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 December 27, 2009





OR





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





For the
transition period from ______ to ______





Commission
File Number: 0-20736





Sport
      Chalet, Inc.(Exact
      name of registrant as specified in its charter)Delaware
            95-4390071(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer Identification No.)One
      Sport Chalet Drive, La Canada, CA  91011
              (Address
      of principal executive offices)   (Zip
  Code)(818)
      949-5300
              (Registrant’s
      telephone number, including area code)


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X]   No
[  ]





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).Yes
[  ]   No [  ]





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


Large
accelerated filer   [   ]    Accelerated
filer   [   ]


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




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





At
February 5, 2010, there were 12,359,990 shares of Class A Common Stock
outstanding and 1,763,321 shares of Class B Common Stock
outstanding.








SPORT CHALET,
INC.





Table
of Contents to Form 10-Q





PART I –
FINANCIAL INFORMATION


PageItem
      1.
              Financial
      Statements
              3Item
      2.
              Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
              12Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              25Item
      4T.
              Controls
      and Procedures
              25PART
      II – OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              26Item
      1A.
              Risk
      Factors
              26Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              26Item
      3.
              Defaults
      Upon Senior Securities
              26Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              26Item
      5.
              Other
      Information
              26Item
      6.
              Exhibits
              27










PART
I – FINANCIAL INFORMATION





Item
1.  Financial
Statements.





SPORT
CHALET, INC.





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)







13
      weeks ended
              
              
              39
      weeks endedDecember
      27, 2009
              
              
              December
      28, 2008
              
              
              December
      27, 2009
              
              
              December
      28, 2008(in
      thousands, except share amounts)Net
      sales
              
              $
              95,258
              
              
              $
              104,562
              
              
              $
              263,472
              
              
              $
              288,139Cost
      of goods sold, buying andoccupancy
      costs
              
              
              71,240
              
              
              
              81,237
              
              
              
              193,633
              
              
              
              216,510Gross
      profit
              
              
              24,018
              
              
              
              23,325
              
              
              
              69,839
              
              
              
              71,629Selling,
      general andadministrative
      expenses
              
              
              21,988
              
              
              
              29,107
              
              
              
              63,991
              
              
              
              83,582Impairment
      charge
              
              
              10,935
              
              
              
              10,730
              
              
              
              10,935
              
              
              
              10,730Depreciation
      and amortization
              
              
              3,192
              
              
              
              3,700
              
              
              
              9,922
              
              
              
              10,967Loss
      from operations
              
              
              (12,097
              )
              
              
              (20,212
              )
              
              
              (15,009
              )
              
              
              (33,650
              )Interest
      expense
              
              
              821
              
              
              
              571
              
              
              
              2,105
              
              
              
              1,650Loss
      before taxes
              
              
              (12,918
              )
              
              
              (20,783
              )
              
              
              (17,114
              )
              
              
              (35,300
              )Income
      tax (benefit) provision
              
              
              (9,118
              )
              
              
              11,593
              
              
              
              (9,118
              )
              
              
              5,823Net
      loss
              
              $
              (3,800
              )
              
              $
              (32,376
              )
              
              $
              (7,996
              )
              
              $
              (41,123
              )Loss
      per share:Basic
              
              $
              (0.27
              )
              
              $
              (2.29
              )
              
              $
              (0.57
              )
              
              $
              (2.91
              )Diluted
              
              $
              (0.27
              )
              
              $
              (2.29
              )
              
              $
              (0.57
              )
              
              $
              (2.91
              )Weighted
      average number ofcommon
      shares outstanding:Basic
              
              
              14,123
              
              
              
              14,123
              
              
              
              14,123
              
              
              
              14,123Diluted
              
              
              14,123
              
              
              
              14,123
              
              
              
              14,123
              
              
              
              14,123


See
accompanying notes.


3


SPORT
CHALET, INC.





CONDENSED
CONSOLIDATED BALANCE SHEETS







December
      27,
              
              
              March
      29,2009
              
              
              2009(Unaudited)Assets
              
              (in
      thousands, except share amounts)Current
      assets:Cash
      and cash equivalents
              
              $
              9,156
              
              
              $
              290Accounts
      receivable, net
              
              
              4,056
              
              
              
              1,434Merchandise
      inventories
              
              
              105,893
              
              
              
              88,431Prepaid
      expenses and other current assets
              
              
              1,035
              
              
              
              2,178Income
      tax receivable
              
              
              9,120
              
              
              
              1,004Total
      current assets
              
              
              129,260
              
              
              
              93,337Fixed
      assets, net
              
              
              37,484
              
              
              
              57,718Total
      assets
              
              $
              166,744
              
              
              $
              151,055Liabilities
      and stockholders' equityCurrent
      liabilities:Accounts
      payable
              
              $
              39,145
              
              
              $
              31,083Loan
      payable to bank
              
              
              56,162
              
              
              
              39,140Salaries
      and wages payable
              
              
              3,206
              
              
              
              4,150Other
      accrued expenses
              
              
              19,072
              
              
              
              19,379Total
      current liabilities
              
              
              117,585
              
              
              
              93,752Deferred
      rent
              
              
              24,743
              
              
              
              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 atDecember
      27, 2009 and March 29, 2009
              
              
              124
              
              
              
              124Class
      B Common Stock, $.01 par value:Authorized
      shares - 2,000,000Issued
      and outstanding shares – 1,763,321 atDecember
      27, 2009 and March 29, 2009
              
              
              18
              
              
              
              18Additional
      paid-in capital
              
              
              34,784
              
              
              
              34,458Accumulated
      deficit
              
              
              (10,510
              )
              
              
              (2,514
              )Total
      stockholders’ equity
              
              
              24,416
              
              
              
              32,086Total
      liabilities and stockholders’ equity
              
              $
              166,744
              
              
              $
              151,055


See
accompanying notes.


