UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q


(Mark
One)





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





For the
quarterly period ended June 28, 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 August
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 INFORMATIONPageItem
      1.
                                                  Financial
      Statements
                                                  3Item
      2.
                                                  Management’s
      Discussion and Analysis of Financial Condition and
      Results of Operations
                                                  12Item
      3.
                                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                                  22Item
      4T.
                                                  Controls
      and Procedures
                                                  22PART
      II – OTHER INFORMATIONItem
      1.
                                                  Legal
      Proceedings
                                                  23Item
      1A.
                                                  Risk
      Factors
                                                  23Item
      2.
                                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                  23Item
      3.
                                                  Defaults
      Upon Senior Securities
                                                  23Item
      4.
                                                  Submission
      of Matters to a Vote of Security Holders
                                                  23Item
      5.
                                                  Other
      Information
                                                  23Item
      6.
                                                  Exhibits
                                                  24


2





PART
I – FINANCIAL INFORMATION
 
 Item
1.  Financial
Statements.
 
 SPORT
CHALET, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 Three
      months endedJune
      28, 2009
                          
                          
                          June
      29, 2008(in
      thousands, except per share amounts)Net
      sales
                          
                          $
                          79,403
                          
                          
                          $
                          87,120Cost
      of goods sold, buying andoccupancy
      costs
                          
                          
                          58,413
                          
                          
                          
                          64,412Gross
      profit
                          
                          
                          20,990
                          
                          
                          
                          22,708Selling,
      general andadministrative
      expenses
                          
                          
                          19,937
                          
                          
                          
                          25,969Depreciation
      and amortization
                          
                          
                          3,456
                          
                          
                          
                          3,611Loss
      from operations
                          
                          
                          (2,403
                          )
                          
                          
                          (6,872
                          )Interest
      expense
                          
                          
                          581
                          
                          
                          
                          657Loss
      before taxes
                          
                          
                          (2,984
                          )
                          
                          
                          (7,529
                          )Income
      tax benefit
                          
                          
                          -
                          
                          
                          
                          (3,003
                          )Net
      loss
                          
                          $
                          (2,984
                          )
                          
                          $
                          (4,526
                          )Loss
      per share:Basic
                          
                          $
                          (0.21
                          )
                          
                          $
                          (0.32
                          )Diluted
                          
                          $
                          (0.21
                          )
                          
                          $
                          (0.32
                          )Weighted
      average number ofcommon
      shares outstanding:Basic
                          
                          
                          14,123
                          
                          
                          
                          14,123Diluted
                          
                          
                          14,123
                          
                          
                          
                          14,123
 
 See
accompanying notes.
  3
 SPORT
CHALET, INC.
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 June
      28,
                      
                      
                      March
      29,2009
                      
                      
                      2009(Unaudited)Assets
                      
                      (in
      thousands, except share amounts)Current
      assets:Cash
      and cash equivalents
                      
                      $
                      290
                      
                      
                      $
                      290Accounts
      receivable, net
                      
                      
                      2,724
                      
                      
                      
                      1,434Merchandise
      inventories
                      
                      
                      99,704
                      
                      
                      
                      88,431Prepaid
      expenses and other current assets
                      
                      
                      1,206
                      
                      
                      
                      2,178Income
      tax receivable
                      
                      
                      3
                      
                      
                      
                      1,004Total
      current assets
                      
                      
                      103,927
                      
                      
                      
                      93,337Fixed
      assets, net
                      
                      
                      54,470
                      
                      
                      
                      57,718Total
      assets
                      
                      $
                      158,397
                      
                      
                      $
                      151,055Liabilities
      and stockholders' equityCurrent
      liabilities:Accounts
      payable
                      
                      $
                      36,502
                      
                      
                      $
                      31,083Loan
      payable to bank
                      
                      
                      49,789
                      
                      
                      
                      39,140Salaries
      and wages payable
                      
                      
                      2,719
                      
                      
                      
