| SPORT CHALET INC “Item 1A 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 |
| (referred to as the “Company,” “Sport Chalet,” “we,” “us,” and “our” unless specified otherwise), is a leading operator of 40 full-service, specialty sporting goods stores in California, Nevada and Arizona |
| As of March 31, 2006, we had 29 locations in Southern California, five in Northern California, one in Central California, two in Nevada and three in Arizona |
| In addition, we operate a retail e-commerce store through GSI Commerce, Inc |
| We reincorporated as a Delaware corporation in 1992 |
| Our executive offices are located at One Sport Chalet Drive, La Canada, California 91011, and our telephone number is (818) 949-5300 |
| Operating History and Growth Plans In 1959, Norbert Olberz, our Chairman Emeritus and founder (the “Founder”), purchased a small ski and tennis shop in La Canada, California |
| 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 “being the best, not the biggest |
| ” Over the last 47 years, Sport Chalet has grown into a chain of 40 specialty sporting goods stores serving California, Nevada and Arizona |
| Our growth strategy had historically focused on Southern California, but now includes opening new stores throughout California, Nevada and Arizona as suitable locations are found |
| Over the past three years, we have opened twelve new stores, five of which include our recent expansion into the Northern California market, one in the Central California market and three in the Phoenix, Arizona market |
| We currently plan to open five stores during the next 12 months |
| Future store openings are subject to availability of satisfactory store locations based on local competitive conditions, site availability and cost and our ability to provide and maintain high service levels and quality brand merchandising at competitive prices |
| For fiscal 2006, average sales per store for stores open throughout both fiscal 2006 and fiscal 2005 were dlra9dtta4 million, with corresponding average sales per square foot of dlra238 |
| Store openings are expected to have a favorable impact on sales volume, but to negatively affect profit in the short term |
| New stores tend to have higher costs in the early years of operation, due primarily to increased promotional costs and lower sales on a per employee basis until the store matures |
| Our stores generally require three to four years to attract a stable, mature customer base |
| We estimate the cash required to open an average new store is approximately dlra2dtta5 million consisting primarily of the investment in inventory (net of average vendor payables), the cost of leasehold improvements (net of landlord reimbursement), fixtures and equipment and pre-opening expenses, such as the costs associated with training employees and stocking the store |
| Cash requirements for opening costs of each new store can 1 _________________________________________________________________ [36]Table of Contents vary significantly depending on how much the landlord has agreed to contribute to our required improvements |
| Our sales partially depend on the economic environment and level of consumer spending in California, Nevada and Arizona |
| The retail industry historically has been subject to substantial cyclical variation, and a recession in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits in our market areas have had, and may in the future have, a materially adverse effect on our results of operations |
| Stores and Merchandising Our prototype stores range in size from 42cmam000 to 45cmam000 square feet and showcase each product category with the feel of a specialty shop all contained under one roof |
| The full-service approach to customer service and product knowledge is enhanced by fixtures which feature specific categories |
| Each shop is staffed by trained sales associates with expertise in the merchandise they sell, permitting us to offer our customers a high level of product knowledge and service from the beginner to the professional sports enthusiast |
| Our prototype format boasts a natural and outdoor-feel color scheme, clear-coated fixtures, 30-foot clear ceilings, large sport-specific graphics, pool for SCUBA and watersports instruction and demonstrations, and a 100 foot shoe wall, among other improvements |
| In coming years we plan to retro-fit certain mature stores to conform to the prototype |
| During fiscal 2007, two stores will be remodeled, with expected grand re-openings in fall of 2007 |
| For both new stores and remodels, we continually update our prototype format to remain competitive |
| While we have taken advantage of unusual building layouts in the past, and when appropriate may do so in the future, we will utilize as many prototype design elements as possible |
| We evaluate stores for remodel based on each store’s age and competitive situation, as well as how much the landlord will contribute to our required improvements |
| Future store remodeling plans will depend upon several factors, including, but not limited to, general economic conditions, competition trends and the availability of capital |
| Once a store is selected for remodel, an estimate of fixtures and leasehold improvements requiring disposal is prepared |
| The remaining book-value of these items is fully expensed over the period prior to the completion of the remodel |
| Our stores feature a number of distinct, specialty sporting goods divisions, offering a large assortment of quality brand name merchandise at competitive prices |
| The stores include traditional sporting goods merchandise (eg, footwear, apparel and other general athletic products) and nontraditional merchandise such as snowboarding, mountaineering and SCUBA The merchandise appeals to both experts and beginners |
| In addition, our stores offer over 40 services for the serious sports enthusiast, including backpacking, canyoneering, and kayaking instruction, custom golf club fitting and repair, ski rental and repair, SCUBA training and certification, SCUBA boat charters, team sales, racquet stringing, and bicycle tune-up and repair |
| Although the revenues generated by these support services are not material, these services further differentiate us from our competitors |
| Our stores are open seven days a week, typically from 9:30 a |
