This Annual Report on Form 10-K 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 "Item 1A. 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 "Item 6. Selected Financial Data" and our consolidated financial statements and related notes thereto.

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. Over the last 53 years, Sport Chalet has grown into a chain of 54 specialty sporting goods stores serving California, Nevada, Arizona and Utah, as well as a Team Sales Division and an online store at sportchalet.com.

Our stores are located in states that have experienced, since the downturn that began in 2008, the worst macroeconomic conditions in the nation, as evidenced by statistics including, but not limited to, high unemployment rates, foreclosure rates and bankruptcy filings. 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 and fiscal 2010, we aggressively took action to modify our business model to make the Company more efficient, improve our liquidity and reduce operating expenses. These efforts continued in fiscal 2011 and fiscal 2012, while at the same time, 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 emphasized value pricing and severely reduced store staffing. As a result of these efforts, we reduced our net loss for fiscal 2012 to $5.1 million, or $0.36 per diluted share, compared to net losses of $8.3 million, or $0.59 per diluted share, and $52.2 million, or $3.70 per diluted share, for fiscal years 2010 and 2009, respectively. For fiscal 2012, our losses increased from a net loss of $3.0 million, or $0.21 per diluted share, for fiscal 2011 primarily due to the unseasonably warm and dry winter weather experienced in the second half of fiscal 2012. With a more normal winter, we believe the improvements we have made to our business over the past few years have positioned us to return to profitability for fiscal 2013. Our comparable store sales, which declined significantly during fiscal 2009 and fiscal 2010, stabilized in the latter part of fiscal 2011 and in fiscal 2012. In fiscal 2013, our comparable store sales increased 2.8% for the nine weeks ended June 3, 2012. A store's sales are included in the comparable store sales calculation in the quarter following its twelfth full month of operation.

Results of Operations

Fiscal 2012 Compared to Fiscal 2011

The following table sets forth statement of operations data determined in accordance with accounting principles generally accepted in the United States ("GAAP"), the relative percentages of net sales, and the percentage increase or decrease, for fiscal years 2012 and 2011 (in thousands, except per share amounts). Fiscal 2011 was a 53 week year and thus included one extra week in the fourth quarter and ended on April 3, 2011. The results for the 52 weeks ended April 1, 2012 (fiscal 2012) are compared to the 53 weeks ended April 3, 2011 (fiscal 2011), except for sales comparisons that exclude the extra week in fiscal year 2011 and compare the 52 weeks ended April 1, 2012 to the 52 weeks ended April 3, 2011 (excluding the first week of fiscal 2011).

                                                Fiscal year
                                     2012                          2011                 Dollar        Percentage
                            Amount        Percent         Amount        Percent          change         change
Net sales                  $ 349,883          100.0 %    $ 362,483          100.0 %    $ (12,600 )           (3.5 %)
Gross profit                  95,373           27.3 %      102,352           28.2 %       (6,979 )           (6.8 %)
Selling, general and
administrative expenses       89,203           25.5 %       92,647           25.6 %       (3,444 )           (3.7 %)
Depreciation and
amortization                   9,450            2.7 %       10,351            2.9 %         (901 )           (8.7 %)
Loss from operations          (3,280 )         (0.9 %)        (646 )         (0.2 %)      (2,634 )          407.7 %
Loss before income taxes      (5,070 )         (1.4 %)      (3,012 )         (0.8 %)      (2,058 )           68.3 %
Income tax provision               2            0.0 %            3            0.0 %           (1 )          (33.3 %)
Net loss                      (5,072 )         (1.4 %)      (3,015 )         (0.8 %)      (2,057 )           68.2 %

Loss per share:
Basic and diluted          $   (0.36 )                   $   (0.21 )                   $   (0.14 )           68.2 %

Net sales decreased $12.6 million, or 3.5%, to $349.9 million for fiscal 2012 from $362.5 million for fiscal 2011. The decrease in sales is primarily due to the extra week in fiscal 2011 that contributed $5.8 million to sales in that fiscal year. Excluding the extra week in fiscal year 2011, net sales decreased $6.8 million, or 1.9%, primarily due to a store closure decrease of $4.1 million, a comparable store sales decrease of $1.9 million, or 0.6%, and an increase in the usage of our customer relationship management program, Action Pass, which requires sales be reduced as points are earned, partially offset by an increase in online business of 22.0%. The comparable store sales decrease was due to the unseasonably warm and dry winter weather experienced in the second half of the year, which significantly affected snowfall at the resorts most frequented by our customers. This resulted in a 25.9% sales decrease in winter related merchandise, which was partially offset by a 4.6% sales increase in non-winter categories in the second half of the year. Online sales of winter related merchandise decreased 18.7% while online sales of non-winter categories increased 41.3% in the second half of the year. In October 2011, one store was closed to complete this store's relocation to a larger store in an area with more appealing customer demographics, which opened in June 2008.

