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SPCHA > SEC Filings for SPCHA > Form 10-Q on 10-Nov-2011All Recent SEC Filings

Show all filings for SPORT CHALET INC

Form 10-Q for SPORT CHALET INC


10-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements relating to trends in, or representing management's beliefs about, our future strategies, operations and financial results, as well as other statements including words such as "believe," "anticipate," "expect," "estimate," "predict," "intend," "plan," "project," "will," "could," "may," "might" or any variations of such words or other words with similar meanings. Forward-looking statements are made based upon management's current expectations and beliefs concerning trends and future developments and their potential effects on the Company. You are cautioned not to place undue reliance on forward-looking statements as predictions of actual results. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which are discussed in further detail under "- Factors That May Affect Future Results" and "Risk Factors." We do not assume, and specifically disclaim, any obligation to update any forward-looking statements, which speak only as of the date made.

The following should be read in conjunction with the Company's financial statements and related notes thereto provided under "Item 1-Financial Statements" above. For purposes of "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," the 13 and 26 weeks ended October 2, 2011 are compared to the 13 and 26 weeks ended September 26, 2010, except for comparable store sales results, which compare the 13 and 26 weeks ended October 2, 2011 to the 13 and 26 weeks ended October 3, 2010.

General Overview

Sport Chalet, Inc. (referred to as the "Company," "Sport Chalet," "we," "us," and "our") is a leading operator of full-service, specialty sporting goods stores offering a broad assortment of brand name sporting goods equipment, apparel, and footwear. As of October 2, 2011, we operated 55 stores, including 34 locations in Southern California, nine in Northern California, three in Nevada, eight in Arizona and one in Utah, comprising a total of over two million square feet of retail space. These stores average approximately 41,000 square feet in size. Our stores offer over 50 specialty services for the sports enthusiast, including climbing, backcountry skiing, ski mountaineering, avalanche education, and mountain trekking instruction, car rack installation, snowboard and ski rental and repair, Scuba training and certification, Scuba boat charters, team sales, custom golf club fitting, racquet stringing, and bicycle tune-up and repair. In addition, we have a Team Sales Division and an online store at sportchalet.com.


In 1959, Norbert Olberz, our founder (the "Founder"), purchased a small ski and tennis shop in La Caņada, California. A focus on providing quality merchandise with outstanding customer service was the foundation of Norbert's vision. As a true pioneer in the industry, Norbert's goal was: to "see things through the eyes of the customer;" to "do a thousand things a little bit better;" to focus on "not being the biggest, but the best," to "be the image of the sportsperson," and to "create ease of shopping."

Business Strategy

Our strategy is to be a leading specialty retailer by being first to market with performance, technology and lifestyle merchandise for the serious sports enthusiast. We enhance our customer's shopping experience with a well-trained sales staff who earn recognition and advancement based on their demonstrated merchandise and specialty service knowledge. This strategy is supported by our investments in technology and marketing to understand customer and merchandise behavior. Through our customer relationship management program, Action Pass, we are able to fully analyze each member's buying pattern by store and by season, including frequency and specialty services purchased. In addition, as a direct result of our earlier investment in information technology, we are able to understand how each item we sell performs in each store, by size and by color. We study our customer's online behavior and how they use our website to learn more about the merchandise and services we offer in our stores, as well as their online purchasing behavior. This data helps us to understand our business within a diverse marketplace and to make more informed decisions relating to marketing, store assortments, employee staffing and training, and store location planning both on a short-term tactical basis as well as on a long-term strategic basis.

