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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004  
 Commission File Number: 0-20736 Sport Chalet, Inc.  Delaware
    
    95-4390071(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 One Sport Chalet Drive, La Canada, CA 91011
(Address of principal executive offices) (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 is an accelerated filer (as
defined in Rule 12b-2 of Act). Yes [   ] No [X] Number of shares outstanding of the registrants Common Stock, $0.01 par value,
as of July 29, 2004: 6,679,034 1




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SPORT CHALET, INC. Table of Contents to Form 10-Q PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    8Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    17Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits and Reports on Form 8-K
    
    
    18EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
 2




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements. SPORT CHALET, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) Three months endedJune 30,2004
    
    2003Net sales
    
    $
    61,538,119
    
    
    $
    53,309,276Cost of goods sold, buying and
occupancy
    
    
    43,839,441
    
    
    
    38,536,263Gross profit
    
    
    17,698,678
    
    
    
    14,773,013Selling, general and administrative
expenses
    
    
    17,236,355
    
    
    
    15,721,469Income (loss) from operations
    
    
    462,323
    
    
    
    (948,456
    )Interest expense
    
    
    (43,291
    )
    
    
    (34,010
    )Income (loss) before taxes
    
    
    419,032
    
    
    
    (982,466
    )Income tax provision (benefit)
    
    
    174,000
    
    
    
    (389,000
    )Net income (loss)
    
    $
    245,032
    
    
    $
    (593,466
    )Earnings (loss) per share:Basic
    
    $
    0.04
    
    
    $
    (0.09
    )Diluted
    
    $
    0.03
    
    
    $
    (0.09
    )Weighted average number of
common shares outstanding:Basic
    
    
    6,673,534
    
    
    
    6,629,667Diluted
    
    
    7,190,852
    
    
    
    6,629,667
 See accompanying notes. 3




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SPORT CHALET, INC. CONDENSED CONSOLIDATED BALANCE SHEETS June 30,
    
    March 31,2004
    
    2004(Unaudited)AssetsCurrent assets:Cash
    
    $
    1,530,938
    
    
    $
    3,071,648Accounts receivable, less allowance of $30,000
    
    
    1,015,778
    
    
    
    1,158,934Merchandise inventories
    
    
    64,521,890
    
    
    
    54,172,055Prepaid expenses and other current assets
    
    
    2,478,926
    
    
    
    2,202,036Deferred income taxes
    
    
    2,412,173
    
    
    
    2,443,945Total current assets
    
    
    71,959,705
    
    
    
    63,048,618Furniture, equipment and leasehold improvements-net
    
    
    29,706,263
    
    
    
    29,467,976Deferred income taxes
    
    
    614,101
    
    
    
    83,704Other assets
    
    
    93,019
    
    
    
    101,036Total assets
    
    $
    102,373,088
    
    
    $
    92,701,334Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    19,466,625
    
    
    $
    11,131,473Salaries and wages payable
    
    
    3,347,569
    
    
    
    3,354,368Income taxes payable
    
    
    366,328
    
    
    
    35,631Other accrued expenses
    
    
    8,449,941
    
    
    
    7,830,961Total current liabilities
    
    
    31,630,463
    
    
    
    22,352,433Deferred rent
    
    
    5,924,790
    
    
    
    5,818,026Stockholders equityPreferred stock, $.01 par value:Authorized shares - 2,000,000Issued and outstanding shares  none
    
    
    
    
    
    
    Common stock, $.01 par value:Authorized shares - 15,000,000Issued and outstanding shares  6,673,534
at June 30, 2004 and
March 31, 2004
    
    
    66,735
    
    
    
    66,735Additional paid-in capital
    
    
    22,872,834
    
    
    
    22,830,906Retained earnings
    
    
    41,878,266
    
    
    
    41,633,234Total stockholders equity
    
    
    64,817,835
    
    
    
    64,530,875Total liabilities and stockholders equity
    
    $
    102,373,088
    
    
    $
    92,701,334
 See accompanying notes. 4




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SPORT CHALET, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) Three months ended June 30,2004
    
    2003Operating activitiesNet income (loss)
    
    $
    245,032
    
    
    $
    (593,466
    )Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation and amortization
    
