Forzani Sees Strong Franchise Performance Offset by Flat Corporate Results in First Quarter…

While the winter weather never materialized for many U.S. retailers this year, Forzani experienced too much of a good thing during the fiscal first quarter ended April 29. The weather remained wet and cold throughout much of Western Canada, causing many regions to experience only two weeks of spring conditions. This cold snap held Forzani’s retail system sales down to a single-digit increase for the quarter, impacting corporate stores more so than franchise locations.

Corporate revenues were flat for the quarter with a slight 0.4% increase in comparable store sales. Sales were described as uniform throughout all regions. The division was also impacted negatively by the transfer of nine Fitness Source stores into the franchise division. Corporate store operating expenses were up 10 basis points to 29.6% of sales. On a comparable store basis, operating expenses were actually down slightly. Outerwear was the strongest growth category during Q1 followed by footwear and hockey. Athletic spring apparel was “on the softer side,” while ski and snowboard equipment sales were slow. Management said that bike sales have been the biggest surprise so far this year, with “phenomenal” growth reported in the category.

Inventories were described as clean, with less ski and snowboard products left behind than last year, but more outerwear on hand. The corporate stores are experiencing a much stronger Q2 so far, with comparable store sales up 4.5% for the first four weeks of the period.

In the franchise division, sales were much stronger with a 9.6% increase in comparable store sales. Performance came from all of FGL’s franchise banners, with the traditional full-line sporting goods stores upping their game and the new specialty stores, including Nevada Bob’s Golf, Atmosphere’s, Hockey Experts and Pegasus, exceeding expectations. Forzani will be introducing a new specialty banner in the third quarter to address the fitness market. Footwear, athletic apparel and sportswear were described as the strongest categories, followed by racquet, bike, camping and team sports.

Spring has finally arrived in Canada and it appears to be helping boost sales performance in the second quarter. Management said the first four weeks of Q2 saw comps increase 14.6% versus last year.

Forzani’s wholesale division posted an 18.7% sales increase due to stronger sales to franchisees and increasing performance in the wholesale division.

Forzani recently sold its stake in a licensing operation — presumably the stake in Collective Licensing International that it picked up in the Leisure Brands merger last year (SEW_0607) that was acquired by Payless this year (SEW_0711) — but retained the licensing rights to all of the brands for the Canadian market. Forzani will continue to manage the brands under the licensing umbrella in the wholesale division.

Margins increased 120 basis points in Q1 largely due to the better margins in the corporate stores. FGL franchise margins and wholesale margins also improved during the quarter. G&A expenses were 8.8% of sales during the quarter, an increase of 180 basis points over last year, primarily due to increased performance-based compensation.

Forzani took a one-time loss of $900,000 on the sale of their investment in the licensing company. This impacted earnings considerably, but the bottom line was still well ahead of last year. Without the compensation expenses or the one-time charge, FGL would have reported EPS of roughly seven cents per share compared to one penny last year.