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EX-32.1 - EXHIBIT 32.1 - SPORT CHALET INCex32-1.htm
EX-31.1 - EXHIBIT 31.1 - SPORT CHALET INCex31-1.htm
EX-31.2 - EXHIBIT 31.2 - SPORT CHALET INCex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 26, 2010

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 000-20736

Sport Chalet, Inc.
 
(Exact name of registrant as specified in its charter)
 
   
Delaware
95-4390071
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
   
One Sport Chalet Drive, La Cañada, CA  91011
(Address of principal executive offices)   (Zip Code)
   
(818) 949-5300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer    o Accelerated filer   o
Non-accelerated filer      o Smaller reporting company    x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).
Yes o     No x

At February 1, 2011, there were 12,413,490 shares of Class A Common Stock outstanding and 1,775,821 shares of Class B Common Stock outstanding.
 
 
 

 

SPORT CHALET, INC.

Table of Contents to Form 10-Q
 

PART I – FINANCIAL INFORMATION
     
   
Page
     
Item 1.
Financial Statements
3
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations 9
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20
     
Item 4T.
Controls and Procedures
20
     
PART II – OTHER INFORMATION
     
     
Item 1.
Legal Proceedings
21
     
Item 1A.
Risk Factors
21
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21
     
Item 3.
Defaults Upon Senior Securities
21
     
Item 4.
[Removed and Reserved]
21
     
Item 5.
Other Information
21
     
Item 6.
Exhibits
22
 
 
2

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

SPORT CHALET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
13 weeks ended
   
39 weeks ended
 
   
December 26, 2010
   
December 27, 2009
   
December 26, 2010
   
December 27, 2009
 
   
(in thousands, except per share amounts)
 
Net sales
  $ 95,828     $ 95,258     $ 264,278     $ 263,472  
Cost of goods sold, buying and occupancy costs
    69,464       71,240       190,366       193,633  
Gross profit
    26,364       24,018       73,912       69,839  
                                 
Selling, general and administrative expenses
    24,226       21,988       67,706       63,991  
Impairment charge
    -       10,935       -       10,935  
Depreciation and amortization
    2,456       3,192       7,644       9,922  
Loss from operations
    (318 )     (12,097 )     (1,438 )     (15,009 )
                                 
Interest expense
    543       821       1,884       2,105  
Loss before taxes
    (861 )     (12,918 )     (3,322 )     (17,114 )
                                 
Income tax benefit
    -       (9,118 )     -       (9,118 )
Net loss
  $ (861 )   $ (3,800 )   $ (3,322 )   $ (7,996 )
                                 
Loss per share:
                               
Basic and diluted
  $ (0.06 )   $ (0.27 )   $ (0.23 )   $ (0.57 )
                                 
Weighted average number of common shares outstanding:                                
Basic and diluted
    14,189       14,123       14,188       14,123  

 
See accompanying notes.

 
3

 

SPORT CHALET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
December 26,
   
March 28,
 
   
2010
   
2010
 
   
(Unaudited)
       
Assets
 
(in thousands, except share amounts)
 
Current assets:
           
Cash and cash equivalents
  $ 13,644     $ 2,906  
Accounts receivable, net
    3,987       2,403  
Merchandise inventories
    108,074       97,280  
Prepaid expenses and other current assets
    1,292       1,235  
Income tax receivable
    3       12  
Total current assets
    127,000       103,836  
                 
Fixed assets, net
    29,086       34,873  
Total assets
  $ 156,086     $ 138,709  
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Accounts payable
  $ 45,495     $ 24,998  
Loan payable to bank
    41,893       45,290  
Salaries and wages payable
    3,346       3,972  
Other accrued expenses
    19,906       15,909  
Total current liabilities
    110,640       90,169  
                 
Deferred rent
    23,575       24,056  
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, $.01 par value:
               
Authorized shares - 2,000,000
               
Issued and outstanding shares – none
    -       -  
Class A Common Stock, $.01 par value:
               
Authorized shares - 46,000,000
               
Issued and outstanding shares – 12,413,490 at
December 26, 2010 and 12,412,490 at March 28, 2010
    124       124  
Class B Common Stock, $.01 par value:
               
Authorized shares - 2,000,000
               
Issued and outstanding shares – 1,775,821 at
December 26, 2010 and 1,770,821 at March 28, 2010
    18       18  
Additional paid-in capital
    35,839       35,130  
Accumulated deficit
    (14,110 )     (10,788 )
Total stockholders’ equity
    21,871       24,484  
Total liabilities and stockholders’ equity
  $ 156,086     $ 138,709  

 
See accompanying notes.

