for an entity’s financial position and performance, the nature and extent of risks arising
from financial instruments to which the entity is exposed, and the entity’s process for managing such risks.
Section 3863 enhances a financial statement user’s understanding of the significance of financial instruments to
an entity’s financial position, performance and cash flows by establishing standards for presentation of financial
instruments and non-financial derivatives. The adoption of this standard did not have an impact on the
Company’s consolidated financial statements.

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6.3 Future Changes in Accounting Policies

In February 2008, the CICA amended Section 1000 “Financial Statement Concepts” to clarify the criteria for
recognition of an asset and the timing of recognition of expenses. This amendment is effective for interim and
annual financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the
Company will apply this amendment at the beginning of its fiscal 2010 year. The Company is currently
evaluating the impact that the adoption of this amendment will have on its consolidated financial statements.
In February 2008, the CICA issued Section 3064 “Goodwill and Intangible Assets”. Section 3064 replaced
Section 3062 “Goodwill and Other Intangible Assets” and Section 3450 “Research and Development”. This new
section provides additional guidance on the recognition, measurement, presentation and disclosure of goodwill
and intangible assets. This standard is effective for interim and annual financial statements for fiscal years
beginning on or after October 1, 2008. Accordingly, the Company will apply this new standard at the beginning
of its fiscal 2010 year. The Company is currently evaluating the impact that the adoption of this Section will
have on its consolidated financial statements.
In February 2008, the CICA announced that the Canadian Accounting Standards Board confirmed that the
changeover to International Financial Reporting Standards (“IFRS”) from Canadian GAAP will be required for
publicly accountable enterprises’ interim and annual financial statements effective for fiscal years beginning on
or after January 1, 2011. Companies will be required to provide comparative information under IFRS for the
previous fiscal year. The implementation of IFRS will be applicable for the Company for the first quarter of fiscal
2012, for which the current and comparative financial information will be presented in accordance with IFRS.
The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the
Company’s reported financial results.
In addition, the International Accounting Standards Board has projects underway that are expected to result in
new pronouncements that continue to evolve IFRS, and as a result, IFRS as at the transition date is expected to
differ from its current form.
Preliminary IFRS Impact Assessment

An initial evaluation or impact assessment has been completed to analyze potential significant differences
between current IFRS and Canadian GAAP as they apply to the Company. The results of the assessment
identified the following:
Preliminary analysis of all Canadian GAAP to IFRS differences and IFRS 1 elections, including a
prioritization of high, medium and low impact areas for the Company;
Preliminary resource requirements;
Preliminary training requirements; and
Preliminary IFRS Transition Plan.
The initial assessment has identified some standards as having a higher likelihood for generating accounting
differences including Intangible Assets (IAS 38), Impairment of Assets (IAS 36) and Business Combinations
(IFRS 3), as well as the more extensive presentation and disclosure requirements under IFRS. The Company
continues to analyze available accounting policy choices including IFRS 1 elections, and is therefore unable to
quantify the exact impact of IFRS on the Company’s financial statements at this time.
IFRS Transition Plan

During fiscal 2010, the Company will finalize and implement a formal IFRS Transition Plan. This plan will include
the following:
An established project structure and governance practices;
Detailed timetable for fiscal 2010;
Identification and allocation of resources (internal and external);
Development and execution of a training program;
Detailed analysis of all Canadian GAAP to IFRS differences;
Detailed analysis and selection of all IFRS 1 elections; and
Assessment of impact on data systems, internal controls over financial reporting, and business
activities, such as financing and compensation arrangements.

24


IFRS Transition Disclosures

As the Company transitions from Canadian GAAP to IFRS, it is required to qualitatively disclose its
implementation impacts. As the IFRS Transition Plan progresses, disclosure on accounting policy differences is
expected to increase.
In January, 2009, the CICA issued Sections 1582 “Business Combinations”, 1601 “Consolidated Financial
Statements” and 1602 “Non-Controlling Interests”, which replaced Sections 1581 “Business Combinations” and
1600 “Consolidated Financial Statements”. These new Sections harmonize Canadian accounting with the
International Accounting Standards Board’s (IASB) International Financial Reporting Standard 3 “Business
Combinations”. These new standards are to be applied prospectively for business combinations in the first
annual reporting period beginning on or after January 1, 2011. The Company intends to apply these Sections at
the beginning of its fiscal 2012 year, although earlier application is permitted. Assets and liabilities that arose
from business combinations which precede the application date will not be adjusted upon adoption of the new
standards. The Non-Controlling Interests standard is not applicable to the Company at this time.
6.4 Disclosure Controls and Procedures

