Gander Mountain Company posted a 14.9% increase in third quarter net sales to $246.5 million from $214.6 million in the same period last year. In addition, comparable store sales increased 7.4% in the quarter. Income from operations was $7.5 million in the 2006 quarter, compared to a loss from operations of $4.3 million in the same quarter of the prior year. For the third quarter of fiscal 2006, the company reported net income of $2.0 million, compared to a net loss of $7.5 million in the third quarter of 2005. The results for the third quarter include a $1.4 million gain from the insurance settlement related to the flooding of the Binghamton, N.Y., store in June 2006.
“We are very pleased with the quarter. Our associates worked hard to get the best products at the right prices in our stores in plenty of time and helped our customers select their purchases for the fall hunting seasons,” said Mark Baker, president and CEO. “We have a great selection of products in our stores, and our customers are responding. Our marketing effectively communicated our extensive assortment of products and services and our Everyday Low Price strategy. The efforts of our associates were rewarded as sales increased 14.9 percent while our gross margin increased by 200 basis points.”
For the 39 weeks ended October 28, 2006, the company reported sales of $584.6 million, an increase of 11.6% over the same period in 2005. Comparable store sales on a year-to-date basis declined 2.0%. The company reported a net loss for the 39-week period of $28.5 million, compared to a net loss of $35.5 million for the 39 weeks ended October 29, 2005. The results for the 39 weeks ended October 29, 2005, include a one-time payment to Gander Mountain of $2.5 million in the first quarter of 2005 related to the termination of the company's previous co-branded credit card agreement.
The net income per share for the third quarter of fiscal 2006 was 14 cents, compared to a net loss of 53 cents per share for the same period of fiscal 2005. The company does not currently record a tax expense or benefit in calculating net income or loss, or the net income or loss per share. In contrast, analysts' estimates of the company's net income or loss per share as reported by First Call include a pro forma tax expense or benefit. If a tax impact were recorded at a 40% rate, the net income per share for the third quarter of fiscal 2006 would be 8 cents, compared to a net loss of 32 cents per share for the fiscal 2005 quarter.
Gross Margin
The gross margin improved by 200 basis points to 25.5% in the recent quarter, compared to 23.5% in the third quarter of fiscal 2005. Initial product margin increased approximately 200 basis points in the quarter. This improvement was due to product margin increases in virtually all major product categories as a result of continued benefits from increasing scale, lower levels and better pricing of clearance merchandise, and higher penetration of the company's owned-brand merchandise. In the third quarter of 2005, the company closed two small-format stores, replacing one with a large- format store and allowing the lease on the second to expire because the store was within ten miles of one of the company's large-format stores. The liquidation sales at the closing stores had a negative impact on margin. Mix was not a significant factor in the margin improvement in the 2006 quarter.
Since the company opened fewer stores in the 2006 quarter than in the 2005 quarter, gross margin did not benefit as much from new-store vendor discounts. Higher freight rates also impacted the gross margin this quarter. However, reduced costs at the distribution center helped offset these margin reductions. Store occupancy costs remained relatively constant as a percent of sales, as higher real estate and personal property taxes offset the leverage achieved with higher comparable store sales.
Distribution costs declined as a percent of sales in the quarter as the result of investments in equipment and process improvements at the distribution center over the past year. The improvements both lowered costs and improved the efficiency of the distribution center even with increased receipts and shipments this year, ensuring that product was in the stores on a timely basis, helping to drive sales in the quarter.
Operating Expenses
Store operating expenses as a percent of sales declined by approximately 190 basis points from 20.0% to 18.1%. The company leveraged store labor costs on the 7.4% increase in comparable store sales despite higher benefit costs. Utilities and supplies also declined as a percent of sales from a combination of expense control and leverage on the gain in comparable store sales. Spending on advertising and marketing in the third quarter was similar to that of the third quarter of 2005 in dollar terms, while declining as a percent of sales. Credit card fees declined as a percent of sales as more customers used the company's co-branded credit card.
Interest expense was $5.5 million for the third quarter this year versus $3.2 million in the comparable quarter last year. Borrowings on the credit facility increased to $260 million at the end of the period, up from $228 million at the end of the third quarter of fiscal 2005. In addition, the weighted average interest rate increased by approximately 240 basis points compared to the third quarter of fiscal 2005.
In the third quarter of fiscal 2006, Gander Mountain opened five new stores, bringing the total to 105 stores in 22 states. All of the new locations further the company's objective of increasing its market penetration in the Southeast. Four of the five new stores introduced the Gander Mountain brand to new states — Lake Mary, Fla.; Charleston, W.Va.; Knoxville, Tenn.; and Huntsville, Ala. The fifth store, Winchester, Va., is the company's second store in that state. In the third quarter of 2005, Gander Mountain opened nine new stores.
Gander Mountain Company
Statements of Operations - Unaudited
(In thousands, except per share data)
13 Weeks Ended 39 Weeks Ended
October October October October
28, 29, 28, 29,
2006 2005 2006 2005
Sales $246,491 $214,606 $584,553 $523,652
Cost of goods sold 183,594 164,201 450,590 407,081
Gross profit 62,897 50,405 133,963 116,571
Operating expenses:
Store operating expenses 44,553 42,889 116,880 113,591
General and administrative
expenses 10,490 9,041 29,449 27,165
Pre-opening expenses 1,772 2,779 3,245 6,555
Gain on insurance
settlement (1,400) - (1,400) -
Gain on contract settlement - - - (2,500)
Income (loss) from operations 7,482 (4,304) (14,211) (28,240)
Interest expense, net 5,456 3,236 14,289 7,249
Income (loss) before income
taxes 2,026 (7,540) (28,500) (35,489)
Income tax provision - - - -
Net income (loss) $2,026 $(7,540) $(28,500) $(35,489)
Income (loss) per common share
Basic $0.14 $(0.53) $(1.99) $(2.49)
Diluted $0.14 $(0.53) $(1.99) $(2.49)
Weighted average common shares
outstanding
Basic 14,308 14,264 14,295 14,252
Diluted 14,325 14,264 14,295 14,252
