The Forzani Group Ltd./Le Groupe Forzani Ltee
TSX : FGL

The Forzani Group Ltd./Le Groupe Forzani Ltee

April 06, 2010 16:00 ET

FGL Announces Fourth Quarter Results and Strategic Updates

CALGARY, ALBERTA--(Marketwire - April 6, 2010) - The Forzani Group Ltd. (TSX:FGL) ("FGL" or the "Company"), Canada's largest retailer of sporting goods, today reported fiscal 2010 results for the 13-week fourth quarter and 52-week annual period ended January 31, 2010.

"Our fourth quarter and essentially flat annual results attest to our resilience given the worst recession in 70 years, significant one-time costs and the impact of unseasonable weather," said Bob Sartor, FGL's Chief Executive Officer. "While flat results are never satisfying, our team managed well under the circumstances and for the year, we outperformed both our Canadian retail peer group and the North American sporting goods peer group in the key same-store sales metric."

"Looking to fiscal 2011, early results from the start of the first quarter were strong and exceeded expectations in both our corporate and franchise stores. We believe our progress against strategic objectives is positioning our businesses to take full advantage of both the economic recovery this year and further growth opportunities well into the future."



Financial Summary

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For the thirteen weeks ended For the fifty-two weeks ended
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Jan. 31, 2010 Feb. 1, 2009 Jan. 31, 2010 Feb. 1, 2009
(Restated)(1) (Restated)
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Revenue ($000s)
Retail 317,813 317,098 990,706 994,043
Wholesale 55,110 63,714 367,540 352,715
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Total 372,923 380,812 1,358,246 1,346,758
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EBITA Margin 12.8% 12.4% 7.1% 7.2%
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Net Earnings ($000s) 22,923 24,229 28,778 29,626
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Earnings Per Share
(Diluted) $0.75 $0.80 $0.94 $0.94
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Same-Store Sales(2)
Corporate (4.1%) (8.1%) (1.1%) (3.5%)
Franchise (1.5%) 0.4% 0.0% 3.1%
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Consolidated (3.1%) (5.1%) (0.7%) (1.1%)
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(1) Certain figures for the quarter and year ended February 1, 2009 were
restated as a result of the Company's adoption of CICA Section
3064 - Goodwill and Intangible Assets effective February 2, 2009.
(2) Refer to "Non-GAAP Measures" below.


Progress Against Strategic Plan

FGL has made progress during the year against its strategic plan to unify and simplify its business, expand its reach, and improve productivity. Specifically, and among other things:

- During the year, FGL announced the planned consolidation of its two outdoor and lifestyle banners, Coast Mountain Sports and Atmosphere. It created operational and marketing plans to support the consolidation with a Spring 2010 timeline to complete these conversions. As a part of the overall plan, on March 11, 2010 FGL opened its first corporately-owned Atmosphere prototype store, in Red Deer, Alberta.

- During the year, as a test, FGL opened 14 GNC performance nutrition boutiques within FGL stores in the Calgary market. Initial results have been encouraging, and we intend to add additional boutiques outside the Calgary test market in the coming fiscal year.

- During the year, FGL added an additional 26 Nevada Bob's Golf boutiques to Sport Chek stores. These boutiques are operating at triple the sales volume of a regular Sport Chek golf department. Plans for fiscal 2011 are to add an additional 38 boutiques in existing Sport Chek locations.

- On October 28, 2009 FGL completed the design and launch of its new e-commerce initiative, Sportchek.ca. With the launch, FGL is now able to extend its retail reach to customers outside its normal trading area and provide support to the estimated 70% of Canadian consumers that research their purchases online. The state of the art site contains a catalogue with more than 5,000 unique product styles and colours. The site is supported by world class e-commerce provider GSI Commerce Solutions Inc. To date, the site has hosted in excess of 3.2 million unique visitors. From the launch date, site traffic during the holiday season more than doubled to over 40,000 unique visitors per day and is now averaging approximately 25,000 unique visitors per day. In the coming year, FGL plans to further improve the site's consumer experience while expanding its product selection.

Fiscal Fourth Quarter Financial Results

FGL's fiscal 2010 fourth quarter same-store sales decline of 3.1% was the result of the impact that unseasonably warm weather had on sales of winter categories. The three largest categories (alpine ski, snowboard and outerwear) accounted for an overall same-store retail system sales decline of 8.1%. Excluding those weather impacted product categories, the Company achieved an overall same-store sales increase of 2.0% comparing favourably with a decline of 1.0% for the Canadian retail peer group and an increase of 0.1% experienced by the North American sporting goods group. FGL's annualized same-store sales performance of -0.7% exceeded both the Canadian retail peer group at -2.3% and the North American sporting goods peer group at -4.2%.

