Forzani Takes Measures to Update Product, Presentation, and Promotions…

The Forzani Group Ltd. last week offered much more visibility to their business as management worked to provide a broader view of the opportunities for Canada’s largest sporting goods retailer on the heels of disappointing first quarter results. The retailer offered a glimpse of the future, a future that will see the company’s corporate Sport Chek stores start to look quite a bit more like their successful franchise stores, while the Sport Mart stores will be positioned as a value player.

The vision for the future and the tone in which it was delivered is far removed from the strategy unveiled last year that had the company focused more heavily on the closeout business and discounted goods. Based on the new positioning, Forzani has awakened to the same realities that are now paying dividends for their peers south of the border. The move to upgrade presentation to get access to better product appears to be paying off as FGL starts to see some real benefits in their efforts.

On the Gen-X wholesale front, the company saw a few issues hurt results, as both closeout and licensed sales suffered in the period. Sales declined 8.6% for the period to CN$74.1 million from CN$78.1 million in the year-ago period. The loss of the Airwalk license last year impacted sales of product that should be replaced, at least in part, by the company’s new license for Vision footwear, which enabled them to start shipping goods in Q2. Management said they have “hundreds of thousands” of pairs shipping into the U.S. in the second and third quarters. On the closeout side, management said they took a CN$1.1 million one-time write-down on one product line that was not selling well. FGL also cited a shift in purchasing timelines with their franchisees as a contributor to the decline.

Total retail system sales, which includes both corporate and franchise stores, increased 14.1% in the first quarter ended May 1 to CN$259.8 million from CN$227.7 million in the year-ago period. Total comparable store sales were up 0.3% for the quarter.

Corporate store sales increased 10.8% for the period to CN$166.8 million from CN$150.6 million in Q1 last year, due primarily to the acquisition of the National Sports chain at the end of January. Comp store sales for the corporate stores were down 4.3% for the quarter, due in large part to weakness in in-line skates, ski and snowboard products, and licensed hockey products. The retailer’s move to a better product mix in footwear helped push comps up 5.6% for that category. Comparable corporate clothing sales, exclusive of winter categories and licensed products, were down 1.7%.

The western stores were down a little more than 5% for the period, while the eastern stores were off less than 3%, with strong results in Ontario driving the gain.

Comps in the newly-acquired National Sports stores were up 0.8% for Q1, but would have been up 4.0% excluding the impact of lower licensed product sales.

Forzani took a CN$1.3 million charge in Q1 to clean up aged inventories.

Franchise store sales were up more than 20% to CN$93.0 million in the quarter, compared to CN$77.1 million in Q1 last year. Comp store sales were up 9.4% on the strength of athletic clothing and footwear.

The continued strength of the franchise business is clearly influencing the merchandising and decision-making process at Forzani. Management said they have done a complete review of the Sport Chek and Coast Mountain businesses, formats that represent roughly 50% to 60% of total FGL sales. Corporate store president and COO Bill Gregson said they have gone back to a reporting structure that has the merchant, marketing, and operations groups for those stores reporting directly to him instead of an intermediary. Group CEO Bob Sartor will pick up some of Gregson’s other responsibilities.

Part of the “revitalization” program for the Sport Chek stores requires a new paint job and lighting in many of the stores opened between 1997 and 2002, a period when Forzani was on a huge growth curve. Gregson said the stores had dark paint pallets and dark lighting that needed upgrading. All stores will be completed by August 1. The other change for the “Chek” stores is the addition of a twelve-person visual merchandising group, a group that did not exist at the same time last year. FGL will also be increasing comp hours for sales floor personnel to improve service in-store.

Gregson sees a shift to better brand showcasing leading to better assortments in running product, fashion product, and outdoor product. He said the footwear comp margin dollars through May were up in double-digits and sales comps were up in the high-singles. He said increased allocations of key product have led to higher average tickets in footwear.

In outerwear, the COO said that the positive comp growth for spring came at the expense of margins as they read the writing on the wall for the category and took the write-down now. Outerwear, along with athletic apparel and the fashion athletic category, all saw single-digit comp sales gains in the spring YTD period, but margins declined for each as FGL moved to pare inventories. Comp inventories were down 25% for the group at the end of May.

Gregson said they had a “phenomenal spring” in outdoor clothing, primarily from The North Face and Columbia, resulting in double-digit comp sales and margin dollar gains. He sees even more upside going into the fall as TNF moves from 50 doors for men and 25 doors for women in spring to an all-door program for the back half. They will also be launching ten Columbia in-store shops for the fall.

Not surprisingly, the toughest area of business was in licensed apparel, which suffered from the NHL lockout. While U.S. retailers made up the shortfall with increased MLB sales this spring, FGL did not have the opportunity. The COO said that a 58% drop in licensed sales has contributed to a 2.5% decline in total comp stores sales for the four-month spring period. The margin loss was pegged at CN$2 million, or a 74% decline, in Chek/Coast licensed sales.

In hardgoods, FGL sees the category continuing to strengthen as a key contributor for the business, despite the tough spring in ski, snowboard, hockey, and in-line skates. The in-line business was said to be down 31% for the YTD period, resulting in a CN$1.5 million margin hit. Gregson said they can pick up all they have lost “and then some” in the in-line category through proper assortments that play to strength in the golf, bike, camping, and team categories. They have also added 60 sku’s to the hockey assortment for fall to stand as a hockey store.

In marketing, the Chek/Coast message will reflect a better balance between brand message and tactical messaging, and a balance between flyers and other media. For Back-to-School, Forzani has doubled the pages in their flyer and television ads will run during the peak BTS selling period this year instead of after as they did last year.

Total FGL revenues were up 4.2% to CN$238.2 million in the first quarter, compared to CN$228.6 million in the year-ago period. Gross margins for the group declined 170 basis points to 29.0% of sales, due in large part to initiatives taken to liquidate goods and the impact of competing against the closure of the Joggers stores in the Ontario market.

The efforts to lower inventories pushed winter category inventories down 8.0% from last year, while comp athletic inventories were down 26% at quarter-end. Total comp store inventories were down 9.3% at the end of the period.

Forzani’s 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.

>>> Same story, different retailer… The move to better goods is on… Seems the times they are a changing just about everywhere these days…

>>> A shift to performance and better goods will see more retailers boost both sales and margins as long as they commit to the right presentation and maintain pricing…