Forzani Cuts Loss on Lower Expenses, Comps Dip 0.4%

The Forzani Group Ltd. reduced its loss in the first quarter to CN$1.1 million ($0.9 mm), or  for the period ended ended May 3 compared to CN$2.8 million ($2.8 mm) in the year-ago quarter. Sales were flat at CN$307.7 million versus CN$307.5 million. Comps dipped 0.4%. Comps rose 1% at its corporate banners but slid 2.9% at its franchise banners. 
                           
In a statement, Forzani said that despite the 60% reduction in its loss, “we are not satisfied with our first quarter of fiscal 2010, as we had expected a return to a profitable first quarter. However, we believe that our performance reflects the initial signs of a number of strategic initiatives launched last year coming to fruition especially in the corporate retail banners as: Firstly, our corporate same store sales were up, albeit modestly, in a very tough business climate. Secondly, our continued attention to inventory management allowed us to achieve the sales growth, while at the same time improving our gross margins. Thirdly, Athletes World turned its second consecutive quarterly profit and is beginning to gain momentum as a result of our re-branding strategy and integration into corporate systems.

Retail system revenues were down 4.3% to CN$201.3 million ($162 mm) from CN$210.3 million ($209 mm) in Q1 last year. The decrease was primarily due to the impact of closings of Athletes World stores during fiscal 2009, which were acquired in CCAA in late fiscal 2008. Forzani noted that the same store sales in Corporate locations came despite “the general retail malaise seen by most of the Canadian retail sector.” Its franchise division was going against a 3.1% increase in the prior year.

Wholesale revenues were down 4.3% to CN$106.4 million ($86 mm) from CN$97.2 million ($97 mm) in Q1 2008 as a result of increases in both franchise division sales to franchisees and sales by the FGL. Forzani said the integration of its INA and FGL wholesale businesses “is already beginning to show results as we begin to market a wider array of products to our existing customer base, and introduce the assortment to new customers.”
 
Combined gross margin for the quarter was 33.7% of revenue compared to 34.3% in the prior-year quarter. The overall rate decrease was said to reflect a shift in the sales mix between higher margined retail sales and the lower margined wholesale businesses as margin rates actually increased in both the corporate retail and franchise wholesale divisions due to cleaner inventories on a year over year basis.

Cost control measures have produced an absolute reduction in both selling and G&A expenses and reduced run rates in both. Forzani expects this improvement “to continue throughout the remainder of the year.”

Overall store operating expenses, as a percentage of sales, were 33.1% of sales against the prior year of 33.5% of sales, a reflection of the impacts of changes made in fiscal 2009 to the wage structure in the Sport Chek division. Same store operating expenses were flat at 30.6% of sales. In absolute dollars, same-store costs increased $0.3 million, or 0.5%. General and administrative expenses were 8.3% of total revenue versus the prior year's 8.9% and are expected to be down, as a percent of sales, throughout the year.

During the quarter, the company opened one Athletes World store, converted 9 Fitness Source stores from franchise to corporate ownership, closed a total of three stores (oneSport Chek and two Athletes World), and sold one Nevada Bob's Golf store to become a Buying Member in the franchise division. In the franchise division, two new stores were opened (one Atmosphere and one Hockey Experts) and two Buying Members were added (one from the sale of a corporate Nevada Bob's Golf store and one formerly franchised RnR store), four stores closed (one Fitness Source and three RnR) and nine Fitness Source stores reverted to corporate ownership. As a result, at the end of the first quarter, the company had 343 corporate stores and 218 franchise locations. This was a net decrease of 27,032 square feet of retail selling space, a 0.4% decrease versus the previous quarter. The company now has 561 stores from coast to coast (May 4, 2008 – 568 stores).

The company's working capital of CN$74.9 million decreased CN$26.8 million from the prior year. The year over year decrease is the carry-over impact of CN$33.0 million in share repurchases made during the second quarter of fiscal 2009 under the company's normal course issuer bid, and ongoing capital expenditures for store openings and renovations. These expenditures were made from operating cash flow.

On June 9, 2009, the company declared a dividend of CN$0.075 per Class A common share, payable on August 3, 2009 to shareholders of record on July 20, 2009. All dividends paid by The Forzani Group Ltd. 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.