Forzani Group Slashes Fiscal Second Quarter Loss on Stronger Comps

 

That led to improved EBITA, earnings per share and sales over the same quarter a year earlier.

FGL management said the retailer continues to close the performance gap between its historically better performing franchise stores and its corporate-owned stores and that results continued to improve in the first five weeks of its third quarter. The company’s banners include its flagship SportChek chain, SportMart, National Sports, Athletes World, Hockey Experts and Atmosphere, an outdoor specialty chain formerly known as Coast Mountain Sports.

The improvements indicate FGL’s focus on improving sales productivity – including a more profitable mix of apparel and footwear – is working, said company CEO Bob Sartor. “We believe we still have enormous opportunity in our existing store base, and that is what we're attacking first,” Sartor told analysts when asked if the company would shift more focus toward cost cutting in a weak economy. “And the best time to focus on that is when everybody else is looking at costs.”

Same store sales rose 5.2% at corporate-owned stores, compared to a decline of 1.6% in the year earlier quarter, and rose 3.1% at franchise stores, compared to a year earlier decline of 0.1%.  Comps sales were positive for footwear, athletic clothing and licensed product around the FIFA 2010 World Cup. The company said its conversion of Nevada Bob’s Golf Stores into boutiques within its SportChek, Intersport and Sports Expert stores yielded sales and margin growth despite difficult conditions in the golf market.

Revenues rose 5.6% at corporate-owned stores and 9% at the wholesale business, which includes sales to franchisees and sales of private brands by its INA International business. The increase in franchise shipments was due primarily to late receipt of Q1 deliveries due to factory delays in China as well as early restocking for back-to-school in an effort to avoid further possible factory delays. 

Retail system sales, which include sales from corporate and franchise stores, reached CN$360.8 million ($347 mm), an increase of 3.6% from the comparable 13-week sales of CN$348.4 million ($307 mm) a year earlier. Reebok’s Zig line, the Livestrong brand of apparel, footwear and accessories, toning footwear and footwear featuring body protection or enhanced body performance for exercise all performed well. Nike and FGL have exclusive Canadian rights to sell Livestrong, which has raised more than $80 million for the Lance Armstrong Foundation since 2004. 

Gross profit growth outpaced revenue due to improvements in margins in both the corporate retail and wholesale businesses. Gross margin increased 120 basis points to 34.6% of revenue as an 86 basis point improvement in retail margins added to stronger wholesale margins to more than offset a shift in the revenue mix towards the lower margin wholesale business.

Store operating expenses rose CN$2.8 million ($2.7 mm) 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% of sales from 32.0% of sales in fiscal Q2 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  CN$600,000, 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 CN$2.4 million was primarily the result of a planned shift in the quarter, of CN$1.8 million ($1.7 mm) in net advertising expenditures to launch the Atmosphere banner, Livestrong and FIFA 2010 World Cup-branded products.

While vendors have not yet pressured the company for higher prices to recover rising input costs, FGL is concerned about the impact of rising steel costs on its bicycling business. The company “will push back very, very hard on cost increases,” especially given the appreciation of the Canadian dollar, said CFO Mike Lambert.

Earnings before interest, taxes and amortization, (“EBITA”) were CN$11.7 million ($11.2 mm), up 69.6% from CN$6.9 million ($6.1 mm)  in Q2 last year. Loss before income taxes was CN$2.6 million ($2.5 mm), compared with pre-tax losses of CN$6.3 million ($5.6 mm) a year earlier.
While FGL does not provide guidance, Sartor said the third quarter got off to a solid start with increases 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 compared to a 1.1% decline during the same period a year earlier.

FGL will start testing this fall a smaller format of its flagship SportChek banner that could allow it to add as many as 50 to 100 new stores. “There is an opportunity that we are looking at now, and that is a small market format of the same box,” said Tom Quinn, FGL’s president and COO. “That has the potential for significant store additions, albeit much smaller square footage per store, but it is a potential good growth vehicle. So we have got a couple of tests that we will begin in the fall.”
FGL will continue to add or expand stores as it adds categories like fitness and nutrition, said Quinn. “As we expand our product assortment to truly provide more of a one-stop shop for our customer in sports and lifestyle recreation, we will have to have larger stores,” he said. “So you should expect to see lots more expansions in the future.” 

FGL executives said FGL had reset about 80% of the merchandise mix at its SportMart banner to distinguish it from SportChek. FGL is assorting SportMart with lower price points and basic commodities to position it with consumers as a value/price play.