Our stores are located in states that are among those hardest hit by the severe downturn in the macroeconomic environment. As a result, our sales, which are largely dependent on the level of consumer spending in the geographic regions surrounding our stores, declined and we incurred substantial losses in fiscal 2009 and fiscal 2010. During fiscal 2009, we began aggressively taking action by examining our practices, assumptions, models and costs in an effort to modify our business model to make the Company more efficient. Continuing into fiscal 2010, we focused on improving liquidity and reducing operating expenses. In fiscal 2011, we reinforced our commitment to be first to market with performance, technology and lifestyle merchandise by expanding our specialty brands and continuing to emphasize the availability and proficiency of our sales staff while many of our competitors sought to emphasize value pricing and to severely reduce store staffing. As a result of these efforts, we significantly reduced our net loss for fiscal 2011 to $3.0 million, or $0.21 per diluted share, compared to a net loss of $8.3 million, or $0.59 per diluted share, for fiscal 2010 and a net loss of $52.2 million, or $3.70 per diluted share, for fiscal 2009. Additionally, we reduced our net loss for the first half of fiscal 2012 to $0.2 million, or $0.02 per diluted share, compared to a net loss of $2.5 million, or $0.17 per diluted share, for the first half of fiscal 2011.

Our comparable store sales, which also declined during the downturn, began to stabilize in fiscal 2011 compared to the significant decreases in fiscal 2009 and fiscal 2010. From the fourth quarter of fiscal 2011 to the second quarter of fiscal 2012, comparable store sales have been positive and improving each quarter (Q4: 1.3%, Q1: 2.3%, and Q2: 3.1%). For the 26 weeks ended October 2, 2011 comparable store sales increased 2.7%. A store's sales are included in the comparable store sales calculation in the quarter following its twelfth full month of operation. We remain focused on continued improvement and return to profitability through the following operating and strategic initiatives:


? Striving to have the best trained experts in merchandise and specialty services.

? Continuing to micro-merchandise each store to best fit to its individual store market area and customer base.

? Continuing to improve the functionality and efficiency of sportchalet.com.

? Utilizing our growing Action Pass member data.

? Continuing to refine and expand our Team Sales Division.

? Fully leveraging our information systems.

? Refining our store strategy by evaluating each of our store locations.

Despite a restrictive credit market, we entered into an expanded credit facility in October 2010 that has increased our availability and reduced interest rates. The increased availability under the credit facility provides us with the financial flexibility to pursue our strategic plan and enhances our vendor relationships to source the best performance, technology and lifestyle merchandise.

Although no assurance can be given about the ultimate impact of these initiatives or of the overall economic climate, we believe these initiatives will position us for better results in the future as the economy improves.

Results of Operations

13 Weeks Ended October 2, 2011 Compared to September 26, 2010

The following table sets forth statements of operations data and relative
percentages of net sales for the 13 weeks ended October 2, 2011 compared to the
13 weeks ended September 26, 2010 (dollar amounts in thousands, except per share
amounts):

                                                 13 weeks ended
                                 October 2, 2011            September 26, 2010           Dollar       Percentage
                               Amount       Percent        Amount         Percent        Change         Change
Net sales                     $ 87,980         100.0 %   $    88,763         100.0 %    $   (783 )           (0.9 %)
Gross profit                    25,699          29.2 %        25,008          28.2 %         691              2.8 %
Selling, general and
administrative expenses         22,340          25.4 %        22,328          25.2 %          12              0.1 %
Depreciation and
amortization                     2,329           2.6 %         2,549           2.9 %        (220 )           (8.6 %)
Income from operations           1,030           1.2 %           131           0.1 %         899            686.3 %
Interest expense                   431           0.5 %           649           0.7 %        (218 )          (33.6 %)
Net income (loss)                  599           0.7 %          (518 )        (0.6 %)      1,117                *

Earnings (loss) per share:
Basic                         $   0.04                   $     (0.04 )                  $   0.08                *
Diluted                       $   0.04                   $     (0.04 )                  $   0.08                *

*Percentage change not
meaningful.

Sales decreased $0.8 million, or 0.9%, to $88.0 million for the 13 weeks ended October 2, 2011 from $88.8 million for the 13 weeks ended September 26, 2010. The decrease is primarily due to a calendar shift decrease of $2.5 million, partially offset by a comparable store sales increase of 3.1% and an online sales increase of 18%. The increase in comparable store sales marked the third consecutive quarterly increase as well as an improvement over the prior two quarters (Q4: 1.3%, Q1: 2.3%, and Q2: 3.1%). The impact of the calendar shift is primarily the result of the Fourth of July weekend being included in the first quarter of fiscal 2012 compared to the second quarter in fiscal 2011. For a more detailed discussion of the calendar shift, see "Item 1. Business - Fiscal Calendar" in the Company's Annual Report on Form 10-K for the fiscal year ended April 3, 2011.