| The following table illustrates our merchandise assortment of hardlines, which are durable items, and softlines, which are non-durable items such as apparel and footwear, as a percentage of total net sales for each of the last three fiscal years: Year Ended March 31, 2006 2005 2004 Hardlines 52 % 53 % 53 % Apparel 29 % 28 % 28 % Footwear 19 % 19 % 19 % Total 100 % 100 % 100 % 2 _________________________________________________________________ [37]Table of Contents We operate our online store through GSI Commerce, Inc |
| com shopping experience, including fulfillment and purchasing, while remaining transparent to the customer |
| We receive a license fee based on a percentage of sales generated by the website |
| The licensing fee is not material to total revenues |
| The market for retail sporting goods is seasonal in nature |
| As with many other retailers, our business is heavily affected by sales of merchandise during the Holiday season |
| In addition, our product mix has historically emphasized cold weather sporting goods merchandise, particularly winter-sports related products |
| In recent years, the months of November, December and January represented between 30prca and 34prca of our total net sales, while winter-related products ranged from 15prca to 19prca of total net sales |
| We anticipate this seasonal trend in sales will continue |
| We respond to changes in mid-season weather by maintaining flexibility in product placement at the stores and the marketing of product offerings |
| See “Item 1A Risk Factors – Seasonal fluctuations in the sales of sporting goods could cause our operating results to suffer |
| ” Marketing and Advertising We generate all of our marketing and advertising campaigns in-house, with production support from outside vendors as needed |
| The campaigns are designed to reflect our strategic direction through our brand and product offerings, as well as communicate a focused and consistent theme/event calendar through media including newspaper, direct mail, radio, billboards, magazines and the internet |
| Through the Team Sales Division, we reach out to communities in which our stores do business, contributing to local teams and leagues |
| Our advertising leverage has been boosted by vendor payments under cooperative advertising arrangements as well as vendor participation in sponsoring sporting events and programs |
| Purchasing and Distribution In order to provide a full line of specialty and sporting goods brands and a wide selection, we purchase merchandise from over 1cmam000 vendors |
| Vendor payment terms typically range from 30 to 120 days from our receipt, and there are no long-term purchase commitments |
| Our largest vendor, Nike, Inc, accounted for approximately 8dtta1prca and 8dtta2prca of our total inventory purchases for fiscal 2006 and 2005, respectively |
| We operate one distribution center, a 326cmam000 square foot facility located in Ontario, California |
| The distribution center serves as the primary receiving, distribution and warehousing facility |
| A minimal amount of merchandise is shipped directly by vendors to our stores |
| Most of the product received at the distribution center is processed by unpacking and verifying the contents received and then sorting the contents by store for delivery |
| Some of the product received at the distribution center is pre-packaged and pre-ticketed by the vendor so it can be immediately cross-docked to trucks bound for the stores |
| Due to the efficiencies cross-docking creates, we encourage vendors to pre-package their merchandise in a floor-ready manner |
| Some of the merchandise is held at the distribution center for future allocation to the stores based on current sales trends as directed by our computerized replenishment and allocation systems to optimize inventory levels |
| We believe that the advantages of a single distribution center include reduced individual store inventory levels and better use of store floor space, timely inventory replenishment of store inventory needs, consolidated vendor returns, and reduced transportation costs |
| Common carriers deliver merchandise to our stores |
| The JDA E3 system consists of three modules: (i) warehouse replenishment, which manages purchases from vendors, (ii) store replenishment, which manages shipments from the warehouse to stores, and (iii) network optimization, which synchronizes the two systems |
| In addition, we utilize the JDA Consumer Outlook and Pinpoint seasonal profile software to help identify, create and manage the seasonal trends of our merchandise |
| Currently, we utilize the E3 system to manage approximately 57prca of our total inventory |
| The remaining 43prca of the inventory purchases historically was managed by traditional methods conducted by the buying staff on a short-term purchase order basis |
| 3 _________________________________________________________________ [38]Table of Contents During fiscal 2006, for merchandise planning and allocation we began using the SAS Marketmax software solution |
| The software solution includes merchandise planning, open-to-buy management, assortment planning, store clustering, high performance forecasting, performance analysis and allocation |
| We have converted our merchandise planning and open-to-buy management from a traditional spreadsheet-based, buyer-managed process to the robust functionality of Marketmax which is managed by our new merchandise planning department |
| With the deployment of the Marketmax allocation solution, we now allocate merchandise to our stores based on trends and statistical modeling while increasing our flow-through at our distribution center |
| We believe this technology package will continue to allow us to better plan and forecast our business and leverage the information to create optimal store assortments and allocate merchandise in a more precise and proactive manner |
| As part of our store systems upgrade during fiscal 2007 we will add CRS’ EnterpriseSelling software which will replace our manual processes of locating and transferring products for a customer |
| This software will allow us to quickly close a sale and ship merchandise from our optimal location to the customer’s preferred destination |
| All new systems communicate with a legacy system that has become the centralized data repository and the primary financial system |
