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

The Forzani Group Ltd./Le Groupe Forzani Ltee

December 10, 2009 16:37 ET

FGL Announces Third Quarter Results and Strategic Updates

CALGARY, ALBERTA--(Marketwire - Dec. 10, 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 third quarter and 39-week period ended November 1, 2009.

"FGL's fiscal 2010 third quarter financial results show a return to profitability on a year to date basis and an improvement on reasonably solid quarterly results from the prior year," said Bob Sartor, FGL's Chief Executive Officer. "We are continuing to make significant progress on our long-term strategic initiatives. Favourable weather through late September and October drove customers to our stores, where our focus on improved standards and visual presentation made a difference in our results."

"However, unseasonably warm weather and ongoing consumer caution had a negative impact on sales early in the fourth quarter," continued Mr. Sartor. "Now that the weather has improved in many parts of the country, we are already noticing an increase in sales."



Financial Summary:

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For the thirteen For the thirty-nine
weeks ended weeks ended
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Nov. 1, 2009 Nov. 2, 2008 Nov. 1, 2009 Nov. 2, 2008
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Revenue ($000s)
---------------
Retail 255,305 245,325 672,893 676,945
Wholesale 125,780 117,569 312,430 289,001
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Total 381,085 362,894 985,323 965,946
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EBITA Margin 8.1% 7.5% 5.0% 5.2%
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Net Earnings ($000's) 11,384 6,647 5,855 5,387
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Earnings Per Share $0.37 $0.22 $0.19 $0.17
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Same Store Sales(1)
Corporate 1.3% -0.2% 0.3% -2.1%
Franchise 4.2% 11.5% 0.6% 4.5%
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Consolidated 2.3% 3.8% 0.4% 0.3%
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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 created operational and marketing plans to support the announced consolidation of its two outdoor and lifestyle banners, Coast Mountain Sports and Atmosphere, and has confirmed the Spring 2010 timeline to complete these conversions.

- During the third quarter, 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 third quarter, FGL added an additional 6 Nevada Bob's Golf boutiques to Sport Chek stores. These shops are operating at triple the sales volume of a regular Sport Chek golf department.

- 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. It is supported by world class E-commerce provider, GSI Commerce Inc. To date, the site is receiving an average of 20,000 unique visitors on a daily basis.

Fiscal Third Quarter Financial Results:

The 2.3% improvement 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 4.9% for the fall quarter.

FGL's total revenue was up 5.0% from a year earlier and included a 7.0% gain in wholesale sales to third parties and the franchise network. The gain in wholesale sales mainly reflected continued restocking initiatives on the part of our franchisees after they had previously allowed their inventories to drop significantly in anticipation of weak consumer demand.

Adding to the strong wholesale performance was a 4.1% increase in retail sales from corporate stores compared with a year earlier. Improving consumer demand and favourable weather in September and October drove retail performance.

Retail system sales, which include sales from corporate and franchise stores, were $391.1 million, an increase of $10.1 million, or 2.7%, from the comparable 13-week sales of $381.0 million a year earlier.

Gross profit was $131.0 million, up 8.3% from $120.9 million a year earlier, and gross margin was 34.4% of revenue compared with 33.3% of revenue a year earlier. Gross profit as a percentage of sales returned to pre-recession levels as the Company did not need to move as aggressively in reducing prices to maintain sales momentum as it had in the prior year's quarter when the international financial crisis sent wary consumers to the sidelines. Gross margin rates showed improvement during the quarter in both the retail and wholesale businesses.

Store operating expenses rose for the fiscal 2010 third 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 25.6% of corporate store revenue compared to 24.8% in the prior year. Same store expenses, in absolute dollars, increased $2.3 million or 4.2% as a result of incremental marketing costs associated with the Nevada Bob's boutique launch and normalized accruals for year end performance based compensation costs. The prior year's quarterly run rate was positively impacted by the reversal of those accruals when annual targets were deemed to be unattainable. The Company anticipates that same store operating expenses in the remainder of the year will reflect prior year run rates.

