##### Table of Contents



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 for 1934
for the quarterly period ended June 30, 2002
|--- | -------------------------------------------------------------------------------------------------------------------------------------



|[   ] | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act for 1934
for the transition period from ______________ to ______________
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Commission File Number: 0-20736

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.)

|                                                     |  |           
|---------------------------------------------------- |  | ----------
|920 Foothill Boulevard, La Canada, California        |  | 91011     
|(Address of principal executive offices)             |  | (Zip Code)
|                                                    
|(818) 790-2717                                       |  |           
|(Registrants telephone number, including area code) |  |           

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


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 [   ]

Number of shares outstanding of the registrants common
stock as of July 30, 2002: 6,606,334

1



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TABLE OF CONTENTS



|                               |                                                                                                |  |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I  Financial Information
|                               | Item 1. Financial Statements.                                                                 
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|Part II  Other Information   
|                               | Item 5. Other Information.                                                                    
|                               | Item 6. Exhibits and Reports on Form 8-K.                                                     
|SIGNATURE                     



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##### Table of Contents



SPORT CHALET, INC.

Index 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  |     
|                           
|Part II  Other Information
|Item 5.                     |  | Other Information                                                                             |  |  | 14 |     
|Item 6.                     |  | Exhibits and Reports on Form 8-K                                                              |  |  | 14 |     

2



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Part I  Financial Information




Item 1. Financial Statements.

SPORT CHALET, INC.

CONDENSED STATEMENTS OF INCOME
(UNAUDITED)

|                                                      |         |   |                             |           |      |   |            |           | 
|----------------------------------------------------- | ------- | - | --------------------------- | --------- | ---- | - | ---------- | --------- | 
|                                                      |         |   | Three months ended June 30,
|                                                      |         |   |                            
|                                                      |         |   | 2002                        |           | 2001
|                                                      |         |   |                             |           |     
|Net sales                                             |         | $ | 51,204,660                  |           |      | $ | 47,949,471 |          
|Cost of goods sold, buying and occupancy              |         |   | 37,423,341                  |           |      |   | 32,974,251 |          
|                                                      |         |   |                             |           |      |   |            |          
|Gross profit                                          |         |   | 13,781,319                  |           |      |   | 14,975,220 |          
|Selling, general and administrative
expenses          |         |   | 13,599,489                  |           |      |   | 12,913,629 |          
|                                                      |         |   |                             |           |      |   |            |          
|Income from operations                                |         |   | 181,830                     |           |      |   | 2,061,591  |          
|Interest (expense) income                             |         |   | (39,942                     | )         |      |   | 69,361     |          
|                                                      |         |   |                             |           |      |   |            |          
|Income before taxes                                   |         |   | 141,888                     |           |      |   | 2,130,952  |          
|Income tax provision                                  |         |   | 58,000                      |           |      |   | 848,000    |          
|                                                      |         |   |                             |           |      |   |            |          
|Net income                                            |         | $ | 83,888                      |           |      | $ | 1,282,952  |          
|                                                      |         |   |                             |           |      |   |            |          
|Earnings per share:                                   |         |   |                             |           |      |   |            |          
|                                                      | Basic   |   | $                           | 0.01      |      |   | $          | 0.19      | 
|                                                      |         |   |                             |           |      |   |            |          
|                                                      | Diluted |   | $                           | 0.01      |      |   | $          | 0.18      | 
|                                                      |         |   |                             |           |      |   |            |          
|Weighted average number of common
shares outstanding: |         |   |                             |           |      |   |            |          
|                                                      | Basic   |   |                             | 6,603,945 |      |   |            | 6,580,001 | 
|                                                      |         |   |                             |           |      |   |            |          
|                                                      | Diluted |   |                             | 7,006,165 |      |   |            | 6,999,670 | 
|                                                      |         |   |                             |           |      |   |            |          

See accompanying notes.

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SPORT CHALET, INC.

