UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q


(Mark
One)





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





For the
quarterly period ended September 27, 2009





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: 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.)One
      Sport Chalet Drive, La Canada, 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
__   No __





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.:


Large
accelerated filer  
[   ]                                                                                                                  Accelerated
filer   [   ]


Non-accelerated
filer   [   ]                                                                                               
Smaller reporting company   [X]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of Exchange Act). Yes __   No X





At
November 6, 2009, there were 12,359,990 shares of Class A Common Stock
outstanding and 1,763,321 shares of Class B Common Stock
outstanding.




1




SPORT CHALET,
INC.





Table
of Contents to Form 10-Q





PART I –
FINANCIAL INFORMATION





PageItem
      1.
                            Financial
      Statements
                            3Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            11Item
      3.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            23Item
      4T.
                            Controls
      and Procedures
                            23PART
      II – OTHER INFORMATIONItem
      1.
                            Legal
      Proceedings
                            24Item
      1A.
                            Risk
      Factors
                            24Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            24Item
      3.
                            Defaults
      Upon Senior Securities
                            24Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            24Item
      5.
                            Other
      Information
                            26Item
      6.
                            Exhibits
                            26





2
 
  SPORT
CHALET, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
   13
      weeks ended
                                  
                                  
                                  26
      weeks endedSeptember
      27, 2009
                                  
                                  
                                  September
      28, 2008
                                  
                                  
                                  September
      27, 2009
                                  
                                  
                                  September
      28, 2008(in
      thousands, except share amounts)Net
      sales
                                  
                                  $
                                  88,811
                                  
                                  
                                  $
                                  96,457
                                  
                                  
                                  $
                                  168,214
                                  
                                  
                                  $
                                  183,577Cost
      of goods sold, buying andoccupancy
      costs
                                  
                                  
                                  63,980
                                  
                                  
                                  
                                  70,861
                                  
                                  
                                  
                                  122,393
                                  
                                  
                                  
                                  135,273Gross
      profit
                                  
                                  
                                  24,831
                                  
                                  
                                  
                                  25,596
                                  
                                  
                                  
                                  45,821
                                  
                                  
                                  
                                  48,304Selling,
      general andadministrative
      expenses
                                  
                                  
                                  22,066
                                  
                                  
                                  
                                  28,506
                                  
                                  
                                  
                                  42,003
                                  
                                  
                                  
                                  54,475Depreciation
      and amortization
                                  
                                  
                                  3,274
                                  
                                  
                                  
                                  3,656
                                  
                                  
                                  
                                  6,730
                                  
                                  
                                  
                                  7,267Loss
      from operations
                                  
                                  
                                  (509
                                  )
                                  
                                  
                                  (6,566
                                  )
                                  
                                  
                                  (2,912
                                  )
                                  
                                  
                                  (13,438
                                  )Interest
      expense
                                  
                                  
                                  703
                                  
                                  
                                  
                                  422
                                  
                                  
                                  
                                  1,284
                                  
                                  
                                  
                                  1,079Loss
      before taxes
                                  
                                  
                                  (1,212
                                  )
                                  
                                  
                                  (6,988
                                  )
                                  
                                  
                                  (4,196
                                  )
                                  
                                  
                                  (14,517
                                  )Income
      tax benefit
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,767
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (5,770
                                  )Net
      loss
                                  
                                  $
                                  (1,212
                                  )
                                  
                                  $
                                  (4,221
                                  )
                                  
                                  $
                                  (4,196
                                  )
                                  
                                  $
                                  (8,747
                                  )Loss
      per share:Basic
                                  
                                  $
                                  (0.09
                                  )
                                  
                                  $
                                  (0.30
                                  )
                                  
                                  $
                                  (0.30
                                  )
                                  
                                  $
                                  (0.62
                                  )Diluted
                                  
                                  $
                                  (0.09
                                  )
                                  
                                  $
                                  (0.30
                                  )
                                  
                                  $
                                  (0.30
                                  )
                                  
                                  $
                                  (0.62
                                  )Weighted
      average number ofcommon
      shares outstanding:Basic
                                  
                                  
                                  14,123
                                  
                                  
                                  
                                  14,123
                                  
                                  
                                  
                                  14,123
                                  
                                  
                                  
                                  14,123Diluted
                                  
                                  
                                  14,123
                                  
                                  
                                  
                                  14,123
                                  
                                  
                                  
                                  14,123
                                  
                                  
                                  
                                  14,123
   See
accompanying notes.


3




SPORT
CHALET, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS
   September
      27,
                    
                    
                    March
      29,2009
                    
                    
                    2009(Unaudited)Assets
                    
                    (in
      thousands, except share amounts)Current
      assets:Cash
      and cash equivalents
                    
                    $
                    499
                    
                    
                    $
                    290Accounts
      receivable, net
                    
                    
                    4,248
                    
                    
                    
                    1,434Merchandise
      inventories
                    
                    
                    93,970
                    
                    
                    
                    88,431Prepaid
      expenses and other current assets
                    
                    
                    1,193
                    
                    
                    
                    2,178Income
      tax receivable
                    
                    
                    3
                    
                    
                    
                    1,004Total
      current assets
                    
                    
                    99,913
                    
                    
                    
                    93,337Fixed
      assets, net
                    
                    
                    51,349
                    
                    
                    
                    57,718Total
      assets
                    
                    $
                    151,262
                    
                    
                    $
                    151,055Liabilities
      and stockholders' equityCurrent
      liabilities:Accounts
      payable
                    
                    $
                    29,706
                    
                    
                    $
                    31,083Loan
      payable to bank
                    
                    
                    49,124
                    
                    
                    
                    39,140Salaries
      and wages payable
                    
                    
                    4,169
                    
                    
                    
                    4,150Other
      accrued expenses
                    
                    
                    15,236
                    
                    
                    
                    19,379Total
      current liabilities
                    
                    
                    98,235
                    
                    
                    
                    93,752Deferred
      rent
                    
                    
                    24,943
                    
                    
                    
                    25,217Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.01 par value:Authorized
      shares - 2,000,000Issued
      and outstanding shares – none
                    
                    
                    -
                    
                    
                    
                    -Class
      A Common Stock, $.01 par value:Authorized
      shares - 46,000,000Issued
      and outstanding shares – 12,359,990 atSeptember
      27, 2009 and March 29, 2009
                    
                    
                    124
                    
                    
                    
                    124Class
      B Common Stock, $.01 par value:Authorized
      shares - 2,000,000Issued
      and outstanding shares – 1,763,321 atSeptember
      27, 2009 and March 29, 2009
                    
                    
                    18
                    
                    
                    
                    18Additional
      paid-in capital
                    
                    
                    34,652
                    
                    
                    
                    34,458Accumulated
      deficit
                    
                    
                    (6,710
                    )
                    
                    
                    (2,514
                    )Total
      stockholders’ equity
                    
                    
                    28,084
                    
                    
                    
                    32,086Total
      liabilities and stockholders’ equity
                    
                    $
                    151,262
                    
                    
                    $
                    151,055
   See
accompanying notes.