                      4,150Other
      accrued expenses
                      
                      
                      15,364
                      
                      
                      
                      19,379Total
      current liabilities
                      
                      
                      104,374
                      
                      
                      
                      93,752Deferred
      rent
                      
                      
                      24,830
                      
                      
                      
                      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 atJune
      28, 2009 and March 29, 2009
                      
                      
                      124
                      
                      
                      
                      124Class
      B Common Stock, $.01 par value:Authorized
      shares - 2,000,000Issued
      and outstanding shares – 1,763,321 atJune
      28, 2009 and March 29, 2009
                      
                      
                      18
                      
                      
                      
                      18Additional
      paid-in capital
                      
                      
                      34,549
                      
                      
                      
                      34,458Accumulated
      deficit
                      
                      
                      (5,498
                      )
                      
                      
                      (2,514
                      )Total
      stockholders’ equity
                      
                      
                      29,193
                      
                      
                      
                      32,086Total
      liabilities and stockholders’ equity
                      
                      $
                      158,397
                      
                      
                      $
                      151,055
 
 See
accompanying notes.
  4
 SPORT
CHALET, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 
 Three
      months endedJune
      28, 2009
                                  
                                  
                                  June
      29, 2008(in
      thousands)Operating
      activitiesNet
      loss
                                  
                                  $
                                  (2,984
                                  )
                                  
                                  $
                                  (4,526
                                  )Adjustments
      to reconcile net loss to net cashprovided
      by operating activities:Depreciation
      and amortization
                                  
                                  
                                  3,456
                                  
                                  
                                  
                                  3,611Share-based
      compensation
                                  
                                  
                                  91
                                  
                                  
                                  
                                  72Deferred
      income taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,418
                                  )Changes
      in operating assets and liabilities:Accounts
      receivable
                                  
                                  
                                  (1,290
                                  )
                                  
                                  
                                  (1,149
                                  )Merchandise
      inventories
                                  
                                  
                                  (11,273
                                  )
                                  
                                  
                                  (7,441
                                  )Prepaid
      expenses and other current assets
                                  
                                  
                                  972
                                  
                                  
                                  
                                  1,128Income
      tax receivable
                                  
                                  
                                  1,001
                                  
                                  
                                  
                                  1,405Accounts
      payable
                                  
                                  
                                  2,327
                                  
                                  
                                  
                                  9,063Salaries
      and wages payable
                                  
                                  
                                  (1,431
                                  )
                                  
                                  
                                  (1,430
                                  )Other
      accrued expenses
                                  
                                  
                                  (4,015
                                  )
                                  
                                  
                                  4,510Deferred
      rent
                                  
                                  
                                  (387
                                  )
                                  
                                  
                                  (188
                                  )Net
      cash (used in) provided by operating activities
                                  
                                  
                                  (13,533
                                  )
                                  
                                  
                                  637Investing
      activitiesPurchase
      of fixed assets
                                  
                                  
                                  (208
                                  )
                                  
                                  
                                  (5,748
                                  )Net
      cash used in investing activities
                                  
                                  
                                  (208
                                  )
                                  
                                  
                                  (5,748
                                  )Financing
      activitiesProceeds
      from bank borrowing
                                  
                                  
                                  99,405
                                  
                                  
                                  
                                  30,121Repayments
      of bank borrowing
                                  
                                  
                                  (88,756
                                  )
                                  
                                  
                                  (25,472
                                  )Checks
      drawn in excess of cash balances
                                  
                                  
                                  3,092
                                  
                                  
                                  
                                  -Tax
      benefit on employee stock options
                                  
                                  
                                  -
                                  
                                  
                                  
                                  10Net
      cash provided by financing activities
                                  
                                  
                                  13,741
                                  
                                  
                                  
                                  4,659Decrease
      in cash and cash equivalents
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (452
                                  )Cash
      and cash equivalents at beginning of period
                                  
                                  
                                  290
                                  
                                  
                                  
                                  3,894Cash
      and cash equivalents at end of period
                                  
                                  $
                                  290
                                  
                                  
                                  $
                                  3,442Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the period for:Income
      taxes
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Interest
                                  
                                  
                                  598
                                  
                                  
                                  
                                  318
 
 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 period presented have been
included in the interim period.
 
