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The Forzani Group Announces Q1 Result and Strategic Updates

By
June 09, 2010 6:34 AM

- Same store sales rise 9.8%

- Total revenue up 6.9%

- Earnings of 7 cents per share vs. 4 cents per share

Press Release:

CALGARY, ALBERTA--(Marketwire - June 8, 2010) - The Forzani Group Ltd. (TSX:FGL - News; "FGL" or the "Company"), Canada's largest retailer of sporting goods, today reported first quarter fiscal 2011 results for the 13-weeks ended May 2, 2010.

"Our strategic initiatives, our strong market share and seasonal weather all contributed to improved same store sales, margin and operating cost in the first quarter of fiscal 2011." said Bob Sartor, FGL's Chief Executive Officer. "Even though the first quarter is seasonally the weakest of the year, and even though we incurred one-time re-branding costs for our Atmosphere stores and a significant increase in stock-based compensation costs due to the increase in our share price, we nevertheless reduced our loss per share by 50% from a year earlier."

"But for the one-time marketing costs and the incremental stock-based compensation expense, we would have achieved earnings of $0.07 per share for the first quarter of fiscal 2011 compared with the loss of $0.04 per share in the first quarter of fiscal 2010."

"During the first quarter of fiscal 2011, we made further progress against our strategic plan to unify and simplify our business, expand our reach and improve productivity. With each step forward, we are improving FGL's prospects for long term growth and profitability."

Progress Against Strategic Plan

FGL's progress during the first quarter against its strategic plan included, but was not limited to, the following:

- Executing on the planned consolidation of its two outdoor and lifestyle banners, Coast Mountain Sports and Atmosphere. As part of the operational and marketing plans, the Company undertook a one-time $1.9 million multi-channel advertising campaign to support the re-launch and, as previously reported, opened its first corporately-owned Atmosphere prototype store in Red Deer, Alberta.

- Identifying 11 Alberta based Sport Chek stores as the next test markets for GNC performance nutrition boutiques. These boutiques are planned to open within the next two quarters.

- Adding an additional 30 Nevada Bob's Golf boutiques to Sport Chek stores. Plans for fiscal 2011 are to add a total of 38 boutiques in existing Sport Chek locations.

- Commencing the next generation of purchasing, allocation and distribution information system enhancement project.

- FGL continued to benefit from the October 28, 2009 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 launched with an initial catalogue of approximately 5,000 unique product styles and colours, has now grown to an offering of more than 8,000. The site is supported by world class e-commerce provider GSI Commerce Solutions Inc. By the end of the first quarter, the site had hosted in excess of 5.4 million unique daily visitors. During the first quarter, weekly site traffic continued to grow and is now equal to that seen during the 2009 Christmas season. In addition, during the first quarter, the Company launched online customer surveys to measure service levels and assess areas for continued site enhancement.

Fiscal First Quarter Financial Results

FGL's fiscal 2011 first quarter same-store retail system sale(3) increase of 9.8% was the result of a number of factors. First, the tactics of FGL's strategic plan to increase its golf, fitness and cycling businesses within Sport Chek delivered a combined 27% same-store sales increase in the quarter in those categories. Second, seasonable weather through much of the quarter positively impacted sales of all spring categories, most notably outerwear, athletic clothing, footwear and hockey equipment. Third, the 2010 Vancouver Olympics spurred sales of licensed apparel, in particular Team Canada hockey jerseys. The 9.8% sales increase compares favourably to the Company's Canadian retail peer group (increase of 3.5%) and those posted by the North American sporting goods group (increase of 4.9%) for their latest quarters.

(3) Refer to Non-GAAP measures below

FGL's total revenue was up 6.9% from a year earlier despite a 5.2% decline in wholesale sales to third parties and the franchise network. The decline in wholesale sales mainly reflected a 7.7% decline in sales to franchisees as a result of the year over year reduction in store count within the franchise network, primarily the result of the conversion of nine Fitness Source franchise locations to corporate late in the first quarter of fiscal 2010 and closures of Nevada Bob's "stand-alone" stores as part of our strategic initiative to improve the profitability of that business via Sport Chek based boutiques.

Retail system sales, which include sales from corporate and franchise stores, were $349.4 million, an increase of $30.8 million, or 9.7%, from the comparable 13-week sales of $318.6 million a year earlier.

Gross profit was $114.3 million, up 14.7% from $99.6 million a year earlier, and gross margin was 34.8% of revenue compared with 32.4% of revenue a year earlier. During the quarter, corporate distribution centre costs were reclassified to Cost of Goods Sold (previously included in general and administrative costs) in order to be more comparable to the Company's peer group. The improved gross margin rate was primarily due to gains in the corporate retail business, where previous improvements to the aging and mix of inventory allowed the Company to avoid the significant discounting that was required a year earlier. The shift in the revenue mix toward higher margined retail from lower margined wholesale revenues also helped boost the rate.