4




SPORT
CHALET, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)


26
      weeks endedSeptember
      27, 2009
                      
                      
                      September
      28, 2008(in
      thousands)Operating
      activitiesNet
      loss
                      
                      $
                      (4,196
                      )
                      
                      $
                      (8,747
                      )Adjustments
      to reconcile net loss to net cash(used
      in) provided by operating activities:Depreciation
      and amortization
                      
                      
                      6,730
                      
                      
                      
                      7,267Loss
      on disposal of equipment
                      
                      
                      -
                      
                      
                      
                      179Share-based
      compensation
                      
                      
                      194
                      
                      
                      
                      189Deferred
      income taxes
                      
                      
                      -
                      
                      
                      
                      (5,780
                      )Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (2,814
                      )
                      
                      
                      (3,465
                      )Merchandise
      inventories
                      
                      
                      (5,539
                      )
                      
                      
                      (15,573
                      )Prepaid
      expenses and other current assets
                      
                      
                      985
                      
                      
                      
                      883Income
      tax receivable
                      
                      
                      1,001
                      
                      
                      
                      -Accounts
      payable
                      
                      
                      (1,377
                      )
                      
                      
                      18,136Salaries
      and wages payable
                      
                      
                      19
                      
                      
                      
                      308Other
      accrued expenses
                      
                      
                      (4,143
                      )
                      
                      
                      5,065Deferred
      rent
                      
                      
                      (274
                      )
                      
                      
                      1,781Net
      cash (used in) provided by operating activities
                      
                      
                      (9,414
                      )
                      
                      
                      243Investing
      activitiesPurchase
      of fixed assets
                      
                      
                      (361
                      )
                      
                      
                      (11,536
                      )Net
      cash used in investing activities
                      
                      
                      (361
                      )
                      
                      
                      (11,536
                      )Financing
      activitiesProceeds
      from bank borrowing
                      
                      
                      188,794
                      
                      
                      
                      77,309Repayments
      of bank borrowing
                      
                      
                      (178,810
                      )
                      
                      
                      (65,286
                      )Tax
      benefit on employee stock options
                      
                      
                      -
                      
                      
                      
                      10Net
      cash provided by financing activities
                      
                      
                      9,984
                      
                      
                      
                      12,033Increase
      in cash and cash equivalents
                      
                      
                      209
                      
                      
                      
                      740Cash
      and cash equivalents at beginning of period
                      
                      
                      290
                      
                      
                      
                      3,894Cash
      and cash equivalents at end of period
                      
                      $
                      499
                      
                      
                      $
                      4,634Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the period for:Income
      taxes
                      
                      $
                      -
                      
                      
                      $
                      -Interest
                      
                      $
                      1,291
                      
                      
                      $
                      591






See
accompanying notes.




5


SPORT
CHALET, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 1.
              Description
      of Business and Basis of
Presentation
 
 Sport
Chalet, Inc. (the “Company”), founded in 1959, is a leading operator of 55
full-service, specialty sporting goods stores in California, Nevada, Arizona and
Utah.  The Company has 33 locations in Southern California, eight in
Northern California, two in Central California, three in Nevada, eight in
Arizona and one in Utah.
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”) for interim financial information and with the
instructions to Form 10-Q.  Accordingly, they do not include all
information and footnotes required by U.S. GAAP for complete financial
statements.  In the opinion of management, all adjustments (consisting
of normal recurring adjustments and accruals) considered necessary for a fair
presentation of the results of operations for the periods presented have been
included in the interim periods.
 
 The
accompanying condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2009.
The condensed consolidated financial data at March 29, 2009 is derived from
audited financial statements included in the Company’s Annual Report on Form
10-K for the year ended March 29, 2009.  Interim results are not
necessarily indicative of results for the full year.
 
 The
preparation of financial statements in conformity with U.S. 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.
 
 The
Company has evaluated subsequent events through the issuance date of this Form
10-Q.
 
 2.
              Liquidity
 
 Our
primary capital requirements are for inventory.  Historically, cash
from operations, credit terms from vendors and bank borrowing have met our
liquidity needs.  For the foreseeable future our ability to continue
our operations and business is dependent on these same sources of
capital.  The following table sets forth comparable store sales by
quarter for the past three fiscal years:
  FY
      2008
                    
                    FY
      2009
                    
                    FY
      2010Q1
                    1.3%
                    
                    (11.1%)
                    
                    (14.7%)Q2
                    (2.2%)
                    
                    (6.7%)
                    
                    (12.4%)Q3
                    (6.9%)
                    
                    (15.4%)
                    
                    (2.8%)*Q4
                    (8.8%)
                    
                    (17.7%)
                    
                    n/a*Third
      quarter through November 1, 2009.
 In the
event sales decline at a rate greater than anticipated to support the covenants
in our bank credit facility, we may have insufficient working capital to
continue to operate our business as it has been operated, or at
all.
  6
 SPORT
CHALET, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 As a
result of the comparable store sales decline, we are focused on reducing
operating expenses and improving liquidity through cost reductions and other
initiatives.  For a detailed discussion of the cost reductions and
other initiatives, see “Item 1 Business – Company Initiatives to Manage
Macro-Economic Environment” section of the Company’s Annual Report on Form 10-K
for the fiscal year ended March 29, 2009.
 
 The
amount we can borrow under our credit facility with Bank of America, N.A. (the
“Lender”) is limited to a percentage of the value of eligible inventory, minus
certain reserves.  A significant decrease in eligible inventory due to
the aging of inventory, an unfavorable inventory appraisal or other factors,
could have an adverse effect on our borrowing capabilities under our credit
facility, which may adversely affect the adequacy of our working
capital.
 
 3.
              Income
      Taxes
 
 We
evaluate whether a valuation allowance should be established against our net
deferred tax assets based on the consideration of all available evidence using a
"more likely than not" standard.  Significant weight is given to
evidence that can be objectively verified.  The determination to
record a valuation allowance is based on the recent history of cumulative losses
and losses expected in the near future.  In conducting our analysis,
we utilize a consistent approach which considers our current year loss,
including an assessment of the degree to which any losses are driven by items
that are unusual in nature and incurred to improve future
profitability.  In addition, we review changes in near-term market
conditions and any other factors arising during the period which may impact our
future operating results.
 
 As a
result of our previous analysis, we determined that a full valuation allowance
against our net deferred tax assets for fiscal 2009 was required.  We
will not record income tax benefits in the consolidated financial statements
until it is determined that it is more likely than not that we will generate
sufficient taxable income to realize our deferred income tax
assets.  As of September 27, 2009, our net deferred tax assets and
related valuation allowance totaled $25.7 million.  The Company has
federal and state net operating loss carryforwards of approximately $39 million,
which can be carried forward for a period of 20 years.
 
 We
determined there is no liability related to uncertain tax
positions.  When applicable, we recognize interest and penalties
related to uncertain tax positions in income tax expense.  The tax
year ending March 30, 2008 remains open to examination by the Internal Revenue
Service.  The tax years ending March 31, 2005 to March 30, 2008 remain
open to examination by the state of California.  The tax years ending
March 31, 2006 to March 30, 2008 remain open to examination by the state of
Arizona.  The tax year ending March 30, 2008 remains open to
examination by the state of Utah.
  7
 
 SPORT
CHALET, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 4.
                  Loss
      per Share
 
 Loss per
share, basic, is computed based on the weighted average number of common shares
outstanding for the period.  Loss per share, diluted, is computed
based on the weighted average number of common and potentially dilutive common
equivalent shares outstanding for the period.  A reconciliation of the
numerators and denominators of the basic and diluted loss per share computations
are set forth below:
  13
      weeks ended
                              
                              
                              26
      weeks endedSeptember
      27, 2009
                              
                              
                              September
      28, 2008
                              
                              
                              September
      27, 2009
                              
                              
                              September
      28, 2008(in
      thousands, except share amounts)Net
      loss
                              
                              $
                              (1,212
                              )
                              
                              $
                              (4,221
                              )
                              
                              $
                              (4,196
                              )
                              
                              $
                              (8,747
                              )Weighted
      average number of common shares:Basic
                              
                              
                              14,123
                              
                              
                              
                              14,123
                              
                              
                              
                              14,123
                              
                              
                              
                              14,123Effect
      of dilutive securities-stock options
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Diluted
                              
                              
                              14,123
                              
                              
                              
                              14,123
                              
                              
                              
                              14,123
                              
                              
                              
                              14,123Class
      A and Class B Loss per share:Basic
                              
                              $
                              (0.09
                              )
                              
                              $
                              (0.30
                              )
                              
                              $
                              (0.30
                              )
                              
                              $
                              (0.62
                              )Effect
      of dilutive securities-stock options
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Diluted
                              
                              $
                              (0.09
                              )
                              
                              $
                              (0.30
                              )
                              
                              $
                              (0.30
                              )
                              
                              $
                              (0.62
                              )
   An
aggregate of 1,785,027 and 1,953,605 options for the 13 and 26 weeks ended
September 27, 2009 and September 28, 2008, respectively, are excluded from the
computation of diluted loss per share as their effect would have been
anti-dilutive.
 