| Our inventory systems track purchasing, sales and inventory transfers down to the stock keeping unit or “SKU” level and allow us to improve overall inventory management by identifying individual SKU activity by location and projecting trends and replenishment needs on a timely basis |
| Although we believe these systems have historically enabled us to increase margins by reducing inventory and markdowns while strengthening our in-stock positions, we feel these systems should now be upgraded as part of our comprehensive review of internal control over financial reporting while also enhancing our ability to grow |
| We are currently researching software to replace the legacy inventory and financial applications |
| The legacy system operates on a Sun computer |
| Store systems utilize the Encore Retail Suite of applications from CRS Retail Systems but are currently being upgraded with the latest CRS RetailStore 3dtta0 application, including EnterpriseSelling and Returns Management, and new IBM SurePOS hardware |
| A custom rental program has been added to the store system |
| Merchandise replenishment is controlled by E3 software from JDA, running on an IBM iSeries |
| The processing of debit/credit card authorization allows on-line debit and signature capture |
| The distribution center uses warehouse management software from HighJump Software (a 3M Company) |
| HighJump is web-enabled, real-time, scaleable software that can expand to meet the demands of our growth plans |
| Recapitalization Plan In September 2005, our stockholders approved a recapitalization plan designed to facilitate the orderly transition of control from our Founder to certain members of management and to increase financial flexibility for the Company and its stockholders |
| The recapitalization plan consisted of (1) the reclassification of each outstanding share of Common Stock as 0dtta25 share of Class B Common Stock, (2) the issuance of seven shares of Class A Common Stock for each outstanding share of Class B Common Stock and (3) the transfer of a portion of the Founder’s ownership to Craig Levra, Chairman and Chief Executive Officer, and Howard Kaminsky, Executive Vice President — Finance, Chief Financial Officer and Secretary, and allowed current stockholders to retain existing ownership and voting interests |
| The recapitalization established two classes of Common Stock and was effected through a reclassification of each outstanding share of Common Stock into 0dtta25 share of Class B Common Stock |
| The reclassification was followed by a non-taxable stock dividend of seven shares of Class A Common Stock for each one outstanding share of Class B Common Stock |
| Each share of Class B Common Stock entitles the holder to one vote, and each share of Class A Common Stock entitles the holder to 1/20th of one vote |
| The recapitalization doubled our total number of shares outstanding and, therefore, had the same impact on earnings per share as a 2-for-1 stock split |
| However, the establishment of dual classes of Common Stock did not affect the relative voting or equity interests of existing stockholders since the reclassification of Common Stock and issuance of a stock dividend affected each stockholder in 4 _________________________________________________________________ [39]Table of Contents proportion to the number of shares previously owned |
| The Class A Common Stock and the Class B Common Stock will generally vote on all matters as a single class |
| The holders of the Class A Common Stock and Class B Common Stock will vote as a separate class on any reverse stock split which results in holders of more than 5prca of such class being converted into fractional shares |
| The holders of Class A Common Stock, voting as a separate class, are also entitled to elect one director, and the affirmative vote of the holders of a majority of the shares of Class A Common Stock, voting as a separate class, will be required to amend certain provisions of the Company’s Certificate of Incorporation |
| The recapitalization plan also included certain protection features for holders of Class A Common Stock in an effort to ensure parity in the trading of the two classes of Common Stock |
| The Founder transferred 974cmam150 shares of Class B Common Stock to Craig Levra and Howard Kaminsky, which was intended to give them approximately 45prca of the combined voting interests of Class B and Class A Common Stock when added to the shares of Sport Chalet stock they then owned |
| These shares of Class B Common Stock transferred by the Founder are treated as a contribution to the Company’s capital with the offsetting charge as compensation expense |
| For the fiscal year ended March 31, 2006, the contribution to capital and related compensation expense was dlra8cmam221cmam826, the recapitalization plan expenses were dlra471cmam388 and the effect on net income was dlra7cmam839cmam214 |
| The tax savings related to the recapitalization plan was limited to dlra854cmam000 as the transfer of shares resulted in compensation expense in excess of the specified limits for tax purposes |
| The effect on net income is as follows: Fiscal Year ended March 31, 2006 Compensation expense $ 8cmam221cmam826 Professional fees 471cmam388 8cmam693cmam214 Income tax benefit (854cmam000 ) Effect on net income $ 7cmam839cmam214 Trademarks and Trade Names We use the “Sport Chalet” name as a service mark in connection with our business operations |
| We have registered “Sport Chalet” as a service mark with the State of California, and have obtained federal registration for certain purposes, which has been successfully defended in the past against attack by third parties |
| We also retain common law rights to the name, which we have used since 1959 |
| The lack of federal registration for certain purposes might pose a problem if we were to expand into a geographic area where the name or any confusingly similar name is used by someone with prior rights |
| Industry and Competition The market for retail sporting goods is highly competitive, fragmented and segmented |