CONDENSED BALANCE SHEETS

|                                                    |  |                                                                 |                                                                                                                           |                                            |            |             |            |           |            |            |            | 
|--------------------------------------------------- |  | --------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ---------- | --------- | ---------- | ---------- | ---------- | 
|                                                    |  |                                                                 |                                                                                                                           |                                            |            | June 30,    |            | March 31,
|                                                    |  |                                                                 |                                                                                                                           |                                            |            | 2002        |            | 2002     
|                                                    |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|                                                    |  |                                                                 |                                                                                                                           |                                            |            | (Unaudited) |            |           |            |           
|Assets                                              |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|Current assets:                                     |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|                                                    |  | Cash                                                            |                                                                                                                           | $                                          | 4,130,724  |             |            | $         | 4,273,485  |           
|                                                    |  | Accounts receivable, less allowance of $25,000 in 2002
and 2001 |                                                                                                                           |                                            | 1,058,561  |             |            |           | 678,709    |           
|                                                    |  | Merchandise inventories                                         |                                                                                                                           |                                            | 55,372,594 |             |            |           | 47,916,553 |           
|                                                    |  | Prepaid expenses and other current assets                       |                                                                                                                           |                                            | 2,033,122  |             |            |           | 1,757,007  |           
|                                                    |  | Prepaid income taxes                                            |                                                                                                                           |                                            | 413,583    |             |            |           | 448,760    |           
|                                                    |  | Deferred income taxes                                           |                                                                                                                           |                                            | 1,211,307  |             |            |           | 1,258,795  |           
|                                                    |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|                                                    |  |                                                                 | Total current assets                                                                                                      |                                            |            | 64,219,891  |            |           |            | 56,333,309 |           
|Furniture, equipment and leasehold improvements-net |  |                                                                 | 25,770,384                                                                                                                |                                            |            |             | 26,577,041 |          
|Deferred income taxes                               |  |                                                                 | 333,550                                                                                                                   |                                            |            |             | 184,492    |          
|Other assets                                        |  |                                                                 | 198,055                                                                                                                   |                                            |            |             | 215,468    |          
|                                                    |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|                                                    |  |                                                                 | Total assets                                                                                                              |                                            | $          | 90,521,880  |            |           | $          | 83,310,310 |           
|                                                    |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|Liabilities and stockholders equity                |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|Current liabilities:                                |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|                                                    |  | Current portion of loans payable to bank                        |                                                                                                                           | $                                          | 1,380,000  |             |            | $         |           |           
|                                                    |  | Bank overdraft                                                  |                                                                                                                           |                                            | 7,872,680  |             |            |           | 7,192,258  |           
|                                                    |  | Accounts payable                                                |                                                                                                                           |                                            | 14,608,437 |             |            |           | 10,815,241 |           
|                                                    |  | Salaries and wages payable                                      |                                                                                                                           |                                            | 2,333,066  |             |            |           | 2,184,509  |           
|                                                    |  | Other accrued expenses                                          |                                                                                                                           |                                            | 4,937,480  |             |            |           | 4,008,208  |           
|                                                    |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|                                                    |  |                                                                 | Total current liabilities                                                                                                 |                                            |            | 31,131,663  |            |           |            | 24,200,216 |           
|Deferred rent                                       |  |                                                                 | 4,322,611                                                                                                                 |                                            |            |             | 4,185,625  |          
|Stockholders equity                                |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|                                                    |  | Preferred stock, $.01 par value:                                |                                                                                                                           |                                            |            |             |            |           |            |           
|                                                    |  |                                                                 | Authorized
shares - 2,000,000
Issued and outstanding shares  none                                                        |                                            |            |            |            |           |            |           |           
|                                                    |  | Common stock, $.01 par value:                                   |                                                                                                                           |                                            |            |             |            |           |            |           
|                                                    |  |                                                                 | Authorized
shares - 15,000,000
Issued and outstanding shares  6,606,334
at June 30, 2002 and 6,595,500
at March 31, 2002 |                                            |            | 66,063      |            |           |            | 65,955     |           
|                                                    |  | Additional paid-in capital                                      |                                                                                                                           |                                            | 21,991,758 |             |            |           | 21,932,617 |           
|                                                    |  | Retained earnings                                               |                                                                                                                           |                                            | 33,009,785 |             |            |           | 32,925,897 |           
|                                                    |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|                                                    |  | Total stockholders equity                                      |                                                                                                                           |                                            | 55,067,606 |             |            |           | 54,924,469 |           
|                                                    |  |                                                                 |                                                                                                                           |                                            |            |             |            |          
|                                                    |  |                                                                 |                                                                                                                           | Total liabilities and stockholders equity |            | $           | 90,521,880 |           |            | $          | 83,310,310 | 
|                                                    |  |                                                                 |                                                                                                                           |                                            |            |             |            |          

See accompanying notes.

