UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C.  20549





FORM 10-K





(Mark One)





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





For the fiscal year endedMarch 28, 2010





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 Number)One Sport Chalet Drive, La Cañada, California

91011(Address of principal executive offices)

(Zip Code)




Registrant’s telephone number, including area code: (818) 949-5300


Securities registered pursuant to Section 12(b) of the Act:




Title of Each Class:

Name of Each Exchange on Which Registered:Class A Common Stock, $0.01 par value

The NASDAQ Stock Market LLCClass B Common Stock, $0.01 par value

The NASDAQ Stock Market LLC




Securities registered pursuant to Section 12(g) of the Act:  None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  [   ]  Yes  [X]  No





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [   ]  Yes  [X]  No





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. [X]  Yes  [   ]  No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]







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 the Exchange Act). [   ]  Yes  [X]  No





The aggregate market value of Class A Common Stock and Class B Common Stock held by non-affiliates of the registrant as of September 27, 2009, was approximately $10.5 million based upon the closing sale prices of Class A Common Stock and Class B Common Stock on that date.





At June 17, 2010, there were 12,413,490 shares of Class A Common Stock outstanding and 1,775,821 shares of Class B Common Stock outstanding.





DOCUMENTS INCORPORATED BY REFERENCE





Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2010 annual meeting of stockholders are incorporated by reference into Part III of this Report. The proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended March 28, 2010.










TABLE OF CONTENTS




Item

PagePART I1.
Business
11A.
Risk Factors
91B.
Unresolved Staff Comments
162.
Properties
163.
Legal Proceedings
174.
[Removed and Reserved]
17PART II5.
Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities
186.
Selected Financial Data
207.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
227A.
Quantitative and Qualitative Disclosures About Market Risk
348.
Financial Statements and Supplementary Data
349.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
349A(T).
Controls and Procedures
349B.
Other Information
35PART III10.
Directors, Executive Officers and Corporate Governance
3611.
Executive Compensation
3612.
Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters
3613.
Certain Relationships and Related Transactions, and Director Independence
3614.
Principal Accountant Fees and Services
36PART IV15.
Exhibits and Financial Statement Schedules
37







Table of Contents




PARTI





This Annual Report on Form 10-K 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 “Item 1A. 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.





ITEM 1.  BUSINESS





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 March 28, 2010, we had 34 locations in Southern California, nine in Northern 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 Team Sales Division and an ECommerce store at sportchalet.com.  Originally we were incorporated in California and we reincorporated as a Delaware corporation in 1992.  Our executive offices are located at One Sport Chalet Drive, La Cañada, California 91011, and our telephone number is (818) 949-5300.





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 our industry, Norbert’s goal was to:





·
See things through the eyes of the customer;


·
Do a thousand things a little bit better;


·
Not be the biggest, but the best;


·
Be the image of the sportsperson; and


·
Create ease of shopping.





Over the last 51 years, Sport Chalet has grown into a chain of 55 specialty sporting goods stores serving California, Nevada, Arizona and Utah, with a Team Sales Division and an ECommerce store.





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, as well as ECommerce.  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 new stores in fiscal 2008, 11 new stores in the last three years and 20 in the last five years.  In fiscal 2009, we opened four new stores, relocated one existing store and re-launched our website.  We did not open any new stores in fiscal 2010 and currently do not anticipate opening new stores in fiscal 2011.  We are using this respite to analyze and evaluate our current real estate portfolio to ensure that we manage our capital investment in the most efficient means possible.  In addition, we are focused on our ECommerce store as our best method of establishing a national footprint.





Store openings have had a favorable impact on sales volume, but have negatively affected profit in the short term.  New stores tend to have higher costs in the early years of operation, due primarily to increased promotional costs and lower sales on a per employee basis until the store matures.  As the store matures, sales tend to level off and expenses decline as a percentage of sales.  We believe our stores historically have required three to four years to attract a stable, mature customer base; but, because of our relatively low number of stores and changing economic conditions, reliable statistical trends are not available and there can be no assurance that our newer stores will mature at that rate.




1


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Recent History





Our stores are located in states that are among those hardest hit by the downturn in the housing and credit markets, increased unemployment and bankruptcies.  Our sales are largely dependent on the level of consumer spending in the geographic regions surrounding our stores.  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 continue to have, a materially adverse effect on our results of operations.





Our comparable store sales growth had been positive for the four fiscal years prior to fiscal 2008.  The severe downturn in the macroeconomic environment caused comparable store sales to decline 12.4% in fiscal 2009, and as a result we incurred a net loss of $52.2 million, or $3.70 per diluted share for fiscal 2009.  During fiscal 2009, we began aggressively taking action by examining our practices, assumptions, models and costs in an effort to modify our business model to make the Company more efficient.  Continuing into fiscal 2010, we focused on improving liquidity and reducing operating expenses through the following core initiatives:





·
Secured an amendment to our loan agreement and temporarily increased availability an additional $10 million.





·
Renegotiated lease terms to reduce base rent and add percentage rent based on sales and clauses permitting us to terminate leases on stores which do not obtain specified minimum sales levels (“kick-out clauses”).





·
Communicated with all vendors regularly to make sure they were fully aware of the challenges we faced and continued their support.





·
Improved inventory management and aggressively reduced aged inventory, thereby providing fresher merchandise in our stores.





·
Significantly increased payroll efficiency in our stores and distribution center, thereby delivering lower spend per customer while maintaining the customer experience.





·
Initiated significant reductions in corporate overhead related to personnel and discretionary spending.





As a result of these initiatives, we reduced markdowns $11.0 million, rent $3.7 million, labor $9.9 million, advertising $5.8 million, professional fees $3.3 million and other expenses $5.1 million during fiscal 2010 as compared to fiscal 2009, and our net loss for fiscal 2010 was reduced to $8.3 million, or $0.59 per diluted share, compared to a net loss of $52.2 million or $3.70 per diluted share, for fiscal 2009.





Comparable store sales decreased 8.3% for fiscal 2010, but improved each consecutive quarter and the fourth quarter marked our first increase in comparable store sales after ten consecutive quarters of negative comparable store sales.  Comparable store sales by quarter for the past three fiscal years are set forth in the following table:





QuarterQ4



Q3



Q2



Q1FY 2010


5.7%



(10.8%)



(12.4%)



(14.7%)FY 2009


(17.7%)



(15.4%)



(6.7%)



(11.1%)FY 2008


(8.8%)



(6.9%)



(2.2%)



1.3%




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While the comparable store sales increase in the fourth quarter of fiscal 2010 reflects a positive change in trends, we remain focused on continued improvement through the following:





·
Continuing to improve the functionality and efficiency of sportchalet.com by leveraging our business partners’ significant knowledge in their areas of expertise.





·
Continually refining the way each store is merchandised so as to best fit to its individual store market area and customer base through information provided by our Action Pass customer relationship program.


.


·
Increasing utilization of our growing Action Pass membership to create ever more effective marketing vehicles.





·
Continuing to refine and expand our Team Sales Division by attracting new universities and leagues as customers, while focusing on continuous profitability improvements through more efficient manufacturing and embellishment processes.





·
Recommitment to ensuring we have the best trained merchandise and specialty services employee experts throughout our Company.





·
Continuing toward the full utilization of our information systems to understand our business better and to improve efficiency in both inventory and overall operating costs.





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 position us for better results in the future as the economy improves.





Stores and Merchandising





Our prototype store is 42,000 square feet in size and showcases every merchandise and service category with the feel of a specialty shop all contained under one roof.  The full-service approach to customer service and product knowledge is enhanced by fixtures which feature specific technical, performance and lifestyle brands.  Each shop is staffed by trained sales associates with expertise in the merchandise they sell, permitting us to offer our customers a high level of product knowledge and service from the beginner to the advanced sports enthusiast.





Our prototype format boasts a natural and outdoor-feel color scheme, clear-coated fixtures, 30-foot clear ceilings, large sport-specific graphics, a training pool for SCUBA and water sports instruction and demonstrations, and a 100 foot shoe wall, among other features.  We have retro-fitted ten mature stores to conform to the prototype as much as was practical.  For both new stores and remodels, we continually update our prototype format to remain competitive.  While we have taken advantage of unusual building layouts in the past, and when appropriate may do so in the future, we will utilize as many standard prototype design elements as possible.  We evaluate stores for remodel based on each store’s age and competitive situation, as well as how much the landlord will contribute to our required improvements. Future store remodeling plans will depend upon several factors, including, but not limited to, general economic conditions, competitive trends and the availability of capital. As of March 28, 2010, 78% of our store base is based on our prototype.





Our stores feature a number of distinct, specialty sports and lifestyle categories, offering a large assortment of quality brand name merchandise at competitive prices.  The stores include traditional sporting goods merchandise (e.g., footwear, apparel and other general athletic products) and core specialty merchandise such as snowboarding, skateboarding, mountaineering and SCUBA.  The merchandise appeals to both beginner and expert users.  Using our investments in technology, we tailor each store’s merchandise mix to appeal to our customers in each market.  Generally, our stores are open seven days a week, typically from 9:30 a.m. to 9:30 p.m. Monday through Friday, 9:00 a.m. to 9:00 p.m. Saturday, and 10:00 a.m. to 7:00 p.m. on Sunday.




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Our stores offer over 50 services for the sports enthusiast, including backpacking, canyoneering and kayaking instruction, custom golf club fitting and repair, snowboard and ski rental and repair, SCUBA training and certification, SCUBA boat charters, team sales, racquet stringing, and bicycle tune-up and repair.  Although the revenues generated by these support services are not material, these services further differentiate us from our competitors.





The following table illustrates our merchandise assortment of hardlines, which are durable items, and softlines, which are non-durable items suchas apparel and footwear, as a percentage of total net sales for each of the last three fiscal years:





Fiscal year2010


2009


2008Hardlines


53%



53%



52%Apparel


26%



27%



28%Footwear


21%



20%



20%Total


100%



100%



100%





ECommerce





Prior to December 2008, Sport Chalet had an online store that was operated and managed by GSI Commerce, Inc. (“GSI”).   Since 1999, GSI had created and operated all aspects of the sportchalet.com shopping experience, including fulfillment and purchasing. Sport Chalet received a license fee based on a percentage of sales generated by the website.  The licensing fee was not material to total revenues.





In March 2009, we re-launched our website at sportchalet.com, providing a fully integrated online/offline shopping experience for customers.  The site is currently managed by Sport Chalet employees and displays the complete selection of merchandise available in Sport Chalet stores.  The new site also presents information about all the services available in our stores and provides product selection tools, advice and community sharing technologies.  In developing this new ECommerce strategy, we leveraged our significant investments in infrastructure and systems including SAP, Epicor, High Jump and MarketMax/SAS.  We also partnered with leading technology providers to maximize the opportunity including:





·
MarketLive – for the ECommerce platform and website hosting. The MarketLive solution includes value added technology services from Endeca, Omniture and Scene7.


·
Sapient Interactive – for site design, build and technical integration.


·
Shopatron – for order management, payment processing, customer support, and enabling of in-store pickup.


·
Baazarvoice – for customer ratings and reviews.


·
Experian Cheetah Mail – for email campaign management.





Purchases made online are shipped from the distribution center or our stores, leveraging our inventory investment.  Customers also have the option to complete purchases online and have merchandise available for in-store pickup.  Additionally, in conjunction with Enterprise Selling, a direct to customer service, any merchandise item in any store is available for direct shipping to the customer at any other store, their home or business.  The website supports the redemption of the same gift cards and Action Pass rewards as may be redeemed in our stores.





Team Sales Division





We operate our Team Sales Division in a facility located in Van Nuys, California.  Team Sales serves as a full service, vertically integrated team dealer offering in-house embellishment, silk screen, embroidery and custom art work on uniforms, footwear and equipment.  The Team Sales customer base is generally comprised of universities, high schools, athletic teams, youth sports leagues, booster clubs and recreational organizations.  We utilize an outside commissioned sales force to serve our customers.  Team Sales offers a unique added value by establishing an early relationship between our customers at all skill levels and ages and our Sport Chalet brand and retail stores.





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Marketing and Advertising





Historically, we have generated our marketing and advertising campaigns in-house, with production support from outside vendors as needed.  The campaigns are designed to reflect our strategic direction through our brand and product offerings, as well as communicate a focused and consistent theme/event calendar through media including email, the internet, special events, direct mail, radio and magazines.Our marketing leverage has been boosted by vendor payments under cooperative marketing arrangements as well as vendor participation in sponsoring events, clinics and athletes’ appearances.   In fiscal 2010, we significantly enhanced our online presence with a complete redesign of sportchalet.com and new initiatives focused on driving consumers to the new website and building ongoing relationships with our Action Pass customers.  We also seek to strengthen our position as a leading sporting goods retailer in our markets through high-profile sponsorships with teams and organizations such as the world champion Los Angeles Lakers, University of Southern California, University of California, Los Angeles, Los Angeles and Disneyland Marathons, Association of Volleyball Professionals and Element YMCA Skate Camp, while raising our profile in communities where we do business with contributions to local teams and leagues through our Team Sales Division.