General and administrative expenses were 7.2% of revenues compared with 7.5% a year earlier. The prior year's run rate included incremental overhead from the Athletes World acquisition which was not fully integrated until the fourth quarter of fiscal 2009. In absolute dollars, general and administrative costs were up $0.2 million exclusively the result of increased stock based compensation expenses driven by relative changes in the company's stock price over the prior year's quarter. This increase was offset to a degree by savings associated with the Athletes World integration.

Earnings before income taxes were $16.5 million, compared with pre-tax earnings of $12.7 million a year earlier. The earnings improvement for the fiscal 2010 third quarter was principally due to increased sales, strong margins and well controlled store operating expenses.

Net earnings for the quarter were $11.4 million or $0.37 per share versus $6.6 million or $0.22 in the prior year. The current year's earnings and EPS benefit from a lower prevailing tax rate versus the prior year.

Cash flow from operations increased to $24.5 million, or $0.80 per share, from $15.6 million, or $0.51 per share, in the prior year.

Fiscal Third Quarter Store Activity:

During the quarter, the Company opened 10 corporately-owned stores (8 Sport Chek, 1 Coast Mountain Sports and 1 Athletes World) and closed 4 stores (1 Sport Chek, 1 Nevada Bob's Golf, 1 Hockey Experts and 1 Sport Mart). Additionally, 2 corporately-owned Nevada Bob's Golf locations were converted to Fitness Source stores. In the franchise division, 2 stores were opened (1 Atmosphere and 1 Intersport), while 1 Buying Member store was closed. As a result, at the end of the third quarter, the Company had 350 corporate stores and 218 franchise locations. This represents a net increase of 256,274 square feet of retail selling space, a 4.0% increase versus the year-earlier quarter. The Company now has 568 stores from coast to coast across Canada compared with 561 stores at November 2, 2008.

During the quarter, the Company opened 6 Nevada Bob's Golf shops within Sport Chek stores and 14 GNC boutiques within Sport Chek, Coast Mountain Sports, Fitness Source and Hockey Experts locations.

Fiscal First Three Quarters Financial Results

The main drivers affecting financial results for the first three quarters include consumer caution, unseasonably wet weather in key urban markets in the first two quarters, and one time costs.

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

- Retail system sales-$1.058 billion, down 1.3% from $1.072 billion;

- Gross profit-$337.7 million, up 1.7% from $332.1 million;

- Gross margin-34.3% of revenue, compared with 34.4% of revenue;

- Store operating expenses-31.0% of corporate revenue compared with 29.9% of corporate revenue. Comparable store operating expenses were 28.5% versus 27.7% in the prior year. On an absolute dollar basis, store operating expenses were up $5.9 million from the prior year;

- General and administrative expenses-8.1% of total revenue down from 8.3%. Overall, general and administrative expenses increased only $0.1 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 items, the G&A run rate would have been 7.9% down 40 basis points from the prior year of 8.3%;

- EBITA-$49.4 million, down 1.0% from $49.9 million;

- Earnings-$5.9 million compared with $5.4 million; and

- Cash flow from operations-$37.5 million or $1.23 per share, compared with $32.2 million or $1.02 per share.

Balance Sheet:

The Company's working capital of $70.7 million increased 10.5% from the prior year.

Dividends:

On December 10, 2009, the Company declared a dividend of $0.075 per Class A share, payable on February 1, 2010 to shareholders of record on January 18, 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.

Preliminary Q4 Results:

As in previous years, FGL will disclose its Holiday Season sales and margin results in mid-January. The Holiday Season period encompasses the first 10 weeks of the fiscal fourth quarter, including Christmas and Boxing Day.

Overall 2010 fourth fiscal quarter results will be challenging compared with a year earlier, the second best fourth quarter in FGL's history. Sales in the first five weeks of the 2010 fourth fiscal quarter have been hindered by unseasonably warm weather across much of the country and by continuing consumer caution. This stands in contrast to the positive effects of weather in Q3. Same-store sales for the first five weeks of the fiscal fourth quarter declined 8.6% for corporate locations, against last year's increase of 0.1%, and decreased 14.2% for franchise stores, compared with a prior year increase of 6.2% for an overall retail system sales decrease of 10.7% versus an increase of 2.4% in fiscal 2009.