4


SPORT
CHALET, INC.





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)







39
      weeks endedDecember
      27, 2009
              
              
              December
      28, 2008(in
      thousands)Operating
      activitiesNet
      loss
              
              $
              (7,996
              )
              
              $
              (41,123
              )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
              
              
              9,922
              
              
              
              10,967Impairment
      charge
              
              
              10,935
              
              
              
              10,730Loss
      on disposal of equipment
              
              
              -
              
              
              
              179Share-based
      compensation
              
              
              326
              
              
              
              278Deferred
      income taxes
              
              
              -
              
              
              
              5,723Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (2,622
              )
              
              
              (1,953
              )Merchandise
      inventories
              
              
              (17,462
              )
              
              
              (22,473
              )Prepaid
      expenses and other current assets
              
              
              1,143
              
              
              
              3,715Income
      tax receivable
              
              
              (8,116
              )
              
              
              41Accounts
      payable
              
              
              8,062
              
              
              
              9,387Salaries
      and wages payable
              
              
              (944
              )
              
              
              (1,093
              )Other
      accrued expenses
              
              
              (307
              )
              
              
              9,718Deferred
      rent
              
              
              (474
              )
              
              
              1,408Net
      cash used in operating activities
              
              
              (7,533
              )
              
              
              (14,496
              )Investing
      activitiesPurchase
      of fixed assets
              
              
              (623
              )
              
              
              (14,404
              )Net
      cash used in investing activities
              
              
              (623
              )
              
              
              (14,404
              )Financing
      activitiesProceeds
      from bank borrowing
              
              
              287,276
              
              
              
              222,419Repayments
      of bank borrowing
              
              
              (270,254
              )
              
              
              (184,431
              )Tax
      benefit on employee stock options
              
              
              -
              
              
              
              10Net
      cash provided by financing activities
              
              
              17,022
              
              
              
              37,998Increase
      in cash and cash equivalents
              
              
              8,866
              
              
              
              9,098Cash
      and cash equivalents at beginning of period
              
              
              290
              
              
              
              3,894Cash
      and cash equivalents at end of period
              
              $
              9,156
              
              
              $
              12,992Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the period for:Income
      taxes
              
              $
              -
              
              
              $
              -Interest
              
              $
              1,820
              
              
              $
              1,129


See
accompanying notes.


5


SPORT
CHALET, INC.





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.           Description
of Business and Basis of Presentation





Sport Chalet, Inc. (the “Company”),
founded in 1959, is a leading operator of 55 full-service, specialty sporting
goods stores in California, Nevada, Arizona and Utah.  The Company has
33 locations in Southern California, eight in Northern California, two in
Central California, three in Nevada, eight in Arizona and one in
Utah.





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





The
accompanying condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2009.
The condensed consolidated financial data at March 29, 2009 is derived from
audited financial statements included in the Company’s Annual Report on Form
10-K for the year ended March 29, 2009.  Interim results are not
necessarily indicative of results for the full year.





The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes.  Actual results could
differ from those estimates.





The
Company has evaluated subsequent events through the issuance date of this Form
10-Q.





2.           Liquidity





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






FY
      2008
              
              FY
      2009
              
              FY
      2010Q1
              1.3%
              
              (11.1%)
              
              (14.7%)Q2
              (2.2%)
              
              (6.7%)
              
              (12.4%)Q3
              (6.9%)
              
              (15.4%)
              
              (10.8%)Q4
              (8.8%)
              
              (17.7%)


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





6


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 2 Management Discussion and Analysis of Financial
Condition and Results of Operations – Recent History following.





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, less
certain reserves.  A significant decrease in eligible inventory due to
the aging of inventory and/or an unfavorable inventory appraisal 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





On
November 6, 2009, the President of the United States signed into law the Worker,
Homeownership, and Business Assistance Act of 2009, which expands the net
operating loss (“NOL”) carryback period from two to five years, allowing us to
carryback the fiscal 2009 loss. As a result, we recorded a tax benefit of $9.1
million related to the portion of the 2009 NOL that was previously not carried
back, reduced the associated valuation allowance and increased our tax
receivable. We filed our carryback tax return in November 2009 and received our
federal refund in January 2010.





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 December 27, 2009, our net deferred tax assets and
related valuation allowance totaled $21.8 million.  The Company has
federal and state net operating loss carryforwards of approximately $13 million
and $38 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 years after fiscal 2008 remain open to examination
by the Internal Revenue Service.  The tax years after fiscal 2006
remain open to examination by state tax authorities.





7


4.           Loss
per Share





Loss per
share, basic, is computed based on the weighted average number of common shares
outstanding for the period.  Loss per share, diluted, is computed
based on the weighted average number of common and potentially dilutive common
equivalent shares outstanding for the period.  A reconciliation of the
numerators and denominators of the basic and diluted loss per share computations
are set forth below:




13
      weeks ended
              
              
              39
      weeks endedDecember
      27, 2009
              
              
              December
      28, 2008
              
              
              December
      27, 2009
              
              
              December
      28, 2008(in
      thousands, except share amounts)Net
      loss
              
              $
              (3,800
              )
              
              $
              (32,376
              )
              
              $
              (7,996
              )
              
              $
              (41,123
              )Weighted
      average number of common shares:Basic
              
              
              14,123
              
              
              
              14,123
              
              
              
              14,123
              
              
              
              14,123Effect
      of dilutive securities-stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
              
              
              14,123
              
              
              
              14,123
              
              
              
              14,123
              
              
              
              14,123Class
      A and Class B Loss per share:Basic
              
              $
              (0.27
              )
              
              $
              (2.29
              )
              
              $
              (0.57
              )
              
              $
              (2.91
              )Effect
      of dilutive securities-stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
              
              $
              (0.27
              )
              
              $
              (2.29
              )
              
              $
              (0.57
              )
              
              $
              (2.91
              )






An aggregate of 1,373,106 and 1,949,105
options for the 13 and 39 weeks ended December 27, 2009 and December 28, 2008,
respectively, are excluded from the computation of diluted loss per share as
their effect would have been anti-dilutive.