 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, store relocation and
remodeling.  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 our cash flow from operations and borrowing
capacity.  Comparable store sales for the past eight quarters from the
second quarter of fiscal 2008 to the first quarter of fiscal 2010 are -2.2%,
-6.9%, -8.8%, -11.1%, -6.7%, -15.4%, -17.7% and -14.7%,
respectively.  More recently, for our second quarter through August 2,
2009, we have experienced a 10.4% decline in comparable store
sales.  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 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 – 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.
 
 6
 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 June 28, 2009, our net deferred tax assets and
related valuation allowance totaled $25.3 million.  The Company has
federal and state net operating loss carryforwards of $37.2 million and $36.5
million, respectively, 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.
 
 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:
 
 7
 Three
      months endedJune
      28, 2009
                                
                                
                                June
      29, 2008(in
      thousands, except per share amounts)Net
      loss
                                
                                $
                                (2,984
                                )
                                
                                $
                                (4,526
                                )Weighted
      average number of common shares:Basic
                                
                                
                                14,123
                                
                                
                                
                                14,123Effect
      of dilutive securities-stock options
                                
                                
                                -
                                
                                
                                
                                -Diluted
                                
                                
                                14,123
                                
                                
                                
                                14,123Class
      A and Class B Loss per share:Basic
                                
                                $
                                (0.21
                                )
                                
                                $
                                (0.32
                                )Effect
      of dilutive securities-stock options
                                
                                
                                -
                                
                                
                                
                                -Diluted
                                
                                $
                                (0.21
                                )
                                
                                $
                                (0.32
                                )
 
 An aggregate of 1,620,155 and 1,669,555
options for the three months ended June 28, 2009 and June 29, 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, $45.0 million will be available to the Company, increasing
up 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
revolver limit up 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 a $10.0 million
maximum 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 June 28, 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,
a one-time, non-refundable commitment fee of $350,000 and an early termination
fee of 1.50% in year one, 0.75% in year two and 0.25% in year three which is
waived if the loan is refinanced by the Lender or any of its
affiliates.  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 a covenant that we maintain a minimum monthly
EBITDA.
 
 6.           Share-based
Compensation
 
 Total
share-based compensation expense and the related income tax benefit recognized
for the three months ended June 28, 2009 and June 29, 2008:
 
 Three
      months endedJune
      28, 2009
                                  
                                  
                                  June
      29, 2008(in
      thousands)Compensation
      expense
                                  
                                  $
                                  91
                                  
                                  
                                  $
                                  44Income
      tax benefit
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  18
 
 8
 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 three months ended June
28, 2009 and June 29, 2008, the following weighted average assumptions were used
to estimate the fair value for stock options granted in that
period:
 
 Three
      months endedJune
      28, 2009
                            
                            
                            June
      29, 2008Risk-free
      interest rate
                            
                            
                            2.1
                            %
                            
                            
                            2.5
                            %Expected
      volatility
                            
                            
                            80.9
                            %
                            
                            
                            38.9
                            %Expected
      dividend yield
                            
                            
                            0
                            %
                            
                            
                            0
                            %Expected
      life in years
                            
                            
                            7.5
                            
                            
                            
                            7.5
 
 The
following table sets forth information concerning stock option activity for the
three months ended June 28, 2009:
 
 Options
                                                      
                                                      
                                                      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
                                                      
                                                      
                                                      18,000
                                                      
                                                      
                                                      
                                                      0.18Exercised
                                                      
                                                      
                                                      -Forfeited
      or expired
                                                      
                                                      
                                                      (305,800
                                                      )
                                                      
                                                      
                                                      2.99Outstanding
      as of June 28, 2009
                                                      
                                                      
                                                      1,620,155
                                                      
                                                      
                                                      $
                                                      5.39
                                                      
                                                      
                                                      
                                                      5.9
                                                      
                                                      
                                                      $
                                                      112
 
 The
aggregate intrinsic value in the table above is based on the Company’s closing
stock price of $2.50 and $3.41 for Class A and Class B, respectively, as of the
last trading day of the period ended June 28, 2009.
 