 5.
              Loan
      Payable to Bank
 
 Under our
bank credit facility, up to $45.0 million will be available to the Company,
increasing to $70.0 million, from September 1st of each year through December
31st of each year, and up to an additional $10.0 million will be available to
the Company through a special advance facility.  The amount available
under the special advance facility will be reduced by $2.5 million on the first
day of each month commencing on July 1, 2010, and the special advance facility
will terminate on October 1, 2010.  This effectively increases the
revolving credit limit to $55 million from January 1st of each year through
August 31st and also allows for seasonal advances up to $75.0 million from
September 1st of each year to December 31st, subject to the scheduled
reductions.  This facility also provides for up to $10.0 million in
authorized letters of credit.  The amount we may borrow under this
credit facility is limited to a percentage of the value of eligible inventory,
minus certain reserves.  Interest accrues at the Lender’s prime rate
plus 2.0% (5.25% at September 27, 2009) or at our option we can fix the rate for
a period of time at LIBOR plus 4.5%.  In addition, there is an unused
commitment fee of 0.25% per year, based on a weighted average formula, and an
early termination fee if the facility is terminated before June 2010 which is
waived if the loan is refinanced by the Lender or any of its affiliates. This
credit facility expires in June 2012.  Our obligation to the Lender is
presently secured by a first priority lien on substantially all of our non-real
estate assets, and we are subject to, among others, a covenant that we maintain
a minimum monthly EBITDA.
 
  8
 
 SPORT
CHALET, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 6.
                  Share-based
      Compensation
 
 Total
share-based compensation expense and the related income tax benefit recognized
for the 13 and 26 weeks ended September 27, 2009 and September 28,
2008:
  13
      weeks ended
                              
                              
                              26
      weeks endedSeptember
      27, 2009
                              
                              
                              September
      28, 2008
                              
                              
                              September
      27, 2009
                              
                              
                              September
      28, 2008(in
      thousands)
                              
                              
                              (in
      thousands)Compensation
      expense
                              
                              $
                              102
                              
                              
                              $
                              117
                              
                              
                              $
                              193
                              
                              
                              $
                              189Income
      tax benefit
                              
                              $
                              -
                              
                              
                              $
                              47
                              
                              
                              $
                              -
                              
                              
                              $
                              76
  The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option valuation model.  The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully
transferable.  In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility.  For the 13 and 26 weeks ended September 27, 2009 and
September 28, 2008, the following weighted average assumptions were used to
estimate the fair value for stock options granted in that period:
  13
      weeks ended
                          
                          
                          26
      weeks endedSeptember
      27, 2009
                          
                          
                          September
      28, 2008
                          
                          
                          September
      27, 2009
                          
                          
                          September
      28, 2008Risk-free
      interest rate
                          
                          
                          2.5
                          %
                          
                          
                          3.5
                          %
                          
                          
                          2.6
                          %
                          
                          
                          3.0
                          %Expected
      volatility
                          
                          
                          93.0
                          %
                          
                          
                          38.4
                          %
                          
                          
                          92.0
                          %
                          
                          
                          38.6
                          %Expected
      dividend yield
                          
                          
                          0
                          %
                          
                          
                          0
                          %
                          
                          
                          0
                          %
                          
                          
                          0
                          %Expected
      life in years
                          
                          
                          7.5
                          
                          
                          
                          7.5
                          
                          
                          
                          7.5
                          
                          
                          
                          7.5
  The
following table sets forth information concerning stock option activity for the
26 weeks ended September 27, 2009:
 
  Shares
                                                    
                                                    
                                                    Weighted
      Average
                                                      Exercise
      Price
                                                    
                                                    Weighted-Average
                                                      Remaining
      Contractual
                                                      Term
      (Years)
                                                    
                                                    Aggregate
      Intrinsic
                                                      Value
      (in 000's)Outstanding
      as of March 29, 2009
                                                    
                                                    
                                                    1,907,955
                                                    
                                                    
                                                    $
                                                    5.06Granted
                                                    
                                                    
                                                    220,000
                                                    
                                                    
                                                    
                                                    1.54Exercised
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Forfeited
      or expired
                                                    
                                                    
                                                    (342,928
                                                    )
                                                    
                                                    
                                                    3.35Outstanding
      as of September 27, 2009
                                                    
                                                    
                                                    1,785,027
                                                    
                                                    
                                                    $
                                                    4.95
                                                    
                                                    6.1
                                                    
                                                    $31
 The
aggregate intrinsic value in the table above is based on the Company’s closing
stock price of $1.96 and $3.65 for Class A Common Stock and Class B Common
Stock, respectively, as of the last trading day of the period ended September
27, 2009.
 
 In
October 2009, the Company offered eligible employees the voluntary opportunity
to exchange certain outstanding options to purchase shares of Class A Common
Stock for new options (“Exchange Offer”).  Any outstanding option to
purchase shares of Class A Common Stock with an exercise price equal to or
greater than $2.38 per share, that was granted under our 1992 Incentive Award
Plan or our 2004 Equity Incentive Plan, as amended, is eligible to be exchanged
in this offer.  The Company expects to cancel the options accepted for
exchange, and to grant the new options, no earlier than November 6,
2009.  For a detailed discussion of the Exchange Offer, see the
Company’s Tender Offer Statement on Schedule TO filed with the Securities and
Exchange Commission (“SEC”) on October 6, 2009.
 
 
 9
 
 SPORT
CHALET, INC.
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 7.
                  Recently
      Issued Accounting Pronouncements
 
 The
following is a list of recently issued accounting pronouncements, none of which
have had or are expected to have a material impact on our results of operations,
cash flows or financial position.
 On
September 27, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board (“FASB”) to the authoritative hierarchy of
GAAP.  These changes establish the FASB Accounting Standards
Codification (“ASC”) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP.  Rules
and interpretive releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants.  The FASB
will no longer issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue
Accounting Standards Updates.  Accounting Standards Updates will not
be authoritative in their own right as they will only serve to update the
ASC.  These changes and the ASC itself do not change
GAAP.  Other than the manner in which new accounting guidance is
referenced, the adoption of these changes had no impact on the Financial
Statements.
 
 In the
first quarter of fiscal 2010, the Company adopted FASB ASC 855, Subsequent
Events, which establishes general standards of accounting for, and disclosure
of, events that occur after the balance sheet date but before financial
statements are issued or are available to be issued and requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued.  The
effect of adopting this pronouncement did not have a material impact on the
Company’s financial position or results of operations.




10
 
  Item
2.    Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.





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





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





General
Overview





Sport Chalet, Inc. (referred to as the
“Company,” “Sport Chalet,” “we,” “us,” and “our” unless specified otherwise) is
a leading operator of 55 full-service, specialty sporting goods stores in
California, Nevada, Arizona and Utah, comprising a total of over two million
square feet of retail space.  As of September 27, 2009, we had 33
locations in Southern California, eight in Northern California, two in Central
California, three in Nevada, eight in Arizona and one in Utah. These stores
average approximately 41,000 square feet in size. In addition, we have a retail
e-commerce store at www.sportchalet.com.





Operating
History





In 1959, Norbert Olberz, our founder
(the “Founder”), purchased a small ski and tennis shop in La Cañada,
California.  A focus on providing quality merchandise with outstanding
customer service was the foundation of Norbert’s vision.  As a true
pioneer in the industry, Norbert’s mission was three simple
things.  To “see things through the eyes of the customer;” “to do a
thousand things a little bit better;” and to focus on “not being the biggest,
but the best.”  Over the last 50 years, Sport Chalet has grown into a
chain of 55 specialty sporting goods stores serving California, Nevada, Arizona
and Utah.





Our growth had historically focused on
Southern California; but since 2001 we have expanded our scope to all of
California and to Nevada, Arizona and Utah.  Generally, our new stores
were located with the intent of strengthening our focus on Southern California
or in areas characterized by a large number of housing
developments.  We opened seven stores in fiscal 2008, 17 stores in the
last three years and 25 in the last five years.  In fiscal 2009, we
opened four new stores, relocated one and re-launched our website.  We
currently do not anticipate opening new stores or entering into new lease
commitments in the near future.