5.           Loan
Payable to Bank





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





8


6.           Share-based
Compensation





Total
share-based compensation expense and the related income tax benefit recognized
for the 13 and 39 weeks ended December 27, 2009 and December 28,
2008:




13
      weeks ended
              
              
              39
      weeks endedDecember
      27, 2009
              
              
              December
      28, 2008
              
              
              December
      27, 2009
              
              
              December
      28, 2008(in
      thousands)
              
              
              (in
      thousands)Compensation
      expense
              
              $
              132
              
              
              $
              88
              
              
              $
              325
              
              
              $
              278Income
      tax benefit
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -







The fair value of each option granted
is estimated on the date of grant using the Black-Scholes option valuation
model.  The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable.  In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility.  For the 13 and 39 weeks ended
December 27, 2009 and December 28, 2008, the following weighted average
assumptions were used to estimate the fair value for stock options granted in
that period:







13
      weeks ended
              
              39
      weeks endedDecember
      27, 2009
              
              December
      28, 2008
              
              December
      27, 2009
              
              December
      28, 2008Risk-free
      interest rate
              1.7%
              
              3.0%
              
              2.0%
              
              3.0%Expected
      volatility
              90.0%
              
              44.7%
              
              91.0%
              
              38.8%Expected
      dividend yield
              0%
              
              0%
              
              0%
              
              0%Expected
      life in years
              3.8
              
              7.5
              
              5.2
              
              7.5


The
following table sets forth information concerning stock option activity for the
39 weeks ended December 27, 2009:


Shares
                  
                  
                  Weighted
      Average Exercise Price
                  
                  Weighted-Average
      Remaining Contractual Term (Years)
                  
                  Aggregate
      Intrinsic Value (in 000's)Outstanding
      as of March 29, 2009
                  
                  
                  1,907,955
                  
                  
                  $
                  5.06Granted
                  
                  
                  580,976
                  
                  
                  
                  1.65Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
      or expired
                  
                  
                  (1,115,745
                  )
                  
                  
                  5.21Outstanding
      as of December 27, 2009
                  
                  
                  1,373,186
                  
                  
                  $
                  3.48
                  
                  
                  
                  5.8
                  
                  
                  $
                  168,930





The
aggregate intrinsic value in the table above is based on the Company’s closing
stock price of $1.90 and $2.32 for Class A Common Stock and Class B Common
Stock, respectively, as of the last trading day of the period ended December 27,
2009.





In
October 2009, the Company offered eligible employees, excluding the Chief
Executive Officer, Chief Financial Officer and members of the Board of Directors
of the Company, the voluntary opportunity to exchange some or all of his or her
outstanding options to purchase shares of Class A Common Stock, with exercise
prices equal to or greater than $2.38 per share, that were granted under the
Company's 1992 Incentive Award Plan or 2004 Equity Incentive Plan, for a
conditional right to receive new options to purchase a fewer number of shares
than the exchanged options  (the “Option Exchange”).  The
Option Exchange had an exchange ratio of 2:1.  This exchange ratio
resulted in the issuance of new options that have an aggregate fair value
approximately equal to the aggregate fair value of the Eligible Options that
they replace.  The Option Exchange expired at 5:00 p.m., Pacific Time,
on November 6, 2009.  Pursuant to the Option Exchange, eligible
options to purchase an aggregate of 721,927 shares of Class A Common Stock were
tendered and accepted for cancellation, representing approximately 70% of the
total shares of Class A Common Stock underlying options eligible for exchange in
the Option Exchange.  On November 9, 2009, the Company granted new
options to purchase an aggregate of 360,976 shares of Class A Common Stock in
exchange for the eligible options surrendered in the Option
Exchange.  The exercise price per share of the new options is $1.71,
which was the closing price of the Class A Common Stock on November 9, 2009 as
reported by The Nasdaq Global Market.  The new options vest 1⁄2 on the
first anniversary of the date of grant and 1⁄2 on the second anniversary
regardless of whether the exchanged options were fully or partially
vested.  For a detailed discussion of the Option Exchange, see the
Company’s Tender Offer Statement on Schedule TO filed with the Securities and
Exchange Commission (the “SEC”) on October 6, 2009 and Amendment No. 1 thereto
filed with the SEC on November 6, 2009.





9


7.           Impairment
of Long-Lived Assets





The Company performs a review of
long-lived tangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of these assets is measured by comparison of their
carrying amounts to future undiscounted cash flows that the assets are expected
to generate. If long-lived assets are considered to be impaired, the impairment
to be recognized equals the amount by which the carrying value of the assets
exceeds its fair value and is recorded in the period the determination was
made.





A non-cash impairment charge of $10.9
million, $10.7 million and $2.1 million was recorded in the 13 and 39 weeks
ended December 27, 2009, December 28, 2008 and December 30, 2007, related to
six, eleven and two stores, respectively, where events or changes in
circumstances have resulted in significantly lower than expected sales
volume.  These stores are not expected to obtain sufficient cash flow over
their remaining lease terms to support the carrying value of their leasehold
improvements and fixtures.  The existence of the impairment was assessed by
calculating the undiscounted future cash flow of each store individually, after
at least one full year of operations, and comparing it to the carrying value of
the individual store assets.





8.           Recently
Issued Accounting Pronouncements





The following is a list of recently
issued accounting pronouncements, none of which have had or are expected to have
a material impact on our results of operations, cash flows or financial
position.