| We compete with a variety of other retailers, including the following: • full-line sporting goods chains, such as The Sports Authority, Dick’s Sporting Goods and Copeland Sports; • specialty stores, such as REI, Bass Pro, Foot Locker, Finish Line, Chicks and Adventure 16; • supplier-owned stores, such as Nike, The North Face, adidas, New Balance and Puma; • mass merchandisers, club stores, discount stores and department stores, such as Wal-Mart, Costco, Target and Kohl’s, Macy’s and Nordstroms; and • Internet retailers and catalog merchandisers, such as Cabela’s and Sportsman’s Guide |
| Many of these competitors have greater financial resources than we do, or better name recognition in regions into which we seek to expand |
| Our industry is dominated by sporting goods superstore retailers, ie, full-line sporting goods chains with stores typically larger than 30cmam000 square feet |
| Superstore chains generally provide a greater selection of higher quality merchandise than other retailers, while remaining price competitive |
| Specialty retailers often have the advantage of a lower cost structure 5 _________________________________________________________________ [40]Table of Contents and a smaller “footprint” that can be located in shopping centers and strip malls, offering more customer convenience |
| Many of these competitors have an online store, offering customers easy access to merchandise |
| Historically, we have distinguished ourselves from our competitors by providing a broader selection of higher-end specialty items that require higher levels of customer service and sales associate expertise than other superstore retailers in the California, Nevada and Arizona areas |
| We believe that our broad selection of high quality name brands and numerous specialty items at competitive prices, showcased by our well-trained sales associates, differentiates us from discount and department stores, traditional and specialty sporting goods stores and other superstore operations |
| Our format takes advantage of several significant trends and conditions in the sporting goods industry |
| These conditions include the size of the industry, fragmented competition, limited assortments offered by many sporting goods retailers, consumer preference for one-stop shopping, and the importance of delivering value through selection, quality, service and price |
| Employees As of March 31, 2006, we had a total of approximately 3cmam149 full and part-time employees, 2cmam841 of whom were employed in our stores and 308 of whom were employed in warehouse and delivery operations or in executive office positions |
| None of our employees are covered by a collective bargaining agreement |
| We encourage and welcome the communication of our employees’ ideas, suggestions and concerns and believe this contributes to our strong employee relations |
| A typical store has approximately 75 employees, of whom 20 to 40 are in the store at any given time on a normal operating basis |
| Generally, each store employs a general manager, two to three assistant managers, who along with area managers and department heads supervise the sales associates in customer service, merchandising, and operations |
| Additional part-time employees are typically hired during the Holiday and other peak seasons |
| We are committed to the growth and training of our employees in order to provide “The Experts” in product knowledge and service to our customers |
| Our “Certified Pro” program encourages employees to attend product-line-specific clinics and receive hands-on training to improve technical product and service expertise |
| Only after completing all of the clinics and training, in addition to passing specific testing, may an associate be considered a Certified Pro |
| Certified Pro certification is offered in 19 different service disciplines and is a requirement for new associates in their areas of expertise |
| Additional Information The Company makes available free of charge through our website, www |
| com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably practicable after those reports are filed with or furnished to the Securities and Exchange Commission (“SEC”) |
| The public may read any of the items we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549 |
| The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330 |
| The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Company and other issuers that file electronically with the SEC at www |
| 6 _________________________________________________________________ [41]Table of Contents ITEM 1A RISK FACTORS 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 following risk factors, in addition to the information contained in this report |
| This Annual Report on Form 10-K 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 those set forth below |
| Implementing Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive, time-consuming and require significant management attention, and may not be successful |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company will be required, beginning in its fiscal year 2008, to perform an evaluation of its internal control over financial reporting and have its independent registered public accounting firm test and evaluate the design and operating effectiveness of such internal controls and publicly attest to such evaluation |
| The implementation process of Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive, time-consuming and will require significant attention of the Company’s management |
| The Company cannot assure that it will not discover material weaknesses in its internal controls |
| The Company also cannot assure that it will complete the process of its evaluation and the auditors’ attestation on time |
| If the Company discovers a material weakness, corrective action may be time-consuming, costly and further divert the attention of management |
| The disclosure of a material weakness, even if quickly remedied, could reduce the market’s confidence in the Company’s financial statements, cause the delisting of its Common Stock from Nasdaq and harm its stock price, especially if a restatement of financial statements for past periods were to be necessary |
| A downturn in the economy may affect consumer purchases of discretionary items, which would reduce our net sales |
| The retail industry historically has been subject to substantial cyclical variations |
| The merchandise sold by us is generally a discretionary expense for our customers |
