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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 September 30, 2012

OR

[  ]
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 [  ]

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 [X]   No [  ]

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   [   ]                                                      Accelerated filer   [   ]
             Non-accelerated filer   [   ]                                    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 [  ]   No [X]

At November 7, 2012, there were 12,414,490 shares of Class A Common Stock outstanding and 1,775,821 shares of Class B Common Stock outstanding.
 
 
1

 
 
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
 
8
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
17
       
Item 4.
Controls and Procedures
 
17
       
       
PART II – OTHER INFORMATION
       
       
Item 1.
Legal Proceedings
 
18
       
Item 1A.
Risk Factors
 
18
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
18
       
Item 3.
Defaults Upon Senior Securities
 
18
       
Item 4.
Mine Safety Disclosures
 
18
       
Item 5.
Other Information
 
19
       
Item 6.
Exhibits
 
19
 
 
2

 
 
PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

SPORT CHALET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
13 weeks ended
   
26 weeks ended
 
   
September 30, 2012
   
October 2, 2011
   
September 30, 2012
   
October 2, 2011
 
   
(in thousands, except per share amounts)
 
Net sales
  $ 91,452     $ 87,980     $ 175,301     $ 170,804  
Cost of goods sold, buying and occupancy costs
    66,233       62,281       126,714       121,281  
Gross profit
    25,219       25,699       48,587       49,523  
                                 
Selling, general and administrative expenses
    21,924       22,340       42,662       43,955  
Depreciation and amortization
    2,041       2,329       4,110       4,897  
Income from operations
    1,254       1,030       1,815       671  
                                 
Interest expense
    492       431       950       896  
Income (loss) before income taxes
    762       599       865       (225 )
                                 
Income tax provision
    2       -       2       2  
Net income (loss)
  $ 760     $ 599     $ 863     $ (227 )
                                 
Earnings (loss) per share:
                               
Basic
  $ 0.05     $ 0.04     $ 0.06     $ (0.02 )
Diluted
  $ 0.05     $ 0.04     $ 0.06     $ (0.02 )
                                 
Weighted average number of common shares outstanding:
                               
Basic
    14,190       14,190       14,190       14,190  
Diluted
    14,203       14,223       14,201       14,190  
 
See accompanying notes.
 
 
3

 
 
SPORT CHALET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

   
September 30,
2012
   
April 1,
2012
 
   
(Unaudited)
       
Assets
 
(in thousands, except share amounts)
 
Current assets:
           
Cash and cash equivalents
  $ 3,663     $ 2,811  
Accounts receivable, net
    7,564       2,777  
Merchandise inventories
    105,879       98,181  
Prepaid expenses and other current assets
    1,898       1,603  
Total current assets
    119,004       105,372  
                 
Fixed assets, net
    19,723       22,081  
Total assets
  $ 138,727     $ 127,453  
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Accounts payable
  $ 35,676     $ 28,220  
Loan payable to bank
    44,894       41,255  
Salaries and wages payable
    3,353       2,980  
Other accrued expenses
    17,593       17,370  
Total current liabilities
    101,516       89,825  
                 
Deferred rent
    17,919       19,340  
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 – 12,414,490 at September 30, 2012 and 12,414,490 at April 1, 2012
    124       124  
Class B Common Stock, $.01 par value:
               
Authorized shares – 2,000,000 Issued and outstanding shares – 1,775,821 at September 30, 2012 and 1,775,821 at April 1, 2012
    18       18  
Additional paid-in capital
    37,162       37,021  
Accumulated deficit
    (18,012 )     (18,875 )
Total stockholders’ equity
    19,292       18,288  
Total liabilities and stockholders’ equity
  $ 138,727     $ 127,453  
 
See accompanying notes.
 
