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SPCHA > SEC Filings for SPCHA > Form 10-Q on 7-Feb-2013All Recent SEC Filings

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Form 10-Q for SPORT CHALET INC


7-Feb-2013

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.

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 December 30, 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 online same day delivery, 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, gait analysis, baseball/softball glove steaming and lacing, 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 an athlete;" and to "create ease of shopping."


Recent History

Our stores are located in states that have experienced, since the economic 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.

Fiscal 2013

In the first half of fiscal 2013, we realized net income of $0.9 million, or $0.06 per diluted share, primarily from a comparable store sales increase of 4.1%. However, our recent growth in comparable store sales and profitability plateaued as warm weather and a continuing trend for consumers to postpone holiday shopping negatively impacted the third quarter of fiscal 2013, as comparable store sales decreased 0.7% and we incurred a net loss of $1.9 million, or $0.13 per diluted share, for the third quarter of fiscal 2013 and a net loss of $1.0 million, or $0.07 per diluted share, for the 39 weeks ended December 30, 2012.

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% through the five weeks ended February 3, 2013. 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. 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. Team Sales Division sales increased 17.9% from the third quarter of last year and online sales increased 32.6% from the third quarter of last year.

As previously announced, we currently plan to open a next generation Sport Chalet this summer in Downtown Los Angeles. 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. While no assurance can be given that we will be successful in implementing this new concept, at 27,300 square feet, we believe this smaller format store will allow an immediate opportunity for growth across a wider geography. We currently plan to close two existing stores in fiscal 2014 as part of our ongoing and rigorous approach to our portfolio of stores, allocating resources towards the greatest growth opportunities, as well as unwavering commitment to our long-term business strategy of returning to sustained profitability.


Results of Operations

13 Weeks Ended December 30, 2012 Compared to January 1, 2012

The following table sets forth statements of operations data and relative
percentages of net sales for the 13 weeks ended December 30, 2012 compared to
the 13 weeks ended January 1, 2012 (dollar amounts in thousands, except per
share amounts):

                                          13 weeks ended
                         December 30, 2012                January 1, 2012              Dollar        Percentage
                      Amount          Percent          Amount         Percent          change          change
Net sales           $    97,567           100.0 %    $   97,223           100.0 %    $      344              0.4 %
Gross profit             26,925            27.6 %        26,306            27.1 %           619              2.4 %
Selling, general
and
   administrative
expenses                 26,097            26.7 %        24,410            25.1 %         1,687              6.9 %
Depreciation and
amortization              2,105             2.2 %         2,468             2.5 %          (363 )          (14.7 %)
Loss from
operations               (1,277 )          (1.3 %)         (572 )          (0.6 %)         (705 )         (123.3 %)
Interest expense            608             0.6 %           464             0.5 %           144             31.0 %
Net loss                 (1,885 )          (1.9 %)       (1,036 )          (1.1 %)         (849 )          (81.9 %)

Loss per share:
Basic and diluted   $     (0.13 )                    $    (0.07 )                    $    (0.06 )          (81.9 %)

Sales increased $0.3 million, or 0.4%, to $97.6 million for the 13 weeks ended December 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% and 32.6%, respectively, partially offset by a 0.7% decrease in comparable store sales. The comparable store sales decrease of 0.7%, which is an improvement from the 2.0% decrease in the same period last year, was primarily due to the 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%, and as a percent of sales increased to 27.6% from 27.1%. 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%, 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% from 25.1%.

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.

39 Weeks Ended December 30, 2012 Compared to January 1, 2012

The following table sets forth statements of operations data and relative
percentages of net sales for the 39 weeks ended December 30, 2012 compared to
the 39 weeks ended January 1, 2012 (dollar amounts in thousands, except per
share amounts):

                                         39 weeks ended
                        December 30, 2012                January 1, 2012              Dollar        Percentage
                     Amount          Percent          Amount         Percent          change          change
Net sales          $   272,868           100.0 %    $  268,027           100.0 %    $    4,841              1.8 %
Gross profit            75,512            27.7 %        75,829            28.3 %          (317 )           (0.4 %)
Selling,
general and
  administrative
expenses                68,759            25.2 %        68,365            25.5 %           394              0.6 %
Depreciation and
amortization             6,215             2.3 %         7,365             2.7 %        (1,150 )          (15.6 %)
Income from
operations                 538             0.2 %            99             0.0 %           439            443.4 %
Interest expense         1,558             0.6 %         1,360             0.5 %           198             14.6 %
Loss before
income taxes            (1,020 )          (0.4 %)       (1,261 )          (0.5 %)          241             19.1 %
Income tax
provision                    2             0.0 %             2             0.0 %             -              0.0 %
Net loss                (1,022 )          (0.4 %)       (1,263 )          (0.5 %)          241             19.1 %