| A recession in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits has had, and in the future may have, a materially adverse effect on our results of operations |
| Terrorist attacks or acts of war may harm our business |
| Terrorist attacks may cause damage or disruption to our employees, facilities, information systems, vendors and customers, which could significantly impact net sales, costs and expenses and financial condition |
| The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility may cause greater uncertainty and cause us to suffer in ways that we currently cannot predict |
| Our geographical focus in California, Nevada and Arizona may make us more vulnerable to such uncertainties than other comparable retailers who may not have similar geographical concentration |
| Intense competition in the sporting goods industry could limit our growth and reduce our profitability |
| The sporting goods business and the retail environment are highly competitive, and we compete with national, regional and local full-line sporting goods chains, specialty stores, supplier owned stores, discount and department stores, and internet retailers |
| A number of our competitors are larger and have greater resources |
| Because our stores are concentrated in the western portion of the United States, we are subject to regional risks |
| Currently, most of our stores are located in Southern California and the balance is located in Northern California, Central California, Nevada and Arizona |
| Accordingly, we are subject to regional risks, such as the economy, weather conditions, natural disasters and government regulations |
| For example, 7 _________________________________________________________________ [42]Table of Contents warm winter weather in the resorts frequented by our customers has affected sales in the past |
| When the region suffers an economic downturn or when other adverse events occur, historically there has been an adverse effect on our sales and profitability and this could also affect our ability to implement our planned growth |
| In addition, many of our vendors rely on the Ports of Los Angeles and Long Beach to process our shipments |
| Any disruption or congestion at the ports could impair our ability to adequately stock our stores |
| Several of our competitors operate stores across the United States and, thus, are not as vulnerable to such regional risks |
| We rely on one distribution center and any disruption could reduce our sales |
| We currently rely on a single distribution center in Ontario, California |
| Any natural disaster or other serious disruption to this distribution center due to fire, earthquake or any other cause could damage a significant portion of our inventory and could materially impair both our ability to adequately stock our stores and our sales and profitability |
| Our ability to expand our business will be dependent upon our ability to meet challenges in new markets |
| Our continued growth depends on a strategy of opening new, profitable stores in existing markets and in new regional markets |
| The ability to successfully implement this growth strategy could be negatively affected by any of the following: • suitable sites may not be available for leasing; • we may not be able to negotiate acceptable lease terms; • we might not be able to hire and retain qualified store personnel; and • we might not have the financial resources necessary to fund our expansion plans |
| In addition, our expansion in new and existing markets may present competitive, distribution and merchandising challenges that differ from the current challenges |
| These potential new challenges include competition among our stores, added strain on our distribution center, additional information to be processed by our management information systems and diversion of management attention from ongoing operations |
| We face additional challenges in entering new markets, including consumers’ lack of awareness of the Company, difficulties in hiring personnel and problems due to our unfamiliarity with local real estate markets and demographics |
| New markets may also have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets |
| To the extent that we are not able to meet these new challenges, sales could decrease and operating costs could increase |
| Furthermore, a decline in our overall financial performance, increased rents or any other adverse effects arising from the commercial real estate market in our geographical markets may adversely affect our current growth plan |
| There can be no assurance that we will possess sufficient funds to finance the expenditures related to our planned growth, that new stores can be opened on a timely basis, that such new stores can be operated on a profitable basis, or that such growth will be manageable |
| We may pursue strategic acquisitions, which could have an adverse impact on our business |
| We may from time to time acquire complementary companies or businesses |
| Acquisitions may result in difficulties in assimilating acquired companies, and may result in the diversion of our capital and our management’s attention from other business issues and opportunities |
| We may not be able to successfully integrate operations that we acquire, including their personnel, financial systems, distribution, operations and general store operating procedures |
| If we fail to successfully integrate acquisitions, our business could suffer |
| In addition, the integration of any acquired business, and their financial results, into ours may adversely affect our operating results |
| We currently do not have any agreements with respect to any such acquisitions |
| Our future growth will be dependent on the availability of additional financing |
| We may not be able to fund our future growth or react to competitive pressures if we lack sufficient funds |
| Unexpected conditions could cause us to be in violation of our lender’s operating 8 _________________________________________________________________ [43]Table of Contents covenants |
| Currently, we believe we have sufficient cash available through our bank credit facilities and cash from operations to fund existing operations for the foreseeable future |
| We cannot be certain that additional financing will be available in the future if necessary |
| If we are unable to successfully implement our controlled growth strategy or manage our growing business, our future operating results could suffer |