 
4

 
 
SPORT CHALET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
26 weeks ended
 
   
September 30, 2012
   
October 2, 2011
 
   
(in thousands)
 
Operating activities
           
Net income (loss)
  $ 863     $ (227 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    4,110       4,897  
Gain on disposal of property and equipment
    (16 )     -  
Share-based compensation
    141       564  
Changes in operating assets and liabilities:
               
Accounts receivable
    (4,787 )     (3,122 )
Merchandise inventories
    (7,698 )     (2,303 )
Prepaid expenses and other current assets
    (295 )     (99 )
Accounts payable
    6,880       6,416  
Salaries and wages payable
    373       271  
Other accrued expenses
    (21 )     (1,856 )
Deferred rent
    (1,421 )     (1,418 )
Net cash (used in) provided by operating activities
    (1,871 )     3,123  
                 
Investing activities
               
Purchase of fixed assets
    (932 )     (1,389 )
Proceeds from sale of assets
    16       -  
Net cash used in investing activities
    (916 )     (1,389 )
                 
Financing activities
               
Proceeds from bank borrowing
    187,025       181,119  
Repayment of bank borrowing
    (183,386 )     (180,899 )
Net cash provided by financing activities
    3,639       220  
                 
Increase in cash and cash equivalents
    852       1,954  
Cash and cash equivalents at beginning of period
    2,811       51  
Cash and cash equivalents at end of period
  $ 3,663     $ 2,005  
                 
Supplemental disclosure of cash flow information
               
Cash paid during the period for:
               
Interest
  $ 950     $ 906  
Income tax
  $ 2     $ 2  
                 
Supplemental disclosure of non-cash investing and financing activities
               
Purchases of fixed assets on credit
    732       -  
Fixed assets acquired under capital leases
  $ 244     $ 722  
 
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 by Norbert Olberz in 1959, is a leading operator of full-service, specialty sporting goods stores offering a broad assortment of brand name sporting goods equipment, apparel, and footwear.  As of September 30, 2012, the Company operated 54 stores including 33 locations in Southern California, nine in Northern California, eight in Arizona, three in Nevada, and one in Utah.  In addition, the Company has a Team Sales Division and an online 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 material adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the financial condition, results of operations and cash flows 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 and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 1, 2012. The condensed consolidated financial data at April 1, 2012 is derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 1, 2012.  Interim results are not necessarily indicative of results for any other interim period or for the full fiscal 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.
 
 
6

 
 
2.             Earnings (loss) per Share

Earnings (loss) per share, basic, is computed based on the weighted average number of common shares outstanding for the period.  Earnings (loss) per share, diluted, 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 illustrated below:
 
   
13 weeks ended
   
26 weeks ended
 
   
September 30, 2012
   
October 2, 2011
   
September 30, 2012
   
October 2, 2011
 
   
(in thousands, except per share amounts)
 
Net income (loss)
  $ 760     $ 599     $ 863     $ (227 )
                                 
Weighted average number of common shares outstanding:
                               
Basic
    14,190       14,190       14,190       14,190  
Effect of dilutive securities-stock options
    13       33       11       -  
Diluted
    14,203       14,223       14,201       14,190  
                                 
                                 
                                 
Earnings (loss) per share:
                               
Basic
  $ 0.05     $ 0.04     $ 0.06     $ (0.02 )
Effect of dilutive securities-stock options
    -       -       -       -  
Diluted
  $ 0.05     $ 0.04     $ 0.06     $ (0.02 )
 
Options to purchase an aggregate of 2.2 million shares for the 13 and 26 weeks ended September 30, 2012 and an aggregate of 1.7 million shares for the 13 and 26 weeks ended October 2, 2011 are excluded from the computation of diluted loss per share as their effect would have been anti-dilutive.

3.           Recently Issued Accounting Pronouncements

                We reviewed all recently issued accounting pronouncements and determined either that they are not applicable to our business or that no material effect is expected on our financial position, results of operations or disclosures.
 
 
7

 
 
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.
 