FGL's total revenue was down 2.1% from a year earlier and included a 13.5% decline in wholesale sales to third parties and the franchise network. The decline in wholesale sales mainly reflected a 4.0% decline in retail sales of stores within the franchise network and the timing of order receipts from third parties.

Retail system sales, which include sales from corporate and franchise stores, were $499.9 million, a decrease of $7.0 million, or 1.4%, from the comparable 13-week sales of $506.9 million a year earlier.

Gross profit was $156.6 million, up 3.4% from $151.4 million a year earlier, and gross margin was 42.0% of revenue compared with 39.8% of revenue a year earlier. The improved gross margin rate was primarily due to gains in the corporate retail business, where previous improvements to the aging and mix of inventory allowed the Company to avoid the significant discounting that was required a year earlier. The shift in the revenue mix toward higher margined retail from lower margined wholesale revenues also helped boost the rate.

Store operating expenses rose for the fiscal 2010 fourth quarter from a year earlier, reflecting the opening, during the year, of additional corporate locations and the impact of the fiscal 2010 first quarter conversion to corporate ownership of nine formerly franchised Fitness Source locations. Same-store operating expenses were 20.9% of corporate store revenue compared to 20.8% in the prior year. Same-store expenses, in absolute dollars, decreased $2.3 million or 3.8% as a result of tightly controlled store wages and reduced accruals for year end performance based compensation in the face of the decline in sales.

General and administrative expenses were 8.7% of revenues compared with 7.8% a year earlier. In absolute dollars, general and administrative costs were up $2.8 million almost exclusively the result of the Company's successful decision in early December to ramp up strategic marketing expenditures which had the result of improving sales without discounting margins.

EBITA(3) was $47.7 million or 12.8% of revenues, up $0.5 million and 1.1% respectively from the prior year's fourth quarter, as incremental sales and margins more than offset the increased strategic marketing spending made to drive the business.

Earnings before income taxes were $32.6 million, compared with pre-tax earnings of $33.9 million a year earlier. The earnings decline resulted from the incremental $1.9 million in amortization expense related to the new stores opened throughout fiscal 2010.

Net earnings for the quarter were $22.9 million or $0.75 per share versus $24.2 million or $0.80 in the prior year. The current quarter's earnings and EPS are both negatively impacted by a higher tax rate applied in the current quarter versus the prior year.

Cash flow from operations(4) decreased to $37.3 million, or $1.22 per share, from $40.5 million, or $1.33 per share, in the prior year.

(3) Refer to "Non-GAAP Measures" below.

(4) Refer to "Non-GAAP Measures" below.

Fourth Quarter Store Activity

At the end of the fourth quarter, the Company had 558 stores, which is six less than a year earlier. However, the Company also had 2.5% more retail selling space (an extra 162,172 square feet) compared with a year earlier, due to FGL's strategy of increasing store size. Corporate stores totalled 342 at the end of the fourth quarter, up by five from a year earlier, while franchise stores totalled 216, down 11 from a year earlier.

During the quarter, the Company decreased the number of corporate stores by nine with the closing of three Sport Mart stores, three Athletes World stores, and one each of Nevada Bob's Golf, National Sports, and Hockey Experts stores. While FGL did not open any new corporate store locations, it did convert four Nevada Bob's Golf locations into other banners, including one Sport Chek, one Hockey Experts and two Fitness Source stores.

The franchise division had a net reduction of one store during the quarter, as FGL franchisees opened three stores (an Atmosphere, a Hockey Experts and an S3) while closing four (two Intersport, one Buying Member and one Nevada Bob's Golf).

Fiscal 2010 Annual Financial Results

The main drivers affecting financial results for the year consisted of: consumer caution as a result of the recession; unseasonably wet summer weather in key urban markets in the first two quarters; unseasonably warm and dry winter weather in the fourth quarter in key markets; and one-time costs.

Certain key financial metrics for the fiscal year are provided in the financial summary table. Following are additional important metrics compared with a year earlier:

- Retail system sales-$1.558 billion, down 1.3% from $1.579 billion;

- Gross profit-$494.2 million, up 2.2% from $483.5 million;

- Gross margin-36.4% of revenue, compared with 35.9% of revenue;

- Store operating expenses-28.8% of corporate revenue compared with 27.9% of corporate revenue. Same-store operating expenses were 26.0% versus 25.4% in the prior year. On an absolute dollar basis, comparable store operating expenses were up $2.0 million from the prior year;

- General and administrative expenses-8.3% of total revenue up from 8.1%. Overall, general and administrative expenses increased only $2.9 million in absolute dollars despite $1.6 million in one-time legal expenses and $0.4 million in one-time severance costs related to the completion of the technology harmonization program. Excluding these one-time items, the G&A run rate would have been flat to the prior year at 8.1%;

- EBITA-$97.1 million, flat to the prior year;

- Earnings-$28.8 million or $0.94 per share (diluted) compared with $29.6 million or $0.94 per share (diluted); and

- Cash flow from operations-$74.6 million or $2.44 per share, compared with $74.5 million or $2.38 per share.