On September 27, 2009, the Company
adopted changes issued by the Financial Accounting Standards Board (“FASB”) to
the authoritative hierarchy of GAAP.  These changes establish the FASB
Accounting Standards Codification (“ASC”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with
GAAP.  Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants.  The FASB will no longer issue new standards in the form
of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead the FASB will issue Accounting Standards Updates.  Accounting
Standards Updates will not be authoritative in their own right as they will only
serve to update the ASC.  These changes and the ASC itself do not
change GAAP.  Other than the manner in which new accounting guidance
is referenced, the adoption of these changes had no impact on the financial
statements.





10


In the first quarter of fiscal 2010,
the Company adopted FASB ASC 855, “Subsequent Events”, which establishes general
standards of accounting for, and disclosure of, events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued and requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, that is, whether that
date represents the date the financial statements were issued or were available
to be issued.  The effect of adopting this pronouncement did not have
a material impact on the Company’s financial position or results of
operations.






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 December 27, 2009, we had 33
locations in Southern California, eight in Northern California, two in Central
California, three in Nevada, eight in Arizona and one in Utah. These stores
average approximately 41,000 square feet in size. In addition, we have a retail
e-commerce store at www.sportchalet.com.





Operating
History





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





Our growth had historically focused on
Southern California; but since 2001 we have expanded our scope to all of
California and to Nevada, Arizona and Utah.  Generally, our new stores
were located with the intent of strengthening our focus on Southern California
or in areas characterized by a large number of housing
developments.  We opened seven stores in fiscal 2008, 17 stores in the
last three years and 25 in the last five years.  In fiscal 2009, we
opened four new stores, relocated one and re-launched our
website.  For the first nine months of fiscal 2010, we did not open
any new stores or relocate any existing stores.  We currently do not
anticipate opening new stores or entering into new lease commitments in the near
future.





12


Recent
History





We
believe our stores are located in the geographic regions hardest hit by the
downturn in the housing and credit markets, unemployment and bankruptcies. 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, 12.4% for fiscal 2009 and 12.7% in the first nine months of
fiscal 2010 as we continued to confront a difficult macro-economic
environment.  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.  In the first nine months of fiscal 2010, we have
incurred a net loss of $8.0 million, or $0.57 per diluted
share.  Included in the losses are a non-cash impairment charge of
$10.9 million, $10.7 million and $2.1 million in the first nine months of fiscal
2010, fiscal 2009 and fiscal 2008, respectively, related to underperforming
stores.  We have sustained operating losses in ten of the past eleven
quarters.   The following table sets forth comparable store sales
by quarter for the past three fiscal years:







FY
      2008
              
              FY
      2009
              
              FY
      2010Q1
              1.3%
              
              (11.1%)
              
              (14.7%)Q2
              (2.2%)
              
              (6.7%)
              
              (12.4%)Q3
              (6.9%)
              
              (15.4%)
              
              (10.8%)Q4
              (8.8%)
              
              (17.7%)
              
              4.3%**
      Fourth quarter through January 31, 2010, which is not indicative of the
      full fourth quarter results.





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





As a
result of the comparable store sales decline, we have focused on reducing
operating expenses and improving liquidity.  In October 2008, we began
aggressively taking action to address the severe downturn in the macroeconomic
environment by examining our practices, assumptions, models and costs in an
effort to modify our business model to make the Company more
efficient.  We continue to focus on reducing operating expenses and
improving liquidity through the following core initiatives and their savings
realized for the 39 weeks of fiscal 2010 as compared to 39 weeks of fiscal
2009:





·
            Improved
      inventory management and saved $7.5 million in reduced markdowns. As a
      result of liquidating aged inventory throughout fiscal 2009, our inventory
      is fresher and newer.





13


·
            Renegotiated
      lease terms and saved $2.5 million in rent.  Based on executed
      amendments to date, we expect to save over $3.5 million in fiscal 2010
      compared to fiscal 2009.





·
            Increased
      payroll efficiency and saved $10.0 million.  Based on current
      trends, we anticipate saving $10.4 million in fiscal
  2010.





·
            Reduced
      all expense categories and saved $11.1 million primarily from advertising,
      professional fees and repairs and maintenance and utilities. We anticipate
      saving $11.4 million in fiscal
2010.





Although
no assurance can be given about the ultimate impact of these initiatives or of
the overall economic climate, we believe these initiatives, combined with the
exit or diminished capacity of many key specialty competitors in our
marketplace, will better position us for sustainability, viability and positive
results in the future as the economy improves.





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





Results
of Operations





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





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







13
      weeks endedDecember
      27, 2009
                
                
                December
      28, 2008
                
                
                Dollar
                  Change
                
                
                Percentage
                  ChangeAmount
                
                
                Percent
                
                
                Amount
                
                
                PercentNet
      sales
                
                $
                95,258
                
                
                
                100.0%
                
                
                $
                104,562
                
                
                
                100.0%
                
                
                $
                (9,304
                )
                
                
                (8.9%
                )Gross
      profit
                
                
                24,018
                
                
                
                25.2%
                
                
                
                23,325
                
                
                
                22.3%
                
                
                
                693
                
                
                
                n/a
                *Selling,
      general andadministrative
      expenses
                
                
                21,988
                
                
                
                23.1%
                
                
                
                29,107
                
                
                
                27.8%
                
                
                
                (7,119
                )
                
                
                (24.5%
                )Impairment
      charge
                
                
                10,935
                
                
                
                11.5%
                
                
                
                10,730
                
                
                
                10.3%
                
                
                
                205
                
                
                
                1.9%Depreciation
      and amortization
                
                
                3,192
                
                
                
                3.4%
                
                
                
                3,700
                
                
                
                3.5%
                
                
                
                (508
                )
                