    
    1,840,892
    
    
    
    1,452,000Loss on disposal of furniture, equipment and leasehold improvements
    
    
    
    
    
    
    244,821Deferred income taxes
    
    
    (498,625
    )
    
    
    (227,352
    )Tax benefit on employee stock options
    
    
    41,928
    
    
    
    2,257Changes in operating assets and liabilities:Accounts receivable
    
    
    143,156
    
    
    
    314,006Merchandise inventories
    
    
    (10,349,835
    )
    
    
    (8,614,079
    )Prepaid expenses and other current assets
    
    
    (276,890
    )
    
    
    (234,191
    )Refundable income taxes
    
    
    
    
    
    
    (263,906
    )Bank overdraft
    
    
    
    
    
    
    1,190,640Accounts payable
    
    
    8,335,152
    
    
    
    9,594,563Salaries and wages payable
    
    
    (6,799
    )
    
    
    599,409Income taxes payable
    
    
    330,697
    
    
    
    Other accrued expenses
    
    
    618,980
    
    
    
    830,089Deferred rent
    
    
    106,764
    
    
    
    166,741Net cash provided by operating activities
    
    
    530,452
    
    
    
    4,461,532Investing activitiesPurchase of furniture, equipment and leasehold improvements
    
    
    (2,079,179
    )
    
    
    (2,192,387
    )Other assets
    
    
    8,017
    
    
    
    6,275Net cash used in investing activities
    
    
    (2,071,162
    )
    
    
    (2,186,112
    )Financing activitiesProceeds from exercise of stock options
    
    
    
    
    
    
    8,875Net cash provided by financing activities
    
    
    
    
    
    
    8,875Increase (decrease) in cash and cash equivalents
    
    
    (1,540,710
    )
    
    
    2,284,295Cash and cash equivalents at beginning of period
    
    
    3,071,648
    
    
    
    4,230,003Cash and cash equivalents at end of period
    
    $
    1,530,938
    
    
    $
    6,514,298Supplemental Disclosure of Cash Flow InformationCash paid during the period for:Income taxes
    
    $
    300,000
    
    
    $
    100,000Interest
    
    
    
    
    
    
    
 See accompanying notes. 5




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SPORT CHALET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the results of
operations for the periods presented have been included. The financial data at March 31, 2004 is derived from audited financial
statements which are included in the Companys Annual Report on Form 10-K for
the year ended March 31, 2004, and should be read in conjunction with the
audited financial statements and notes thereto. Interim results are not
necessarily indicative of results for the full year. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. 2. Earnings (loss) per Share Earnings (loss) per share, basic, is computed based on the weighted
average number of common shares outstanding for the period. Earnings (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 is as follows: Three months endedJune 30,2004
    
    2003Net income (loss)
    
    $
    245,032
    
    
    $
    (593,466
    )Weighted average number of common shares:Basic
    
    
    6,673,534
    
    
    
    6,629,667Effect of dilutive securities-
stock options
    
    
    517,318
    
    
    
    Diluted
    
    
    7,190,852
    
    
    
    6,629,667Earnings (loss) per share:Basic
    
    $
    0.04
    
    
    $
    (0.09
    )Effect of dilutive securities
    
    $
    0.01
    
    
    $
    0.00Diluted
    
    $
    0.03
    
    
    $
    (0.09
    )
 6




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3. Stock Compensation The Financial Accounting Standards Boards (FASB) SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, and
Amendment of FASB Statement No. 123 (SFAS No.148) amends SFAS No. 123
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to fair value based method of accounting for
employee stock-based compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosure in
annual and interim financial statements about the method of accounting for
stock-based compensation and its effects on reporting. The Company continues
to apply the principles of APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no
compensation expense has been recorded in conjunction with options issued to
employees. Had compensation cost been determined based on the fair value of
the options at the grant date and amortized over the options vesting period,
consistent with the method prescribed by SFAS No. 123, the Companys net income
would have been: Three months ended June 30,2004
    
    2003Net income (loss) as reported
    
    $
    245,032
    
    
    $
    (593,466
    )Add:Stock based
compensation expense
included in reported
net income, net of
related tax effects
    
    
    
    
    
