Forzani Turns Restructuring into Q3 Profit…

Following two quarters of sluggish comps, bottom-line losses, and renovation charges, Forzani managed to make its new model perform during the third quarter with positive comps, increasing margins, and flat store operating expenses. These three positive factors were offset a bit by slightly higher advertising expenses, but the group’s bottom line still showed a healthy increase. All three of Forzani’s main business sectors performed well, with corporate stores, franchise stores, and the wholesale division all increasing their top line.

The sales boost was spurred primarily by the acquisition of National Sports at the beginning of 2005, but the recent re-merchandising and renovations at Sport Chek and Sport Mart also contributed to the growth. The expenses related to this remodeling effort impacted EPS by roughly two cents per share. In order to drive more traffic into these recently overhauled locations, FGL increased its media buy during the quarter, resulting in an increase in G&A expenses to 7.5% of revenue compared to 5.7% last year. This impacted the bottom line by roughly four cents per share. Bob Sartor, Forzani’s CEO, said that G&A expenses will return to more normal levels during Q4 since this increased ad spend was designed to promote the new store format and assortment, which are expected to drive further sales growth.

Sport Chek and Coast Mountain Sports reported a combined comparable store sales increase of 4.2%, while Sport Mart reported a 0.9% comp decline, a stat for Sport Mart that management sees turning positive in the fourth quarter. The recently-acquired National Sports chain was said to be “nicely” profitable, but its margins were still not up to par with the rest of FGL’s banners. Technical casual wear, Under Armour, and technical sneakers were all said to be performing very well, and the average price of athletic footwear continues to climb.

While wholesale sales were positive overall, the Gen-X business was slightly down for the quarter. However, pre-season orders were up and the company is seeing solid re-orders from U.S. retailers. Wholesale margins were flat to last year.

Forzani’s franchise business has rolled out several niche specialty retail banners over the past year. The company now does business under seven distinct specialty retail titles. The three new banners address the Golf market with Nevada Bob’s, the Hockey market with Hockey Experts, and the running market with Pegasus.

Nevada Bob’s is in the process of evaluating its current franchisee base. Sartor said that the company will keep all stores on-board as licensees for 18 months and evaluate their business to see if they stand up to Forzani’s “fairly strict franchise standards.” The company also wants to make sure all licensees are willing to work within the FGL operating model. At the same time, there are reportedly several “independents” who recently attended Nevada Bob’s buying show that are now interested in converting. FGL management anticipates 40 to 44 stores in Nevada Bob’s chain by March 2006.

Hockey Experts will be rolled out only in the province of Quebec with 12 to 20 locations, due to the fact that the Sport Experts and Intersport stores perform well with Hockey throughout the rest of the country. The company’s specialty running store, Pegasus, will be rolled out throughout the country with a total of 50 to 70 stores in the long term. Forzani is doing some interesting experiments with some of its franchise locations as well. The company recently opened up its first multi-banner location – four specialty sports retailers with four completely separate store fronts in one location.