The Forzani Group Ltd. net earnings for the second quarter were C$1.9 million, or six cents per share, compared to a loss in the prior year’s second quarter of C$2.3 million, or seven cents per share.
During the most recent quarter, net earnings were seven cents before a one penny per share, non-recurring, non-cash charge to the Company’s future income tax expense resulting from Federal and Provincial income tax rate changes enacted during the quarter. While this change in rates increased the Company’s effective tax rate in the second quarter, due to a requirement to recognize the impact of changes in the period in which they occur, it will lower the Company’s effective tax rate in future years.
“The improved results that the Company continues to generate, commencing with the third quarter of fiscal 2006, have continued as a result of last year’s Sport Chek revitalization, the current year’s Sport Mart revitalization, and the early impact of changes made to merchandising and inventory management processes. Franchise operations continue to perform to plan and the wholesale division (operating as Gen-X Sports) and Intersport North America, our private-label arm, are generating solid profits,” Forzani managment said in a prepared statement. “Store operating and general and administrative expenses are in line with historical rates and we look forward to improved results throughout the remainder of the year. EBITA, on a trailing four-quarter basis, was $89.4 million compared to $59.4 million for the four quarters ending in the second quarter of last year, a 50.6% improvement.”
Retail system sales for the quarter were C$337.9 million, an increase of C$32.8 million, or 10.8% from the comparable 13-week sales of C$305.1 million. The increase was due to continued, strong contributions from franchise and corporate stores and the addition, on January 31, 2006, of The Fitness Source Inc. (“Fitness Source”). Exclusive of the acquisition of Fitness Source, retail system sales increased $29.1 million, or 9.5%.
Same store sales in corporate locations were up 5.4% and increased 6.9% in franchise locations, over the fiscal 2006 second quarter, for an overall same store sales increase of 6.0%.
Revenue, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, was $284.0 million, up $40.4 million, or 16.6% over the comparable period last year.
Combined gross margin for the 13 weeks ended July 30, 2006 was 34.0% of revenue, or $96.7 million, compared to 34.1%, or $83.2 million in the previous year. The slight decrease in consolidated margin is a result of a change in the mix of revenue between retail and wholesale, as wholesale revenues generate a lower gross margin. Taken individually, both retail and wholesale margins improved over the prior year. The margin dollar improvements continue to be driven by a combination of solid franchise results, and improved corporate store results. All categories performed well, in particular team sports, cycling and inline hardgoods lines, athletic, casual and licensed clothing, and footwear.
Store operating expenses, as a percent of corporate store revenue, were 27.4% against the prior year of 28.8%. Same store operating costs were 26.2% of corporate store revenue, 27.1% in the prior year. Same store costs, in absolute dollars, increased $1.0 million or 2.0%. In addition, the overall store operating expense increase reflects the impact of acquiring 9 Fitness Source stores on January 31, 2006.
General and administrative expenses were 8.3% of total revenue versus the prior year’s 8.0%. The absolute dollar increase of $4.2 million was a combination of standard year over year increases, the addition of the Fitness Source infrastructure and accruals for anticipated, year-end, performance-based compensation including stock based compensation.
Earnings before interest, taxes and amortization (“EBITA”) were $16.1 million, compared to $8.6 million for the 13-week period last year.
During the quarter, the Company opened 1 Econosport store (corporately owned and operated by the franchise division), relocated 1 Sport Chek and 1 corporate store became a franchise store. In the franchise division, 5 stores were opened (1 Hockey Experts, 1 Pegasus, 1 Sports Experts, 1 Atmosphere and 1 Intersport), 1 corporate store was franchised and 7 stores closed (including the departure of 5 Nevada Bob’s Golf licensees). As a result, at the end of the first quarter, the Company had 263 corporate stores and 207 franchise locations. This was a net increase of 28,685 square feet of retail selling space, a 0.5% increase versus the previous quarter. The Company now has 470 stores from coast to coast (July 31, 2005 – 452 stores).
Basic and diluted earnings per share for the 26-week period ended July 30, 2006, inclusive of the $0.01 reduction due to the change in tax rates referred to above, were $0.07, compared to a loss of $0.30 in the prior year. Cash flow from operations increased to $22.0 million from $7.6 million. On a per share basis, cash flow increased 191.3% to $0.67 compared to $0.23 in the prior year.
Retail system sales for the 26 weeks were $637.0 million, a $72.1 million increase from sales for the comparative fiscal 2006 period. Exclusive of the sales attributable to Fitness Source locations, retail system sales increased $62.2 million or 11.0%. Same store sales in corporate stores increased 8.5%, while franchise stores increased 6.5%, with total same store retail system sales increasing 7.8%.
Revenue was $564.4 million, an $82.6 million, or 17.1% increase over the 26-week period last year. Combined gross margin for the 26 weeks ended July 30, 2006 was up 150 basis points to 33.1% of revenue, from 31.6% in the prior year. In absolute dollars, the combined gross margin increased $34.6 million, to $186.8 million, from the 26-week period last year.
Store operating expenses, as a percent of corporate revenue, were 28.4% versus 29.8% in the prior year. General and administrative expenses were flat at 7.7% of total revenue.
EBITA was $28.9 million, or 5.1% of total revenue, compared to 1.8% for the same period last year. Earnings before income taxes for the 26 weeks ended July 30, 2006 were $4.2 million compared to a $15.3 million loss for the 26-week period in the prior year.
The Company’s working capital of $113.9 million grew by 6.5% over the prior year due to stronger results and leaner inventories, which reduced debt levels.
For the first 3 weeks of the Back to School period (Q3, fiscal 2007) same store sales in corporate stores grew by 1.1%, on top of a 3.9% same store sales increase the year earlier, with margins up sharply. Franchise comparable store sales for the same period grew 1.9%, as compared to a same store sales increase of 3.4% the year earlier. The trend experienced the last several years appears to be continuing this year with Back to School shopping shifting to late August and the first few weeks of September. This is demonstrated by the acceleration of same store sales on both the franchise and corporate side of the business as the quarter has progressed, as was the case last year, when comparable store sales performance improved throughout the quarter on both the corporate and franchise fronts.