    
    Deduct:Total stock-based
employee compensation
expense determined
under fair market
value based method for
all awards, net of
related tax effects
    
    $
    134,647
    
    
    $
    134,202Pro forma net income (loss)
    
    $
    110,385
    
    
    $
    (727,668
    )Earnings (loss) per share  basic and dilutedAs reported  basic
    
    $
    0.04
    
    
    $
    (0.09
    )As reported  diluted
    
    $
    0.03
    
    
    $
    (0.09
    )Pro forma  basic
    
    $
    0.02
    
    
    $
    (0.11
    )Pro forma  diluted
    
    $
    0.01
    
    
    $
    (0.11
    )
 The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in fiscal 2004: expected volatility of 41%; risk-free interest
rate of 4.0%; expected lives from one to four years; and expected dividends of
0%. The Black-Scholes 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. Because
the Companys employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. 7




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. Except for the historical information contained herein, the matters
addressed in this Item 2 constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are subject to a variety of risks and uncertainties, including those
discussed below under the heading Factors That May Affect Future Results and
elsewhere in this Quarterly Report on Form 10-Q, that could cause actual
results to differ materially from those anticipated by the Companys
management. The Private Securities Litigation Reform Act of 1995 (the Act)
provides certain safe harbor provisions for forward-looking statements. All
forward-looking statements made in this Quarterly Report on Form 10-Q are made
pursuant to the Act. The following should be read in conjunction with the Companys financial
statements and related notes thereto provided under Item 1Financial Statements
above. Results of Operations The following tables set forth statements of operations data and relative
percentages of net sales for the periods indicated (dollar amounts in
thousands, except per share amounts). Three months ended June 30,2004
    
    2003Amount
    
    Percent
    
    Amount
    
    PercentNet sales
    
    $
    61,538
    
    
    
    100.0
    %
    
    $
    53,309
    
    
    
    100.0
    %Gross profit
    
    
    17,699
    
    
    
    28.8
    %
    
    
    14,773
    
    
    
    27.7
    %Selling, general and administrative expenses
    
    
    17,236
    
    
    
    28.0
    %
    
    
    15,721
    
    
    
    29.5
    %Income (loss) from operations
    
    
    463
    
    
    
    0.8
    %
    
    
    (948
    )
    
    
    (1.8
    %)Interest expense
    
    
    (43
    )
    
    
    (0.1
    %)
    
    
    (34
    )
    
    
    (0.1
    %)Income (loss) before taxes
    
    
    420
    
    
    
    0.7
    %
    
    
    (982
    )
    
    
    (1.8
    %)Net (loss) income
    
    
    245
    
    
    
    0.4
    %
    
    
    (593
    )
    
    
    (1.1
    %)Earnings (loss) per share:Basic
    
    $
    0.04
    
    
    
    
    
    
    $
    (0.09
    )Diluted
    
    $
    0.03
    
    
    
    
    
    
    $
    (0.09
    )
 Three Months Ended June 30, 2004 Compared to Three Months Ended June 30,
2003.Sales increased $8.2 million, or 15.4%, from $53.3 million for the three
months ended June 30, 2003 to $61.5 million for the same period this year. The
increase is the result of opening three new stores which contributed $5.0
million in sales, or 9.4%, as well as a same store sales increase of 6.1%. The
same store sales increase is due to warmer weather which was more consistent
with historical first quarter temperatures compared to the same period last
year. The three new stores were opened in the third quarter of fiscal 2004.
Same store sales are based upon stores opened throughout both periods. Gross profit increased $2.9 million, or 19.8%, primarily from increased
sales. As a percent of sales, gross profit increased from 27.7% for the three
months ended June 30, 2003 to 28.8% for the same period this year. The increase
in gross profit as a percent of sales is primarily due to reduced costs from
more efficient inbound logistics as well as continued improvements in inventory
procurement. Selling, general and administrative expenses increased $1.5 million, or
9.6%, primarily from additional stores. As a percent of sales, these expenses
decreased from 29.5% for the three months ended June 30, 2003, to 28.0% for the
same period this year. The decrease is primarily a result of the increase in
same store sales, labor savings and lower advertising expense attributable to a
larger portion of vendor 8