 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.
 
 In December 2007, the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 141(R), “Business Combinations” (“FAS 141(R)”), to
replace FAS 141, “Business Combinations.”  FAS 141(R) requires use of
the acquisition method of accounting, defines the acquirer, establishes the
acquisition date and broadens the scope to all transactions and other events in
which one entity obtains control over one or more other
businesses.  This statement is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008 with earlier
adoption prohibited.  While the adoption of FAS 141(R) has not had a
material impact to our consolidated financial statements, the impact of the
accounting change could be material for business combinations which may be
consummated subsequent thereto.
 
 9
 In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“FAS 160”).  FAS 160 establishes accounting
and reporting standards for the non-controlling interest in a subsidiary and for
the retained interest and gain or loss when a subsidiary is
deconsolidated.  This statement is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008 with earlier
adoption prohibited.  We currently do not have any non-controlling
interests or deconsolidated subsidiaries and therefore FAS 160 will not have any
impact on our consolidated financial statements.
 
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” This pronouncement is effective
for interim and annual reporting periods ending after June 15,
2009.  FSP FAS 157-4 was effective for the Company’s first quarter of
2009.  The adoption of FSP FAS 157-4 in the first quarter of 2009 did
not have any impact on the Company’s consolidated financial
statements.
 
 In
April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board
(“APB”) 28-1, “Interim Disclosures about Fair Value of Financial
Instruments.” These pronouncements amend SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments” to require disclosures about
fair value of financial instruments, including method(s) and significant
assumptions used to estimate the fair value in interim financial statements as
well as in annual financial statements. FAS 107-1 and APB 28-1 are effective for
interim and annual periods ending after June 15, 2009 and the Company
determined that no additional disclosures were required at this
time.
 
 In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” These pronouncements are
intended to provide greater clarity to investors about the credit and noncredit
component of an other-than-temporary impairment (“OTTI”) event and to more
effectively communicate when an OTTI event has occurred. FSP FAS 115-2 and FAS
124-2 apply to debt securities and require that the total OTTI be presented in
the statement of earnings with an offset for the amount of impairment that is
recognized in other comprehensive income, which is the noncredit component.
Noncredit component losses are to be recorded in other comprehensive income if
an investor can assess that (a) it does not have the intent to sell or (b)
it is not more likely than not that it will have to sell the security prior to
its anticipated recovery. FSP FAS 115-2 and FAS 124-2 are effective for interim
and annual periods ending after June 15, 2009 and these pronouncements did
not have any impact on the Company’s consolidated financial
statements.
 
 The
Company adopted FASB SFAS No. 165, “Subsequent Events” (“FAS165”) in the first quarter of
fiscal 2010.  This statement 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.FAS165
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
 In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles” (“FAS
168”).  FAS 168 will become the single source of authoritative
nongovernmental U.S.  GAAP, superseding existing FASB, American
Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force
(“EITF”), and related accounting literature.  FAS 168 reorganizes the
thousands of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure.  Also included is relevant
Securities and Exchange Commission guidance organized using the same topical
structure in separate sections.  FAS 168 will be effective for
financial statements issued for reporting periods that end after September 15,
2009.
 
 
 11
  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 June 28, 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.
 