Overview

Sport Chalet, Inc. (referred to as the “Company,” “Sport Chalet,” “we,” “us,” and “our”) is a leading operator of full-service, specialty sporting goods stores offering a broad assortment of brand name sporting goods equipment, apparel, and footwear. As of September 30, 2012, we operated 54 stores, including 33 locations in Southern California, nine in Northern California, eight in Arizona, three in Nevada, and one in Utah, comprising a total of over two million square feet of retail space.  These stores average approximately 41,000 square feet in size.  Our stores offer over 50 specialty services for the sports enthusiast, including climbing, backcountry skiing, ski mountaineering, avalanche education, mountain trekking instruction, car rack installation, snowboard and ski rental and repair, Scuba training and certification, Scuba boat charters, team sales, gait analysis, baseball/softball glove steaming and lacing, racquet stringing, and bicycle tune-up and repair.  In addition, we have a Team Sales Division and an online store at sportchalet.com.  As previously announced, the Company currently plans to open one new store in May 2013 in Downtown Los Angeles.

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 goal was:  to “see things through the eyes of the customer;” to “do a thousand things a little bit better;” to focus on “not being the biggest, but the best,” to “be the image of the sportsperson,” and to “create ease of shopping.”
 
 
8

 
 
Our stores are located in states that have experienced, since the downturn that began in 2008, the worst macroeconomic conditions in the nation, as evidenced by statistics including, but not limited to, high unemployment rates, foreclosure rates and bankruptcy filings.  As a result, our sales, which are largely dependent on the level of consumer spending in the geographic regions surrounding our stores, declined and we incurred substantial losses in fiscal 2009 and fiscal 2010.  During fiscal 2009 and fiscal 2010, we aggressively took action to modify our business model to make the Company more efficient, improve our liquidity and reduce operating expenses.  These efforts continued in fiscal 2011 and fiscal 2012, while at the same time, we reinforced our commitment to be first to market with performance, technology and lifestyle merchandise by expanding our specialty brands and continuing to emphasize the availability and proficiency of our sales staff while many of our competitors emphasized value pricing and severely reduced store staffing.  As a result of these efforts, we reduced our net loss for fiscal 2012 to $5.1 million, or $0.36 per diluted share, compared to net losses of $8.3 million, or $0.59 per diluted share, and $52.2 million, or $3.70 per diluted share, for fiscal 2010 and 2009, respectively.  For fiscal 2012, our net loss increased from fiscal 2011’s net loss of $3.0 million, or $0.21 per diluted share, primarily due to the unseasonably warm and dry winter weather experienced in the second half of fiscal 2012.  We believe the improvements we have made to our business over the past few years have positioned us, assuming better winter weather conditions, to return to profitability for fiscal 2013.  We realized net income of $0.9 million, or $0.06 per diluted share, in the first half of fiscal 2013.

Second Quarter Highlights

 
·
Net income of $0.8 million compared to net income of $0.6 million in the second quarter of the prior year;
 
 
·
Comparable store sales increased 5.5% for the 13 weeks ended September 30, 2012;
 
 
·
Team Sales division sales increased 23.7% from the second quarter of last year; and
 
 
·
Online sales increased 15.6% from the second quarter of last year.

Results of Operations

13 Weeks Ended September 30, 2012 Compared to October 2, 2011

The following table sets forth statements of operations data and relative percentages of net sales for the 13 weeks ended September 30, 2012 compared to the 13 weeks ended October 2, 2011 (dollar amounts in thousands, except per share amounts):
 
   
13 weeks ended
             
   
September 30, 2012
   
October 2, 2011
   
Dollar
change
   
Percentage
change
 
   
Amount
   
Percent
   
Amount
   
Percent
             
Net sales
  $ 91,452       100.0 %   $ 87,980       100.0 %   $ 3,472       3.9 %
Gross profit
    25,219       27.6 %     25,699       29.2 %     (480 )     (1.9 %)
Selling, general and administrative expenses
    21,924       24.0 %     22,340       25.4 %     (416 )     (1.9 %)
Depreciation and amortization
    2,041       2.2 %     2,329       2.6 %     (288 )     (12.4 %)
Income from operations
    1,254       1.4 %     1,030       1.2 %     224       21.7 %
Interest expense
    492       0.5 %     431       0.5 %     61       14.2 %
Income before income taxes
    762       0.8 %     599       0.7 %     163       27.2 %
Income tax provision
    2       0.0 %     -       0.0 %     2       *  
Net income
    760       0.8 %     599       0.7 %     161       26.9 %
                                                 
Earnings per share:
                                               
Basic
  $ 0.05             $ 0.04             $ 0.01       26.9 %
Diluted
  $ 0.05             $ 0.04             $ 0.01       27.1 %
 
* Percentage change not meaningful.
 
