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

The Forzani Group Ltd./Le Groupe Forzani Ltee

September 08, 2009 16:18 ET

FGL Announces Second Quarter Results and Strategic Updates

CALGARY, ALBERTA--(Marketwire - Sept. 8, 2009) - 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 second quarter and 26-week period ended August 2, 2009.

"FGL's fiscal 2010 second quarter financial results surpassed many of our industry peers but were weak compared to the prior year," said Bob Sartor, FGL's Chief Executive Officer. "We are making significant progress on our long-term strategic initiatives, including our announcement today that we are combining our two outdoor lifestyle banners as part of our initiative to drive financial performance by unifying and simplifying our banners and operations. However, our results were impacted by a cautious consumer and a wet and cold summer across much of Canada that cut deeply into the sale of seasonal items like bikes, in-line skates, sandals and swimsuits. We anticipate that this cautious consumer attitude will prevail for the remainder of the fiscal year."



Financial Summary:

----------------------------------------------------------------------------
For the thirteen For the twenty-six
weeks ended weeks ended
----------------------------------------------------------------------------
August 2, August 3, August 2, August 3,
2009 2008 2009 2008
(restated) (restated)
----------------------------------------------------------------------------
Revenue ($000s)
Retail 216,257 221,290 417,588 431,620
Wholesale 80,268 74,272 186,650 171,432
------------------------------------------
Total 296,525 295,562 604,238 603,052
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EBITA Margin 2.3% 5.0% 3.0% 3.7%
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Net Earnings (Loss) ($000's) (4,412) 1,560 (5,529) (1,261)
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Earnings (Loss) Per Share $ (0.14) $ 0.05 $ (0.18) $ (0.04)
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Same Store Sales (%)(1)
Corporate -1.6 -6.5 -0.4 -5.3
Franchise -0.1 -0.6 -1.3 1.1
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Consolidated -1.0 -4.2 -0.7 -2.9
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(1)Refer to "Non-GAAP Measures" below.


Progress Against Strategic Objectives

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

- FGL announced plans today to consolidate its two outdoor and lifestyle banners, Coast Mountain Sports and Atmosphere to create a single national outdoor lifestyle banner under the Atmosphere name. In addition to simplifying the business, FGL expects efficiencies from a single national advertising program, higher sales per square foot from an enhanced product mix and extended reach as Atmosphere will be the largest outdoor lifestyle chain in Canada. All existing Atmosphere stores (predominantly Quebec based) will remain franchised, while the converted Coast Mountain Sports stores will remain corporate. The consolidation is expected to require very little capital and is scheduled to be completed by Spring 2010;

- Having completed a major corporate technology harmonization project over the summer, FGL eliminated 28 positions from its information technology group. FGL expects the restructuring will cut annual expenses by $3 million. In the fiscal second quarter, FGL incurred severance expenses of approximately $0.4 million related to this restructuring; and

- During the second quarter, FGL announced a new partnership that will put GNC performance nutrition boutiques within FGL stores. The first pilot market will be in Calgary this fall. FGL expects the partnership will attract a wider range of sports-oriented consumers and increase foot traffic to its stores.

Fiscal Second Quarter Financial Results:

The 1.0% reduction in FGL's same-store sales from a year earlier was superior to its peer group of North American sporting goods retailers which reported an average same store sales decline for the quarter of 7.5% for the summer quarter.

FGL's total revenue was up 0.3% from a year earlier and included an 8.1% gain in wholesale sales to third parties and the franchise network. The gain in wholesale sales mainly reflected restocking initiatives on the part of our franchisees after they had previously allowed their inventories to drop significantly in anticipation of weak consumer demand.

Partially offsetting the wholesale performance was a 2.3% reduction in retail sales from corporate stores compared with a year earlier. In addition to weak consumer demand and poor weather, retail performance results were affected by year-earlier liquidation sales at Athletes World, which emerged from Companies' Creditor Arrangement Act ("CCAA") protection in June 2008.

Retail system sales, which includes sales from corporate and franchise stores, were $348.4 million, a decrease of $8.3 million, or 2.3%, from the comparable 13-week sales of $356.7 million a year earlier.

The loss for the fiscal 2010 second quarter was principally due to lower sales, higher store operating expenses, which included launch costs for new Nevada Bob's Golf boutiques, and certain one-time expenses, including $1.6 million to defend the company against the proxy fight waged by a dissident shareholder.

Gross profit was $103.1 million, down 2.6% from $105.8 million a year earlier, and gross margin was 34.8% of revenue compared with 35.8% of revenue a year earlier. Gross profit did not keep pace with revenue because of the shift in the revenue mix, as the wholesale business provides a lower margin than the corporate retail business.