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SPORT CHALET, INC.

CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                              |                                              |                                           |             |           |            |      |            |           |             |  
|----------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | ----------- | --------- | ---------- | ---- | ---------- | --------- | ----------- | -
|                                                                              |                                              |                                           |             | 2002      |            | 2001
|                                                                              |                                              |                                           |             |           |            |     
|Operating activities                                                          |                                              |                                           |             |           |            |      |            |          
|Net income                                                                    |                                              | $                                         | 83,888      |           |            | $    | 1,282,952  |          
|Adjustments to reconcile net
income to net cash used by operating activities: |                                              |                                           |             |           |            |      |            |          
|                                                                              | Depreciation and amortization                |                                           |             | 1,377,000 |            |      |            | 1,296,000 |            
|                                                                              | Deferred income taxes                        |                                           |             | (101,570  | )          |      |            | 166,112   |            
|                                                                              | Tax Benefit on employee stock options        |                                           |             | 24,392    |            |      |            |          |            
|                                                                              | Changes in operating assets and liabilities: |                                           |             |           |            |      |            |           |            
|                                                                              |                                              | Accounts receivable                       |             |           | (379,852   | )    |            |           | (323,612    | )
|                                                                              |                                              | Merchandise inventories                   |             |           | (7,456,041 | )    |            |           | (11,125,925 | )
|                                                                              |                                              | Prepaid income taxes                      |             |           | 35,177     |      |            |           | (203,252    | )
|                                                                              |                                              | Prepaid expenses and other current assets |             |           | (276,115   | )    |            |           | 104,092     |  
|                                                                              |                                              | Bank overdraft                            |             |           | 680,422    |      |            |           |            |  
|                                                                              |                                              | Accounts payable                          |             |           | 3,793,196  |      |            |           | 6,514,183   |  
|                                                                              |                                              | Salaries and wages payable                |             |           | 148,557    |      |            |           | (882,235    | )
|                                                                              |                                              | Other accrued expenses                    |             |           | 929,272    |      |            |           | 339,688     |  
|                                                                              |                                              | Income taxes payable                      |             |           |           |      |            |           | (1,286,861  | )
|                                                                              |                                              | Deferred rent                             |             |           | 136,986    |      |            |           | 119,070     |  
|                                                                              |                                              |                                           |             |           |            |      |            |          
|Net cash used in operating activities                                         |                                              |                                           | (1,004,688  | )         |            |      | (3,999,788 | )        
|Investing activities                                                          |                                              |                                           |             |           |            |      |            |          
|Other assets                                                                  |                                              |                                           | 17,413      |           |            |      | 30,073     |          
|Purchase of furniture, equipment and leasehold improvements                   |                                              |                                           | (570,343    | )         |            |      | (3,148,811 | )        
|                                                                              |                                              |                                           |             |           |            |      |            |          
|Net cash used in investing activities                                         |                                              |                                           | (552,930    | )         |            |      | (3,118,738 | )        
|Financing activities                                                          |                                              |                                           |             |           |            |      |            |          
|Proceeds from bank borrowing                                                  |                                              |                                           | 25,325,000  |           |            |      |           |          
|Repayments of bank borrowing                                                  |                                              |                                           | (23,945,000 | )         |            |      |           |          
|Proceeds from exercise of stock options                                       |                                              |                                           | 34,857      |           |            |      |           |          
|                                                                              |                                              |                                           |             |           |            |      |            |          
|Net cash provided by financing activities                                     |                                              |                                           | 1,414,857   |           |            |      |           |          
|                                                                              |                                              |                                           |             |           |            |      |            |          
|Decrease
in cash and cash equivalents                                         |                                              |                                           | (142,761    | )         |            |      | (7,118,526 | )        
|Cash and cash equivalents at beginning of period                              |                                              |                                           | 4,273,485   |           |            |      | 8,945,034  |          
|                                                                              |                                              |                                           |             |           |            |      |            |          
|Cash and cash equivalents at end of period                                    |                                              | $                                         | 4,130,724   |           |            | $    | 1,826,508  |          
|                                                                              |                                              |                                           |             |           |            |      |            |          
|Supplemental Disclosure of Cash Flow Information                              |                                              |                                           |             |           |            |      |            |          
|Cash paid during the period for:                                              |                                              |                                           |             |           |            |      |            |          
|                                                                              |                                              | Income taxes                              |             | $         | 100,000    |      |            | $         | 2,172,000   |  
|                                                                              |                                              | Interest                                  |             |           | 12,242     |      |            |           |            |  

See accompanying notes.