 
4

 

SPORT CHALET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
39 weeks ended
 
   
December 26, 2010
   
December 27, 2009
 
   
(in thousands)
 
Operating activities
           
Net loss
  $ (3,322 )   $ (7,996 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    7,645       9,922  
Impairment charge
    -       10,935  
Share-based compensation
    697       326  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,584 )     (2,622 )
Merchandise inventories
    (10,794 )     (17,462 )
Prepaid expenses and other current assets
    (57 )     1,143  
Income tax receivable
    9       (8,116 )
Accounts payable
    20,497       8,062  
Salaries and wages payable
    (626 )     (944 )
Other accrued expenses
    3,355       (307 )
Deferred rent
    (481 )     (474 )
Net cash provided by (used in) operating activities
    15,339       (7,533 )
                 
Investing activities
               
Purchase of fixed assets
    (1,216 )     (623 )
Net cash used in investing activities
    (1,216 )     (623 )
                 
Financing activities
               
Proceeds from bank borrowing
    269,628       287,276  
Repayments of bank borrowing
    (273,025 )     (270,254 )
Proceeds from exercise of stock options
    12       -  
Net cash (used in) provided by financing activities
    (3,385 )     17,022  
                 
Increase in cash and cash equivalents
    10,738       8,866  
Cash and cash equivalents at beginning of period
    2,906       290  
Cash and cash equivalents at end of period
  $ 13,644     $ 9,156  
                 
Supplemental Disclosure of Cash Flow Information
               
Cash paid during the period for:
               
Interest
  $ 1,771     $ 1,820  
                 
Supplemental Disclosure of non-cash investing and financing activities
               
   Property and equipment acquired under capital leases
  $ 642     $ -  

 
See accompanying notes.

 
5

 

SPORT CHALET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.             Description of Business and Basis of Presentation

Sport Chalet, Inc. (the “Company”), founded in 1959, is a leading operator of 55 full-service, specialty sporting goods stores in California, Nevada, Arizona and Utah.  The Company has 34 locations in Southern California, nine in Northern California, three in Nevada, eight in Arizona and one in Utah.  In addition, the Company has a Team Sales Division and an ECommerce store at sportchalet.com.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included in the interim periods.

The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2010. The condensed consolidated financial data at March 28, 2010 is derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 28, 2010.  Interim results are not necessarily indicative of results for the full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.
 
2.             Income Taxes

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 expanded the net operating loss (“NOL”) carryback period from two to five years, allowing us to carryback the fiscal 2009 loss.  As a result, we recorded a tax benefit of $9.1 million related to the portion of the 2009 NOL that was previously not carried back, reduced the associated valuation allowance and increased our tax receivable. We filed our carryback tax return in November 2009 and received our federal refund in January 2010.

We evaluate whether a valuation allowance should be established against our net deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard.  Significant weight is given to evidence that can be objectively verified.  The determination to record a valuation allowance is based on the recent history of cumulative losses and losses expected in the near future.  In conducting our analysis, we utilize a consistent approach which considers our current year loss, including an assessment of the degree to which any losses are driven by items that are unusual in nature and incurred to improve future profitability.  In addition, we review changes in near-term market conditions and any other factors arising during the period which may impact our future operating results.
 
 
6

 
 
As a result of our previous analysis, we determined that a full valuation allowance against our net deferred tax assets was required.  We will not record income tax benefits in the consolidated financial statements until it is determined that it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets.  As of December 26, 2010, our net deferred tax assets and related valuation allowance totaled $23.3 million.  The Company has federal and state net operating loss carryforwards of approximately $17.9 million and $44.2 million, respectively, which can be carried forward for a period of 20 years.

We determined there is no liability related to uncertain tax positions.  When applicable, we recognize interest and penalties related to uncertain tax positions in income tax expense.  The tax years after fiscal 2008 remain open to examination, and fiscal 2009 is currently under audit, by the Internal Revenue Service.  The tax years after fiscal 2006 remain open to examination by state tax authorities.
 
3.             Loss per Share
 
Basic loss per share is computed based on the weighted average number of common shares outstanding for the period.  Diluted loss per share is computed based on the weighted average number of common and potentially dilutive common equivalent shares outstanding for the period.  A reconciliation of the numerators and denominators of the basic and diluted loss per share computations are set forth below:
 
   
13 weeks ended
   
39 weeks ended
 
   
December 26, 2010
   
December 27, 2009
   
December 26, 2010
   
December 27, 2009
 
   
(in thousands, except per share amounts)
 
Net loss
  $ (861 )   $ (3,800 )   $ (3,322 )   $ (7,996 )
                                 
Weighted average number of common shares
    14,189       14,123       14,188       14,123  
                                 
Basic and diluted loss per share
  $ (0.06 )   $ (0.27 )   $ (0.23 )   $ (0.57 )
 
An aggregate of 1,722,183 and 1,373,106 options for the 13 and 39 weeks ended December 26, 2010 and December 27, 2009, respectively, are excluded from the computation of diluted loss per share as their effect would have been anti-dilutive.