11





Recent
Events





We
believe our stores are located in the geographic regions hardest hit by the
downturn in the housing and credit markets. Our sales largely depend on the
economic environment and level of consumer spending in the geographic regions
around our stores. The retail industry historically has been subject to
substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits in our market areas are having, and may in the future continue to have, a
materially adverse effect on our results of operations.





Comparable store sales declined 4.5%
for fiscal 2008 and 12.4% for fiscal 2009 as we continued to confront a
difficult macro-economic environment, which began with weak housing trends and
high gasoline prices in our core markets and continued with the financial and
credit crisis.  As a result of the reduction in comparable store sales
for fiscal 2009 and the opening of new stores which have not reached maturity,
we incurred a net loss of $52.2 million, or $3.70 per diluted share for fiscal
2009, compared to a net loss of $3.4 million, or $0.24 per diluted share for
fiscal 2008.  Included in the losses are a non-cash impairment charge
of $10.7 million and $2.1 million in fiscal 2009 and fiscal 2008, respectively,
related to underperforming stores.  We have sustained operating losses
in nine of the past ten quarters.   The following table sets
forth comparable store sales by quarter for the past three fiscal
years:




FY
      2008
                  
                  FY
      2009
                  
                  FY
      2010Q1
                  1.3%
                  
                  (11.1%)
                  
                  (14.7%)Q2
                  (2.2%)
                  
                  (6.7%)
                  
                  (12.4%)Q3
                  (6.9%)
                  
                  (15.4%)
                  
                  (2.8%)*Q4
                  (8.8%)
                  
                  (17.7%)
                  
                  n/a*Third
      quarter through November 1, 2009.




In the
event sales decline at a rate greater than anticipated to support the loan
covenants, we may have insufficient working capital to continue to operate our
business as it has been operated, or at all.





As a
result of the comparable store sales decline, we have focused on reducing
operating expenses and improving liquidity.  In October 2008, we began
aggressively taking action to address the severe downturn in the macroeconomic
environment by examining our practices, assumptions, models and costs in an
effort to modify our business model to make the Company more
efficient.  We continue to focus on reducing operating expenses and
improving liquidity through the following core initiatives and their savings
realized for the first half of fiscal 2010 as compared to first half of fiscal
2009:





·
            Improved
      inventory management and saved $3.7 million in reduced markdowns. As a
      result of liquidating aged inventory throughout fiscal 2009, our inventory
      is fresher and cleaner.





·
            Renegotiated
      lease terms and saved $1.5 million in rent.  Based on executed
      amendments to date, we expect to save over $5.0 million in fiscal 2010
      compared to fiscal 2009.




12




·
            Increased
      payroll efficiency and saved $7.1 million.  Based on current
      trends, we anticipate saving $10.7 million in fiscal
  2010.





·
            Reduced
      all expense categories and saved $6.9 million primarily from advertising,
      professional fees and repairs and maintenance. We anticipate saving $9.4
      million in fiscal 2010.





Although
no assurance can be given about the ultimate impact of these initiatives or of
the overall economic climate, we believe these initiatives, combined with the
exit or diminished capacity of many key specialty competitors in our
marketplace, will better position us for sustainability, viability and positive
results in the future as the economy improves.  For a detailed
discussion of these cost reductions and other initiatives, see “Item 1 Business
– Company Initiatives to Manage Macro-Economic Environment” section of the
Company’s Annual Report on Form 10-K for the fiscal year ended March 29,
2009.





The terms
comparable store sales or same store sales are used interchangeably and are
considered a key performance measurement.  The sales of a store are
first included in the comparable store sales calculation in the quarter
following its twelfth full month of operation.





Results
of Operations





13
Weeks Ended September 27, 2009 Compared to September 28 2008





The
following table sets forth statements of operations data and relative
percentages of net sales for the 13 weeks ended September 27, 2009 compared to
the 13 weeks ended September 28, 2008 (dollar amounts in thousands, except per
share amounts):




13
      weeks endedSeptember
      27, 2009
                              
                              
                              September
      28, 2008
                              
                              
                              Dollar
                              
                              
                              PercentageAmount
                              
                              
                              Percent
                              
                              
                              Amount
                              
                              
                              Percent
                              
                              
                              Change
                              
                              
                              ChangeNet
      sales
                              
                              $
                              88,811
                              
                              
                              
                              100.0
                              %
                              
                              $
                              96,457
                              
                              
                              
                              100.0
                              %
                              
                              $
                              (7,646
                              )
                              
                              
                              (7.9
                              %)Gross
      profit
                              
                              
                              24,831
                              
                              
                              
                              28.0
                              %
                              
                              
                              25,596
                              
                              
                              
                              26.5
                              %
                              
                              
                              (765
                              )
                              
                              
                              (3.0
                              %)Selling,
      general andadministrative
      expenses
                              
                              
                              22,066
                              
                              
                              
                              24.8
                              %
                              
                              
                              28,506
                              
                              
                              
                              29.6
                              %
                              
                              
                              (6,440
                              )
                              
                              
                              (22.6
                              %)Depreciation
      and amortization
                              
                              
                              3,274
                              
                              
                              
                              3.7
                              %
                              
                              
                              3,656
                              
                              
                              
                              3.8
                              %
                              
                              
                              (382
                              )
                              
                              
                              (10.4
                              %)Loss
      from operations
                              
                              
                              (509
                              )
                              
                              
                              (0.6
                              %)
                              
                              
                              (6,566
                              )
                              
                              
                              (6.8
                              %)
                              
                              
                              6,057
                              
                              
                              
                              (92.2
                              %)Interest
      expense
                              
                              
                              703
                              
                              
                              
                              0.8
                              %
                              
                              
                              422
                              
                              
                              
                              0.4
                              %
                              
                              
                              281
                              
                              
                              
                              66.6
                              %Loss
      before taxes
                              
                              
                              (1,212
                              )
                              
                              
                              (1.4
                              %)
                              
                              
                              (6,988
                              )
                              
                              
                              (7.2
                              %)
                              
                              
                              5,776
                              
                              
                              
                              (82.7
                              %)Income
      tax benefit
                              
                              
                              -
                              
                              
                              
                              0.0
                              %
                              
                              
                              (2,767
                              )
                              
                              
                              (2.9
                              %)
                              
                              
                              2,767
                              
                              
                              
                              *Net
      loss
                              
                              
                              (1,212
                              )
                              
                              
                              (1.4
                              %)
                              
                              
                              (4,221
                              )
                              
                              
                              (4.4
                              %)
                              
                              
                              3,009
                              
                              
                              
                              (71.3
                              %)Class
      A and Class B Loss per share:Basic
                              
                              $
                              (0.09
                              )
                              
                              
                              
                              
                              
                              $
                              (0.30
                              )
                              
                              
                              
                              
                              
                              $
                              0.21
                              
                              
                              
                              (71.3
                              %)Diluted
                              
                              $
                              (0.09
                              )
                              
                              
                              
                              
                              
                              $
                              (0.30
                              )
                              
                              
                              
                              
                              
                              $
                              0.21
                              
                              
                              
                              (71.3
                              %)*Percentage
      change not meaningful.




13





Sales decreased $7.7 million, or 7.9%,
to $88.8 millionfor
the 13 weeks ended September 27, 2009 from $96.5 million for the second quarter
of last year.  The decrease is primarily the result of worsening
macro-economic conditions.  Sales from three new stores, not included
in the same store sales calculation, resulted in a $2.3 million increase in
sales, or 2.4%.  This increase, along with an increase in Team Sales
of $0.9 million, was offset by a same store sales decrease of $11.7 million, or
12.4%.





Gross profit decreased $0.8 million, or
3.0%, as a result of the sales decrease partially offset by reductions in
markdowns of $1.6 million and in rent of $0.8 million.  As a percent
of sales, gross profit increased 150 basis points to 28.0% from 26.5%, also
primarily as a result of decreased markdowns and rent.