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reimbursement, partially offset by an increase in
workers compensation expenses. The effective income tax rate was 39.6% for the three months ended June
30, 2003 compared to 41.5% for the same period this year. These rates differ
from the statutory rate of 39.8% primarily as a result of permanent differences
between financial reporting and tax-basis income. Net income increased $838,000, from a loss of $593,000, or $0.09 per
diluted share, for the three months ended June 30, 2003 to income of $245,000,
or $0.03 per diluted share, for the same period this year, primarily as a
result of increased sales and improved gross profit combined with decreased
selling, general and administrative costs. Liquidity and Capital Resources The Companys primary capital requirements are for inventory and store
expansion, relocation and remodeling. Historically, cash from operations,
credit terms from vendors and bank borrowings have met the Companys liquidity
needs. Management believes that these sources will be sufficient to fund
currently anticipated cash requirements for the foreseeable future. Net cash provided by operating activities is primarily the result of net
income, adjusted for depreciation and amortization, and increases in accounts
payable partially offset by inventory purchases. For the three months ended
June 30, 2004, $530,000 was generated by operating activities compared to $4.5
million for the same period last year. Inventories increased by $10.3 million and $8.6 million for the three
months ended June 30, 2004 and 2003, respectively, compared to the respective
year-end balances primarily due to the seasonal build-up of summer related
inventory. In addition, the Company opened three new stores in the third
quarter of fiscal 2004. The average inventory per store decreased by 2.1%, at
June 30, 2004 as compared to June 30, 2003, primarily from continued
improvements in inventory procurement. Bank overdraft represents the total of checks in transit in excess of cash
on hand. Although there is no bank overdraft at June 30, 2004, the overdraft
is expected to continue and fluctuate due to the timing of vendor payments in
the future. Historically, accounts payable has increased as inventory
increases. In the three months ended June 30, 2004, accounts payable combined
with the bank overdraft, increased by $8.3 million as compared to an increase
of $10.8 million for the three months ended June 30, 2003. The relative change
as compared to inventory levels is primarily the result of the timing of
inventory receipts during the period. Net cash used in investing activities for the three months ended June 30,
2004 was $2.1 million compared to $2.2 million for the same period ended June
30, 2003. In addition to routine capital spending, the Company remodeled two
stores during the three months ended June 30, 2003 compared to the three months
ended June 30, 2004, when the Company incurred additional expenditures for new
stores scheduled to open this fiscal year. The Companys amended credit facility with Bank of America, N.A. (the
Lender) provides for advances up to $20 million, increasing to $35.0 million
for the period October 1, through December 31, each year, less the amount of
any outstanding draws, up to a $4.0 million maximum in authorized letters of
credit. Interest accrues at the Lenders prime rate plus 0.25% (4.50% at June
30, 2004) or can be fixed for a period of time at the then current rate
established under one of several indices, all at the Companys option. In
addition, there is an unused commitment fee of 0.20% per year, based on a
weighted average formula. This credit facility expires on September 30, 2005,
and the Company expects to renegotiate and 9




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extend the term of this agreement or
obtain another form of financing before that date. The Companys obligation to
the Lender is presently secured by a first priority lien on substantially all
of the Companys non-real estate assets, and the Company is subject to several
restrictive covenants. The principal operating covenants require the Company
to maintain certain minimum cash flow coverage and debt to equity ratios and
restrict the level of capital expenditures, calculated on a quarterly basis.
The Company currently is in compliance with the covenants. The Company
believes its credit line with the Lender is sufficient to fund capital
expenditures for the foreseeable future and to meet seasonal fluctuations in
cash flow requirements. However, unexpected conditions could require the
Company to request additional borrowing capacity from the Lender or alter its
expansion plans or operations. Due to improved inventory management the Company
did not borrow on this facility during the period ended June 30, 2004. The Companys primary contractual obligations and commitments as of March
31, 2004, are its store leases with initial terms expiring from 2005 through
2020, which typically provide for multiple five-year renewal options, and
employment contracts: OperatingPayments due by period:
    
    Leases
    
    Employment ContractsWithin 1 year
    
    $
    17,023,811
    
    
    $
    319,5002 - 3 years
    
    
    33,948,239
    
    
    
    639,0004 - 5 years
    
    
    31,537,754
    
    
    
