Forzani Sees Strong 2005, but Misses EPS Target…

Forzani continues to reap the benefits of the restructuring and remodeling efforts made early in the year. The company has now posted two quarters in a row of double digit corporate comparable store sales growth, with third quarter comps up 11% and Q4 up 10.1%. Whereas previously these comps were driven by the remodeled Sportmart and SportChek banners, this quarter, comps were up “across all banners and across all regions.”

For the fourth quarter retail system sales $438.0 million, a 19.5% increase from last year, when sales were $366.6 million. Excluding the impact of the two new acquired banners, National Sports and Nevada Bob’s Golf, retail system sales were $407.1 million, an 11.0% increase over sales last year. Total revenues, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, were $342.2 million, an increase of 24.8% from $274.2 million the prior year. Exclusive of the impact of National Sports and Nevada Bob's Golf, revenues increased to $316.1 million or 15.2% over last year's fourth quarter. Wholesale sales for the quarter were $54.4 million, up 21.4% from the prior year. Franchise comparable store sales were up 5.3% for the quarter on the strength of footwear, athletic and winter clothing.

Gross margins for the quarter were 37.9%, up 50 basis points from the prior year of 37.4%. Corporate store operating expenses, as a percent of retail revenue, decreased to 21.5% this year versus 23.2% in the prior year. In spite of all of these improvements, Forzani did not achieve Wall Street EPS estimates of 64 cents for the year-to-date, falling short by 20 cents at 44 cents diluted EPS. During a conference call with investors and the media, Forzani CEO Bob Sartor said that the 64 cents per share target was unreasonable and, “There is a time to save money and a time to spend money, this year was definitely a time to spend money.”

The EPS miss was mainly due to sharp increases in G&A expenses, which soared 170 basis points to 8.4% of total revenue at $28.8 million versus $18.4 million, or 6.7% of revenues in the prior year. Management sees this number declining considerably in fiscal 2007. Already in the first quarter of the year, these expenses have come down to be more in-line with historical levels. The increases during Q4 of fiscal 2006 were primarily due to higher expenses at National Sports and major increases in advertising expenses during the second half of the fourth quarter. For fiscal 2007, analysts are estimating EPS of roughly $1.00, but Forzani management repeatedly refused to comment on whether or not these assumptions were reasonable.