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SPORT CHALET, INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)



|1. |  | Basis of Presentation
|-- |  | ---------------------

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

The financial data at March 31, 2002 is derived from audited financial
statements which are included in the Companys Annual Report on Form 10-K for
the year ended March 31, 2002, and should be read in conjunction with the
audited financial statements and notes thereto. Interim results are not
necessarily indicative of results for the full year.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.



|2. |  | Earnings per Share
|-- |  | ------------------

Earnings per share, basic, is computed based on the weighted average
number of common shares outstanding for the period. 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 is as follows:

|                                          |                                               |   |                             |           |      |   |           |           | 
|----------------------------------------- | --------------------------------------------- | - | --------------------------- | --------- | ---- | - | --------- | --------- | 
|                                          |                                               |   | Three months ended June 30,
|                                          |                                               |   |                            
|                                          |                                               |   | 2002                        |           | 2001
|                                          |                                               |   |                             |           |     
|Net Income                                |                                               | $ | 83,888                      |           |      | $ | 1,282,952 |          
|Weighted average number of common shares: |                                               |   |                             |           |      |   |           |          
|                                          | Basic                                         |   |                             | 6,603,945 |      |   |           | 6,580,001 | 
|                                          | Effect of dilutive securities  stock options |   |                             | 402,220   |      |   |           | 419,669   | 
|                                          |                                               |   |                             |           |      |   |           |          
|                                          | Diluted                                       |   |                             | 7,006,165 |      |   |           | 6,999,670 | 
|                                          |                                               |   |                             |           |      |   |           |          
|Earnings per share:                       |                                               |   |                             |           |      |   |           |          
|                                          | Basic                                         |   | $                           | 0.01      |      |   | $         | 0.19      | 
|                                          | Effect of dilutive securities                 |   | $                           | 0.00      |      |   | $         | 0.01      | 
|                                          |                                               |   |                             |           |      |   |           |          
|                                          | Diluted                                       |   | $                           | 0.01      |      |   | $         | 0.18      | 
|                                          |                                               |   |                             |           |      |   |           |          

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|3. |  | New Accounting Pronouncements
|-- |  | -----------------------------

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising
from business combinations completed after June 30, 2001. Statement 142
prohibits the amortization of goodwill and intangible assets with indefinite
useful lives. Statement 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives. Additionally, Statement 142
requires that goodwill included in the carrying value of equity method
investments no longer be amortized. The Company adopted Statement 142 beginning
in the first quarter of fiscal 2003 and it did not have a material impact on
its results of operations.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations for a
disposal of a segment of a business. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company adopted SFAS 144 in the first quarter of fiscal 2003 and it did not
have a material impact on its results of operations.

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|Item 2. | Managements Discussion and Analysis of Financial Condition and
Results of Operations
|------- | -------------------------------------------------------------------------------------

Except for the historical information contained herein, the matters
addressed in this Item 2 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. Such forward-looking
statements are subject to a variety of risks and uncertainties, including those
discussed below under the heading Factors That May Affect Future Results and
elsewhere in this Quarterly Report on Form 10-Q, that could cause actual
results to differ materially from those anticipated by the Companys
management. The Private Securities Litigation Reform Act of 1995 (the Act)
provides certain safe harbor provisions for forward-looking statements. All
forward-looking statements made on this Quarterly Report on Form 10-Q are made
pursuant to the Act.

The following should be read in conjunction with the Companys financial
statements and related notes thereto provided under Item 1 above.

