Forzani Posts Q2 Loss on Repositioning Charges; Sees Strong BTS Results…

The Forzani Group experienced a solid fiscal second quarter at retail with positive comps in both corporate and franchise stores. The retail increase was partly due to the inclusion of Nevada Bob's franchise retail sales and the National Sports corporate retail volume, both of which FGL acquired since Q2 last year. Excluding the acquired businesses, total Forzani retail sales would have increased 5.3% to CN$270.1 million ($218 mm). Total Forzani retail sales, including both corporate and retail stores, increased 19% to CN$305.1 million ($246 mm) from CN$256.4 million ($190 mm) in Q2 last year.

FGL revenues, which includes just the corporate stores, royalties and other fees, and wholesale business, posted a 12.6% increase to CN$243.6 million ($197 mm), versus CN$216.4 million ($160 mm) in Q2 last year. Corporate retail sales increased 17.6% to CN$191.3 million from CN$162.7 million and wholesale revenues declined 2.5% to CN$52.3 million from CN$53.7 million in the year-ago period
Comparable store sales from Corporate stores were up 0.2%, while franchise comparable store sales increased 4.6% for the period. The Corporate store performance was impacted by a 4.3% decline in the Sport Mart banner. The Sport Chek/Coast Mountain Sports stores comp store sales improved 1.3% for the quarter. The consolidated corporate store increase was the first quarterly comp store sales gain in ten quarters.

The company is in the middle of a number of initiatives designed to increase both sales and margins through remodeling, remerchandising, and redesigning the image of its corporate stores. These initiatives had considerable impact on margins and the bottom line for the second quarter. However, management expects both of these metrics to return to higher levels through the back-to-school and holiday seasons.

The company’s Franchise division reported strong comparable store sales with clothing, bicycles, and footwear sales leading the pace. The division launched a new prototype Nevada Bob’s golf format and “both volume and margins are exceeding plan.” The Franchise division will also be launching a new running specialty chain dubbed “Pegasus” this fall and a hockey specialty banner, which will be in Quebec only.

The increased sales on the Corporate side were driven by the remodeling of the Sport Chek and Coast Mountain Sports stores and the inventory clearance associated with this initiative. The remodeling effort itself was said to have cost the company “a few cents” on the EPS line, but the remerchandising affected margins.

Forzani management said that footwear was by far the strongest category during the quarter, with running and cross training product leading the way. Management also stated that apparel is seeing improved sales thanks to the addition of TNF and Columbia to the Sport Chek and Coast Mountain Sports product mix.

The company stated that as it worked its way through the balance of the merchandise that was dated or no longer part of the revamped assortment, completed the revitalization of its Sport Chek banner, and re-merchandised the Sport Chek stores with new product, gross margin began to dramatically improve.

Sport Chek is now consistently delivering year over year comparable store sales increases at margins significantly in excess of the prior year, but it came at a price. Sport Chek is a 120 store big box chain carrying roughly $140 to $150 in inventory per square foot. Forzani revamped the entire apparel selection, which accounted for about a third of that inventory.

The next renovation on Forzani’s list is the company’s Sport Mart Stores. Management said the sales decline here in Q2 was mainly due to the stores shift in advertising strategy. Previously, the store was known for its value-priced comparisons to MSRP. Forzani will implement a new advertising and merchandising strategy over the next two quarters, but it is not expected to have as high of a price tag since Sport Mart does not carry as much inventory as Sport Chek.

Despite the sales decline in the wholesale business management said that margins have improved, particularly through the Gen-X closeout side of the business.

All the efforts to reposition its nameplates cost the company on the bottom line. FGL posted a net loss of CN$2.3 million, or a loss of 7 seven cents a share, for the period, compared to net income of CN$2.0 million, or 6 cents per share, in the year-ago period.

Forzani expects continued improvement in the back-half of the year, setting the stage for a strong year next year as the company’s corporate store issues are resolved and the franchise and wholesale businesses continue their current performance.