| Since our inception, we have experienced periods of rapid growth |
| Any future growth in sales will require additional working capital and may place a significant strain on our management, management information systems, inventory management, distribution facilities and receivables management |
| Any failure to timely enhance our operating systems, or unexpected difficulties in implementing such enhancements, could have a material adverse effect on our results of operations |
| If we lose key management or are unable to attract and retain talent, our operating results could suffer |
| We depend on the continued service of our senior management |
| The loss of the services of any key employee could hurt our business |
| Also, our future success depends on our ability to identify, attract, hire, train and motivate other highly skilled personnel |
| Failure to do so may adversely affect future results |
| Seasonal fluctuations in the sales of sporting goods could cause our annual operating results to suffer |
| Our sales volume increases significantly during the Holiday season as is typical with other sporting goods retailers |
| In addition, our product mix has historically emphasized cold weather sporting goods increasing the seasonality of our business |
| In recent years, the months of November, December and January represented between 30prca and 34prca of our total net sales, while winter-related products ranged from 15prca to 19prca of total net sales |
| The operating results historically have been influenced by the amount and timing of snowfall at the resorts frequented by our customers |
| An early snowfall often has influenced sales because it generally extends the demand for winter apparel and equipment, while a late snowfall may have the opposite effect |
| Suppliers in the ski and snowboard industry require us to make commitments for purchases of apparel and equipment by April for fall delivery, and only limited quantities of merchandise can be reordered during the fall |
| Consequently, we place our orders in the spring anticipating snowfall in the winter |
| If the snowfall does not at least provide an adequate base or occurs late in the season, or if sales do not meet projections, we may be required to mark down our winter apparel and equipment |
| Our quarterly operating results may fluctuate substantially, which may adversely affect our business |
| We have experienced, and expect to continue to experience, a substantial variation in our net sales and operating results from quarter to quarter |
| We believe that the factors which influence this variability of quarterly results include general economic and industry conditions that affect consumer spending, changing consumer demands, the timing of our introduction of new products, the level of consumer acceptance of each new product, the seasonality of the markets in which we participate, the weather and actions of competitors |
| Accordingly, a comparison of our results of operations from period to period is not necessarily meaningful, and our results of operations for any period are not necessarily indicative of future performance |
| We are controlled by our Founder and management, whose interests may differ from other stockholders |
| At June 12, 2006, Norbert Olberz, the Company’s Chairman Emeritus, director and founder, Craig Levra, the Company’s Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief Financial Officer, collectively owned approximately 67prca of the Company’s outstanding Class A and Class B Common Stock |
| Olberz, Levra and Kaminsky effectively have the ability to control the outcome on all matters requiring stockholder approval, including, but not limited to, the election and removal of directors, and any merger, consolidation or sale of all or substantially all of the Company’s 9 _________________________________________________________________ [44]Table of Contents assets, and to control the Company’s management and affairs |
| Transactions may be pursued that could enhance Messrs |
| Olberz, Levra and Kaminsky’s interests in the Company while involving risks to the interests of the Company’s other stockholders, and there is no assurance that their interests will not conflict with the interests of the Company’s other stockholders |
| Problems with our information systems could disrupt our operations and negatively impact our financial results |
| Our success, in particular our ability to successfully manage inventory levels and our centralized distribution system, largely depends upon the efficient operation of our computer hardware and software systems |
| We use management information systems to track inventory information at the store level, replenish inventory from our warehouse, and aggregate daily sales information among other things |
| These systems and our operations are vulnerable to damage or interruption from: • earthquake, fire, flood and other natural disasters; • power loss, computer systems failures, internet and telecommunications or data network failure, operator negligence, improper operation by or supervision of employees, physical and electronic loss of data and similar events; and • computer viruses, penetration by hackers seeking to disrupt operations or misappropriate information and other breaches of security |
| We seek to minimize these risks by the use of backup facilities and redundant systems |
| Nevertheless any failure that causes an interruption in our operations or a decrease in inventory tracking could result in reduced net sales |
| If we are unable to predict or react to changes in consumer demand, we may lose customers and our sales may decline |
| If we fail to anticipate changes in consumer preferences, we may experience lower net sales, higher inventory markdowns and lower margins |
| Products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty |
| These preferences are also subject to change |
| Sporting goods are often subject to short-lived trends, such as the short-lived popularity of in-line scooters |
| Outdoor wear is significantly influenced by fashion |
| Our success depends upon the ability to anticipate and respond in a timely manner to trends in sporting goods merchandise and consumers’ participation in sports |