Additional Quarterly Disclosure:

In conjunction with the release, the Company invites you to listen to its teleconference call on Thursday, December 10th, 2009 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 December 24, 2009.

Replay Number: 1-416-640-1917 or 1-877-289-8525 (passcode 4188720#)

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 third quarter and year to date 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 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 expectations in respect of fourth quarter sales;

- the Company's progress in respect of its strategic objectives including, without limitation: (a) the Company's Spring 2010 timeline for the consolidation of its Coast Mountain Sports and Atmosphere banners and the opening of its first corporate Atmosphere store in March of 2010; and (b) the opening of additional GNC boutique stores outside the Calgary market in the coming fiscal year; and

- the Company's expectation that same store operating expenses in the remainder of this fiscal year will reflect prior year run rates.

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) (unaudited)

As at November 1, February 1, November 2,
2009 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Restated) (Restated)

ASSETS
Current
Cash $ 2,817 $ 3,474 $ 1,996
Accounts receivable 163,270 84,455 154,455
Inventory 394,462 291,497 378,978
Prepaid expenses 5,305 2,827 2,863
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565,854 382,253 538,292
Capital assets 205,634 196,765 191,761
Goodwill and other intangibles 96,003 91,434 91,452
Other assets 6,943 8,545 7,589
Future income tax asset 9,107 9,960 16,322
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$ 883,541 $ 688,957 $ 845,416
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LIABILITIES
Current
Indebtedness under revolving
credit facility $ 90,125 $ 17,130 $ 90,643
Accounts payable and accrued
liabilities 405,029 277,820 381,214
Current portion of long-term
debt - 7,501 2,398
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495,154 302,451 474,255
Long-term debt 5,945 126 4,623
Deferred lease inducements 44,682 47,811 49,824
Deferred rent liability 5,716 5,893 5,927
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551,497 356,281 534,629
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SHAREHOLDERS' EQUITY
Share capital 149,258 147,161 147,161
Contributed surplus 5,988 6,401 6,401
Accumulated other
comprehensive earnings 103 863 928
Retained earnings 176,695 178,251 156,297
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332,044 332,676 310,787
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$ 883,541 $ 688,957 $ 845,416
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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 39 weeks ended
November 1, November 2, November 1, November 2,
2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Restated) (Restated)
Revenue
Retail $ 255,305 $ 245,325 $ 672,893 $ 676,945
Wholesale 125,780 117,569 312,430 289,001
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381,085 362,894 985,323 965,946
Cost of sales 250,126 241,948 647,654 633,835
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Gross margin 130,959 120,946 337,669 332,111
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Operating and administrative
expenses
Store operating 72,431 66,302 208,430 202,545
General and administrative 27,519 27,310 79,842 79,690
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99,950 93,612 288,272 282,235
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Operating earnings before
undernoted items 31,009 27,334 49,397 49,876
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Amortization of capital
assets 13,846 11,983 38,910 34,504
Interest 664 2,609 2,001 4,568
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14,510 14,592 40,911 39,072
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Earnings before income taxes 16,499 12,742 8,486 10,804
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Income tax expense
Current 3,456 5,668 1,778 5,095
Future 1,659 427 853 323
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5,115 6,095 2,631 5,418
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Net earnings for the period $ 11,384 $ 6,647 $ 5,855 $ 5,386
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Basic and diluted earnings
per share $ 0.37 $ 0.22 $ 0.19 $ 0.17
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The Forzani Group Ltd.

