Sport Chalet’s Losses Increase in Q3

Sales increased $0.3 million, or 0.4 percent, to $97.6 million for the 13 weeks ended Dec. 30, 2012 from $97.2 million for the 13 weeks ended January 1, 2012. The slight sales increase is primarily the result of sales increases in the Team Sales Division and online of 17.9 percent and 32.6 percent, respectively, partially offset by a 0.7 percent decrease in comparable store sales. The comparable store sales decrease of 0.7 percent, which is an improvement from the 2.0 percent decrease in the same period last year, was primarily due to warm and dry winter weather for the majority of the holiday shopping season exacerbated by a bad winter sports season last year, a change in our strategy to be less promotional, and general consumer caution from the uncertainty about regional and national economic conditions.

Gross profit increased $0.6 million, or 2.4 percent, and as a percent of sales increased to 27.6 percent from 27.1 percent. The increase in gross profit is primarily the result of the increase in sales and a reduction in markdowns from a change in our strategy to be less promotional during the holiday period, specifically on Black Friday/Cyber Monday weekend, partially offset by a payment received in the prior year from a landlord as part of a store’s closing.

Selling, general and administrative (“SG&A”) expenses increased $1.7 million, or 6.9 percent, primarily due to increases of $0.7 million in advertising and $0.6 million in labor-related expenses, such as salaries, payroll taxes and employee health insurance coverage. The increase in advertising served to focus customer attention on our technical merchandise and innovative brand offerings while being less promotional. As a percent of sales, SG&A increased to 26.7 percent from 25.1 percent. Depreciation decreased $0.4 million as a result of the low level of capital expenditures in recent fiscal years with no new store openings or significant remodels.

Net loss for the quarter ended December 30, 2012 increased $0.8 million to $1.9 million, or $0.13 per diluted share, from a net loss of $1.0 million, or $0.07 per diluted share, for the quarter ended January 1, 2012.

Craig Levra, Chairman and CEO, stated, “While this was a tough holiday season for many retailers, our third quarter results were well below our expectations. Following a strong summer and fall, positive sales trends deteriorated significantly in November and for the first two weeks of December. Unseasonably warm and dry weather coming on top of a bad winter sports season last year, combined with our customers general economic uncertainty and our desire to be less promotional all contributed to the decrease in comparable store sales. We have exited the holiday season with our inventory well positioned, having maintained our strong pricing discipline and brand integrity.  Additionally, we are encouraged by the improvement in sales trends since mid-December and its continuation into our fourth quarter as comparable store sales increased 20.3 percent through the five weeks ended February 3, 2013.”

Levra continued by noting, “We believe that the January sales numbers reflect both the return to more normal winter weather conditions and the continued response of our customers to our strategy of being first to market with performance, technology and lifestyle merchandise as evidenced by our growth in average ticket size. In addition to our differentiated product offerings, our Team Sales Division and online sales also are essential channels for growth and expansion of our footprint and customer base. Therefore, we continue to heavily invest in these areas where we believe we can distinguish ourselves from our competition and provide the greatest financial return. To that end, a prioritization of talent and resources is underway to continue growing businesses that deliver an overall seamless customer experience while more closely linking online, Team Sales Division and our retail stores. Recent examples include our launch of same day delivery currently being tested in three select markets and online drop ship to customers with vendor inventory to expand our product offering both online and in stores.”

Nine-Month Results

For the nine months ended December 30, 2012, sales increased 1.8 percent to $272.9 million from $268.0 million for the first nine months of the prior fiscal year. The sales increase is primarily due to a comparable store sales increase of 2.3 percent, while sales for the Team Sales Division and online increased 18.6 percent and 21.6 percent, respectively, partially offset by one store closure which contributed $3.2 million in sales in the prior year.

Gross profit as a percent of sales decreased to 27.7 percent from 28.3 percent for the first nine months of last year. The 0.6 percent decrease as a percent of sales is primarily due to costs related to ongoing customer satisfaction initiatives implemented in August 2011, changes in merchandise costs and in the product mix, and a payment received in the prior year from a landlord as part of a store’s closing.

SG&A expenses increased $0.4 million, or 0.6 percent, primarily due to an increase of $1.0 million in advertising partially offset by savings from labor-related expenses, such as self-insurance for employee health insurance coverage and stock option expense. SG&A expenses as a percent of sales decreased to 25.2 percent from 25.5 percent.  Depreciation decreased $1.2 million as a result of the low level of capital expenditures in recent fiscal years with no new store openings or significant remodels.

The Company’s net loss for the nine months ended December 30, 2012 decreased to $1.0 million, or $0.07 per diluted share, from a net loss of $1.3 million, or $0.09 per diluted share, for the same period last year.

Liquidity

On Dec. 30, 2012, the Company’s bank credit facility had a borrowing capacity of $70.0 million, of which the Company utilized $40.8 million (including a letter of credit for $3.6 million) and had $37.0 million in availability including cash compared to $36.9 million in availability including cash for the same period ended last year. The amount of availability fluctuates due to seasonal changes throughout the year.

New Store Opening

As previously announced, the Company currently plans to open a next generation Sport Chalet this summer in Downtown Los Angeles. Designed by Gensler, the world’s leading architect, this store will incorporate a new design template of enhanced displays, fixtures, and graphics to reinforce the Sport Chalet brand and its market positioning as a destination for premium brands, technical merchandise and the highest quality service offerings. Sport Chalet will be an anchor tenant at Brookfield Office Properties FIGat7th, the destination retail center at the intersection of Figueroa Street and 7th Street that has undergone a $40 million redevelopment. The store will occupy 27,300 square feet of space at the lower courtyard level, and will join City Target as the first new anchors at the redeveloped FIGat7th.  While the Company currently has no plans to open additional stores and future store openings are dependent on the availability of financing, it believes this new concept will allow an immediate opportunity for growth across a wider geography.

Existing Store Closings

The Company currently plans to close two existing stores in fiscal 2014. The two stores, which are located in Antioch, California and Phoenix, Arizona, are being closed as part of the Company’s ongoing and rigorous approach to its portfolio of stores, allocating resources towards the greatest growth opportunities, as well as unwavering commitment to its long-term business strategy of returning to sustained profitability.