Forzani Shares Reach Three-Year High on Continued Upside from Repositioning…

The Forzani Group continued to see improvements to its bottom line from the repositioning it initiated last year. Even with relatively low sales increases and expanding G&A and operating expenses in the fourth quarter, the company’s significant growth in gross margins was able to boost profitability considerably.

Revenue, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, was CA$353.2 million ($306.4 mm), up 3.2% over the comparable period last year. Retail system sales for the quarter were CA$440.2 million ($381.8 mm), an increase of 0.5% from the comparable 13-week sales of CA$438.0 million ($375.1 mm). The results were impacted by the unseasonable weather in the East, offset by increases in Western Canada. Same store sales in corporate locations were up 1.1% and down 2.9% in franchise locations, for an overall same store sales decrease of 0.3%.

According to FGL management, for the quarter, every province was positive except Ontario, which shared with Quebec the warm winter until late January. The strong comps in Alberta and British Columbia were offset by sharp decreases in Ontario. Footwear was very strong while hardgoods and apparel results were mixed according to region with hardgoods affected by ski and snowboard sales, and apparel affected by outerwear sales. For the first seven weeks of Q1, corporate stores saw comps increase 1.9%
The company is exiting January with less ski and snowboard inventory in its corporate stores than a year ago. On the outerwear side, inventories are up mid single-digits over last year and management has “no concerns” about footwear inventory. In the franchise stores, winter category inventories were not significantly higher at the end of Q4 than the previous year, with the exception of cross-country skis and snowshoes. However, the franchise stores saw 17.1% comp sales to start the year, and this has considerably cleaned up winter inventories in the franchise locations.

Management said that the Gen-X business is finishing the year with strong results in both the wholesale and the close-out businesses. Volumes were said to be up 40% at the end of Q4. In addition, the Gen-X business was said to be starting fiscal 2007 well ahead of last year.

Gross margins for the quarter were 41.2% of revenue, compared to 37.9% in the previous year due to stronger operating results from both corporate and franchise stores. Store operating expenses, as a percent of corporate store revenue inched up 30 basis points to 21.8% against the prior year of 21.5%. General and administrative expenses increased 140 basis points to 9.8% of total revenue versus the prior year's 8.4% due primarily to performance based compensation expenses.

During the quarter, the company opened three Sport Chek stores and acquired seven Nevada Bob's Golf stores from a former licensee. In addition, the company closed one National Sports store and one corporately owned Golf Experts store. In the franchise division, five stores were opened – one Nevada Bob's Golf, one Sports Experts, one Atmosphere and two Intersport. At the end of the fourth quarter, the company had 270 corporate stores and 209 franchise locations.

Net earnings for the fourth quarter increased 24.1% to CA$21.1 million ($18.3 mm), compared to CA$17.0 million ($14.6 mm). Diluted EPS was CA62 cents per share (54 cents) versus CA51 cents per share (44 cents) last year.