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EX-31 - EXHIBIT 31.2 - SPORT CHALET INCex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

[X]

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

 

For the quarterly period ended June 30, 2013

 

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 Flintridge, 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 August 13, 2013, 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

16

     

Item 4.

Controls and Procedures

17

     
     

PART II – OTHER INFORMATION

     
     

Item 1.

Legal Proceedings

17

     

Item 1A.

Risk Factors

17

     

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

18

     

Item 6.

Exhibits

18

 

 

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SPORT CHALET, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   

13 weeks ended

 
   

June 30, 2013

   

July 1, 2012

 
   

(in thousands, except per share amounts)

 

Net sales

  $ 81,525     $ 83,849  

Cost of goods sold, buying and occupancy costs

    60,060       60,481  

Gross profit

    21,465       23,368  
                 

Selling, general and administrative expenses

    21,604       20,738  

Depreciation and amortization

    2,166       2,069  

(Loss) income from operations

    (2,305 )     561  
                 

Interest expense

    541       458  

Net (loss) income

  $ (2,846 )   $ 103  
                 

(Loss) earnings per share:

               

Basic

  $ (0.20 )   $ 0.01  

Diluted

  $ (0.20 )   $ 0.01  
                 

Weighted average number of common shares outstanding:

               

Basic

    14,190       14,190  

Diluted

    14,190       14,199  
 

See accompanying notes. 

 

 

 
3

 

 

SPORT CHALET, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

June 30,

2013

   

March 31,

2013

 
   

(Unaudited)

         
   

(in thousands, except share amounts)

 

Assets

             

Current assets:

               

Cash and cash equivalents

  $ 4,155     $ 3,775  

Accounts receivable, net

    5,687       5,169  

Merchandise inventories

    109,147       104,255  

Prepaid expenses and other current assets

    3,853       1,830  

Total current assets

    122,842       115,029  
                 

Fixed assets, net

    18,168       18,338  

Total assets

  $ 141,010     $ 133,367  
                 

Liabilities and stockholders' equity

               

Current liabilities:

               

Accounts payable

  $ 37,707     $ 33,512  

Loan payable to bank

    51,702       46,324  

Salaries and wages payable

    4,183       3,367  

Other accrued expenses

    20,362       18,839  

Total current liabilities

    113,954       102,042  
                 

Deferred rent

    14,597       16,075  

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 June 30, 2013 and March 31, 2013

    124       124  

Class B Common Stock, $.01 par value:

               

Authorized shares – 2,000,000 Issued and outstanding shares – 1,775,821 at June 30, 2013 and March 31, 2013

    18       18  

Additional paid-in capital

    37,373       37,318  

Accumulated deficit

    (25,056 )     (22,210 )

Total stockholders’ equity

    12,459       15,250  

Total liabilities and stockholders’ equity

  $ 141,010     $ 133,367  

 

See accompanying notes. 

 

 

 
4

 

 

See accompanying notes.SPORT CHALET, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

  

   

13 weeks ended

 
   

June 30, 2013

   

July 1, 2012

 
   

(in thousands)

 

Operating activities

               

Net (loss) income

  $ (2,846 )   $ 103  

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

               

Depreciation and amortization

    2,166       2,069  

Loss on disposal of property and equipment

    -       (11 )

Share-based compensation

    55       62  

Changes in operating assets and liabilities:

               

Accounts receivable

    (518 )     (1,997 )

Merchandise inventories

    (4,891 )     (8,612 )

Prepaid expenses and other current assets

    (2,023 )     109  

Accounts payable

    4,688       11,109  

Salaries and wages payable

    816       1,146  

Other accrued expenses

    1,523       (586 )

Deferred rent

    (1,478 )     (716 )

Net cash (used in) provided by operating activities

    (2,508 )     2,676  
                 

Investing activities

               

Purchase of fixed assets

    (2,490 )     (940 )

Proceeds from sale of assets

    -       11  

Net cash used in investing activities

    (2,490 )     (929 )
                 

Financing activities

               

Proceeds from bank borrowing

    92,262       87,653  

Repayment of bank borrowing

    (86,884 )     (86,484 )

Net cash provided by financing activities

    5,378       1,169  
                 

Increase in cash and cash equivalents

    380       2,916  

Cash and cash equivalents at beginning of period

    3,775       2,811  

Cash and cash equivalents at end of period

  $ 4,155     $ 5,727  
                 

Supplemental disclosure of cash flow information

               

Cash paid during the period for:

               