The launch of the new sportchalet.com in March 2009 marked the introduction of an ECommerce strategy to better connect with our customers, capture additional market share through an online and offline shopping experience, and raise familiarity with Sport Chalet.  As traditional forms of media become less relevant and effective, this platform has allowed us to leverage our vendors’ creative resources and web-ready content to our advantage.  Unlike traditional media, there is less lead time involved and a social connection can be established with customers, similar to the store experience. By internally managing the website, we are able to better control product assortments, specialty services featured and branding opportunities offered.  The new site is supported with a program of online ads combined with search engine marketing and optimization to build awareness of Sport Chalet with online shoppers, especially around key promotional periods.





Our customer relationship program, Action Pass, continues to grow following its rollout in November 2007, now with over one million members.  In addition to earning points for each purchase redeemable towards future purchases, Action Pass members have access to exclusive merchandise, appearances by athletes, trips and specialty services related to their particular sporting interest.  The program allows us to develop marketing vehicles targeted at specific customers to create excitement around product launches, new technologies and new services.  We are forming stronger relationships with our customers as we actively solicit Action Pass members’ feedback regarding their decision to shop at Sport Chalet and perceptions of our store environment, product selection, and pricing.  This allows us to understand our customers’ purchasing habits and shopping carts.  We use this information to respond to our customers’ shopping preferences and patterns with continuous improvement in merchandise assortments, category adjacencies and other marketing initiatives across our entire network of stores.  Additionally, we are not obligated to long term advertising schedules, which can be expensive, and we believe this to be a more efficient way to use vendor support.





Seasonality





The market for retail sporting goods is seasonal in nature.  As with many other retailers, our business is heavily affected by sales of merchandise during the Holiday season.  In addition, our product mix has historically emphasized cold weather sporting goods merchandise, particularly Winter-sports related products.  In recent years, our third fiscal quarter, which includes the Holiday season, represented approximately 30% of our annual net sales.  Winter-related products and services represent approximately 16% of our annual net sales and have ranged from 25% to 30% of sales in our fourth fiscal quarter.  We anticipate this seasonal trend in sales will continue.  We attempt to respond to changes in mid-season weather by maintaining flexibility in product placement at the stores and the marketing of product offerings.  See “Item 1A. Risk Factors – Seasonal fluctuations in the sales of sporting goods could cause our annual operating results to suffer.”




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Purchasing and Distribution





In order to provide a full line of specialty and sporting goods brands and a wide selection, we purchase merchandise from approximately 1,000 vendors.  Vendor payment terms typically range from 30 to 120 days from our receipt, and there are no long-term purchase commitments. Our largest vendor, Nike, Inc., accounted for approximately 10% of our total inventory purchases for fiscal 2010, slightly higher than fiscal 2009, and our ten largest vendors collectively accounted for approximately 40% of our total purchases during fiscal 2010.





For merchandise planning and allocation we use the SAS Marketmax software solution.  This software includes merchandise planning, open-to-buy management, assortment planning, store clustering, high performance forecasting, performance analysis and allocation.  We allocate merchandise to our stores based on trends and statistical modeling maximizing flow-through at our distribution center.  We believe this technology package allows us to better plan and forecast our business and leverage the information to optimize store assortments and merchandise allocations.





For replenishment we use a system from JDA Software Group, Inc.  The JDA E3 system consists of three modules: (i) warehouse replenishment, which manages purchases from vendors, (ii) store replenishment, which manages shipments from the warehouse to stores, and (iii) network optimization, which synchronizes the two systems. In addition, we use the JDA Consumer Outlook and Pinpoint seasonal profile software to help identify, create and manage the seasonal trends of our merchandise. Currently, we use the E3 system to manage approximately 54% of our total inventory.  The remaining 46% of the inventory purchases are managed by the SAS Marketmax software.





With our EDI capabilities, we provide sell through information by individual item size, color, and store to our key merchandise suppliers so that they can better forecast our inventory needs and we can better refine our assortments by store.





We operate one distribution center, a 326,000 square foot facility located in Ontario, California.  The distribution center serves as the primary receiving, distribution and warehousing facility.  A minimal amount of merchandise is shipped directly by vendors to our stores. Most of the product received at the distribution center is processed by unpacking and verifying the contents received and then sorting the contents by store for delivery. Some of the product received at the distribution center is pre-packaged and pre-ticketed by the vendor so it can be immediately cross-docked to trucks bound for the stores. Due to the efficiencies cross-docking creates, we encourage vendors to pre-package their merchandise in a floor-ready manner. Some of the merchandise is held at the distribution center for future allocation to the stores based on current sales trends as directed by our computerized replenishment and allocation systems to optimize inventory levels.  We believe that the advantages of a single distribution center include reduced individual store inventory levels and better use of store floor space, timely inventory replenishment of store inventory needs, consolidated vendor returns, and reduced transportation costs. Common carriers deliver merchandise to our stores.





Epicor Enterprise Selling software replaced our manual processes of locating and transferring products for a customer in fiscal 2008.  In the event we do not stock a particular item in a store, this software allows us to quickly locate the item in another location, including our distribution center, and complete the sale by accepting payment from the customer and shipping merchandise from the most optimal location to the customer’s preferred destination.





Information Systems





Historically we have used a “best of breed” approach to information systems.  All systems communicated with a legacy system that was the centralized data repository and the primary financial system.  As part of our comprehensive review of internal control over financial reporting and also to enhance our ability to grow, the legacy system has been replaced effective March 31, 2008.





In October 2006, we selected mySAP2005 ERP from SAP as the replacement system and began the implementation process.  Selecting SAP was based on a strategic decision to focus future resources on a single-vendor ERP solution.  Our analysis had revealed that recent improvements in SAP’s solutions provided robust retail functions, and we anticipate that future releases will provide additional support for improved retail business processes.  This decision will eventually permit us to enjoy the efficiencies of a fully integrated solution without the overhead generally associated with interfacing systems in a multi-vendor solution.




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Store systems use the Retail Store 3.0 Suite of applications from Epicor Retail Systems that include a Returns Management application, and IBM SurePOS hardware.  Epicor Enterprise Selling was added in fiscal 2008. The processing of debit/credit card authorization allows on-line debit and signature capture. A rental program is also a part of the store system.  For merchandise planning and allocation we use the SAS Marketmax software solution.  Merchandise replenishment is controlled by E3 software from JDA.  The distribution center uses warehouse management software from HighJump Software.





Our inventory systems track purchasing, sales and inventory transfers down to the lowest level of detail, individual items by size, color and store, which allow us to identify and project trends and replenishment needs on a timely basis.





Recapitalization Plan





In September 2005, our stockholders approved a recapitalization plan designed to facilitate the orderly transition of control from our Founder to certain members of management and to increase financial flexibility for the Company and its stockholders. The recapitalization plan consisted of (1) the reclassification of each outstanding share of common stock as 0.25 share of Class B Common Stock, (2) the issuance of seven shares of Class A Common Stock for each outstanding share of Class B Common Stock and (3) the transfer of a portion of the Founder’s ownership to Craig Levra, Chairman and Chief Executive Officer, and Howard Kaminsky, Executive Vice President - Finance, Chief Financial Officer and Secretary.  The recapitalization doubled our total number of shares outstanding. Therefore, the recapitalization plan had the same effect on earnings per share as a 2-for-1 stock split.  Shares transferred by the Founder to Messrs. Levra and Kaminsky were treated as a contribution to the Company’s capital with the offsetting charge as compensation expense.





Trademarks and Trade Names





We use the “Sport Chalet” name as a service mark in connection with our business operations.  We have registered “Sport Chalet” as a federal service mark with the United States Patent and Trademark Office, along with the mark “Action Pass,” among others.  We also own additional common law trademarks and service marks which are used in commerce without dispute.





Industry and Competition





The market for retail sporting goods is highly competitive, fragmented and segmented. We compete with a variety of other retailers, including the following:




·
specialty stores and independent dealers;




·
internet retailers and catalog merchandisers;




·
vendor owned stores;




·
high end department stores;




·
big box sporting goods chains; and




·
mass merchandisers, club stores and discount stores.




Beginning in 2008, the retail industry was severely impacted by the weak macroeconomic environment.  Several competitors have closed stores, including Sierra Snowboard, Busy Body, Active Ride Shops, Chick’s Sporting Goods, Joe’s, Sportsman’s Warehouse and independent retailers.  Other competitors may have greater financial resources than we do, or better name recognition in regions into which we have recently or might seek to expand.  Specialty retailers often have the advantage of a lower cost structure and a smaller "footprint" that can be located in shopping centers and strip malls, offering more customer convenience.  We also compete with big box sporting goods chains with more purchasing power, but with less emphasis on customer service and specialty services, which often choose to compete on price.




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We have distinguished ourselves from our competitors by our emphasis on customer service and specialty services, and by providing a broader selection of higher-end specialty items that require such service and expertise.  We believe that our broad selection of high quality name brands and numerous specialty items at competitive prices, showcased by our well-trained sales associates, differentiates us from all of our competitors.





Employees





As of March 28, 2010, we had a total of approximately 3,000 (down from 3,200 at March 29, 2009 and 4,300 at March 30, 2008) full and part-time employees, 2,700 of whom were employed in our stores and 300 of whom were employed in warehouse and delivery operations or in corporate office positions.  None of our employees are covered by a collective bargaining agreement.  We operate with an open door policy and encourage and welcome the communication of our employees’ ideas, suggestions and concerns and believe this contributes to our strong employee relations. Generally, each store employs a general manager, two to three assistant managers, who along with supervisors and department heads oversee the sales associates in customer service, merchandising, and operations. Additional part-time employees are typically hired during the Holiday and other peak seasons.





We are committed to the growth and training of our employees in order to provide “The Experts” in product knowledge and service to our customers.  We conduct specialty universities, consisting of off-site technical training and product demonstrations provided by our vendors for our employees.  All of these universities are recorded for follow-up training online, and we continuously provide individual category training on an individual store basis.  This training prepares our employees to become certified in particular sports or activities, while at the same time reducing employee turnover. In addition, our “Certified Pro” program encourages employees to attend product-line-specific clinics and receive hands-on training to improve technical product and service expertise.  Only after completing all of the clinics and training and passing specific tests, may an associate be considered a Certified Pro. Certified Pro certification is offered in 20 different service disciplines and is a requirement for new associates in their areas of expertise.  Being knowledgeable and informed allows our work force to meet the customer's needs and enhance their shopping experience.





Additional Information





The Company makes available free of charge through our website, sportchalet.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably practicable after those reports are filed with or furnished to the Securities and Exchange Commission (“SEC”).





The public may read any of the items we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Company and other issuers that file electronically with the SEC at www.sec.gov.




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ITEM 1A.  RISK FACTORS





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 consider carefully the following risk factors, in addition to the information contained in this report.  This Annual Report on Form 10-K 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 those set forth below.





We have a history of losses which could continue in the future.





We have reported losses in each of the last three fiscal years and have an accumulated deficit of $10.8 million as of March 28, 2010.  There can be no assurance that we will report net income in any future period.





The limited availability under our revolving credit facility may result in insufficient working capital.





Our credit facility with Bank of America, N.A. (the “Lender”) provides for advances up to $45.0 million 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 currently is 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.  The amount we may borrow under this credit facility is limited to a percentage of the value of eligible inventory, minus certain reserves.  Our obligation to the Lender is presently secured by a first priority lien on substantially all of our non-real estate assets.  A significant decrease in eligible inventory due to our vendors’ unwillingness to ship us product, the aging of inventory, an unfavorable inventory appraisal or other factors, could have an adverse effect on our borrowing capabilities under our credit facility, which may adversely affect the adequacy of our working capital.





If cash generated by operations does not result in a sufficient level of unused borrowing capacity, our current operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility.  In such a case, we would need to seek other financing alternatives with our bank or other sources.  Additional financing may not be available at terms acceptable to us, or at all.  Failure to obtain financing in such circumstances may require us to significantly curtail our operations.





In the event of a significant decrease in availability under our credit facility, we may have insufficient working capital to continue to operate our business as it has been operated, or at all.





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





Our credit facility with our Lender is subject to an EBITDA covenant that requires us to exceed certain monthly amounts as defined in the Fourth Amendment to the Amended and Restated Loan and Security Agreement.There can be no assurance that there will not be an event of default and additional financing may not be available at terms acceptable to us, or at all.  Failure to obtain financing in such circumstances may require us to significantly curtail our operations.





If our vendors do not provide sufficient quantities of products, our net sales may suffer and hinder our return to profitability.


We purchase merchandise from approximately 1,000 vendors.  Although only one vendor accounted for approximately 10% of our total inventory purchases for fiscal 2010, our dependence on principal vendors involves risk.  Our ten largest vendors collectively accounted for approximately 40% of our total purchases during fiscal 2010.  If there is a disruption in supply from a principal vendor for any reason, including concern over our position with our Lender, we may be unable to obtain merchandise that we desire to sell and that consumers desire to purchase.  A vendor could discontinue selling products to us at any time for reasons that may or may not be within our control.  Our net sales may decline and hinder our return to profitability if we are unable to promptly replace a vendor who is unwilling or unable to satisfy our requirements with a vendor providing equally appealing products.  Moreover, many of our vendors provide us with incentives, such as return privileges, volume purchase allowances and cooperative marketing arrangements.  A decline or discontinuation of these incentives could also negatively impact our results of operations.