 
7

 
 
4.             Loan Payable to Bank

In October 2010, we entered into an amended and restated credit facility with our existing bank, Bank of America, N.A. (the “Lender”), which provides for advances up to $65.0 million, previously $45.0 million ($55.0 million including a $10.0 million special advance facility that terminated on October 1, 2010), from January 1st of each year through August 31st of each year.  The seasonal revolver remains unchanged at $70.0 million, from September 1st of each year through December 31st of each year.  This facility also provides for up to $10.0 million in authorized letters of credit.  The increase in the amount we can borrow under this credit facility (the “Line Amount”) is based on the following changes: (i) the increase in the inventory advance rate to 70% from 68%, (ii) additional availability based on accounts receivables and Team Sales Division inventory, and (iii) the elimination or reduction of certain reserves.  The Line Amount is limited to a percentage of the value of accounts receivable and eligible inventory, minus certain reserves.    A significant decrease in accounts receivable and eligible inventory due to the aging of inventory and/or an unfavorable inventory appraisal could have an adverse effect on our borrowing capabilities under our credit facility, which may adversely affect the adequacy of our working capital.  Interest accrues at the Lender’s prime rate plus 1.75% (5.00% at December 26, 2010), previously 2.0%, or at our option we can fix the rate for a period of time at LIBOR plus 2.75%, previously 4.5%.  In addition, there is an unused commitment fee of 0.25% per year, based on a weighted average formula. The credit facility’s expiration has been extended to October 2014.  Our obligation to the Lender is presently secured by a first priority lien on substantially all of our non-real estate assets, and we are subject to, among others, a covenant that we maintain a minimum monthly cumulative EBITDA on a trailing 12-month basis.  Under the new credit facility, the $5.35 million minimum EBITDA has been revised to increase by $0.5 million in December and June of each year beginning in 2011, until 2014 when it reaches $9.35 million; but, the revised covenant would only apply if our availability falls below the greater of (x) $5.0 million and (y) 10% of the Line Amount or the borrowing base, whichever is less.  On December 26, 2010, we had $27 million in availability, $20 million above the availability requirement of $6.5 million and we expect availability to continue to satisfy the financial covenant requiring a minimum monthly cumulative EBITDA.

 
8

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements relating to trends in, or representing management’s beliefs about, our future strategies, operations and financial results, as well as other statements including words such as “believe,” “anticipate,” “expect,” “estimate,” “predict,” “intend,” “plan,” “project,” “will,” “could,” “may,” “might” or any variations of such words or other words with similar meanings.  Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on the Company.  You are cautioned not to place undue reliance on forward-looking statements as predictions of actual results. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.  Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which are discussed in further detail under “- Factors That May Affect Future Results” and “Risk Factors.”  We do not assume, and specifically disclaim, any obligation to update any forward-looking statements, which speak only as of the date made.

The following should be read in conjunction with the Company’s financial statements and related notes thereto provided under “Item 1–Financial Statements” above.

General Overview

Sport Chalet, Inc. (referred to as the “Company,” “Sport Chalet,” “we,” “us,” and “our”) is a leading operator of 55 full-service, specialty sporting goods stores in California, Nevada, Arizona and Utah, comprising a total of over two million square feet of retail space.  As of December 26, 2010, we had 34 locations in Southern California, nine in Northern California, three in Nevada, eight in Arizona and one in Utah.  These stores average approximately 41,000 square feet in size. In addition, we have a Team Sales Division and an ECommerce store at sportchalet.com.

In 1959, Norbert Olberz, our founder (the “Founder”), purchased a small ski and tennis shop in La Cañada, California.  A focus on providing quality merchandise with outstanding customer service was the foundation of Norbert’s vision.  As a true pioneer in the industry, Norbert’s mission was three simple things:  to “see things through the eyes of the customer;” “to do a thousand things a little bit better;” and to focus on “not being the biggest, but the best.”

Recent History

Our growth had historically focused on Southern California; but since 2001 we have expanded our scope to all of California and to Nevada, Arizona and Utah, as well as ECommerce.  Generally, our new stores were located with the intent of strengthening our focus on Southern California or in areas characterized by a large number of housing developments.  We opened seven new stores in fiscal 2008, 11 new stores in the last three fiscal years and 20 in the last five fiscal years.  In fiscal 2009, we opened four new stores, relocated one existing store and re-launched our website.

 
9

 
 
Our stores are located among the geographic regions hardest hit by the downturn in the housing and credit markets and the increases in unemployment, foreclosures and bankruptcies.  Our sales are significantly influenced by the level of consumer spending in the geographic regions surrounding our stores.  Our comparable store sales growth had been positive for the four fiscal years prior to fiscal 2008.  The severe downturn in the macroeconomic environment caused comparable store sales to decline for the past three fiscal years.  During fiscal 2009, we began aggressively taking action by examining our practices, assumptions, models and costs in an effort to modify our business model to make the Company more efficient.  Continuing into fiscal 2010, we focused on improving liquidity and reducing operating expenses.  As a result of these initiatives, we reduced our net loss for fiscal 2010 to $8.3 million, or $0.59 per diluted share, compared to a net loss of $52.2 million, or $3.70 per diluted share, for fiscal 2009.