Management is responsible for establishing and maintaining a system of controls and procedures over the
public disclosure of financial and non-financial information regarding the Company. Disclosure controls and
procedures are designed to seek to ensure that information required to be disclosed in reports filed with
Canadian securities regulatory authorities is recorded, processed, summarized and reported on a timely basis,
and is accumulated and communicated to senior management, including the Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
The Company’s system of disclosure controls and procedures includes, but is not limited to, a Disclosure Policy,
a Code of Business Conduct, the effective functioning of a Disclosure Committee and internal controls over
financial reporting. The Company’s management, including the CEO and the CFO, does not expect that the
disclosure controls will prevent or detect all misstatements due to error or fraud. Because of the inherent
limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute, assurance
that all control issues and instances of fraud or error, if any, have been detected. The Company is continually
seeking to evolve and enhance its system of controls and procedures.
Based on the evaluation of the disclosure controls and procedures which included documentation review,
enquiries and other procedures considered by management to be appropriate in the circumstances, the CEO
and CFO have concluded that, to their knowledge, as at January 31, 2009, except for the weakness identified
below in the internal control over financial reporting, the disclosure controls and procedures are designed and
operating effectively.
6.5 Internal Control over Financial Reporting

Management is also responsible for establishing and maintaining appropriate internal controls over financial
reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with GAAP. The Company’s internal controls over financial reporting include, but are not limited to, policies and
procedures related to accounting and reporting, and controls over systems that process transactions. The
Company’s procedures for financial reporting also include the involvement of qualified financial professionals,
senior management and the Company’s Audit Committee.
During fiscal 2009, management engaged the services of external consultants, independent of the Company’s
external auditor, to provide additional advice and technical expertise relating to internal controls over financial
reporting. During the process of management's review and evaluation of the design and operational effectiveness
of the Company's internal control over financial reporting, the CEO and CFO have concluded that, as at January
31, 2009, the internal controls over financial reporting are effective in providing reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with GAAP with the exception of the previously disclosed design weakness. As is indicative of many small
companies, management has identified the existence of full competencies in the complex areas of taxation as an
area requiring improvement. Risks associated with this weakness have the potential to result in material
misstatements in the Company’s consolidated financial statements among other things. Senior management
seeks to mitigate these risks by consulting with external experts to assist management in their analysis.
25


Management does not intend to remediate the Company’s lack of in-house tax expertise as it does not believe it
to be economically beneficial at this time and that the established procedures are sufficient at this time. It should
be noted that a control system, no matter how well conceived or operated, can only provide reasonable
assurance, not absolute assurance, that the objectives of the control system are met.
Management has evaluated whether there were changes in internal controls over financial reporting during the
quarter ended January 31, 2009 that materially affected, or are reasonably likely to materially affect, the internal
controls over financial reporting. Management has determined that no material changes occurred during in the
fourth quarter.

7.0 Growth Strategy and Outlook
7.1 Growth Strategy

The Company’s vision is to be the retail destination of choice for Canadian tweens and teens seeking to fulfill
their action sports lifestyle needs. The Company will fulfill its vision and achieve its objectives through executing
a growth strategy which is primarily focused on maximizing returns at existing locations (through improving
gross margins; leveraging expenses; and driving comparable store sales) as well as growing its stores across
Canada (by opening new stores in existing markets and expanding into new markets).
7.2 Future Outlook

The economic downturn that began in 2008 has continued to evolve into a global economic meltdown,
negatively impacting consumer confidence across Canada. While spending by the Company’s tween and teen
target market consumers has historically been thought of as recession resistant, the effects have been far more
reaching and volatile than the past, and Canadian youth are looking to make their dollars go further.
Management and the Board of Directors continue to believe in the strong growth potential of the Company over
the next several years. However, in light of the current macroeconomic environment and constraints in the
capital markets, management will continue to be prudent and definitive in the actions taken to preserve and
grow market share and strengthen the profitability of the Company. This means that maximizing the value from
existing operations will continue to take precedence over other elements of our growth strategy over the near
term. As such, store growth will likely be limited to four or five new stores and only a few major
renovation/relocations in fiscal 2010. In addition, the Company will continue to reassess underperforming
stores, and intends to close two to four stores in fiscal 2010 as opportunities to exit leases arise.