    639,000After 5 years
    
    
    62,662,962
    
    
    
    1,597,500Total
    
    $
    145,172,766
    
    
    $
    3,195,000
 All retail store leases provide for base rent which may or may not be
credited against percentage rent based upon gross sales from the premises. In
some of the leases, base rental amounts increase as the lease term progresses
although, in some cases, the Company expects that percentage rent will more
than offset the base rental amounts. Generally, our purchase obligations are
cancelable 45 days prior to shipment from our vendors. Letters of credit
amounting to $1,555,093 relating to purchase commitments were outstanding as of
March 31, 2004 and expire within one year. No cash dividends were declared on Common Stock in fiscal 2004. The
Company intends to retain earnings for use in the operation and expansion of
its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future. Critical Accounting Policies and Use of Estimates The Companys significant accounting policies are described in Note 2 of
the Companys Annual Report on Form 10-K for the year ended March 31, 2004,
which have been prepared in accordance with accounting principles generally
accepted in the United States. In preparing the financial statements, the
Company is required to make estimates and judgments which affect the results of
its operations and the reported value of assets and liabilities. Actual results
may differ from these estimates. The Company believes that the following summarizes critical accounting policies which
require significant judgments and estimates in the preparation of its
consolidated financial statements. Inventory Valuation.Merchandise inventories are stated at the lower of
cost (first-in, first-out determined by the retail method of accounting) or
market. The Company considers cost to include direct cost of merchandise, plus
internal costs associated with merchandise procurement, storage and handling.
The Company regularly reviews aged and excess inventories to determine if the
carrying value of such inventories exceeds market value. A reserve is recorded
to reduce the carrying value to market value as necessary. A determination of
market value requires estimates and judgment based on the Companys 10




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historical
markdown experience and anticipated markdowns based on future merchandising and
advertising plans, seasonal considerations, expected business trends and other
factors. Revenue Recognition.Sales are recognized upon the purchase by customers
at the Companys retail store locations, less merchandise returned by
customers. The Company provides a reserve for projected merchandise returns
based on historical experience. As the reserve for merchandise returns is based
on estimates, the actual returns could differ from the reserve, which could
impact sales. Revenue from gift cards, gift certificates and store merchandise
credits is recognized at the time of redemption. Self-insurance.Property, general liability and workers compensation
insurance coverage is self-insured for various levels. Self-insurance accruals
include claims filed, as well as estimates of claims incurred but not yet
reported based on historical trends. Projections of future loss are inherently
uncertain because of the random nature of insurance claim occurrences and could
be significantly affected if future occurrences and claims differ from
historical trends. Gift Card/Certificate Redemption.The Company offers its customers the
option of purchasing gift cards and, in the past, gift certificates which may
be used toward the future purchase of the Companys product offerings. The
gift cards and certificates have no expiration dates. The Company records
unredeemed gift cards or certificates as a liability until the point of
redemption. The Companys historical experience indicates that not all issued
gift cards or certificates get redeemed. Accordingly, the Company periodically
adjusts the carrying value of the related liability. Pending legislation could
impact the method in which the Company calculates carrying value in the future.
The Company monitors redemptions rates as a percent of issuances and uses this
information to estimate probable redemption of all outstanding gift cards or
certificates. This calculation is based on historical experience, and future
redemption rates may vary if consumer purchasing practices change or if the
pattern of redeeming gift cards is significantly different than the Company has
experienced with gift certificates. Impairment of Long-Lived Assets.The Company accounts for long-lived
assets in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is determined by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered impaired, the impairment recognized is measured by
comparing projected individual store discounted cash flow to the asset carrying
values. Declines in projected store cash flow could result in the impairment
of assets. Accounting for Income Taxes.As part of the process of preparing the
financial statements, income taxes are estimated for each of the jurisdictions
in which the Company operates. This process involves estimating actual current
tax exposure together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included within the balance sheet. The
likelihood that deferred tax assets will be recovered from future taxable
income is assessed, recognizing that future taxable income may give rise to new
deferred tax assets. To the extent that future recovery is not likely, a
valuation allowance would be established. To the extent that a valuation
allowance is established or increased, an expense will be included within the
tax provision in the income statement. Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against net deferred tax assets. Based on the Companys
history of operating earnings, no valuation allowance has been recorded as of 11




