The Forzani Group Ltd. reported net earnings for the second quarter fell 72.2% to C$1.5 million ($1.4 million), or 5 cents per share, compared to the prior year’s second quarter of C$5.4 million ($5 million), or 16 cents. Cash flow from operations for the Canadian retailer decreased to C$10.9 million ($10.1 million), or 35 cents per share, from C$13.8 million ($12.8 million), or 41 cents per share, in the prior year.


 


Retail system sales were C$356.7 million ($332.7 million), an increase 1.5% from C$351.3 million ($326.7 million) a year ago. Same store sales in corporate locations were down 6.5% and 0.6% in franchise locations, over the fiscal 2008 second quarter, for an overall same store sales decrease of 4.2%. These results were on top of prior year same store increases of 0.4% and 6.1% respectively in Corporate and Franchise businesses.


 


Revenue, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, was C$295.6 million ($275 million), up 1.1% over the comparable period last year. Wholesale sales to the franchise network increased 11.3% as product receipts, delayed in the first quarter, were received and moved through to franchise outlets. Those increases were offset by declines in the opportunity and licensed business which depends largely on U.S sales.


 


Combined gross margin for the 13 weeks ended August 3, 2008 was 35.8% of revenue, compared to 34.9%, in the previous year. Wholesale margins improved over the prior year while retail margins were down slightly over the prior year reflecting the impact of the Athletes World acquisition on the overall business. Athletes World, which emerged from Companies Creditor Arrangement Act “CCAA” protection during the quarter, saw its margins impacted by the liquidation of aged inventories. The company expects that Athletes World will be fully stocked with fresh inventory in time for the important Back to School business of the third quarter of fiscal 2009.


 


Store operating expenses, as a percent of corporate store revenue, were 29.7% against the prior year of 27.7%, a reflection of the addition of Athletes World and reduced sales volumes. Same store operating costs were 28.2% of corporate store revenue, 26.3% in the prior year. Same store costs, in absolute dollars, increased 0.1%.


 


General and administrative expenses were 8.5% of total revenue versus the prior year’s 7.6%, attributable to the Athletes World acquisition. Of the net absolute dollar increase of C$2.9 million ($2.7 million), fully C$2.7 million ($2.5 million) was related to the addition of the Athletes World infrastructure.


 


Earnings before interest, taxes and amortization (“EBITA”) were C$14.9 million($13.9 million), compared to C$20.9 million ($19.4 million) for the 13-week period last year. Earnings for the quarter were C$1.5 million, compared to C$5.4 million in the prior year. Excluding the impact of Athletes World, earnings for the quarter were C$1.9 million or $0.06 per share.


 


In a statement, the company said its second quarter results, while disappointing, are not surprising given the state of the Canadian retail economy, particularly in Eastern Canada. Consumer pessimism, combined with a cooler than normal spring hit hardest in our Retail division, while our Wholesale division improved both sales and margin performance during the quarter. EBITA, on a trailing four-quarter basis, was C$110.1 million ($102.4 million) compared to C$113.8 million ($105.8 million) for the four quarters ending in the second quarter of last year, a 3.2% decline.


 


As announced on June 30, 2008, Athletes World emerged from CCAA protection. As noted above, Athletes World has negatively impacted year to date results due to its lack of fresh seasonal inventory, expenses related to the CCAA administration and store closures. The Company is confident that with fresh inventories for the important Back to School and Christmas selling seasons ahead, and reduced overheads, Athletes World will be accretive for fiscal 2009. Further, the cash flow benefits associated with the utilization of Athletes World’s tax losses will begin to be realized in the latter half of the current fiscal year.


 


As in the prior two years, the Back to School selling period has shifted to the latter half of August and the first half of September and the Company has adjusted its advertising spend to coincide with this shift. The Company will be releasing its Back to School results at the end of September.


 


For the first 4 weeks of the third quarter, same store sales were up 9.8% in corporate locations and up 5.4% in franchise stores for an overall increase of 8.2%.


 


During the quarter, the company opened 1 Nevada Bob’s Golf corporately owned store, acquired 1 Econosport store from a franchisee and closed 5 Athletes World locations. In the franchise division, 2 stores were opened (1 Atmosphere and 1 Hockey Experts), 1 Econosport was converted to corporate and 1 RnR store closed. As a result, at the end of the second quarter, the Company had 338 corporate stores and 227 franchise locations. This was a decrease of 6,081 square feet of retail selling space, a 0.1% decrease versus the previous quarter. The company now has 565 stores from coast to coast As of July 29, 2007, it had 488 stores.


 


Year to Date Results


 


Net losses for the 26-week period ended August 3, 2008, were C$1.4  million ($1.3 million), or 4 cents a share, compared to net earnings of C$6.2 million ($5.8 million), or 18 cents in the prior year. Excluding the impact of Athletes World, the company recorded a net income of C$0.4 million ($0.3 million). Cash flow from operations decreased to C$16.6 million ($15.4 million) from C$26.2 million ($24.4 million). On a per share basis, cash flow decreased 32.5% to C$0.52 compared to C$0.77 in the prior year.


 


Retail system sales for the 26 weeks were C$690.8 million ($642.4 million), a C$31.1 million ($28.9 million) increase from sales for the comparative fiscal 2008 period. Same store sales in corporate stores decreased 5.3%, while franchise stores increased 1.1%, with total same store retail system sales decreasing 2.9%.


 


Revenue was $603.1 million ($561 million), a 2.7% increase over the 26-week period last year. Combined gross margin for the 26 weeks ended August 3, 2008 was up 90 basis points to 35.0% of revenue, from 34.1% in the prior year.


 


Store operating expenses, as a percent of corporate revenue, were 31.6% versus 28.7% in the prior year. For the year to date, Athletes World store operating expenses have a higher run rate that the company’s other corporate banners due to the liquidation activities carried out in Athletes World during the first quarter of the year. On a year to date basis, Athletes World represents C$14 million of the absolute dollar increase of C$19.8 million.


 


General and administrative expenses were 8.7% of total revenue due to the impact of the Athletes World acquisition. Overall, the absolute dollar increase in general and administrative expenses was $4.1 million. Excluding the $5.5 million in Athletes World infrastructures costs, general and administrative costs fell by C$1.4 million and represented 8.3% of total revenue versus 8.2% in the prior year.


 


EBITA was C$22.5 million ($20.9 million), or 3.7% of total revenue, compared to 6.0% for the same period last year. Losses before income taxes for the 26 weeks ended August 3, 2008 were $2.2 million ($2 million) compared to a pre-tax profit of C$9.7 million ($9 million) for the 26-week period in the prior year.


 


Balance Sheet


 


The company’s working capital of C$64.1 million ($59.6 million) decreased 49.8% over the prior year due to the company’s completion of its normal course issuer bid which saw the company spend $44 million ($40.9 million) repurchasing its stock in the first six months of fiscal 2009. With those expenditures completed, the company expects its working capital to return to historical levels by the end of fiscal 2009.


 


Effective June 11, the company renewed its credit agreement with GE Canada Finance Holding Company to June 11, 2013, on substantially the same terms and conditions. The renewed agreement increased the C$235 million ($219 million) credit facility to C$250 million ($232.5 million), comprised entirely of a revolving loan.