                
                (13.7%
                )Loss
      from operations
                
                
                (12,097
                )
                
                
                (12.7%
                )
                
                
                (20,212
                )
                
                
                (19.3%
                )
                
                
                8,115
                
                
                
                (40.1%
                )Interest
      expense
                
                
                821
                
                
                
                0.9%
                
                
                
                571
                
                
                
                0.5%
                
                
                
                250
                
                
                
                43.8%Loss
      before taxes
                
                
                (12,918
                )
                
                
                (13.6%
                )
                
                
                (20,783
                )
                
                
                (19.9%
                )
                
                
                7,865
                
                
                
                (37.8%
                )Income
      tax (benefit) provision
                
                
                (9,118
                )
                
                
                (9.6%
                )
                
                
                11,593
                
                
                
                11.1%
                
                
                
                (20,711
                )
                
                
                n/a
                *Net
      loss
                
                
                (3,800
                )
                
                
                (4.0%
                )
                
                
                (32,376
                )
                
                
                (31.0%
                )
                
                
                28,576
                
                
                
                (88.3%
                )Class
      A and Class B loss per share:Basic
                
                $
                (0.27
                )
                
                
                
                
                
                $
                (2.29
                )
                
                
                
                
                
                $
                2.02
                
                
                
                (88.3%
                )Diluted
                
                $
                (0.27
                )
                
                
                
                
                
                $
                (2.29
                )
                
                
                
                
                
                $
                2.02
                
                
                
                (88.3%
                )
  *Percentage
      change not meaningful.





14


Sales decreased $9.3 million, or 8.9%,
to $95.3 millionfor
the 13 weeks ended December 27, 2009 from $104.6 million for the 13 weeks ended
December 28, 2008.  The decrease is primarily due to a same store
sales decrease of $10.9 million, or 10.8%, the result of worsening
macro-economic conditions, partially offset by sales from two new stores and
other revenue not included in the same store sales calculation.





Gross profit increased $0.7 million, or
3.0%, as a result of reduced rent expense of $1.3 million and reductions in
markdowns, partially offset by the reduction in sales.  As a percent
of sales, gross profit increased 290 basis points to 25.2% from 22.3%, also
primarily as a result of decreased markdowns and rent.




Selling,
general and administrative expenses decreased $7.1 million, or 24.5%, as a
result of expense reduction initiatives and no new store opening
costs.  Expense reduction initiatives include $3.0 million in labor
savings from stores, corporate office overhead and the distribution
center.  Additional savings include advertising of $2.1 million,
professional fees of $0.9 million and utilities of $0.4 million.  As a
percent of sales, SG&A decreased 470 basis points to 23.1% for the 13 weeks
ended December 27, 2009 from 27.8% for the 13 weeks ended December 28, 2008 as
the expense reductions more than offset the sales decrease.




A
non-cash impairment charge of $10.9 million and $10.7 million was recorded in
the 13 weeks ended December 27, 2009 and December 28, 2008, related to six and
eleven stores, respectively, where events or changes in circumstances have
resulted in significantly lower than expected sales volume.  These stores
are not expected to obtain sufficient cash flow over their remaining lease terms
to support the carrying value of their leasehold improvements and
fixtures.  The existence of the impairment was assessed by calculating the
undiscounted future cash flow of each store individually, after at least one
full year of operations, and comparing it to the carrying value of the
individual store assets.





On November 6, 2009, the President of
the United States signed into law the Worker, Homeownership, and Business
Assistance Act of 2009, which expands the net operating loss (“NOL”) carryback
period from two to five years, allowing us to carryback the fiscal 2009 loss. As
a result, we recorded a tax benefit of $9.1 million related to the portion of
the 2009 NOL that was previously not carried back, reduced the associated
valuation allowance and increased our tax receivable.  We filed our
carryback tax return in November 2009 and received our federal refund in January
2010.  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 December 27, 2009, our net deferred tax assets and
related valuation allowance totaled $21.8 million.  The Company has
federal and state net operating loss carryforwards of approximately $13 million
and $38 million, respectively, which can be carried forward for a period of 20
years.





Net loss
for the 13 weeks ended December 27, 2009 was $3.8 million, or $0.27 per diluted
share, compared to a net loss of $32.4 million, or $2.29 per diluted share, for
the 13 weeks ended December 28, 2008.  The net loss for the 13 weeks
ended December 27, 2009 includes a net tax benefit of $9.1 million, or $0.65 per
diluted share, and a non-cash impairment charge of $10.9 million, or $0.77 per
diluted share, while the 13 weeks ended December 28, 2008 includes a net tax
provision of $11.6 million, or $0.82 per diluted share, and a non-cash
impairment charge of $10.7 million, or $0.76 per diluted
share.  Excluding the tax benefit and tax provision, respectively, as
well as the non-cash impairment charges, net loss for the 13 weeks ended
December 27, 2009 was $2.0 million, or $0.14 per diluted share, compared to a
net loss of $10.1 million, or $0.71 per diluted share, for the 13 weeks ended
December 28, 2008.