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If we are unable to effectively manage and expand our alliances and relationships with selected suppliers of brand name products, we may be unable to effectively execute our strategy to differentiate ourselves from our competitors.





As part of our focus on product differentiation, we have formed strategic alliances and exclusive relationships with selected suppliers to market products under a variety of well-recognized brand names. If we are unable to manage and expand these alliances and relationships or identify alternative sources for comparable products, we may not be able to effectively execute product differentiation.





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





The retail industry historically has been subject to substantial cyclical variations. The merchandise sold by us is generally a discretionary expense for our customers.  The current downturn in the general economy and uncertainties regarding future economic prospects that affect consumer spending habits are having, and are likely to continue for some time to have, a materially adverse effect on our results of operations.  We have sustained operating losses and negative comparable store sales for the past three fiscal years.  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.





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.





In our efforts to reduce operating expenses and improve liquidity, we have reviewed all of our store leases and are obtaining rent reductions and lease modifications from our landlords.  Additionally, we are evaluating our operating expenses, such as store labor, corporate overhead and advertising, and continue to implement cost reductions.  No assurance can be given that by reducing operating expenses and controlling costs we will return to profitability.  Any failure to successfully reduce an adequate amount of operating expenses and control costs could constrain our ability to continue to operate our business.





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





We continually review all our stores' operating performance and evaluate the carrying value of their assets in relation to their expected future cash flows.  In those cases where circumstances indicate that the carrying value of the applicable assets may not be recoverable, we record an impairment loss related to the long-lived assets.  We incurred a non-cash impairment charge of $10.9 million, $10.7 million and $2.1 million in fiscal 2010, fiscal 2009 and fiscal 2008, related to six, nine and two stores, respectively.  If our newer stores' operating performance does not improve in the future or our existing stores’ operating performance continues to deteriorate in the future, the carrying value of our stores' assets may not be recoverable in light of future expected cash flows.  Additionally, our newer stores may not mature at a rate in line with our expectations or past experience.  This may result in our need to record additional impairment losses in certain markets where our stores operate and could have a materially adverse effect on our business, financial condition and results of operations.





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





The sporting goods business and the retail environment are highly competitive, and we compete with local, regional and national specialty stores and independent retailers, internet retailers and catalog merchandisers, vendor owned stores, high end department stores, big box sporting goods chains, mass merchandisers, club stores, and discount stores.  A number of our competitors are larger and may have greater resources.  No assurance can be given that a diminished competitive environment due to the exit of key competitors throughout the marketplace will allow us to improve our business and increase our overall profitability.




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





We may not be able to fund our future operations or react to competitive pressures if we lack sufficient funds.  Unexpected conditions could cause us to be in violation of our Lender’s operating covenants as occurred in fiscal 2009.  Although we have restructured our bank credit facility and we believe we have sufficient cash available through our bank credit facility and cash from operations to fund existing operations for the foreseeable future, we cannot be certain that additional financing will be available in the future if necessary.





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





Currently, most of our stores are located in Southern California and the remaining are located in Northern California, Nevada, Arizona and Utah.  Accordingly, we are 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 our customers has affected sales in the third quarter of the most recent fiscal year.  When the region suffers an economic downturn, such as declines in the housing and credit markets, increased unemployment and bankruptcies, which has been strongly felt in California, Arizona and Nevada, or when other adverse events occur, historically there has been an adverse effect on our sales and profitability.  In addition, many of our vendors rely on the Ports of Los Angeles and Long Beach to process our shipments.  Any disruption or congestion at the ports could impair our ability to adequately stock our stores. Several of our competitors operate stores across the United States and, thus, are not as vulnerable to such regional risks.





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





If we fail to anticipate changes in consumer preferences, we will experience lower net sales, higher inventory markdowns and lower margins.  Products may or may not appeal to a broad range of consumers whose preferences cannot be predicted with certainty. These preferences are also subject to change.  Specialty sporting goods are often subject to short-lived trends, such as the short-lived popularity of wheeled footwear.  Apparel is significantly influenced by the latest fashion trends and styles.  Our success depends upon the ability to anticipate and respond in a timely manner to trends in specialty merchandise and consumers’ participation in sports on an individual market basis. Failure to identify and respond to these changes may cause net sales to decline. In addition, because we generally make commitments to purchase products from vendors up to nine months in advance of the proposed delivery, misjudging the market may cause us to over-stock unpopular products and force inventory markdowns that could have a negative impact on profitability, or cause us to have insufficient inventory of a popular item that can be sold at full markup.





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




The increasing costs associated with information security — such as increased investment in technology, the costs of compliance with consumer protection laws and costs resulting from consumer fraud — could cause our business and results of operations to suffer materially.  While we are taking significant steps to protect customer and confidential information, there can be no assurance that advances in computer capabilities or other developments will prevent the compromise of our customer transaction processing capabilities and personal data.  More specifically, as Action Pass, our customer relationship program, continues to grow, our exposure and risk increase as well.  If any such compromise of our information security were to occur, it could have a material adverse effect on our reputation, business, operating results and financial condition and may increase the costs we incur to protect against such information security breaches.





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





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





In addition, 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;




·
we may not be able to negotiate acceptable lease terms;




·
we might not be able to hire and retain qualified store personnel; and




·
we might not have the financial resources necessary to fund our expansion plans.




We face additional challenges in entering new markets, including consumers’ lack of awareness of the Company, difficulties in hiring personnel and problems due to our unfamiliarity with local real estate markets and demographics. New markets may also have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets. To the extent that we are not able to meet these new challenges, sales could decrease and operating costs could increase. Furthermore, a decline in our overall financial performance, increased rents or any other adverse effects arising from the commercial real estate market in our geographical markets may adversely affect our growth.  There can be no assurance that we will possess sufficient funds to finance the expenditures related to 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.




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





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





Seasonal fluctuations in the sales of our merchandise and services could cause our annual operating results to suffer.





Our sales volume increases significantly during the Holiday season as is typical with other retailers.  In addition, our product mix has historically emphasized cold weather merchandise increasing the seasonality of our business.  In recent years, our third fiscal quarter, which includes the Holiday season, represented approximately 30% of our annual net sales.  Winter-related products represent approximately 16% of our annual net sales and have ranged from 25% to 30% of our fourth fiscal quarter.  We anticipate this seasonal trend in sales will continue.  The operating results historically have been influenced by the amount and timing of snowfall at the resorts frequented by our customers.  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.  Ski and snowboard vendors require us to make commitments for purchases of apparel and equipment by early Spring for Fall delivery, and only limited quantities of merchandise can be reordered during the Fall.  Consequently, we place our 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, we may be required to mark down our Winter apparel and equipment.





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





We have experienced, and expect to continue to experience, a substantial variation in our net sales and operating results from quarter to quarter.  We believe 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 our introduction of new products, the level of consumer acceptance of each new product, the seasonality of the markets in which we participate, the weather and actions of competitors.  Accordingly, a comparison of our results of operations from period to period is not necessarily meaningful, and our results of operations for any period are not necessarily indicative of future performance.





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


Our marketing campaigns historically relied on direct mail, radio, newspaper, magazines and more recently, email and the internet.  Also our marketing leverage has been boosted by vendor payments under cooperative marketing arrangements as well as vendor participation in sponsoring events, clinics and athletes’ appearances.  Our recent strategy shift significantly enhanced our online presence with a complete redesign of sportchalet.com and new initiatives focused on driving consumers to the new website and building ongoing relationships with our Action Pass customers.  We are directly marketing to individual customers based on their personal shopping information through the customer relationship program.  No assurance can be given that our recent shift in marketing strategy will be successful in connecting with our customers, capturing additional market share through a fully integrated online and offline shopping experience, and raising familiarity with Sport Chalet.  We are relatively new to and have fewer resources than our competitors in the ECommerce arena and our results may not meet our expectations.  In addition, no assurance can be given that what we learn from our Action Pass members about their shopping preferences and patterns will increase our ability to apply this learning to decisions about assortments, category adjacencies, and other marketing initiatives across our entire network of stores.





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





Our ability to successfully manage inventory levels and our centralized distribution system largely depends upon the efficient operation of our computer hardware and software systems.  We use management information systems to track inventory information at the store level, replenish inventory from our warehouse, and aggregate daily sales information, among other things.  These systems and our 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.





We seek to minimize these risks by the use of backup facilities and redundant systems.  Nevertheless any failure that causes an interruption in our operations or a decrease in inventory tracking could result in reduced net sales.





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





As of June 17, 2010, Norbert Olberz, the Company's founder, Craig Levra, the Company’s Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief Financial Officer, owned approximately 20%, 33% and 12%, respectively, of the voting power of the Company’s outstanding voting Class A and Class B Common Stock.  Messrs. Olberz, Levra and Kaminsky effectively have 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.  Transactions may be pursued that could enhance Messrs. Olberz, Levra and Kaminsky’s interests in the Company while involving risks to the interests of the Company’s other stockholders, and there is no assurance that their interests will not conflict with the interests of the Company’s other stockholders.




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





Our Class A Common Stock and Class B Common Stock are thinly traded making it difficult to sell large amounts.  The market prices of our Class A Common Stock and Class B Common Stock are 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 us or our competitors of a material nature, additions or departures of key personnel, future sales of Class A Common Stock and Class B 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 our Class A Common Stock and Class B Common Stock.





From time to time the Class A Common Stock has traded significantly lower than the Class B Common Stock, and there can be no assurance as to the relative trading prices of the Class A Common Stock and the Class B Common Stock.





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





As of  June 17, 2010, Norbert Olberz, the Company's founder, Craig Levra, the Company’s Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief Financial Officer, owned approximately 20%, 33% and 12%, respectively, of the voting power of the Company’s outstanding voting Class A and Class B Common Stock.  The holder of a share of Class B Common Stock is entitled to one vote on each matter presented to the stockholders whereas the holder of a share of Class A Common Stock has 1/20th of one vote on each matter presented to the stockholders.  Subject to the Class A protection provisions described below, Messrs. Olberz, Levra and Kaminsky will be able to sell shares of Class A Common Stock and use the proceeds to purchase additional shares of Class B Common Stock, thereby increasing their collective voting power.  Subject to the prohibition on the grant, issuance, sale or transfer of Class B Common Stock to Messrs. Levra and Kaminsky, the Company will also be able to issue Class B Common Stock (subject to the applicable rules of the NASD and the availability of authorized and unissued shares of Class B Common Stock) to persons deemed by the Board of Directors to be preferable to a potential acquirer, thereby diluting the voting power of that potential acquirer.  The Class A protection provisions in the Company's Certificate of Incorporation could also make acquisition of voting control more expensive by requiring an acquirer of 10% or more of the outstanding shares of Class B Common Stock to purchase a corresponding proportion of Class A Common Stock.





The Company's Certificate of Incorporation contains certain other provisions that may have an "anti-takeover" effect.  The Company's Certificate of Incorporation does not provide for cumulative voting and, accordingly, a significant minority stockholder could not necessarily elect any designee to the Board of Directors.  As a result of these provisions in the Company's Certificate of Incorporation, stockholders of the Company may be deprived of an opportunity to sell their shares at a premium over prevailing market prices and it would be more difficult to replace the directors and management of the Company.




We may be subject toperiodic litigation that may adversely affect our business and financial performance.





We may be subject to lawsuits resulting from injuries associated with the use of the products or services we sell, employment matters or violations of government regulations. There is a risk that claims or liabilities will exceed our insurance coverage.  In addition, we may be unable to retain adequate liability insurance in the future.  An unfavorable outcome or settlement in any such proceeding could, in addition to requiring us to pay any settlement or judgment amount, increase our operating expense as a consequence and cause damage to our reputation.





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





Accounting principles generally accepted in the United States and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition; lease accounting; the carrying amount of property and equipment, inventories and deferred income tax assets are highly complex and may involve many subjective assumptions, estimates and judgments by management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change our reported or expected financial performance.





Terrorist attacks or acts of war may harm our business.





Terrorist attacks may cause damage or disruption to our 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 us to suffer in ways that we currently cannot predict. Our geographical focus in California, Nevada, Arizona and Utah may make us more vulnerable to such uncertainties than other comparable retailers who may not have similar geographical concentration.





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





We currently rely 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 our inventory and could materially impair both our ability to adequately stock our stores and our sales and profitability.





We may pursue strategic acquisitions, which could have an adverse impact on our business.





We may from time to time acquire complementary companies or businesses. Acquisitions may result in difficulties in assimilating acquired companies, and may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may not be able to successfully integrate operations that we acquire, including their personnel, financial systems, distribution, operations and general store operating procedures. If we fail to successfully integrate acquisitions, our business could suffer. In addition, the integration of any acquired business, and their financial results, into ours may adversely affect our operating results. We currently do not have any agreements with respect to any such acquisitions.





Our comparable store sales will fluctuate and may not be a meaningful indicator of future performance.





