Forzani Group Q4 Sales and Earnings Dip on Warm Weather

The Forzani Group Ltd. (FGL) said its revenue declined 2.1% for the quarter ended Jan. 31, 2010 as unseasonably warm weather hurt sales of snowsports gear at Canadas largest sporting goods retailers.

The company ended the year with less than a third of the cash it started with, or C$962,000 ($894,660), while its inventory rose 8.5% to C$316.3 million ($297.3mm). As of Jan. 31, it had borrowed C$27.9 million ($26.2mm) under its revolving credit facility, or nearly $10 million more than a year earlier.

“Our fourth quarter and essentially flat annual results attest to our resilience given the worst recession in 70 years, significant one-time costs and the impact of unseasonable weather,” said Bob Sartor, FGL’s Chief Executive Officer. “While flat results are never satisfying, our team managed well under the circumstances and for the year, we outperformed both our Canadian retail peer group and the North American sporting goods peer group in the key same-store sales metric.”

FGL’s total revenue was down 2.1% from a year earlier and included a 13.5% decline in wholesale sales to third parties and the franchise network. The decline in wholesale sales mainly reflected a 4.0% decline in retail sales of stores within the franchise network and the timing of order receipts from third parties.

Retail system sales, which include sales from corporate and franchise stores, were C$499.9 million ($474.4mm), a decrease of C$7.0 million ($6.6mm), or 1.4%, from the comparable 13-week sales of $506.9 million ($413.6mm) a year earlier.

Less Q4 discounting, better margins

Store operating expenses rose for the fiscal 2010 fourth quarter from a year earlier, reflecting the opening, during the year, of additional corporate locations and the impact of the fiscal 2010 first quarter conversion to corporate ownership of nine formerly franchised Fitness Source locations.

Same-store operating expenses were 20.9% of corporate store revenue compared to 20.8% in the prior year. Same-store expenses, in absolute dollars, decreased $2.3 million ($2.2mm) or 3.8% as a result of tightly controlled store wages and reduced accruals for year-end performance based compensation in the face of the decline in sales.

General and administrative expenses were 8.7% of revenues compared with 7.8% a year earlier. In absolute dollars, general and administrative costs were up C$2.8 million ($2.7mm) almost exclusively the result of the company’s successful decision in early December to ramp up strategic marketing expenditures which had the result of improving sales without discounting margins.

EBITA(3) was C$47.7 million ($45.3mm) or 12.8% of revenues, up C$500,000 ($474.5mm) and 1.1% respectively from the prior year’s fourth quarter, as incremental sales and margins more than offset the increased strategic marketing spending made to drive the business.

Earnings before income taxes were C$32.6 million ($30.9mm), compared with pre-tax earnings of C$33.9 million ($27.7mm) a year earlier. The earnings decline resulted from the incremental C$1.9 million in amortization expense related to the new stores opened throughout fiscal 2010.

Net earnings for the quarter were C$22.9 million ($21.7mm) or 75 cents per share versus C$24.2 million ($19.7mm) or $0.80 in the prior year. The current quarter’s earnings and EPS are both negatively impacted by a higher tax rate applied in the current quarter versus the prior year.

Cash flow from operations decreased to C$37.3 million ($35.4mm), or C$1.22 per share, from C$40.5 million ($33.0), or C$1.33 per share, in the prior year.

Fourth Quarter Store Activity
At the end of the fourth quarter, the company had 558 stores, which is six less than a year earlier. However, FGL also had 2.5% more retail selling space (an extra 162,172 square feet) compared with a year earlier, due to FGL’s strategy of increasing store size.

Corporate stores totaled 342 at the end of the fourth quarter, up by five from a year earlier, while franchise stores totaled 216, down 11 from a year earlier.

During the quarter, FGL decreased the number of corporate stores by nine with the closing of three Sport Mart stores, three Athletes World stores, and one each of Nevada Bob’s Golf, National Sports, and Hockey Experts stores. While FGL did not open any new corporate store locations, it did convert four Nevada Bob’s Golf locations into other banners, including one Sport Chek, one Hockey Experts and two Fitness Source stores.

The franchise division had a net reduction of one store during the quarter, as FGL franchisees opened three stores (an Atmosphere, a Hockey Experts and an S3) while closing four (two Intersport, one Buying Member and one Nevada Bob’s Golf).

Preliminary Q1 Results
Results in the first eight weeks of the fiscal 2011 first quarter stand in stark contrast to the prior year’s first quarter results. The first four weeks sales were supported by sales of Vancouver 2010 Winter Olympic licensed products. However, that sales momentum increased in the subsequent weeks with year-over-year improvements in most major categories, aided in part by a return to seasonal weather, a cautiously optimistic consumer and the impact of our strategic initiatives.

Overall retail system sales increased by 14.5% for the first eight weeks (against the prior year’s increase of 0.9%). Of the total gain, same-store sales in the most recent period increased by 15.5% for corporate locations (over the prior year’s increase of 2.7%), and increased by 12.7% for franchise stores, (against the prior year’s decrease of 2.0%). The sales improvements have been made while retaining stronger gross margin performance.

Financial Summary
(All figures in Canadian dollars)

(1) Certain figures for the quarter and year ended February 1, 2009 were restated as a result of the Company’s adoption of CICA Section 3064 – Goodwill and Intangible Assets effective February 2, 2009.