 12
 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 eight of the past nine
quarters.  Comparable store sales for the past eight quarters from the
second quarter of fiscal 2008 to the first quarter of fiscal 2010 are -2.2%,
-6.9%, -8.8%, -11.1%, -6.7%, -15.4%, -17.7% and -14.7%,
respectively.  More recently, for our second quarter through August 2,
2009, we have experienced a 10.4% decline in comparable store
sales.  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 are 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 cost structures
in an effort to modify our business model to make the Company more efficient,
more focused and better able to navigate the difficult
environment.  We are focused more intently than ever on reducing
operating expenses and improving liquidity through the following core
initiatives and their savings realized for the first quarter of fiscal 2010 as
compared to first quarter of fiscal 2009:
 
 ·
              Improved
      inventory management and saved $1.6 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 $0.6 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 $3.4 million.  Based on current
      trends, we anticipate saving $10.7 million in fiscal
  2010.
  ·
              Reduced
      all expense categories and saved $3.7 million primarily from advertising,
      professional fees and repairs and maintenance. We anticipate saving $9.4
      million in fiscal 2010.
 
 13
 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 – 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
 
 Three
Months Ended June 28, 2009 Compared to June 29, 2008
 
 The
following table sets forth statements of operations data and relative
percentages of net sales for the three months ended June 28, 2009 compared to
three months ended June 29, 2008 (dollar amounts in thousands, except per share
amounts):
 
 Three
      months endedJune
      28, 2009
                                                                                  
                                                                                  
                                                                                  June
      29, 2008
                                                                                  
                                                                                  
                                                                                  Dollar
                                                                                  
                                                                                  
                                                                                  PercentageAmount
                                                                                  
                                                                                  
                                                                                  Percent
                                                                                  
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  
                                                                                  Percent
                                                                                  
                                                                                  
                                                                                  Change
                                                                                  
                                                                                  
                                                                                  ChangeNet
      sales
                                                                                  $
                                                                                  79,403
                                                                                  
                                                                                  
                                                                                  
                                                                                  100.0
                                                                                  %
                                                                                  
                                                                                  $
                                                                                  87,120
                                                                                  
                                                                                  
                                                                                  
                                                                                  100.0
                                                                                  %
                                                                                  
                                                                                  $
                                                                                  (7,717
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (8.9
                                                                                  %)Gross
      profit
                                                                                  
                                                                                  20,990
                                                                                  
                                                                                  
                                                                                  
                                                                                  26.4
                                                                                  %
                                                                                  
                                                                                  
                                                                                  22,708
                                                                                  
                                                                                  
                                                                                  
                                                                                  26.1
                                                                                  %
                                                                                  
                                                                                  
                                                                                  (1,718
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (7.6
                                                                                  %)Selling,
      general andadministrative
      expenses
                                                                                  
                                                                                  19,937
                                                                                  
                                                                                  
                                                                                  
                                                                                  25.1
                                                                                  %
                                                                                  
                                                                                  
                                                                                  25,969
                                                                                  
                                                                                  
                                                                                  
                                                                                  29.8
                                                                                  %
                                                                                  
                                                                                  
                                                                                  (6,032
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (23.2
                                                                                  %)Depreciation
      and amortization
                                                                                  
                                                                                  3,456
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.4
                                                                                  %
                                                                                  
                                                                                  
                                                                                  3,611
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.1
                                                                                  %
                                                                                  
                                                                                  
                                                                                  (155
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (4.3
                                                                                  %)Loss
      from operations
                                                                                  
                                                                                  (2,403
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (3.0
                                                                                  %)
                                                                                  
                                                                                  
                                                                                  (6,872
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (7.9
                                                                                  %)
                                                                                  
                                                                                  
                                                                                  4,469
                                                                                  
                                                                                  
                                                                                  
                                                                                  *Interest
      expense
                                                                                  
                                                                                  581
                                                                                  
                                                                                  
                                                                                  
                                                                                  0.7
                                                                                  %
                                                                                  
                                                                                  
                                                                                  657
                                                                                  
                                                                                  
                                                                                  
                                                                                  0.8
                                                                                  %
                                                                                  
                                                                                  
                                                                                  (76
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (11.6
                                                                                  %)Loss
      before taxes
                                                                                  
                                                                                  (2,984
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (3.8
                                                                                  %)
                                                                                  
