BOSS Goes One-On-One with Sport Chalet’s Craig Levra

BOSS sat down with Craig Levra, chairman, president and CEO, to discuss the west coast sporting goods chain's business trends and prospects. On June 26, Sport Chalet reported its loss widened in its fourth quarter ended March 29, to $11.1 million, or 79 cents a share, from $2.8 million, or 20 cents, in the year-ago period.

BOSS: In early May, Sports Chalet said sales trends were improving. Is that still holding true?

CL: As we stated in May, our sales trends are improving but the consumer remains very cautious. Clearly the overall macro environment continues to be challenging and is affecting all industries. So there's still this great uncertainly in the consumer's mind, particularly on the West Coast. For every two steps forward the economy takes, there’s one step backwards. The good news for us is that so many competitors keep leaving the scene. That gives us great comfort that our model works and makes sense. It works even in this environment with some modifications. Some of our toughest specialty competitors may not have the horsepower or the wherewithal financially to get through this.

BOSS: Are you talking about smaller stores?

CL: I'm talking about three or five store chains or the single-owner shop. If you look at some of the specialty businesses –high-end fitness, higher-end surf, skate & snow, those categories are just being hit very hard, I feel very badly for those owners because I know they've put their whole life's work into that one shop or that chain.. I empathize with them. But if we do what we’re supposed to do, we'll benefit by the pie getting re-cut.

BOSS: What adjustments need to be made in this climate?

CL: You have to be very careful on the expense side, you need to make sure those expense reductions are invisible to your customers. If we take people, systems, or processes away that our customers notice, then it will affect their overall shopping experience with Sport Chalet and our brand.

BOSS: What categories outperformed in the fourth quarter?

CL: Performance footwear and apparel continue to do well. Some of the action sports categories did very well such as fitness and cycling.

BOSS: Which were weaker?

CL: Last year we experienced another unusual winter season on the West Coast. We've had five really unusual winter seasons in a row, which have been shorter, started later, and ended sooner. As a result, this has negatively impacted sales for our winter goods.

BOSS: How's the markdown climate in your regions?

CL: The liquidations started last summer, so we're almost cycling through a whole year during which a number of retailers went out of business, creating pressure on our margins. But I think for the most part it's pretty well flushed out. We're also very focused on managing our aged inventory in every category. As an example, in our winter categories we worked very hard last year to finish the year with only current and fresh inventory. As of middle of January, we didn’t have a snowboard, a ski, a boot, or binding that wasn’t this year's model. This continues to be a main focus for us. We want our customer to come in and be excited about the assortment they see on the floor. You can't do that if you're sitting on old product.

BOSS: Can you elaborate on your efforts to improve lease terms?

CL: As we said in our June 29th press release, we've approached the landlords of all of our 55 stores as well as of the corporate office, distribution center, and Team Sales division about restructuring lease terms. To date, that's resulted in projected savings of approximately $17 million, $14 million of which is over the next three years. We take great pride in the fact that our landlords want us in the centers and tell their lending institutions or stockholders, 'This is an example of the type of tenant we want in our shopping center.' But our landlords are getting hit on all sides as well, and our goal isn't to push so hard that we push a landlord over the edge. But we'll continue to seek to realign our lease terms with the new economic reality.

BOSS: Your 10K shows your workforce was reduced from 4,300 employees to 3,200 over the last fiscal year. Can you discuss that process?

CL: As our release said, we saw a $7.2 million reduction in payroll in the second half of fiscal 2009 and expect to further reduce payroll expense by $10.7 million in fiscal 2010. As stated in our 10K that includes freezing incentive and salary programs, and our workforce was reduced. These have been very difficult but necessary decisions, and I appreciate the hard work and dedication of all of our employees. After all, the essence of the Sport Chalet experience is our great product selection and the expertise of our employees.

BOSS Can you discuss the new e-commerce launch?

