Forzani’s Q3 Net Income Tumbles 33%

The company increased its tax provision as a result of an assessment which would deny interest deductions of certain payments by the company to a subsidiary in the taxation years ended 2004 and 2005. The earnings impact in the current quarter totals C$1.8 million ($1.4 million) and the company has provided for the proposed settlement. Including the impact of this provision, net earnings for the company were C$6.6 million ($5.3 million), or 22 cents a share.

 

Of the increased sales, approximately $18.6 million was attributable to the acquisition of Athletes World with the remainder derived in the franchise division which saw double digit same store increases “despite the turbulent economic environment.”

 

Revenue, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, was C$362.9 million ($290 million), up 8.8% from the comparable period last year.

 

 

Combined gross margin for the 13-weeks ended November 2, 2008 was 33.3% of revenue compared to 34.2% in the previous year. The margin rate reduction in the quarter reflects an aggressive pricing strategy in light of the deterioration in consumer confidence and spending.

 

 

Store operating expenses, as a percent of corporate store revenue, were 27.0% against the prior year of 27.2%. Same store operating costs were 25.4% of corporate store revenue, 26.0% in the prior year. Same store costs, in absolute dollars, decreased 2.5%. These decreased costs, in absolute dollars and as a percentage of revenue, are a reflection of reduced accruals for year end store performance-based compensation costs and continued efforts to control costs.

 

General and administrative expenses were 7.5% of total revenue versus the prior year's 6.0%. The absolute dollar increase of C$7.2 million ($5.8 million) is attributable to C$2.4 million ($1.9 million) in Athletes World infrastructure costs, C$3.6 million ($2.9 million) in incremental advertising spending and standard year over year expense increases, while the rate increase reflects the reduced sales volumes versus plan rather than any unplanned expenses.

 

Earnings before interest, taxes and amortization (“EBITA”) were C$27.3 million ($21.8 million), or 7.6% of revenues, compared to C$32.9 million ($26.3 million) or 9.9% of revenues for the 13-week period last year.

 

 

During the quarter, the company opened 1 Sport Chek and 1 corporate Nevada Bob's Golf store and closed 1 Nevada Bob's Golf, 1 Sport Mart and 3 Athletes World stores. In the franchise division, 5 stores were opened (2 Atmosphere, 1 Hockey Experts, 1 S3 and 1 Buying Member) and 6 stores closed (2 Intersport and 4 Nevada Bob's Golf). Additionally, 1 Buying Member converted to an Intersport franchise. As a result, at the end of the third quarter, the Company had 335 corporate stores and 226 franchise locations. The Company now has 561 stores from coast to coast (October 28, 2007 – 490 stores).

 

 

Earnings per share for the 39-week period ended November 2, 2008 were C16 cents compared to C55 cents in the prior year. Excluding the impact of the Athletes World acquisition, earnings per share were C22 cents. As noted, the Alberta Finance settlement proposal reduced earnings by C6 cents a share. Excluding both Athletes World and the Alberta Finance settlement, earnings per share were $0.28 for the 39 weeks ending November 2, 2008.

 

Cash flow from operations was $32.2 million or $1.02 per share compared to $1.41 per share, in the prior year.

 

Retail system sales for the 39 weeks were $1.072 billion, a $67.4 million increase from sales for the comparative fiscal 2008 period. Same store sales in corporate stores decreased 2.1%, while franchise stores increased 4.5%, with total same store retail system sales increasing 0.3%.

 

Revenue was $965.9 million, a $45.5 million, or 4.9% increase over the 39-week period last year. Combined gross margin for the 39 weeks ended November 2, 2008 was up 30 basis points to 34.4% of revenue, from 34.1% in the prior year driven by improvements in our wholesale businesses. In absolute dollars, the combined gross margin increased $18.0 million, to $332.1 million, from the 39-week period last year.

 

Store operating expenses, as a percent of corporate revenue, were 29.9% versus 28.1% in the prior year. General and administrative expenses were 8.3% of total revenue versus 7.4% in the prior year.

EBITA was $49.9 million, or 5.2% of total revenue, compared to 7.4% for the same period last year. Earnings before income taxes for the 39 weeks ended November 2, 2008 were $10.4 million compared to $29.7 million for the 39-week period in the prior year.

 

 

As noted in our Q2 and Back to School press releases, business in Q3 was a roller coaster ride, starting well before Labour Day, dropping off during September, as the financial crisis sent nervous consumers to the sidelines, and finishing well in October as our promotional strategy kicked in during the last 5 weeks and brought value conscious consumers back to our stores.

 

Our regularized earnings for the quarter, although reduced by the impact of additional promotional activities on margins and general and administrative costs, are satisfactory when viewed in terms of the extreme economic turbulence seen during the quarter. Additionally, we are pleased to note that Athletes World broke even for the quarter, and should be accretive to earnings for the balance of the year and in the future. The reorganization and rationalization of Athletes World back-office functions were completed during November. We look forward to solid results throughout the remainder of the year. EBITA, on a trailing four-quarter basis, was $104.5 million, or 7.6% of revenues, compared to $115.3 million, or 9.1%, for the four quarters ending in the third quarter of last year, a 9.4% decrease.

 

On December 12, 2008 the company declared a dividend of $0.075 per Class A common share, payable on February 2, 2009 to shareholders of record on January 19, 2009. All dividends paid by The Forzani Group Ltd. are, pursuant to subsection 89 (14) of the Income Tax Act, designated as eligible dividends. An eligible dividend paid to a Canadian resident is entitled to the enhanced dividend tax credit.

 

For the first five weeks of the fourth quarter, same store sales from corporate stores increased 0.1% and franchise same store sales 6.2%. These results were on top of same store sales increases in the prior year of 4.9% and 16.7% respectively. Corporate store margins improved on both a rate and dollar basis.

Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)



                               For the thirteen         For the thirty-nine
                                    weeks ended                 weeks ended
                       November 2,   October 28,   November 2,   October 28,
                             2008          2007          2008          2007
—————————————————————————-
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Revenue
  Retail             $    245,325  $    224,158  $    676,945  $    630,458
  Wholesale               117,569       109,313       289,001       289,950
—————————————————————————-
                          362,894       333,471       965,946       920,408
Cost of sales             241,948       219,545       633,835       606,332
—————————————————————————-
Gross margin              120,946       113,926       332,111       314,076
—————————————————————————-



Operating and
 administrative expenses
  Store operating          66,302        60,915       202,545       177,401
  General and
   administrative          27,310        20,065        79,690        68,330
—————————————————————————-
                           93,612        80,980       282,235       245,731
—————————————————————————-



Operating earnings
 before undernoted items   27,334        32,946        49,876        68,345
—————————————————————————-
Amortization of capital
 assets                    12,076        11,137        34,861        33,039
Interest                    2,609         1,831         4,568         4,737
Loss on sale of investment      –             –             –           864
—————————————————————————-
                           14,685        12,968        39,429        38,640
—————————————————————————-



Earnings before
 income taxes              12,649        19,978        10,447        29,705
—————————————————————————-



Income tax expense
 (recovery)
  Current                   5,667         7,428         5,095        11,146
  Future                      396           (36)          198          (194)
—————————————————————————-
                            6,063         7,392         5,293        10,952
Net earnings for
 the period          $      6,586  $     12,586  $      5,154  $     18,753
—————————————————————————-
—————————————————————————-
Earnings per share
 (Note 3)            $       0.22  $       0.37  $       0.16  $       0.55
—————————————————————————-
—————————————————————————-
Diluted earnings per
 share (Note 3)      $       0.22  $       0.36  $       0.16  $       0.55
—————————————————————————-