| In addition, because we generally make commitments to purchase products from vendors up to nine months in advance of the proposed delivery, misjudging the market may over-stock unpopular products and force inventory markdowns that could have a negative impact on profitability, or have insufficient inventory of a popular item that can be sold at full markup |
| The price of our Class A Common Stock and Class B Common Stock may be volatile |
| Our Class A Common Stock and Class B Common Stock are thinly traded making it difficult to sell large amounts |
| The market prices of our Class A Common Stock and Class B Common Stock are likely to be volatile and could be subject to significant fluctuations in response to factors such as quarterly variations in operating results, operating results which vary from the expectations of securities analysts and investors, changes in financial estimates, changes in market valuations of competitors, announcements by us or our competitors of a material nature, additions or departures of key personnel, future sales of Class A Common Stock and Class B Common Stock and stock volume fluctuations |
| Also, general political and economic conditions such as a recession or interest rate fluctuations may adversely affect the market price of our Class A Common Stock and Class B Common Stock |
| Provisions in the Company’s charter documents could discourage a takeover that stockholders may consider favorable |
| At June12, 2006, Norbert Olberz, the Company’s Chairman Emeritus, director and founder, Craig Levra, the Company’s Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief Financial Officer, collectively owned approximately 67prca of the Company’s outstanding Class A and 10 _________________________________________________________________ [45]Table of Contents Class B Common Stock |
| The holder of a share of Class B Common Stock is entitled to one vote on each matter presented to the stockholders whereas the holder of a share of Class A Common Stock has 1/20th of one vote on each matter presented to the stockholders |
| Subject to the Class A protection provisions described below, Messrs |
| Olberz, Levra and Kaminsky will be able to sell shares of Class A Common Stock and use the proceeds to purchase additional shares of Class B Common Stock, thereby increasing their collective voting power |
| Subject to the prohibition on the grant, issuance, sale or transfer of Class B Common Stock to Messrs |
| Levra and Kaminsky, the Company will also be able to issue Class B Common Stock (subject to the applicable rules of the NASD and the availability of authorized and unissued shares of Class B Common Stock) to persons deemed by the Board of Directors to be preferable to a potential acquirer, thereby diluting the voting power of that potential acquirer |
| The Class A protection provisions in the Company’s Certificate of Incorporation could also make acquisition of voting control more expensive by requiring an acquirer of 10prca or more of the outstanding shares of Class B Common Stock to purchase a corresponding proportion of Class A Common Stock |
| The Company’s Certificate of Incorporation contains certain other provisions that may have an “anti-takeover” effect |
| The Company’s Certificate of Incorporation does not provide for cumulative voting and, accordingly, a significant minority stockholder could not necessarily elect any designee to the Board of Directors |
| The Company’s Certificate of Incorporation also provides that the Board of Directors shall be divided into three classes, as nearly equal in number as possible, which are elected for staggered three-year terms and, accordingly, it could take at least two annual meetings to change a majority of the Board of Directors |
| As a result of these provisions in the Company’s Certificate of Incorporation, stockholders of the Company may be deprived of an opportunity to sell their shares at a premium over prevailing market prices and it would be more difficult to replace the directors and management of the Company |
| We may be subject to product liability claims and our insurance may not be sufficient to cover damages related to those claims |
| We may be subject to lawsuits resulting from injuries associated with the use of sporting goods equipment that we sell |
| We may incur losses relating to these claims or the defense of these claims |
| There is a risk that claims or liabilities will exceed our insurance coverage |
| In addition, we may be unable to retain adequate liability insurance in the future |
| In addition, we are subject to regulation by the Consumer Product Safety Commission and similar state regulatory agencies |
| If we fail to comply with government and industry safety standards, we may be subject to claims, lawsuits, fines and adverse publicity that could have a material adverse effect on our business, results of operations and financial condition |
| Our comparable store sales will fluctuate and may not be a meaningful indicator of future performance |
| Changes in our comparable store sales results could affect the price of our Class A Common Stock and Class B Common Stock |
| A number of factors have historically affected, and will continue to affect, our comparable store sales results, including: competition, our new store openings and remodeling, general regional and national economic conditions, actions taken by our competitors, consumer trends and preferences, changes in the shopping centers in which we are located, new product introductions and changes in our product mix, timing and effectiveness of promotional events, lack of new product introductions to spur growth in the sale of various kinds of sports equipment, and weather |
| Our comparable store sales may vary from quarter to quarter, and an unanticipated decline in revenues or comparable store sales may cause the price of our Class A Common Stock and Class B Common Stock to fluctuate significantly |
| “Item 1A 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 “Item 6 |
| Selected Financial Data” and our consolidated financial statements and related notes thereto |
| Overview We are a leading operator of 40 full service specialty sporting goods stores in California, Nevada and Arizona |
| In 1959, Norbert Olberz, our Chairman Emeritus and founder (the “Founder”), purchased a small ski and tennis shop in La Canada, California |