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

For the 13 weeks ended For the 39 weeks ended
Consolidated Statements of November 1, November 2, November 1, November 2,
Retained Earnings 2009 2008 2009 2008
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(Restated) (Restated)

Retained earnings, beginning
of period $ 168,145 152,567 $ 178,251 $ 191,176
Adjustment arising from
adoption of new accounting
policies - (633) - (2,161)
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Adjusted Retained earnings,
beginning of period 168,145 151,934 178,251 189,015
Net earnings 11,384 6,647 5,855 5,386
Dividends (2,299) (2,284) (6,876) (7,042)
Adjustment arising from
shares purchased under a
normal course issuer bid (535) - (535) (31,062)
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Retained earnings, end of
period $ 176,695 156,297 $ 176,695 $ 156,297
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Consolidated Statements of
Comprehensive Earnings
----------------------------------------------------------------------------
For the 13 weeks ended For the 39 weeks ended
November 1, November 2, November 1, November 2,
2009 2008 2009 2008
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Net earnings $ 11,384 $ 6,647 $ 5,855 $ 5,386
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Other comprehensive earnings
(loss):
Unrealized foreign currency
gains (loss) on cash flow
hedges 371 1,391 (1,101) 1,439
Tax impact (115) (486) 341 (503)
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Other comprehensive earnings
(loss) 256 905 (760) 936
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Comprehensive earnings $ 11,640 $ 7,552 $ 5,095 $ 6,322
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Consolidated Statements of
Accumulated Other
Comprehensive Earnings
("AOCE")
----------------------------------------------------------------------------
For the 13 weeks ended For the 39 weeks ended
November 1, November 2, November 1, November 2,
2009 2008 2009 2008
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Accumulated other
comprehensive earnings
(loss), beginning of period $ (153) $ 23 $ 863 $ (8)
Other comprehensive earnings
(loss) 256 905 (760) 936
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Accumulated other
comprehensive earnings, end
of period $ 103 $ 928 $ 103 $ 928
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The Forzani Group Ltd.

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

For the thirteen For the thirty-nine
weeks ended weeks ended
November 1, November 2, November 1, November 2,
2009 2008 2009 2008
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(Restated) (Restated)

Cash provided by (used in)
operating activities
Net earnings for the period $ 11,384 $ 6,647 $ 5,855 $ 5,386
Items not involving cash:
Amortization of capital
assets 13,846 11,983 38,910 34,504
Amortization of deferred
finance charges 41 37 121 330
Amortization of deferred
lease inducements (2,666) (2,821) (8,524) (8,591)
Rent expense 33 70 92 74
Stock-based compensation 24 (1,120) 55 (174)
Future income tax expense 1,659 427 853 323
Unrealized loss on
ineffective hedges 149 345 104 344
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24,470 15,568 37,466 32,196
Changes in non-cash elements
of working capital related
to operating
activities 22,158 40,374 (58,254) (30,151)
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46,628 55,942 (20,788) 2,045
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Cash provided by (used in)
financing activities
Proceeds from issuance of
share capital 389 - 1,970 2,384
Share repurchase via normal
course issuer bid (876) - (876) (44,027)
Long-term debt (6,248) (879) (5,376) (1,762)
Revolving credit facility (24,386) (38,801) 72,995 90,643
Dividends paid (2,299) (2,284) (6,876) (7,042)
Lease inducements received 1,442 2,028 5,395 3,327
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(31,978) (39,936) 67,232 43,523
Changes in non-cash elements
of financing activities (1,225) (1,460) 3,079 (51,611)
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(33,203) (41,396) 70,311 (8,088)
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Cash provided by (used in)
investing activities
Capital assets (15,200) (11,538) (47,260) (34,611)
Other assets (366) (2,373) (551) (2,402)
Acquisition of assets - - (945) -
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(15,566) (13,911) (48,756) (37,013)
Changes in non-cash elements
of investing activities 2,053 (1,429) (1,424) (2,432)
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(13,513) (15,340) (50,180) (39,445)
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Decrease in cash (88) (794) (657) (45,488)
Cash position, opening 2,905 2,790 3,474 47,484
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Cash position, closing $ 2,817 $ 1,996 $ 2,817 $ 1,996
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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