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

The Forzani Group Ltd./Le Groupe Forzani Ltee

April 05, 2011 16:00 ET

FGL Announces Fourth Quarter Results and Strategic Update

CALGARY, ALBERTA--(Marketwire - April 5, 2011) - The Forzani Group Ltd. (TSX:FGL) ("FGL" or the "Company"), Canada's largest retailer of sporting goods, today reported fiscal 2011 results for the 13-week fourth quarter and 52-week annual period ended January 30, 2011.

"Our fourth quarter and annual results attest to the strength of our strategic plan and its execution over the past year," said Bob Sartor, FGL's Chief Executive Officer. "Despite significant increases in one-time and structural costs, we outperformed both our Canadian retail peer group and the North American sporting goods peer group in the key same-store sales metric, and delivered a 28% increase in EPS this past year."

"Looking to fiscal 2012, results from the start of the first quarter although strong in many categories, do not offset the previous year's strength in licensed apparel categories which were boosted by the 2010 Vancouver Olympics last year. Excluding licensed apparel, comparative store sales were in line with expectations despite poor spring weather, which we attribute to continuing execution of our strategic objectives."



Financial Summary

----------------------------------------------------------------------------
For the thirteen For the fifty-two
weeks ended weeks ended
----------------------------------------------------------------------------
Jan. 30, Jan. 31, Jan. 30, Jan. 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
Revenue ($000s)
Retail 343,457 317,813 1,060,541 990,706
Wholesale 67,471 55,110 388,178 367,540
---------------------------------------------
Total 410,928 372,923 1,448,719 1,358,246
----------------------------------------------------------------------------
EBITA Margin 12.2% 12.8% 7.6% 7.1%
----------------------------------------------------------------------------
Net Earnings ($000s) 24,215 22,923 35,418 28,778
----------------------------------------------------------------------------
Earnings Per Share (Diluted) $ 0.84 $ 0.75 $ 1.20 $ 0.94
----------------------------------------------------------------------------

Same-Store Sales (1)
Corporate 9.5% (4.1%) 7.5% (1.1%)
Franchise 3.7% (1.5%) 2.2% 0.0%
----------------------------------------------------------------------------
Consolidated 7.3% (3.1%) 5.5% (0.7%)
----------------------------------------------------------------------------

(1) 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 completed the planned consolidation of its two outdoor and lifestyle banners, Coast Mountain Sports and Atmosphere, and opened its first corporately-owned Atmosphere prototype store, in Red Deer, Alberta.

- During the year, as a test, FGL opened 11 GNC performance nutrition concept shops within FGL stores in the Edmonton market as a follow up to the prior year's test in the Calgary market.

- During the year, FGL added an additional 41 Nevada Bob's Golf concept shops to Sport Chek stores, and continued to close less profitable stand-alone Nevada Bob's stores. Plans for fiscal 2012 are to add an additional 19 concept shops to existing Sport Chek locations.

- Based on the success of the Nevada Bob's Golf concept shops, FGL opened 27 Hockey Experts concept shops within key Sport Chek stores. These shops expand the product offering to meet the needs of "elite" level players. Plans for fiscal 2012 are to add an additional 20 concept shops to existing Sport Chek locations.

- Late in the year, FGL opened its first S3 concept shop within Sport Chek. As the name suggests, the S3 concept is targeting "Surf, Skate, Snow" footwear and clothing categories by adding authentic surf and skate brands to Sport Chek's category-killer selection of snowboard brands. Plans for fiscal 2012 are to add a further 22 concept shops to existing Sport Chek locations.

- FGL completed its first full year of business in its e-commerce initiative, Sportchek.ca. FGL is now able to reach 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 10,000 unique product styles and colours. The site is supported by world class e-commerce provider GSI Commerce Solutions Inc. In the coming year, FGL plans to further improve the site's consumer experience while expanding its product selection.

- Subsequent to year end, FGL completed the acquisition of Toronto-based Sports International CSTS Inc. ("Sportsphere"), a manufacturer and distributor of team and corporate logo'd apparel. In keeping with its stated intention to extend its consumer reach, FGL plans to integrate Sportsphere into its wholesale operations and grow its sales/marketing channels across Canada.

Fiscal Fourth Quarter Financial Results

FGL's fiscal 2011 fourth quarter same-store sales increase of 7.3% was the result of continued execution of the Company's strategic initiatives in key hard-good categories, the impact that seasonably cold weather had on sales of winter categories early in the quarter and improved consumer confidence throughout the Christmas and Boxing Day period. FGL's annualized same-store sales performance of 5.5% exceeded both the Canadian retail peer group at 0.8% and the North American sporting goods peer group at 4.7%.