15


39
Weeks Ended December 27, 2009 Compared to December 28, 2008





The
following table sets forth statements of operations data and relative
percentages of net sales for the 39 weeks ended December 27, 2009 compared to
the 39 weeks ended December 28, 2008 (dollar amounts in thousands, except per
share amounts):







39
      weeks endedDecember
      27, 2009
                
                
                December
      28, 2008
                
                
                Dollar
                  Change
                
                
                Percentage
                  ChangeAmount
                
                
                Percent
                
                
                Amount
                
                
                PercentNet
      sales
                
                $
                263,472
                
                
                
                100.0%
                
                
                $
                288,139
                
                
                
                100.0%
                
                
                $
                (24,667
                )
                
                
                (8.6%
                )Gross
      profit
                
                
                69,839
                
                
                
                26.5%
                
                
                
                71,629
                
                
                
                24.9%
                
                
                
                (1,790
                )
                
                
                (2.5%
                )Selling,
      general andadministrative
      expenses
                
                
                63,991
                
                
                
                24.3%
                
                
                
                83,582
                
                
                
                29.0%
                
                
                
                (19,591
                )
                
                
                (23.4%
                )Impairment
      charge
                
                
                10,935
                
                
                
                4.2%
                
                
                
                10,730
                
                
                
                3.7%
                
                
                
                205
                
                
                
                1.9%Depreciation
      and amortization
                
                
                9,922
                
                
                
                3.8%
                
                
                
                10,967
                
                
                
                3.8%
                
                
                
                (1,045
                )
                
                
                (9.5%
                )Loss
      from operations
                
                
                (15,009
                )
                
                
                (5.7%
                )
                
                
                (33,650
                )
                
                
                (11.7%
                )
                
                
                18,641
                
                
                
                (55.4%
                )Interest
      expense
                
                
                2,105
                
                
                
                0.8%
                
                
                
                1,650
                
                
                
                0.6%
                
                
                
                455
                
                
                
                27.6%Loss
      before taxes
                
                
                (17,114
                )
                
                
                (6.5%
                )
                
                
                (35,300
                )
                
                
                (12.3%
                )
                
                
                18,186
                
                
                
                (51.5%
                )Income
      tax (benefit) provision
                
                
                (9,118
                )
                
                
                (3.5%
                )
                
                
                5,823
                
                
                
                2.0%
                
                
                
                (14,941
                )
                
                
                n/a
                *Net
      loss
                
                
                (7,996
                )
                
                
                (3.0%
                )
                
                
                (41,123
                )
                
                
                (14.3%
                )
                
                
                33,127
                
                
                
                (80.6%
                )Class
      A and Class B loss per share:Basic
                
                $
                (0.57
                )
                
                
                
                
                
                $
                (2.91
                )
                
                
                
                
                
                $
                2.35
                
                
                
                (80.6%
                )Diluted
                
                $
                (0.57
                )
                
                
                
                
                
                $
                (2.91
                )
                
                
                
                
                
                $
                2.35
                
                
                
                (80.6%
                )
  *Percentage
      change not meaningful.





Sales decreased $24.7 million, or 8.6%,
to $263.5 millionfor
the 39 weeks ended December 27, 2009 from $288.1 million for the 39 weeks ended
December 28, 2008.  The decrease is primarily due to a same store
sales decrease of $34.8 million, or 12.7%, the result of worsening
macro-economic conditions, partially offset by sales from four new stores and
other revenue not included in the same store sales calculation.





Gross profit decreased $1.8 million, or
2.5%, as a result of reduced rent expense of $2.5 million and reductions in
markdowns offset by the reduction in sales.  As a percent of sales,
gross profit increased 160 basis points to 26.5% from 24.9%, also primarily as a
result of decreased markdowns and rent.




Selling,
general and administrative expenses decreased $19.6 million, or 23.4%, as
expenses related to new stores of $1.5 million were offset by expense reductions
of $21.1 million.  Expense reduction initiatives include $10.0 million
in labor savings from stores, corporate office overhead and the distribution
center.  Additional savings include advertising of $5.8 million,
professional fees of $2.3 million, repairs and maintenance of $1.3 million and
utilities of $1.0 million.  As a percent of sales, SG&A decreased
470 basis points to 24.3% for the 39 weeks ended December 27, 2009 from 29.0%
for the 39 weeks ended December 28, 2008, as the expense reductions more than
offset the sales decrease.





A
non-cash impairment charge of $10.9 million and $10.7 million was recorded in
the 39 weeks ended December 27, 2009 and December 28, 2008, related to six and
eleven stores, respectively, where events or changes in circumstances have
resulted in significantly lower than expected sales volume.  These stores
are not expected to obtain sufficient cash flow over their remaining lease terms
to support the carrying value of their leasehold improvements and
fixtures.  The existence of the impairment was assessed by calculating the
undiscounted future cash flow of each store individually, after at least one
full year of operations, and comparing it to the carrying value of the
individual store assets.





16


On
November 6, 2009, the President of the United States signed into law the Worker,
Homeownership, and Business Assistance Act of 2009, which expands the net
operating loss (“NOL”) carryback period from two to five years, allowing us to
carryback the fiscal 2009 loss. As a result, we recorded a tax benefit of $9.1
million related to the portion of the 2009 NOL that was previously not carried
back, reduced the associated valuation allowance and increased our tax
receivable. We filed our carryback tax return in November 2009 and received our
federal refund in January 2010.  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 December 27, 2009, our
net deferred tax assets and related valuation allowance totaled $21.8
million.  The Company has federal and state net operating loss
carryforwards of approximately $13 million and $38 million, respectively, which
can be carried forward for a period of 20 years.




Net loss
for the 39 weeks ended December 27, 2009 was $8.0 million, or $0.57 per diluted
share, compared to a net loss of $41.1 million, or $2.91 per diluted share, for
the 39 weeks ended December 28, 2008.  The net loss for the 39 weeks
ended December 27, 2009 includes a net tax benefit of $9.1 million, or $0.65 per
diluted share, and a non-cash impairment charge of $10.9 million, or $0.77 per
diluted share, while the 39 weeks ended December 28, 2008 includes a net tax
provision of $5.8 million, or $0.41 per diluted share, and a non-cash impairment
charge of $10.7 million, or $0.76 per diluted share.  Excluding the
tax benefit and tax provision, respectively, as well as the non-cash impairment
charges, net loss for the 39 weeks ended December 27, 2009 was $6.2 million, or
$0.44 per diluted share, compared to a net loss of $24.6 million, or $1.74 per
diluted share, for the 39 weeks ended December 28, 2008.