Changes in our comparable store sales results could affect the price of our Class A Common Stock and Class B Common Stock. A number of factors have historically affected, and will continue to affect, our comparable store sales results, including: competition, our new store openings and remodeling, general regional and national economic conditions, actions taken by our competitors, consumer trends and preferences, changes in the shopping centers in which we are located, new product introductions and changes in our product mix, timing and effectiveness of promotional events, lack of new product introductions to spur growth in the sale of various kinds of sports equipment, and weather. Our comparable store sales may vary from quarter to quarter, and an unanticipated decline in revenues or comparable store sales may cause the price of our Class A Common Stock and Class B Common Stock to fluctuate significantly.




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A regional or global health pandemic could severely affect our business.





A health pandemic is a disease that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time.  If a regional or global health pandemic were to occur, depending upon its location, duration and severity, our business could be severely affected. Customers might avoid public places in the event of a health pandemic, and local, regional or national governments might limit or ban public gatherings to halt or delay the spread of disease.  A regional or global health pandemic might also adversely impact our business by disrupting or delaying production and delivery of products in our supply chain and by causing staffing shortages in our stores.





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





Changes to our environment, whether natural or man-made, could cause significant disruption in both air temperature and snowfall, limiting our ability to capitalize on one of our core competencies, the Winter business.  In addition, lack of proper snowfall could have a negative impact on our fishing and lake-focused water sports businesses, as these rely on streams, rivers, and lakes to be at adequate depth and clarity in order to provide enjoyable experiences for our customers.





ITEM 1B.  UNRESOLVED STAFF COMMENTS





Not applicable.





ITEM 2.  PROPERTIES





At March 28, 2010, we had 55 store locations.  Swimming pool facilities for SCUBA and kayaking instruction are located in 33 of the 55 store locations The following table details key information on our store locations by region:





Year




% of TotalRegion

Entered

Number of Stores


Number of StoresSouthern California

1959


34



62
%Northern California

2003


9



16
%Arizona

2005


8



15
%Nevada

2001


3



5
%Utah

2007


1



2
%Total




55



100
%




We lease all of our existing store locations.  The leases for most of the existing stores are for approximately ten-year terms plus multiple option periods under non-cancelable operating leases with scheduled rent increases.  The 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.  All of the leases obligate us to pay costs of maintenance, utilities, and property taxes.





In our efforts to reduce operating expenses and improve liquidity, we have reviewed our store leases and obtained rent reductions and lease modifications from our landlords.  These negotiations have included 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 feature kick-out clauses, which allow us to terminate the lease at our option at a specified date if contractually specified minimum sales volumes are not exceeded. We did not open any new stores in fiscal 2010 and currently do not anticipate opening new stores in fiscal 2011.  We are using this respite to analyze and evaluate our current real estate portfolio to ensure that we manage our capital investment in the most efficient means possible.




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We lease from corporations controlled by Norbert Olberz, our Founder, our corporate office space in La Cañada and our stores in La Cañada, Huntington Beach and Porter Ranch, California.  We have incurred rental expense to the Founder of $3.2 million, $2.8 million and $2.5 million in fiscal 2010, 2009 and 2008, respectively.





Management believes that the occupancy costs under the leases with corporations controlled by the Founder described above are no higher than those which would be charged by unrelated third parties under similar circumstances.





ITEM 3.  LEGAL PROCEEDINGS





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.





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 was submitted for resolution to an arbitrator and the hearing before the arbitrator is in October 2010.  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.





ITEM 4.  [REMOVED AND RESERVED]





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PART II





ITEM 5.  MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER


MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Market Price for Common Shares





Pursuant to the stockholder approved recapitalization plan that established two classes of common stock, on September 21, 2005, each outstanding share of common stock was reclassified into 0.25 share of Class B Common Stock.  On September 30, 2005, the Company made a non-taxable stock dividend of seven shares of Class A Common Stock for each one outstanding share of Class B Common Stock.  The recapitalization doubled our total number of shares outstanding and, therefore, had the same impact on earnings per share as a 2-for-1 stock split.  Our Class A Common Stock and Class B Common Stock are traded on the Nasdaq Global Market System under the symbol “SPCHA” and “SPCHB,” respectively.  The following table reflects the range of high and low sale prices of our Class A Common Stock and Class B Common Stock for the periods indicated:





Class A


Class BFY 2011

High


Low


High


LowQ1*

$
3.49


$
2.21


$
3.63


$
2.51Class A


Class BFY 2010

High


Low


High


LowQ4

$
2.84


$
1.75


$
3.43


$
2.00Q3

$
2.45


$
1.51


$
4.61


$
2.32Q2

$
2.17


$
1.23


$
4.95


$
2.01Q1

$
2.50


$
0.16


$
3.41


$
0.54Class A


Class BFY 2009

High


Low


High


LowQ4

$
0.50


$
0.16


$
0.95


$
0.41Q3

$
2.70


$
0.30


$
3.37


$
0.50Q2

$
4.75


$
2.91


$
4.58


$
3.15Q1

$
5.63


$
4.20


$
5.25


$
4.25*through June 17, 2010





On June 17, 2010, the closing price of our Class A Common Stock and Class B Common Stock as reported by Nasdaq was $2.65 and $2.80, respectively.  Stockholders are urged to obtain current market quotations for the Class A Common Stock and Class B Common Stock.





Approximate Number of Holders of Common Shares





The number of stockholders of record of our Class A Common Stock and Class B Common Stock as of June 15, 2010 was 138 and 127, respectively (excluding individual participants in nominee security position listings), and as of that date, we estimate that there were approximately 1,000 beneficial owners for Class A Common Stock and 800 beneficial owners for Class B Common Stock holding stock in nominee or “street” name.




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Performance Graph





The following graph compares the yearly percentage change in cumulative total stockholder return of the Company's common stock during the period from March 31, 2005 to March 28, 2010 with (i) the cumulative total return of the Nasdaq Composite Stock Market Index and (ii) the cumulative total return of the S&P Specialty Stores Index.  The comparison assumes $100 was invested on March 31, 2005 in the common stock and in each of the foregoing indices and the reinvestment of dividends through March 28, 2010.  The stock price performance on the following graph is not necessarily indicative of future stock price performance.




In September 2005, the stockholders of the Company approved amendments to the Company's Certificate of Incorporation that resulted in the reclassification of each outstanding share of common stock as 0.25 share of Class B Common Stock and the issuance of seven shares of Class A Common Stock for each outstanding share of Class B Common Stock.  For the period commencing on September 30, 2005, the Company has added the share price of one share of Class B Common Stock and seven shares of Class A Common Stock in calculating its cumulative total return for purposes of the following graph.




The graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act of 1933 or under the Securities  Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such Acts.







Dividend Policy





We have not paid any cash dividends to stockholders since our initial public offering in November 1992.  We currently intend to retain any earnings for use in the operation and potential expansion of our business and, therefore, do not anticipate declaring or paying any cash dividends in the foreseeable future.  The declaration and payment of any such dividends in the future will depend upon our earnings, financial condition, capital needs and other factors deemed relevant by the Board of Directors.




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ITEM 6.  SELECTED FINANCIAL DATA





The following table sets forth selected consolidated financial data as of and for the five most recent fiscal years ended March 28, 2010.  Our fiscal year consists of 52 or 53 weeks, ends on the Sunday nearest to the last day in March and is named for the calendar year ending closest to that date.  This data should be read in conjunction with the financial statements and related notes thereto and other financial information included herein.  All share and per share information has been adjusted to reflect the reclassification and stock dividend as discussed in “Item 1. Business - Recapitalization Plan.”





Fiscal year2010


2009


2008


2007


2006(1)Statements of Operations Data:

(In thousands, except per share, stores and per square foot amounts)Net sales

$
353,695


$
372,652


$
402,534


$
388,209


$
343,204Costs of goods sold, buying and occupancy costs


258,873



284,257



285,982



268,188



237,137Gross profit


94,822



88,395



116,552



120,021



106,067Selling, general and administrative expenses


85,894



107,651



105,697



96,357



92,308Depreciation and amortization


12,644



14,243



12,898



11,419



9,226Impairment charge


10,935



10,730



2,077



-



-(Loss) income from operations


(14,651
)


(44,229
)


(4,120
)


12,245



4,533Interest expense


2,762



2,195



1,466



516



267(Loss) income before income taxes


(17,413
)


(46,424
)


(5,586
)


11,729



4,266Income tax (benefit) provision


(9,139
)


5,823



(2,224
)


4,630



4,353Net (loss) income

$
(8,274
)

$
(52,247
)

$
(3,362
)

$
7,099


$
(87
)Class A and Class B (loss) earnings per share:Basic

$
(0.59
)

$
(3.70
)

$
(0.24
)

$
0.51


$
(0.01
)Diluted

$
(0.59
)

$
(3.70
)

$
(0.24
)

$
0.49


$
(0.01
)Weighted average Class Aand Class B shares outstanding:Basic


14,126



14,123



14,075



13,850



13,506Diluted


14,126



14,123



14,075



14,460



13,506Selected Operating Data:Comparable store sales (decrease) increase (2)


(8.3
)%


(12.4
)%


(4.5
)%


2.0
%


1.9
%Gross profit margin


26.8
%


23.7
%


29.0
%


30.9
%


30.9
%Selling, general and administrative expenses as apercentage of net sales


24.3
%


28.9
%


26.3
%


24.8
%


26.9
%Net cash (used in) provided by operating activities

$
(2,938
)

$
(10,739
)

$
16,374


$
10,664


$
15,962Stores open at end of period


55



55



51



45



40Total square feet at end of period


2,260



2,260



2,067



1,789



1,586Net sales per square foot (3)

$
155


$
179


$
218


$
235


$
238Average net sales per store (3)

$
6,317


$
7,303


$
8,533


$
9,232


$
9,351As of fiscal year endBalance Sheet Data:


2010



2009



2008



2007



2006Working capital

$
13,667


$
(415
)

$
39,197


$
45,493


$
43,446Total assets


138,709



151,055



171,315



171,249



132,238Bank debt


45,290



39,140



17,216



11,776



-Total stockholders' equity

$
24,484


$
32,086


$
83,969


$
86,426


$
77,468
  (1)
For fiscal 2006, the recapitalization plan included the transfer of stock from the Company’s founder to certain members of management with a resulting charge to selling, general and administrative expenses of $8.7 million, primarily related to stock compensation, and a reduction to net income of $7.8 million.  Selling, general and administrative expenses for fiscal 2006 without the expense from the recapitalization plan are 24.4% of sales.  Basic and diluted earnings per share for fiscal 2006 without the expense of the recapitalization plan are $0.57 and $0.55, respectively.(2)
A store’s sales are included in the comparable store sales calculation in the quarter following its twelfth full month of operation.(3)
Calculated using stores that were open for the full current fiscal year and were also open for the full prior fiscal year.




20


Table of Contents


Non-GAAP Financial Measures





In addition to reporting our financial results in accordance with accounting principles generally accepted in the United States (“GAAP”), we provide information regarding EBITDA, net loss and loss per diluted share adjusted for non-cash impairment charges and income taxes.  These measures are considered non-GAAP and are not preferable to GAAP financial information.  EBITDA, as defined in our current bank loan agreement is a non-GAAP measure of liquidity and is included to provide information concerning our performance relative to benchmarks contained in the bank loan agreement.  In addition, we believe the non-GAAP information provides additional measures of performance that our management, analysts and investors can use to compare operating results between reporting periods.  A reconciliation of these non-GAAP results of operations measures to the nearest comparable GAAP measures is presented in the tables below.





EBITDA, as defined in our current bank loan agreement, to net loss as presented in the consolidated statements of operations:





Fiscal year2010


2009


2008(in thousands)Net loss

$
(8,274
)

$
(52,247
)

$
(3,362
)Income tax (benefit) provision


(9,139
)


5,823



(2,224
)Interest expense


2,762



2,195



1,466Depreciation and amortization


12,644



14,243



12,898Share-based compensation


530



354



233Non-cash impairment charge


10,935



10,730



2,077EBITDA (loss)

$
9,458


$
(18,902
)

$
11,088




The exclusion of impairment charges and income taxes for fiscal 2010, 2009 and 2008 from net loss and diluted loss per share provides a consistent comparison between years:





Fiscal year2010


2009


2008(in thousands)Net loss

$
(8,274
)

$
(52,247
)

$
(3,362
)Non-cash impairment charge


10,935



10,730



2,077Income tax (benefit) provision


(9,139
)


5,823



(2,224
)Non-GAAP net loss

$
(6,478
)

$
(35,694
)

$
(3,509
)Non-GAAP diluted loss per share

$
(0.46
)

$
(2.53
)

$
(0.25
)Diluted shares


14,126



14,123



14,075





21


Table of Contents


ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND


RESULTS OF OPERATIONS





This Annual Report on Form 10-K 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 “Item 1A. 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 “Item 6. Selected Financial Data” and our consolidated financial statements and related notes thereto.





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 March 28, 2010, we had 34 locations in Southern California, nine in Northern 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 Team Sales Division and an ECommerce store at sportchalet.com.  Originally we were incorporated in California and we reincorporated as a Delaware corporation in 1992.  Our executive offices are located at One Sport Chalet Drive, La Cañada, California 91011, and our telephone number is (818) 949-5300.





