Press Release:
CALGARY, ALBERTA–(Marketwire – Dec. 9, 2010) – The Forzani Group Ltd. (TSX:FGL – News; “FGL” or the “Company”), Canada’s largest retailer of sporting goods, today reported fiscal 2011 results for the 13-week third quarter and 39-week period ended October 31, 2010.
“The continued execution of our strategic initiatives contributed significantly to our improved same-store sales, margin and operating costs in the third quarter of fiscal 2011,” said Bob Sartor, FGL’s Chief Executive Officer. “Our strong market presence and favourable weather in Eastern Canada also played a role in the gains.”
“We accomplished these results despite lower year-over-year marketing spending in the quarter. This planned reduction resulted from the shift of spending to Q1 and Q2 in support of the Winter Olympics, FIFA World Cup, the re-branding efforts of our Atmosphere stores and the launch of the Livestrong footwear, apparel and accessories program. At the same time, we maintained disciplined expense control at the store level, which contributed to a 21% improvement in EBIT over the strong results achieved a year earlier.”
“As we enter the all-important Christmas season, we believe there still seems to be some uncertainty around the economic recovery. However, our confidence is bolstered by the gains we have made so far, by our achievements against our strategic plan and by the promising start to our fourth fiscal quarter.”
Progress Against Strategic Plan
As previously disclosed, FGL established a strategic plan designed to unify and simplify our business, expand our reach and improve productivity. FGL’s progress during the third quarter against this strategic plan included, but was not limited to, the following:
— Continuing to rebrand our former Coast Mountain Sports stores under the
Atmosphere banner, allowing us to gain economies of scale from having
one outdoor and lifestyle chain instead of two.
— Adding three Nevada Bob’s Golf concept shops to Sport Chek stores, which
extended the planned fiscal 2011 roll-out to 41 concept shops in Sport
Chek locations. There are now 73 concept shops.
— Opening 8 Hockey Experts elite hockey concept shops in key Sport Chek
locations as a further test of the “shop within a shop” component of our
strategic plan. There are now 27 concept shops.
— Continuing work on the next generation of the purchasing, allocation and
distribution information systems enhancement project.
— During the quarter, FGL completed the first full year of its e-commerce
initiative, Sportchek.ca. Since the launch in October 2009, FGL has
extended its retail reach to customers outside its normal trading area
and provided support to the estimated 70% of Canadian consumers that
research their purchases online. The state of the art site now offers
more than 10,000 unique product styles and colours, up from
approximately 5,000 at launch. The site is supported by world class e-
commerce provider GSI Commerce Solutions Inc. In its first year of
operations, the site hosted nearly 10 million unique visitors.
Fiscal Third Quarter Financial Results:
Compared with its peer group of North American sporting goods retailers, FGL’s same-store sales have been less volatile since the onset of the recession two years ago. FGL increased retail system same-store sales by 1.2% for the third quarter of fiscal 2011, on top of an increase of 2.3% in the third quarter of the prior year.
FGL’s total revenue was up 3.2% from a year earlier, led by a 2.2% increase in retail sales from corporate stores. Augmenting the increase in the retail business, wholesale revenues rose 5.2% overall. This included a 29.0% increase in wholesale sales by our INA International division, partly due to the introduction of Diadora clothing and footwear to franchisees and improved hockey, snowboard equipment and footwear shipments to wholesale customers in Canada and the United States.
Retail system sales, which include sales from corporate and franchise stores, were $392.9 million, an increase of $1.8 million, or 0.5%, from the comparable 13-week sales of $391.1 million a year earlier.
Gross profit was $132.3 million, up 4.4% from $126.7 million a year earlier, and gross margin was 33.6% of revenue compared with 33.2% of revenue a year earlier. Gross profit growth outpaced revenue due to improvements in margins in corporate retail as well as each of our wholesale businesses.
Store operating expenses rose $0.8 million or 1.1% for the fiscal 2011 third quarter from a year earlier reflecting increased accruals for year end performance-based compensation costs due to the sales growth achieved. As a percentage of retail revenues, store operating expenses fell to 28.1% from 28.4% in fiscal 2010. Same-store operating expenses were 24.1% of corporate store revenue compared to 25.8% in the prior year. Same-store expenses, in absolute dollars, decreased $1.9 million or 3.4%.