Liquidity
and Capital Resources





In the
absence of growth in the number of stores, our primary capital requirements are
for inventory replenishment and store operations.  Historically, cash
from operations, credit terms from vendors and bank borrowing have met our
liquidity needs.  For the foreseeable future our ability to continue
our operations and business is dependent on these same sources of
capital.






17


The
following table sets forth comparable store sales by quarter for the past three
fiscal years:




FY
      2008
                
                FY
      2009
                
                FY
      2010Q1
                1.3%
                
                (11.1%)
                
                (14.7%)Q2
                (2.2%)
                
                (6.7%)
                
                (12.4%)Q3
                (6.9%)
                
                (15.4%)
                
                (10.8%)Q4
                (8.8%)
                
                (17.7%)
                
                4.3%**
      Fourth quarter through January 31, 2010, which is not indicative of the
      full fourth quarter results.


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





As a
result of the comparable store sales decline, we have focused on reducing
operating expenses and improving liquidity.  In October 2008, we began
aggressively taking action to address the severe downturn in the macroeconomic
environment by examining our practices, assumptions, models and costs in an
effort to modify our business model to make the Company more
efficient.  We continue to focus on reducing operating expenses and
improving liquidity through the following core initiatives and their savings
realized for the 39 weeks of fiscal 2010 as compared to 39 weeks of fiscal
2009:





·
            Improved
      inventory management and saved $7.5 million in reduced markdowns. As a
      result of liquidating aged inventory throughout fiscal 2009, our inventory
      is fresher and newer.





·
            Renegotiated
      lease terms and saved $2.5 million in rent.  Based on executed
      amendments to date, we expect to save over $3.5 million in fiscal 2010
      compared to fiscal 2009.





·
            Increased
      payroll efficiency and saved $10.0 million.  Based on current
      trends, we anticipate saving $10.4 million in fiscal
  2010.





·
            Reduced
      all expense categories and saved $11.1 million primarily from advertising,
      professional fees and repairs and maintenance and utilities. We anticipate
      saving $11.4 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.





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.






18


The
following table shows the more significant items for the 39 weeks ended December
27, 2009 and December 28, 2008:




39
      weeks endedDecember
      27, 2009
              
              
              December
      28, 2008(in
      thousands)Net
      loss
              
              $
              (7,996
              )
              
              $
              (41,123
              )Income
      tax receivable
              
              
              (8,116
              )
              
              
              -Depreciation
      and amortization
              
              
              9,922
              
              
              
              10,967Impairment
      charge
              
              
              10,935
              
              
              
              10,730Deferred
      income taxes
              
              
              -
              
              
              
              5,723Merchandise
      inventories
              
              
              (17,462
              )
              
              
              (22,473
              )Accounts
      payable
              
              
              8,062
              
              
              
              9,387Other
      accrued expenses
              
              
              (307
              )
              
              
              9,718Other
              
              
              (2,571
              )
              
              
              2,575Net
      cash used in operating activities
              
              $
              (7,533
              )
              
              $
              (14,496
              )


Historically, 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. For the 39
weeks ended December 27, 2009, same store sales decreased 12.7% and reduced the
need for inventory.  Although average inventory per store decreased
2.5% to $1.9 million from $2.0 million at December 28, 2008, this was less than
the decline in sales as December sales were less than plan.  The
increase of $17.4 million in the 39 weeks ended December 27, 2009 and the
increase of $22.4 million in the 39 weeks ended December 28, 2008 were primarily
due to seasonality, while the period ended December 28, 2008 also included
increases for four new stores.





Typically,
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.





Additionally,
the insufficient cash available during the fourth quarter of fiscal 2009 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 recorded a tax benefit of $9.1
million related to the portion of the 2009 NOL that was previously not carried
back, reduced the associated valuation allowance and increased our tax
receivable.  We filed our carryback tax return in November 2009 and
received our federal refund in January 2010. 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 December 27, 2009, our
net deferred tax assets and related valuation allowance totaled $21.8
million.  The Company has federal and state net operating loss
carryforwards of approximately $13 million and $38 million, respectively, which
can be carried forward for a period of 20 years.





A
non-cash impairment charge of $10.9 million, $10.7 million and $2.1 million was
recorded in the 13 and 39 weeks ended December 27, 2009, December 28, 2008 and
December 30, 2007, related to six, eleven and two stores, respectively, where
events or changes in circumstances have resulted in significantly lower than
expected sales volume.  These stores are not expected to obtain sufficient
cash flow over their remaining lease terms to support the carrying value of
their leasehold improvements and fixtures.  The existence of the impairment
was assessed by calculating the undiscounted future cash flow of each store
individually, after at least one full year of operations, and comparing it to
the carrying value of the individual store assets.





19


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





39
      weeks endedDecember
      27, 2009
              
              
              December
      28, 2008(in
      thousands)New
      stores
              
              $
              -
              
              
              $
              9,511Remodels/Relocations
              
              
              -
              
              
              
              2,972Existing
      stores
              
              
              301
              
              
              
              460Information
      systems
              
              
              145
              
              
              
              1,407Other
              
              
              177
              
              
              
              54Total
              
              $
              623
              
              
              $
              14,404





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





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





Net cash
provided by financing activities reflects advances and repayments of borrowings
under our revolving credit facility.  The outstanding balance as of
December 27, 2009 is $56.2 million compared to $39.1 million at the end of
fiscal 2009.  The increase is primarily the result of the insufficient
cash available during the fourth quarter of fiscal 2009 which caused a slowdown
in payments to our vendors.  During fiscal 2010, payments were made to
bring vendors current.





