The Forzani Group Ltd. reported that same-store retail system sales for the first quarter ended May 1 decreased 2.0 percent as it failed to match robust sales of licensed apparel generated by the 2010 Vancouver Olympics. Canada’s largest retailer of sporting goods said sales have since rebounded strongly, however, with the arrival of warmer weather.
Company executives said it was still a strong quarter given the challenging weather, the difficulty of matching the prior year’s comp sale growth and news that Forzani Group is being acquired by one of Canada’s largest retailers in a friendly merger.
“In summation, this has been a momentous quarter for our company and our shareholders given that on May 9, 2011 we announced that we had entered into a friendly transaction with Canadian Tire Corporation, Limited that will combine our premium sporting goods business with Canadian Tire’s everyday selection of sporting goods in Canada,” said Bob Sartor, FGL’s Chief Executive Officer.
As noted in its Q4 press release, sales in the first four weeks of the quarter were down 3.3 percent, due largely to two factors. First was lower sales of Team Canada hockey jerseys, which were a top seller during last year’s Winter Olympics. Excluding licensed apparel sales, however, Forzani’s sales during the quarter rose 5.1 percent. Second, unseasonably cold weather throughout much of the quarter delayed sales of key spring categories, most notably cycling and in-line skates, which were down a combined $4.1 million, or 32 percent, in the quarter, on a same-store basis.
Excluding bikes, in-line skates and Olympic sales, comparative stores sales in the corporate division were up 1.8 percent for the quarter versus the prior year. Now that spring has arrived, executives said Forzani is well on its way to recovering the lost sales in cycling and in-line skates.
FGL’s total revenue was up 0.7 percent from a year earlier as a 10.2 percent increase in wholesale sales to third parties and the franchise network more than offset a 3.5 percent decline in retail sales. The increase in wholesale sales mainly reflected an 11 percent increase in sales to franchisees.
Retail system sales, which include sales from corporate and franchise stores, were $337.1 million, a decrease of $12.3 million, or 3.5 percent, from the comparable 13-week sales of $349.4 million a year earlier.
Gross profit was $109.9 million, down 3.3 percent from $113.6 million a year earlier, and gross margin was 33.3 percent of revenue compared with 34.7 percent of revenue a year earlier. The reduced gross margin rate was primarily due to the impact of the change in mix of business toward the lower margined wholesale revenues. Corporate gross margin rate was negatively impacted by the year over year reduction in high margined licensed products associated with the 2010 Vancouver Olympics as well as the percentage of late season clearance items versus new spring stock, due to the late arrival of spring weather.
Store operating expenses increased $700,000 for the fiscal 2012 first quarter from a year earlier. Same-store operating expenses were 34.2 percent of corporate store revenue compared to 32.1 percent in the prior year. Same-store expenses, in absolute dollars, increased $2.4 million or 3.5 percent.
General and administrative expenses were 9.8 percent of revenues compared with 10.7 percent a year earlier. In absolute dollars, general and administrative costs were down $2.7 million. Much of this decrease was the result of two key expense items:
The elimination of $1.9 million in one-time incremental marketing costs in the prior year to support the Coast Mountain Sports re-launch as Atmosphere; and $1.5 million overall reduction in stock-based compensation costs.
These savings were offset by $1.4 million in expenses for the due diligence process related to the proposed sale of the Company to an affiliate of Canadian Tire Corporation, Limited.
EBITA was $9.4 million or 2.9 percent of revenues, down $4.1 million from the prior year’s first quarter, as the retail volume related reduction in margins offset savings in operating and administrative costs.
The net loss for the first quarter of fiscal 2012 was $1.9 million, compared with $0.4 million in the first quarter of the prior year. The loss per share was $0.07 compared with $0.01 per share in the first quarter of fiscal 2011. Excluding the incremental legal costs and stock-based compensation rule change costs, the Company’s loss per share would have been flat to the prior year.
Cash flow from operations at $5.5 million was down $5.3 million from $10.8 million in the prior year. On a per share basis, cash flow fell to $0.19 from $0.35 per share in the prior year.
First Quarter Store Activity
At the end of the first quarter, the Company had 529 stores, which is 23 less than a year earlier. The Company had 1.1 percent less retail selling space (a reduction of only 75,338 square feet) compared with a year earlier, due to FGL’s strategy of closing smaller less productive stores while increasing store size in its Sport Chek banner. Corporate stores totaled 317 at the end of the first quarter, down by twenty from a year earlier, while franchise stores totaled 212, down three from a year earlier.
During the quarter, the Company decreased the number of corporate stores by four, closing two Sport Mart stores, one Athletes World store, and two Sport Chek stores, while opening one Sport Chek store.
The franchise division had a net reduction of one store during the quarter, as FGL franchisees opened two stores (one Atmosphere and one S3) while closing three (two Sports Experts and one Nevada Bob’s Golf).
Preliminary Q2 Results
Results in the four weeks of the second quarter show significant improvement over the prior year, as seasonable weather returns to the country. On a same-store category basis, the increase was led by athletic clothing, footwear and cycling equipment.
Overall retail system sales increased by 6.2 percent for the first four weeks (over the prior year’s increase of 5.8 percent). Of the total gain, same-store sales in the most recent period increased by 7.1 percent for corporate locations (over the prior year’s increase of 4.3 percent), and increased by 4.6 percent for franchise stores, (against the prior year’s decrease of 8.4 percent). The sales improvements were made without significant promotional pricing pressure on gross margin performance.
The Forzani Group Ltd
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
For the thirteen weeks ended
May 1, 2011 May 2, 2010
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Revenue
Retail $ 218,368 $ 226,370
Wholesale 111,285 100,982
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329,653 327,352
Cost of sales 219,747 213,700
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Gross margin 109,906 113,652
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Operating and administrative expenses
Store operating 79,508 78,838
General and administrative 32,351 34,950
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111,859 113,788
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Operating (loss) before undernoted items (1,953) (136)
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Finance income (31) (55)
Finance costs 792 502
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761 447
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Loss before income taxes (2,714) (583)
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Income tax recovery
Current 554 160
Deferred 282 21
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836 181
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Net (loss) for the period $ (1,878) $ (402)
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Basic (loss) per share $ (0.07) $ (0.01)
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Diluted (loss) per share $ (0.07) $ (0.01)
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The Forzani Group Ltd.
Consolidated Statements of Comprehensive (Loss) Earnings
(in thousands)
(unaudited)
Consolidated Statements of Comprehensive For the thirteen weeks ended
(Loss) Earnings May 1, 2011 May 2, 2010
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Net (loss) $ (1,878) $ (402)
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Other comprehensive loss:
Movement on cash flow hedges (885) 141
Tax impact of hedges 283 (45)
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Other comprehensive (loss) earnings (602) 96
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Comprehensive (loss) $ (2,480) $ (306)
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