Gross profit increased $0.7 million, or 2.8%, and as a percent of sales increased to 29.2% from 28.2%, primarily due to a decrease in markdowns, as a result of a change in promotional strategy related to the Labor Day weekend, and an improvement in inventory shrinkage.

Selling, general and administrative (SG&A) expenses slightly increased $0.1 million, or 0.1%. As a percent of sales, SG&A increased to 25.4% from 25.2%, primarily due to the decrease in leverage from the decline in sales.

Net income for the quarter ended October 2, 2011 increased by $1.1 million to $0.6 million, or $0.04 per diluted share, compared to a net loss of $0.5 million, or $0.04 per diluted share, for the quarter ended September 26, 2010.

26 Weeks Ended October 2, 2011 Compared to September 26, 2010

The following table sets forth statements of operations data and relative
percentages of net sales for the 26 weeks ended October 2, 2011 compared to the
26 weeks ended September 26, 2010 (dollar amounts in thousands, except per share
amounts):

                                                   26 weeks ended
                                   October 2, 2011             September 26, 2010           Dollar       Percentage
                                Amount        Percent         Amount         Percent        Change         Change
Net sales                      $ 170,804         100.0 %    $   168,450         100.0 %    $  2,354              1.4 %
Gross profit                      49,523          29.0 %         47,548          28.2 %       1,975              4.2 %
Selling, general and
administrative expenses           43,955          25.7 %         43,480          25.8 %         475              1.1 %
Depreciation and
amortization                       4,897           2.9 %          5,188           3.1 %        (291 )           (5.6 %)
Income (loss) from
operations                           671           0.4 %         (1,120 )        (0.7 %)      1,791                *
Interest expense                     896           0.5 %          1,341           0.8 %        (445 )          (33.2 %)
Loss before income taxes            (225 )        (0.1 %)        (2,461 )        (1.5 %)      2,236             90.9 %
Income tax provision                   2           0.0 %              -           0.0 %           2                *
Net loss                            (227 )        (0.1 %)        (2,461 )        (1.5 %)      2,234             90.8 %

Loss per share:
Basic                          $   (0.02 )                  $     (0.17 )                  $   0.15             90.8 %
Diluted                        $   (0.02 )                  $     (0.17 )                  $   0.15             90.8 %

*Percentage change not
meaningful.

Sales increased $2.4 million, or 1.4%, to $170.8 million for the 26 weeks ended October 2, 2011 from $168.5 million for the 26 weeks ended September 26, 2010. The increase is primarily due to a comparable store sales increase of 2.7% and an online sales increase of 39%, partially offset by a calendar shift decrease of $1.2 million. For a more detailed discussion of the calendar shift, see "Item 1. Business - Fiscal Calendar" in the Company's Annual Report on Form 10-K for the fiscal year ended April 3, 2011.


Gross profit increased $2.0 million, or 4.2%, and as a percent of sales increased to 29.0% from 28.2%, primarily due to a decrease in markdowns, an improvement in inventory shrinkage and a decrease in rent expense.

SG&A expenses increased $0.5 million or 1.1%. As a percent of sales, SG&A decreased to 25.7% from 25.8%.

Net loss for the period ended October 2, 2011 decreased by $2.2 million to $0.2 million, or $0.02 per diluted share, from a net loss of $2.5 million, or $0.17 per diluted share, for the period ended September 26, 2010.

Liquidity and Capital Resources

In the absence of new store openings, our primary capital requirements currently are for inventory replenishment and store operations. From fiscal 2007 to fiscal 2010, we increasingly relied on bank borrowings for our capital needs to fund new store openings and losses from operations. For fiscal 2011, we generated positive cash from operating activities and reduced the utilization of our bank credit facility. We believe that cash from operations will be sufficient to fund currently anticipated requirements for the next 12 months and further reduce our dependence on bank borrowings.