Comparable store sales decreased 8.3% for fiscal 2010, but improved each consecutive quarter and have begun to stabilize in recent quarters.  While the first three quarters of fiscal 2011 had comparable store sales decreases of 0.9%, 1.9% and 0.4%, respectively, the three quarters maintained the stability attained in the fourth quarter of fiscal 2010 and are improvements compared to the significant decreases in the first three quarters of fiscal 2010.  While the relative stability in comparable store sales reflects a positive change in trends, we remain focused on continued improvement through the following operating and strategic initiatives:

 
·
Continuing to improve the functionality and efficiency of sportchalet.com by leveraging our business partners’ significant knowledge in their areas of expertise.

 
·
Continuing to refine the way each store is merchandised to best fit to its individual store market area and customer base through information provided by our Action Pass customer relationship program.
 
 
·
Increasing utilization of our growing Action Pass membership to create ever more effective marketing vehicles.

 
·
Continuing to refine and expand our Team Sales Division by attracting new universities and leagues as customers, while focusing on continuously improving profitability through more efficient manufacturing and embellishment processes.

 
·
Striving to have the best trained experts in merchandise and specialty services throughout our Company.

 
·
Fully utilizing our information systems to understand our business better and to improve efficiency in both inventory and overall operating costs.

 
·
Refining our store strategy.

 
10

 
 
In refining our store strategy, we did not open any new stores or relocate any existing stores in fiscal 2010 and will not open new stores in fiscal 2011.  We are using this respite to analyze and evaluate our current real estate portfolio to ensure that we manage our capital investment in the most efficient means possible and to better align our business with the challenging economic environment.  As the next phase of our strategic plan, we have engaged a provider of market optimization analytics for the retail industry, to assist in evaluating each of our store locations, identifying underperforming stores and replacing these locations with better sites in new and existing markets as real estate opportunities arise.  We are in the process of reviewing this information.  We currently plan to close one existing store in the near future (previously expected to close in February 2011) to complete this store’s relocation to a larger store in an area with more appealing customer demographics, which opened in June 2008.  In addition, we are focused on our ECommerce store to establish a national presence.

Despite an extremely tight credit market, we entered into an expanded credit facility in October 2010 that allows us to borrow on more favorable terms and conditions.  The credit facility has increased availability and reduced interest rates.  The increased availability under the credit facility provides us with the financial flexibility to pursue our strategic plan and enhances our vendor relationships to source the best technical performance and lifestyle merchandise.

Although no assurance can be given about the ultimate impact of these initiatives or of the overall economic climate, we believe these initiatives will position us for better results in the future as the economy improves.

Our fiscal year consists of 52 or 53 weeks, ends on the Sunday nearest to the last day in March and is named for the calendar year ending closest to that date.  Fiscal 2011 is a 53 week year and thus the fourth quarter will include one extra week and end on April 3, 2011.

Results of Operations

13 Weeks Ended December 26, 2010 Compared to December 27, 2009

The following table sets forth statements of operations data and relative percentages of net sales for the 13 weeks ended December 26, 2010 compared to the 13 weeks ended December 27, 2009 (dollar amounts in thousands, except per share amounts):
 
   
13 weeks ended
             
   
December 26, 2010
   
December 27, 2009
   
Dollar
Change
   
Percentage
Change
 
   
Amount
   
Percent
   
Amount
   
Percent
 
Net sales
  $ 95,828       100.0 %   $ 95,258       100.0 %   $ 570       0.6 %
Gross profit
    26,364       27.5 %     24,018       25.2 %     2,346       9.8 %
Selling, general and administrative expenses
    24,226       25.3 %     21,988       23.1 %     2,238       10.2 %
Impairment charge
    -       0.0 %     10,935       11.5 %     (10,935 )     (100.0 %)
Depreciation and amortization
    2,456       2.6 %     3,192       3.4 %     (736 )     (23.1 %)
Loss from operations
    (318 )     (0.3 %)     (12,097 )     (12.7 %)     (11,779 )     (97.4 %)
Interest expense
    543       0.6 %     821       0.9 %     (278 )     (33.9 %)
Loss before taxes
    (861 )     (0.9 %)     (12,918 )     (13.6 %)     (12,057 )     (93.3 %)
Income tax benefit
    -       0.0 %     (9,118 )     (9.6 %)     (9,118 )     (100.0 %)
Net loss
    (861 )     (0.9 %)     (3,800 )     (4.0 %)     (2,939 )     (77.3 %)
                                                 
Loss per share:
                                               
Basic and diluted
  $ (0.06 )           $ (0.27 )           $ (0.21 )     (77.8 %)
 
 
11

 
 
Sales slightly increased $0.6 million, or 0.6%, to $95.8 million for the 13 weeks ended December 26, 2010 from $95.3 million for the 13 weeks ended December 27, 2009.  The increase reflects improvements in the ECommerce and Team Sales divisions of 85% and 20%, respectively, partially offset by a 0.4% decrease in comparable store sales, over the same period last year.  The comparable store sales decrease is a result of reduced promotional activity and continuing macroeconomic weakness, partially offset by favorable weather experienced in the Company’s markets.