Results of Operations

The following tables set forth statements of income data and relative
percentages of net sales for the periods indicated (dollar amounts in
thousands, except per share amounts).

|                                             |         |   |                             |      |         |  |        |    |         |   |        |      |  |  |       |   | 
|-------------------------------------------- | ------- | - | --------------------------- | ---- | ------- |  | ------ | -- | ------- | - | ------ | ---- |  |  | ----- | - | 
|                                             |         |   | Three months ended June 30,
|                                             |         |   |                            
|                                             |         |   | 2002                        |      | 2001   
|                                             |         |   |                             |      |        
|                                             |         |   | Amount                      |      | Percent |  | Amount |    | Percent
|                                             |         |   |                             |      |         |  |        |    |        
|Net sales                                    |         | $ | 51,205                      |      |         |  | 100.0  | %  |         | $ | 47,949 |      |  |  | 100.0 | %
|Gross profit                                 |         |   | 13,781                      |      |         |  | 26.9   | %  |         |   | 14,975 |      |  |  | 31.2  | %
|Selling, general and administrative expenses |         |   | 13,599                      |      |         |  | 26.6   | %  |         |   | 12,914 |      |  |  | 26.9  | %
|Income from operations                       |         |   | 182                         |      |         |  | 0.4    | %  |         |   | 2,062  |      |  |  | 4.3   | %
|Interest (expense) income                    |         |   | (40                         | )    |         |  | (0.1   | %) |         |   | 69     |      |  |  | 0.1   | %
|Income before taxes                          |         |   | 142                         |      |         |  | 0.3    | %  |         |   | 2,131  |      |  |  | 4.4   | %
|Net income                                   |         |   | 84                          |      |         |  | 0.2    | %  |         |   | 1,283  |      |  |  | 2.7   | %
|Earnings per share:                          |         |   |                             |      |         |  |        |    |         |   |        |      |  |  |       |  
|                                             | Basic   |   | $                           | 0.01 |         |  |        |    |         |   | $      | 0.19 |  |  |       |   | 
|                                             | Diluted |   | $                           | 0.01 |         |  |        |    |         |   | $      | 0.18 |  |  |       |   | 

Three Months Ended June 30, 2002, Compared to Three Months Ended June 30,
2001.Sales have increased from $47.9 million for the three months ended June
30, 2001 to $51.2 million for the same period this year, a 6.8% increase. The
increase is the result of opening one store late in the quarter last year and
two new stores in November 2001, partially offset by a comparable store sales
decrease of 0.9%. Comparable store sales are based upon stores opened
throughout both periods. Comparable store sales have decreased as consumer
demand, in reaction to prolonged weak economic conditions, has made the retail
sales environment difficult as compared to last year.

Gross profit as a percent of sales decreased from 31.2% for the three
months ended June 30, 2001 to 26.9% for the same period this year due to a
change in consumer purchasing that has trended towards value merchandise. In
addition, the decrease in comparable store sales and the new larger
distribution center caused occupancy costs to increase by 1.1% of sales in the
period ended June 30, 2002 as compared to the same period last year.

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Selling, general and administrative expenses as a percent of sales
decreased from 26.9% for the three months ended June 30, 2001 to 26.6% for the
same period this year. The decrease is a result of lower distribution center
labor expenses from efficiencies gained by the new facility and no new store
pre-opening expenses as compared to one new store opening last year.

Interest expense was $40,000 for the period ended June 30, 2002, compared
to interest income of $69,000 for the period ended June 30, 2001, due to the
use of the Companys credit facility in the current period compared to the same
period last year when the facility was not utilized.

The effective income tax rate was 39.8% for the three months ended June
30, 2001, compared to 40.9% for the same period this year, which differs from
the statutory rate as a result of permanent differences between financial
reporting and tax-basis income.

Net income decreased from $1.3 million, or $0.18 per diluted share, for
the three months ended June 30, 2001 to $84,000, or $0.01 per diluted share,
for the same period this year, primarily as a result of decreased gross profit.

Liquidity and Capital Resources

The Companys primary capital requirements are for inventory and store
expansion, relocation and remodeling. Historically, cash from operations,
credit terms from vendors and bank borrowing have met the Companys liquidity
needs. Management believes that these sources will be sufficient to fund
currently anticipated cash requirements for the foreseeable future.