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 our industry, Norbert’s goal was to:





·
See things through the eyes of the customer;


·
Do a thousand things a little bit better;


·
Not be the biggest, but the best;


·
Be the image of the sportsperson; and


·
Create ease of shopping.





Over the last 51 years, Sport Chalet has grown into a chain of 55 specialty sporting goods stores serving California, Nevada, Arizona and Utah, with a Team Sales Division and an ECommerce store.





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, as well as ECommerce.  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 new stores in fiscal 2008, 11 new stores in the last three years and 20 in the last five years.  In fiscal 2009, we opened four new stores, relocated one existing store and re-launched our website.  We did not open any new stores in fiscal 2010 and currently do not anticipate opening new stores in fiscal 2011.  We are using this respite to analyze and evaluate our current real estate portfolio to ensure that we manage our capital investment in the most efficient means possible.  In addition, we are focused on our ECommerce store as our best method of establishing a national footprint.




22


Table of Contents


Store openings have had a favorable impact on sales volume, but have negatively affected profit in the short term.  New stores tend to have higher costs in the early years of operation, due primarily to increased promotional costs and lower sales on a per employee basis until the store matures.  As the store matures, sales tend to level off and expenses decline as a percentage of sales.  We believe our stores historically have required three to four years to attract a stable, mature customer base; but, because of our relatively low number of stores and changing economic conditions, reliable statistical trends are not available and there can be no assurance that our newer stores will mature at that rate.





Recent History





Our stores are located in states that are among those hardest hit by the downturn in the housing and credit markets, increased unemployment and bankruptcies.  Our sales are largely dependent on the level of consumer spending in the geographic regions surrounding our stores.  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 continue to have, a materially adverse effect on our results of operations.





Our comparable store sales growth had been positive for the four fiscal years prior to fiscal 2008.  The severe downturn in the macroeconomic environment caused comparable store sales to decline 12.4% in fiscal 2009, and as a result we incurred a net loss of $52.2 million, or $3.70 per diluted share for fiscal 2009.  During fiscal 2009, we began aggressively taking action by examining our practices, assumptions, models and costs in an effort to modify our business model to make the Company more efficient.  Continuing into fiscal 2010, we focused on improving liquidity and reducing operating expenses through the following core initiatives:





·
Secured an amendment to our loan agreement and temporarily increased availability an additional $10 million.





·
Renegotiated lease terms to reduce base rent and add percentage rent based on sales and clauses permitting us to terminate leases on stores which do not obtain specified minimum sales levels (“kick-out clauses”).





·
Communicated with all vendors regularly to make sure they were fully aware of the challenges we faced and continued their support.





·
Improved inventory management and aggressively reduced aged inventory, thereby providing fresher merchandise in our stores.





·
Significantly increased payroll efficiency in our stores and distribution center, thereby delivering lower spend per customer while maintaining the customer experience.





·
Initiated significant reductions in corporate overhead related to personnel and discretionary spending.





As a result of these initiatives, we reduced markdowns $11.0 million, rent $3.7 million, labor $9.9 million, advertising $5.8 million, professional fees $3.3 million and other expenses $5.1 million during fiscal 2010 as compared to fiscal 2009, and our net loss for fiscal 2010 was reduced to $8.3 million, or $0.59 per diluted share, compared to a net loss of $52.2 million or $3.70 per diluted share, for fiscal 2009.





Comparable store sales decreased 8.3% for fiscal 2010, but improved each consecutive quarter and the fourth quarter marked our first increase in comparable store sales after ten consecutive quarters of negative comparable store sales.  Comparable store sales by quarter for the past three fiscal years are set forth in the following table:





QuarterQ4



Q3



Q2



Q1FY 2010


5.7%



(10.8%)



(12.4%)



(14.7%)FY 2009


(17.7%)



(15.4%)



(6.7%)



(11.1%)FY 2008


(8.8%)



(6.9%)



(2.2%)



1.3%




23


Table of Contents


While the comparable store sales increase in the fourth quarter of fiscal 2010 reflects a positive change in trends, we remain focused on continued improvement through the following:





·
Continuing to improve the functionality and efficiency of sportchalet.com by leveraging our business partners’ significant knowledge in their areas of expertise.





·
Continually refining the way each store is merchandised so as to best fit to its individual store market area and customer base through information provided by our Action Pass customer relationship program.


.


·
Increasing utilization of our growing Action Pass membership to create ever more effective marketing vehicles.





·
Continuing to refine and expand our Team Sales Division by attracting new universities and leagues as customers, while focusing on continuous profitability improvements through more efficient manufacturing and embellishment processes.





·
Recommitment to ensuring we have the best trained merchandise and specialty services employee experts throughout our Company.





·
Continuing toward the full utilization of our information systems to understand our business better and to improve efficiency in both inventory and overall operating costs.





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 position us for better results in the future as the economy improves.





Results of Operations





Fiscal 2010 Compared to Fiscal 2009





The following table sets forth statement of operations data determined in accordance with accounting principles generally accepted in the United States (“GAAP”), the relative percentages of net sales, and the percentage increase or decrease, for the 2010 and 2009 fiscal years (in thousands, except per share amounts).




Fiscal year2010


2009


Dollar


PercentageAmount


Percent


Amount


Percent


Change


ChangeNet sales

$
353,695



100.0
%

$
372,652



100.0
%

$
(18,957
)


(5.1
%)Gross profit


94,822



26.8
%


88,395



23.7
%


6,427



7.3
%Selling, general and administrativeexpenses


85,894



24.3
%


107,651



28.9
%


(21,757
)


(20.2
%)Depreciation and amortization


12,644



3.6
%


14,243



3.8
%


(1,599
)


(11.2
%)Impairment charge


10,935



3.1
%


10,730



2.9
%


205



1.9
%Loss from operations


(14,651
)


(4.1
%)


(44,229
)


(11.9
%)


29,578



(66.9
%)Interest expense


2,762



0.8
%


2,195



0.6
%


567



25.8
%Loss before income taxes


(17,413
)


(4.9
%)


(46,424
)


(12.5
%)


29,011



(62.5
%)Income tax (benefit) provision


(9,139
)


(2.6
%)


5,823



1.6
%


(14,962
)


*Net loss


(8,274
)


(2.3
%)


(52,247
)


(14.0
%)


43,973



(84.2
%)Class A and Class BLoss per share:Basic and diluted

$
(0.59
)





$
(3.70
)





$
3.11



(84.2
%)
  * Percentage change not meaningful





Netsales decreased $19.0 million, or 5.1%, to $353.7 million for fiscal 2010 from $372.7 million for fiscal 2009.  Sales from four new stores, not included in the comparable store sales calculation, resulted in a $5.9 million increase in sales, or 1.6%.  Sales from our Team Sales and ECommerce divisions resulted in $4.6 million increase in sales.  These increases were offset by a comparable store sales decrease of $30.4 million, or 8.3%.  The decrease in comparable store sales is the result of worsening macroeconomic conditions earlier in the year partially offset by improved sales in the fourth quarter from favorable winter weather conditions and improved inventory levels as a result of support from vendors, as compared to the fourth quarter last year.




24


Table of Contents


Gross profit increased $6.4 million, or 7.3%, primarily as a result of a decrease in rent expense of $3.7 million from successful landlord negotiations and a $11.0 million reduction in markdowns primarily related to improved demand for winter products and improved inventory control, offset by the decrease in sales. As a percent of sales, gross profit increased 310 basis points to 26.8% from 23.7%.  The increase is primarily the result of decreased rent and markdowns.





Selling, general and administrative expenses (“SG&A”) decreased $21.8 million, or 20.2%, as expenses related to new stores of $2.2 million were offset by successful expense reduction initiatives of $24.0 million.  Expense reductions included $9.9 million in labor savings from stores, corporate office overhead and the distribution center.  Additional savings include advertising of $5.8 million, professional fees of $3.3 million, repairs and maintenance of $1.0 million and utilities of $1.3 million.  As a percent of sales, SG&A decreased 460 basis points to 24.3% from 28.9% as the expense reductions more than offset the leverage lost from the sales decrease.





A non-cash impairment charge of $10.9 million and $10.7 million was recorded in fiscal 2010 and in fiscal 2009, related to six and nine stores, respectively, where events or changes in circumstances have resulted in significantly lower than expected sales volume.  These stores were not expected to obtain sufficient cash flow over their remaining lease terms to support the carrying value of their leasehold improvements and fixtures.





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 and reduced the associated valuation allowance. We filed our carryback tax return in November 2009 and received our federal refund in January 2010.





Primarily as a result of increased gross profit, decreased SG&A expenses and the income tax refund, partially offset by the reduction in comparable store sales and the impairment charge, we reduced our net loss by $44.0 million to $8.3 million, or $0.59 per diluted share for fiscal 2010, compared to a net loss of $52.2 million or $3.70 per diluted share for fiscal 2009.  Excluding the non-cash impairment charges and the effect of income taxes in fiscal 2010 and 2009, we reduced our net loss by $29.2 million to a net loss of $6.5 million, or $0.46 per diluted share, compared to net loss of $35.7 million, or $2.53 per diluted share for the same period last year.




25


Table of Contents





Fourth Quarter 2010 Compared to Fourth Quarter 2009





The following tables set forth statement of income data and relative percentages of net sales, and the percentage increase or decrease, for the fourth quarter of fiscal 2010 and 2009 (in thousands, except per share amounts).





Fiscal fourth quarter2010


2009


Dollar


PercentageAmount


Percent


Amount


Percent


Change


ChangeNet sales

$
90,223



100.0
%

$
84,513



100.0
%

$
5,710



6.8
%Gross profit


24,983



27.7
%


16,766



19.8
%


8,217



49.0
%Selling, general and administrativeexpenses


21,903



24.3
%


24,069



28.5
%


(2,166
)


(9.0
%)Depreciation and amortization


2,722



3.0
%


3,276



3.9
%


(554
)


(16.9
%)Income (loss) from operations


358



0.4
%


(10,579
)


(12.5
%)


10,937



*Interest expense


657



0.7
%


545



0.6
%


112



20.6
%Loss before income taxes


(299
)


(0.3
%)


(11,124
)


(13.2
%)


10,825



(97.3
%)Income tax benefit


(21
)


(0.0
%)


-



0.0
%


(21
)


*Net loss


(278
)


(0.3
%)


(11,124
)


(13.2
%)


10,846



(97.5
%)Class A and Class BLoss per share:Basic and diluted

$
(0.02
)





$
(0.79
)





$
0.77



(97.5
%)* Percentage change not meaningful




Sales increased $5.7 million, or 6.8%, to $90.2 million for the fourth quarter of 2010 from $84.5 million for the same period in fiscal 2009. Comparable store sales increased 5.7% for the quarter. Improved inventory as a result of support from vendors and favorable winter weather experienced in most of our markets as compared to the same period last year contributed to the increase in sales.





Gross profit increased $8.2 million, or 49%, primarily as a result of the reduced need for markdowns due to favorable winter weather, the decrease in rent expense and the increase in sales.  As a percent of sales, gross profit increased 790 basis points to 27.7% from 19.8% primarily the result of decreased markdowns on winter product.





Selling, general and administrative expenses decreased $2.2 million, or 9.0%.  We incurred $1.0 million in operating expenses related to managing our ECommerce site which we did not incur prior to the relaunch at the end of fiscal 2009.  This was offset by successful expense reduction initiatives of $3.2 million.  Expense reductions included savings on professional fees of $1.3 million, labor savings of $0.8 million, and utilities of $0.3 million.  As a percent of sales, SG&A decreased 420 basis points to 24.3% for the fourth quarter of fiscal 2010 from 28.5% for the same period last year primarily due to the expense reduction initiatives and the leverage from increased sales.





Primarily as a result of increased sales and decreased SG&A expenses, we reduced our net loss by $10.8 million to $0.3 million, or $0.02 per diluted share for the 13 weeks ended March 28, 2010, compared to a net loss of $11.1 million, or $0.79 per diluted share for the 13 weeks ended March 29, 2009.




26


Table of Contents


Fiscal 2009 Compared to Fiscal 2008





The following table sets forth statement of operations data determined in accordance with generally accepted accounting principles (“GAAP”), the relative percentages of net sales, and the percentage increase or decrease, for the 2009 and 2008 fiscal years (in thousands, except per share amounts).





Fiscal year2009


2008


Dollar


PercentageAmount


Percent


Amount


Percent


Change


ChangeNet sales

$
372,652



100.0
%

$
402,534



100.0
%

$
(29,882
)


(7.4
%)Gross profit


88,395



23.7
%


116,552



29.0
%


(28,157
)


(24.2
%)Selling, general and administrativeexpenses


107,651



28.9
%


105,697



26.3
%


1,954



1.8
%Depreciation and amortization


14,243



3.8
%


12,898



3.2
%


1,345



10.4
%Impairment charge


10,730



2.9
%


2,077



0.5
%


8,653



416.6
%Loss from operations


(44,229
)


(11.9
%)


(4,120
)


(1.0
%)


(40,109
)


973.5
%Interest expense


2,195



0.6
%


1,466



0.4
%


729



49.7
%Loss before income taxes


(46,424
)


(12.5
%)


(5,586
)


(1.4
%)


(40,838
)


731.1
%Income tax provision (benefit)


5,823



1.6
%


(2,224
)


(0.6
%)


8,047



*Net loss


(52,247
)


(14.0
%)


(3,362
)


(0.8
%)


(48,885
)


1,454.0
%Class A and Class BLoss per share:Basic and diluted

$
(3.70
)





$
(0.24
)





$
(3.46
)


1,448.8
%* Percentage change not meaningful





Sales decreased $29.9 million, or 7.4%, to $372.7 million for fiscal 2009 from $402.5 million for fiscal 2008.  Sales from eleven new stores, not included in the comparable store sales calculation, resulted in a $16.2 million increase in sales, or 4.1%.  This increase was offset by a comparable store sales decrease of $45.3 million, or 12.4%.  The positive impact on sales by reducing prices was offset by worsening macroeconomic conditions.





