The Sports Authority, Inc. reported that net income for the fourth quarter ended January 29 was $25.6 million, or 97 cents per diluted share, compared with net income of $28.3 million, or $1.08 per diluted share in the prior year's fourth quarter, excluding the effect of after-tax merger integration costs of $13.7 million, or 52 cents per diluted share.
Including merger integration costs, net income for the prior year's fourth quarter was $14.6 million, or 55 cents per diluted share.
Total sales for the fourth quarter were $713.8 million compared with $712.0 million in the prior year's fourth quarter. Fourth quarter comparable store sales for the Company decreased 2.2% from last year's results, in line with previous guidance.
On August 4, 2003, Gart Sports Company and The Sports Authority, Inc. (TSA) announced that they had completed a merger of equals. The results of the fourth quarter of 2004 and 2003 represent the performance of the combined company. The results of the twelve months ended January 29, 2005 represent the performance of the combined company while the results for the twelve months ended January 31, 2004 represent the combined company for the last six months and stand-alone results for Gart Sports Company for the first six months.
The Company also announced that fourth quarter and full year earnings and earnings per share are subject to adjustments based on the final outcome of its evaluation of its lease-related accounting. The results below exclude any provision for these lease-related accounting adjustments.
Net income for the fiscal year ending January 29, 2005 was $47.3 million, or $1.79 per diluted share, excluding the effect of after-tax merger integration costs of $13.3 million, or $0.50 per diluted share, compared with $2.11 per diluted share in the prior year, excluding the effect of after-tax merger integration costs of $26.7 million, or $1.37 per diluted share, and income related to non-recurring events and a related tax benefit of $1.9 million, or $0.10 per diluted share. Pro-forma combined earnings for the prior year was $1.58 per diluted share.
Total sales for the fiscal year ending January 29, 2005 were $2.44 billion compared with $1.76 billion in the prior year. Year-to-date comparable store sales for the combined company decreased 2.0 % from last year's combined company results.
The Company opened six stores and closed four stores during the fourth quarter to arrive at a total number of stores in operation as of January 29, 2005 of 392 stores in 45 states.
Doug Morton, Chairman and Chief Executive Officer of the Sports Authority stated, “Our bottom-line results in the fourth quarter were primarily driven by improved operating efficiencies and better cost controls across the board. During the quarter, our winter and outdoor product categories were impacted by unseasonable weather, however, we were very pleased with the strong sales gains we registered in apparel and the continued positive performance of our re-modeled stores. While we recognize that there is still much work to be done, we are encouraged about the direction of our business and remain committed to executing a strategy that will result in long-term growth and increased shareholder value.”
Mr. Morton continued, “Since David Campisi joined our team as President of Merchandising this past November, we have already begun to see the positive results of his efforts. David and his team are focused on process, discipline and accountability, improving the flow of merchandise, enhancing marketing and advertising, driving sales and better inventory management. We recognize that these things take time to fully implement, however, we are confident that these new initiatives will help better position the company for the future.”
Lease Accounting Issues
As a result of a clarification issued by the Securities and Exchange Commission on February 7, 2005 affecting many retail companies, The Sports Authority has reevaluated its method of accounting for leases. After consultation with its independent auditors, Deloitte & Touche, and its audit committee, the Company has determined that it will conform to the SEC's Chief Accountant's clarification and adjust its accounting for leases. Consistent with many other retailers, The Sports Authority accounted for construction allowances received from landlords on its balance sheets as a reduction of fixed assets. The Company will record construction allowances from landlords as a component of deferred rent liability on its balance sheet. The Company will also adjust its statements of cash flows to reflect construction allowances as cash flows from operating activities rather than a reduction of capital expenditures within cash flows from investing activities. Historically, the Company had recognized the straight line rent expense for leases beginning on the earlier of the store opening date or lease commencement date, which had the effect of excluding the build-out period (or rent holiday period) of its stores from the calculation of the period over which it expensed rent. The Company has determined that it will include the build-out period in its calculation of straight line rent expense in accordance with Financial Accounting Standards Board Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases” and will change its straight line rent accrual and deferred lease credits accordingly.
These are non-cash adjustments and have no impact on revenues or comparable store sales nor will they affect the Company's compliance with covenants under its current credit facility.
Based on its preliminary assessment, the Company anticipates the adjustment to its method of accounting for leases will decrease diluted earnings per share by approximately $0.01 in the fourth fiscal quarter ended January 29, 2005, and approximately $0.08 for the 2004 fiscal year. It will also result in a charge for the cumulative effect for the restatement of periods prior to fiscal 2004 totaling approximately $3.9 million, net of tax. The Company plans to file an amendment to its annual report on Form 10-K for the fiscal year ended January 31, 2004 and all years presented therein, and amend the Form 10-Q's filed for the first three quarters of fiscal 2004. As a result of the pending restatement, the financial statements currently contained in the Company's prior filings with the SEC should no longer be relied upon.
Guidance for Fiscal Year 2005
For fiscal year 2005, the Company is forecasting comparable store sales of approximately 2% and diluted EPS of $1.90 to $1.95, excluding the impact of any lease accounting adjustments, the expensing of stock options and based on 26.5 million diluted shares. The Company is expecting the impact of the lease accounting adjustments to reduce diluted EPS approximately $0.08 to $0.10 for the fiscal year. The Company is currently analyzing the impact of expensing stock options in anticipation of the adoption of Financial Accounting Standards Board Statement No. 123R. This analysis is not yet complete however, based on current information, the Company anticipates the impact in the second half of fiscal 2005 to be a reduction of diluted EPS of approximately $0.02 to $0.04. The Company currently expects to open 14 new stores, relocate 4 stores and close 6 stores during the year.
For the first quarter of fiscal 2005, the Company is forecasting comparable store sales of approximately 1% to 2% and diluted EPS of 25 cents to 27 cents per share, excluding any lease accounting adjustments and based on 26.5 million diluted shares. The Company is expecting the impact of the lease accounting adjustments to reduce diluted EPS approximately two to three cents in the first quarter. The Company expects to open 5 stores, relocate one store and close one store during the quarter.
The Sports Authority, Inc.
Condensed Consolidated Statements of Income
(Dollars in thousands, except share and per share data)
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13 Weeks Ended 52 Weeks Ended
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January 29, January 31, January 29, January 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales $713,756 $711,970 $2,435,863 $1,760,450
Cost of goods sold,
buying, and occupancy 508,619 501,237 1,756,850 1,274,721
----------- ----------- ----------- -----------
Gross profit 205,137 210,733 679,013 485,729
Gross profit % 28.7% 29.6% 27.9% 27.6%
Operating expenses:
Selling, general and
administrative
expenses 157,550 160,155 579,759 407,471
Selling, general and
administrative
expenses % 22.1% 22.5% 23.8% 23.1%
Merger integration
costs - 22,453 21,750 43,807
Store pre-opening
expenses 485 555 2,945 1,552
----------- ----------- ----------- -----------
Operating income 47,102 27,570 74,559 32,899
Non-operating income
(expense):
Interest (5,456) (4,323) (20,103) (12,327)
Other income
(expense) 112 686 1,396 3,514
----------- ----------- ----------- -----------
Income before income
taxes 41,758 23,933 55,852 24,086
Income tax expense (16,204) (9,363) (21,702) (7,719)
----------- ----------- ----------- -----------
Net income $25,554 $14,570 $34,150 $16,367
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Earnings per share:
Basic $0.99 $0.58 $1.33 $0.89
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Diluted $0.97 $0.55 $1.29 $0.84
