Forzani Group Ltd. total revenue for the second quarter was up 0.3%
from a year earlier and included an 8.1% gain in wholesale sales to
third parties and the franchise network. Comparable store sales fell
1.0% during the quarter. Forzani slipped to a $4.4 million net loss
compared to net income of $1.5 million for the same quarter last year.

The gain in wholesale sales mainly reflected restocking
initiatives on the part of our franchisees after they had previously
allowed their inventories to drop significantly in anticipation of weak
consumer demand.
The 1.0% reduction in FGL's same-store sales from a year earlier
was superior to its peer group of North American sporting goods
retailers which reported an average same store sales decline for the
quarter of 7.5% for the summer quarter.
Partially offsetting the wholesale performance was a 2.3%
reduction in retail sales from corporate stores compared with a year
earlier. In addition to weak consumer demand and poor weather, retail
performance results were affected by year-earlier liquidation sales at
Athletes World, which emerged from Companies' Creditor Arrangement Act
(“CCAA”) protection in June 2008.
Retail system sales, which includes sales from corporate and
franchise stores, were $348.4 million, a decrease of $8.3 million, or
2.3%, from the comparable 13-week sales of $356.7 million a year
The loss for the fiscal 2010 second quarter was principally due to
lower sales, higher store operating expenses, which included launch
costs for new Nevada Bob's Golf boutiques, and certain one-time
expenses, including $1.6 million to defend the company against the
proxy fight waged by a dissident shareholder.
Gross profit was $103.1 million, down 2.6% from $105.8 million a
year earlier, and gross margin was 34.8% of revenue compared with 35.8%
of revenue a year earlier. Gross profit did not keep pace with revenue
because of the shift in the revenue mix, as the wholesale business
provides a lower margin than the corporate retail business.
The decline in wholesale gross margin rates was partly offset by a
slight gain in the retail gross margin rate reflecting the impact of
fresh inventory in Athletes World locations. A year earlier, the
Athletes World gross margin rate was lowered by the liquidation of aged
inventories as part of the CCAA process. Excluding Athletes World,
other corporate retail margins were flat to the prior year despite the
soft sales climate.
Store operating expenses rose for the fiscal 2010 second quarter
from a year earlier reflecting the opening, during the latest quarter,
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
29.9% of corporate store revenue compared to 28.6% in the prior year.
Same store expenses, in absolute dollars, increased $1.3 million or
2.4%. The company anticipates that same store operating expenses in the
remainder of the year will reflect prior year run rates.
General and administrative expenses, excluding the proxy contest,
were flat compared with a year earlier both on a run rate and absolute
dollar expenditure basis.
Earnings before interest, taxes and amortization, (“EBITA”), on a
trailing four-quarter basis, was $92.9 million compared to $110.1
million for the four quarters ending in the second quarter of last year.
Loss before income taxes was $6.3 million, compared with pre-tax
earnings of $2.4 million a year earlier. Cash flow from operations
decreased to $4.7 million, or $0.15 per share, from $10.9 million, or
$0.35 per share, in the prior year.
Fiscal Second Quarter Store Activity:
During the quarter, the Company opened 4 corporately-owned stores
(1 Sport Chek, 1 Coast Mountain Sports, 1 Fitness Source and 1 Hockey
Experts) and closed 3 stores (1 Nevada Bob's Golf, 1 Athletes World and
1 Sport Mart). In the franchise division, 2 stores were opened (1
Atmosphere and 1 Sports Experts), while 3 stores were closed (1
Intersport, 1 Econosports and 1 Nevada Bob's Golf). As a result, at the
end of the second quarter, the Company had 344 corporate stores and 217
franchise locations. This was a net increase of 38,299 square feet of
retail selling space, a 0.6% increase versus the year-earlier quarter.
The Company now has 561 stores from coast to coast across Canada
(August 3, 2008 – 565 stores).
“FGL's fiscal 2010 second quarter financial results surpassed many
of our industry peers but were weak compared to the prior year,” said
Bob Sartor, FGL's Chief Executive Officer. “We are making significant
progress on our long-term strategic initiatives, including our
announcement today that we are combining our two outdoor lifestyle
banners as part of our initiative to drive financial performance by
unifying and simplifying our banners and operations. However, our
results were impacted by a cautious consumer and a wet and cold summer
across much of Canada that cut deeply into the sale of seasonal items
like bikes, in-line skates, sandals and swimsuits. We anticipate that
this cautious consumer attitude will prevail for the remainder of the
fiscal year.”
FGL has made progress during the quarter against its strategic
objectives to unify and simplify its business, expand its reach, and