Interest

  $ 541     $ 433  
                 

Supplemental disclosure of non-cash investing and financing activities

               

Purchases of fixed assets on credit

  $ 903     $ 156  

 

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 premier, full-service specialty sporting goods retailer offering a broad assortment of brand name sporting goods equipment, apparel, and footwear. As of June 30, 2013, the Company operated 53 stores including 34 locations in Southern California, eight in Northern California, seven 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 March 31, 2013. The condensed consolidated financial data at March 31, 2013 is derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013. 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.             (Loss) Earnings per Share

 

(Loss) earnings per share, basic, is computed based on the weighted average number of common shares outstanding for the period. (Loss) earnings 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

 
   

June 30, 2013

   

July 1, 2012

 
   

(in thousands, except per share amounts)

 

Net (loss) income

  $ (2,846 )   $ 103  
                 

Weighted average number of common shares outstanding:

               

Basic

    14,190       14,190  

Effect of dilutive securities-stock options

    -       9  

Diluted

    14,190       14,199  
                 
                 
                 

(Loss) earnings per share:

               

Basic

  $ (0.20 )   $ 0.01  

Effect of dilutive securities-stock options

    -       -  

Diluted

  $ (0.20 )   $ 0.01  

 

Options to purchase an aggregate of 2.2 million shares for the 13 weeks ended June 30, 2013 and July 1, 2012 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.

 

4.             Loan Payable to Bank

 

In August 2013, we entered into a second amendment to our October 2010 amended and restated credit facility with our existing bank, Bank of America, N.A. (the “Lender”), which was first amended in May 2012. The credit facility provides for advances up to $75.0 million (previously $65.0 million from January 1 of each year through August 31 of each year and $70.0 million from September 1 of each year through December 31 of each year). This facility provides for up to $10.0 million in authorized letters of credit within the $75.0 million facility. The amount we can borrow under this credit facility is limited to fixed percentages of the value of various categories of accounts receivable and fixed percentages of the value of various categories of eligible inventory, minus certain reserves. As amended by the second amendment, eligible inventory now includes food, rental equipment inventory up to $2.5 million of borrowing base, and ski lift ticket inventory from December 1 to March 31 of each year to the extent the lift tickets are subject to a guaranteed buy-back. Our borrowing capacity and thus the adequacy of our working capital would be adversely affected if we experienced a significant decrease in eligible inventory, whether due to our vendors’ unwillingness to ship us merchandise, the aging of inventory and/or an unfavorable inventory appraisal. Interest under the amended credit facility accrues at the Lender’s prime rate plus a margin of between 1.25% and 1.75% per annum (presently 1.50% per annum), or at our option we can fix the rate for a period of time at LIBOR plus a margin of between 2.25% and 2.75% per annum (presently 2.50% per annum), in each case based on average credit facility utilization. Under the credit facility prior to the current amendment, the margins depended on EBITDA on a trailing 12-month basis. Interest accrued under the credit facility prior to the current amendment at a rate of 5.00% per annum at June 30, 2013. In addition, there is an unused commitment fee of 0.25% per year, based on a weighted average formula. The credit facility’s expiration has been extended to August 2018. 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 of 1.10 to 1.00 (previously 1.25 to 1.00). The covenant would apply only if our availability is equal to or less than the greater of (x) $5.0 million and (y) 10% of the amount of the credit facility (presently $75.0 million) 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.

 

 
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. A store’s sales are included in the comparable store sales calculation in the quarter following its twelfth full month of operation and excluded from the calculation in the quarter of its closure.

 

General Overview

 

Sport Chalet, Inc. (referred to as the “Company,” “Sport Chalet,” “we,” “us,” and “our”) is a premier, full-service specialty sporting goods retailer offering a broad assortment of brand name sporting goods equipment, apparel, and footwear. As of June 30, 2013, we operated 53 stores, including 34 locations in Southern California, eight in Northern California, seven 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 online same day delivery, climbing, backcountry skiing, ski mountaineering, avalanche education, and 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.

 

In 1959, Norbert Olberz, our founder (the “Founder”), purchased a small ski and tennis shop in La Cañada Flintridge, 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 an athlete;” and to “create ease of shopping.”

 

 

 
8

 

 

Recent History

 

Our stores are located in states that experienced, since the downturn that began in 2007, some of the worst macroeconomic conditions in the nation, including 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 response, we modified our business model to make the Company more efficient, improved our liquidity and reduced operating expenses during the downturn. Additionally, 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.