Gross profit decreased $28.2 million, or 24.2%, primarily as a result of the sales decrease, an additional $9.7 million in markdowns primarily used to stimulate the demand for inventory and a $4.4 million increase in rent from new stores.  As a percent of sales, gross profit decreased 530 basis points to 23.7% from 29.0%.  The decrease is primarily the result of increased markdowns, rent as a percent of sales in newer stores which take time to reach their desired operating efficiency.





Selling, general and administrative expenses increased $2.0 million, or 1.8%, primarily due to $4.7 million from expenses related to additional stores, $2.1 million for increased professional fees primarily related to new system implementation support and training as well as professional fees incurred in obtaining our new bank credit facility and the related amendments, partially offset by labor savings of $4.8 million.  As a percent of sales, SG&A increased to 28.9% from 26.3%, primarily from the decrease in comparable store sales, the expenses associated with new stores, which take time to reach their desired operating efficiency, and an increase in professional fees offset by labor savings.





A non-cash impairment charge of $10.7 million was recorded in the year ended March 29, 2009 related to nine stores with significantly lower than expected sales volume and based on recent trends are not expected to obtain sufficient cash flow over their remaining lease terms to support the net book value of their leasehold improvements and fixtures.  The existence of the impairment was assessed by calculating the net cash flow of each individual store on an undiscounted basis and comparing it to the net book value of the individual store.  The actual impairment charge was measured by determining the fair value of the store's assets, calculated based on the discounted net cash flow of the store over the remaining lease term, and comparing it to the book value.





A tax provision of $5.8 million was recorded for fiscal 2009 as there was no valuation allowance on the net deferred tax assets of $5.8 million at March 30, 2008. Based largely on the magnitude of this year’s loss, the cumulative losses to date, the near term outlook and other available objective evidence, management concluded that a valuation allowance equal to all of the net deferred tax assets, $24.1 million, should be recorded as the Company’s ability to return to profitability during the loss carryforward period does not meet the “more likely than not” standard.




27


Table of Contents


Primarily as a result of the reduction in comparable store sales, the opening of new stores, the impairment charge and the income tax valuation allowance, we incurred a net loss of $52.2 million, or $3.70 per diluted share for the year ended March 29, 2009.  Excluding the non-cash impairment charge and the affect of the valuation allowance as well as a non-cash impairment charge recorded in the prior fiscal year, net loss was $35.7 million, or $2.53 per diluted share, compared to net loss of $3.5 million, or $0.25 per diluted share for the same period last year.





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.





Net cash used in or provided by operating activities has generally been the result of net income or loss, adjusted for depreciation and amortization, and changes in inventory along with related accounts payable.  The following table shows the more significant items for years ended March 28, 2010 and March 29, 2009:




Fiscal year2010


2009(in thousands)Net loss

$
(8,274
)

$
(52,247
)Depreciation and amortization


12,644



14,243Impairment charge


10,935



10,730Merchandise inventories


(8,849
)


(2,286
)Accounts payable


(6,085
)


1,602Prepaid expenses and other current assets


943



3,992Other accrued expense


(3,470
)


6,125Deferred tax


-



5,723Other


(782
)


1,379Net cash used in operating activites

$
(2,938
)

$
(10,739
)




Typically, inventory levels increase from year to year due to the addition of new stores, while improvements in inventory management decrease inventory required for each store.  Total inventory increased $8.4 million as average inventory per store increased 10.0% to $1.8 million from $1.6 million at the end of fiscal 2010 and fiscal 2009, respectively.  The increase is due to improved vendor fulfillment against our purchase orders as compared to the prior year.  The inventory level is higher than planned and we are focused on reducing the levels in early fiscal 2011.





Historically, accounts payable increases as inventory increases.  However, the timing of vendor payments or receipt of merchandise near the end of the period influences this relationship.  As a result of insufficient cash available during the fourth quarter of fiscal 2009, we had slowed payments to our vendors.  We are now current with our vendors.





Prepaid expenses and other current assets normally include approximately one month’s rent as most leases require payment at the beginning of each month.  As a result of insufficient cash available during the fourth quarter of fiscal 2009, we held all rent payments for one month.  We are now current with our rent payments; however, due to the timing of our quarter end in fiscal 2010, payments to our landlords were not yet due and mailed subsequent to our quarter end.





Insufficient cash available during the fourth quarter of fiscal 2009 also caused other accrued expenses to increase $6.1 million as compared to fiscal 2008.  We are now current with all expense vendors.




A tax provision of $5.8 million was recorded for fiscal 2009 as there was no valuation allowance on the net deferred tax assets of $5.8 million at March 30, 2008. Based largely on the magnitude of the prior year loss, the cumulative losses to date, the near term outlook and other available objective evidence, management concluded that a valuation allowance equal to all of the net deferred tax assets, $22.0 million, is required as the Company’s ability to return to profitability during the loss carryforward period does not meet the “more likely than not” standard.  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 and reduced the associated valuation allowance. We filed our carryback tax return in November 2009 and received our federal refund in January 2010.




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





Fiscal year2010


2009


2008(in thousands)New stores, relocations and ECommerce

$
168


$
13,895


$
11,722Remodels


-



230



2,343Existing stores


150



505



1,198Information systems


281



1,475



6,627Rental equipment


139



9



433Other


-



131



110Total

$
738


$
16,245


$
22,433




We did not open any new stores in fiscal 2010 compared to four new stores and one store 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 in fiscal 2011. Forecasted capital expenditures for fiscal 2011 are expected to be $3.8 million.





Net cash provided by financing activities reflects advances and repayments of borrowings under our revolving credit facility.  The outstanding balance as of March 28, 2010 is $45.3 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 and subsequent payments made to bring vendors current during fiscal 2010.





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 currently is 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 March 28, 2010) 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 there is no early termination fee.  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.





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  exceed the Lender’s minimum EBITDA requirement of $5.4 million EBITDA profit based on the trailing 12 months.   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 following table reconciles EBITDA, as defined in our bank credit facility, to net loss as presented in our consolidated statements of operations.




29


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  Fiscal year2010


2009


2008(in thousands)Net loss

$
(8,274
)

$
(52,247
)

$
(3,362
)Income tax (benefit) provision


(9,139
)


5,823



(2,224
)Interest expense


2,762



2,195



1,466Depreciation and amortization


12,644



14,243



12,898Share-based compensation


530



354



233Non-cash impairment charge


10,935



10,730



2,077EBITDA (loss)

$
9,458


$
(18,902
)

$
11,088




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 accounting principles generally accepted in the United States.





The following table summarizes such obligations as of March 28, 2010:





Payment due by periodContractual Obligations




Less than








More than(in thousands)

Total


1 year


2-3 years


4-5 years


5 yearsOperating Leases (a)

$
196,928


$
30,956


$
60,451


$
46,685


$
58,836Employment Contracts


679



170



339



170



-Total Contractual Obligations

$
197,607


$
31,126


$
60,790


$
46,855


$
58,836
  (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; $11.5 million, $10.5 million and $9.6 million for the fiscal years 2010, 2009 and 2008, respectively.  Operating Lease Obligations reflect savings from lease modifications, assume kick-out clauses will be excercised and do not reflect potential renewals or replacements of expiring leases.





We lease all of our existing store locations.  The leases for most of the existing stores are for approximately ten-year terms plus multiple option periods under non-cancelable operating leases with scheduled rent increases.  The 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.  All of the leases obligate us to pay costs of maintenance, utilities, and property taxes.





In our efforts to reduce operating expenses and improve liquidity, we reviewed our store leases and obtained rent reductions and lease modifications from our landlords.  These negotiations included 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 feature kick-out clauses, which allow us to terminate the lease at our option at a specified date if contractually specified minimum sales volumes are not exceeded. We did not open any new stores in fiscal 2010 and currently do not anticipate opening new stores in fiscal 2011.  We are using this respite to analyze, evaluate and execute against a real estate portfolio to maximize our capital in the most efficient means possible.





Generally, our purchase obligations are cancelable 45 days prior to shipment from our vendors.  Letters of credit amounting to approximately $1.6 million relating to workers’ compensation insurance were outstanding as of March 28, 2010 and expire within one year.





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





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Critical Accounting Policies and Use of Estimates





Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.  In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with accounting principles generally accepted in the United States. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.





Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board.





Inventory Valuation. In connection with the implementation of a new financial and merchandising system, effective March 31, 2008, we have changed the inventory valuation method from the first-in, first-out “FIFO” basis determined by the retail method of accounting to a weighted-average cost basis, using the retail method.  The cumulative effect of this change is not determinable as we do not have the ability to recalculate average cost for prior periods.  We began fiscal 2009 with the FIFO costs as used for the ending fiscal 2008 inventory valuation; going forward these amounts are updated as new purchases are made.  This change has not had a material effect on our results of operations, and we chose this method based on our new system capabilities.





We consider cost to include direct cost of merchandise and inbound freight, plus internal costs associated with merchandise procurement, storage and handling. The retail method is widely used in the retail industry due to its practicality. Current owned retail represents the retail price for which merchandise is offered for sale on a regular basis reduced for any permanent or clearance markdowns. As a result, the retail method normally results in an inventory valuation that is lower than a traditional cost basis.





Inherent in the retail method calculation are certain significant management judgments and estimates including initial mark-up, markdowns and shrinkage, which can significantly impact the owned retail and, therefore, the ending inventory valuation at cost. Specifically, the failure to take permanent or clearance markdowns on a timely basis can result in an overstatement of carrying cost under the retail method. Management believes that its application of the retail method reasonably states inventory at the lower of cost or market.





We regularly review 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 our historical markdown experience and anticipated markdowns based on future merchandising and advertising plans, seasonal considerations, expected business trends and other factors.





Shrinkage is accrued as a percentage of sales based on historical shrinkage trends.  We perform physical inventories twice per year at our stores, near the end of our second quarter and near the end of our fiscal year.  The reserve for shrinkage represents an estimate since the last physical inventory date through the reporting date and actual results can vary from this reserve based on internal and external factors.  The shrinkage at fiscal year end is immaterial.




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We have not made any material changes in the accounting methodology used to establish our inventory valuation, except as described previously or the related markdown or inventory loss reserves during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in future estimates or assumptions we use to calculate our inventory. However, if estimates regarding consumer demand are inaccurate or our ability to maintain our cost complement percentages for certain products changes in an unforeseen manner, we may be exposed to losses or gains that could be material. A 10% change in our reserve for slow moving inventories would not be material to the Company’s financial statements for the past three years.





Revenue Recognition. Sales are recognized upon the purchase by customers at our retail store locations, less merchandise returned by customers. Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption. We generally accept returns up to 30 days from the date of purchase with a sales receipt or proof of purchase. Typically refunds are in the same form of payment originally received from the customer. We accommodate customers who do not have a receipt or proof of purchase by offering an exchange or store credit. When available we track the original sale date with each return and provide a reserve for projected merchandise returns based on this historical experience. As the reserve for merchandise returns is based on estimates, the actual returns could differ from the reserve, which could impact sales.





We have not made any material changes in the accounting methodology used to recognize revenue during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates we use to reserve for returns. Additionally, we believe that a 10% change in our reserves for merchandise returns would not be material to the Company’s financial statements for the past three years.





We have a customer loyalty program, Action Pass, which allows members to earn points for each purchase completed at our stores. Points earned enable members to receive a certificate that may be redeemed on future purchases. The value of points earned are included in accrued expenses and recorded as a reduction in sales at the time the points are earned, based on the retail value of points that are projected to be redeemed. A 10% change in our customer loyalty program liability at March 28, 2010, would not have been material to the Company’s financial statements.





Gift Card/Certificate Redemption.We offer our customers the option of purchasing gift cards and, in the past, gift certificates which may be used toward the future purchase of our products. Revenue from gift cards, gift certificates and store merchandise credits (the “Gift Cards”) is recognized at the time of redemption. The Gift Cards have no expiration dates. We record unredeemed Gift Cards as a liability until the point of redemption.





Our historical experience indicates that not all issued Gift Cards are redeemed (the “Breakage”). Based upon over five years of redemption data, approximately 90% of Gift Cards are redeemed within the year after issuance, and approximately 95% are redeemed within 36 months of the date of issuance, after which redemption activity is negligible. Accordingly, we recognize Breakage as revenue by periodically decreasing the carrying value of the Gift Card liability by approximately 5% of the aggregate amount. A 10% change in our breakage estimates at March 28, 2010, would not have been material to the Company’s financial statements.