improve productivity. Specifically, and among other things:
FGL announced plans today to consolidate its two outdoor and
lifestyle banners, Coast Mountain Sports and Atmosphere to create a
single national outdoor lifestyle banner under the Atmosphere name. In
addition to simplifying the business, FGL expects efficiencies from a
single national advertising program, higher sales per square foot from
an enhanced product mix and extended reach as Atmosphere will be the
largest outdoor lifestyle chain in Canada. All existing Atmosphere
stores (predominantly Quebec based) will remain franchised, while the
converted Coast Mountain Sports stores will remain corporate. The
consolidation is expected to require very little capital and is
scheduled to be completed by Spring 2010;
Having completed a major corporate technology harmonization
project over the summer, FGL eliminated 28 positions from its
information technology group. FGL expects the restructuring will cut
annual expenses by $3 million. In the fiscal second quarter, FGL
incurred severance expenses of approximately $0.4 million related to
this restructuring.
During the second quarter, FGL announced a new partnership that
will put GNC performance nutrition boutiques within FGL stores. The
first pilot market will be in Calgary this fall. FGL expects the
partnership will attract a wider range of sports-oriented consumers and
increase foot traffic to its stores.
Fiscal First Half Financial Results
The main drivers affecting first half financial results, including
consumer caution and bad weather, were similar to those described above
for the second quarter.
Certain key financial metrics for the fiscal first half are
provided in the financial summary table. Following are additional
important metrics compared with a year earlier:
  • Retail system sales-$667.0 million, down 3.4% from $690.8 million;
  • Gross profit-$206.7 million, down 2.1% from $211.2 million;
  • Gross margin-34.2% of revenue, compared with 35.0% of revenue;
  • Store operating expenses-32.6% of corporate revenue compared
    with 31.6% of corporate revenue. On an absolute dollar basis, store
    operating expenses were down $0.2 million from the prior year;
General and administrative expenses-8.7% of total revenue,
unchanged. Overall, an absolute dollar decrease in general and
administrative expenses of $0.1 million was achieved despite $1.6
million in one-time legal expenses. Excluding this item, the G&A
run rate would have been 8.4% down 30 basis points from the prior year
of 8.7%.
  • EBITA-$18.4 million, down 18.2% from $22.5 million;
  • Loss before income taxes-$8.0 million compared with $2.0 million; and
  • Cash flow from operations-13.0 million or $0.43 per share, compared with $16.6 million or $0.52 per share.
Balance Sheet:
The Company's working capital of $62.3 million decreased 2.8% from the prior year.
On September 8, 2009, the Company declared a dividend of $0.075
per Class A common share, payable on November 2, 2009 to shareholders
of record on October 19, 2009. All dividends paid by the Company are,
pursuant to subsection 89 (14) of the Income Tax Act, designated as
eligible dividends. An eligible dividend paid to a Canadian resident is
entitled to the enhanced dividend tax credit.
Preliminary Back to School Results:
Same-store sales for the first five weeks of the fiscal third
quarter declined by 4.5% for corporate locations, against last year's
increase of 2.2%, and increased by 6.2% for franchise stores, compared
with a prior year increase of 3.1% for an overall retail system sales
decrease of 1.1% versus an increase of 2.5% in fiscal 2009. These
preliminary results are skewed by the year over year calendar which
sees both of the two peak weeks of Back to School, namely the week
before and the week immediately following Labour Day, included in the
prior year's figures while reflecting only the first of those weeks in
the current year. Although the current year's five week period does
include an extra selling day for those FGL stores that are closed on
Labour Day, management believes that this positive impact is more than
offset by the exclusion of the remainder of the second peak selling
week noted above.
As in previous years, FGL will disclose its Back to School sales
results at the end of September. The Back-to-School period encompasses
the latter half of August and the first half of September. Preliminary
indications, based on the first four weeks of the fiscal third quarter,
suggest a continuation of the mood of consumer caution.

Financial Summary:

For the thirteen For the twenty-six
weeks ended weeks ended
August 2, August 3, August 2, August 3,
2009 2008 2009 2008
(restated) (restated)
Revenue ($000s)
Retail 216,257 221,290 417,588 431,620
Wholesale 80,268 74,272 186,650 171,432
Total 296,525 295,562 604,238 603,052
EBITA Margin 2.3% 5.0% 3.0% 3.7%
Net Earnings (Loss) ($000's) (4,412) 1,560 (5,529) (1,261)
Earnings (Loss) Per Share $ (0.14) $ 0.05 $ (0.18) $ (0.04)

Same Store Sales (%)(1)
Corporate -1.6 -6.5 -0.4 -5.3
Franchise -0.1 -0.6 -1.3 1.1
Consolidated -1.0 -4.2 -0.7 -2.9