Loss per share:
Basic and
diluted            $     (0.07 )                    $    (0.09 )                    $     0.02             19.1 %

Sales increased $4.8 million, or 1.8%, to $272.9 million for the 39 weeks ended December 30, 2012 from $268.0 million for the 39 weeks ended January 1, 2012. The sales increase is primarily due to a comparable store sales increase of 2.3%, while sales for Team Sales Division and online increased 18.6% and 21.6%, respectively, partially offset by one store closure which contributed $3.2 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 $0.3 million, or 0.4%, and as a percent of sales decreased to 27.7% from 28.3%. The 0.6% decrease as a percent of sales is primarily due to costs related to ongoing customer satisfaction initiatives implemented in August 2011 (see "Critical Accounting Policies and Use of Estimates"), changes in merchandise costs and 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%, primarily due to an increase of $1.0 million in advertising partially offset by savings in labor-related expenses, such as self-insurance for employee health insurance coverage and stock option expense. As a percent of sales, SG&A decreased to 25.2% from 25.5%.

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.

Net loss for the period ended December 30, 2012 decreased $0.2 million 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 ended January 1, 2012.


Liquidity and Capital Resources

Our primary capital requirements currently are for inventory replenishment, store operations and new store openings. Since fiscal 2007, we have increasingly relied on bank borrowing for our capital needs to fund new store openings and losses from operations. The amount outstanding on our bank credit facility, net of cash on hand, increased from $27.5 million on January 1, 2012 to $29.5 million on December 30, 2012. For the foreseeable future our ability to continue our operations and business is dependent on credit terms from vendors and bank borrowing.

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. The following table summarizes the more significant items for the 39 weeks ended December 30, 2012 and January 1, 2012:

                                                         39 weeks ended
                                             December 30, 2012       January 1, 2012
                                                         (in thousands)
Net loss                                    $            (1,022 )   $          (1,263 )
Depreciation and amortization                             6,215                 7,365
Merchandise inventories                                 (11,870 )             (13,416 )
Accounts payable                                         16,639                22,261
Accounts receivable                                      (5,272 )              (2,649 )
Other accrued expenses                                    4,984                 3,603
Other                                                       268                   343
Net cash provided by operating activities   $             9,942     $          16,244

Inventory increased $11.9 million in the 39 weeks ended December 30, 2012 as average inventory per store increased 2.8% to $2.04 million from $1.98 million at December 30, 2012 and January 1, 2012, respectively. The inventory increase is primarily due to additional investments in merchandise categories that have exhibited the greatest sales growth potential and the lower than planned holiday season sales during 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.

Net cash used in investing activities is primarily for capital expenditures which are expected to remain nominal with only a single new store opening until at least fiscal 2014 and no significant remodels. Forecasted capital expenditures for the remainder of the current fiscal year are expected to be approximately $2.0 million primarily for new rental equipment, information systems, and one new store (see "Overview"). Approximately $1.0 million for the new store will be reimbursed by the landlord upon opening in early fiscal 2014. We currently have no plans to open additional stores and future store openings are dependent on the availability of financing.

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 December 30, 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 December 30, 2012, our credit facility had a borrowing capacity of $70.0 million, of which we utilized $40.8 million (including a letter of credit of $3.6 million) and had $37.0 million in availability including cash, $17.6 million above the availability requirement of $6.5 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 December 30, 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)   $   147,548     $     30,621     $     49,408     $     33,656     $     33,863
Capital leases               1,363              782              514               67                -
Revolving credit
facility (2)                37,333           37,333                -                -                -
Letters of credit            3,550            3,550                -                -                -
Employment contracts
(3)                            113               75               38                -                -
Total contractual
obligations            $   189,907     $     72,361     $     49,959     $     33,723     $     33,863

(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.


We currently plan 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 our ongoing and rigorous approach to our portfolio of stores, allocating resources towards the greatest growth opportunities, as well as unwavering commitment to our long-term business strategy of returning to sustained profitability.

Generally, our purchase obligations are cancelable 45 days prior to shipment from our vendors. Letters of credit amounting to approximately $3.6 million, related to workers' compensation deductibles, were outstanding as of December 30, 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 our 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."

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-insurance 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 Quarterly 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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