 

While fiscal 2013 began to show signs of improvement, as evidenced by our first annual comparable store sales increase since fiscal 2007, the momentum reversed during the first quarter of fiscal 2014 due to a weaker-than-anticipated retail sales environment. We incurred a net loss of $2.8 million during the first quarter of fiscal 2014. Despite the setback, we continue to implement a number of strategic initiatives to position the Company for improved financial performance, as follows:

 

 

New store prototype/next generation store (one opened at the end of June 2013 in Downtown Los Angeles);

 

 

Online sales growth expected to continue in fiscal 2014;

 

 

Leveraging data to drive geographical expansion efforts;

 

 

Local store marketing and micro-merchandising initiatives to create differentiation and increase recognition in the community; and

 

 

Comprehensive digital strategy to enhance the customer experience.

 

In response to the results of the first quarter, we are renewing our focus on reducing costs and refining our inventory position and store strategy. We are reducing our costs by decreasing store and corporate office labor expense to align with current sales trends, cutting IT maintenance expenses in non-critical areas, switching to a more cost effective logistics provider, negotiating rent reductions and honing our customer satisfaction initiatives. Through the closure of underperforming stores, selected staff reductions, and the renegotiation of logistics and software contracts, we have reduced our annualized operating expenses by approximately $3.2 million. We continue to refine our inventory position through improvements in merchandise assortments and category adjacencies. We are tailoring merchandise mix to meet the needs of local customers and aggressively managing inventory at both the store and vendor levels. In reviewing our store portfolio, we attempt to identify underperforming trade areas within markets where we have stores. We intend to terminate, modify or renegotiate the leases of underperforming trade area stores that do not meet specific financial criteria, which may reduce our sales and the impact of advertising in those local markets, as well as free up operating resources for more productive stores. During the 13 weeks ended June 30, 2013, we closed two underperforming stores located in Antioch, California and Phoenix, Arizona, and opened one new concept store in Downtown Los Angeles. We will close one underperforming store located in Concord, California in August 2013 and have no planned new store openings.

 

 

 
9

 

 

Results of Operations

 

13 Weeks Ended June 30, 2013 Compared to July 1, 2012

 

The following table sets forth statements of operations data and relative percentages of net sales for the 13 weeks ended June 30, 2013 compared to the 13 weeks ended July 1, 2012 (dollar amounts in thousands, except per share amounts):

 

   

13 weeks ended

                 
   

June 30, 2013

   

July 1, 2012

   

Dollar

change

   

Percentage

change

 
   

Amount

   

Percent

   

Amount

   

Percent

                 

Net sales

  $ 81,525       100.0%     $ 83,849       100.0%     $ (2,324 )     (2.8% )

Gross profit

    21,465       26.3%       23,368       27.9%       (1,903 )     (8.1% )

Selling, general and administrative expenses

    21,604       26.5%       20,738       24.7%       866       4.2 %

Depreciation and amortization

    2,166       2.7%       2,069       2.5%       97       4.7 %

(Loss) income from operations

    (2,305 )     (2.8% )     561       0.7%       (2,866 )      

Interest expense

    541       0.7%       458       0.5%       83       18.1 %

Net (loss) income

    (2,846 )     (3.5% )     103       0.1%       (2,949 )     *  
                                                 

(Loss) earnings per share:

                                               

Basic

  $ (0.20 )           $ 0.01             $ (0.21 )      

Diluted

  $ (0.20 )           $ 0.01             $ (0.21 )      

 

* Percentage change not meaningful.

                                     
 

Sales decreased $2.3 million, or 2.8%, to $81.5 million for the 13 weeks ended June 30, 2013 from $83.8 million for the 13 weeks ended July 1, 2012. The sales decrease is primarily the result of a sales decrease of $1.1 million from the closure of two underperforming stores, a sales decrease in Team Sales Division of 31.0% due to the departure of several sales representatives, and a comparable store sales decrease of 0.7%, partially offset by a 37.6% increase in online sales. The comparable store sales decrease of 0.7% was primarily due to the general consumer caution from the uneven retail environment. The two underperforming stores were closed in April 2013 and June 2013, while the one new concept store was opened at the end of June 2013.

 

Gross profit decreased $1.9 million, or 8.1%, and as a percent of sales decreased to 26.3% from 27.9%. The decrease in gross profit is primarily the result of an increase in promotional activity to stimulate sales as well as the decrease in sales. Occupancy costs related to the new store was offset by the savings from the store closures.