Net cash used in operating activities was $1.0 million for the three
months ended June 30, 2002 compared to $4.0 million for the same period last
year as the result of lower net income, adjusted for depreciation and
amortization, and increases in bank overdraft combined with accounts payable
offset by inventory purchases.

Inventories increased by $7.5 million and $11.1 million for the three
months ended June 30, 2002 and 2001, respectively, compared to the respective
year-end balances primarily due to the seasonal build-up of summer related
inventory. Inventory at June 30, 2002 is $1.8 million greater than the same
period last year primarily as a result of the opening of two stores since the
end of this period in the prior year. This increase was partially offset by
the implementation of a new replenishment system that resulted in a 5% decrease
in average store inventory.

Historically accounts payable increases as inventory increases. In fiscal
2002, invested cash built-up in prior years was used to fund the Companys
expansion plans causing a bank overdraft of $1.4 million, which represents the
total of checks in transit in excess of cash on hand. The overdraft is expected
to continue to fluctuate due to the timing of vendor payments. For the quarter
ended June 30, 2002 and 2001, accounts payable combined with bank overdraft
increased $4.8 million and $6.5 million, respectively, primarily as a result of
increased inventory levels.

Net cash used in investing activities for the three months ended June 30,
2002 was $523,000, resulting from capital expenditures primarily for existing
store improvements. For the same period last year net cash used in investing
activities was $3.1 million, primarily as a result

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of the addition of one new store and capital expenditures to enhance
merchandising presentation in the Companys older stores.

Net cash provided by financing activities reflects advances and repayment
of borrowings under the Companys revolving credit facility. As of June 30,
2002 the Company has $1.4 million outstanding on this facility for the seasonal
build-up of inventory. There were no borrowings during the three months ended
June 30, 2001.

The Companys credit facility with Bank of America National Trust and
Savings Association, Inc. (the Lender) provides for advances up to $20
million, increasing to $30 million for the period October 1, 2002 through
December 31, 2002, less the amount of any outstanding draws up to a $1.5
million maximum in authorized letters of credit. Interest accrues at the
Lenders prime rate plus 1⁄4% or can be fixed for a period of time at the
then current rate established under one of several indices, all at the
Companys option. This credit facility expires on September 30, 2003 and the
Company expects to renegotiate and extend the term of this agreement or obtain
another form of financing before that date. The Companys obligation to the
Lender is presently secured by a first priority lien on substantially all of
the Companys non-real estate assets, and the Company is subject to several
restrictive covenants. The principal operating covenants require the Company
to maintain certain minimum cash flow coverage and debt to equity ratios and
restrict the level of capital expenditures, calculated on a quarterly basis.
The Company currently is in compliance with the amended covenants. The Company
believes its credit line with the Lender is sufficient to fund capital
expenditures for the foreseeable future and to meet seasonal fluctuations in
cash flow requirements. However, unexpected conditions could require the
Company to request additional borrowing capacity from the Lender or alter its
expansion plans or operations.

The Companys primary contractual obligations and commitments are its
store leases with initial terms expiring from 2004 through 2020 and typically
provide for multiple five-year renewal options:

|                        |  |                  |             | 
|----------------------- |  | ---------------- | ----------- | 
|Payments due by period: |  | Operating Leases
|                        |  |                 
|Through March 31, 2003  |  | $                | 12,992,154  | 
|2 - 3 years             |  |                  | 26,087,236  | 
|4 - 5 years             |  |                  | 25,124,427  | 
|After 5 years           |  |                  | 58,266,144  | 
|Total                   |  | $                | 122,469,961 | 

All retail store leases provide for base rent which may or may not be
credited against percentage rent based upon gross sales from the premises. In
some of the leases, base rental amounts increase as the lease term progresses,
although in some cases, the Company expects that percentage rent will more than
offset the base rental amounts.

No cash dividends have been declared on Common Stock in fiscal 2002. The
Company intends to retain earnings for use in the operation and expansion of
its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.

