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

The Forzani Group Ltd./Le Groupe Forzani Ltee

August 31, 2005 05:00 ET

FGL Announces Second Quarter Results and Early Back to School Performance

CALGARY, ALBERTA--(CCNMatthews - Aug. 31, 2005) - The Forzani Group Ltd. (TSX:FGL), Canada's largest retailer of sporting goods, today reported second quarter results for the three months ended July 31, 2005.

For the Second Quarter:

Sales:

Retail system sales for the quarter were $305.1 million, an increase of $48.7 million, or 19.0% from the comparable 13 week number of $256.4 million. The increase was partly due to the addition of the Nevada Bob's franchise retail sales and the National Sports corporate retail volume, a result of their acquisition by FGL. Without these volumes, the existing retail business generated system retail sales of $270.1 million, a 5.3% increase over last year.

Revenue, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, was $243.6 million, up $27.2 million, or 12.6% over the comparable period last year. Again, this was partly driven by the Nevada Bob's and National Sports revenues. Excluding these two, the revenues were $221.3 million, a 2.3% increase over the prior year. Comparable store sales from corporate stores were up 0.2%, while franchise comparable store sales increased by 4.6%. The corporate store performance was driven by a decline of 4.3% in the Sport Mart banner. The Sport Chek / Coast Mountain Sports stores generated positive comparable store sales of 1.3% for the quarter. The consolidated corporate store increase was the first quarterly comparable store sales increase in 10 quarters.

Gross Margins:

Combined gross margin for the 13 weeks ended July 31, 2005 was 34.2% of revenue, or $83.2 million, down 2.1% from the previous year. On an absolute dollar basis, margin increased by $4.6 million. The margin rate erosion was driven principally by margin reduction in the Sport Chek and Sport Mart banners, as both took markdowns to further reduce inventory levels and make room for fresh merchandise in the stores.

Expenses:

Store operating expenses of $55.2 million were up $10.1 million, or 28.8% of retail revenues versus $45.1 million or 27.7% in the prior year. The absolute dollar increase was due to the addition of National Sports stores and additional labor required to re-merchandise the Sport Chek stores as part of their retrofit. Absolute dollar expenses in comparable stores were up only $0.8 million.

General and Administrative ("G&A") expenses, at $19.4 million, were 8.0% of revenues versus $18.8 million or 8.7% in the prior year. Exclusive of the Nevada Bob's and National Sport expenses, comparable G&A costs were actually down $0.8 million for the quarter as a result of management's focus on cost management in the business.

Earnings and Earnings Per Share:

The Company recorded a net loss of $2.3 million for the second quarter, or $0.07 per share, compared to a profit of $2.0 million or $0.06 per share in the prior year.

For the Year to Date:

Retail system sales for the 26 weeks ended July 31, 2005 were $564.9 million, an $80.7 million increase from sales for the 26 weeks ended August 1, 2004. As mentioned above, this is primarily a result of the acquisition of National Sports in the first quarter of fiscal 2005. Comparable sales in corporate stores decreased 2.3%, while franchise stores increased 6.8%, with total comparable retail system sales increasing 0.9%.

Revenue was $481.8 million, a $36.8 million, or 8.3% increase over the 26-week period last year. Combined gross margin for the 26 weeks ended July 31, 2005 was down 180 basis points to 31.6% of revenue, from 33.4% in the prior year. In absolute dollars, the combined gross margin increased $3.4 million, to $152.2 million, from the 26-week period last year.

Store operating expenses, as a percent of corporate revenue, were 29.8% versus 28.8% in the prior year. General and administrative expenses were 7.7% of total revenue versus 7.4% in the prior year.

EBITDA was $8.6 million, or 1.8% of total revenue, compared to 5.8% for the same period last year. Earnings before income taxes for the 26 weeks ended July 31, 2005 were a loss of $15.3 million compared to a $4.4 million profit for the 26-week period in the prior year.

Basic and diluted earnings (loss) per share for the 26-week period ended July 31, 2005 were ($0.30), compared to $0.09 in the prior year. Cash flow from operations decreased from $19.2 million to $7.1 million. On a per share basis, cash flow decreased 62.7% to $0.22 compared to $0.59 the prior year.

Inventories:

Total inventories were $312.9 million, a 6.9% increase over the prior year. Excluding National Sports and new stores opened in the last year, comparable store inventories were down 5.8% or $16.6 million versus the prior year.

Management Comments:

On the second quarter

The second quarter unfolded as expected. Margins started the quarter where they ended in Q1, well below the prior year. As the Company worked its way through the balance of the merchandise that was dated or no longer part of the revamped assortment, completed the revitalization of its Sport Chek banner, and re-merchandised the Sport Chek stores with new product, margin began to dramatically improve. Sport Chek is now consistently delivering year over year comparable store sales increases at margins significantly in excess of the prior year. Sport Chek is beginning to rebound according to plan.