Net cash provided by operating activities has generally been the result of net loss, adjusted for depreciation and amortization, and changes in inventory along with related accounts payable. In October 2011, we closed one existing store to complete this store's relocation to a larger store in an area with more appealing customer demographics, which opened in June 2008. We received the final installment payment of $0.9 million from the landlord as part of the closing terms. The following table shows the more significant items for the 26 weeks ended October 3, 2011 and September 26, 2010:

                                                         26 weeks ended
                                                                     September 26,
                                                October 2, 2011          2010
                                                         (in thousands)
   Net loss                                    $            (227 )   $      (2,461 )
   Depreciation and amortization                           4,897             5,189
   Merchandise inventories                                (2,303 )           3,572
   Accounts payable                                        6,416             2,073
   Accounts receivable                                    (3,122 )          (2,146 )
   Other accrued expenses                                 (1,856 )          (2,301 )
   Other                                                    (682 )             132
   Net cash provided by operating activities   $           3,123     $       4,058

Inventory increased $2.3 million in the 26 weeks ended October 2, 2011 primarily due to the seasonal build up for winter and decreased $3.6 million in the 26 weeks ended September 26, 2010 as we reduced the higher than planned inventory levels at the end of fiscal 2010. Our average inventory per store increased 2.3% to $1.74 million from $1.70 million as of September 26, 2010, primarily due to the increase in sales and the planned earlier receipt of winter merchandise.

Accounts payable changes are generally related to inventory changes. However, the timing of vendor payments or receipt of merchandise near the end of the period influences this relationship.


Net cash used in investing activities is primarily for capital expenditures which are expected to remain nominal with no planned new store openings or significant remodels.

Net cash provided by financing activities reflects advances and repayments of borrowings under our revolving credit facility. Our revolving credit facility with Bank of America, N.A. (the "Lender") provides for advances up to $65.0 million increasing to $70.0 million, from September 1st of each year through December 31st of each year. This facility also provides for up to $10.0 million in authorized letters of credit. The amount we may borrow under this credit facility (the "Line Amount") is limited to a percentage of the value of accounts receivable and eligible inventory, minus certain reserves. A significant decrease in eligible inventory due to our vendors' unwillingness to ship us merchandise, the aging of inventory and/or an unfavorable inventory appraisal could have an adverse effect on our borrowing capacity under our credit facility, which may adversely affect the adequacy of our working capital. Interest accrues at the Lender's prime rate plus 1.75% (5.00% at October 2, 2011), or at our option we can fix the rate for a period of time at LIBOR plus 2.75%. In addition, there is an unused commitment fee of 0.25% per year, based on a weighted average formula. This credit facility expires in October 2014. Our obligation to the Lender is presently secured by a first priority lien on substantially all of our non-real estate assets, and we are subject to, among others, a covenant that we maintain a minimum monthly cumulative EBITDA on a trailing 12-month basis. The covenant would only apply if our availability falls below the greater of (x) $5.0 million and (y) 10% of the Line Amount or the borrowing base, whichever is less. In the event of a significant decrease in availability under our credit facility, it is highly likely that the EBITDA covenant would be violated.

On October 2, 2011, the bank credit facility had a borrowing capacity of $59.9 million, of which we utilized $43.6 million (including a letter of credit for $2.6 million) and had $16.3 million in availability, $10.3 million above the EBITDA covenant availability requirement.

Contractual obligations and commitments related to operating lease obligations, employment contracts and letters of credit are excluded from the balance sheet in accordance with accounting principles generally accepted in the United States.