Store operating expenses increased $4.3 million for the fiscal 2011 first quarter from a year earlier, reflecting the opening, during the prior year, of additional corporate locations. Same-store operating expenses were 28.0% of corporate store revenue compared to 30.6% in the prior year. Same-store expenses, in absolute dollars, increased $1.1 million or 2.0%.

General and administrative expenses were 9.2% of revenues compared with 7.0% a year earlier. In absolute dollars, general and administrative costs were up $8.7 million. Much of this increase was the result of three key expense items:

1) $3.5 million in incremental marketing costs, of which $1.9 million was a one-time planned advertising campaign to costs to support the Coast Mountain Sports re-launch as Atmosphere;

2) $2.3 million increase in stock-based compensation costs due to share price appreciation during the quarter;

3) and $0.8 million increase in accruals for fiscal 2011 performance-based compensation costs due to the Company's estimate that a larger population of its key employees will achieve their performance targets for the year, than was estimated at the same time last year.

EBITA was $13.2 million or 4.0% of revenues, up $1.7 million and 0.3% respectively from the prior year's first quarter, as incremental sales and margins more than offset the increased operating and administrative costs.

The net loss for the first quarter of fiscal 2011 was $0.7 million, a 38% improvement compared with the net loss of $1.1 million in the first quarter of the prior year. The loss per share was $0.02 in the first quarter of fiscal 2011, a 50% improvement compared with the loss of $0.04 per share in the first quarter of fiscal 2010.

Cash flow from operations(4) increased to $10.4 million, or $0.34 per share, from $8.3 million, or $0.27 per share, in the prior year.

(4) Refer to Non-GAAP measures below

First Quarter Store Activity

At the end of the first quarter, the Company had 552 stores, which is nine less than a year earlier. However, the Company also had 2.5% more retail selling space (an extra 161,936 square feet) compared with a year earlier, due to FGL's strategy of increasing store size. Corporate stores totalled 337 at the end of the first quarter, down by six from a year earlier, while franchise stores totalled 215, down one from a year earlier.

During the quarter, the Company decreased the number of corporate stores by five. FGL closed three Sport Mart stores, two Athletes World stores, and one each of Nevada Bob's Golf and Fitness Source stores while opening one Atmosphere store and converting one Nevada Bob's Golf franchise location to corporate ownership.

The franchise division had a net reduction of one store during the quarter, as FGL franchisees opened three stores (two Atmosphere and one Intersport) while closing three (one Intersport, one Sports Experts and one Nevada Bob's Golf) and converting one Nevada Bob's franchise location to corporate ownership.

Balance Sheet

The Company's working capital was $95.6 million, up 27.6% from the prior year.

Dividends

On June 8, 2010, the Company declared a dividend of $0.075 per Class "A" share, payable on August 2, 2010 to shareholders of record on July 19, 2010. All dividends paid by the Company are, pursuant to subsection 89 (14) of the Income Tax Act, designated as eligible dividends. An eligible dividend paid to a Canadian resident is entitled to the enhanced dividend tax credit.

Normal Course Issuer Bid

The Company renewed its Normal Course Issuer Bid ("NCIB") with the Toronto Stock Exchange ("TSX") on April 14, 2010. The renewed NCIB, allows the Company to repurchase up to 2,451,105 Class "A" shares (or approximately 10% of its public float) between April 16, 2010 and the expiry of the NCIB on April 15, 2011. Except as permitted under the TSX rules, the Company will not purchase on any given trading day under the NCIB more than 10,967 Common Shares, being approximately 25% of the average daily trading volume of the Class "A" shares on the TSX for the previous six calendar months of 43,871 Class "A" shares per day.

National Bank Financial Inc. ("National Bank") was appointed as the broker firm responsible for making purchases of the Class "A" shares under the NCIB on behalf of the Company pursuant to an automatic securities purchase plan agreement between the Company and National Bank (the "ASPP Agreement"). Pursuant to the terms of the ASPP, the timing for the purchase of Class "A" shares, the number of Class "A" shares purchased and the price payable for the Class "A" shares will be determined by National Bank in its sole discretion, without consultation with the Company, having regard to the price limitations and other terms of the ASPP and the rules of the TSX.

As at June 8, the Company had repurchased 1,423,705 Class "A" shares at a total cost of $24,142,858 or $16.96 per share. All shares will be returned to treasury for cancellation.

Preliminary Q2 Results

Results in the four weeks of the fiscal 2011 second quarter continued to show improvement over the prior year, despite somewhat unseasonable weather in Western Canada. On a same-store category basis, the increase was led by athletic clothing, footwear and fitness equipment.

Overall retail system sales increased by 5.8% for the first four weeks (against the prior year's increase of 0.2%). Of the total gain, same-store sales in the most recent period increased by 4.3% for corporate locations (over the prior year's increase of 0.8%), and increased by 8.4% for franchise stores, (against the prior year's decrease of 0.8%). The sales improvements have been made while retaining stronger gross margin performance.

Additional Quarterly Disclosure

In conjunction with this release, the Company invites you to listen to its teleconference call on Wednesday June 9th, 2010 at 10:30 a.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.


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