FGL's total revenue was up 10.2% from a year earlier and included an 8.1% increase in retail sales and a 22.4% increase in wholesale sales to third parties and the franchise network. The wholesale sales increase was driven by early shipment of key spring product lines by the INA International division.

Retail system sales, which include sales from corporate and franchise stores, were $532.3 million, an increase of $32.4 million, or 6.5%, from the comparable 13-week sales of $499.9 million a year earlier.

Gross profit was $163.2 million, up 6.9% from $152.6 million a year earlier, and gross margin was 39.7% of revenue compared with 40.9% of revenue a year earlier. The reduced gross margin rate was primarily due to pricing strategy in the corporate division and a shift in the revenue mix toward lower margined wholesale from higher margined corporate revenues, which offset margin rate gains in the wholesale business.

Store operating expenses were flat in absolute dollars for the fiscal 2011 fourth quarter from a year earlier. As a percentage of retail revenues, store operating expenses fell to 22.3% from 24.1% in the prior year, reflecting the impact of the strong sales results on variable costs. Same-store operating expenses were 18.7% of corporate store revenue compared to 21.9% in the prior year. Same-store expenses, in absolute dollars, decreased $4.0 million or 6.1% as a result of tightly controlled store wages which more than offset increased accruals for year end performance-based compensation driven by the increase in sales.

General and administrative expenses were 8.9% of revenues compared with 7.6% a year earlier. In absolute dollars, general and administrative costs were up $8.2 million primarily as a result of the following:

- $2.8 million increase in accruals for performance-based compensation costs resulting from the Company's 27% increase in annual EPS from the prior year;

- $4.0 million increase in stock-based compensation costs resulting from the 28% increase in the value of the Company's shares in the quarter;

- $1.3 million in non-capitalizable information technology project costs; and

- $0.5 million increase in net advertising expenditures, made to drive foot traffic in the key selling period.

EBITA(1) was $50.0 million or 12.2% of revenues, up $2.3 million and 4.9% respectively from the prior year's fourth quarter, as incremental sales and margins more than offset the increased general and administrative expenses.

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

Earnings before income taxes were $36.6 million, up 12.3% when compared with pre-tax earnings of $32.6 million a year earlier.

Net earnings for the quarter were $24.2 million or $0.84 per share, compared with $22.9 million or $0.75 per share earned in the prior year. The current quarter's earnings were negatively impacted by a higher tax rate resulting from Federal Budget changes related to taxation of stock-based compensation costs. This change reduced net earnings by $1.5 million in the quarter or $0.05 per share.

Cash flow from operations(2) increased to $45.6 million, or $1.59 per share, from $38.0 million, or $1.24 per share, in the prior year.

Fourth Quarter Store Activity

At the end of the fourth quarter, the Company had 534 stores, 24 less than a year earlier. However, the Company had only 0.4% less retail selling space (a reduction of 23,520 square feet) compared with a year earlier, due to FGL's strategy of increasing average store size while closing smaller, less profitable locations. Corporate stores totalled 321 at the end of the fourth quarter, down 21 from a year earlier, while franchise stores totalled 213, down three from a year earlier.

During the quarter, the Company decreased the net number of corporate stores by nine with the closing of six Sport Mart stores, two Nevada Bob's Golf stores, one Fitness Source store, one Athletes World store and one Sport Chek store. Offsetting the eleven closures listed above, FGL opened two additional Sport Chek locations and converted one Nevada Bob's Golf store to a Fitness Source store.

In the franchise division, the store count remained static during the quarter, as FGL franchisees opened two Atmosphere stores while amalgamating one Fitness Source and one Nevada Bob's Golf stores into an adjacent Sports Experts store.

Fiscal 2011 Annual Financial Results

The main drivers affecting financial results for the year consisted of: our strategic initiative roll-out and tactical marketing execution in support of one-time sports related events such as the Vancouver 2010 Winter Olympics and FIFA World Cup, favourable weather throughout much of the year, and improved "post-recession" consumer confidence. Disciplined expense controls helped to offset significant one-time and performance related costs incurred during the year.

