The Forzani Group Ltd. cut its net loss in the second quarter ended Aug. 1 with the aid of improved margins and sales. Total revenue was up 6.5% from a year earlier led by a 5.6% increase in retail sales from corporate stores. The Canadian sporting goods chain also said results in the first five weeks of the fiscal 2011 third quarter continued to show improvement over the prior year, despite somewhat unseasonable weather in Western Canada

“The successful execution of our strategic initiatives, and a stronger economy, contributed significantly to our improved same-store sales, margin and operating costs in the second quarter of fiscal 2011,” said CEO Bob Sartor. “Our strong market presence and favourable weather in Eastern Canada also played a role in the gains.”

“We shifted our marketing spend to support the re-branding efforts of our Atmosphere stores, the launch of the Livestrong footwear, apparel and accessories program, and our offering of FIFA 2010 World Cup-branded products. At the same time, we maintained disciplined expense control at the store level, which contributed to a 70% improvement in EBITA compared with a year earlier.”

“As we enter our seasonally stronger second half, we believe there still seems to be some uncertainty around the economic recovery. However, our confidence is bolstered by the gains we have made so far, by our achievements against our strategic plan and by the promising start to our third fiscal quarter.”

  

 

Financial Summary:

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                                     For the thirteen    For the twenty-six
                                          weeks ended           weeks ended
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                                  August 1,  August 2,  August 1,  August 2,
                                      2010       2009       2010       2009
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Revenue (C$000s)
 Retail                            228,305    216,257    456,286    417,588
 Wholesale                          87,456     80,268    188,352    186,650
                                 ——————————————-
 Total                             315,761    296,525    644,638    604,238
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EBITA Margin(1)                        3.7%       2.3%       3.9%       3.0%
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Net Earnings (Loss) (C$000s)         (1,821)    (4,412)    (2,512)    (5,529)
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Earnings (Loss) Per Share           (C$0.06)    (C$0.14)    (C$0.08)    (C$0.18)
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Same Store Sales (%)1
 Corporate                             5.2       -1.6        8.4       -0.4
 Franchise                             3.1       -0.1        4.1       -1.3
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 Consolidated                          4.4       -1.0        6.8       -0.7
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(1) Refer to “Non-GAAP Measures” below.

Progress Against Strategic Plan

As previously disclosed, FGL established a new strategic plan in April 2009 designed to unify and simplify our business, expand our reach and improve productivity. FGL's progress during the second quarter against this strategic plan included, but was not limited to, the following:

 
 
  • Continuing to rebrand our former Coast Mountain Sports stores under the Atmosphere banner, allowing us to gain economies of scale from having one outdoor and lifestyle chain instead of two.
  • Opening 11 additional GNC performance nutrition boutiques in Alberta-based Sport Chek stores as the next test markets for this concept.
  • Adding eight Nevada Bob's Golf boutiques to Sport Chek stores, which completed the planned fiscal 2011 roll-out of 38 boutiques in Sport Chek locations. There are now 70 boutiques.
  • Opening 19 Hockey Experts elite hockey boutiques in key Sport Chek locations as a further test of the “shop within a shop” component of our strategic plan.
  • Continuing work on the next generation of the purchasing, allocation and distribution information systems enhancement project.
  • During the quarter, FGL continued to benefit from the October 28, 2009 launch of its new e-commerce initiative, Sportchek.ca. With the launch, FGL is now able to extend its retail reach to customers outside its normal trading area and provide support to the estimated 70% of Canadian consumers that research their purchases online. The state of the art site now offers more than 9,000 unique product styles and colours, up from approximately 5,000 at launch. The site is supported by world class e-commerce provider GSI Commerce Solutions Inc. By the end of the second quarter, the site had hosted nearly 7.5 million unique daily visitors, up 2.1 million from the end of the first quarter. During the second quarter, FGL reviewed online customer surveys completed in the first quarter to measure service levels and assess areas for continued site enhancement.

    Fiscal Second Quarter Financial Results:

    Compared with its peer group of North American sporting goods retailers, FGL's same-store sales have been less volatile since the onset of the recession two year ago. FGL increased same-store sales by 4.4% for the second quarter of fiscal 2011, which more than offset a decline of 1.0% in the second quarter of the prior year.

    FGL's total revenue was up 6.5% from a year earlier led, by a 5.6% increase in retail sales from corporate stores. Augmenting the increase in the retail business, wholesale revenues rose 9.0% overall. This included a 14.4% increase in wholesale sales to third parties made by our INA International division, partly due to timing of shipments from factories in China and partly due to growth, especially for hockey equipment. This also included a 7.0% improvement in sales to franchisees attributable to late receipt of Q1 shipments in Q2.