Selling,
general and administrative expenses decreased $6.4 million, or 22.6%, as
expenses related to new stores of $0.9 million were offset by expense reductions
of $7.3 million.  Expense reduction initiatives include $3.9 million
in labor savings from stores, corporate office overhead and the distribution
center.  Additional savings in other areas include advertising of $1.6
million, professional fees of $0.7 million, utilities of $0.5 million and
repairs and maintenance of $0.5 million.  As a percent of sales,
SG&A decreased 480 basis points to 24.8% from 29.6% in the second quarter of
fiscal 2009, because the expense reductions more than offset the decline in
sales.





We will
not record income tax benefits in the consolidated financial statements until it
is determined that it is more likely than not that we will generate sufficient
taxable income to realize our deferred income tax assets.  As of
September 27, 2009, our net deferred tax assets and related valuation allowance
totaled $25.7 million.  The Company has federal and state net
operating loss carryforwards of approximately $39 million, which can be carried
forward for a period of 20 years.





Net loss
for the second quarter of fiscal 2010 was $1.2 million, or $0.09 per diluted
share, compared to a net loss of $4.2 million, or $0.30 per diluted share, for
the second quarter of fiscal 2009.  The net loss for the second
quarter of fiscal 2010 did not reflect any net tax benefit (because of tax
valuation allowances), while the second quarter of fiscal 2009 reflected a net
tax benefit of $2.8 million, or $0.20 per share.  Without the tax
benefit, the net loss for the second quarter of fiscal 2009 would have been $7.0
million, or $0.49 per share.




14





26
Weeks Ended September 27, 2009 Compared to September 28 2008





The
following table sets forth statements of operations data and relative
percentages of net sales for the 26 weeks ended September 27, 2009 compared to
the 26 weeks ended September 28, 2008 (dollar amounts in thousands, except per
share amounts):




26
      weeks endedSeptember
      27, 2009
                              
                              
                              September
      28, 2008
                              
                              
                              Dollar
                              
                              
                              PercentageAmount
                              
                              
                              Percent
                              
                              
                              Amount
                              
                              
                              Percent
                              
                              
                              Change
                              
                              
                              ChangeNet
      sales
                              
                              $
                              168,214
                              
                              
                              
                              100.0
                              %
                              
                              $
                              183,577
                              
                              
                              
                              100.0
                              %
                              
                              $
                              (15,363
                              )
                              
                              
                              (8.4
                              %)Gross
      profit
                              
                              
                              45,821
                              
                              
                              
                              27.2
                              %
                              
                              
                              48,304
                              
                              
                              
                              26.3
                              %
                              
                              
                              (2,483
                              )
                              
                              
                              (5.1
                              %)Selling,
      general andadministrative
      expenses
                              
                              
                              42,003
                              
                              
                              
                              25.0
                              %
                              
                              
                              54,475
                              
                              
                              
                              29.7
                              %
                              
                              
                              (12,472
                              )
                              
                              
                              (22.9
                              %)Depreciation
      and amortization
                              
                              
                              6,730
                              
                              
                              
                              4.0
                              %
                              
                              
                              7,267
                              
                              
                              
                              4.0
                              %
                              
                              
                              (537
                              )
                              
                              
                              (7.4
                              %)Loss
      from operations
                              
                              
                              (2,912
                              )
                              
                              
                              (1.7
                              %)
                              
                              
                              (13,438
                              )
                              
                              
                              (7.3
                              %)
                              
                              
                              10,526
                              
                              
                              
                              (78.3
                              %)Interest
      expense
                              
                              
                              1,284
                              
                              
                              
                              0.8
                              %
                              
                              
                              1,079
                              
                              
                              
                              0.6
                              %
                              
                              
                              205
                              
                              
                              
                              19.0
                              %Loss
      before taxes
                              
                              
                              (4,196
                              )
                              
                              
                              (2.5
                              %)
                              
                              
                              (14,517
                              )
                              
                              
                              (7.9
                              %)
                              
                              
                              10,321
                              
                              
                              
                              (71.1
                              %)Income
      tax benefit
                              
                              
                              -
                              
                              
                              
                              0.0
                              %
                              
                              
                              (5,770
                              )
                              
                              
                              (3.1
                              %)
                              
                              
                              5,770
                              
                              
                              
                              *Net
      loss
                              
                              
                              (4,196
                              )
                              
                              
                              (2.5
                              %)
                              
                              
                              (8,747
                              )
                              
                              
                              (4.8
                              %)
                              
                              
                              4,551
                              
                              
                              
                              (52.0
                              %)Class
      A and Class B Loss per share:Basic
                              
                              $
                              (0.30
                              )
                              
                              
                              
                              
                              
                              $
                              (0.62
                              )
                              
                              
                              
                              
                              
                              $
                              0.32
                              
                              
                              
                              (52.0
                              %)Diluted
                              
                              $
                              (0.30
                              )
                              
                              
                              
                              
                              
                              $
                              (0.62
                              )
                              
                              
                              
                              
                              
                              $
                              0.32
                              
                              
                              
                              (52.0
                              %)*Percentage
      change not meaningful.




Sales decreased $15.4 million, or 8.4%,
to $168.2 millionfor
the 26 weeks ended September 27, 2009 from $183.6 million for the 26 weeks of
last year.  The decrease is primarily the result of worsening
macro-economic conditions.  Sales from four new stores, not included
in the same store sales calculation, resulted in a $6.1 million increase in
sales, or 3.3%.  This increase, along with an increase in Team Sales
of $1.7 million, was offset by a same store sales decrease of $24.0 million, or
13.6%.





Gross profit decreased $2.5 million, or
5.1%, as a result of the sales decrease offset by reductions in markdowns of
$3.7 million and in rent of $1.5 million.  As a percent of sales,
gross profit increased 90 basis points to 27.2% from 26.3%, also primarily as a
result of decreased markdowns and rent.





Selling,
general and administrative expenses decreased $12.5 million, or 22.9%, as
expenses related to new stores of $1.8 million were offset by expense reductions
of $14.0 million.  Expense reduction initiatives include $7.1 million
in labor savings from stores, corporate office overhead and the distribution
center.  Additional savings in other areas include advertising of $3.7
million, professional fees of $1.3 million, utilities of $0.6 million and
repairs and maintenance of $1.1 million.  As a percent of sales,
SG&A decreased 470 basis points to 25.0% from 29.7% in the first half of
fiscal 2009, because the expense reductions more than offset the decline in
sales.





We will
not record income tax benefits in the consolidated financial statements until it
is determined that it is more likely than not that we will generate sufficient
taxable income to realize our deferred income tax assets.  As of
September 27, 2009, our net deferred tax assets and related valuation allowance
totaled $25.7 million.  The Company has federal and state net
operating loss carryforwards of approximately $39 million, which can be carried
forward for a period of 20 years.




15





Net loss
for the first half of fiscal 2010 was $4.2 million, or $0.30 per diluted share,
compared to a net loss of $8.7 million, or $0.62 per diluted share, for the
first half of fiscal 2009.  The net loss for the first half of fiscal
2010 did not reflect any net tax benefit (because of tax valuation allowances),
while the first half of fiscal 2009 reflected a net tax benefit of $5.8 million,
or $0.41 per share.  Without the tax benefit, the net loss for the
first half of fiscal 2009 would have been $14.5 million, or $1.03 per
share.





Liquidity
and Capital Resources





Our
primary capital requirements are for inventory.  Historically, cash
from operations, credit terms from vendors and bank borrowing have met our
liquidity needs.  For the foreseeable future our ability to continue
our operations and business is dependent on these same sources of
capital.  The following table sets forth comparable store sales by
quarter for the past three fiscal years:




FY
      2008
                    
                    FY
      2009
                    
                    FY
      2010Q1
                    1.3%
                    
                    (11.1%)
                    
                    (14.7%)Q2
                    (2.2%)
                    
                    (6.7%)
                    
                    (12.4%)Q3
                    (6.9%)
                    
                    (15.4%)
                    
                    (2.8%)*Q4
                    (8.8%)
                    
                    (17.7%)
                    
                    n/a*Third
      quarter through November 1, 2009.