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March 31, 2004. In the event that actual results differ from these estimates,
or these estimates are adjusted in future periods, a valuation allowance may
need to be established, which could impact the Companys financial position and
results of operations. Provisions for income taxes for 2004, 2003 and 2002 are based on numerous
factors that are subject to audit by the Internal Revenue Service and the tax
authorities in the various jurisdictions in which the Company does business. Factors That May Affect Future Results The Companys short- and long-term success is subject to many factors that
are beyond the Companys control. Stockholders and prospective stockholders in
the Company should consider carefully the following risk factors, in addition
to other information contained in this report. This Report on Form 10-Q
contains forward-looking statements, which are subject to a variety of risks
and uncertainties. The Companys actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors including those set forth below. Economic Conditions.The retail industry historically has been subject to
substantial cyclical variations. The merchandise sold by the Company is
generally a discretionary expense for its customers. A recession in the
general economy or uncertainties regarding future economic prospects that
affect consumer spending habits has had, and may in the future have, a material
adverse effect on the Companys results of operations. Terrorism/War.Terrorist attacks may cause damage or disruption to the
Companys employees, facilities, information systems, vendors and customers,
which could significantly impact net sales, costs and expenses and financial
condition. The potential for future terrorist attacks, the national and
international responses to terrorist attacks, and other acts of war or
hostility may cause greater uncertainty and cause the Company to suffer in ways
that the Company currently cannot predict. The Companys geographical focus in
California and Nevada may make the Company more vulnerable to such
uncertainties than other comparable retailers who may not have similar
geographical concentration. Competition.The sporting goods business and the retail environment are
highly competitive, and the Company competes with national, regional and local
full-line sporting goods chains, specialty stores, supplier owned stores,
discount and department stores, and internet retailers. A number of the
Companys competitors are larger and have greater resources than the Company. Regional Market Concentration.Currently, most of the Companys stores
are located in Southern California and the balance are located in Northern
California and the Las Vegas area of Nevada. Accordingly, the Company is
subject to regional risks, such as the economy, weather conditions, natural
disasters and government regulations. For example, warm winter weather in the
resorts frequented by Southern California residents has affected sales in the
past. When the region suffers an economic downturn or when other adverse events occur, historically there has been
an adverse effect on the Companys net sales and profitability and this could
also affect the Companys ability to implement its planned growth. Several of
the Companys competitors operate stores across the United States and, thus,
are not as vulnerable as the Company to such regional risks. Reliance on a Single Distribution Center.The Company currently relies on
a single distribution center in Ontario, California. Any natural disaster or
other serious disruption to this distribution center due to fire, earthquake or
any other cause could damage a significant portion of the Companys inventory
and 12




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could materially impair both the Companys ability to adequately stock its
stores and the Companys net sales and profitability. Expansion Plan.The Companys continued growth depends on a strategy of
opening new, profitable stores in existing markets and in new regional markets.
The ability to successfully implement this growth strategy could be negatively
affected by any of the following:  
    
    suitable sites may not be available for leasing;
    
    the Company may not be able to negotiate acceptable lease terms;
    
