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SPCHA > SEC Filings for SPCHA > Form 10-Q on 10-Aug-2012All Recent SEC Filings

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Form 10-Q for SPORT CHALET INC


10-Aug-2012

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.

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 July 1, 2012, we operated 54 stores, including 33 locations in Southern California, nine in Northern California, eight in Arizona, three in Nevada, 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, 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. As previously announced, the Company currently plans to open one new store in May 2013 in Downtown Los Angeles.

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."


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 2010 and 2009, respectively. For fiscal 2012, our net loss increased from fiscal 2011's net loss of $3.0 million, or $0.21 per diluted share, 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.

First Quarter Highlights

· Net income of $0.1 million compared to net loss of $0.8 million in the first quarter of the prior year;

· Comparable store sales increased 2.9%;

· Team Sales division sales up 12.5%;

· Online sales up 7.0%; and

· Through the five weeks ended August 5, 2012, comparable store sales are up 3.8%, but the negative trends and effects in gross profit experienced during the first quarter have continued similarly in the second quarter.

Results of Operations

13 Weeks Ended July 1, 2012 Compared to July 3, 2011

The following table sets forth statements of operations data and relative percentages of net sales for the 13 weeks ended July 1, 2012 compared to the 13 weeks ended July 3, 2011 (dollar amounts in thousands, except per share amounts):


                                           13 weeks ended
                              July 1, 2012                 July 3, 2011             Dollar        Percentage
                         Amount        Percent        Amount        Percent         change          change
Net sales               $  83,849          100.0 %   $  82,824          100.0 %    $   1,025              1.2 %
Gross profit               23,368           27.9 %      23,824           28.8 %         (456 )           (1.9 %)
Selling, general and
administrative
expenses                   20,738           24.7 %      21,615           26.1 %         (877 )           (4.1 %)
Depreciation and
amortization                2,069            2.5 %       2,568            3.1 %         (499 )          (19.4 %)
Income (loss) from
operations                    561            0.7 %        (359 )         (0.4 %)         920                *
Interest expense              458            0.5 %         465            0.6 %           (7 )           (1.5 %)
Income (loss) before
income taxes                  103            0.1 %        (824 )         (1.0 %)         927                *
Income tax provision            -            0.0 %           2            0.0 %           (2 )              *
Net income (loss)             103            0.1 %        (826 )         (1.0 %)         929                *

Earnings (loss) per
share:
Basic                   $    0.01                    $   (0.06 )                   $    0.07                *
Diluted                 $    0.01                    $   (0.06 )                   $    0.07                *

* Percentage change not meaningful.

Sales increased $1.0 million, or 1.2%, to $83.8 million for the 13 weeks ended July 1, 2012 from $82.8 million for the 13 weeks ended July 3, 2011. The sales increase is primarily due to a 2.9% increase in comparable store sales, an improvement on top of the 2.3% increase in the same period last year. Team Sales division and online sales increased 12.5% and 7.0%, respectively. These sales increases were partially offset by a store closure which contributed $1.7 million in sales in the prior 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 $0.5 million, or 1.9%, and as a percent of sales decreased to 27.9% from 28.8%, primarily due to an increase in merchandise costs, changes in the product mix, and ongoing customer satisfaction initiatives (see "Critical Accounting Policies and Use of Estimates") implemented in August 2011.

Selling, general and administrative ("SG&A") expenses decreased $0.9 million, or 4.1%, primarily due to $0.8 million in savings from labor-related expenses, such as self-insurance for employee health insurance coverage and incentive payments largely for store employees. As a percent of sales, SG&A decreased to 24.7% from 26.1%.

Depreciation decreased $0.5 million as a result of the low level of capital expenditures in recent fiscal years with no new store openings or significant remodels.

Net income for the quarter ended July 1, 2012 increased $0.9 million to $0.1 million, or $0.01 per diluted share, compared to a net loss of $0.8 million, or $0.06 per diluted share, for the quarter ended July 3, 2011.

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. A reduction in bank borrowings during fiscal 2011 was reversed during fiscal 2012 primarily due to the unseasonably warm and dry winter weather, which significantly affected snowfall at the resorts most frequented by our customers and resulted in lower sales and cash generated to pay down bank borrowings. 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 and 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 (used in) operating activities has generally been the result of net income (loss), adjusted for depreciation and amortization, and changes in inventory along with related accounts payable. The following table summarizes the more significant items for the 13 weeks ended July 1, 2012 and July 3, 2011:

                                                                    13 weeks ended
                                                            July 1, 2012       July 3, 2011
                                                                    (in thousands)
Net income (loss)                                          $          103     $         (826 )
Depreciation and amortization                                       2,069              2,568
Merchandise inventories                                            (8,612 )           (5,239 )
Accounts payable                                                   11,109              5,660
Accounts receivable                                                (1,997 )           (1,378 )
Other accrued expenses                                               (586 )           (1,953 )
Other                                                                 590                939
Net cash provided by (used in) operating activities        $        2,676     $         (229 )

Inventory increased $8.6 million in the 13 weeks ended July 1, 2012 as average inventory per store increased 10.1% to $2.0 million from $1.8 million at the end of July 1, 2012 and July 3, 2011, respectively. The increase is primarily the carryover of winter related merchandise due to the lower than planned sales in fiscal 2012 which resulted from the unseasonably warm and dry winter weather. The winter carryover inventory has been integrated into the inventory purchase plans for the current fiscal year and will result in higher than normal inventory levels through at least the third fiscal quarter.