Sport Mart, a second corporate banner is now undergoing a revitalization similar to that just completed with Sport Chek. Planned changes for that banner will be tested in the fall and rolled out in spring '06. Unlike the revitalization completed at Sport Chek, the impact on the financial results of the Sport Mart revitalization are not expected to be material as that banner's inventory levels are significantly lower than Sport Chek, and its store base is much newer, requiring less work and disruption to its results.

Store Activity:

During the quarter the franchise business hit its targets and both of the wholesale businesses, The Forzani Group wholesale division (operating as Gen-X Sports) and Intersport North America, our private label arm, generated solid profits.

On Back to School

The Forzani Group is off to its best Back to School start in several years, driven by a revitalized Sport Chek business. A great product assortment, complimented by a completely refreshed in-store experience and strong, new marketing initiatives have driven Sport Chek, our largest banner and a key driver of our overall performance, to solid comparable store revenue gains of 3.9%, at higher margins than last year. We expected that comparable store sales would come first, as they did throughout most of the second quarter, and that margins would follow, as they are doing so now. Sport Mart trails Sport Chek with flat comparable store sales to date for Back to School, but we believe that it too will rebound as Sport Chek has done after its revitalization is completed. As indicated in our first quarter press release, we expect continued improvement in our results in the back-half of the year, setting the stage for a strong year next year as our corporate store issues are resolved and our franchise and wholesale businesses continue their strong performance.

Store Activity:

During the quarter, the Company opened 4 corporate stores (3 Sport Chek and 1 Coast Mountain Sports) and closed 1 Sport Chek store. In the franchise division, 5 stores were opened (4 Nevada Bob's and 1 Buying Member) and 2 Intersport stores were closed. As a result, at the end of the second quarter, the Company had 255 corporate stores and 197 franchise locations. This was a net increase of 102,000 square feet of retail selling space, a 1.85% increase versus the previous quarter. The Company now has 452 stores from coast to coast (Q2 Fiscal 2005 - 392 stores).

Teleconference Call:

In conjunction with this release, the Company invites you to listen to its teleconference call scheduled for Wednesday, August 31st at 8:00 am (Eastern time).

To listen to the teleconference call, please dial the following number approximately five minutes prior to commencement:

Within Toronto: 416-640-4127

Outside Toronto: 1-800-796-7558

Replay: Should you be unable to join the conference call, an audio recording will be available approximately three hours after the call until September 13, 2005.

Replay Number: 1-416-640-1917 or 1-877-289-8525 (passcode 21134153#)

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 four corporate banners: Sport Chek, Coast Mountain Sports, Sport Mart and National Sports. The Company also retails on-line at www.sportmart.ca and provides a content rich sporting goods information site at www.sportchek.ca. The Forzani Group is also a franchisor under the banners: Sports Experts, Intersport, RnR, Econosports, Atmosphere, Tech Shop and Nevada Bob's Golf.

The foregoing information may contain forward-looking statements relating to the future performance of The Forzani Group Ltd. Forward-looking statements, specifically those concerning future performance, are subject to certain risks and uncertainties, and actual results may differ materially. The Company, in compliance with the reporting requirements of the various securities commissions, details these risks and uncertainties from time to time.



THE FORZANI GROUP LTD.
Consolidated Balance Sheets
(in thousands)
(unaudited)

------------------------------------------------------------------------
As at July 31, January 30, August 1,
2005 2005 2004
(restated -
see note 2)
------------------------------------------------------------------------

ASSETS
Current
Cash $ 1,444 $ 26,018 $ 668
Accounts receivable 80,597 54,651 72,694
Inventory 312,867 278,631 292,673
Prepaid expenses 3,887 3,022 12,198
-------------------------------------
398,795 362,322 378,233
Capital assets 189,063 179,702 170,064
Goodwill and other intangibles 75,319 52,790 46,632
Other assets 9,423 9,415 7,566
Future income tax asset 4,653 - 2,953
-------------------------------------

$ 677,253 $ 604,229 $ 605,448
------------------------------------------------------------------------

LIABILITIES
Current
Indebtedness under revolving
credit facility $ 94,200 $ - $ 66,822
Accounts payable and accrued
liabilities 197,149 234,314 199,670
Current portion of long-term debt 584 1,580 858
-------------------------------------
291,933 235,894 267,350
Long-term debt 63,583 40,278 35,391
Deferred lease inducements 64,363 62,613 57,691
Deferred rent liability 3,200 2,213 1,108
Future income tax liability - 384 -
-------------------------------------
423,079 341,382 361,540
-------------------------------------
SHAREHOLDERS' EQUITY
Share capital 138,003 137,811 135,112
Contributed surplus 3,790 2,915 4,446
Retained earnings 112,381 122,121 104,350
-------------------------------------
254,174 262,847 243,908
-------------------------------------

$ 677,253 $ 604,229 $ 605,448
------------------------------------------------------------------------
------------------------------------------------------------------------