Under our
bank credit facility, up to $45.0 million will be available to the Company,
increasing to $70.0 million, from September 1st of each year through December
31st of each year, and up to an additional $10.0 million will be available to
the Company through a special advance facility.  The amount available
under the special advance facility will be reduced by $2.5 million on the first
day of each month commencing on July 1, 2010, and the special advance facility
will terminate on October 1, 2010.  This facility also provides for up
to $10.0 million in authorized letters of credit.  The amount we may
borrow under this credit facility is limited to a percentage of the value of
eligible inventory, less certain reserves.  A significant decrease in
eligible inventory due to the aging of inventory and/or an unfavorable inventory
appraisal could have an adverse effect on our borrowing capabilities under our
credit facility, which may adversely affect the adequacy of our working
capital.  Interest accrues at the Lender’s prime rate plus 2.0% (5.25%
at December 27, 2009) or at our option we can fix the rate for a period of time
at LIBOR plus 4.5%.  In addition, there is an unused commitment fee of
0.25% per year, based on a weighted average formula, and an early termination
fee if the facility is terminated before June 2010 which is waived if the loan
is refinanced by the Lender or any of its affiliates. This credit facility
expires in June 2012 and there is no assurance that this will be fully or
partially renewed.  Our obligation to the Lender is presently secured
by a first priority lien on substantially all of our non-real estate assets, and
we are subject to, among others, a covenant that we maintain a minimum monthly
cumulative EBITDA.





20





EBITDA is
defined in our bank credit facility as (loss) income before provision (benefit)
for income taxes, interest expense, depreciation and amortization, and certain
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.  The covenant requires us to 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 the 39 weeks ending December 27, 2009.  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 and/or an unfavorable inventory appraisal, 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 December 27,
2009:





Payment
      due by periodLess
      than
                
                
                
                
                
                
                
                
                More
      thanTotal
                
                
                1
      year
                
                
                2-3
      year
                
                
                4-5
      year
                
                
                5
      yearsContractual
      obligations
                
                (in
      thousands)Operating
      leases (a)
                
                $
                211,972
                
                
                $
                31,108
                
                
                $
                62,234
                
                
                $
                50,721
                
                
                $
                67,909Employment
      contracts
                
                
                764
                
                
                
                170
                
                
                
                339
                
                
                
                255
                
                
                
                -Total
      contractual obligations
                
                $
                212,736
                
                
                $
                31,278
                
                
                $
                62,573
                
                
                $
                50,976
                
                
                $
                67,909
  (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
      fiscal years 2009, 2008 and 2007, respectively.  Operating lease
      obligations reflect savings from lease modifications, assume "kick-out
      clauses" (as defined below) 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 (“kick-out
clauses”).  We are also exploring the possibility of potentially
closing stores that are underperforming with no significant improvement foreseen
in the near term.





21


Generally,
our purchase obligations are cancelable 45 days prior to shipment from our
vendors.  Letters of credit amounting to approximately $2.8 million
relating to workers’ compensation insurance were outstanding as of December 27,
2009 and expire within one year.





No cash
dividends have been declared or paid on Class A Common Stock and Class B Common
Stock as we intend to retain earnings, if any, 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” in the
Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2009,
we consider our policies on inventory valuation, revenue recognition, gift card
redemption, self insurance reserves, impairment of long-lived assets, accounting
for income taxes, estimation of net deferred income tax asset valuation
allowance and stock-based compensation to be the most critical in understanding
the significant estimates and judgments that are involved in preparing our
consolidated financial statements.





Factors
That May Affect Future Results





Our short-term and long-term success is
subject to many factors that are beyond our control.  Stockholders and
prospective stockholders in the Company should carefully consider the following
risk factors, in addition to the information contained elsewhere in this
Report.  This Report on Form 10-Q contains forward-looking statements,
which are subject to a variety of risks and uncertainties.  Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors including, but are not limited to,
those set forth below.





For a more detailed discussion of these
factors, see “Item 1A – Risk Factors” in 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.








22


Risks
Related To Our Business:




·
            The
      covenants in our revolving credit facility may limit future borrowings to
      fund our operations.  In the event of a significant decrease in
      availability under our bank credit facility, we may have insufficient
      working capital to continue to operate our business as it has been
      operated, or at all.





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





23


·
            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.





24


Item
3.  Quantitative and Qualitative
Disclosures About Market Risk.





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





Item
4T.  Controls and
Procedures.





Disclosure
Controls and Procedures





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


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


There
were no changes in the Company's internal controls over financial reporting,
identified by the Chief Executive Officer or the Chief Financial Officer that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
  25


PART
II – OTHER INFORMATION





Item 1.Legal
Proceedings.





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





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





Item
1A.  Risk
Factors.





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





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





Not
Applicable.





Item
3.  Defaults
Upon Senior Securities.





Not Applicable.





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





Not Applicable.





Item
5.  Other
Information.





Not Applicable.





26


Item
6.  Exhibits.





Exhibits:





3.1
            Certificate
      of Incorporation restated as of November 4, 2009 (incorporated by
      reference to Exhibit 3.1 of the Company’s Form 10-Q filed on November 6,
      2009)





3.2
            Bylaws
      of Sport Chalet, Inc. amended as of September 15, 2009 (incorporated by
      reference to Exhibit 3.2 of the Company’s Form 10-Q filed on November 6,
      2009)





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





4.2
            Form
      of Certificate for Class B Common Stock, par value $0.01 per share
      (incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed
      on September 29, 2005)





31.1
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002





31.2
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002





32.1
            Certification
      Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002











27




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:  February
      5, 2010
              By:
              /s/ Howard
      K. KaminskyHoward
      K. Kaminsky
                Executive
      Vice President-Finance,
                Chief
      Financial Officer and Secretary
                (On
      behalf of the Registrant and as
                Principal
      Financial and Accounting Officer)





28