Gross profit decreased $7.0 million, or 6.8%, primarily as a result of the decrease in sales. Additionally, a decrease in sales of winter rentals and repairs, which have higher margins, and an increase in the usage of Action Pass, negatively impacted gross profit as a percent of sales, which decreased to 27.3% from 28.2%.

Selling, general and administrative expenses ("SG&A") decreased $3.4 million, or 3.7%. The decrease is primarily due to savings of $1.9 million in labor to align to the lower sales trends, $1.6 million in insurance costs as a result of self-insuring for a significant portion of employee health insurance coverage, and the extra week in fiscal 2011. As a percent of sales, SG&A slightly decreased to 25.5% from 25.6%.

Depreciation expense decreased $0.9 million, or 8.7%, as a result of the low level of capital expenditures in recent fiscal years with no new store openings or significant remodels.

Net loss increased by $2.1 million, primarily due to the unseasonably warm and dry winter weather, to $5.1 million, or $0.36 per diluted share for fiscal 2012, from a net loss of $3.0 million, or $0.21 per diluted share for fiscal 2011.

Fourth Quarter 2012 Compared to Fourth Quarter 2011

The following tables set forth statement of income data and relative percentages of net sales, and the percentage increase or decrease, for the fourth quarter of fiscal years 2012 and 2011 (in thousands, except per share amounts). Fiscal 2011 was a 53 week year and thus included one extra week in the fourth quarter and ended on April 3, 2011. The results for the 13 weeks ended April 1, 2012 (fourth quarter of fiscal 2012) are compared to the 14 weeks ended April 3, 2011 (fourth quarter of fiscal 2011), except for sales comparisons that exclude the extra week in fiscal year 2011 and compare the 13 weeks ended April 1, 2012 to the 13 weeks ended April 3, 2011 (excluding the first week of the fourth quarter of fiscal 2011).

                                          Fiscal fourth quarter
                                    2012                          2011                Dollar        Percentage
                           Amount        Percent         Amount        Percent        change          change
Net sales                 $  81,856          100.0 %    $  98,205          100.0 %   $ (16,349 )          (16.6 %)
Gross profit                 19,544           23.9 %       28,440           29.0 %      (8,896 )          (31.3 %)
Selling, general and
administrative expenses      20,838           25.5 %       24,941           25.4 %      (4,103 )          (16.5 %)
Depreciation and
amortization                  2,085            2.5 %        2,707            2.8 %        (622 )          (23.0 %)
(Loss) income from
operations                   (3,379 )         (4.1 %)         792            0.8 %      (4,171 )              *
Interest expense                430            0.5 %          482            0.5 %         (52 )          (10.8 %)
(Loss) income before
income taxes                 (3,809 )         (4.7 %)         310            0.3 %      (4,119 )              *
Income tax provision              -            0.0 %            3            0.0 %          (3 )              *
Net (loss) income            (3,809 )         (4.7 %)         307            0.3 %      (4,116 )              *

(Loss) earnings per
share:
Basic and diluted         $   (0.27 )                   $    0.02                    $   (0.29 )              *

* Percentage change not meaningful

Net sales decreased $16.3 million, or 16.6%, to $81.9 million for the fourth quarter of fiscal 2012 from $98.2 million for the fourth quarter of fiscal 2011. The decrease in sales is primarily due to the extra week in the fourth quarter of fiscal 2011 that contributed $9.7 million to sales in that quarter. Excluding the extra week in the fourth quarter of fiscal year 2011, net sales decreased $6.6 million, or 7.5%, primarily due to a comparable store sales decrease of $4.4 million, or 5.3%, a store closure decrease of $2.0 million, and an increase in the usage of our customer relationship management program, Action Pass, which requires sales be reduced as points are earned, partially offset by an increase in online business of 11.5%. The comparable store sales decrease was due to the unseasonably warm and dry winter weather, which significantly affected snowfall at the resorts most frequented by our customers. This resulted in a 32.1% sales decrease in winter related merchandise, which was partially offset by a 2.6% sales increase in non-winter categories. Online sales of winter related merchandise decreased 27.7% while online sales of non-winter categories increased 56.9%.

Gross profit decreased $8.9 million, or 31.3%, primarily as a result of the decrease in sales. Additionally, a decrease in sales of winter rentals and repairs, which have higher margins, negatively impacted gross profit as a percent of sales, which decreased to 23.9% from 29.0%.