Balance Sheet

The Company's working capital was $101.0 million, up 22.1% from the prior year.

Dividends

On April 6, 2010, the Company declared a dividend of $0.075 per Class "A" share, payable on May 3, 2010 to shareholders of record on April 19, 2010. All dividends paid by the Company are, pursuant to subsection 89 (14) of the Income Tax Act, designated as eligible dividends. An eligible dividend paid to a Canadian resident is entitled to the enhanced dividend tax credit.

Normal Course Issuer Bid

The Company's Notice of Intention to Make a Normal Course Issuer Bid originally filed on April 9, 2009, expires on April 13, 2010. The Company intends to file a notice of its intention to commence another normal course issuer bid through the facilities of the Toronto Stock Exchange (the "TSX"). Subject to the prior approval of the TSX, the Company intends to purchase for cancellation pursuant to such normal course issuer bid up to a maximum of 10% of the Company's public float.

Preliminary Q1 Results

Results in the first eight weeks of the fiscal 2011 first quarter stand in stark contrast to the prior year's first quarter results. The first four weeks sales were supported by sales of Vancouver 2010 Winter Olympic licensed products. However, that sales momentum increased in the subsequent weeks with year-over-year improvements in most major categories, aided in part by a return to seasonal weather, a cautiously optimistic consumer and the impact of our strategic initiatives.

Overall retail system sales increased by 14.5% for the first eight weeks (against the prior year's increase of 0.9%). Of the total gain, same-store sales in the most recent period increased by 15.5% for corporate locations (over the prior year's increase of 2.7%), and increased by 12.7% for franchise stores, (against the prior year's decrease of 2.0%). The sales improvements have been made while retaining stronger gross margin performance.

Additional Quarterly Disclosure

In conjunction with this release, the Company invites you to listen to its teleconference call on Tuesday, April 6th, 2010 at 4:30 p.m. Eastern Standard Time. The conference call will also be available simultaneously and in its entirety, including presentation materials, to all interested investors and the news media through a web cast which can be accessed on the Company's website at www.forzanigroup.com. Please visit the website at least 15 minutes prior to the indicated start time to download and install any necessary software.

Teleconference Call: To listen to the conference call, please dial one of the following numbers approximately five minutes prior to commencement:

Within Toronto: 416-644-3414

Outside Toronto: 1-800-814-4859

Replay: Should you be unable to join the conference call, an audio recording of the call will be available approximately three hours after the call until April 20th, 2010.

Replay Number: 1-416-640-1917 or 1-877-289-8525 (passcode 4258367#)

All individuals listening to the conference call or the replay are reminded that all conference call material is copyrighted by the Company and cannot be recorded or rebroadcast without the Company's express written consent. FGL invites investors to read it's more detailed disclosure contained in the fiscal 2010 Annual Report, Financial Statements and Management's Discussion and Analysis. These documents will be available on the FGL website and SEDAR.

Non-GAAP Measures:

The use of the term "Retail System Sales" (retail sales from corporate and franchise stores) is not recognized under Canadian generally accepted accounting principles ("GAAP"). Management believes that this measure is useful supplemental information which provides the reader with an indication of the Company's total retail sales, but may not be comparable to measures used by other companies.

Same-store sales include sales from all of the Company's franchise and corporate stores that had been open for the comparable period in the prior year. This metric is commonly used throughout the retail industry, and by management as an appropriate comparison to other stores open during the period and to results in the prior period.

The use of the term "EBITA" (earnings before interest, taxes and amortization) is not recognized under Canadian GAAP. Management believes that in addition to net earnings, EBITA is a useful measure that provides an indication of the results generated by the Company's business activities prior to consideration of how activities were financed and how the results are taxed. Investors should be cautioned, however, that EBITA should not be construed as an alternative to net earnings, cash flows from operating activities or other measures of financial performance, determined in accordance with GAAP, as an indicator of the Company's performance. Furthermore, this measure does not have a standardized meaning under GAAP and may not be comparable to similar measures presented by other companies.

