Sport Chalet Swings to Q2 Profit, but Disappoints…

Sport Chalet, Inc. saw a one day shift in its weekly reporting calendar impact sales for the fiscal second quarter ended October 1, but modest sales gains at its more mature stores were the real culprit in holding Sport Chalet back from more impressive growth for the period. Six new stores opened since the fiscal second quarter last year contributed $9.0 million in sales on a same-day basis and comps rose 3.0% on the same basis. Company Chairman and CEO Craig Levra said that the mountain shop business was a challenge in Q2 and cycling challenged them “a wee bit” as well. He said golf was “a bit choppy.” He said they are bringing in 2007 golf product early and are seeing strong results in their new cycling program and the mountain shop. SPCH shifted its calendar to close each week on Sunday, which now aligns their internal reporting with their public reporting. Because of the change, the quarter was one day shorter this year, impacting total sales by $1.8 million.

The gross margin improvement was said to be the result of lower levels of markdowns related to lower average inventory levels per store, partially offset by increased occupancy costs from the new stores. SG&A increased 270 basis points to 29.1% of sales when excluding the impact of the recapitalization last year, an increase that was due primarily to “reduced leverage on modest sales from mature stores as well as increased costs related to Sarbanes Oxley compliance, utilities, infrastructure investments and personnel.” Advertising expenses were 50 basis points higher this year as a percent of sales. The loss last year included about $8.5 million in SG&A expenses related to the recap effort. Excluding the recap impact and other one-time expenses, net income would have been down more than 35% for the period.

Mr. Levra sounded disappointed that second quarter did not mirror the strength of the retailer’s first quarter, but he was encouraged by the performance of the newer stores. Levra said that expansion will help offset the impact of a few under-performing stores, signaling the retailer’s intention to continue their store growth plans, but did admit that they saw some cannibalization of their store base. SPCH will open three more stores this month, expanding their base in both northern and southern California, and plan to have 64% of their store base either new or newly remodeled by the end of the fiscal year.