Gander Mountain Company second fiscal quarter sales increased to $182.5 million, a gain of 5.0% over fiscal 2005. The loss from operations declined to $2.7 million in the quarter from $8.0 million in the same quarter of the prior year, a 66% improvement. The company reported a $7.6 million net loss, compared to a second quarter 2005 net loss of $10.4 million, a 27% improvement. Comparable store sales decreased 6.7% in the recent quarter.

“Our sustained efforts to improve product margins and control costs enabled us to achieve a 66-percent reduction in our operating loss for the quarter and a significant increase in cash flow from store operations,” said Mark Baker, President and CEO. “This achievement gives us confidence that we will be able to show increased profitability as we move into the fall hunting seasons and see our sales initiatives gain traction. The softness in sales in the second quarter resulted in part from our decision to reduce spending on advertising and promotions. In addition, having less clearance merchandise negatively impacted sales in the quarter.”

For the 26 weeks ended July 29, 2006, the company reported sales of $338.1 million, an increase of 9.4 percent over the same period in 2005. Comparable store sales declined 8.4 percent. The company reported a net loss for the 26-week period of $30.5 million. This compares to a net loss of $30.4 million for the 26 weeks ended July 30, 2005, before 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 reported net loss for the first 26 weeks of 2005 was $27.9 million.

The net loss per share for the second quarter of fiscal 2006 was $0.53, compared to a net loss of $0.73 per share for the same period of fiscal 2005. The company does not currently record a tax benefit in calculating net loss or loss per share. In contrast, analysts estimates of the company’s loss per share as reported by First Call reduce the loss by the amount of a pro forma tax benefit. If a tax benefit were recorded at a 40 percent rate, the net loss per share for the second quarter of fiscal 2006 would be $0.32 compared to a net loss of $0.44 per share for the fiscal 2005 quarter.

The gross profit margin improved by approximately 70 basis points to 24.2 percent in the recent quarter, compared to 23.5 percent in the second quarter of fiscal 2005. Initial product margin increased approximately 170 basis points in the quarter. This improvement was due to product margin gains in virtually all major product categories as a result of continued benefits from increasing scale, the positive impact of the company’s Everyday Low Pricing strategy on the pricing structure, and higher penetration of the company’s owned-brand merchandise. Supply chain improvements and lower clearance inventory also contributed to the margin increase. Mix was a slight negative factor, as the relative share of hunting and Power Shop sales increased in the quarter.

The improvement in initial product margin was largely offset by a deleveraging of store occupancy costs, a result of lower comparable store sales and lower sales per square foot at the newer, less mature stores. Store occupancy costs negatively impacted margin by approximately 140 basis points.

Investments in equipment and process improvements at the distribution center over the past year resulted in an approximately 10-percent reduction in distribution costs and improved through-put effectiveness for the quarter. The decline in distribution costs came despite an approximately seven percent increase in freight costs as a result of higher fuel prices.

Store operating expenses as a percentage of sales declined by approximately 190 basis points from 21.9 percent to 20.0 percent of sales as the company continued to manage expenses in periods of slower sales. The company reduced advertising and marketing expenditures by approximately 50 percent in the second quarter of fiscal 2006 as compared to the 2005 period because these expenditures have proven less effective in driving sales in the seasonally slow first and second fiscal quarters. The company expects to increase spending on advertising and marketing outlays in the third and fourth quarters.

General and administrative expenses for the quarter decreased 30 basis points as the result of cost controls.

Interest expense was $4.8 million for the second quarter this year versus $2.3 million in the comparable quarter last year as borrowings on the credit facility increased to $216 million at the end of the period, up from $187 million at the end of the second quarter of fiscal 2005, and the company received $20 million in funding from the placement of convertible debt in August 2005. In addition, the weighted average interest rate increased by approximately 290 basis points compared to the second quarter of fiscal 2005.

No income tax benefits were recorded in either year, as the realization of the tax benefits related to the net operating loss carryforward was uncertain for financial reporting purposes.

In the second quarter of fiscal 2006, Gander Mountain opened a new store in Mooresville, N.C., bringing the total count to 100 stores in 18 states. The company anticipates opening five new stores in the second half of 2006, all of which further the company’s objective of increasing its market penetration in the southeast. Four of the five new stores introduce the Gander Mountain brand to new states — Lake Mary, Fla.; Charleston, W.Va.; Knoxville, Tenn.; and Huntsville, Ala. The fifth store, Winchester, Va., will be the company’s second store in that state.

The company reduced inventory per square foot in open stores at the end of the second quarter of fiscal 2006 to $66, down seven percent from $71 per square foot at the end of the prior year’s second quarter. This improvement reflects the success of the company’s supply chain initiatives to reduce inventory and improve through-put, and the more effective targeting of inventory in recently opened stores. While inventory per square foot is lower, the company believes that stores are set earlier and with a better selection of merchandise for the fall season than in past years.

Currently the company has approximately $20 million of availability under its credit facility and is in compliance with the covenants of the facility. This facility, together with operating cash flow, will provide the company flexibility to fund its growth.


                           Gander Mountain Company
                     Statements of Operations - Unaudited
                    (In thousands, except per share data)

                                     13 Weeks Ended       26 Weeks Ended

                                   July 29,  July 30,   July 29,   July 30,
                                     2006      2005       2006       2005
  Sales                           $182,482   $173,787   $338,062   $309,046
  Cost of goods sold               138,408    132,931    266,996    242,880
  Gross profit                      44,074     40,856     71,066     66,166

  Operating expenses:
     Store operating expenses       36,472     38,133     72,327     70,703
     General and administrative
      expenses                       9,606      9,738     18,959     18,122
     Gain on contract settlement         -          -          -     (2,500)
     Pre-opening expenses              708      1,017      1,473      3,776
  Loss from operations              (2,712)    (8,032)   (21,693)   (23,935)
  Interest expense, net              4,847      2,349      8,833      4,014
  Loss before income taxes          (7,559)   (10,381)   (30,526)   (27,949)
  Income tax provision                   -          -          -          -
  Net loss                         $(7,559)  $(10,381)  $(30,526)  $(27,949)


  Basic and diluted loss per share  $(0.53)    $(0.73)    $(2.14)    $(1.96)

  Weighted average common shares
   outstanding                      14,293     14,258     14,289     14,247