Sport Chalet Q3 Sales Decline 10.3%

Sport Chalet, Inc. saw sales for its third quarter of FY09 ended Dec. 28, 2008 declined 10.3% to $104.6 million compared to $116.6 million last year. Eight new stores not included in same store sales contributed $4.7 million in sales for the quarter while same store sales decreased 15.4%. The company said same store sales were negatively impacted primarily by soft macroeconomic conditions, which included weak housing trends, rising unemployment, and the state budget crisis, as well as unseasonably warm weather in the company's core markets.

Gross profit as a percent of sales was 22.3% compared to 30.2% for the third quarter of last year. The decline was primarily due to increased promotional activity, increased rent as a percent of sales in newer stores and increased use of Action Pass as consumers accumulate points that allow for certain reward certificates to be used toward their purchases. Selling, general and administrative expenses as a percent of sales increased to 27.8% from 26.2% in the same period last year, reflecting the decrease in comparable store sales, the expenses associated with new stores which take time to ramp up and an increase in professional fees.

For the three months ended Dec. 28, 2008, the company recorded a non-cash impairment charge of $10.7 million pre-tax, or 76 cents per diluted share, related to certain stores. In addition, a tax provision of $11.6 million was recorded for the three months ended Dec. 28, 2008 as there was no valuation allowance on the net deferred tax assets at Sept. 28, 2008. Based on the magnitude of the third quarter fiscal 2009 loss, the cumulative losses to date in fiscal 2009 and other available objective evidence, the company concluded that a valuation allowance equal to all of the net deferred tax assets should be recorded. The combined total of the non-cash impairment charge and valuation allowance was $22.3 million, or $1.58 per diluted share.

Excluding the non-cash impairment charge and the affect of the valuation allowance in the third quarter of fiscal 2009 as well as a non-cash impairment charge of $2.1 million pre-tax, or 9 cents per diluted share, recorded in the third quarter of the prior fiscal year, net loss was $10.1 million, or 71 cents per diluted share, compared to net income of $0.6 million, or 4 cents per diluted share, for the third quarter last year. Including the non-cash impairment charge and valuation allowance, net loss for the third quarter of 2009 was $32.4 million, or $2.29 per diluted share, compared to a net loss of $0.7 million, or 5 cents per diluted share, for the third quarter last year.

“During this unprecedented time in the economic history of our country, we continued to experience a challenging retail environment and decreased consumer spending,” stated Chairman and CEO Craig Levra. “This, combined with unseasonably warm weather, negatively impacted our top and bottom line performance. As a result, we accelerated our promotional activity and cost reduction initiatives, which we believe are essential as we navigate through these difficult times. At the same time, our team successfully managed aged inventory to a historical low. We are leaving no stone unturned to reduce costs while also improving our operations and meeting the needs for our customers.''

Nine-Month Results

For the nine months ended Dec. 28, 2008, sales decreased 5.8% to $288.1 million from $305.8 million for the first nine months of the prior year. Sales from eleven new stores not included in same store sales contributed $15.1 million to total sales for the first nine months of fiscal 2009. Same store sales decreased 11.1% for the nine-month period.

Gross profit as a percent of sales was 24.9% for the nine months ended Dec. 28, 2008 compared to 29.8% in the same period last year. The decline was due to increased promotional activity as well as increased rent as a percent of sales in newer stores and increased use of Action Pass. Selling, general and administrative expenses as a percent of sales for the nine-month period was 29.0% compared to 25.9% in the same period of fiscal 2008, reflecting a decrease in comparable store sales, increased expenses from new stores and an increase in professional fees.

Excluding the non-cash impairment charge from both fiscal years and the affect of the valuation allowance in the current fiscal year, net loss was $24.6 million, or $1.74 per diluted share, compared to net income of $0.7 million, or 5 cents per diluted share, for the same period last year. Including the aforementioned non-cash impairment charge and an income tax valuation charge of $5.8 million, or 41 cents per diluted share for the nine months ended Dec. 28, 2008, net loss was $41.1 million, or $2.91 per diluted share, for the nine months ended December 28, 2008, compared to a net loss of $0.6 million, or 4 cents per diluted share, for the same period last year.

“Given that we expect fiscal 2009 will continue to be extremely challenging, we will maintain our prudent approach toward managing all areas of the organization,” continued Levra. “As such, we have appropriately reduced our capital expenditures for the year including our store opening program and other discretionary costs. We will continue to focus on strengthening our balance sheet to improve our cash flow and ensure that we have the appropriate resources to fund our operations, despite ongoing pressure on our top line. While we remain committed to meeting the challenges posed by the weak macroeconomic conditions across all of our markets, the Board of Directors continues to evaluate all strategic alternatives to achieve maximum value for Sport Chalet shareholders.''