THE FORZANI GROUP LTD.
Consolidated Statements of Operations and Retained Earnings
(in thousands, except per share data)
(unaudited)

For the thirteen For the twenty-six
weeks ended weeks ended
------------------------------------------------------------------------
July 31, August 1, July 31, August 1,
2005 2004 2005 2004
------------------------------------------------------------------------
(restated) (restated)
------------------------------------------------------------------------

Revenue
Retail $ 191,282 $ 162,706 $ 358,086 $ 313,258
Wholesale 52,348 53,663 123,746 131,738
------------------------------------------------------------------------
243,630 216,369 481,832 444,996
Cost of sales 160,467 137,768 329,604 296,163
------------------------------------------------------------------------

Gross margin 83,163 78,601 152,228 148,833

Operating and
administrative
expenses
Store operating 55,150 45,113 106,739 90,185
General and
administrative 19,423 18,773 36,880 32,977
------------------------------------------------------------------------
74,573 63,886 143,619 123,162
------------------------------------------------------------------------

Operating earnings
before undernoted
items 8,590 14,715 8,609 25,671

Amortization 10,536 8,798 20,725 17,471
Interest 1,712 1,019 3,222 1,940
Write-down of investment - 1,814 - 1,814
------------------------------------------------------------------------
12,248 11,631 23,947 21,225
------------------------------------------------------------------------

Earnings (loss)
before income taxes (3,658) 3,084 (15,338) 4,446
Income tax expense
(recovery)
Current (644) 1,878 (4,954) 2,784
Future (691) (753) (644) (1,160)
------------------------------------------------------------------------
(1,335) 1,125 (5,598) 1,624
------------------------------------------------------------------------
Net earnings (loss)
for the period $ (2,323) $ 1,959 $ (9,740) $ 2,822
------------------------------------------------------------------------

------------------------------------------------------------------------
Retained earnings,
beginning of period 114,704 102,391 122,121 101,528
------------------------------------------------------------------------
Retained earnings,
end of period $ 112,381 $ 104,350 $ 112,381 $ 104,350
------------------------------------------------------------------------
------------------------------------------------------------------------
Basic and diluted
earnings (loss)
per share $ (0.07) $ 0.06 $ (0.30) $ 0.09
------------------------------------------------------------------------
------------------------------------------------------------------------


THE FORZANI GROUP LTD.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

For the thirteen For the twenty-six
weeks ended weeks ended
------------------------------------------------------------------------
July 31, August 1, July 31, August 1,
2005 2004 2005 2004
------------------------------------------------------------------------
(restated) (restated)
------------------------------------------------------------------------

Cash provided by (used in)
operating activities
Net earnings (loss)
for the period $ (2,323) $ 1,959 $ (9,740) $ 2,822
Items not involving cash
Amortization 10,536 8,798 20,725 17,471
Amortization of
finance charges 181 164 423 414
Amortization of deferred
lease inducements (2,955) (2,374) (5,394) (4,832)
Straight-line rent expense 96 564 874 1,108
Stock-based compensation 542 793 875 1,559
Future income tax expense
(recovery) (691) (753) (644) (1,160)
Write-down of investment - 1,814 - 1,814
------------------------------------------------------------------------
5,386 10,965 7,119 19,196
Changes in non-cash
operating elements
of working capital 1,422 5,476 (95,227) (82,639)
------------------------------------------------------------------------
6,808 16,441 (88,108) (63,443)
------------------------------------------------------------------------
Cash provided by (used in)
financing activities
Proceeds from issuance
of share capital 84 560 192 2,308
Increase (decrease)
in long-term debt 23,845 (2,706) 23,800 (2,046)
Increase (decrease)
in revolving credit
facility (13,183) (3,644) 76,278 66,822
Proceeds from deferred
lease inducements 1,816 1,162 3,774 2,358
------------------------------------------------------------------------
12,562 (4,628) 104,044 69,442
------------------------------------------------------------------------
Cash (used in) investing
activities
Acquisition of wholly
owned subsidiary,
net of cash acquired - (12,428) (9,589)
Net addition of capital
assets (19,104) (11,173) (26,939) (18,683)
Net addition of
other assets (615) (595) (1,143) (374)
------------------------------------------------------------------------
(19,719) (11,768) (40,510) (28,646)
------------------------------------------------------------------------
Increase (decrease)
in cash (349) 45 (24,574) (22,647)
Net cash position,
beginning of period 1,793 623 26,018 23,315
------------------------------------------------------------------------

Net cash position,
end of period $ 1,444 $ 668 $ 1,444 $ 668
------------------------------------------------------------------------
------------------------------------------------------------------------


Contact Information

  • The Forzani Group Ltd.
    Robert Sartor, C.A.
    Chief Executive Officer
    (403) 717-1342
    or
    The Forzani Group Ltd.
    Bill Gregson, C.A.
    President & Chief Operating Officer
    (403) 717-1386