8.0 Risk Management
The Company attempts to mitigate and manage risks wherever possible through various tactics including
continuous monitoring of its internal and external environments for threats and opportunities, planning for the risk
with contingency plans and protecting against the risk of loss with insurance, where applicable. The risks described
below are inherent in the Company’s normal course of business and have the potential to impact the financial
performance of the Company. The risks included here are not exhaustive. The Company operates in a very
competitive and rapidly changing environment. New risk factors may emerge from time to time and it is not possible
for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company.
8.1 Economic Conditions
Current Economic Downturn

The apparel retail industry can be affected by macroeconomic factors, including changes in national, regional, and
local economic conditions, employment levels, salary and wage levels, interest and currency exchange rates,
taxation and consumer spending patterns. The current global economic downturn has adversely impacted the
Canadian retail landscape primarily in the form of reduced consumer confidence and could negatively affect
consumers’ willingness to purchase the Company’s products as they reduce their discretionary spending. Moreover,
current economic conditions may adversely affect the ability of the Company’s manufacturers and/or suppliers to
obtain the credit necessary to fund their working capital needs, which could negatively impact their ability to continue
to provide products to the Company. If the current economic conditions persist or deteriorate, sales of the
Company’s products could be adversely affected and the Company may face obsolescence issues with its
inventory, either of which could have a material adverse impact on its operating results and financial condition.

26


The Company’s sales also depend on the continuing popularity of malls as shopping and leisure-time
destinations for tweens and teens. The current economic recession and uncertain economic outlook in Canada
may further lower consumer spending levels and cause a decrease in mall traffic or new mall development,
each of which could adversely affect the Company.

Currency Exchange Rates

The Company’s foreign currency exchange rate risk is generally limited to currency fluctuations between the
Canadian and United States (U.S.) dollar. The Company is exposed to foreign exchange rate variability on its
merchandise purchases in U.S. dollars. Pricing is determined in advance with considerable lead times, and
significant fluctuations in foreign exchange rates could have an impact on the Company’s operating results and
financial condition. The Company does not currently engage in any foreign currency hedging activities due to
the relatively small volume of transactions in U.S. dollars.

A significant portion of the Company’s merchandise purchases are made through Canadian distributors of U.S.
suppliers. Similar to the above, pricing is determined in advance with considerable lead times, and significant
fluctuations in foreign exchange rates could have immediate positive or negative affects on the Company’s
ability to be price competitive. Since the Company’s pricing is locked in for longer periods of time, this
competitive pricing delay can be adjusted by the Company in the short-term through markdowns or other
means, which could have significant positive or negative effects on the Company’s operating results and
financial condition.
8.2 Banking Arrangements

Aside from cash flows from operations, the Company is dependent on borrowings under its credit facilities to
support its seasonal cash requirements. The current global financial market downturn has resulted in severe
restrictions on credit availability in most parts of the world, including Canada. Credit contraction in financial
markets may hurt the Company's ability to borrow funds to meet its anticipated cash needs and access credit in
the event that it identifies an acquisition opportunity or some other opportunity that would require a significant
investment in resources.

A significant decrease in the operating results of the Company could adversely affect the Company’s ability to
maintain required financial ratios under the Company’s credit facilities. Required financial ratios include a
minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth. The
Company is also subject to a maximum amount of capital expenditure per annum. If these financial ratios are
not maintained or the capital expenditure limit is exceeded, the lender will have the option to terminate the
facilities and require immediate repayment of all amounts outstanding under the credit facilities. If the Company
were unable to obtain waivers or renegotiate acceptable lending terms, there can be no guarantee that the
Company would be able to obtain a new credit agreement with another bank or group of lenders on similar
terms or at all and this could have an adverse effect on the Company.

8.3 Competition

The Canadian retail apparel and accessory industry is highly competitive. The Company competes with other
retailers for manufacturers and/or suppliers, customers, suitable store locations, qualified associates and
management personnel. In addition, given the close proximity of many of the Company’s stores to the U.S.,
cross-border shopping also presents a constant risk. The Company currently competes directly with street-level
alternative stores located primarily in metropolitan areas as well as with other mall-based teenage-focused
retailers such as, but not limited to: Bluenotes™, American Eagle Outfitters™, Old Navy™, Below the Belt™,
The GAP™ and boathouse™. The Company may also experience increased competition from additional non-
Canadian retailers moving into the Canadian marketplace. Among the other retailers who could enter the
Canadian marketplace are PacSun™ (Pacific Sunwear™), Zumiez™ and Hot Topic™. Some of the Company’s
competitors are larger and may have greater resources than the Company. Direct competition with these and
other retailers may increase significantly in the future, which could require the Company, among other things, to
lower its prices. Failure to develop and implement appropriate competitive strategies could have an adverse
effect on the Company.