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-$1.635 billion, up 4.9% from $1.558 billion;

- Gross profit-$518.9 million, up 8.6% from $478.0 million;

- Gross margin-35.8% of revenue, compared with 35.2% of revenue;

- Store operating expenses-27.6% of corporate revenue compared with 28.8% of corporate revenue. Same-store operating expenses were 24.3% versus 26.2% in the prior year. On an absolute dollar basis, comparable store operating expenses were down $0.4 million from the prior year;

- General and administrative expenses-8.0% of total revenue up from 7.1%. Overall, general and administrative expenses increased $20.2 million in absolute dollars due primarily to significant increases in four key areas:

-- $7.9 million in performance-based compensation resulting from the 28% increase in EPS from the prior year;

-- $5.5 million in stock-based compensation costs resulting from the 31% increase in the Company's share price over the year;

-- $3.8 million in non-capitalizable information technology project costs; and

-- $1.3 million in additional net marketing expenditures made to support various events and initiatives throughout the year, including the Atmosphere re-bannering, Vancouver Olympics, FIFA World Cup and the Nike Livestrong product launch.

- EBITA-$109.7 million, versus $97.1 million in the prior year;

- Earnings-$35.4 million or $1.20 per share (diluted) compared with $28.8 million or $0.94 per share (diluted). As noted above, earnings for the year were negatively impacted by a higher tax rate resulting from Federal Budget changes related to taxation of stock-based compensation costs. This change reduced net earnings by $1.5 million or $0.05 per share;

- Cash flow from operations-$92.9 million or $3.16 per share, a 19.4% increase when compared with $77.8 million or $2.55 per share in the prior year; and

- Return on equity - 10.1%, up 171 basis points compared to 8.39% in the prior year.

Balance Sheet

The Company's working capital was $97.9 million, down $3.1 million or 3.1% from the prior year. This reduction was primarily the result of the Company's repurchase of $35.7 million of its shares under the Normal Course Issuer Bid during the year.

Dividends

On April 5, 2011, the Company declared a dividend of $0.075 per Class "A" share, payable on May 2, 2011 to shareholders of record on April 18, 2011. 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 Q1 Results

As expected, results in the first eight weeks of the fiscal 2012 were down slightly when compared to the prior year's first quarter results. The first four weeks sales were up against sales of Vancouver 2010 Winter Olympic licensed products, which offset positive same store results in all other categories to post a decline of 3.3%. Excluding licensed product sales, comparative store sales were up 5.1% across all categories. In the subsequent four weeks, continuing winter weather hampered sales of spring hard-good categories to post an overall 2.8% comparative store decline.

Overall retail system same store sales decreased by 2.1% for the first eight weeks (against the prior year's increase of 14.5%). Of the total decline, same-store sales in the period decreased by 3.0% for corporate locations (against the prior year's increase of 15.5%), and decreased by 0.2% for franchise stores, (against the prior year's increase of 12.7%).

Additional Quarterly Disclosure

In conjunction with this release, the Company invites you to listen to its teleconference call on Tuesday, April 5th, 2011 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. The presentation materials are also currently available on our website at www.forzanigroup.com.

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 12th, 2011.

Replay Number: 1-416-640-1917 or 1-877-289-8525 (passcode 4415121#)

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.

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 plans with respect to the opening of concept shops within its Sport Chek stores including, without limitation, 19 Nevada Bob's Golf shops, 20 Hockey Experts shops and 22 S3 shops; (b) the Company's intentions with respect to the improvements in its online retailing capabilities; and (c) the integration of Sportsphere into the Company's wholesale operations and the growth in that business generally.

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, Atmosphere, Sport Mart, National Sports, Athletes World, Sports Experts, Intersport, Atmosphere, Tech Shop, 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)

January 30, January 31,
As at 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS
Current
Cash $ 951 $ 962
Accounts receivable 81,738 71,544
Inventory 349,007 316,319
Prepaid expenses 6,191 5,092
----------------------------------------------------------------------------
437,887 393,917
Capital assets 191,842 199,589
Goodwill and other intangibles 95,835 95,990
Other assets 14,492 5,914
Future income tax asset 59 6,519
----------------------------------------------------------------------------
$ 740,115 $ 701,929
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES
Current
Indebtedness under revolving credit facility $ 19,969 $ 27,932
Accounts payable and accrued liabilities 320,026 265,007
----------------------------------------------------------------------------
339,995 292,939
Other liabilities 6,904 6,177
Deferred lease inducements 39,871 44,062
Deferred rent liability 5,034 5,525
----------------------------------------------------------------------------
391,804 348,703
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Share capital 144,908 150,359
Contributed surplus 5,317 5,770
Accumulated other comprehensive (loss) earnings (378) 34
Retained earnings 198,464 197,063
----------------------------------------------------------------------------
348,311 353,226
----------------------------------------------------------------------------
$ 740,115 $ 701,929
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Forzani Group Ltd.
Consolidated Statements of Operations
(in thousands, except per share data)