The following table summarizes such obligations as of October 2, 2011:


                                                            Payment due by period
Contractual Obligations                          Less than                                       More than
(in thousands)                      Total         1 year         2-3 years       4-5 years        5 years
Operating leases (1)              $ 161,858     $    31,324     $    54,159     $    34,801     $    41,574
Capital leases                        1,641             606             991              45               -
Revolving credit facility (2)        41,074          41,074               -               -               -
Letters of credit                     2,550           2,550               -               -               -
Employment contracts (3)                192              82             110               -               -
Total contractual obligations     $ 207,315     $    75,636     $    55,260     $    34,846     $    41,574

(1) Amounts include the direct lease obligations. Other obligations required by the lease agreements such as contingent rent based on sales, common area maintenance, property taxes and insurance are not fixed amounts and, therefore, are not included. The amount of the excluded expenses are: $10.0 million and $11.5 million for fiscal years 2011 and 2010, respectively. Operating lease obligations reflect savings from lease modifications, assume "kick-out clauses" will be excercised and do not reflect potential renewals or replacements of expiring leases.

(2) Periodic interest payments on the credit facility are not included in the preceding table because interest expense is based on variable indices, and the balance of our credit facility fluctuates daily depending on operating, investing and financing cash flows. The credit facility expires in October 2014 and is shown as less than 1 year due to a "lock box arrangement" per ASC 470-10-45-5A, Debt.

(3) On July 15, 2011, Norbert Olberz passed away. Pursuant to his amended employment contract dated April 1, 2000, upon his death, Irene Olberz will be paid a base salary of $0.1 million per year until March 31, 2014.

We lease all of our existing store locations. The leases for most of the existing stores are for approximately ten-year terms plus multiple option periods under non-cancelable operating leases with scheduled rent increases. Some of the leases provide for contingent rent based upon a percentage of sales in excess of specified minimums. Additionally, some of the leases contain kick-out clauses, which allow us to terminate the lease at our option at a specified date if contractually specified minimum sales volumes are not exceeded. If there are any free rent periods, they are accounted for on a straight line basis over the lease term, beginning on the date of initial possession, which is generally when we enter the space and begin the construction build-out. The amount of the excess of straight line rent expense over scheduled payments is recorded as a deferred rent liability. Construction allowances and other such lease incentives are recorded as deferred credits, and are amortized on a straight line basis as a reduction of rent expense over the lease term. All of the leases obligate us to pay costs of maintenance, utilities, and property taxes.

Generally, our purchase obligations are cancelable 45 days prior to shipment from our vendors. Letters of credit amounting to approximately $2.6 million were outstanding as of October 2, 2011 and expire within one year.

No cash dividends have been declared on Class A Common Stock and Class B Common Stock as we intend to retain earnings for use in the operation of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

Critical Accounting Policies and Use of Estimates

In preparing our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. Actual results may differ from these estimates. As discussed in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended April 3, 2011, we consider our policies on inventory valuation, revenue recognition, gift card redemption, self insurance reserves, impairment of long-lived assets and estimation of net deferred income tax asset valuation allowance to be the most critical in understanding the significant estimates and judgments that are involved in preparing our consolidated financial statements.


In August 2011, we updated our merchandise return policy to enhance our customer's shopping experience. The updated return policy is: "If at any time you are not completely satisfied with a service or item purchased, simply return it so we can make it right." As we estimate a reserve for projected merchandise returns based on historical experience, the actual returns could differ from the reserve, which could impact sales. We do not believe there is a reasonable likelihood that there will be a material change in the estimates we use to reserve for returns as a result of the change in our return policy. However, if actual results are not consistent with our estimates, we may be exposed to losses or gains that could be material.

On June 1, 2011, we began to self-insure for a significant portion of employee health insurance coverage. When estimating our self-insured liabilities, which include employee health, property, general liability and workers' compensation insurance at various levels, we consider a number of factors, including historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Although we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. This is particularly pertinent as it relates to employee health insurance, where our costs could be affected by seasonality and other factors, which could cause costs to vary widely and unpredictably from period to period.

Factors That May Affect Future Results

Our short-term and long-term success is subject to many factors that are beyond our control. Stockholders and prospective stockholders in the Company should carefully consider the following risk factors, in addition to the information contained elsewhere in this Report. This Report on Form 10-Q contains forward-looking statements, which are subject to a variety of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but are not limited to, those set forth below. . . .

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