Gross profit increased $2.3 million, or 9.8%, and as a percent of sales increased 230 basis points to 27.5% from 25.2%, primarily as a result of a $2.1 million reduction in markdowns from promotional activity and $1.5 million lower rent expense from successful landlord negotiations, partially offset by increases in other costs.

Selling, general and administrative expenses increased $2.2 million, or 10.2%, and as a percent of sales increased 220 basis points to 25.3% from 23.1%, primarily from an increase in labor for store payroll in anticipation of stronger sales than experienced.

Depreciation expense decreased $0.7 million, or 23.1%, as a result of the non-cash impairment charge of $10.9 million recorded in fiscal 2010 and the historically low level of capital expenditures in fiscal 2010 and to date in fiscal 2011 with no new store openings or remodels.

Interest expense decreased $0.3 million, or 33.9%, as a result of a 21% reduction in average debt outstanding as cash generated from operations reduced the need to borrow and a 16% reduction in the average interest rate from the new bank credit facility.

We will not record income tax benefits in the consolidated financial statements until it is determined that it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets.  For the 13 weeks ended December 27, 2009 we recorded a tax benefit of $9.1 million.  See Note 2 - Income Taxes.

39 Weeks Ended December 26, 2010 Compared to December 27, 2009

The following table sets forth statements of operations data and relative percentages of net sales for the 39 weeks ended December 26, 2010 compared to the 39 weeks ended December 27, 2009 (dollar amounts in thousands, except per share amounts):

 
12

 
 
   
39 weeks ended
             
   
December 26, 2010
   
December 27, 2009
   
Dollar
Change
   
Percentage
Change
 
   
Amount
   
Percent
   
Amount
   
Percent
 
Net sales
  $ 264,278       100.0 %   $ 263,472       100.0 %   $ 806       0.3 %
Gross profit
    73,912       28.0 %     69,839       26.5 %     4,073       5.8 %
Selling, general and administrative expenses
    67,706       25.6 %     63,991       24.3 %     3,715       5.8 %
Impairment charge
    -       0.0 %     10,935       4.2 %     (10,935 )     (100.0 %)
Depreciation and amortization
    7,644       2.9 %     9,922       3.8 %     (2,278 )     (23.0 %)
Loss from operations
    (1,438 )     (0.5 %)     (15,009 )     (5.7 %)     (13,571 )     (90.4 %)
Interest expense
    1,884       0.7 %     2,105       0.8 %     (221 )     (10.5 %)
Loss before taxes
    (3,322 )     (1.3 %)     (17,114 )     (6.5 %)     (13,792 )     (80.6 %)
Income tax benefit
    -       0.0 %     (9,118 )     (3.5 %)     (9,118 )     (100.0 %)
Net loss
    (3,322 )     (1.3 %)     (7,996 )     (3.0 %)     (4,674 )     (58.5 %)
                                                 
Loss per share:
                                               
Basic and diluted
  $ (0.23 )           $ (0.57 )           $ (0.34 )     (59.6 %)
 
Sales slightly increased $0.8 million, or 0.3%, to $264.3 million for the 39 weeks ended December 26, 2010 from $263.5 million for the 39 weeks ended December 27, 2009.  The increase reflects improvements in the ECommerce and Team Sales divisions of 254% and 11%, respectively, partially offset by a 1.1% decrease in comparable store sales, over the same period last year.  Continued macroeconomic weakness in our markets provided no catalyst for a sales increase despite our initiatives to improve sales.

Gross profit increased $4.1 million, or 5.8%, and as a percent of sales increased 150 basis points to 28.0% from 26.5%, primarily as a result of a $4.5 million reduction in rent expense from successful landlord negotiations and $1.4 million lower markdowns from reduced promotional activity in December, partially offset by increases in other costs.

Selling, general and administrative expenses increased $3.7 million, or 5.8%, and as a percent of sales increased 130 basis points to 25.6% from 24.3%, primarily from an increase in labor for payroll to support our initiative on having the best trained merchandise and specialty services experts.

Depreciation expense decreased $2.3 million, or 23.0%, as a result of the non-cash impairment charge of $10.9 million recorded in fiscal 2010 and the historically low level of capital expenditures in fiscal 2010 and to date in fiscal 2011 with no new store openings or remodels.