For the 52 weeks ended
January 30, January 31,
2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenue
Retail $ 1,060,541 $ 990,706
Wholesale 388,178 367,540
----------------------------------------------------------------------------
1,448,719 1,358,246
Cost of sales 929,808 880,209
----------------------------------------------------------------------------

Gross margin 518,911 478,037
----------------------------------------------------------------------------
Operating and administrative expenses
Store operating 292,915 284,895
General and administrative 116,268 96,073
----------------------------------------------------------------------------
409,183 380,968
----------------------------------------------------------------------------

Operating earnings before undernoted items 109,728 97,069
----------------------------------------------------------------------------

Amortization of capital assets 54,047 53,504
Interest 2,843 2,488
----------------------------------------------------------------------------
56,890 55,992
----------------------------------------------------------------------------

Earnings before income taxes 52,838 41,077
----------------------------------------------------------------------------

Income tax expense
Current 10,960 8,858
Future 6,460 3,441
----------------------------------------------------------------------------
17,420 12,299
----------------------------------------------------------------------------

Net earnings for the period $ 35,418 $ 28,778
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per share $ 1.21 $ 0.94
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings per share $ 1.20 $ 0.94
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Forzani Group Ltd.
Consolidated Statements of Retained Earnings, Comprehensive Earnings and
Accumulated Other Comprehensive (Loss) Earnings (in thousands)

For the 52 weeks ended
January 30, January 31,
Consolidated Statements of Retained Earnings 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Retained earnings, beginning of period $ 197,063 $ 178,251
Net earnings 35,418 28,778
Dividends paid (8,792) (9,174)
Adjustment arising from shares purchased
under a normal course issuer bid (25,225) (792)
----------------------------------------------------------------------------
Retained earnings, end of period $ 198,464 $ 197,063
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Consolidated Statements of Comprehensive
Earnings
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net earnings $ 35,418 $ 28,778
----------------------------------------------------------------------------
Other comprehensive loss:
Unrealized foreign currency losses on cash
flow hedges (601) (1,277)
Tax impact 189 448
----------------------------------------------------------------------------
Other comprehensive earnings loss (412) (829)
----------------------------------------------------------------------------
Comprehensive earnings $ 35,006 $ 27,949
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Accumulated Other Comprehensive
(Loss) Earnings ("AOCE")
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated other comprehensive earnings,
beginning of period $ 34 $ 863
Other comprehensive loss (412) (829)
----------------------------------------------------------------------------
Accumulated other comprehensive (loss)
earnings, end of period $ (378) $ 34
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Forzani Group Ltd.
Consolidated Statements of Cash Flows
(in thousands)

For the 52 weeks ended
January 30, January 31,
2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Cash provided by (used in) operating activities
Net earnings for the period $ 35,418 $ 28,778
Items not involving cash:
Amortization of capital assets 54,047 53,504
Amortization of deferred finance charges 149 158
Amortization of deferred lease inducements (10,729) (11,404)
Rent expense 609 90
Stock-based compensation 6,925 3,239
Future income tax expense 6,460 3,441
----------------------------------------------------------------------------
92,879 77,806
Changes in non-cash elements of working capital
related to operating activities 6,813 (24,354)
----------------------------------------------------------------------------
99,692 53,452
----------------------------------------------------------------------------
Cash provided by (used in) financing activities
Net proceeds from issuance of share capital 4,046 2,994
Share repurchase via normal course issuer bid (35,684) (1,299)
Other liabilities (1,737) (7,501)
Revolving credit facility (7,963) 10,802
Lease inducements received 6,538 7,656
Dividends paid (8,792) (9,174)
----------------------------------------------------------------------------
(43,592) 3,478
Changes in non-cash elements of financing
activities (1,840) (2,359)
----------------------------------------------------------------------------
(45,432) 1,119
----------------------------------------------------------------------------
Cash provided by (used in) investing activities
Capital assets (45,510) (55,643)
Other assets (1,909) (485)
Acquisition of assets - (945)
----------------------------------------------------------------------------
(47,419) (57,073)
Changes in non-cash elements of investing
activities (6,852) (10)
----------------------------------------------------------------------------
(54,271) (57,083)
----------------------------------------------------------------------------
Decrease in cash (11) (2,512)
Net cash position, opening 962 3,474
----------------------------------------------------------------------------
Net cash position, closing $ 951 $ 962
----------------------------------------------------------------------------
----------------------------------------------------------------------------



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