The Forzani Group's retail system sales for the quarter were $305.1 million, an increase of $48.7 million, or 19.0% from the comparable 13 week number of $256.4 million. The increase was partly due to the addition of the Nevada Bob's franchise retail sales and the National Sports corporate retail volume, a result of their acquisition by FGL. Without these volumes, the existing retail business generated system retail sales of $270.1 million, a 5.3% increase over last year.
Revenue, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, was $243.6 million, up $27.2 million, or 12.6% over the comparable period last year. Again, this was partly driven by the Nevada Bob's and National Sports revenues. Excluding these two, the revenues were $221.3 million, a 2.3% increase over the prior year. Comparable store sales from corporate stores were up 0.2%, while franchise comparable store sales increased by 4.6%.
The corporate store performance was driven by a decline of 4.3% in the Sport Mart banner. The Sport Chek / Coast Mountain Sports stores generated positive comparable store sales of 1.3% for the quarter. The consolidated corporate store increase was the first quarterly comparable store sales increase in 10 quarters.
Combined gross margin for the 13 weeks ended July 31, 2005 was 34.2% of revenue, or $83.2 million, down 2.1% from the previous year. On an absolute dollar basis, margin increased by $4.6 million. The margin rate erosion was driven principally by margin reduction in the Sport Chek and Sport Mart banners, as both took markdowns to further reduce inventory levels and make room for fresh merchandise in the stores.
Store operating expenses of $55.2 million were up $10.1 million, or 28.8% of retail revenues versus $45.1 million or 27.7% in the prior year. The absolute dollar increase was due to the addition of National Sports stores and additional labor required to re-merchandise the Sport Chek stores as part of their retrofit. Absolute dollar expenses in comparable stores were up only $0.8 million.
General and Administrative (“G&A”) expenses, at $19.4 million, were 8.0% of revenues versus $18.8 million or 8.7% in the prior year. Exclusive of the Nevada Bob's and National Sport expenses, comparable G&A costs were actually down $0.8 million for the quarter as a result of management's focus on cost management in the business.
The Company recorded a net loss of $2.3 million for the second quarter, or $0.07 per share, compared to a profit of $2.0 million or $0.06 per share in the prior year.
Retail system sales for the 26 weeks ended July 31, 2005 were $564.9 million, an $80.7 million increase from sales for the 26 weeks ended August 1, 2004. As mentioned above, this is primarily a result of the acquisition of National Sports in the first quarter of fiscal 2005. Comparable sales in corporate stores decreased 2.3%, while franchise stores increased 6.8%, with total comparable retail system sales increasing 0.9%.
Revenue was $481.8 million, a $36.8 million, or 8.3% increase over the 26-week period last year. Combined gross margin for the 26 weeks ended July 31, 2005 was down 180 basis points to 31.6% of revenue, from 33.4% in the prior year. In absolute dollars, the combined gross margin increased $3.4 million, to $152.2 million, from the 26-week period last year.
Store operating expenses, as a percent of corporate revenue, were 29.8% versus 28.8% in the prior year. General and administrative expenses were 7.7% of total revenue versus 7.4% in the prior year.
EBITDA was $8.6 million, or 1.8% of total revenue, compared to 5.8% for the same period last year. Earnings before income taxes for the 26 weeks ended July 31, 2005 were a loss of $15.3 million compared to a $4.4 million profit for the 26-week period in the prior year.
Basic and diluted earnings (loss) per share for the 26-week period ended July 31, 2005 were ($0.30), compared to $0.09 in the prior year. Cash flow from operations decreased from $19.2 million to $7.1 million. On a per share basis, cash flow decreased 62.7% to $0.22 compared to $0.59 the prior year.
Total inventories were $312.9 million, a 6.9% increase over the prior year. Excluding National Sports and new stores opened in the last year, comparable store inventories were down 5.8% or $16.6 million versus the prior year.
The second quarter unfolded as expected. Margins started the quarter where they ended in Q1, well below the prior year. As the Company worked its way through the balance of the merchandise that was dated or no longer part of the revamped assortment, completed the revitalization of its Sport Chek banner, and re-merchandised the Sport Chek stores with new product, margin began to dramatically improve. Sport Chek is now consistently delivering year over year comparable store sales increases at margins significantly in excess of the prior year. Sport Chek is beginning to rebound according to plan.
Sport Mart, a second corporate banner is now undergoing a revitalization similar to that just completed with Sport Chek. Planned changes for that banner will be tested in the fall and rolled out in spring '06. Unlike the revitalization completed at Sport Chek, the impact on the financial results of the Sport Mart revitalization are not expected to be material as that banner's inventory levels are significantly lower than Sport Chek, and its store base is much newer, requiring less work and disruption to its results.
During the quarter the franchise business hit its targets and both of the wholesale businesses, The Forzani Group wholesale division (operating as Gen-X Sports) and Intersport North America, our private label arm, generated solid profits.
The Forzani Group is off to its best Back to School start in several years, driven by a revitalized Sport Chek business. A great product assortment, complimented by a completely refreshed in-store experience and strong, new marketing initiatives have driven Sport Chek, our largest banner and a key driver of our overall performance, to solid comparable store revenue gains of 3.9%, at higher margins than last year. We expected that comparable store sales would come first, as they did throughout most of the second quarter, and that margins would follow, as they are doing so now. Sport Mart trails Sport Chek with flat comparable store sales to date for Back to School, but we believe that it too will rebound as Sport Chek has done after its revitalization is completed. As indicated in our first quarter press release, we expect continued improvement in our results in the back-half of the year, setting the stage for a strong year next year as our corporate store issues are resolved!
and our franchise and wholesale businesses continue their strong performance.
THE FORZANI GROUP LTD.
Consolidated Statements of Operations and Retained Earnings
(in thousands, except per share data)
(unaudited)
For the thirteen For the twenty-six
weeks ended weeks ended
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July 31, August 1, July 31, August 1,
2005 2004 2005 2004
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(restated) (restated)
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Revenue
Retail $ 191,282 $ 162,706 $ 358,086 $ 313,258
Wholesale 52,348 53,663 123,746 131,738
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243,630 216,369 481,832 444,996
Cost of sales 160,467 137,768 329,604 296,163
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Gross margin 83,163 78,601 152,228 148,833
Operating and
administrative
expenses
Store operating 55,150 45,113 106,739 90,185
General and
administrative 19,423 18,773 36,880 32,977
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74,573 63,886 143,619 123,162
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Operating earnings
before undernoted
items 8,590 14,715 8,609 25,671
Amortization 10,536 8,798 20,725 17,471
Interest 1,712 1,019 3,222 1,940
Write-down of investment - 1,814 - 1,814
------------------------------------------------------------------------
12,248 11,631 23,947 21,225
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Earnings (loss)
before income taxes (3,658) 3,084 (15,338) 4,446
Income tax expense
(recovery)
Current (644) 1,878 (4,954) 2,784
Future (691) (753) (644) (1,160)
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(1,335) 1,125 (5,598) 1,624
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Net earnings (loss)
for the period $ (2,323) $ 1,959 $ (9,740) $ 2,822
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------------------------------------------------------------------------
Retained earnings,
beginning of period 114,704 102,391 122,121 101,528
------------------------------------------------------------------------
Retained earnings,
end of period $ 112,381 $ 104,350 $ 112,381 $ 104,350
------------------------------------------------------------------------
------------------------------------------------------------------------
Basic and diluted
earnings (loss)
per share $ (0.07) $ 0.06 $ (0.30) $ 0.09
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