SG&A decreased $4.1 million, or 16.5%. The decrease is primarily due to savings of $2.1 million in labor to align to the lower sales trends, $0.6 million in insurance costs, and the extra week in fiscal 2011. As a percent of sales, SG&A slightly increased to 25.5% from 25.4% primarily due to the decrease in sales.

Depreciation expense decreased $0.6 million, or 23.0%, as a result of the low level of capital expenditures in recent fiscal years with no new store openings or significant remodels.

Net loss increased by $4.1 million, primarily due to the unseasonably warm and dry winter weather, to a loss of $3.8 million, or $0.27 per diluted share for the fourth quarter of fiscal 2012, compared to net income of $0.3 million, or $0.02 per diluted share for the fourth quarter of fiscal 2011.

Fiscal 2011 Compared to Fiscal 2010

The following table sets forth statement of operations data determined in accordance with GAAP, the relative percentages of net sales, and the percentage increase or decrease, for fiscal years 2011 and 2010 (in thousands, except per share amounts). Fiscal 2011 was a 53 week year and thus included one extra week in the fourth quarter and ended on April 3, 2011. The results for the 53 weeks ended April 3, 2011 (fiscal 2011) are compared to the 52 weeks ended March 28, 2010 (fiscal 2010), except for comparable store sales results, which compare the 52 weeks ended April 1, 2011 to the 52 weeks ended March 28, 2010.

                                             Fiscal year
                                  2011                          2010                 Dollar        Percentage
                         Amount        Percent         Amount        Percent         change          change
Net sales               $ 362,483          100.0 %    $ 353,695          100.0 %    $   8,788              2.5 %
Gross profit              102,352           28.2 %       94,822           26.8 %        7,530              7.9 %
Selling, general and
administrative
expenses                   92,647           25.6 %       85,894           24.3 %        6,753              7.9 %
Depreciation and
amortization               10,351            2.9 %       12,644            3.6 %       (2,293 )          (18.1 %)
Impairment charge               -            0.0 %       10,935            3.1 %      (10,935 )              *
Loss from operations         (646 )         (0.2 %)     (14,651 )         (4.1 %)      14,005            (95.6 %)
Interest expense            2,366            0.7 %        2,762            0.8 %         (396 )          (14.3 %)
Loss before income
taxes                      (3,012 )         (0.8 %)     (17,413 )         (4.9 %)      14,401            (82.7 %)
Income tax provision
(benefit)                       3            0.0 %       (9,139 )         (2.6 %)       9,142                *
Net loss                   (3,015 )         (0.8 %)      (8,274 )         (2.3 %)       5,259            (63.6 %)

Loss per share:
Basic and diluted       $   (0.21 )                   $   (0.59 )                   $    0.37            (63.7 %)

* Percentage change not meaningful

Net sales increased $8.8 million, or 2.5%, to $362.5 million for fiscal 2011 from $353.7 million for fiscal 2010. The change in sales is primarily due to the extra week in fiscal 2011 which contributed $5.9 million to sales. See "Item 1. Business - Fiscal Calendar." Excluding the extra week in fiscal year 2011, net sales increased $2.9 million, or 0.8% due to sales increases in online and Team Sales divisions of 110% and 15%, respectively, partially offset by a comparable store sales decrease of $1.3 million, or 0.4%. Continued weak macroeconomic conditions in our markets caused a slight decline in comparable store sales.

Gross profit increased $7.5 million, or 7.9%, primarily as a result of a decrease in rent expense of $3.9 million from successful landlord negotiations and the increase in sales. As a percent of sales, gross profit increased to 28.2% from 26.8%.

SG&A increased $6.8 million, or 7.9%. The increase is primarily due to an increase of $4.7 million in labor to sell higher priced specialty merchandise, which helped increase the dollar value of our average sales transaction by 2.0%, for incentive payments primarily paid to our sales staff, and for the extra week in fiscal 2011, as well as increases in workers compensation expense related to one major claim and credit card fees. As a percent of sales, SG&A increased to 25.6% from 24.3% as the leverage gained from the sales increase was offset by the higher labor expense.

Depreciation expense decreased $2.3 million, or 18.1%, as a result of the non-cash impairment charge of $10.9 million recorded in fiscal 2010 and the low level of capital expenditures in fiscal 2010 and fiscal 2011 with no new store openings or significant remodels.

In fiscal 2010, we recorded a tax benefit of $9.1 million due to a refund from a net operating loss carryback. We will not record income tax benefits until it is determined that is it more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets.

