The Forzani Group Ltd. reported that retail system sales for the first quarter ended May 1 were CN$259.8 million, a 14.1% increase from CN$227.7 million in the year-ago period. Revenue, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, was CN$238.2 million, a 4.2% increase over the same period last year due, primarily, to the acquisition of National Gym Clothing Limited (National Sports) on January 31, 2005.

Combined gross margin for the 13 weeks ended May 1, 2005 was down 170 basis points to 29.0% of revenue, from 30.7% in the prior year. This was due to a combination of factors, including various initiatives to ensure appropriate inventory positions as a weak winter season was exited, and the liquidation and subsequent closure of a competitor in the Ontario market during the quarter, and its effect on regional margins.

Comparable store sales from corporate locations were down 4.3%, a result, largely, of soft sales in inline skates, ski and snowboard, and licensed hockey products. Comparable corporate clothing sales, exclusive of winter categories and licensed products were down 1.7%. Footwear sales were strong, up 5.6%. Franchise comparable store sales were up 9.4% on the strength of athletic clothing and footwear. On a combined basis, comparable store sales were up 0.3%.

Comparable store operating costs were 29.6% of corporate store revenues, versus 28.8% in the prior year, a result of the reduced sales volume. The comparative costs in absolute dollars decreased CN$0.7 million or 1.7%. The overall store operating expense increase reflects the addition of 19 National Sports stores coupled with the opening (net of closings), in the past year, of 12 corporate stores.

The net loss for the quarter was CN$7.4 million, or CN$0.23 per diluted share, compared to a profit of CN$0.9 million, or CN$0.03 per share in the prior year.

Sport Chek / Sport Mart

The current quarter's results were impacted by soft corporate sales and margins. In the Sport Chek and Sport Mart banners the effects were most severe in ski, snowboard and outerwear categories, resulting in lower gross margin dollars of CN$1.7 million; in inline skates, resulting in lower gross margin dollars of CN$1.3 million; and in licensed products, primarily NHL, resulting in lower gross margin dollars of CN$1.3 million. The company also took a CN$1.3 million charge against dated inventory, to ensure a clean inventory position in all stores, once renovated.

Retail system sales are retail sales from corporate and franchise stores and are not a recognized performance measure under GAAP. Management believes that this measure is useful supplemental information, which provides the reader with an indication of the Company's total retail sales.

The results for the prior year have been restated in compliance with the Canadian Institute of Chartered Accountants (CICA) requirement for the adoption of new guidelines and policies including EIC 144, which resulted in a decrease in net earnings of CN$406,000; and a change in accounting for certain lease costs, resulting in a decrease in net earnings of CN$343,000. The accounting changes which resulted in the restatement of the prior year's results had the effect, in the current year, of a decrease in net earnings of CN$498,000 on account of EIC 144 and CN$214,000 as a result of the change in accounting for certain lease costs.

National Sports

In the newly acquired National Sports banner, comparable store sales were up 0.8%. Exclusive of licensed products, sales were up 4.0%.

In total, for the corporate banners, the reduction in gross margin dollars due to these specific categories was mitigated, in part, by contributions from improved categories, including footwear, and by the overall margin contribution of National Sports, acquired during the quarter.


The Gen-X division's results were considerably lower than last year's, driven by weaker licensed product sales and the decision to take a onetime write down of CN$1.1 million to effect an exit from a closeout line that was not selling through. The Gen-X bookings of licensed products for the second and third quarters of this year are stronger.


Total inventories were CN$318.5 million, a 10.4% increase versus last year. After the effect of new stores opened since Q1 last year, and the National Sports acquisition, comparable store and warehouse inventory was CN$277.8 million versus CN$288.5 the prior year. The Company's inventory position is not only much leaner than the prior year, its composition is now much fresher with a higher margin component than at any time in the last three years.

Comparable store sales for the final three weeks of the quarter and the first three weeks of the second quarter were up 3.1% corporately and 7.3% in franchise stores, with both footwear and clothing performing well.

During the quarter, in addition to the acquisition of 19 stores under the National Sports banner previously mentioned, the Company opened 2 corporate stores (1 Sport Chek and 1 Sport Mart) and closed 1 Sport Mart store. In the franchise division, 3 stores were opened (2 Intersport and 1 Nevada Bob's) and 4 stores were closed (2 Intersport and 1 each of Nevada Bob's and Buying Member). As a result, at the end of the first quarter, the Company had 252 corporate stores and 194 franchise locations. This was a net increase of 504,855 square feet of retail selling space, a 10.1 % increase versus the previous quarter. The Company now has 446 stores from coast to coast (fiscal 2005 – 395 stores).