We recognize Breakage at the time of redemption of Gift Cards. The revenue from Breakage is included in the income statement line item net sales and amounted to approximately $542,000, $627,000 and $552,000 for fiscal years 2010, 2009 and 2008, respectively.





Self-insurance. Property, general liability and workers' compensation insurance coverage is self-insured for various levels. When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Self-insurance accruals include claims filed, as well as estimates of claims incurred but not yet reported based on historical trends.





We have not made any material changes in the accounting methodology used to establish our self-insured liabilities during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our self-insured accruals at March 28, 2010, would not have been material to the Company’s financial statements.




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Table of Contents


Impairment of Long-Lived Assets.We review 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.




Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.  We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years.  We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.  Using the impairment evaluation methodology described herein, we recorded long-lived asset impairment charges totaling $10.9 million, $10.7 million and $2.1 million, in the aggregate, during fiscal 2010, 2009 and 2008, respectively.  The carrying value of property and equipment was approximately $34.9 million as of March 28, 2010.





Accounting for Income Taxes.  As part of the process of preparing the consolidated financial statements, income taxes are estimated for each of the jurisdictions in which we operate. 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.





Based largely on the magnitude of this year’s loss, the cumulative losses to date, the near term outlook and other available objective evidence, management concluded that a valuation allowance equal to all of the net deferred tax assets, $22.1 million, should be recorded as the Company’s ability to return to profitability during the loss carryforward period does not meet the “more likely than not” standard.  The net deferred assets include federal and state net operating loss carryforwards of $13.1 million and $38.6 million, respectively, which can be carried forward for a period of up to 20 years.




Provisions for income taxes 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 we do business.





Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.  An unfavorable tax settlement would require use of our cash and would result in an increase in our effective income tax rate in the period of resolution.





Recently Issued Accounting Pronouncements





On September 27, 2009, we 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.




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Table of Contents


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Our exposure to interest rate risk consists primarily of borrowings under our credit facility, which bears interest at floating rates (primarily LIBOR 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.





Although we cannot precisely determine the overall effect of inflation, our operations are influenced by general economic conditions.  We do not believe that, historically, inflation has had a material impact on our results of operations as we are generally able to pass along inflationary increases in costs to our customers.  However, in recent periods, we have experienced an impact on overall sales due to a consumer spending slowdown as a result of macroeconomic circumstances which include weak housing trends and rising unemployment in our core markets.





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The financial statements required by this section are submitted as part of Item 15 of this report.





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE





None.





ITEM 9A(T).  CONTROLS AND PROCEDURES





Disclosure 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, have evaluated the Company’s disclosure controls and procedures, and have concluded that, as of the end of the period covered by this report, these controls and procedures are effective at the reasonable assurance level to ensure that the information required to be disclosed by the Company in this report is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and the Chief 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 control 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.




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Table of Contents


Management’s Annual Report on Internal Control Over Financial Reporting





Management prepared and is responsible for the consolidated financial statements and all related financial information contained in this Annual Report and for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company's Chief Executive Officer and the Chief Financial Officer and implemented by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.





The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.





Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that the Company’s internal control over financial reporting is effective as of March 28, 2010.





This Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this Annual Report on Form 10-K.


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 fiscal quarter ended March 28, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.





ITEM 9B.  OTHER INFORMATION





None.




35
 
 Table of Contents





PART III





ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The information concerning the directors and executive officers of the Company is incorporated herein by reference from the section entitled “Proposal 1 - Election of Directors” contained in the definitive proxy statement of the Company to be filed pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year (the “Proxy Statement”).  We have adopted a code of business conduct and ethics that applies to our Chief Executive Officer and senior financial officers.  The code of ethics has been posted on our website under “About Us – Investor Relations – Corporate Governance” at sportchalet.com.  We intend to satisfy disclosure requirements regarding amendments to, or waivers from, any provisions of our code of business conduct and ethics on our website.





ITEM 11.  EXECUTIVE COMPENSATION





The information concerning executive compensation is incorporated herein by reference from the sections entitled “Proposal 1 - Election of Directors,” “Compensation Discussion and Analysis” and “Executive Compensation” contained in the Proxy Statement.





ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS





The information concerning the security ownership of certain beneficial owners and management is incorporated herein by reference from the sections entitled “General Information - Security Ownership of Principal Stockholders and Management” and “Executive Compensation” contained in the Proxy Statement.





ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR INDEPENDENCE





The information concerning certain relationships and related transactions, and director independence, is incorporated herein by reference from the section entitled “Proposal 1 - Election of Directors” contained in the Proxy Statement.





ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





The information concerning principal accountant fees and services is incorporated herein by reference from the section entitled “Independent Registered Public Accounting Firm” contained in the Proxy Statement.




36


Table of Contents


PART IV





ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)
(1)
Financial Statements - The financial statements listed on the accompanying Index


to Audited Consolidated Financial Statements are filed as part of this report.





(2)
Schedules – Valuations and Qualifying Accounts.





For fiscal years 2010, 2009 and 2008, in thousands.




Allowance for

Balance at








Balance atSales Returns

Beginning of








End of(Year ended)

Period


Additions


Deductions


Period3/28/2010

$
374


$
29,041


$
28,982


$
4333/29/2009

$
443


$
21,222


$
21,291


$
3743/30/2008

$
394


$
20,738


$
20,689


$
443





(b)           Exhibits - See Index on Page 38.





37
 
 Table of Contents





Sport Chalet, Inc.





Index to Audited Consolidated Financial Statements




PageReport of Independent Registered Public Accounting Firm




39Consolidated Statements of Operations for each of the three years in the period ended March 28, 2010




40Consolidated Balance Sheets as of March 28, 2010 and March 29, 2009




41Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended March 28, 2010




42Consolidated Statements of Cash Flows for each of the three years in the period ended March 28, 2010




43Notes to Consolidated Financial Statements




44




38
 
 Table of Contents




Report of Independent Registered Public Accounting Firm





To the Stockholders and Board of Directors


Sport Chalet, Inc.




We have audited the accompanying consolidated balance sheets of Sport Chalet, Inc. as of March 28, 2010 and March 29, 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended March 28, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements and schedule referred to above present fairly, in all material respects, the consolidated financial position of Sport Chalet, Inc. as of March 28, 2010 and March 29, 2009, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended March 28, 2010, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.





/s/ Moss Adams LLP





Los Angeles, California


June 18, 2010





39
 
 Table of Contents





Sport Chalet, Inc.





Consolidated Statements of Operations





Fiscal year2010


2009


2008(in thousands, except per share amounts)Net sales

$
353,695


$
372,652


$
402,534Costs of goods sold, buying and occupancy costs


258,873



284,257



285,982Gross profit


94,822



88,395



116,552Selling, general and administrative expenses


85,894



107,651



105,697Depreciation and amortization


12,644



14,243



12,898Impairment charge


10,935



10,730



2,077Loss from operations


(14,651
)


(44,229
)


(4,120
)Interest expense


2,762



2,195



1,466Loss before income taxes


(17,413
)


(46,424
)


(5,586
)Income tax (benefit) provision


(9,139
)


5,823



(2,224
)Net loss

$
(8,274
)

$
(52,247
)

$
(3,362
)Loss per share:Basic and diluted

$
(0.59
)

$
(3.70
)

$
(0.24
)Weighted average number of common sharesoutstanding:Basic and diluted


14,126



14,123



14,075




The accompanying notes are an integral part of these financial statements.




40
 
 Table of Contents




Sport Chalet, Inc.





Consolidated Balance Sheets


March 28,


March 29,2010


2009Assets

(in thousands, except share amounts)Current assets:Cash and cash equivalents

$
2,906


$
290Accounts receivable, net of allowances for doubtfulaccounts of $348 and $376, respectively


2,403



1,434Merchandise inventories


97,280



88,431Prepaid expenses and other current assets


1,235



2,178Income tax receivable


12



1,004Total current assets


103,836



93,337Fixed assets, net


34,873



57,718Total assets

$
138,709


$
151,055Liabilities and stockholders’ equityCurrent liabilities:Accounts payable

$
24,998


$
31,083Loan payable to bank


45,290



39,140Salaries and wages payable


3,972



4,150Other accrued expenses


15,909



19,379Total current liabilities


90,169



93,752Deferred rent


24,056



25,217Commitments and contingenciesStockholders’ equity:Preferred stock, $.01 par value:Authorized shares – 2,000,000


-



-Issued and outstanding shares – noneClass A Common stock, $.01 par value:Authorized shares – 46,000,000


124



124Issued and outstanding shares – 12,412,490 in 2010and 12,359,990 in 2009Class B Common stock, $.01 par value:Authorized shares – 2,000,000


18



18Issued and outstanding shares – 1,770,821 in 2010and 1,763,321 in 2009Additional paid-in capital


35,130



34,458Accumulated deficit


(10,788
)


(2,514
)Total stockholders’ equity


24,484



32,086Total liabilities and stockholders’ equity

$
138,709


$
151,055





The accompanying notes are an integral part of these financial statements.




41
 
 Table of Contents





Sport Chalet, Inc.





Consolidated Statements of Stockholders’ Equity





RetainedCommon Stock





EarningsClass A


Class B


Additional


(AccumulatedShares


Amount


Shares


Amount


Paid-in Capital


Deficit)


Total(in thousands, except share amounts)Balance at April 1, 2007


12,252,654


$
123



1,741,489


$
17


$
33,191


$
53,095


$
86,426Options exercised


107,336



1



21,832



-



371



-



372Related income tax benefit


















300



-



300Share-based compensation






-







-



233



-



233Net loss for 2008






















(3,362
)


(3,362
)Balance at March 30, 2008


12,359,990


$
124



1,763,321


$
18


$
34,094


$
49,733


$
83,969Related income tax benefit


















10



-



10Share-based compensation






-







-



354



-



354Net loss for 2009






















(52,247
)


(52,247
)Balance at March 29, 2009


12,359,990


$
124



1,763,321


$
18


$
34,458


$
(2,514
)

$
32,086Options exercised


52,500



1



7,500



-



142



-



142Share-based compensation






-







-



530



-



530Net loss for 2010






















(8,274
)


(8,274
)Balance at March 28, 2010


12,412,490


$
124



1,770,821


$
18


$
35,130


$
(10,788
)

$
24,484




The accompanying notes are an integral part of these financial statements.




42
 
 Table of Contents




Sport Chalet, Inc.





Consolidated Statements of Cash Flows





Fiscal year2010


2009


2008Operating activities

(in thousands)Net loss

$
(8,274
)

$
(52,247
)

$
(3,362
)Adjustments to reconcile net loss to net cash(used in) provided by operating activities:Depreciation and amortization


12,644



14,243



12,898Loss on disposal of equipment


4



173



326Impairment charge


10,935



10,730



2,077Share-based compensation


530



354



233Deferred income taxes


-



5,723



1,928Changes in operating assets and liabilities:Accounts receivable


(969
)


(75
)


5,535Merchandise inventories


(8,849
)


(2,286
)


922Prepaid expenses and other current assets


943



3,992



(1,343
)Income tax receivable


992



401



77Accounts payable


(6,085
)


1,602



(1,373
)Salaries and wages payable


(178
)


(470
)


(379
)Other accrued expenses


(3,470
)


6,125



(2,327
)Deferred rent


(1,161
)


996



1,162Net cash (used in) provided by operating activities


(2,938
)


(10,739
)


16,374Investing activitiesPurchases of fixed assets


(738
)


(16,245
)


(22,433
)Net cash used in investing activities


(738
)


(16,245
)


(22,433
)Financing activitiesProceeds from bank borrowings


396,262



321,979



110,573Repayment of bank borrowings


(390,112
)


(300,055
)


(105,133
)Checks drawn in excess of cash in balances


-



1,446Proceeds from exercise of stock options


142



-



372Tax benefit on employee stock options


-



10



300Net cash provided by financing activities


6,292



23,380



6,112Increase (decrease) in cash and cash equivalents


2,616



(3,604
)


53Cash and cash equivalents at beginning of year


290



3,894



3,841Cash and cash equivalents at end of year

$
2,906


$
290


$
3,894Cash paid during the year for:Income taxes

$
-


$
52


$
30Interest

$
2,645


$
1,716


$
1,247




The accompanying notes are an integral part of these financial statements.




43
 
 Table of Contents


Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements




1. Description of Business





Sport Chalet, Inc. (the “Company”), founded by Norbert Olberz (the “Founder”) in 1959, is a leading operator of 55 full-service, specialty sporting goods stores in California, Nevada, Arizona and Utah.  The Company has 34 locations in Southern California, nine in Northern California, three in Nevada, eight in Arizona and one in Utah.   Sport Chalet, Inc. has two wholly owned subsidiaries: Sport Chalet Value Services, LLC and Sport Chalet Team Sales, Inc.





The Company has two classes of common stock, each share of Class B Common Stock entitles the holder to one vote, and each share of Class A Common Stock entitles the holder to 1/20th of one vote.  The Class A Common Stock and the Class B Common Stock will generally vote on all matters as a single class, except as required by applicable law.  The holders of Class A Common Stock, voting as a separate class, are also entitled to elect one director, and the affirmative vote of the holders of a majority of the shares of Class A Common Stock, voting as a separate class, will be required to amend certain provisions of the Company's Certificate of Incorporation.