We will not record income tax benefits in the consolidated financial statements until it is determined that it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets.  For the 39 weeks ended December 27, 2009 we recorded a tax benefit of $9.1 million.  See Note 2 - Income Taxes.

Liquidity and Capital Resources

Our primary capital requirements currently are for inventory replenishment and store operations.  Historically, cash from operations, credit terms from vendors and bank borrowing have met our liquidity needs.  We believe that these sources will be sufficient to fund currently anticipated cash requirements for the next 12 months.

 
13

 
 
Net cash provided by or used in operating activities has generally been the result of net income or loss, adjusted for depreciation and amortization, and changes in inventory along with related accounts payable.  The anticipated existing store closure mentioned above is expected to generate approximately $2.7 million in total savings from rent reductions and landlord payments by the time the store is closed. The following table shows the more significant uses of operating cash for the 39 weeks ended December 26, 2010 and December 27, 2009:
 
   
39 weeks ended
 
   
December 26, 2010
   
December 27, 2009
 
   
(in thousands)
 
Net loss
  $ (3,322 )   $ (7,996 )
Depreciation and amortization
    7,645       9,922  
Impairment charge
    -       10,935  
Merchandise inventories
    (10,794 )     (17,462 )
Accounts payable
    20,497       8,062  
Accounts receivable
    (1,584 )     (2,622 )
Other accrued expenses
    3,355       (307 )
Income tax receivable
    9       (8,116 )
Other
    (467 )     51  
Net cash provided by (used in) operating activities
  $ 15,339     $ (7,533 )
 
Inventory increased $10.8 million in the 39 weeks ended December 26, 2010 and $17.5 million in the 39 weeks ended December 27, 2009 primarily due to seasonality.  Our average inventory per store increased 2.1% to $2.0 million from $1.9 million as of December 27, 2009 as sales were less than plan.  We remain focused on continuing to improve inventory productivity.

Net cash used in investing activities is primarily for capital expenditures which are expected to remain nominal with no planned new store openings or remodels.

Net cash provided by financing activities reflects advances and repayments of borrowings under our revolving credit facility.  The outstanding balance as of December 26, 2010 is $41.9 million compared to $56.2 million at December 27, 2009, a $14.3 million reduction, primarily the result of cash generated from operations which reduced the need to borrow.

In October 2010, we entered into an amended and restated credit facility with our existing bank, Bank of America, N.A. (the “Lender”), which provides for advances up to $65.0 million, previously $45.0 million ($55.0 million including a $10.0 million special advance facility that terminated on October 1, 2010), from January 1st of each year through August 31st of each year.  The seasonal revolver remains unchanged at $70.0 million, from September 1st of each year through December 31st of each year.  This facility also provides for up to $10.0 million in authorized letters of credit.  The increase in the amount we can borrow under this credit facility (the “Line Amount”) is based on the following changes: (i) the increase in the inventory advance rate to 70% from 68%, (ii) additional availability based on accounts receivables and Team Sales Division inventory, and (iii) the elimination or reduction of certain reserves.  The Line Amount is limited to a percentage of the value of accounts receivable and eligible inventory, minus certain reserves.    A significant decrease in accounts receivable and eligible inventory due to the aging of inventory and/or an unfavorable inventory appraisal could have an adverse effect on our borrowing capabilities under our credit facility, which may adversely affect the adequacy of our working capital.  Interest accrues at the Lender’s prime rate plus 1.75% (5.00% at December 26, 2010), previously 2.0%, or at our option we can fix the rate for a period of time at LIBOR plus 2.75%, previously 4.5%.  In addition, there is an unused commitment fee of 0.25% per year, based on a weighted average formula. The credit facility’s expiration has been extended to October 2014.  Our obligation to the Lender is presently secured by a first priority lien on substantially all of our non-real estate assets, and we are subject to, among others, a covenant that we maintain a minimum monthly cumulative EBITDA on a trailing 12-month basis.  Under the new credit facility, the $5.35 million minimum EBITDA has been revised to increase by $0.5 million in December and June of each year beginning in 2011, until 2014 when it reaches $9.35 million; but, the revised covenant would only apply if our availability falls below the greater of (x) $5.0 million and (y) 10% of the Line Amount or the borrowing base, whichever is less.  On December 26, 2010, we had $27 million in availability, $20 million above the availability requirement of $6.5 million and we expect availability to continue to satisfy the financial covenant.

 
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EBITDA is defined in our bank credit facility as (loss) income before (benefit) provision for income taxes, interest expense, depreciation and amortization, and certain non-cash charges.  EBITDA is a liquidity measure that is one of the key measures used in calculating compliance with covenants in our credit facility.  Non-compliance with financial covenants could result in a default under our credit agreement and restrict our ability to finance operations or capital needs.  The following table reconciles EBITDA, as defined in our bank credit facility, to net loss as presented in our consolidated statements of operations for the trailing 12 months.
 