 
9

 
 
Sales increased $3.5 million, or 3.9%, to $91.5 million for the 13 weeks ended September 30, 2012 from $88.0 million for the 13 weeks ended October 2, 2011.  The sales increase is primarily due to a 5.5% increase in comparable store sales, an improvement on top of the 3.1% increase in the same period last year.  Team Sales division and Online sales increased 23.7% and 15.6%, respectively.  These sales increases were partially offset by one store closure which contributed $1.5 million in sales in the prior year.  In October 2011, one store was closed to complete this store’s relocation to a larger store in an area with more appealing customer demographics, which opened in June 2008.

Gross profit decreased $0.5 million, or 1.9%, and as a percent of sales decreased to 27.6% from 29.2%.  The 1.6% decrease as a percent of sales is primarily due to 0.8% from a promotional campaign in August, 0.3% in costs related to ongoing customer satisfaction initiatives (see “Critical Accounting Policies and Use of Estimates”) implemented in August 2011, and changes in merchandise costs and in the product mix.

Selling, general and administrative (“SG&A”) expenses decreased $0.4 million, or 1.9%, primarily due to $0.4 million in savings from labor-related expenses, such as self-insurance for employee health insurance coverage and stock option expense.  As a percent of sales, SG&A decreased to 24.0% from 25.4%.

Depreciation decreased $0.3 million as a result of the low level of capital expenditures in recent fiscal years with no new store openings or significant remodels.

Net income for the quarter ended September 30, 2012 increased $0.2 million to $0.8 million, or $0.05 per diluted share, compared to net income of $0.6 million, or $0.04 per diluted share, for the quarter ended October 2, 2011.

26 Weeks Ended September 30, 2012 Compared to October 2, 2011

The following table sets forth statements of operations data and relative percentages of net sales for the 26 weeks ended September 30, 2012 compared to the 26 weeks ended October 2, 2011 (dollar amounts in thousands, except per share amounts):

   
26 weeks ended
             
   
September 30, 2012
   
October 2, 2011
   
Dollar
change
   
Percentage
change
 
   
Amount
   
Percent
   
Amount
   
Percent
             
Net sales
  $ 175,301       100.0 %   $ 170,804       100.0 %   $ 4,497       2.6 %
Gross profit
    48,587       27.7 %     49,523       29.0 %     (936 )     (1.9 %)
Selling, general and administrative expenses
    42,662       24.3 %     43,955       25.7 %     (1,293 )     (2.9 %)
Depreciation and amortization
    4,110       2.3 %     4,897       2.9 %     (787 )     (16.1 %)
Income from operations
    1,815       1.0 %     671       0.4 %     1,144       170.5 %
Interest expense
    950       0.5 %     896       0.5 %     54       6.0 %
Income (loss) before income taxes
    865       0.5 %     (225 )     (0.1 %)     1,090       *  
Income tax provision
    2       0.0 %     2       0.0 %     -       0.0 %
Net income (loss)
    863       0.5 %     (227 )     (0.1 %)     1,090       *  
                                                 
Earnings (loss) per share:
                                               
Basic
  $ 0.06             $ (0.02 )           $ 0.08       *  
Diluted
  $ 0.06             $ (0.02 )           $ 0.08       *  
 
* Percentage change not meaningful.
 
 
10

 
 
Sales increased $4.5 million, or 2.6%, to $175.3 million for the 26 weeks ended September 30, 2012 from $170.8 million for the 26 weeks ended October 2, 2011.  The sales increase is primarily due to a 4.1% increase in comparable store sales, an improvement on top of the 2.7% increase in the same period last year.  Team Sales division and Online sales increased 18.8% and 11.1%, respectively.  These sales increases were partially offset by one store closure in October 2011, which contributed $3.2 million in sales in the prior year.