Net loss decreased by $5.3 million to $3.0 million, or $0.21 per diluted share for fiscal 2011, from a net loss of $8.3 million, or $0.59 per diluted share for fiscal 2010. Excluding the non-cash impairment charges and the effect of income taxes in fiscal years 2011 and 2010, we reduced our net loss by $3.5 million to $3.0 million, or $0.21 per diluted share for fiscal 2011, from a net loss of $6.5 million, or $0.46 per diluted share for fiscal 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 loan from $46.9 million (including a letter of credit of $1.6 million) at March 28, 2010 to $42.5 million (including a letter of credit of $1.6 million) at April 3, 2011. For fiscal 2012, our losses increased from fiscal 2011 primarily due to the unseasonably warm and dry winter weather and as a result, we slightly increased the utilization of our bank credit facility from $42.5 million (including a letter of credit of $1.6 million) at April 3, 2011 to $43.9 million (including a letter of credit of $2.6 million) at April 1, 2012. With a more normal winter, we believe the changes we have made to improve our business over the past few years have us well positioned for a return to profitability for fiscal 2013. We believe that cash from operations will be sufficient to fund currently anticipated requirements for the next 12 months and 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. As previously announced, we closed one store to complete this store's relocation to a larger store and we received the final installment payment of $0.9 million from the landlord as part of the closing terms in October 2011. The following table summarizes the more significant items for fiscal years ended April 1, 2012 and April 3, 2011:

                                                           Fiscal year
                                                        2012         2011
                                                         (in thousands)
          Net loss                                    $ (5,072 )   $ (3,015 )
          Depreciation and amortization                  9,450       10,351
          Merchandise inventories                       (4,592 )      3,692
          Accounts payable                               5,533       (3,392 )
          Prepaid expenses and other current assets      2,939       (3,307 )
          Deferred rent                                 (2,684 )     (1,001 )
          Other                                           (277 )       (554 )
          Net cash provided by operating activites    $  5,297     $  2,774

Inventory increased $4.6 million as average inventory per store increased 6.9% to $1.8 million from $1.7 million at the end of fiscal 2012 and fiscal 2011, respectively. The increase is primarily the carryover of winter related merchandise due to the lower than planned sales. The winter carryover inventory has been integrated into the inventory purchasing plans for fiscal 2013 and will result in higher than normal inventory levels through at least the third quarter of fiscal 2013.

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. For fiscal 2012, a portion of the winter carryover inventory has been granted extended dating by the vendors.

Prepaid expenses and other current assets can include approximately one month's rent, depending on the timing of our fiscal month end, as most leases require payment at the beginning of each calendar month. The additional week in fiscal 2011 resulted in one month's rent being reflected in prepaid expenses, while fiscal 2012 did not.

We will not record income tax benefits until it is determined that is it more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. Our valuation allowance is equal to all of the net deferred tax assets, $25.1 million. We have federal and state net operating loss carryforwards of $17.2 million and $45.5 million, respectively, which can be carried forward for a period ranging from 16 to 20 years.

Net cash used in investing activities and fixed assets acquired on credit and under capital leases are for capital expenditures as summarized below:

                                                  Fiscal year
                                          2012        2011       2010
                                           (in thousands)
                   Existing stores       $ 1,064     $   166     $ 318
                   Information systems     1,859       1,485       281
                   Rental equipment        1,903         661       139
                   Total                 $ 4,826     $ 2,312     $ 738

Forecasted capital expenditures for fiscal 2013 are expected to be approximately $5.5 million primarily for new rental equipment, information systems and one new store. Approximately $1.5 million for the new store will be reimbursed by the landlord upon opening in early fiscal 2014. We have not opened new stores since fiscal 2009 and currently do not anticipate opening new stores in fiscal 2013. We currently have plans to open one new store in our core Southern California market in early fiscal 2014.

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 vendor's 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 April 1, 2012), 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 Fixed Charge Coverage Ratio (replacing a previous EBITDA covenant) measured monthly on a trailing 12-month basis between 0.80 to 1.00 and 1.25 to 1.00 (varying from quarter to quarter). 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 covenant would be violated.

In fiscal 2012, our peak borrowing occurred during the week ended December 11, 2011, at which time our credit facility had a borrowing capacity of $70.0 million, of which we utilized $52.7 million (including a letter of credit of $2.6 million) and had $17.3 million in availability. On April 1, 2012, our credit facility had a borrowing capacity of $59.5 million, of which we utilized $43.9 million (including a letter of credit of $2.6 million) and had $15.6 million in availability, $9.6 million above the availability requirement of $6.0 million.

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 our contractual obligations as of April 1, 2012:

                                                          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)            $  149,000     $    30,862     $    50,503     $    33,041     $    34,594
Capital leases                       1,346             628             686              32               -
. . .