27


8.4 Merchandise
Dependence on Manufacturers and/or Suppliers
The Company’s financial results also depend on its ability to maintain access to manufacturers and/or suppliers
who develop and sell current action sport, fashion, music and pop culture related merchandise as well as the
Company’s ability to purchase merchandise in sufficient quantities and to do so at competitive prices. Although
the Company acquires its merchandise from various manufacturers and/or suppliers, many of them limit the
quantity of merchandise produced and sold to the Company as a result of capacity limitations and other factors.
There is no guarantee that the Company will be able to maintain its relationships with its manufacturers and/or
suppliers on current terms or that the Company will obtain the quantity of merchandise it seeks at competitive
prices in the future. Any inability to acquire suitable merchandise, or the loss of one or more key manufacturers
and/or suppliers could have an adverse effect on the Company.
Unfavourable trends or developments, including among others, fluctuations in the price of raw materials, the
unavailability of certain products, the loss of or inability to obtain leased premises on reasonable terms,
transportation disruptions, strikes, lock-outs, labour unrest and/or financial difficulties affecting the Company’s
manufacturers and/or suppliers, may cause a significant reduction in the availability or quality of products and
services purchased by the Company. There can be no assurance that the Company will be able to find alternate
manufacturers and/or suppliers which could have an adverse impact on the Company.
As a diverse and multi-channel retailer, the Company promotes many brands as part of its normal course of business. Damage
to the reputation of any of these brands or the reputation of the manufacturers and/or suppliers of these brands could negatively
impact consumer opinions of the Company and/or its related products and have an adverse effect on the Company.
Private Label Merchandise
The Company’s private label merchandise generally carries higher margins than its other merchandise. Accordingly,
if the Company fails to anticipate, identify and react to trends with its private label merchandise, particularly the ideal
mix of private label versus branded merchandise, then it could have an adverse effect on the Company.
Merchandise Sourcing
A significant portion of merchandise sold by the Company is sourced from manufacturers and/or suppliers
requiring advance notice periods in order to supply the quantities that the Company requires. Lead times may
adversely impact the Company’s ability to respond to changing consumer preferences, resulting in inventory
levels that are insufficient to meet demand or in merchandise that may have to be sold at lower prices. The
inability of a manufacturer and/or supplier to ship orders in a timely manner could also cause the Company to
fail to meet the merchandise requirements of its stores, which could result in lost sales and dissatisfied
customers. Interruptions in the Company’s sourcing could have an adverse effect on the Company and
inappropriate inventory levels may negatively impact the Company’s performance.
In addition, a significant portion of the Company’s private label merchandise is manufactured outside of Canada,
principally in Asia and the United States, through arrangements with distributors and agents. The Company’s
distributors and agents are subject to the risks generally associated with doing business abroad, including
foreign government regulations, political instability, the imposition of additional regulations relating to imports,
the imposition of additional duties, taxes and other charges on imports, significant fluctuations in the value of the
dollar against foreign currencies or restrictions on the transfer of funds.
8.5 Information Systems

The Company has experienced significant growth over the last several years. While the Company regularly
evaluates its information systems capabilities and requirements, there can be no assurance that its existing
information systems will be adequate to support future growth or will remain adequate to support the existing
needs of the Company’s business. In order to support future growth, and to consolidate the many different
platforms across the Company’s business areas, the Company has begun to undertake a significant information
system implementation for all banners. One banner was completed in fiscal 2009. The Company intends to
convert all banners to the new common point-of-sale and merchandising system. Such projects include inherent
risks associated with replacing existing systems, such as system disruptions and the failure to accurately
capture data, among others. Information system disruptions, if not anticipated and appropriately mitigated, could
have an adverse effect on the Company.
28


8.6 Human Resources

There can be no assurance that the Company will be able to maintain key personnel at either the senior
management or retail level. The success of the Company depends upon the efforts of key personnel and,
accordingly, its ability to retain and attract qualified personnel, maintain good relations with its personnel, and to
continue to successfully grow the business. The loss of the services of one or more of these individuals, or the
lack of certain in-house specialized expertise (for example, in tax and other areas), could have an adverse effect
on the Company, and could lead to disclosure errors among other things.