Gross profit decreased $0.9 million, or 1.9%, and as a percent of sales decreased to 27.7% from 29.0%.  The 1.3% decrease as a percent of sales is primarily due to 0.5% from a promotional campaign in August, 0.3% in costs related to ongoing customer satisfaction initiatives (see “Critical Accounting Policies and Use of Estimates”) implemented in August 2011, and changes in merchandise costs and in the product mix.

SG&A expenses decreased $1.3 million, or 2.9%, primarily due to $1.4 million in savings from labor-related expenses, such as self-insurance for employee health insurance coverage, incentive payments largely for store employees and stock option expense.  As a percent of sales, SG&A decreased to 24.3% from 25.7%.

Depreciation decreased $0.8 million as a result of the low level of capital expenditures in recent fiscal years with no new store openings or significant remodels.

Net income for the period ended September 30, 2012 increased $1.1 million to $0.9 million, or $0.06 per diluted share, compared to a net loss of $0.2 million, or $0.02 per diluted share, for the same period ended October 2, 2011.

Liquidity and Capital Resources

Our primary capital requirements currently are for inventory replenishment, store operations and new store openings.  Since fiscal 2007, we have increasingly relied on bank borrowing for our capital needs to fund new store openings and losses from operations.  The amount outstanding on our bank credit facility, net of cash on hand, increased from $39.1 million on October 2, 2011 to $41.2 million on September 30, 2012.  For the foreseeable future our ability to continue our operations and business is dependent on credit terms from vendors and bank borrowing.
 
 
11

 
 
Net cash (used in) provided by operating activities has generally been the result of net income (loss), adjusted for depreciation and amortization, and changes in inventory along with related accounts payable.  The following table summarizes the more significant items for the 26 weeks ended September 30, 2012 and October 2, 2011:
 
   
26 weeks ended
 
   
September 30, 2012
   
October 2, 2011
 
   
(in thousands)
 
Net income (loss)
  $ 863     $ (227 )
Depreciation and amortization
    4,110       4,897  
Merchandise inventories
    (7,698 )     (2,303 )
Accounts payable
    6,880       6,416  
Accounts receivable
    (4,787 )     (3,122 )
Other accrued expenses
    (21 )     (1,856 )
Other
    (1,218 )     (682 )
Net cash (used in) provided by operating activities
  $ (1,871 )   $ 3,123  
 
Inventory increased $7.7 million in the 26 weeks ended September 30, 2012 as average inventory per store increased 12.5% to $2.0 million from $1.7 million at the end of September 30, 2012 and October 2, 2011, respectively. The increase is primarily due to additional investments in merchandise categories that have exhibited the greatest sales growth potential as well as the carryover of winter related merchandise due to the lower than planned sales in fiscal 2012 which resulted from the unseasonably warm and dry winter weather.  The winter carryover inventory has been integrated into the inventory purchase plans for the current fiscal year and will result in higher than normal inventory levels through at least the third fiscal quarter.

Accounts payable changes are generally related to inventory changes.  However, the timing of vendor payments or receipt of merchandise near the end of the period influences this relationship.

Net cash used in investing activities is primarily for capital expenditures which are expected to remain nominal with no planned new store openings until fiscal 2014 or significant remodels.  Forecasted capital expenditures for the current fiscal year are expected to be approximately $5.5 million primarily for new rental equipment, information systems, and one new store (see “Overview”).  Approximately $1.5 million for the new store will be reimbursed by the landlord upon opening in early fiscal 2014.