Bob Sartor, C.E.O. of the Company, commented, “In spite of the slow start to our fiscal 2006 year, we are encouraged by comparable store sales results in the final three weeks of the quarter and the first three weeks of the second quarter, particularly in our corporate store base, which is experiencing its first sustained comparable store sales increase in the past two years. Our operating and G&A costs are in line and we are seeing key indications that the recent consolidation within the market, specifically Ontario, and the acquisition of National Sports, are bearing fruit, and will ultimately result in stronger results for the Group. Moreover, the Sport Chek renovation program is in full swing, to be completed by July, and should positively impact results in the back half of the year. The decision to provide for inventory that just wasn't moving cost us a total of CN$2.4 million and our aggressive stance toward an exit from the winter categories of ski, snowboard and outerwear reduced margins by a further CN$1.7 million. In addition, our realization, early on in the spring selling season, that the inline skate business, globally, would be down sharply, led us to conclude that we should substantially reduce our selling prices to pare down our inventories, at a cost of CN$1.3 million. And, rounding out the difficulties in the quarter was the prolonged NHL lockout that further reduced margin dollars by CN$1.3 million. All in, non-recurring events and decisions that reduced earnings, on an after-tax basis, by CN$4.3 million or CN$0.13 per share. These decisions, while difficult from a quarterly earnings perspective, are not difficult from a longer-term perspective. Our Sport Chek store base will complete its refurbishment during the second quarter. Accompanying it will be stronger, more impactful marketing and a dramatically improved store visual presentation. To marry this effort with an inventory position that is anything but fresh, desirable and more varied in terms of brand offering, would be a half-measured approach to the Sport Chek effort. Our expectations are that results will continue to improve during the second quarter and that the second half of the year will improve. ”

Bill Gregson, the Company's President and COO added, “The massive effort undertaken to re-work all of the elements of Sport Chek which, due to its size, historically has driven sales and profits at FGL, is beginning to pay off. This spring, our footwear business is registering high single digit comparable sales with solid margins. Our revamped clothing business, under pressure the past 18 months is now consistently performing from a sales perspective. On the athletic clothing side, margins have been slightly softer, but improving weekly. And, we've accomplished this with 25% less athletic clothing inventory than last year. Our outdoor clothing and accessory business has been extremely strong with double-digit sales and comparable margin dollar increases so far this spring. The two areas that remain a concern for us are licensed product sales and our inline skate business. The NHL lockout, coupled with the fact that a Canadian team went to the Stanley Cup Finals last year, combined to dramatically impact the licensed category, with year to date sales down 58%. Licensed products alone accounted for a 2.5% total decline in corporate comparable store sales in the first quarter. The good news is that by mid June the situation should improve as the playoffs ended on June 5th last year. The category, we expect, will bounce back fully once play resumes in the NHL. On the inline skate business, the prospects for full recovery are not as bright. The category is down in all markets and, we understand, globally. Given that the selling season for in-lines is almost over and that we took an aggressive stance towards reducing our inventories in this category, we are focused on replacing that volume next spring. We believe that we can achieve this by further expanding our bike, golf and camping businesses, all of which continued to exhibit solid growth this year. These current results, combined with the fact that the competitive environment in Ontario has eased somewhat with the bankruptcy and liquidation of one retailer and the closing of some stores by another retailer during the first quarter, lead us to anticipate better results in the second half of the year.”

Consolidated Statements of Operations and Retained Earnings
(in thousands, except per share data)
                                           For the thirteen weeks ended
                                                   May 1,         May 2,
                                                    2005           2004

 Retail                                        $ 166,804      $ 150,552
 Wholesale                                        71,398         78,075
                                                 238,202        228,627
Cost of sales                                    169,136        158,395
Gross margin                                      69,066         70,232

Operating and administrative expenses
 Store operating                                  51,589         45,073
 General and administrative                       17,458         14,204
                                                  69,047         59,277

Operating earnings before undernoted items            19         10,955

Amortization                                      10,188          8,672
Interest                                           1,510            921
                                                  11,698          9,593

Earnings (loss) before income taxes              (11,679)         1,362
Income tax expense (recovery)
 Current                                          (4,309)           904
 Future                                               47           (405)
                                                  (4,262)           499
Net earnings (loss) for the period             $  (7,417)     $     863

Retained earnings, beginning of period           122,121        101,528
Retained earnings, end of period               $ 114,704      $ 102,391
Basic and diluted earnings (loss) per share    $   (0.23)     $    0.03