In the event sales decline
at a rate greater than anticipated to support the loan covenants, we may
have insufficient working capital to continue to operate our business as it has
been operated, or at all.





As a
result of the comparable store sales decline, we have focused on reducing
operating expenses and improving liquidity.  In October 2008, we began
aggressively taking action to address the severe downturn in the macroeconomic
environment by examining our practices, assumptions, models and costs in an
effort to modify our business model to make the Company more
efficient.  We continue to focus on reducing operating expenses and
improving liquidity through the following core initiatives and their savings
realized for the first half of fiscal 2010 as compared to first half of fiscal
2009:





·
            Improved
      inventory management and saved $3.7 million in reduced markdowns. As a
      result of liquidating aged inventory throughout fiscal 2009, our inventory
      is fresher and cleaner.





·
            Renegotiated
      lease terms and saved $1.5 million in reduced rent.  Based on
      executed amendments to date, we expect to save over $5.0 million in fiscal
      2010 compared to fiscal 2009.





·
            Increased
      payroll efficiency and saved $7.1 million.  Based on current
      trends, we anticipate saving $10.7 million in fiscal
  2010.





·
            Reduced
      all expense categories and saved $6.9 million primarily from advertising,
      professional fees and repairs and maintenance. We anticipate saving $9.4
      million in fiscal 2010.





16




Although
no assurance can be given about the ultimate impact of these initiatives or of
the overall economic climate, we believe these initiatives, combined with a
diminished competitive environment due to the exit or diminished capacity of
many key specialty competitors in our marketplace, will better position us for
sustainability, viability and positive results in the future as the economy
improves.  For a detailed discussion of these cost reductions and
other initiatives, see “Item 1 Business – Company Initiatives to Manage
Macro-Economic Environment” section of the Company’s Annual Report on Form 10-K
for the fiscal year ended March 29, 2009.




Net cash
used in or provided by operating activities has generally been the result of net
income or loss, adjusted for depreciation and amortization, and changes in
inventory along with related accounts payable.  The following table
shows the more significant items for the 26 weeks ended September 27, 2009 and
September 28, 2008:




26
      weeks endedSeptember
      27, 2009
                                    
                                    
                                    September
      28, 2008(in
      thousands)Net
      loss
                                    
                                    $
                                    (4,196
                                    )
                                    
                                    $
                                    (8,747
                                    )Depreciation
      and amortization
                                    
                                    
                                    6,730
                                    
                                    
                                    
                                    7,267Deferred
      income taxes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (5,780
                                    )Merchandise
      inventories
                                    
                                    
                                    (5,539
                                    )
                                    
                                    
                                    (15,573
                                    )Accounts
      payable
                                    
                                    
                                    (1,377
                                    )
                                    
                                    
                                    18,136Other
      accrued expenses
                                    
                                    
                                    (4,143
                                    )
                                    
                                    
                                    5,065Other
                                    
                                    
                                    (889
                                    )
                                    
                                    
                                    (125
                                    )Net
      cash (used in) provided by operating activities
                                    
                                    $
                                    (9,414
                                    )
                                    
                                    $
                                    243


Typically, inventory levels increase
from year to year due to the addition of new stores, while improvements in
inventory management decrease inventory required for each store. In addition,
sales have decreased 13.6% on a same store basis reducing the need for inventory
and as a result, average inventory per store decreased 11% to $1.7 million from
$1.9 million at the end of the second quarter of fiscal 2010 and fiscal 2009,
respectively.  The increase of $5.5 million in the 26 weeks ended
September 27, 2009 and the increase of $15.6 million in the 26 weeks ended
September 28, 2008 were primarily due to seasonality, while the period ended
September 28, 2008 also included increases for three new stores.





Historically,
accounts payable increases as inventory increases.  However, the
timing of vendor payments or receipt of merchandise near the end of the period
influences this relationship.  As a result of insufficient cash
available during the fourth quarter of fiscal 2009, we had slowed payments to
our vendors, most of which have now been brought current.  This is the
primary reason for a decrease of $1.4 million in accounts payable compared to
the increase in inventory of $5.5 million.





Additionally,
the insufficient cash available during the fourth quarter of fiscal 2009 also
caused other accrued expenses to increase as compared to fiscal
2008.  During the first quarter of fiscal 2010, payments were made to
bring expense vendors more current.





We have determined that we will not
record income tax benefits in the consolidated financial statements until it is
determined that it is more likely than not that we will generate sufficient
taxable income to realize our deferred income tax assets.  As of
September 27, 2009, our net deferred tax assets and related valuation allowance
totaled $25.7 million.  The Company has federal and state net
operating loss carryforwards of approximately $39 million, which can be carried
forward for a period of 20 years. A bill, the Net Operating Loss Carryback Act
(H.R. 2452) has been introduced in the House which would permit a carryback of
losses from 2008 or 2009 for up to five years.  In the event this bill
becomes a law, we believe we could obtain an income tax refund of up to $10.0
million.




17





Net cash used in investing activities
is primarily for capital expenditures as shown below:




26
      weeks endedSeptember
      27, 2009
                          
                          
                          September
      28, 2008(in
      thousands)New
      stores
                          
                          $
                          -
                          
                          
                          $
                          7,069Remodels/Relocations
                          
                          
                          -
                          
                          
                          
                          2,860Existing
      stores
                          
                          
                          305
                          
                          
                          
                          376Information
      systems
                          
                          
                          56
                          
                          
                          
                          1,020Other
                          
                          
                          -
                          
                          
                          
                          211Total
                          
                          $
                          361
                          
                          
                          $
                          11,536




We did not open any new stores in the
26 weeks ended September 27, 2009 compared to two new stores and one relocation
in the same period last year.  The costs to open new stores can vary
significantly depending on the terms of the lease.  We currently do
not anticipate opening new stores or entering into new lease commitments in the
near future.





Forecasted
capital expenditures for the remainder of fiscal 2010 are expected to be nominal
as all nonessential projects have been curtailed.





Net cash
provided by financing activities reflects advances and repayments of borrowings
under our revolving credit facility.  The outstanding balance as of
September 27, 2009 is $49.1 million compared to $39.1 million at the end of
fiscal 2009.  The increase is primarily the result of cash used in
operations.





Under our
bank credit facility, up to $45.0 million will be available to the Company,
increasing to $70.0 million, from September 1st of each year through December
31st of each year, and up to an additional $10.0 million will be available to
the Company through a special advance facility.  The amount available
under the special advance facility will be reduced by $2.5 million on the first
day of each month commencing on July 1, 2010, and the special advance facility
will terminate on October 1, 2010.  This effectively increases the
revolving credit limit to $55 million from January 1st of each year through
August 31st and also allows for seasonal advances up to $75.0 million from
September 1st of each year to December 31st, subject to the scheduled
reductions.  This facility also provides for up to $10.0 million in
authorized letters of credit.  The amount we may borrow under this
credit facility is limited to a percentage of the value of eligible inventory,
minus certain reserves.  Interest accrues at the Lender’s prime rate
plus 2.0% (5.25% at September 27, 2009) or at our option we can fix the rate for
a period of time at LIBOR plus 4.5%.  In addition, there is an unused
commitment fee of 0.25% per year, based on a weighted average formula, and an
early termination fee if the facility is terminated before June 2010 which is
waived if the loan is refinanced by the Lender or any of its
affiliates.  This credit facility expires in June 2012. Our obligation
to the Lender is presently secured by a first priority lien on substantially all
of our non-real estate assets, and we are subject to, among others, a covenant
that we maintain a minimum monthly EBITDA.