 

Selling, general and administrative (“SG&A”) expenses increased $0.9 million, or 4.2%, primarily due to increases of $0.2 million in advertising, $0.2 million in expenses associated with the growth of the online business, and $0.5 million in labor-related expenses, such as salaries, payroll taxes and employee health insurance coverage. This increase combined with the decline in sales resulted in an increase in SG&A as a percent of sales to 26.5% from 24.7%. SG&A related to the new store was offset by the savings from the store closures.

 

Net loss for the quarter ended June 30, 2013 increased $2.9 million to $2.8 million, or $0.20 per diluted share, from net income of $0.1 million, or $0.01 per diluted share, for the quarter ended July 1, 2012.

 

 

 
10

 

 

Liquidity and Capital Resources

 

Our primary capital requirements currently are for inventory replenishment and store operations. Since fiscal 2007, we have increasingly relied on bank borrowing for our capital needs to fund new store openings and losses from operations. For the foreseeable future our ability to continue our operations and business is dependent on credit terms from vendors and bank borrowing.

 

Net cash provided by operating activities has generally been the result of net loss, adjusted for depreciation and amortization, and changes in inventory along with related accounts payable. As previously announced, we closed two underperforming stores during the first quarter and at the end of the first quarter, opened one new concept store, which we expect will more than offset the sales decrease from the two closures. The following table summarizes the more significant items for the 13 weeks ended June 30, 2013 and July 1, 2012:

  

   

13 weeks ended

 
   

June 30, 2013

     

July 1, 2012

 
   

(in thousands)

 

Net (loss) income

  $ (2,846 )     $ 103  

Depreciation and amortization

    2,166         2,069  

Merchandise inventories

    (4,891 )       (8,612 )

Accounts payable

    4,688         11,109  

Accounts receivable

    (518 )       (1,997 )

Prepaid expenses and other current assets

    (2,023 )       109  

Other accrued expenses

    1,523         (586 )

Deferred rent

    (1,478 )       (716 )

Other

    871  

 

    1,197  

Net cash (used in) provided by operating activities

  $ (2,508 )     $ 2,676  

 

Inventory increased $4.9 million for the 13 weeks ended June 30, 2013 compared to an increase of $8.6 million for the same period last year. The difference is due to focused efforts to reduce overall inventory levels in light of lower than expected sales. We had previously made additional investments in merchandise categories that had exhibited the greatest sales growth potential, which combined with the first quarter’s overall weak sales, caused the average inventory per store to increase 4.1% to $2.1 million at June 30, 2013 from $2.0 million at July 1, 2012. The increase in average inventory per store is unfavorable and we continue to focus on inventory productivity and expect improvements during the remainder of fiscal 2014.

 

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.

 

Accounts receivable increased $0.5 million for the 13 weeks ended June 30, 2013 compared to an increase of $2.0 million for the same period last year. The difference includes a reduction related to our Team Sales Division of $0.7 million due to reduced sales, offset by $1.7 million due from the landlord of our recently opened new concept store for reimbursement of improvements.

 

Prepaid expenses include rent whose payment timing can fluctuate from the final days to the first days of a fiscal month.

 

 

 
11

 

 

Other accrued expenses include $2.5 million due to a landlord for the early termination of a lease related to an underperforming store approximately five years before the original termination date. The $2.5 million expense will be paid over a three year period.

 

We made the decision to discontinue operations of three of our underperforming stores, each of which was previously fully impaired, because they were not meeting our specific financial criteria. As a result of the store closings, we recognized a benefit from previously recorded deferred rent of $2.2 million for the 13 weeks ended June 30, 2013, which is offset by the $2.5 million expense incurred for the early termination. There are no additional material losses on the net fixed assets related to the store closings and we do not expect to incur further charges in connection with these locations.

 

Net cash used in investing activities is primarily for capital expenditures which are expected to remain nominal with no planned new store openings or significant store remodels in the near future. Forecasted capital expenditures for fiscal 2014 are expected to be approximately $5.5 million primarily for new rental equipment, information systems and the concept store that opened at the end of June 2013 in Downtown Los Angeles. Approximately $1.7 million for the new store will be reimbursed by the landlord.