                                                                                  
                                                                                  (7,529
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (8.6
                                                                                  %)
                                                                                  
                                                                                  
                                                                                  4,545
                                                                                  
                                                                                  
                                                                                  
                                                                                  *Income
      tax benefit
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  0.0
                                                                                  %
                                                                                  
                                                                                  
                                                                                  (3,003
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (3.4
                                                                                  %)
                                                                                  
                                                                                  
                                                                                  3,003
                                                                                  
                                                                                  
                                                                                  
                                                                                  *Net
      loss
                                                                                  
                                                                                  (2,984
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (3.8
                                                                                  %)
                                                                                  
                                                                                  
                                                                                  (4,526
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (5.2
                                                                                  %)
                                                                                  
                                                                                  
                                                                                  1,542
                                                                                  
                                                                                  
                                                                                  
                                                                                  *Class
      A and Class B Loss per share:Basic
                                                                                  $
                                                                                  (0.21
                                                                                  )
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (0.32
                                                                                  )
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  $
                                                                                  0.11
                                                                                  
                                                                                  
                                                                                  
                                                                                  *Diluted
                                                                                  $
                                                                                  (0.21
                                                                                  )
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (0.32
                                                                                  )
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  $
                                                                                  0.11
                                                                                  
                                                                                  
                                                                                  
                                                                                  **Percentage
      change not meaningful.
 
 Sales decreased $7.7 million, or 8.9%,
to $79.4 millionfor
the three months ended June 28, 2009 from $87.1 million for the first quarter of
last year.  Sales from four new stores, not included in the same store
sales calculation, resulted in a $4.0 million increase in sales, or
5.0%.  This increase, along with an increase in Team Sales of $0.8
million, was offset by a same store sales decrease of $12.5 million, or
14.7%.
 
 14
 Gross profit decreased $1.7 million, or
7.6%, as a result of the sales decrease of $7.7 million.  Gross profit
benefitted from reductions in markdowns of $1.6 million and in rent of $0.6
million.  As a percent of sales, gross profit increased 30 basis
points to 26.4% from 26.1%, primarily as a result of decreased
markdowns.  Rent decreased by $0.6 million compared to the first
quarter of fiscal 2009; however, rent expense as a percent of sales increased
due to the $7.7 million sales decrease.
 
 Selling,
general and administrative expenses decreased $6.0 million, or 23.2%, as
expenses related to new stores of $2.0 million were offset by expense reductions
of $7.1 million.  Expense reduction initiatives include $3.4 million
in labor savings from stores, corporate office overhead and the distribution
center.  Additional savings in other areas include advertising of $2.1
million, professional fees of $0.6 million and repairs and maintenance of $0.5
million.  As a percent of sales, SG&A decreased 470 basis points
to 25.1% from 29.8% in the first 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
June 28, 2009, our net deferred tax assets and related valuation allowance
totaled $25.3 million.  The Company has federal and state net
operating loss carryforwards of $37.2 million and $36.5 million, respectively,
which can be carried forward for a period of 20 years.
 
 Net loss
for the first quarter of fiscal 2010 was $3.0 million, or $0.21 per diluted
share, compared to a net loss of $4.5 million, or $0.32 per diluted share, for
the first quarter of fiscal 2009.  The net loss for the first quarter
of fiscal 2010 did not reflect any net tax benefit (because of tax valuation
allowances), while the first quarter of fiscal 2009 reflected a net tax benefit
of $3.0 million, or $0.21 per share.  Without the tax benefit, the net
loss for the first quarter of fiscal 2009 would have been $7.5 million, or $0.53
per share.
 