| A focus on providing quality merchandise with outstanding customer service was the foundation of Norbert’s vision |
| We continue this tradition and are focused on growth through a number of initiatives, including: continuing new store development; remodeling stores to conform to our prototype; and improving information systems to increase product flow-through, improve in-stock positions and optimize merchandise assortment |
| We have opened twelve stores in the last three years and seventeen in the last five years |
| Future store openings are subject to availability of satisfactory store locations based on local competitive conditions, site availability and cost and our ability to provide and maintain high service levels and quality brand merchandising at competitive prices |
| Store openings are expected to have a favorable impact on sales volume, but will negatively affect profit in the short term |
| New stores tend to have higher costs in the early years of operation, due primarily to increased promotional costs and lower sales on a per employee basis until the store matures |
| Our stores generally require three to four years to attract a stable, mature customer base |
| Our prototype stores range in size from 42cmam000 to 45cmam000 square feet and showcase each product category with the feel of a specialty shop all contained under one roof |
| The full service approach to customer service and product knowledge is enhanced by fixtures which feature specific categories, and give the customer an enhanced shopping experience |
| Mature stores are evaluated for remodel based on each store’s age and competitive situation, as well as how much the landlord will contribute to our required improvements |
| Future store remodeling plans will depend upon several factors, including, but not limited to, general economic conditions, competition trends and the availability of adequate capital |
| We believe that the overall growth of our business will allow us to maintain or increase our operating margins |
| Increased merchandise volumes should enable us to improve our purchasing leverage and achieve greater support throughout the supply chain |
| Gross profit as a percent of sales has increased from 28dtta6prca to 30dtta9prca over the past five years |
| Our overall growth should leverage our investments in infrastructure such as the distribution center, integration of corporate facilities into a single location, E3 replenishment system, HighJump warehouse management software and Marketmax planning and allocation technology |
| However, these increased efficiencies and improvements in logistics are partially offset by the operating costs of new and maturing stores |
| Selling, general and administrative 16 _________________________________________________________________ [51]Table of Contents expenses, excluding the cost of the recapitalization plan during fiscal 2006, as a percent of sales have increased from 25dtta3prca to 27dtta1prca over the past five years |
| In September 2005, our stockholders approved a recapitalization plan designed to facilitate the orderly transition of control from our Founder to certain members of management and to increase financial flexibility for the Company and its stockholders |
| The recapitalization plan consisted of (1) the reclassification of each outstanding share of Common Stock as 0dtta25 share of Class B Common Stock, (2) the issuance of seven shares of Class A Common Stock for each outstanding share of Class B Common Stock and (3) the transfer of a portion of the Founder’s ownership to Craig Levra, Chairman and Chief Executive Officer, and Howard Kaminsky, Executive Vice President — Finance, Chief Financial Officer and Secretary |
| The recapitalization doubled our total number of shares outstanding |
| Therefore, the recapitalization plan had the same effect on earnings per share as a 2-for-1 stock split |
| Shares transferred by the Founder to Messrs |
| Levra and Kaminsky were treated as a contribution to the Company’s capital with the offsetting charge as compensation expense |
| As a result, the Company recorded a one-time charge based on the stock price at the time of the transfer of approximately dlra8dtta7 million |
| ” We are in the process of implementing Section 404 of the Sarbanes-Oxley Act of 2002 which requires an extensive review and likely remediation of our internal controls |
| To help meet the requirements of Section 404 and enhance the Company’s ability to grow we are considering replacing our legacy merchandise and financial systems |
| Implementation of these new systems as well as the other work required by Section 404 will be expensive, time-consuming and will require significant attention of management |
| Current rules require our compliance by March 31, 2008 |
| Beginning April 1, 2006, our fiscal year end will change from March 31 to the Sunday closest to March 31 |
| Each fiscal year will consist of four 13 week quarters, with an extra week added onto the fourth quarter every five to six years |
| This fiscal calendar is widely used in the retail industry |
| Results of Operations Fiscal 2006 Compared to Fiscal 2005 |
| The following table sets forth statement of operations data determined in accordance with generally accepted accounting principals (“GAAP”), and the relative percentages of net sales, and the percentage increase or decrease, for the year ended March 31, 2006 and 2005 (dollar amounts in thousands, except per share amounts) |
| Year ended March 31, 2006 2005 Dollar Percentage Amount Percent Amount Percent Change Change Net sales $ 343cmam204 100dtta0 % $ 309cmam090 100dtta0 % $ 34cmam114 11dtta0 % Gross profit 106cmam067 30dtta9 % 95cmam661 30dtta9 % 10cmam406 10dtta9 % Selling, general and administrative expenses 101cmam534 29dtta6 % 85cmam145 27dtta5 % 16cmam389 19dtta2 % Income from operations 4cmam533 1dtta3 % 10cmam516 3dtta4 % (5cmam983 ) (56dtta9 %) Interest expense 267 0dtta1 % 263 0dtta1 % 4 1dtta5 % Income before taxes 4cmam266 1dtta2 % 10cmam253 3dtta3 % (5cmam987 ) (58dtta4 %) Net income (loss) (87 ) (0dtta0 %) 6cmam171 2dtta0 % (6cmam258 ) (101dtta4 %) Class A and Class B Earnings (loss) per share: Basic $ (0dtta01 ) $ 0dtta46 $ (0dtta47 ) (102dtta2 %) Diluted $ (0dtta01 ) $ 0dtta44 $ (0dtta45 ) (102dtta3 %) All share and per share information has been adjusted to reflect the |