    the Company might not be able to hire and retain qualified store personnel; and
    
    the Company might not have the financial resources necessary to
fund the Companys expansion plans. In addition, the Companys expansion in new and existing markets may
present competitive, distribution and merchandising challenges that differ from
the current challenges. These potential new challenges include competition
among the Companys stores, added strain on the Companys distribution center,
additional information to be processed by the Companys information systems and
diversion of management attention from ongoing operations. The Company faces
additional challenges in entering new markets, including consumers lack of
awareness of the Company, difficulties in hiring personnel and problems due to
the Companys unfamiliarity with local real estate markets and demographics.
New markets may also have different competitive conditions, consumer tastes and
discretionary spending patterns than the Companys existing markets. To the
extent that the Company is not able to meet these new challenges, net sales
could decrease and operating costs could increase. Furthermore, a decline in
the Companys overall financial performance, increased rents or any other
adverse effects arising from the commercial real estate market in the Companys
markets may adversely affect the Companys current growth plan. There can be
no assurance that the Company will possess sufficient funds to finance the
expenditures related to its planned growth, that new stores can be opened on a
timely basis, that such new stores can be operated on a profitable basis, or
that such growth will be manageable. Future Capital Requirements.The Company may not be able to fund its
future growth or react to competitive pressures if it lacks sufficient funds.
Unexpected conditions could cause the Company to be in violation of its
Lenders operating covenants. Currently, the Company feels it has sufficient
cash available through its bank credit facilities and cash from operations to
fund existing operations for the foreseeable future. The Company cannot be
certain that additional financing will be available in the future if necessary. Management of Growth.Since its inception, the Company has experienced
periods of rapid growth. No assurance can be given that the Company will be
successful in maintaining or increasing its sales in the future. Any future
growth in sales will require additional working capital and may place a
significant strain on the Companys management, information systems, inventory
management and distribution facilities. Any failure to timely enhance the
Companys operating systems, or unexpected difficulties in implementing such enhancements, could have a material
adverse effect on the Companys results of operations. Dependence on Key Personnel.The Company depends on the continued service
of its senior management. The loss of the services of any key employee could
hurt the business. Also, the future success of the Company depends on its
ability to identify, attract, hire, train and motivate other highly skilled
personnel. Failure to do so may adversely affect future results. Seasonality.The Companys sales volume increases significantly during
the Holiday season as is 13




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typical with other sporting goods retailers. In
addition, the Companys product mix has historically emphasized cold weather
sporting goods increasing the seasonality of the Companys business. In recent
years the months of November, December and January represent between 30% and
34% of the Companys total net sales, while winter-related products ranged from
15% to 19% of total net sales. The operating results historically have been
influenced by the amount and timing of snowfall at the resorts frequented by
those living in Southern California. An early snowfall often has influenced
sales because it generally extends the demand for winter apparel and equipment,
while a late snowfall may have the opposite effect. Suppliers in the ski and
snowboard industry require the Company to make commitments for purchases of
apparel and equipment by April for fall delivery, and only limited quantities
of merchandise can be reordered during the fall. Consequently, the Company
places its orders in the spring anticipating snowfall in the winter. If the
snowfall does not at least provide an adequate base or occurs late in the
season, or if sales do not meet projections, the Company may be required to
mark down its winter apparel and equipment. Variability of Quarterly Results.The Company has experienced, and
expects to continue to experience, a substantial variation in its net sales and
operating results from quarter to quarter. The Company believes that the
factors which influence this variability of quarterly results include general
economic and industry conditions that affect consumer spending, changing
consumer demands, the timing of the Companys introduction of new products, the
level of consumer acceptance of each new product, the seasonality of the
markets in which the Company participates, the weather and actions of
competitors. Accordingly, a comparison of the Companys results of operations
from period to period is not necessarily meaningful, and the Companys results
of operations for any period are not necessarily indicative of future
performance. Closely Controlled Stock.At June 7, 2004, Norbert Olberz, the Companys
founder, Chairman Emeritus, director and principal stockholder, owned
approximately 65% of the Companys outstanding Common Stock. Mr. Olberz
effectively has the ability to control the outcome on all matters requiring
stockholder approval, including, but not limited to, the election and removal
of directors, and any merger, consolidation or sale of all or substantially all
of the Companys assets, and to control the Companys management and affairs. Information Systems are Vulnerable.The Companys success, in particular
the Companys ability to successfully manage inventory levels and its
centralized distribution system, largely depends upon the efficient operation
of the Companys computer hardware and software systems. The Company uses
information systems to track inventory information at the store level,
replenish inventory from the Companys warehouse, and aggregate daily sales
information among other things. These systems and the Companys operations are
vulnerable to damage or interruption from:  
    
    earthquake, fire, flood and other natural disasters;
    
    power loss, computer systems failures, internet and
telecommunications or data network failure, operator negligence,
improper operation by or supervision of employees, physical and
electronic loss of data and similar events; and
    
    computer viruses, penetration by hackers seeking to disrupt
operations or misappropriate information and other breaches of
security. The Company seeks to minimize these risks by the use of backup facilities
and redundant systems. Nevertheless any failure that causes an interruption in
the Companys operations or a decrease in inventory tracking could result in
reduced net sales. 14