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Critical Accounting Policies and Use of Estimates

The Companys significant accounting policies are described in Note 2 of the
Companys Annual Report on Form 10-K for the year ended March 31, 2002, which
have been prepared in accordance with accounting principles generally accepted
in the United States. In preparing the financial statements, the Company is
required to make estimates and judgments which affect the results of its
operations and the reported value of assets and liabilities. Actual results may
differ from these estimates. The Company believes that the following summarizes
critical accounting policies which require significant judgments and estimates
in the preparation of its consolidated financial statements

Inventory Valuation.Merchandise inventories are stated at the lower of
cost (first-in, first-out determined by the retail method of accounting) or
market. The Company considers cost to include direct cost of merchandise, plus
internal costs associated with merchandise procurement, storage and handling.
The Company regularly reviews aged and excess inventories to determine if the
carrying value of such inventories exceeds market value; a reserve is recorded
to reduce the carrying value to market value as necessary. A determination of
market value requires estimates and judgment based on the Companys historical
markdown experience and anticipated markdowns based on future merchandising and
advertising plans, seasonal considerations, expected business trends and other
factors. For interim reporting purposes, the Company accrues an estimate for
inventory shrinkage based upon a percentage of sales in the interim period.
The shrink percentage is based upon the Companys historical shrink results.
Actual shrink results are impacted by internal and external factors and this
estimate may vary significantly from actual results.

Factors That May Affect Future Results

The statements which are not historical facts contained in this Quarterly
Report on Form 10-Q are 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, that involve risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those set forth below.

Economic Conditions.The retail industry historically has been subject to
substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits have had, and may in the future have, a materially adverse effect on the
Companys results of operations.

Competition.The sporting goods business and the retail environment are
highly competitive, and the Company competes with national, regional and local
full-line sporting goods chains, specialty stores, supplier owned stores,
discount and department stores, and e-tailers. A number of the Companys
competitors are larger and have greater resources than the Company.

Regional Market Concentration.Currently, all of the Companys stores are
located in Southern California and the Las Vegas area of Nevada. Accordingly,
the Company is subject to regional risks, such as the economy, weather
conditions, natural disasters and government regulations. If the region were
to suffer an economic downturn or if other adverse events were to occur, there
could be an adverse effect on the Companys net sales and profitability and its
ability

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to implement its planned growth. Several of the Companys competitors
operate stores across the United States and, thus, are not as vulnerable as the
Company to such regional risks.

Single Distribution Center. The Company has a single distribution center
and if there is a natural disaster or other serious disruption at the facility,
merchandise may be lost or undeliverable to our stores, thereby, reducing sales
and profitability.

Expansion Plan.The Companys continued growth is dependent to a
significant degree upon its ability to open new stores on a profitable basis.
The Companys ability to expand will depend, in part, on business conditions
and the availability of satisfactory store locations based on local competitive
conditions, site availability and cost, and the Companys ability to provide
and maintain high service levels and quality brand merchandise at competitive
prices. In addition, a decline in the Companys overall financial performance,
increased rents or any other adverse effects arising from the commercial real
estate market in the Companys markets may adversely effect the Companys
current growth plan. There can be no assurance that the Company will possess
sufficient funds to finance the expenditures related to its planned growth,
that new stores can be opened on a timely basis, that such new stores can be
operated on a profitable basis, or that such growth will be manageable.

Future Capital Requirements.The Company may not be able to fund its
future growth or react to competitive pressures if it lacks sufficient funds.
Unexpected conditions could cause the Company to be in violation of its
Lenders operating covenants. Currently, the Company feels it has sufficient
cash available through its bank credit facilities and cash from operations to
fund existing operations for the foreseeable future. The Company cannot be
certain that additional financing will be available in the future if necessary.

Management of Growth.Since its inception, the Company has experienced
periods of rapid growth. No assurance can be given that the Company will be
successful in maintaining or increasing its sales in the future. Any future
growth in sales will require additional working capital and may place a
significant strain on the Companys management, management information systems,
inventory management, distribution facilities and receivables management. Any
failure to timely enhance the Companys operating systems, or unexpected
difficulties in implementing such enhancements, could have a material adverse
effect on the Companys results of operations.

Dependence on Key Personnel.The Company depends on the continued service
of its senior management. The loss of the services of any key employee could
hurt the business. Also, the future success of the Company depends on its
ability to identify, attract, hire, train and motivate other highly skilled
personnel. Failure to do so may adversely affect future results.

