Forzani Group’s Fourth Quarter Disappoints, but Sees Turnaround in Q1

 

Overall retail system sales climbed 14.5% for the first eight weeks of Q1 versus the prior year’s gain of 0.9%. Comps jumped 15.5% at FGLs corporate locations (Sport Chek, Sport Mart, Coast Mountain Sports, National Sports, Athletes World and Hockey Experts) and 12.7% at its franchised stores (Sports Experts, Nevada Bob’s Golf and Fitness Source.) The rebound came while retaining stronger gross margin performance. On a conference call with analysts, management estimated that the Winter Olympics in Vancouver contributed about 3% of the comp gain but the momentum continued after the Games.

 

Besides better weather, Forzani credited the improvement to “a cautiously optimistic consumer” and the benefits of strategic initiatives.

 

In the fourth quarter, total revenues dipped 2.1% to CN$372.9 million (US$354 mm). Comps declined 3.1% with FGLs three largest categories (alpine ski, snowboard and outerwear) suffering an 8.1% drop. The company had warned in December that Q4 results would be challenging due to warm weather and consumer caution. Excluding the weather-impacted categories, comps increased 2.0%. Positive comps were seen in footwear, athletic apparel, golf, fitness and cycling.

 

Corporate retail system sales inched ahead 0.2% to CN$317.8 million  ($302 mm) in Q4. Comps were down 4.1% at corporate stores and 1.5% at franchised locations. 

 

Wholesale sales declined 13.5% to CN$55.1 million ($52 mm) in the fourth quarter, reflecting a 4.0% decline in retail sales at stores within the franchise network and the timing of order receipts from third parties. On the call, CEO Bob Sartor said franchisees came into Q4 fully restocked and stringent inventory controls led to little replenishment activity. Also, U.S.-based wholesale customers “continue to retrench in the quarter given the fragile economic recovery that was underway there.”

 

Net earnings slid 5.4% to CN$22.9 million ($21.8 mm), or CN75 cents a share, as merchandising margin improvement was offset by the sales decline and increased marketing investments to offset the weather’s impact.

 

“We felt the tactical marketing was the right thing to do,” said Sartor. “While other retailers were pulling in their horns and were early to discount, we maintained our prices, improved our margin dollars at the store level, and invested in our brand equity for the longer term.”

 

Gross margins in the quarter increased 220 basis points to 42.0% of sales as improvements to the aging and mix of inventory allowed the corporate stores to avoid significant discounting. Store operating expenses were slightly higher for as a result of new stores but were down on a same-store basis due to expense management.

 

On the call, Tom Quinn, Forzani’s president & COO, said that corporate store initiatives around golf, fitness and cycling had a positive impact in the quarter and management expects this will continue in 2010. The footwear and apparel business also reportedly “remains strong and continues to grow.” In-store apparel boutiques have been rolled out for Nike, North Face and Columbia while Speedo concept shops are being tested. Helly Hansen boutiques are also being upgraded. On the footwear side, stand-out sellers include the recent Reebok Zig launch and toning shoes.

 

More aggressive support is reportedly paying off with improved performance in kid’s footwear. Also, Forzani just reached a deal for Diadora to become its exclusive soccer brand.

 

Regarding stores, Quinn said the transition of freestanding Nevada Bob’s Golf stores into boutiques within Sport Chek, Intersport and Sports Experts continues and has resulted in positive golf sales and margin improvements despite a tough golf environment. GNC in-store shops have been rolled out in all Calgary stores and the test is being expanded to the Edmonton market. E-commerce was launched for the Christmas selling season and unique visits are now averaging about 25,000 visits per day. The site has over 75% of the bricks n mortar assortment; the goal is to be over 90% by later this year.

 

Despite improved first quarter trends, Sartor said unemployment in Canada as well as commodity prices remains high and business activity in Alberta and British Columbia is sluggish.

 

“While technically Canada has exited the recession and we certainly see some evidence across the board of stronger consumer spending than last year, we still dont believe consumer optimism is at its pre-recession levels,” said Sartor. “So there is still some upside as the consumer gets more comfortable.”