The Forzani Group Ltd. reported retail system sales for the third quarter ended November 2, 2003 grew by 6.0% to $260.6 million from $245.9 million a year ago. Combined revenues, consisting of retail sales from corporate stores and wholesale sales to franchisees increased by 2.6% to $250.2 million.
All figures are expressed in Canadian dollars.
Comparable store sales from corporate locations were down 2.3%, driven largely by very soft October sales and by planned markdowns in clothing, as the Company significantly reduced its inventories in this category. Franchise comparable store sales were up 2.6% as a result of strong results in Quebec. On a combined basis, comparable store sales were down 0.9%. On a year-to-date basis, corporate comparable store sales are down 2.3% and franchise comparable store sales are up 5.5%. On a combined basis the comparable store sales for the year to date were up 0.3%.
Diluted earnings per share for the quarter were $0.23 versus $0.31 in the prior year. On a year-to-date basis diluted earnings per share stood at $0.39 versus $0.51 in the prior year.
Commenting on the results and the outlook for the balance of the year, Chief Executive Officer, Bob Sartor said, ” Our third quarter added to what has been a difficult year for the Company. Unusual weather patterns and other external factors such as SARS, blackouts in Ontario and forest fires in Alberta and B.C. have had an impact on our Company, as has been the case for many retailers. However, this quarter was principally impacted by two factors. First, October sales of winter product were slow due to warm weather. The second contributor was our decision to dramatically and rapidly adjust our product assortment to reduce our future dependence on casual clothing for sales growth, which resulted in a decline of our corporate comparable store sales and overall profit for the quarter and year-to-date. This decision, sparked by our belief that the casual clothing segment of retail will continue to experience intense pressure in the future, resulted in significant markdowns of our casual clothing that negatively affected both our corporate store sales and margins in each of the last two quarters. With our markdowns now behind us, and our inventories cleansed of their previous heavy emphasis on casual clothing, we are positioned for, and expect a stronger fourth quarter. And, for the fourth quarter to date, our results have been strong. Comparable store sales in our corporate stores have been up 3.9% and our corporate store margins have returned to their historical levels as we have successfully replaced our reduced casual clothing sales with sales of technical athletic clothing, footwear and equipment in our stores. Franchise comparable store sales were flat, as expected, as franchisees were up against strong comp sales last year.”
Despite this strong start to the fourth quarter, the Company does not believe that the upcoming quarter's performance will be sufficient to compensate for the performance of the first three quarters of this year. Therefore, earnings expectations have been reduced to a range from $1.01 to $1.05, depending upon the strength of the fourth quarter, down from the previous estimate of $1.35, diluted.
Mr. Sartor further commented, “While we are disappointed with the reduction in our earnings estimate, we recognize that it was a necessary result of our decision to reconfigure our assortment to strengthen our competitive position with a return to our core athletic roots in the clothing that we carried in our stores. And, we are encouraged by the fact that despite a very tough retail environment and a difficult product transition, we will still be able to increase our market share and deliver an increase in profit for our shareholders above the $0.96 recorded in the prior year.”
The Company's earnings for the quarter and on a year-to-date basis have been affected by the adoption of the CICA recommendation on stock based compensation and by the inclusion of a one-time gain on the sale of investment in the prior year. On a normalized basis, comparable earnings performance was as follows:
($ in thousands) For the 13 weeks ended For the 39 weeks ended
November 2, October 27, November 2, October 27,
2003 2002 2003 2002
Pre-tax earnings
as reported $12,075 $16,524 $20,274 $26,865
Gain on sale of
an investment - (1,454) - (1,454)
Stock based compensation 557 165 1,608 382
------------------------------------------------------------------------
12,632 15,235 21,882 25,793
Taxes (4,800) (6,018) (8,315) (10,188)
------------------------------------------------------------------------
Normalized earnings $7,832 $9,217 $13,567 $15,065
------------------------------------------------------------------------
------------------------------------------------------------------------
Normalized Diluted EPS $0.24 $0.29 $0.42 $0.49
THE FORZANI GROUP LTD.
Consolidated Statements of Operations and Retained Earnings
(in thousands, except per share data)
(unaudited)
For the thirteen For the thirty-nine
weeks ended weeks ended
November 2, October 27, November 2, October 27,
2003 2002 2003 2002
(restated) (restated)
------------------------------------------------------------------------
Corporate and Franchise
Retail Sales $ 260,623 $ 245,876 $ 745,001 $ 690,954
------------------------------------------------------------------------
------------------------------------------------------------------------
Revenue
Corporate 179,178 173,751 493,688 470,763
Franchise 70,986 70,170 193,487 169,209
------------------------------------------------------------------------
250,164 243,921 687,175 639,972
Cost of sales 166,206 162,329 462,036 423,733
------------------------------------------------------------------------
Gross margin 83,958 81,592 225,139 216,239
Operating and
administrative expenses
Store operating 46,537 43,683 133,827 125,651
General and
administrative 15,759 14,028 42,249 40,627
Stock-based
compensation (Note 2) 557 165 1,608 382
------------------------------------------------------------------------
62,853 57,876 177,684 166,660
------------------------------------------------------------------------
Operating earnings before
undernoted items 21,105 23,716 47,455 49,579
Amortization 7,791 7,441 23,056 20,711
Interest 1,239 1,205 4,125 3,457
Gain on sale of
investments (Note 5) - (1,454) - (1,454)
------------------------------------------------------------------------
9,030 7,192 27,181 22,714
------------------------------------------------------------------------
Earnings before
income taxes 12,075 16,524 20,274 26,865
Income tax expense
Current 6,406 9,060 9,960 13,476
Future (1,818) (2,534) (2,257) (2,870)
------------------------------------------------------------------------
4,588 6,526 7,703 10,606
------------------------------------------------------------------------
Net earnings for
the period 7,487 9,998 12,571 16,259
------------------------------------------------------------------------
Earnings per share $ 0.24 $ 0.33 $ 0.40 $ 0.54
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted earnings
per share $ 0.23 $ 0.31 $ 0.39 $ 0.51