Cash flow from operations corresponds to "Cash provided by (used in) operating activities" before non-cash changes in working capital in our consolidated interim and annual statements of cash flows and is defined as net earnings for the period, adjusted for specific items not involving cash but excluding non-cash changes in elements of working capital. This metric is used by management to assess the quality of the Company's earnings.

Forward-Looking Information:

This press release contains certain statements that may constitute forward-looking information within the meaning of applicable securities laws. This forward-looking information relates to, among other things:

- the Company's intentions in respect to the further implementation of its strategic plan including, without limitation: (a) the Company's 2011 timeline for opening the additional 38 Nevada Bob's Golf boutiques within Sport Chek stores; (b) the opening of additional GNC boutique stores outside the Calgary market in the coming fiscal year; (c) the Company's improvements to the sportchek.ca e-commerce platform; and (d) the Company's Spring 2010 timeline for the consolidation of Coast Mountain Sports and Atmosphere banner marketing and operational strategies;

- the Company's expectation of an economic recovery during the year and its impact on profitability; and

- the Company's intentions related to the renewal of it's Normal Course Issuer Bid and any purchases thereunder.

Often, but not always, forward-looking information can be identified by the use of such words as "may", "will", "expect", "believe", "plan", "intend", "estimate", "outlook", "forecast", "should", "anticipate" and other similar terminology, including statements concerning possible or assumed future results. Forward-looking information is based on management's reasonable assumptions, analysis and estimates in respect of its experience and perception of trends, current economic conditions and expected developments, as well as other material factors that it considers to be relevant at the time of making such statements.

The forward-looking information in this press release is included solely for the purpose of assisting the Company's shareholders in understanding the Company's financial position and the results of its operations as at the date hereof. By its nature, forward-looking information involves known and unknown risks and uncertainties, which give rise to the possibility that management's assumptions, analysis and estimates will be incorrect and that the Company's anticipated results will not be achieved. Although the Company believes that the statements with respect to forward-looking information are reasonable and current, such statements should not be interpreted as a guarantee of future performance or results, and will not necessarily be an accurate indication of whether or not such results will be achieved. Forward-looking information is necessarily subject to a number of factors that may cause actual results to differ materially from those results implied by the expectations suggested by such information. Those factors include, without limitation, the following:

- our ability to execute upon the initiatives that support our strategic objectives;

- the willingness of customers to shop at our stores;

- changes in economic conditions and/or weather patterns;

- our ability to attract and retain key personnel; and

- those risks and uncertainties described in the Company's Annual Information Form filed with the securities regulatory authorities in Canada under the Company's profile at www.sedar.com.

When relying on the forward-looking information to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors, although we strongly caution that the foregoing list of factors is not exhaustive and other factors could adversely affect our performance. Investors and other readers are encouraged to consider the foregoing risks and other factors carefully when evaluating the forward-looking information and are cautioned not to place undue reliance upon such information when making investment decisions. The forward-looking information in this press release is current to the date hereof, and is subject to change following such date. While the Company may elect to do so, unless required by applicable law, it undertakes no obligation to update this information to reflect new information or circumstances at any particular time.

The Forzani Group Ltd. is Canada's largest national retailer of sporting goods, offering a comprehensive assortment of brand-name and private-brand products, operating stores from coast to coast, under the following corporate and franchise banners: Sport Chek, Coast Mountain Sports, Sport Mart, National Sports, Athletes World, Sports Experts, Intersport, Econosports, Atmosphere, Tech Shop, Pegasus, Nevada Bob's Golf, Hockey Experts, S3 and The Fitness Source. The Company also has websites for several of its corporate and franchise banners which can be accessed through its main website at www.forzanigroup.com.




The Forzani Group Ltd.
Consolidated Balance Sheets
(in thousands)

As at January 31, 2010 February 1, 2009
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(Restated)
ASSETS
Current
Cash $ 962 $ 3,474
Accounts receivable 71,544 84,455
Inventory 316,319 291,497
Prepaid expenses 5,092 2,827
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393,917 382,253
Capital assets 199,589 196,765
Goodwill and other intangibles 95,990 91,434
Other assets 5,914 8,545
Future income tax asset 6,519 9,960
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$ 701,929 $ 688,957
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LIABILITIES
Current
Indebtedness under revolving credit
Facility $ 27,932 $ 17,130
Accounts payable and accrued liabilities 265,007 275,000
Current portion of long-term debt - 7,501
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292,939 299,631
Other liabilities 6,177 2,946
Deferred lease inducements 44,062 47,811
Deferred rent liability 5,525 5,893
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348,703 356,281
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SHAREHOLDERS' EQUITY
Share capital 150,359 147,161
Contributed surplus 5,770 6,401
Accumulated other comprehensive earnings 34 863
Retained earnings 197,063 178,251
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353,226 332,676
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$ 701,929 $ 688,957
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The Forzani Group Ltd.
Consolidated Statements of Operations
(in thousands, except per share data)