 Liquidity
and Capital Resources
 
 Historically
our primary capital requirements for inventory, technology infrastructure, new
stores, store relocation and remodeling have been funded by cash from
operations, credit terms from vendors and bank borrowing.  For the
foreseeable future our ability to continue our operations and business is
dependent on our cash flow from operations and borrowing
capacity.  Comparable store sales for the past eight quarters from the
second quarter of fiscal 2008 to the first quarter of fiscal 2010 are -2.2%,
-6.9%, -8.8%, -11.1%, -6.7%, -15.4%, -17.7% and -14.7%,
respectively.  More recently, for our second quarter through August 2,
2009, we have experienced a 10.4% decline in comparable store
sales.  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 are 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 cost structures
in an effort to modify our business model to make the Company more efficient,
more focused and better able to navigate the difficult
environment.  We are focused more intently than ever on reducing
operating expenses and improving liquidity through the following core
initiatives and their savings realized for the first quarter of fiscal 2010 as
compared to first quarter of fiscal 2009:
 
 15
 ·
              Improved
      inventory management and saved $1.6 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 $0.6 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 $3.4 million.  Based on current
      trends, we anticipate saving $10.7 million in fiscal
  2010.
 
 ·
              Reduced
      all expense categories and saved $3.7 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 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 – 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 three months ended June 28, 2009 and
June 29, 2008:
 
 Three
      months endedJune
      28, 2009
                            
                            
                            June
      29, 2008(in
      thousands)Net
      loss
                            
                            $
                            (2,984
                            )
                            
                            $
                            (4,526
                            )Depreciation
      and amortization
                            
                            
                            3,456
                            
                            
                            
                            3,611Deferred
      income taxes
                            
                            
                            -
                            
                            
                            
                            (4,418
                            )Merchandise
      inventories
                            
                            
                            (11,273
                            )
                            
                            
                            (7,441
                            )Accounts
      payable
                            
                            
                            2,327
                            
                            
                            
                            9,063Other
      accrued expenses
                            
                            
                            (4,015
                            )
                            
                            
                            4,510Other
                            
                            
                            (1,044
                            )
                            
                            
                            (162
                            )Net
      cash (used in) provided by operating activities
                            
                            $
                            (13,533
                            )
                            
                            $
                            637
 
 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.  Average inventory per store slightly increased 0.7% to $1.81
million from $1.80 million at the end of the first quarter of fiscal 2010 and
fiscal 2009, respectively.  Given our recent financial performance and
the overall uncertainty during the fourth quarter of fiscal 2009, we were
anticipating reductions in available credit from our vendors and therefore had
sought merchandise from alternate vendors.  However, we received
better than expected support from our vendor community and as a result
experienced an increase in average inventory per store. We anticipate reducing
average inventory per store over the remainder of this fiscal
year.  The increase of $11.3 million in the three months ended June
28, 2009 and the increase of $7.4 million in the three months ended June 29,
2008 were primarily due to seasonality, as sales increase significantly from our
first quarter to our second quarter.
 
 16
 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, many of which were brought current during the first quarter of
fiscal 2010.  This is the primary reason for an increase of only $2.3
million in accounts payable compared to the increase in inventory of $11.3
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
June 28, 2009, our net deferred tax assets and related valuation allowance
totaled $25.3 million.  The Company has federal and state net
operating loss carryforwards of $37.2 million and $36.5 million, respectively,
which can be carried forward for a period of 20 years. A new 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.
 
 Net cash used in investing activities
is primarily for capital expenditures as shown below:
 
 Three
      months endedJune
      28, 2009
                              
                              
                              June
      29, 2008(in
      thousands)New
      stores
                              
                              $
                              -
                              
                              
                              $
                              3,180Remodels/Relocations
                              
                              
                              -
                              
                              
                              
                              1,439Existing
      stores
                              
                              
                              204
                              
                              
                              
                              244Information
      systems
                              
                              
                              4
                              
                              
                              
                              708Other
                              
                              
                              -
                              
                              
                              
                              177Total
                              
                              $
                              208
                              
                              
                              $
                              5,748
 
 We did not open any new stores in the
three months ended June 28, 2009 compared to one new store 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
June 28, 2009 is $49.8 million compared to $39.1 million at the end of fiscal
2009.  The increase is primarily the result of cash used in
operations.
 