   
52 weeks ended
 
   
December 26, 2010
   
December 27, 2009
 
   
(in thousands)
 
Net loss
  $ (3,600 )   $ (19,120 )
Income tax benefit
    (21 )     (9,118 )
Interest expense
    2,541       2,650  
Depreciation and amortization
    10,366       13,198  
Share-based compensation
    990       402  
Non-cash impairment charge
    -       10,935  
EBITDA
  $ 10,276     $ (1,053 )
 
Our off-balance sheet contractual obligations and commitments relate to operating lease obligations, employment contracts and letters of credit which are excluded from the balance sheet in accordance with generally accepted accounting principles.

 
15

 
 
The following table summarizes such obligations as of December 26, 2010:
 
   
Payment due by period
 
         
Less than
               
More than
 
   
Total
   
1 year
   
2-3 year
   
4-5 year
   
5 years
 
Contractual obligations
 
(in thousands)
 
Operating leases (a)
  $ 179,227     $ 30,325     $ 57,225     $ 38,930     $ 52,747  
Employment contracts
    551       170       339       42       -  
Total contractual obligations
  $ 179,778     $ 30,495     $ 57,564     $ 38,972     $ 52,747  
 
(a) Amounts include the direct lease obligations.  Other obligations required by the lease agreements such as contingent rent based on sales, common area maintenance, property taxes and insurance are not fixed amounts and, therefore, are not included.  The amount of the excluded expenses are: $11.5 million and $10.5 million for fiscal years 2010 and 2009, respectively.  Operating lease obligations reflect savings from lease modifications, assume "kick-out clauses" (as defined below) will be excercised and do not reflect potential renewals or replacements of expiring leases.
 
We lease all of our existing store locations.  The leases for most of the existing stores are for approximately ten-year terms plus multiple option periods under non-cancelable operating leases with scheduled rent increases.  The leases provide for contingent rent based upon a percentage of sales in excess of specified minimums.  If there are any free rent periods, they are accounted for on a straight line basis over the lease term, beginning on the date of initial possession, which is generally when we enter the space and begin the construction build-out.  The amount of the excess of straight line rent expense over scheduled payments is recorded as a deferred rent liability.  Construction allowances and other such lease incentives are recorded as deferred credits, and are amortized on a straight line basis as a reduction of rent expense over the lease term.  All of the leases obligate us to pay costs of maintenance, utilities, and property taxes.

In our efforts to reduce operating expenses and improve liquidity, we reviewed our store leases and obtained rent reductions and lease modifications from our landlords.  These negotiations included renegotiating base rent, revising some of our leases to contain percentage rent clauses, which obligate us to pay rents based on a percentage of sales rather than fixed amounts, and amending certain leases to feature kick-out clauses, which allow us to terminate the lease at our option at a specified date if contractually specified minimum sales volumes are not exceeded.

Generally, our purchase obligations are cancelable 45 days prior to shipment from our vendors.  Letters of credit amounting to approximately $1.6 million relating to workers’ compensation insurance were outstanding as of December 26, 2010 and expire within one year.

No cash dividends have been declared or paid on Class A Common Stock and Class B Common Stock as we intend to retain earnings, if any, for use in the operation of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

Critical Accounting Policies and Use of Estimates

In preparing our consolidated financial statements we are required to make estimates and judgments which affect the results of our operations and the reported value of assets and liabilities.  Actual results may differ from these estimates.  As discussed in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2010, we consider our policies on inventory valuation, revenue recognition, gift card redemption, self insurance reserves, impairment of long-lived assets and estimation of net deferred income tax asset valuation allowance to be the most critical in understanding the significant estimates and judgments that are involved in preparing our consolidated financial statements.

 
16

 
 
Factors That May Affect Future Results

Our short-term and long-term success is subject to many factors that are beyond our control.  Stockholders and prospective stockholders in the Company should carefully consider the following risk factors, in addition to the information contained elsewhere in this Report.  This Report on Form 10-Q contains forward-looking statements, which are subject to a variety of risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but are not limited to, those set forth below.
 
For a more detailed discussion of these factors, see “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2010. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and the Company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances.  Risks Related To Our Business:
 
 
·
We have a history of losses which could continue in the future.
 
 
·
The limited availability under our revolving credit facility may result in insufficient working capital.
 
 
·
The covenants in our revolving credit facility may limit future borrowings to fund our operations.
 
 
·
If our vendors do not provide sufficient quantities of products, our net sales and profitability could suffer.
 
 
·
If we are unable to effectively manage and expand our alliances and relationships with selected suppliers of brand name products, we may be unable to effectively execute our strategy to differentiate ourselves from our competitors.

 
·
A downturn in the economy has affected consumer purchases of discretionary items, significantly reducing our net sales and profitability.
 