18





EBITDA is
defined in our bank credit facility as (loss) income before provision (benefit)
for income taxes, interest expense, depreciation and amortization, and non-cash
charges.  EBITDA is a liquidity measure that is one of the key
measures used in calculating compliance with covenants in our credit
facility.  Non-compliance with financial covenants could result in a
default under our credit agreement and restrict our ability to finance
operations or capital needs.  Based on the strategic initiatives taken
by management, we believe we can improve a $19 million EBITDA loss in fiscal
2009 to exceed the Lender’s minimum EBITDA requirement of $5.4 million EBITDA
profit in fiscal 2010, a $24 million improvement.  Performance against
this plan is measured on a monthly cumulative basis and we have reported to the
Lender that results have exceeded plan for our first half of fiscal
2010.  The monthly minimum EBITDA requirements are not necessarily
indicative of future results, nor are they our projection of future results and
our actual results may or may not differ materially.  We can satisfy
our monthly EBITDA requirement through a number of different combinations of any
of the following components: net sales, gross margins, and operating
expenses.  A deterioration of any component(s) can be offset by an
improvement of any other component(s) and vice versa.  The
relationships between the components as they actualize will determine whether
the minimum EBITDA requirement is met.





The
amount we can borrow under our credit facility with the Lender is limited to a
percentage of the value of eligible inventory, minus certain
reserves.  A significant decrease in eligible inventory due to the
aging of inventory, an unfavorable inventory appraisal or other factors, could
have an adverse effect on our borrowing capabilities under our credit facility,
which may adversely affect the adequacy of our working capital.





Our off-balance sheet contractual
obligations and commitments relate to operating lease obligations, employment
contracts and letters of credit which are excluded from the balance sheet in
accordance with generally accepted accounting principles.





The
following table summarizes such obligations as of September 27,
2009:




Payment
      due by periodLess
      than
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      More
      thanTotal
                                      
                                      
                                      1
      year
                                      
                                      
                                      2-3
      year
                                      
                                      
                                      4-5
      year
                                      
                                      
                                      5
      yearsContractual
      Obligations
                                      
                                      (in
      thousands)Operating
      Leases (a)
                                      
                                      $
                                      216,089
                                      
                                      
                                      $
                                      30,114
                                      
                                      
                                      $
                                      61,358
                                      
                                      
                                      $
                                      52,508
                                      
                                      
                                      $
                                      72,109Employment
      Contracts
                                      
                                      
                                      764
                                      
                                      
                                      
                                      170
                                      
                                      
                                      
                                      339
                                      
                                      
                                      
                                      255
                                      
                                      
                                      
                                      -Total
      Contractual Obligations
                                      
                                      $
                                      216,853
                                      
                                      
                                      $
                                      30,284
                                      
                                      
                                      $
                                      61,697
                                      
                                      
                                      $
                                      52,763
                                      
                                      
                                      $
                                      72,109(a)
      Amounts include the direct lease obligations. Other obligations
      required by the lease agreements such as contingent rent based on sales,
      common area maintenance, property taxes and insurance are not fixed
      amounts and are therefore not included. The amount of the excluded
      expenses are; $10.5 million, $9.6 million and $8.5 million for the fiscal
      years 2009, 2008 and 2007, respectively. Operating Lease Obligations
      reflect savings from lease modifications, assume kick-out clauses will be
      excercised and do not reflect potential renewals or replacements of
      expiring
leases.




We lease
all of our existing store locations.  The leases for most of the
existing stores are for approximately ten-year terms with multiple option
periods under non-cancelable operating leases with scheduled rent
increases.  Some leases provide for contingent rent based upon a
percentage of sales in excess of specified minimums.  If there are any
free rent periods, they are accounted for on a straight line basis over the
lease term, beginning on the date of initial possession, which is generally when
we enter the space and begin the construction build-out.  The amount
of the excess of straight line rent expense over scheduled payments is recorded
as a deferred rent liability.  Construction allowances and other such
lease incentives are recorded as deferred credits, and are amortized on a
straight line basis as a reduction of rent expense over the lease
term.  In our efforts to reduce operating expenses and improve
liquidity, we have reviewed all of our store leases and have obtained and are
seeking additional rent reductions and lease modifications from our
landlords.  We currently expect to achieve savings totaling
approximately $14 million over the next three years.  These
negotiations, which are on-going, include renegotiating base rent, revising some
of our leases to contain percentage rent clauses, which obligate us to pay rents
based on a percentage of sales rather than fixed amounts, and amending certain
leases to allow us to terminate the lease at our option at a specified date when
contractually defined minimum sales volumes are not exceeded.  We are
also exploring the possibility of potentially closing stores that are
underperforming with no significant improvement foreseen in the near
term.




19





Generally,
our purchase obligations are cancelable 45 days prior to shipment from our
vendors.  Letters of credit amounting to approximately $1.7 million
relating to workers’ compensation insurance were outstanding as of September 27,
2009 and expire within one year.





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





Critical
Accounting Policies and Use of Estimates





In
preparing our consolidated financial statements we are required to make
estimates and judgments which affect the results of our operations and the
reported value of assets and liabilities.  Actual results may differ
from these estimates.  As discussed in “Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section of the Company’s Annual Report on Form 10-K for the fiscal year ended
March 29, 2009, we consider our policies on inventory valuation, revenue
recognition, gift card redemption, self insurance reserves, impairment of
long-lived assets, accounting for income taxes, estimation of net deferred
income tax asset valuation allowance and stock-based compensation 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 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” section of the Company’s Annual Report on
Form 10-K for the fiscal year ended March 29, 2009. The forward-looking
statements included in this Quarterly Report on Form 10-Q are made only as of
the date of this report, and the Company undertakes no obligation to update the
forward-looking statements to reflect subsequent events or
circumstances.




20




Risks
Related To Our Business:




·
            The
      covenants in our revolving credit facility may limit future borrowings to
      fund our operations.




·
            If
      our vendors do not provide sufficient quantities of products, our net
      sales and profitability could
suffer.




·
            A
      downturn in the economy has affected consumer purchases of discretionary
      items, significantly reducing our net sales and
    profitability.




·
            No
      assurance can be given that we will be successful in reducing operating
      expenses and controlling costs in an amount sufficient to return to
      profitability.




·
            We
      may need to record additional impairment losses in the future if our
      stores' operating performance does not
improve.




·
            No
      assurance can be given that our Board of Directors will be successful in
      its evaluation of strategic
alternatives.




·
            Intense
      competition in the sporting goods industry could limit our growth and
      reduce our profitability.




·
            Our
      future operations may be dependent on the availability of additional
      financing.


·
            Because
      our stores are concentrated in the western portion of the United States,
      we are subject to regional risks.




·
            If
      we are unable to predict or react to changes in consumer demand, we may
      lose customers and our sales may
decline.





·
            Failure
      to protect the integrity and security of our customers’ information could
      expose us to litigation and materially damage our standing with our
      customers.





·
            As
      a result of the current economic downturn, we have delayed opening new
      stores.  Continued growth is uncertain and subject to numerous
      risks.




·
            If
      we lose key management or are unable to attract and retain talent, our
      operating results could suffer.




·
            Seasonal
      fluctuations in the sales of sporting goods could cause our annual
      operating results to suffer.




·
            Our
      quarterly operating results may fluctuate substantially, which may
      adversely affect our business.




·
            Declines
      in the effectiveness of marketing could cause our operating results to
      suffer.




21




·
            Problems
      with our information systems could disrupt our operations and negatively
      impact our financial results.




·
            We
      are controlled by our Founder and management, whose interests may differ
      from other stockholders.




·
            The
      price of our Class A Common Stock and Class B Common Stock may be
      volatile.




·
            Provisions
      in the Company's charter documents could discourage a takeover that
      stockholders may consider
favorable.




·
            We
      may be subject to periodic litigation that may adversely affect our
      business and financial performance.




·
            Changes
      in accounting standards and subjective assumptions, estimates and
      judgments related to complex accounting matters could significantly affect
      our financial results.




·
            Terrorist
      attacks or acts of war may harm our
business.




·
            We
      rely on one distribution center and any disruption could reduce our
      sales.




·
            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.




·
            Global
      warming could cause erosion of both our Winter and Summer seasonal
      businesses over a long-term basis.





22




Item
3.    Quantitative and Qualitative
Disclosures About Market Risk.





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





Item
4T.  Controls and
Procedures.