The decline in wholesale gross margin rates was partly offset by a slight gain in the retail gross margin rate reflecting the impact of fresh inventory in Athletes World locations. A year earlier, the Athletes World gross margin rate was lowered by the liquidation of aged inventories as part of the CCAA process. Excluding Athletes World, other corporate retail margins were flat to the prior year despite the soft sales climate.

Store operating expenses rose for the fiscal 2010 second quarter from a year earlier reflecting the opening, during the latest quarter, 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 29.9% of corporate store revenue compared to 28.6% in the prior year. Same store expenses, in absolute dollars, increased $1.3 million or 2.4%. The Company anticipates that same store operating expenses in the remainder of the year will reflect prior year run rates.

General and administrative expenses, excluding the proxy contest, were flat compared with a year earlier both on a run rate and absolute dollar expenditure basis.

Earnings before interest, taxes and amortization, ("EBITA"), on a trailing four-quarter basis, was $92.9 million compared to $110.1 million for the four quarters ending in the second quarter of last year.

Loss before income taxes was $6.3 million, compared with pre-tax earnings of $2.4 million a year earlier. Cash flow from operations decreased to $4.7 million, or $0.15 per share, from $10.9 million, or $0.35 per share, in the prior year.

Fiscal Second Quarter Store Activity:

During the quarter, the Company opened 4 corporately-owned stores (1 Sport Chek, 1 Coast Mountain Sports, 1 Fitness Source and 1 Hockey Experts) and closed 3 stores (1 Nevada Bob's Golf, 1 Athletes World and 1 Sport Mart). In the franchise division, 2 stores were opened (1 Atmosphere and 1 Sports Experts), while 3 stores were closed (1 Intersport, 1 Econosports and 1 Nevada Bob's Golf). As a result, at the end of the second quarter, the Company had 344 corporate stores and 217 franchise locations. This was a net increase of 38,299 square feet of retail selling space, a 0.6% increase versus the year-earlier quarter. The Company now has 561 stores from coast to coast across Canada (August 3, 2008 - 565 stores).

Fiscal First Half Financial Results

The main drivers affecting first half financial results, including consumer caution and bad weather, were similar to those described above for the second quarter.

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

- Retail system sales-$667.0 million, down 3.4% from $690.8 million;

- Gross profit-$206.7 million, down 2.1% from $211.2 million;

- Gross margin-34.2% of revenue, compared with 35.0% of revenue;

- Store operating expenses-32.6% of corporate revenue compared with 31.6% of corporate revenue. On an absolute dollar basis, store operating expenses were down $0.2 million from the prior year;

- General and administrative expenses-8.7% of total revenue, unchanged. Overall, an absolute dollar decrease in general and administrative expenses of $0.1 million was achieved despite $1.6 million in one-time legal expenses. Excluding this item, the G&A run rate would have been 8.4% down 30 basis points from the prior year of 8.7%;

- EBITA-$18.4 million, down 18.2% from $22.5 million;

- Loss before income taxes-$8.0 million compared with $2.0 million; and

- Cash flow from operations-13.0 million or $0.43 per share, compared with $16.6 million or $0.52 per share.

Balance Sheet:

The Company's working capital of $62.3 million decreased 2.8% from the prior year.

Dividends:

On September 8, 2009, the Company declared a dividend of $0.075 per Class A common share, payable on November 2, 2009 to shareholders of record on October 19, 2009. 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.

Preliminary Back to School Results:

Same-store sales for the first five weeks of the fiscal third quarter declined by 4.5% for corporate locations, against last year's increase of 2.2%, and increased by 6.2% for franchise stores, compared with a prior year increase of 3.1% for an overall retail system sales decrease of 1.1% versus an increase of 2.5% in fiscal 2009. These preliminary results are skewed by the year over year calendar which sees both of the two peak weeks of Back to School, namely the week before and the week immediately following Labour Day, included in the prior year's figures while reflecting only the first of those weeks in the current year. Although the current year's five week period does include an extra selling day for those FGL stores that are closed on Labour Day, management believes that this positive impact is more than offset by the exclusion of the remainder of the second peak selling week noted above.

As in previous years, FGL will disclose its Back to School sales results at the end of September. The Back-to-School period encompasses the latter half of August and the first half of September. Preliminary indications, based on the first four weeks of the fiscal third quarter, suggest a continuation of the mood of consumer caution.

Additional Quarterly Disclosure:

In conjunction with the release, the Company invites you to listen to its teleconference call on Tuesday, September 8th, 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: 416-644-3416

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 September 22, 2009.

Replay Number: 1-416-640-1917 or 1-877-289-8525 (passcode 4151541#)

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 its more detailed disclosure contained in the fiscal second quarter and first half 2010 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.

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.