General and administrative expenses rose both on a run rate and absolute dollar expenditure basis compared with a year earlier. The absolute dollar increase of $0.9 million was primarily the result of $0.7 million increased information technology spending and accruals for performance-based compensation of $2.2 million in recognition of improved earnings year to date. These accruals more than offset the planned reduction in marketing spending in the quarter due to the planned shift of that spending to the 1st and 2nd quarters of the year in support of the Winter Olympics, FIFA World Cup, Atmosphere re-branding and Livestrong launch.
Earnings before interest, taxes and amortization, (“EBITA”) was $34.9 million, up 12.6% from $31.0 million in the third quarter of last year.
Earnings before income taxes were $19.9 million, compared with pre-tax earnings of $16.5 million a year earlier. Cash flow from operations increased to $25.7 million, or $0.89 per share, from $24.5 million, or $0.80 per share, in the prior year.
Fiscal First Three Quarters Financial Results
The main drivers affecting financial results for the first three quarters, including the execution of our strategic initiatives, our strong market share, favourable weather and disciplined expense controls at the store level, were similar to those described above for the third quarter.
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-$1.103 billion, up 4.2% from $1.058 billion;
— Gross profit-$682.1 million, up 3.4% from $659.9 million;
— Gross margin-34.3% of revenue, compared with 33.0% of revenue;
— Store operating expenses-30.2% of corporate revenue compared with 31.0%
of corporate revenue. On an absolute dollar basis, store operating
expenses were up $8.0 million from the prior year;
— General and administrative expenses-7.7% of total revenue, up from 6.9%.
Overall, an absolute dollar increase in general and administrative
expenses of $12.0 million. This increase reflects one-time costs
associated with the Atmosphere re-branding initiative, increased stock
and performance based compensation costs due to the Company’s improved
profitability, increased information technology spending in support of
the strategic initiatives, and a strategic shift in advertising
expenditures into the first half of the year to support key marketing
initiatives in support of execution of the Company’s strategic plan;
— EBITA-$59.7 million, up 20.9% from $49.4 million;
— Earnings before income taxes-$16.2 million compared with $8.5 million;
and
— Cash flow from operations-$47.2 million or $1.59 per share, compared
with $37.5 million or $1.23 per share.
Third Quarter Store Activity
At the end of the third quarter, the Company had 543 stores, 25 less than a year earlier. Due to FGL’s strategy of increasing average store size, despite the reduced store count, the Company had only 0.4% less retail selling space (26,208 fewer square feet) compared with a year earlier. Corporate stores totalled 330 at the end of the third quarter, down 20 from a year earlier, while franchise stores totalled 213, down 5 from a year earlier.
During the quarter, the Company decreased the number of corporate stores by four, closing four Nevada Bob’s Golf stores, one Fitness Source store, and one Sport Mart store while opening one Sport Chek and acquiring one Nevada Bob’s Golf store from a franchisee.
The franchise division store count remained at 213 with five new store openings (one Intersport, two Atmosphere, one Hockey Experts and one S3 store) offsetting four closures (two Nevada Bob’s Golf and two Pegasus stores) and the aforementioned sale of one franchised Nevada Bob’s Golf store to the Corporate division.
Balance Sheet
The Company’s working capital was $69.3 million, down 2.0% from the prior year.
Dividends
On December 9, 2010, the Company declared a dividend of $0.075 per Class “A” share, payable on January 31, 2011 to shareholders of record on January 17, 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.
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.
As at December 9, the Company had repurchased 2,114,707 Class “A” shares at a total cost of $35.4 million or $16.72 per share. All shares purchased pursuant to the NCIB are returned to treasury for cancellation.
Preliminary Q4 Results
Results in the first five weeks of the fiscal 2011 fourth quarter continued to show improvement over the prior year, as winter weather in Western Canada spurred sales of seasonally weather sensitive goods. On a same-store category basis, the increase was led by outerwear, winter clothing and footwear as well as targeted hard good categories of cycling, golf, fitness equipment and hockey.
Overall retail system same-store sales increased by 15.9% for the first five weeks (against the prior year’s decrease of 10.7%). Of the total gain, same-store sales increased by 16.9% for corporate locations (against the prior year’s decrease of 8.6%), and increased by 13.9% for franchise stores, (against the prior year’s decrease of 14.2%). Gross margin performance as a percentage of sales was up 21 basis points over the prior year.
In terms of the remainder of the fourth quarter, the momentum of the first five weeks is expected to be tempered in December and January as sales will be up against strong sales results in the prior year.
Additional Quarterly Disclosure
In conjunction with this release, the Company invites you to listen to its teleconference call on Thursday December 9th, 2010 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.