Net cash provided by financing activities reflects advances and repayments of borrowings under our revolving credit facility.  Our revolving credit facility with Bank of America, N.A. (the “Lender”) provides for advances up to $65.0 million, increasing to $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 amount we may borrow under this credit facility (the “Line Amount”) is limited to a percentage of the value of accounts receivable and eligible inventory, minus certain reserves.  A significant decrease in eligible inventory due to our vendors’ unwillingness to ship us merchandise, the aging of inventory and/or an unfavorable inventory appraisal could have an adverse effect on our borrowing capacity 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 September 30, 2012), or at our option we can fix the rate for a period of time at LIBOR plus 2.75%.  In addition, there is an unused commitment fee of 0.25% per year, based on a weighted average formula.  This credit facility expires in 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 Fixed Charge Coverage Ratio measured monthly on a trailing 12-month basis between 0.80 to 1.00 and 1.25 to 1.00 (varying from quarter to quarter).  The 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.  In the event of a significant decrease in availability under our credit facility, it is highly likely that the covenant would be violated.
 
 
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At September 30, 2012, our credit facility had a borrowing capacity of $65.6 million, of which we utilized $48.4 million (including a letter of credit of $3.5 million) and had $17.2 million in availability, $10.6 million above the availability requirement of $6.6 million. The amount of availability fluctuates due to seasonal changes throughout the year.
 
Contractual obligations and commitments related to operating lease obligations, employment contracts and letters of credit are excluded from the balance sheet in accordance with accounting principles generally accepted in the United States.

The following table summarizes such obligations as of September 30, 2012:
 
   
Payment due by period
 
Contractual Obligations
       
Less than
               
More than
 
(in thousands)
 
Total
   
1 year
   
2-3 years
   
4-5 years
   
5 years
 
Operating leases (1)
  $ 152,697     $ 30,349     $ 50,172     $ 35,232     $ 36,944  
Capital leases
    1,268       697       489       83       -  
Revolving credit facility (2)
    44,894       44,894       -       -       -  
Letters of credit
    3,550       3,550       -       -       -  
Employment contracts (3)
    113       75       38       -       -  
Total contractual obligations
  $ 202,522     $ 79,565     $ 50,698     $ 35,315     $ 36,944  
 
(1) 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: $9.6 million, $10.0 million and $11.5 million for the fiscal years 2012, 2011 and 2010, respectively.  Operating lease obligations reflect savings from lease modifications, assume "kick-out clauses" will be exercised and do not reflect potential renewals or replacements of expiring leases.
 
(2) Periodic interest payments on the credit facility are not included in the preceding table because interest expense is based on variable indices, and the balance of our credit facility fluctuates daily depending on operating, investing and financing cash flows.  The credit facility expires in October 2014 and is shown as less than 1 year due to a "lock box arrangement" per ASC 470-10-45-5A, Debt.
 
(3) On July 15, 2011, Norbert Olberz passed away.  Pursuant to his amended employment contract dated April 1, 2000, upon his death, Irene Olberz, his wife will be paid a base salary of $0.1 million per year until March 31, 2014.
 
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.  Some of the leases provide for contingent rent based upon a percentage of sales in excess of specified minimums.  Additionally, some of the leases contain 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.  Many of the leases obligate us to pay costs of maintenance, utilities, and property taxes.

Generally, our purchase obligations are cancelable 45 days prior to shipment from our vendors.  Letters of credit amounting to approximately $3.5 million, related to workers’ compensation deductibles, were outstanding as of September 30, 2012 and expire within one year.

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

 
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Critical Accounting Policies and Use of Estimates

In preparing our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures.  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 April 1, 2012, 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.

In August 2011, we updated our merchandise return policy to enhance our customer’s shopping experience.  The updated return policy is: “If at any time you are not completely satisfied with a service or item purchased, simply return it so we can make it right.”  We estimate a reserve for projected merchandise returns based on historical experience. We do not believe there is a reasonable likelihood that there will be a material change in the estimates we use to reserve for returns as a result of the change in our return policy.  However, if actual results are not consistent with our estimates, we may be required to increase our allowance for sales returns, which would affect sales, and such changes could be material.

In June 2011, we began to self-insure for a significant portion of employee health insurance coverage.  When estimating our self-insured liabilities, which include employee health, property, general liability and workers’ compensation insurance at various levels, we consider a number of factors, including historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries.  Although we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.  This is particularly pertinent as it relates to employee health insurance, where our costs could be affected by seasonality and other factors, which could cause costs to vary widely and unpredictably from period to period.