Disclosure
Controls and Procedures





The Company’s principal executive
officer, Craig Levra, Chief Executive Officer, and principal financial officer,
Howard Kaminsky, Chief Financial Officer, with the participation of the
Company’s management, have evaluated the Company’s disclosure controls and
procedures as of September 27, 2009, and have concluded that these controls and
procedures are effective at the reasonable assurance level to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 (15 USC § 78a et
seq) is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms. These
disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits is accumulated and communicated
to management, including the principal executive officer and the principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.





Disclosure controls and procedures, no
matter how well designed and implemented, can provide only reasonable assurance
of achieving an entity's disclosure objectives. The likelihood of achieving such
objectives is affected by limitations inherent in disclosure controls and
procedures. These include the fact that human judgment in decision-making can be
faulty and that breakdowns in internal control can occur because of human
failures such as simple errors, mistakes or intentional circumvention of the
established processes.





Changes
in Internal Control Over Financial Reporting





There
were no changes in the Company's internal controls over financial reporting,
identified by the Chief Executive Officer or the Chief Financial Officer that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
  23




PART
II – OTHER INFORMATION





Item 1.Legal
Proceedings.





By letter dated May 14, 2008, an
attorney for a former employee has asserted claims for sexual harassment by a
former supervisor during the former employee’s one year of
employment.  The former employee alleges being subjected to verbal and
physical harassment.  The former employee is seeking compensatory
damages and punitive damages, attorneys' fees and costs. The dispute will be
submitted for resolution to an arbitrator who was recently selected. 
No date has been set for the hearing before the arbitrator.  We are not
able to evaluate the likelihood of an unfavorable outcome nor can we estimate a
range of potential loss in the event of an unfavorable outcome at the present
time.  If resolved unfavorably to us, this litigation could have a
material adverse effect on our financial condition.





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





Item
1A. Risk
Factors.





There were no material changes to the
risk factors disclosed in our Annual Report on Form 10-K for the year ended
March 29, 2009 (the “Annual Report”).  Our short- and long-term
success is subject to many factors that are beyond our
control.  Stockholders and prospective stockholders in the Company
should consider carefully the risk factors set forth in Part I,
“Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Factors That May Affect Future Results,” as well as the
risk factors set forth in the Annual Report.  Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.  This Report on Form 10-Q contains
forward-looking statements, which are subject to a variety of risks and
uncertainties.  Our actual results could differ materially from those
anticipated in these forward-looking statements.





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





Not
Applicable.





Item
3.    Defaults Upon Senior
Securities.





Not Applicable.





Item 4.   
Submission
of Matters to a Vote of Security Holders.





On
September 15, 2009, we held our 2009 annual meeting of stockholders. At the
annual meeting, there were 12,359,990 shares of Class A Common Stock and
1,763,292 shares of Class B Common Stock entitled to vote.  10,572,989
shares of Class A Common Stock and 1,287,703 shares of Class B Common Stock were
represented at the meeting in person or by proxy.  Each stockholder is
entitled to 1/20th of one
vote for each share of Class A Common Stock and one vote for each share of Class
B Common Stock.




24





The
following summarizes the votes for those matters submitted to our stockholders
for action at the annual meeting:




1.
            Amendments
      of the Certificate of Incorporation and the Bylaws.  To
      adopt proposed amendments to the Company's Amended and Restated
      Certificate of Incorporation (the "Certificate of Incorporation") and the
      Amended and Restated Bylaws (the "Bylaws") to declassify the Board of
      Directors and to provide for the annual election of all
      directors.




For
                  Against
                  Abstain1,805,775
                  10,917
                  34




2.
            Election of
      Directors.  To elect
      six persons to the Board of Directors, each to serve until the next annual
      meeting of stockholders, and until their respective successors have been
      duly elected and qualified.  One of the directors (the
      "Class A Director") was elected by the holders of the Class A
      Common Stock voting as a separate class, and the other directors were
      elected by the holders of the Class A Common Stock and the holders of
      the Class B Common Stock voting together as a single
      class.




Director
                    
                    For
                    
                    WithheldJohn
      R. Attwood *
                    
                    527,527
                    
                    1,123Craig
      L. Levra
                    
                    1,791,323
                    
                    25,403Donald
      J. Howard
                    
                    1,791,584
                    
                    25,142Eric
      S. Olberz
                    
                    1,791,133
                    
                    25,593Frederick
      H. Schneider
                    
                    1,791,584
                    
                    25,142Kevin
      J. Ventrudo
                    
                    1,791,450
                    
                    25,276*
      Class A Director




3.
            Approval of
      Option Exchange Program.To authorize the Board of Directors to offer to exchange certain
      outstanding employee options to purchase shares of Class A Common Stock
      for stock options of approximately equivalent value in the aggregate based
      on the closing market price of the Class A Common Stock on the date the
      new options are granted.




For
                      Against
                      Abstain
                      Non-Votes1,377,243
                      102,979
                      2,028
                      334,476





4.
            Ratification
      of Appointment of Independent Auditors.To
      ratify  the appointment of Moss Adams LLP as the Company's
      independent registered public accounting firm for the fiscal year ending
      March 28, 2010.




For
                  Against
                  Abstain1,802,519
                  1,433
                  12,774





25




Item
5.    Other
Information.





Stockholder Proposals





Under
certain circumstances, stockholders are entitled to present proposals at
stockholder meetings.  Securities and Exchange Commission (“SEC”)
rules provide that any such proposal to be included in the proxy statement for
the Company’s 2010 annual meeting of stockholders must be received by the
Secretary of the Company at the Company’s office at One Sport Chalet Drive, La
Canada, California 91011 not less than 120 calendar days before the date of the
Company’s proxy statement released to stockholders in connection with the 2009
annual meeting in a form that complies with applicable
regulations.  The date of the Company’s proxy statement for the 2009
annual meeting was August 20, 2009.  If the date of the 2010 annual
meeting is advanced or delayed more than 30 days from the date of the 2009
annual meeting, then the deadline for stockholder proposals intended to be
included in the proxy statement for the 2010 annual meeting is a reasonable time
before the Company begins to print and mail the proxy statement for the 2010
annual meeting.





SEC rules
also govern a company's ability to use discretionary proxy authority with
respect to stockholder proposals that were not submitted by the stockholders in
time to be included in the proxy statement.  SEC rules provide that if
a stockholder proposal is not submitted to the Company at least 45 calendar days
before the date on which the Company first mailed the Company’s proxy statement
for the 2009 annual meeting, the proxies solicited by the Board for the 2010
annual meeting of stockholders will confer authority on the proxyholders to vote
the shares in accordance with the recommendations of the Board if the proposal
is presented at the 2010 annual meeting of stockholders without any discussion
of the proposal in the proxy statement for such meeting.  The Company
first mailed the proxy statement for the 2009 annual meeting to stockholders on
August 20, 2009.  If the date of the 2010 annual meeting is advanced
or delayed more than 30 days from the date of the 2009 annual meeting, then the
stockholder proposal must not have been submitted to the Company within a
reasonable time before the Company mails the proxy statement for the 2010 annual
meeting.





The 2010 annual meeting of stockholders
is presently expected to be held on or about August 10, 2010.  Upon
any determination that the date of the 2010 annual meeting will be advanced or
delayed from this date, the Company will disclose the change in the earliest
practical Quarterly Report on Form 10-Q.





Item
6.    Exhibits.





Exhibits:





3.1
            Certificate
      of Incorporation restated as of November 4,
2009





3.2
            Bylaws
      of Sport Chalet, Inc. amended as of September 15,
  2009





4.1
            Form
      of Certificate for Class A Common Stock, par value $0.01 per share
      (incorporated by reference to Exhibit 4.1 to the Company's Form 8-A filed
      on September 29, 2005)





4.2
              Form
      of Certificate for Class B Common Stock, par value $0.01 per share
      (incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed
      on September 29, 2005)31.1
              Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  200231.2
              Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232.1
              Certification
      Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002




26


SIGNATURE




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




SPORT
      CHALET, INC.DATE:    November
      6, 2009
                        By:
                        /s/ Howard
      K. KaminskyHoward
      K. Kaminsky
                          Executive
      Vice President-Finance,
                          Chief
      Financial Officer and Secretary
                          (On
      behalf of the Registrant and as
                          Principal
      Financial and Accounting Officer)