Forward Looking Information:

This news 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 growth objectives, strategic and operating initiatives, revenue, retail system sales, share buy-backs and dividend growth, and can generally be identified by the use of such words as "may", "will", "expect", "believe", "plan", "intend", "are confident" and other similar terminology, including statements concerning possible or assumed future results. Certain material factors or assumptions are applied in making statements regarding forward-looking information, and actual results may differ materially from those expressed or implied in such information. The forward-looking information in this news release is based upon material factors and assumptions that management believes are reasonable as of the date of this news release, including the successful execution of the initiatives described herein; however, the Company cannot assure actual results will be consistent with this forward-looking information. Information about material factors that could cause actual results to differ materially from expectations include, but are not limited to, the factors discussed in the Company's Management Discussion and Analysis and Annual Information Form filed with the securities regulatory authorities in Canada, available 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 and other uncertainties and potential events. Although the Company believes that the expectations reflected in such forward-looking information are reasonable, such information involves significant risks and uncertainties, should not be read 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. 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)
(unaudited)

August 2, February 1, August 3,
As at 2009 2009 2008
----------------------------------------------------------------------------
(Restated) (Restated)
ASSETS
Current
Cash $ 2,905 $ 3,474 $ 2,790
Accounts receivable 106,502 84,455 101,183
Inventory 341,673 291,497 334,604
Prepaid expenses 4,440 2,827 14,583
----------------------------------------------------------------------------
455,520 382,253 453,160
Capital assets 204,120 196,765 192,071
Goodwill and other intangibles 96,020 91,434 91,470
Other assets 8,128 8,545 3,584
Future income tax asset 10,766 9,960 16,749
----------------------------------------------------------------------------

$ 774,554 $ 688,957 $ 757,034
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES
Current
Indebtedness under
revolving credit facility $ 114,511 $ 17,130 $ 129,444
Accounts payable and accrued
liabilities 272,972 277,820 256,502
Current portion of long-term
debt 5,740 7,501 3,187
----------------------------------------------------------------------------
393,223 302,451 389,133
Long-term debt 6,453 126 4,675
Deferred lease inducements 45,906 47,811 50,618
Deferred rent liability 5,806 5,893 5,969
----------------------------------------------------------------------------
451,388 356,281 450,395
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Share capital 149,118 147,161 147,161
Contributed surplus 6,056 6,401 7,521
Accumulated other comprehensive
earnings (loss) (153) 863 23
Retained earnings 168,145 178,251 151,934
----------------------------------------------------------------------------
323,166 332,676 306,639
----------------------------------------------------------------------------
$ 774,554 $ 688,957 $ 757,034
----------------------------------------------------------------------------
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The Forzani Group Ltd.

Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

For the 13 weeks ended For the 26 weeks ended
August 2, August 3, August 2, August 3,
2009 2008 2009 2008
----------------------------------------------------------------------------
(Restated) (Restated)
Revenue
Retail $ 216,257 $ 221,290 $ 417,588 $ 431,620
Wholesale 80,268 74,272 186,650 171,432
----------------------------------------------------------------------------
296,525 295,562 604,238 603,052
Cost of sales 193,449 189,808 397,528 391,887
----------------------------------------------------------------------------

Gross margin 103,076 105,754 206,710 211,165
----------------------------------------------------------------------------

Operating and
administrative
expenses
Store operating 69,422 65,833 135,999 136,243
General and
administrative 26,766 25,060 52,323 52,380
----------------------------------------------------------------------------
96,188 90,893 188,322 188,623
----------------------------------------------------------------------------

Operating earnings
before undernoted
items 6,888 14,861 18,388 22,542
----------------------------------------------------------------------------

Amortization of
capital assets 12,789 11,406 25,067 22,522
Interest 407 1,055 1,334 1,959
----------------------------------------------------------------------------
13,196 12,461 26,401 24,481
----------------------------------------------------------------------------

Earnings (loss)
before income
taxes (6,308) 2,400 (8,013) (1,939)
----------------------------------------------------------------------------

Income tax expense
(recovery)
Current (1,353) 395 (1,678) (571)
Future (543) 445 (806) (107)
----------------------------------------------------------------------------
(1,896) 840 (2,484) (678)
----------------------------------------------------------------------------

Net earnings
(loss) for the
period $ (4,412) $ 1,560 $ (5,529) $ (1,261)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic and
diluted
earnings (loss)
per share $ (0.14) $ 0.05 $ (0.18) $ (0.04)
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The Forzani Group Ltd.