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 April 1, 2012. 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.
 
 
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Risks Related To Our Business:
 
·
We have a history of losses which could continue in the future.
 
 
·
A downturn in the economy has affected consumer purchases of discretionary items, significantly reducing our net sales and profitability.
 
 
·
The limited availability under our revolving credit facility may result in insufficient working capital.
 
 
·
If our vendors do not provide sufficient quantities of merchandise, our net sales may suffer and hinder our return to profitability.
 
 
·
If we are unable to effectively manage and expand our alliances and relationships with selected suppliers of brand name merchandise, we may be unable to effectively execute our strategy to differentiate ourselves from our competitors.
 
 
·
Intense competition in the sporting goods industry could limit our growth and reduce our profitability.
 
 
·
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.
 
 
·
Our future operations may be dependent on the availability of additional financing.
 
 
·
Seasonal fluctuations in the sales of our merchandise and services could cause our annual operating results to suffer.
 
 
·
If we lose key management or are unable to attract and retain talent, our operating results could suffer.
 
 
·
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.
 
 
·
Failure to protect the integrity and security of our customers’ information could expose us to litigation and materially damage our standing with our customers.
 
 
·
We may not be able to renew the leases of existing store locations.
 
 
·
As a result of the current economic downturn, we have delayed opening new stores.  Continued growth is uncertain and subject to numerous risks.
 
 
15

 
 
 
·
We may need to record additional impairment losses in the future if our stores' operating performance does not improve.
 
 
·
Our quarterly operating results may fluctuate substantially, which may adversely affect our business.
 
 
·
We are controlled by Irene and Eric Olberz and management, whose interests may differ from other stockholders.
 
 
·
Our Class B Common Stock may be delisted from the NASDAQ Stock Market (“Nasdaq”).
 
 
·
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 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.
 
 
·
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting and could harm our ability to manage our expenses.
 
 
·
We self-insure for a significant portion of employee health insurance coverage and recent federal health care legislation could increase our expenses.
 
 
·
Terrorist attacks, acts of war and foreign instability may harm our business.
 
 
·
We rely on one distribution center and any disruption could reduce our sales.
 
 
·
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.

 
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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 4.  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.

In designing and evaluating the disclosure controls and procedures, management recognizes that any 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 control over financial reporting, identified by the Chief Executive Officer or the Chief Financial Officer that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
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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 significantly exceed the limits of the Company’s insurance coverage.

On April 12, 2012, the Company was served with a complaint filed in the California Superior Court for the County of Los Angeles, entitled Brian Bennett v. Sport Chalet, Inc. and Sport Chalet Team Sales, Inc. (Case No. BC482472), alleging violations of the California Civil Code.  The complaint was brought as a purported class action on behalf of wheelchair-bound persons located in California.  The plaintiff alleges, among other things, that the Company violated California state law by failing to make certain store locations accessible to individuals with disabilities. The plaintiff seeks, on behalf of the class members, unspecified amounts of damages; attorneys’ fees and costs.  Plaintiffs' demands for injunctive relief claim that the features of some of the Company's California stores are not in compliance with state or federal regulations and therefore are not accessible to individuals who use wheelchairs. The Company intends to defend this litigation vigorously. 

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 April 1, 2012 (the “Annual Report”).  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 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.  Mine Safety Disclosures.

Not Applicable.

 
18

 

Item 5.  Other Information.

Not Applicable.

Item 6.  Exhibits.

Exhibits:

 
3.1
Restated 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 4.2 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

 
101.INS
XBRL Instance Document

 
101.SCH
XBRL Taxonomy Extension Schema Document

 
101.CAL
XBRL Taxonomy Calculation Linkbase Document

 
101.PRE
XBRL Taxonomy Presentation Linkbase Document

 
101.LAB
XBRL Taxonomy Label Linkbase Document

 
101.DEF
XBRL Taxonomy Definition Linkbase Document

 
19

 

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:                                November 8, 2012
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)
 
 
 
20