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 until fiscal 2014 or significant remodels. Forecasted capital expenditures for the current fiscal year are expected to be approximately $5.5 million primarily for new rental equipment, information systems and one new store (see "Overview"). Approximately $1.5 million for the new store will be reimbursed by the landlord upon opening 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 July 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 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.


At July 1, 2012, our credit facility had a borrowing capacity of $65.0 million, of which we utilized $45.7 million (including a letter of credit of $3.3 million) and had $19.3 million in availability, $13.3 million above the availability requirement of $6.0 million. The amount of availability fluctuates due to seasonal changes throughout the year.

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 July 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)              $ 156,138     $    30,470     $    50,413     $    35,104     $    40,151
Capital leases                        1,192             636             531              25               -
Revolving credit facility (2)        42,424          42,424               -               -               -
Letters of credit                     3,250           3,250               -               -               -
Employment contracts (3)                112              82              30               -               -
Total contractual obligations     $ 203,116     $    76,862     $    50,974     $    35,129     $    40,151

(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: $9.6 million, $10.0 million and $11.5 million for the fiscal years 2012, 2011 and 2010, respectively. Operating lease obligations reflect savings from lease modifications, assume "kick-out clauses" will be exercised 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, his wife 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. Many 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 $3.3 million, related to workers' compensation deductibles, were outstanding as of July 1, 2012 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 1, 2012, 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." We estimate a reserve for projected merchandise returns based on historical experience. 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 required to increase our allowance for sales returns and such changes could be material.

In June 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.

For a more detailed discussion of these factors, see "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended April 1, 2012. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and the Company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances.


Risks Related To Our Business:

· We have a history of losses which could continue in the future.

· A downturn in the economy has affected consumer purchases of discretionary items, significantly reducing our net sales and profitability.

· The limited availability under our revolving credit facility may result in insufficient working capital.

· If our vendors do not provide sufficient quantities of merchandise, our net sales may suffer and hinder our return to profitability.

· If we are unable to effectively manage and expand our alliances and relationships with selected suppliers of brand name merchandise, we may be unable to effectively execute our strategy to differentiate ourselves from our competitors.

· Intense competition in the sporting goods industry could limit our growth and reduce our profitability.

· Because our stores are concentrated in the western portion of the United States, we are subject to regional risks.

· If we are unable to predict or react to changes in consumer demand, we may lose customers and our sales may decline.

· Our future operations may be dependent on the availability of additional financing.

· Seasonal fluctuations in the sales of our merchandise and services could cause our annual operating results to suffer.

· If we lose key management or are unable to attract and retain talent, our operating results could suffer.

· Declines in the effectiveness of marketing could cause our operating results to suffer.

· Problems with our information systems could disrupt our operations and negatively impact our financial results.

· Failure to protect the integrity and security of our customers' information could expose us to litigation and materially damage our standing with our customers.

· We may not be able to renew the leases of existing store locations.

· As a result of the current economic downturn, we have delayed opening new stores. Continued growth is uncertain and subject to numerous risks.


· We may need to record additional impairment losses in the future if our stores' operating performance does not improve.

· Our quarterly operating results may fluctuate substantially, which may adversely affect our business.

· We are controlled by Irene and Eric Olberz and management, whose interests may differ from other stockholders.

· Our Class B Common Stock may be delisted from the NASDAQ Stock Market ("Nasdaq").

· The price of our Class A Common Stock and Class B Common Stock may be volatile.

· Provisions in the Company's charter documents could discourage a takeover that stockholders may consider favorable.

· We may be subject to litigation that may adversely affect our business and financial performance.

· Changes in accounting standards and subjective assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results.

· Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting and could harm our ability to manage our expenses.

· We self-insure for a significant portion of employee health insurance coverage and recent federal health care legislation could increase our expenses.

· Terrorist attacks, acts of war and foreign instability may harm our business.

· We rely on one distribution center and any disruption could reduce our sales.

· We may pursue strategic acquisitions, which could have an adverse impact on our business.

· Our comparable store sales will fluctuate and may not be a meaningful indicator of future performance.

· A regional or global health pandemic could severely affect our business.

· Global warming could cause erosion of both our winter and summer seasonal businesses over a long-term basis.


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