Consolidated Statements of Retained Earnings, Comprehensive Earnings (Loss)
and Accumulated Other
Comprehensive Earnings (Loss)
(in thousands)
(unaudited)

For the 13 weeks ended For the 26 weeks ended
Consolidated
Statements of
Retained August 2, August 3, August 2, August 3,
Earnings 2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Restated) (Restated)

Retained
earnings,
beginning of
period $ 174,848 176,377 $ 178,251 $ 191,176
Adjustment
arising from
adoption of
new
accounting
policy - (717) - (2,161)
----------------------------------------------------------------------------
Adjusted
Retained
earnings,
beginning of
period 174,848 175,660 178,251 189,015
Net earnings
(loss) (4,412) 1,560 (5,529) (1,261)
Dividends (2,291) (2,285) (4,577) (4,758)
Adjustment
arising from
shares
purchased
under a
normal course
issuer bid - (23,001) - (31,062)
----------------------------------------------------------------------------
Retained
earnings, end
of period $ 168,145 151,934 $ 168,145 $ 151,934
----------------------------------------------------------------------------
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Consolidated Statements of Comprehensive Earnings (Loss)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the 13 weeks ended For the 26 weeks ended
August 2, August 3, August 2, August 3,
2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net earnings
(loss) $ (4,412) $ 1,560 $ (5,529) $ (1,261)
----------------------------------------------------------------------------
Other
comprehensive
earnings
(loss):
Unrealized
foreign
currency gains
(loss) on cash
flow hedges (87) (37) (1,472) 48
Tax impact (22) 13 456 (17)
----------------------------------------------------------------------------
Other
comprehensive
earnings (loss) (109) (24) (1,016) 31
----------------------------------------------------------------------------
Comprehensive
earnings (loss) $ (4,521) $ 1,536 $ (6,545) $ (1,230)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statements of Accumulated Other Comprehensive Earnings (Loss)
("AOCE")
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the 13 weeks ended For the 26 weeks ended
August 2, August 3, August 2, August 3,
2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated
other
comprehensive
earnings
(loss),
beginning of
period $ (44) $ 47 $ 863 $ (8)
Other
comprehensive
earnings
(loss) (109) (24) (1,016) 31
----------------------------------------------------------------------------
Accumulated
other
comprehensive
earnings
(loss), end
of period $ (153) $ 23 $ (153) $ 23
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Forzani Group Ltd.

Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

For the thirteen weeks For the twenty-six weeks
ended ended
August 2, August 3, August 2, August 3,
2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Restated) (Restated)

Cash provided
by (used in)
operating
activities
Net earnings
(loss) for
the period $ (4,412) $ 1,560 $ (5,529) $ (1,261)
Items not
involving
cash:
Amortization
of capital
assets 12,789 11,406 25,067 22,522
Amortization
of deferred
finance
charges 36 114 78 295
Amortization
of deferred
lease
inducements (2,954) (2,895) (5,858) (5,770)
Rent expense 91 (17) 59 4
Stock-based
compensation 23 257 31 946
Future income
tax expense
(recovery) (543) 445 (806) (107)
Unrealized
(gain) loss
on
ineffective
hedges (321) 24 (45) (1)
----------------------------------------------------------------------------
4,709 10,894 12,997 16,628
Changes in
non-cash
elements of
working
capital
related to
operating
activities (8,525) (14,746) (80,411) (70,525)
----------------------------------------------------------------------------
(3,816) (3,852) (67,414) (53,897)
----------------------------------------------------------------------------
Cash provided
by (used in)
financing
activities
Proceeds from
issuance of
share capital 1,529 127 1,581 2,384
Share
repurchase
via normal
course issuer
bid - (32,953) - (44,027)
Long-term
debt (1,671) (790) 1,396 (883)
Revolving
credit
facility 22,433 101,998 97,381 129,444
Dividends
paid (2,291) (2,285) (4,577) (4,758)
Lease
inducements
received 3,921 190 3,953 1,299
----------------------------------------------------------------------------
23,921 66,287 99,734 83,459
Changes in
non-cash
elements of
financing
activities (775) (50,119) 3,779 (50,151)
----------------------------------------------------------------------------
23,146 16,168 103,513 33,308
----------------------------------------------------------------------------

Cash provided
by (used in)
investing
activities
Capital
assets (20,205) (11,736) (32,061) (23,073)
Other assets (27) (857) (186) (1,154)
Acquisition
of assets - - (945) -
----------------------------------------------------------------------------
(20,232) (12,593) (33,192) (24,227)

Changes in
non-cash
elements of
investing
activities 616 122 (3,476) 122
----------------------------------------------------------------------------
(19,616) (12,471) (36,668) (24,105)
----------------------------------------------------------------------------
Decrease in
cash (286) (155) (569) (44,694)
Cash
position,
opening 3,191 2,945 3,474 47,484
----------------------------------------------------------------------------
Cash
position,
closing $ 2,905 $ 2,790 $ 2,905 $ 2,790
----------------------------------------------------------------------------
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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
    Website: www.forzanigroup.com