For the 52 For the 52
weeks ended weeks ended
January 31, 2010 February 1, 2009
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(Restated)
Revenue
Retail $ 990,706 $ 994,043
Wholesale 367,540 352,715
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1,358,246 1,346,758
Cost of sales 864,004 863,239
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Gross margin 494,242 483,519
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Operating and administrative expenses
Store operating 284,895 277,089
General and administrative 112,278 109,328
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397,173 386,417
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Operating earnings before undernoted items 97,069 97,102
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Amortization of capital assets 53,504 47,156
Interest 2,488 5,175
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55,992 52,331
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Earnings before income taxes 41,077 44,771
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Income tax expense
Current 8,858 6,273
Future 3,441 8,872
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12,299 15,145
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Net earnings $ 28,778 $ 29,626
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Earnings per share $ 0.94 $ 0.95
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Diluted earnings per share $ 0.94 $ 0.94
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The Forzani Group Ltd.
Consolidated Statements of Retained Earnings, Comprehensive Earnings and
Accumulated Other Comprehensive Earnings
(in thousands)

For the 52 For the 52
Consolidated Statements of weeks ended weeks ended
Retained Earnings January 31, 2010 February 1, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Restated)

Retained earnings, beginning of period $ 178,251 $ 191,176
Adjustment arising from adoption of
new accounting policy - (1,357)
Adjustment arising from adoption of
new accounting policy - (804)
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Adjusted retained earnings, beginning
of period $ 178,251 $ 189,015
Net earnings 28,778 29,626
Dividends paid (9,174) (9,327)
Adjustment arising from shares
purchased under a normal course
issuer bid (792) (31,063)
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Retained earnings, end of period $ 197,063 $ 178,251
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Consolidated Statements of
Comprehensive Earnings
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Restated)
Net earnings $ 28,778 $ 29,626
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Other comprehensive earnings (loss):
Unrealized foreign currency gains
(losses) on cash flow hedges (1,277) 1,340
Tax impact 448 (469)
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Other comprehensive earnings (loss) (829) 871
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Comprehensive earnings $ 27,949 $ 30,497
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Consolidated Statements of Accumulated Other
Comprehensive Earnings ("AOCE")
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Accumulated other comprehensive
earnings (loss), beginning of period $ 863 $ (8)
Other comprehensive earnings (loss) (829) 871
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Accumulated other comprehensive earnings,
end of period $ 34 $ 863
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The Forzani Group Ltd.
Consolidated Statements of Cash Flows
(in thousands)

For the 52 For the 52
weeks ended weeks ended
January 31, 2010 February 1, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Restated)
Cash provided by (used in) operating
activities
Net earnings $ 28,778 $ 29,626
Items not involving cash:
Amortization of capital assets 53,504 47,156
Amortization of deferred finance charges 158 377
Amortization of deferred lease inducements (11,404) (11,500)
Rent expense 90 152
Stock-based compensation 80 (174)
Future income tax expense 3,441 8,872
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74,647 74,509
Changes in non-cash elements of
working capital related to operating
activities (23,597) 20,149
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51,050 94,658
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Cash provided by (used in) financing activities
Net proceeds from issuance of share capital 2,994 2,384
Share repurchase via normal course issuer bid (1,299) (44,027)
Long-term debt (7,501) (44,362)
Revolving credit facility 10,802 17,130
Lease inducements received 7,656 4,221
Dividends paid (9,174) (9,327)
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3,478 (73,981)
Changes in non-cash elements of
financing activities 43 (6,873)
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3,521 (80,854)
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Cash provided by (used in) investing activities
Capital assets (55,643) (52,139)
Other assets (485) (2,998)
Acquisition of assets (945) -
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(57,073) (55,137)
Changes in non-cash elements of
investing activities (10) (2,677)
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(57,083) (57,814)
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Decrease in cash (2,512) (44,010)
Net cash position, opening 3,474 47,484
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Net cash position, closing $ 962 $ 3,474
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Contact Information

  • The Forzani Group Ltd.
    Robert Sartor, CA
    Chief Executive Officer
    (403) 717-1342
    or
    The Forzani Group Ltd.
    Michael Lambert, CA
    Chief Financial Officer
    (403) 717-1666
    or
    The Forzani Group Ltd.
    Richard Burnet, CA
    Senior Vice President, Finance and Administration
    (403) 717-1442
    www.forzanigroup.com