The Forzani Group Ltd. saw flat operating earnings for the fiscal second quarter ended August 1 on lower sales and improved margins resulting from cleaner inventories, more closeout sales, and sales from private label products.
However, Canadas largest sporting goods chain saw net income and EPS decline for the period as FGL took a four cents write-down of a passive investment in Huffy Corporation resulting from Huffys 2003 acquisition of Gen-X, the company in which FGL held an investment. Excluding the write-down, earnings from operations were C$3.8 million, or 12 cents per diluted share, in the most recent quarter. Ironically, it is now Forzanis recent acquisition of Gen-X from Huffy that will help provide better margins and an improved bottom line going forward.
Total retail system sales, which includes both corporate and franchise store sales, declined 2.4% to C$256.4 million for Q2, compared to C$262.7 million in the year-ago period. Total retail system comp store sales decreased 4.4%, with corporate stores comps off 4.6% and franchise store comps decreasing 4.1%. FGL blamed the decline on weather issues, commenting that the summer was “much cooler” than last year. Alberta and the Maritimes were said to be the two best performing regions. The retailer said that hardgoods was the best performing category for the quarter, followed by footwear. Apparel was again the biggest challenge.
The 240 basis point gain in gross margin came from both Corporate and Franchise operations, with each contributing about 200 basis points in improvement, on “improved merchandising and a fresher product mix”.
CEO Bob Sartor said that they expect stronger sales in the back half of the year, but that the margin gains will moderate as they “go after some volume”. He said they will be “excitingly promotional” in the back half, but will not “completely sacrifice” margin.
The increase in closeouts as a percent of total sales, which is certainly helped by the Gen-X acquisition, is said to be one way they expect to drive sales while maintaining margins. Closeouts were estimated to make up a “low double-digit” percent of retail sales, but is certainly expected to increase.
“A lot of folks were under-whelmed by our acquisition of Gen-X,” Sartor said in a conference call with analysts. “I like to call it a sleeper acquisition, because what we got in Gen-X is an absolutely outstanding management team.” Sartor also said that, at acquisition, Forzani made up about 20% of Gen-X sales.
What they also got was a platform from which they can acquire more wholesale brands to use as house brands in Canada and possibly wholesale to the rest of the market. The recent Savier deal with Nike is one example of a deal one could expect to see more of in the near future.
Gen-X chief Jamie Salter can easily replicate the former Gen-X model again, this time using Forzanis direct resources rather than the past passive investments.
“They've hit the ground running and have already made a noticeable impact on our business. This was strategically a very important acquisition for us, and we saw its impact manifested in our Q2 margins.”
On the retail side, the recent Nevada Bob's acquisition which is expected to add $30 million a year to sales, provides “a great trade name, and we wanted to get into the pro golf business for some time,” Sartor said. He did clarify that it will be structured more as a franchise business rather than a licensed model as it is today. He said specialty retail requires more owner-operator “hands-on” management, but said these types of independent retailers are “looking for strong central support.”
Forzani is also taking a page out of certain successful U.S. retail footwear manuals and making a larger commitment to more performance product form Nike along the lines of what one analyst called the “Finish Line Nike program”. President and COO Bill Gregson said they are working with Nike to support the shoe wall with product that is not otherwise in the marketplace.