 

Net cash provided by financing activities reflects advances and repayments of borrowings under our revolving credit facility. In August 2013, we entered into a second amendment to our October 2010 amended and restated credit facility with our existing bank, Bank of America, N.A. (the “Lender”), which was first amended in May 2012. The credit facility provides for advances up to $75.0 million (previously $65.0 million from January 1 of each year through August 31 of each year and $70.0 million from September 1 of each year through December 31 of each year). This facility provides for up to $10.0 million in authorized letters of credit within the $75.0 million facility. The amount we can borrow under this credit facility is limited to fixed percentages of the value of various categories of accounts receivable and fixed percentages of the value of various categories of eligible inventory, minus certain reserves. As amended by the second amendment, eligible inventory now includes food, rental equipment inventory up to $2.5 million of borrowing base, and ski lift ticket inventory from December 1 to March 31 of each year to the extent the lift tickets are subject to a guaranteed buy-back. Our borrowing capacity and thus the adequacy of our working capital would be adversely affected if we experienced a significant decrease in eligible inventory, whether due to our vendors’ unwillingness to ship us merchandise, the aging of inventory and/or an unfavorable inventory appraisal. Interest under the amended credit facility accrues at the Lender’s prime rate plus a margin of between 1.25% and 1.75% per annum (presently 1.50% per annum), or at our option we can fix the rate for a period of time at LIBOR plus a margin of between 2.25% and 2.75% per annum (presently 2.50% per annum), in each case based on average credit facility utilization. Under the credit facility prior to the current amendment, the margins depended on EBITDA on a trailing 12-month basis. Interest accrued under the credit facility prior to the current amendment at a rate of 5.00% per annum at June 30, 2013. The current amendment is expected to reduce interest expense by approximately $0.1 million on an annualized basis, based on current borrowing forecasts. In addition, there is an unused commitment fee of 0.25% per year, based on a weighted average formula. The credit facility’s expiration has been extended to August 2018. 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 of 1.10 to 1.00 (previously 1.25 to 1.00). The covenant would apply only if our availability is equal to or less than the greater of (x) $5.0 million and (y) 10% of the amount of the credit facility (presently $75.0 million) 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 June 30, 2013, our credit facility had a borrowing capacity of $65.0 million, of which we utilized $56.2 million (including a letter of credit of $4.5 million) and had $8.8 million in availability, $2.3 million above the availability requirement of $6.5 million. The amount of availability fluctuates due to seasonal changes in sales and inventory purchases throughout the year. If cash generated by operations does not result in a sufficient level of unused borrowing capacity, our current operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility.  In such a case, we would need to seek other financing alternatives with our bank or other sources.  Additional financing may not be available at terms acceptable to us, or at all.  Failure to obtain financing in such circumstances may require us to significantly curtail our operations.

 

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

 

Off-Balance Sheet Arrangements, Contractual Obligations and Commitments

 

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 June 30, 2013:

 

   

Payment due by period

 

Contractual Obligations

(in thousands)

 

Total

   

Less than

1 year

   

2-3 years

   

4-5 years

   

More than

5 years

 

Operating leases (1)

  $ 135,978     $ 30,211     $ 48,108     $ 29,441     $ 28,218  

Capital leases

    1,038       666       326       46       -  

Revolving credit facility (2)

    51,702       51,702       -       -       -  

Letters of credit

    4,475       4,475       -       -       -  

Employment contracts (3)

    56       56       -       -       -  

Total contractual obligations

  $ 193,251     $ 87,112     $ 48,434     $ 29,487     $ 28,218  

 

(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 included. The amounts of such costs incurred in the fiscal years 2013, 2012 and 2011, were $10.4 million, $9.6 million and 10.0 million, 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.

 

 

 
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Generally, our purchase obligations are cancelable 45 days prior to shipment from our vendors. Letters of credit amounting to approximately $4.5 million were outstanding as of June 30, 2013 and expire within one year.

 

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 our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, 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.

 

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 Quarterly 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 our Annual Report on Form 10-K for the fiscal year ended March 31, 2013. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.      

 

Risks Related To Our Business:

 

 

We have a history of losses which could continue in the future.

     
 

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.

     

 

 
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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.

      

 

No assurance can be given that we will be successful in managing the growth of our Team Sales Division and online business.

 

 

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.

     

 

We may not be able to terminate or modify 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.

 

 

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.

 

 
15

 

 

     

 

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.

    

 

Poor performance of professional sports teams within our core regions of operations could affect our business.

 

 

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.

 

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.

 

 

 
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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, as amended (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.

 

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.

 

Item 1A.   Risk Factors

 

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended March 31, 2013 (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 consider carefully 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 Quarterly 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.

 

 

 
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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.

 

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)

 

 

10.1

Second Amendment to Second Amended and Restated Loan and Security Agreement dated as of August 8, 2013 with Bank of America, N.A.

 

 

 
18

 

 

 

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:          August 14, 2013   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)

 

 

 

 

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