 17
 Under our
bank credit facility, $45.0 million will be available to the Company, increasing
up 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
revolver limit up 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 a $10.0 million
maximum 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 June 28, 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,
a one-time, non-refundable commitment fee of $350,000 and an early termination
fee of 1.50% in year one, 0.75% in year two and 0.25% in year three which is
waived if the loan is refinanced by the Lender or any of its
affiliates.  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 a covenant that we maintain a minimum monthly
EBITDA.
 
 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 quarter 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 June 28, 2009:
 
 18
  Payment
      due by periodLess
      than
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                More
      thanTotal
                                                                
                                                                
                                                                1
      year
                                                                
                                                                
                                                                2-3
      year
                                                                
                                                                
                                                                4-5
      year
                                                                
                                                                
                                                                5
      yearsContractual
      Obligations
                                                                
                                                                (in
      thousands)Operating
      Leases (a)
                                                                
                                                                $
                                                                229,743
                                                                
                                                                
                                                                $
                                                                32,518
                                                                
                                                                
                                                                $
                                                                63,464
                                                                
                                                                
                                                                $
                                                                53,937
                                                                
                                                                
                                                                $
                                                                79,824Employment
      Contracts
                                                                
                                                                
                                                                806
                                                                
                                                                
                                                                
                                                                170
                                                                
                                                                
                                                                
                                                                339
                                                                
                                                                
                                                                
                                                                297
                                                                
                                                                
                                                                
                                                                -Total
      Contractual Obligations
                                                                
                                                                $
                                                                230,549
                                                                
                                                                
                                                                $
                                                                32,688
                                                                
                                                                
                                                                $
                                                                63,803
                                                                
                                                                
                                                                $
                                                                54,234
                                                                
                                                                
                                                                $
                                                                79,824
 (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.
 
 Generally,
our purchase obligations are cancelable 45 days prior to shipment from our
vendors.  Letters of credit amounting to approximately $1.85 million
relating to workers’ compensation insurance were outstanding as of June 28, 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.
 
 19
 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.
 
 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.
 
 20
 ·
              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.
 
 ·
              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.
  21
  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, have evaluated the Company’s
disclosure controls and procedures as of June 28, 2009, and have concluded that
these controls and procedures are effective 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.
 
 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.
  22
  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 former employee has
recently requested to submit her claims to arbitration.  We have just
begun a review of the allegations, and 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.
 
 Not Applicable.
 
 Item
5.  Other
Information.
 
 The Company’s annual meeting of
stockholders is scheduled for September 15, 2009 at 9 a.m. at the Company’s
headquarters at One Sport Chalet Drive, La Canada,
CA  91011.  Holders of record of the Common Stock of the
Company at the close of business on August 7, 2009 are entitled to notice
of and to vote, in person or by proxy, at this meeting.
 
 23
 Item
6.  Exhibits.
 
 Exhibits:
 
 3.1
              Amended
      and Restated Certificate of Incorporation (incorporated by reference to
      Exhibit 3.1 of the Company’s Registration Statement on Form S-1, File No.
      33-53120)
 
 3.2
              Bylaws
      of Sport Chalet, Inc. amended as of November 5, 2007 (incorporated by
      reference to Exhibit 3.2 of the Company’s Form 10-Q filed on November 9,
      2007)
 
 3.3
              Certificate
      of Amendment to the Amended and Restated Certificate of Incorporation of
      Sport Chalet, Inc. (incorporated by reference to Exhibit 3.1 of the
      Company’s Form 8-K filed on September 22,
2005)
 
 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
  24
  SIGNATURE
 
 
 Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
 
  SPORT
      CHALET, INC.DATE:                                August
      7, 2009
                            By:
                            /s/ Howard
      K. KaminskyHoward
      K. KaminskyExecutive
      Vice President-Finance,Chief
      Financial Officer and Secretary(On
      behalf of the Registrant and asPrincipal
      Financial and Accounting Officer)
  25