 
·
No assurance can be given that we will be successful in reducing operating expenses and controlling costs in an amount sufficient to return to profitability.
 
 
·
We may need to record additional impairment losses in the future if our stores' operating performance does not improve.
 
 
·
Intense competition in the sporting goods industry could limit our growth and reduce our profitability.
 
 
17

 
 
 
·
Our future operations may be dependent on the availability of additional financing.
 
 
·
Because our stores are concentrated in the western portion of the United States, we are subject to regional risks.
 
 
·
If we are unable to predict or react to changes in consumer demand, we may lose customers and our sales may decline.

 
·
Failure to protect the integrity and security of our customers’ information could expose us to litigation and materially damage our standing with our customers.
 
 
·
As a result of the current economic downturn, we have delayed opening new stores.  Continued growth is uncertain and subject to numerous risks.
 
 
·
If we lose key management or are unable to attract and retain talent, our operating results could suffer.
 
 
·
Seasonal fluctuations in the sales of sporting goods could cause our annual operating results to suffer.
 
 
·
Our quarterly operating results may fluctuate substantially, which may adversely affect our business.
 
 
·
Declines in the effectiveness of marketing could cause our operating results to suffer.
 
 
·
Problems with our information systems could disrupt our operations and negatively impact our financial results.
 
 
·
We are controlled by our Founder and management, whose interests may differ from other stockholders.
 
 
·
The price of our Class A Common Stock and Class B Common Stock may be volatile.
 
 
·
Provisions in the Company's charter documents could discourage a takeover that stockholders may consider favorable.
 
 
·
We may be subject to periodic litigation that may adversely affect our business and financial performance.
 
 
·
Changes in accounting standards and subjective assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results.
 
 
·
Terrorist attacks or acts of war may harm our business.
 
 
·
We rely on one distribution center and any disruption could reduce our sales.
 
 
18

 
 
 
·
We may pursue strategic acquisitions, which could have an adverse impact on our business.
 
 
·
Our comparable store sales will fluctuate and may not be a meaningful indicator of future performance.

 
·
A regional or global health pandemic could severely affect our business.
 
 
·
Global warming could cause erosion of both our Winter and Summer seasonal businesses over a long-term basis.

 
19

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

The Company’s exposure to interest rate risk consists primarily of borrowings under its credit facility, which bears interest at floating rates. The impact on earnings or cash flow during the next fiscal year from a change of 100 basis points in the interest rate would not be significant.

Item 4T.  Controls and Procedures.

Disclosure Controls and Procedures
 
The Company’s Chief Executive Officer, Craig Levra, and Chief Financial Officer, Howard Kaminsky, with the participation of the Company’s management, have evaluated the Company’s disclosure controls and procedures and have concluded that, as of the end of the period covered by this report, these controls and procedures are effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (15 USC § 78a et seq) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company's internal controls over financial reporting, identified by the Chief Executive Officer or the Chief Financial Officer that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
20

 

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

From time to time, the Company is involved in various routine legal proceedings incidental to the conduct of its business.  Management does not believe that any of these legal proceedings will have a material adverse impact on the business, financial condition or results of operations of the Company, either due to the nature of the claims, or because management believes that such claims should not exceed the limits of the Company’s insurance coverage.

Item 1A.  Risk Factors.

There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended March 28, 2010 (the “Annual Report”).  Our short- and long-term success is subject to many factors that are beyond our control.  Stockholders and prospective stockholders in the Company should consider carefully the risk factors set forth in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results,” as well as the risk factors set forth in the Annual Report.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.  This Report on Form 10-Q contains forward-looking statements, which are subject to a variety of risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.

Item 3.  Defaults Upon Senior Securities.

Not Applicable.

Item 4.  [Removed and Reserved].

Not Applicable.

Item 5.  Other Information.

Not Applicable.

 
21

 

Item 6.  Exhibits.

Exhibits:

 
3.1
Certificate of Incorporation restated as of November 4, 2009 (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q for the quarter ended September 27, 2009)
 
 
 
3.2
Bylaws of Sport Chalet, Inc. amended as of September 15, 2009 (incorporated by reference to Exhibit 3.2 of the Company’s Form 10-Q for the quarter ended September 27, 2009)

 
 4.1
Form of Certificate for Class A Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Registration of Certain Classes of Securities on Form 8-A, filed on September 29, 2005)

 
 4.2
Form of Certificate for Class B Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Registration of Certain Classes of Securities on Form 8-A, filed on September 29, 2005)

 
31.1
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
31.2
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
32.1
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
22

 

SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  SPORT CHALET, INC.  
     
     
       
DATE:  February 2, 2011
By:
/s/ Howard K. Kaminsky   
   
Howard K. Kaminsky
 
   
Executive Vice President-Finance,
Chief Financial Officer and Secretary
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
 
 
 
 
23