CL: As a company we're trying to transition our thinking away from a traditional land-based retailer to one that utilizes the Internet to reach our customers and understand what they want. With that in mind and while the year has been difficult, we continued to focus on enhancing specific areas of our business, such as e-commerce. We launched our site on March 23rd and we're now able to very quickly change the messaging. We continue to add shops every day, either concept shops with support of our vendors or theme shops such as back to school. We've got an unbelievable community website built with blogs and ratings and reviews. And we're also getting tremendous feedback, including customer comments. That instantaneous dialogue is essential to a 21st century retail business particularly in an economic downturn and a niche that is largely discretionary.

BOSS: Can you elaborate on the success of your Sport Chalet Action Pass program?

CL: Action Pass is another key initiative to use technology to reach our customers. The company to date has over 720,000 members and is signing 6,000 to 8,000 new members each week. It's an astounding figure when you remember that we did a full scale launch in November 2007 and now 40 percent of our sales are coming from Action Pass members. There are retailers with many more resources than us that would love to have those figures. I think it's a testament to the strength of the program that our marketing team put together; the strength of our buying team’s ability to explain the opportunity to our vendors that are participating in this; and most importantly the ability of our employees in our stores to explain the benefits to our customers. Everybody understands it’s a key initiative.

BOSS: How has vendor support been through your difficulties?

CL: Very supportive. We have been as transparent as we can be. And we're very thankful that across the board our vendors understand our business model, understand what we represent and believe in our company. Everybody's being prudent, that's fine. Some have come around faster than others but we're very thankful that we haven't had anybody turn their back on us. And I believe our results vindicate that trust.

BOSS: What do you consider your primary growth categories?

CL: Cycling and fitness continue to be key growth categories, and we've got a team sales division that is really working well. Last check, we were selling eight of the top 25 high schools in the country in the USA Today Top 25 poll, eight out of 10 in Los Angeles and the top one or two in Las Vegas. While we believe we still have some work to do in our other two states, as a result of the great linkup between team and retail, we have a lot of merchandise that's available in both venues and we're able to customize anything. So the team business just continues to grow due to the fact that we're executing better and in part because competitors are weaker.

BOSS: Are you deemphasizing any slower categories, such as winter?

CL: We believe in the winter business. We want to be great at it. That's how our company started. Are we smarter in how we run it? Absolutely. When I first arrived at the company, we were really a winter company and didn't quite have everything lined up to do a better job outside of the winter season. Now we are clearly doing a much better job in terms of driving more businesses across multiple categories with longer shelf lives and repeat customers. So we're not in any way downscaling or cutting back on winter. Every year we get smarter in how we flow and sell product.

BOSS: How do you think the consumer mentality will change coming out of the recession?

CL: I think every purchase is going to be more considered and that's okay because we have worked hard for so many years to differentiate ourselves and to be first to market with performance, technology, and lifestyle merchandise. There are a lot of other people across retail talking about how to create value by having lower priced product. We try to look at value as saying, 'We're going to fit you with a product that's going to last as long as you need it.' In order to be true to that mission, we have employees on the floor who can explain that product and why buying that product is really the most cost-effective alternative given its quality and unique aspects that a customer can’t get anywhere else.

BOSS: After last year, what gives you confidence that your business model is sound?

CL: I think it’s the great response from our customers. This is all a web. It's a weave. It's a tapestry. We believe in our model and we recognize that our business has suffered because our customers have suffered. We're a mirror image of what our customers are going through and the fact that we get so many positive remarks about our assortment, our people and the things we're doing to improve our business makes me believe we're well positioned for the inevitable economic upturn. The other reason our model has validity is that our employees believe we're right. If they don’t believe you're right, they'll leave you for another job no matter the state of the economy. If you look across the spectrum, we’ve really lost very few of our most valued employees and to me that means we're doing it right. We're not perfect by any stretch but we've got the right philosophy, we are aggressively realigning our business with the changed economic reality without compromising our customer’s shopping experience. We believe our actions will better position our business for when the macro environment improves.