    Retail system sales, which include sales from corporate and franchise stores, were C$360.8 million, an increase of C$12.4 million, or 3.6%, from the comparable 13-week sales of C$348.4 million a year earlier.

    Gross profit was C$109.2 million, up 10.1% from C$99.2 million a year earlier, and gross margin was 34.6% of revenue compared with 33.4% of revenue a year earlier. Gross profit growth outpaced revenue due to improvements in margins in corporate retail as well as each of our wholesale businesses.

    Store operating expenses rose C$2.8 million or 4.0% for the fiscal 2011 second quarter from a year earlier reflecting increased wage costs to support the sales growth achieved. As a percentage of retail revenues, store operating expenses fell to 31.6% from 32.0% in fiscal 2010. Same-store operating expenses were 29.0% of corporate store revenue compared to 30.0% in the prior year. Same-store expenses, in absolute dollars, increased C$0.6 million or 1.0%.

    General and administrative expenses rose both on a run rate and absolute dollar expenditure basis compared with a year earlier. The absolute dollar increase of C$2.4 million was primarily the result of a planned shift in the quarter, of C$1.8 million in net advertising expenditures to support various marketing initiatives designed to drive execution of FGL's strategic plan. The Company has also increased its accruals for both performance-based and stock-based compensation by C$0.9 million in recognition of its improved earnings year to date. There were no hostile proxy contest expenses in the second quarter of fiscal 2011, a saving from the prior year of C$1.6 million. However, the saving was offset by an increase in spending on information technology improvements as noted above in the strategic plan update.

    Earnings before interest, taxes and amortization, (“EBITA”) was C$11.7 million, up 69.6% from C$6.9 million in the second quarter of last year.

    Loss before income taxes was C$2.6 million, compared with pre-tax losses of C$6.3 million a year earlier. Cash flow from operations increased to C$9.8 million, or C$0.33 per share, from C$6.1 million, or C$0.20 per share, in the prior year.

    Fiscal First Half Financial Results

    The main drivers affecting first half financial results, including the execution of our strategic initiatives, our strong market share, favourable weather and disciplined expense controls at the store level, 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-C$710.2 million, up 6.5% from C$667.0 million;
  • Gross profit-C$223.4 million, up12.4% from C$198.7 million;
  • Gross margin-34.7% of revenue, compared with 32.9% of revenue;
  • Store operating expenses-31.4% of corporate revenue compared with 32.6% of corporate revenue. On an absolute dollar basis, store operating expenses were up C$7.2 million from the prior year;
  • General and administrative expenses-8.6% of total revenue, up from 7.3%. Overall, an absolute dollar increase in general and administrative expenses of C$11.0 million. This increase reflects one-time costs associated with the Atmosphere re-branding initiate, increased stock and performance based compensation costs due to the Company's improved profitability and a strategic shift in advertising expenditures into the first half of the year to support key marketing initiatives in support of execution of the Company's strategic plan;
  • EBITA-C$24.8 million, up 34.8% from C$18.4 million;
  • Loss before income taxes-C$3.7 million compared with C$8.0 million; and,
  • Cash flow from operations-C$21.5 million or C$0.72 per share, compared with C$14.9 million or C$0.49 per share.

    Second Quarter Store Activity

    At the end of the second quarter, the Company had 547 stores, which is 14 less than a year earlier. However, the Company also had 2.2% more retail selling space (an extra 139,129 square feet) compared with a year earlier, due to FGL's strategy of increasing store size. Corporate stores totalled 334 at the end of the second quarter, down by 10 from a year earlier, while franchise stores totalled 213, down four from a year earlier.

    During the quarter, the Company decreased the number of corporate stores by three, closing three Sport Mart stores, one Athletes World store, and one Nevada Bob's Golf store while opening two Sport Chek stores.

    The franchise division had a reduction of two Intersport stores during the quarter.

    Preliminary Q3 Results

    Results in the first five weeks of the fiscal 2011 third quarter continued to show improvement over the prior year, despite somewhat unseasonable weather in Western Canada. On a same-store category basis, the increase was led by athletic clothing, footwear and targeted hard good categories of cycling, golf, fitness equipment and hockey.

    Overall retail system same-store sales increased by 4.8% for the first five weeks (against the prior year's decrease of 1.1%). Of the total gain, same-store sales in the most recent period increased by 7.4% for corporate locations (over the prior year's decrease of 4.5%), and decreased by 0.4% for franchise stores, (against the prior year's increase of 6.2%). Gross margin performance as a percentage of sales was flat to the prior year.