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Our Business Depends on Anticipating Consumer Tastes.If the Company
fails to anticipate changes in consumer preferences, it may experience lower
net sales, higher inventory markdowns and lower margins. Products must appeal
to a broad range of consumers whose preferences cannot be predicted with
certainty. These preferences are also subject to change. Sporting goods are
often subject to short-lived trends, such as the short-lived popularity of
in-line scooters. Outdoor wear is significantly influenced by fashion. The
Companys success depends upon the ability to anticipate and respond in a
timely manner to trends in sporting goods merchandise and consumers
participation in sports. Failure to identify and respond to these changes may
cause net sales to decline. In addition, because the Company generally makes
commitments to purchase products from vendors up to nine months in advance of
the proposed delivery, misjudging the market may over-stock unpopular products
and force inventory markdowns that could have a negative impact on
profitability, or have insufficient inventory of a popular item that can be
sold at full markup. Stock Price.The Companys Common Stock is thinly traded making it
difficult to sell large amounts. The market price of the Companys Common
Stock is likely to be volatile and could be subject to significant fluctuations
in response to factors such as quarterly variations in operating results,
operating results which vary from the expectations of securities analysts and
investors, changes in financial estimates, changes in market valuations of
competitors, announcements by the Company or its competitors of a material
nature, additions or departures of key personnel, future sales of Common Stock
and stock volume fluctuations. Also, general political and economic conditions
such as a recession or interest rate fluctuations may adversely affect the
market price of the Companys Common Stock. 15




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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 4. Controls and Procedures. The Companys Chief Executive Officer, Craig Levra, and Chief Financial
Officer, Howard Kaminsky, with the participation of the Companys management,
carried out an evaluation of the effectiveness of the Companys disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer
believe that, as of the end of the period covered by this report, the Companys
disclosure controls and procedures are effective in making known to them
material information relating to the Company (including its consolidated
subsidiaries) required to be included in this report. 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 or mistakes or intentional circumvention of the established
process. There were no changes in the Companys internal controls over financial
reporting, known to 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. 16




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Part II  OTHER INFORMATION 
 Item 1. Legal Proceedings. 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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities. 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. Stockholder Proposals The proxy materials for the 2004 annual meeting of the stockholders to be
held on August 2, 2004 were mailed to stockholders of the Company on June 21,
2004. Under certain circumstances, stockholders are entitled to present
proposals at stockholder meetings. The 2005 annual meeting of stockholders is
presently expected to be held on or about August 1, 2005. Any such proposal to
be included in the proxy statement for the Companys 2005 annual meeting of
stockholders must be received by the Secretary of the Company at the Companys
office at One Sport Chalet Drive, La Canada, California 91011 on or before
February 21, 2005 in a form that complies with applicable regulations. If the
date of the 2005 annual meeting is advanced or delayed more than 30 days from
the date of the 2004 annual meeting, stockholder proposals intended to be
included in the proxy statement for the 2005 annual meeting must be received by
the Company within a reasonable time before the Company begins to print and
mail the proxy statement for the 2005 annual meeting. Upon any determination
that the date of the 2005 annual meeting will be advanced or delayed by more
than 30 days from the date of the 2004 annual meeting, the Company will
disclose the change in the earliest practicable Quarterly Report on Form 10-Q. In the event a stockholder proposal is not submitted to the Company on or
before May 6, 2005, the proxies solicited by the Board of Directors for the
2005 annual meeting of the stockholders will confer authority on the holders of
the proxy to vote the shares in accordance with the recommendations of the
Board of Directors if the proposal is presented at the 2005 annual meeting of
stockholders without any discussion of the proposal in the proxy statement for
such meeting. 17




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Item 6. Exhibits and Reports onForm 8-K.  (a)
    
    Exhibits: 31.1
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  (b)
    
    Reports on Form 8-K:None 18




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. SPORT CHALET, INC.DATE: July 30, 2004
    By:
    /s/ Howard K. KaminskyHoward K. KaminskyExecutive Vice President-Finance,
Chief Financial Officer and Secretary
(On behalf of the Registrant and as
Principal Financial and Accounting Officer) 19