8.7 Relationships with Commercial Landlords

The Company operates its stores with the majority situated in urban malls and other similar urban centres on
premises leased to the Company by various commercial landlords. While the Company is able to change its
merchandise mix and relocate stores in order to maintain its competitiveness, it may be restricted from vacating
a current store location without breaching its contractual obligations and incurring, for example, lease related
expenses up to the remaining term of the lease. In some cases, the long-term nature of the leases may limit the
Company’s ability to respond to changes in the demographics or retail environment at any location. As at
January 31, 2009, the remaining terms of the various leases ranged from less than one year to ten years, with
the average remaining term of the lease being approximately five years.

The Company’s financial results, business and operations are impacted by the Company’s relationships with its
numerous commercial landlords and their agents and representatives. There can be no assurance that the
Company will maintain positive working relationships with such persons and entities which, if compromised,
could impact the Company’s ability to operate its stores, open new stores and to renew leases on existing
stores, among other things. This could, accordingly, have an adverse effect on the Company.

8.8 Legal and Policies
Laws and Regulations

Changes to laws, regulations, policies, rules, orders, practices, methods and similar, including but not limited to
accounting adjustments and changes in accounting policies and methods (collectively, “Laws and Practices”), as
well as changes in the interpretation, implementation or enforcement of Laws and Practices, could adversely
affect the Company. The Company may also incur significant costs in the course of complying with any changes
to applicable Laws and Practices. The Company’s failure to comply with applicable Laws and Practices could
result in judgments, sanctions and/or financial penalties against the Company which could adversely impact the
Company in a number of ways, including potential negative impacts on its reputation.

Intellectual Property

If the Company fails to enforce or maintain any of its intellectual property rights, it may be unable to capitalize on
its efforts to establish and maintain brand equity. All registered trade-marks in Canada can be challenged
pursuant to provisions of the Trade-marks Act (Canada) and if any of the Company’s intellectual property is ever
successfully challenged, this may have an adverse impact on the Company. There can also be no assurance
that any of the Company’s efforts to register or protect its intellectual property will be successful. The use of
unregistered trade-marks, registered trade-marks and licensed trade-marks, among other things, can also be
challenged. Moreover, it is possible that the Company’s licenses to use certain intellectual property will be
terminated or not renewed. The loss of any brand could have an adverse effect on the Company.

In non-Canadian jurisdictions the Company may not own or have the right to use identical or similar trade-
marks, licenses and other intellectual property owned by the Company in Canada. Third parties may also use
such intellectual property in jurisdictions other than Canada in a manner that diminishes its value. If this occurs,
the value of the Company’s intellectual property may suffer and net sales of the Company could decline.
Similarly, negative publicity or events associated with such intellectual property in jurisdictions both in and
outside of Canada may negatively affect the image and reputation of the Company, resulting in a decline in net
sales of the Company.

29


Legal and Regulatory Proceedings

The Company may be subject to legal proceedings including those related to product liability, intellectual
property infringement and any other proceedings arising out of its business. Such potential liability may be
material to the Company and may adversely affect its ability to continue operations. In addition, the Company
may be subject to actions by governmental or regulatory authorities in connection with its operations. Such
actions may result in fines or penalties, revocations of consents, permits, approvals or licenses or other similar
actions, which could be material and may adversely impact the results of operations of the Company. The
Company’s current insurance coverage may not be adequate to cover any or all of the potential losses, liabilities
and damages that could result from the actions referred to above. Publicity resulting from any allegations may
also adversely affect the Company, regardless of whether such allegations are true or whether the Company is
ultimately held liable.

8.9 Insurance Coverage

The Company uses its discretion in determining amounts, coverage limits and deductibility provisions of
insurance, with a view of maintaining appropriate insurance coverage on its assets at a reasonable cost and on
suitable terms. This may result in insurance coverage that, in the event of a substantial loss, may not be
sufficient to cover the full market value or current replacement cost of its assets. This could, accordingly, have
an adverse effect on the Company.

30

West 49 Inc. Annual Report 2009

West 49 Inc. Annual Report 2009

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West 49 Inc. Annual Report 2009