Seasonality.The Companys business is seasonal in nature. As is typical
with other sporting goods retailers, the Companys sales volume increases
significantly during the Christmas holiday season and the peak ski and
snowboard season generally corresponds to the months of November, December and
January. Therefore, the Companys results of operations are likely to vary
during its fiscal year. Historically the Companys operating results have been
influenced by the quantity and timing of snowfall at the resorts frequented by
those living in Southern California. An early seasonal snowfall often
influences sales as it generally extends the demand for winter related
merchandise while a late snowfall will have the opposite effect. Suppliers in
the ski and snowboard industry require purchasing commitments in April for a
fall delivery. If snowfall does not provide an adequate base, occurs late in
the season, or if sales do

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not meet expectations, the Company may be required to mark down its winter
apparel and equipment.

Variability of Quarterly Results. The Company has experienced, and
expects to continue to experience, a substantial variation in its net sales and
operating results from quarter to quarter. The Company believes that the
factors which influence this variability of quarterly results include general
economic and industry conditions that affect consumer spending, changing
consumer demands, the timing of the Companys introduction of new products, the
level of consumer acceptance of each new product, the seasonality of the
markets in which the Company participates, the weather and actions of
competitors. Accordingly, a comparison of the Companys results of operations
from period to period is not necessarily meaningful, and the Companys results
of operations for any period are not necessarily indicative of future
performance.

Closely Controlled Stock. At July 30, 2002, Norbert Olberz, the Companys
founder and Chairman Emeritus of the Board of Directors, owned approximately
66% of the Companys outstanding common stock. Mr. Olberz effectively has the
ability to control the outcome on all matters requiring stockholder approval,
including, but not limited to, the election and removal of directors, and any
merger, consolidation or sale of all or substantially all of the Companys
assets, and to control the Companys management and affairs.

Stock Price. The market price of the Companys common stock is likely to
be volatile and could be subject to significant fluctuations in response to
factors such as quarterly variations in operating results, operating results
which vary from the expectations of securities analyst and investors, changes
in financial estimates, changes in market valuations of competitors,
announcements by the Company or its competitors of a material nature, additions
or departures of key personnel, future sales of common stock and stock volume
fluctuations. Also, general political and economic conditions such as a
recession or interest rate fluctuations may adversely affect the market price
of the Companys stock.

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Part II  Other Information




Item 5. Other Information.

Stockholder Proposals

The proxy materials for the 2002 annual meeting of the stockholders to be
held on August 1, 2002 were mailed to stockholders of the Company on June 21,
2002. Under certain circumstances, stockholders are entitled to present
proposals at stockholders meetings. Any such proposal to be included in the
proxy statement for the Companys 2003 annual meeting of stockholders must be
submitted by a stockholder prior to February 22, 2002 in a form that complies
with applicable regulations. In the event a stockholder proposal is not
submitted to the Company prior to May 7, 2002, the proxies solicited by the
Board of Directors for the 2003 annual meeting of the stockholders will confer
authority on the holders of the proxy to vote the shares in accordance with
their best judgment and discretion if the proposal is presented at the 2003
annual meeting of stockholders without any discussion of the proposal in the
proxy statement for such meeting.

Loan Extensions

The Company granted loans to employees to pay the income taxes associated
with certain stock awards granted in fiscal 1999 and 2001. These loans are
secured by the awarded shares, bear interest at 6% and were due May 2002. The
Board of Directors approved an extension and these loans are now due in May
2004. At June 30, 2002, Messrs. Levra, Kaminsky and Trausch were indebted to
the Company in the amounts of $80,218, $14,107 and $36,350, respectively.




Item 6. Exhibits and Reports on Form 8-K.



| | (a) |  | Reports on Form 8-K.
| | --- |  | --------------------



| | During the quarter for which this report on Form 10-Q
is filed, no reports on Form 8-K were filed.
| | --------------------------------------------------------------------------------------------------

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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 duly authorized officer and principal financial officer.

|                    |                                                                                                                                         |                       
|------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ----------------------
|                    | SPORT CHALET, INC.                                                                                                                     
|                   
|DATE: July 30, 2002 | By:                                                                                                                                     | /s/ HOWARD K. KAMINSKY
|                    |                                                                                                                                        
|                    | Howard K. Kaminsky
Executive Vice President-Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)

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