Each share of Class A Common Stock and each share of Class B Common Stock shall have identical rights with respect to dividends and distributions; provided, however, that the holder of each share of Class A Common Stock shall be entitled to receive a regular cash dividend equal to 110% of any regular cash dividend paid with respect to a share of Class B Common Stock; and provided, further, that dividends or other distributions payable on the common stock in shares of common stock shall be made to all holders of common stock and may be made only as follows:  (i) in shares of Class A Common Stock to the record holders of Class A Common Stock and to the record holders of Class B Common Stock, (ii) in shares of Class A Common Stock to the record holders of Class A Common Stock and in shares of Class B Common Stock to the record holders of Class B Common Stock solely in connection with a proportionate dividend to effectuate a split of the common stock, or (iii) in any other authorized class or series of capital stock to the holders of both classes of common stock.





The Founder along with certain members of management collectively own approximately 63% of the outstanding shares of the Class A Common Stock and Class B Common Stock at March 28, 2010.





Economic Environment and Recent History





Our stores are located among the geographic regions hardest hit by the downturn in the housing and credit markets, increased unemployment and bankruptcies.  Our sales are largely dependent on the level of consumer spending in the geographic regions surrounding our stores.  Our comparable store sales growth had been positive for the four fiscal years prior to fiscal 2008.  The severe downturn in the macroeconomic environment caused comparable store sales to decline 12.4% in fiscal 2009, and as a result we incurred a net loss of $52.2 million, or $3.70 per diluted share for fiscal 2009.  During fiscal 2009, we began aggressively taking action by examining our practices, assumptions, models and costs in an effort to modify our business model to make the Company more efficient.  Continuing into fiscal 2010, we focused on improving liquidity and reducing operating expenses.  As a result of these initiatives, we reduced markdowns $11.0 million, rent $3.7 million, labor $9.9 million, advertising $5.8 million, professional fees $3.3 million and other expenses $5.1 million during fiscal 2010 as compared to fiscal 2009, and our net loss for fiscal 2010 was reduced to $8.3 million, or $0.59 per diluted share, compared to a net loss of $52.2 million or $3.70 per diluted share, for fiscal 2009.





Comparable store sales decreased 8.3% for fiscal 2010, but improved each consecutive quarter and the fourth quarter marked our first increase in comparable store sales after ten consecutive quarters of negative comparable store sales.  While the comparable store sales increase in the fourth quarter of fiscal 2010 reflects a positive change in trends, we remain focused on continued improvement through the following:




44
 
 Table of Contents




Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)


·
Continuing to improve the functionality and efficiency of sportchalet.com by leveraging our business partners’ significant knowledge in their areas of expertise.





·
Continually refining the way each store is merchandised so as to best fit to its individual store market area and customer base through information provided by our Action Pass customer relationship program.


.


·
Increasing utilization of our growing Action Pass membership to create ever more effective marketing vehicles.





·
Continuing to refine and expand our Team Sales Division by attracting new universities and leagues as customers, while focusing on continuous profitability improvements through more efficient manufacturing and embellishment processes.





·
Recommitment to ensuring we have the best trained merchandise and specialty services employee experts throughout our Company.





·
Continuing toward the full utilization of our information systems to understand our business better and to improve efficiency in both inventory and overall operating costs.





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 position us for better results in the future as the economy improves.





Segments of an Enterprise





The Company operates in a single operating segment and operates only in the United States.





2. Summary of Significant Accounting Policies





Principles of Consolidation





The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Sport Chalet Value Services, LLC and Sport Chalet Team Sales, Inc.  All significant inter-company transactions and balances have been eliminated in consolidation.





Cash and Cash Equivalents





The Company considers all highly liquid investments with maturities of less than three months when purchased to be cash equivalents.





Our management of cash provides for the reimbursement of all bank disbursement accounts on a daily basis.  Accounts payable at March 28, 2010 and March 29, 2009 includes $3.1 million and $1.5 million, respectively, of checks drawn in excess of cash balances not yet presented for payment.





The Company has a concentration of credit risk when cash deposits in banks are in excess of federally insured limits in the event of nonperformance by the related financial institution. However, management does not anticipate nonperformance by these financial institutions.





Merchandise Inventories





In connection with the implementation of a new financial and merchandising system, effective March 31, 2008, we have changed the inventory valuation method from the first-in, first-out “FIFO” basis determined by the retail method of accounting to a weighted-average cost basis, using the retail method.  We have accounted for the change in accounting principle prospectively.  The cumulative effect of this change is not determinable as we do not have the ability to recalculate average cost for prior periods.  We began fiscal 2009 with the FIFO costs as used for the ending fiscal 2008 inventory valuation; going forward these amounts are updated as new purchases are made.  This change has not had a material effect on our results of operations, and we chose this method based on our new system capabilities.




45
 
 Table of Contents




Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)


We consider cost to include direct cost of merchandise and inbound freight, plus internal costs associated with merchandise procurement, storage and handling. The retail method is widely used in the retail industry due to its practicality. Current owned retail represents the retail price for which merchandise is offered for sale on a regular basis reduced for any permanent or clearance markdowns. As a result, the retail method normally results in an inventory valuation that is lower than a traditional cost basis.





Inherent in the retail method calculation are certain significant management judgments and estimates including initial mark-up, markdowns and shrinkage, which can significantly impact the owned retail and, therefore, the ending inventory valuation at cost. Specifically, the failure to take permanent or clearance markdowns on a timely basis can result in an overstatement of carrying cost under the retail method. Management believes that its application of the retail method reasonably states inventory at the lower of cost or market.





We regularly review 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 our historical markdown experience and anticipated markdowns based on future merchandising and advertising plans, seasonal considerations, expected business trends and other factors.





Shrinkage is accrued as a percentage of sales based on historical shrinkage trends.  We perform physical inventories twice per year at our stores, near our second quarter and near the end of our fiscal year.  The reserve for shrinkage represents an estimate since the last physical inventory date through the reporting date and actual results can vary from this reserve based on internal and external factors.  The shrinkage reserve at fiscal year end is immaterial.





Accounts Receivable





Accounts receivable is reported net of an allowance for doubtful accounts. The allowance for doubtful accounts represents an estimate of the losses inherent in accounts receivable based on several factors, including historical trends of aging of accounts, write-off experience and expectations of future performance.   Accounts receivable consists of amounts due from customers, vendors and landlords, in thousands, as follows:




March 28,


March 29,2010


2009Customers

$
1,780


$
1,470Vendors


672



-Other


299



3402,751



1,810Allowance for doubtful accounts


(348
)


(376
)Net accounts receivable

$
2,403


$
1,434




Fixed Assets





Fixed assets are primarily fixtures, equipment, and leasehold improvements which are stated on the basis of cost. Depreciation of fixtures and equipment is computed primarily on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the life of the asset or the remaining lease term.




46
 
 Table of Contents




Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)




The estimated useful lives of the assets are as follows:





Fixtures and equipment
5-7 yearsComputer software and equipment
3-7 yearsRental equipment
3 yearsVehicles
5 yearsLeasehold improvements
10-15 years





The following is a summary of the components of fixed assets, in thousands:




March 28,


March 29,2010


2009Fixtures and equipment

$
40,168


$
39,903Computer software and equipment


31,530



31,271Rental equipment


6,630



6,831Vehicles


438



438Leasehold improvements


62,838



62,799141,604



141,242Accumulated depreciation


(106,731
)


(83,524
)Net fixed assets

$
34,873


$
57,718




Maintenance and repairs are charged to expense, as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. When leasehold improvements or equipment are disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts and any gain or loss is included in operations.





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.





Non-cash impairment charges of $10.9 million, $10.7 million and $2.1 million were recorded in fiscal 2010, 2009 and 2008, related to six, nine and two stores, respectively, with significantly lower than expected sales volume which, based on recent trends, are not expected to obtain sufficient cash flow over their remaining lease terms to support the net book value of their leasehold improvements and fixtures.  The existence of the impairment was assessed by calculating the net cash flow of each individual store on an undiscounted basis and comparing it to the net book value of the individual store.  The actual impairment charge was measured by determining the fair value of the store's assets, calculated based on the discounted net cash flow of the store over the remaining lease term, and comparing it to the book value.





Financial Instruments





Cash and cash equivalents, accounts receivable and accounts payable are carried at cost which approximates fair value due to their short-term nature.




Pre-opening Costs




Non-capital expenditures incurred prior to the opening of a new store are charged to operations as incurred.




47
 
 Table of Contents




Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)




Revenue Recognition




Revenue from retail sales are recognized at the time the customer receives the merchandise, net of sales tax and an allowance for estimated returns. Issuance of gift cards and store credits are recorded as a liability until redeemed for merchandise. Revenues from services and licensing agreements are generally recorded on a cash basis, which approximates when the revenue is earned, and are not material.





The Company has a customer loyalty program, Action Pass, which allows members to earn points for each purchase completed at our stores.  Points earned enable members to receive a certificate that may be redeemed on future purchases.  The value of points earned are included in accrued expenses and recorded as a reduction in sales at the time the points are earned, based on the retail value of points that are projected to be redeemed.




Gift Card/Certificate Redemption





Gift cards and certificates are issued by the Company to be used toward the future purchase of the Company’s products. Revenue from gift cards, gift certificates and store merchandise credits (the “Gift Cards”) are recognized at the time of redemption.   The Gift Cards have no expiration dates.





The Company’s experience indicates that not all issued Gift Cards are redeemed (the “Breakage”).  Accordingly, Breakage is recognized as revenue by periodically decreasing the carrying value of the Gift Card liability by approximately 5% of the aggregate amount.  The Company recognizes Breakage at the time of redemption of Gift Cards. The revenue from Breakage is included in the income statement line item net sales and amounted to $542,000, $627,000 and $552,000 for fiscal years 2010, 2009 and 2008, respectively.





Cost of Goods Sold, Buying and Occupancy




Cost of goods sold, buying and occupancy includes product costs, net of discounts and allowances, and inbound freight charges, as well as distribution center, purchasing, and occupancy costs.  Distribution center costs include receiving costs, internal transfer costs, labor, building rent, utilities, depreciation, repairs and maintenance for the Company’s distribution center and distribution system.  Purchasing costs include both labor and administrative expense associated with the purchase of the Company’s products.  Occupancy costs primarily consist of store rent.  All these costs reflect, in management’s opinion, the direct cost involved in bringing the Company’s product to market.





Vendor Allowances





Vendor allowances include consideration received from vendors, such as volume rebates and cooperative advertising funds. Vendor allowances other than for cooperative advertising are immaterial and accounted for when received. The majority of this consideration is based on contract terms. Amounts that represent the reimbursement of costs incurred for advertising are recorded as a reduction of the related expense in the period incurred. Amounts expected to be received from vendors relating to the purchase of merchandise are recognized as a reduction of cost of goods sold as the merchandise is sold.




Advertising Costs




Advertising costs are expensed as incurred. Advertising expense, net of vendor reimbursement, amounted to $4.3 million, $9.9 million and $10.1 million for fiscal years 2010, 2009 and 2008, respectively.  The amount of vendor reimbursements amounted to $3.4 million, $4.1 million and $5.8 million for fiscal years 2010, 2009 and 2008, respectively.




48
 
 Table of Contents





Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)




Income Taxes




The Company utilizes the liability method of accounting to compute the difference between the tax basis of assets and liabilities and the related financial reporting amounts using currently enacted tax laws and rates.




Deferred Rent




Rent expense under non-cancelable operating leases with scheduled rent increases or free rent periods is accounted for on a straight line basis over the lease term, beginning on the date of initial possession, which is generally when the Company begins 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.




Self-insurance Accruals




The Company self insures a significant portion of expected losses under workers’ compensation and general liability programs.  Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and unreported.





Loss Per Share





Loss per share, basic, is computed based on the weighted average number of common shares outstanding for the year.  Loss per share, diluted, is computed based on the weighted average number of common and potentially dilutive common equivalent shares outstanding for the year.   The Company does not utilize the two-class method to report its earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to participation rights in undistributed earnings. Our Class A Common Stock is entitled to receive a regular cash dividend equal to 110% of any regular cash dividend paid with respect to a share of Class B Common Stock, which could result in the two-class method of computing earnings per share. However the application of this method would result in an immaterial change in earnings per share and is therefore not presented.





A reconciliation of the numerators and denominators of the basic and diluted loss per share computations are illustrated below:




Fiscal year2010


2009


2008(in thousands, except per share data)Basic and diluted loss per share computation:Net loss

$
(8,274
)

$
(52,247
)

$
(3,362
)Denominator:Weighted average common sharesoutstanding


14,126



14,123



14,075Basic and diluted loss per share

$
(0.59
)

$
(3.70
)

$
(0.24
)




Options to purchase an aggregate of 1,910,936, 1,907,955 and 1,432,055 shares for fiscal years 2010, 2009 and 2008, respectively, are excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.





Use of Estimates





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.




49
 
 Table of Contents




Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)




Share-Based Compensation





Total stock-based compensation expense recognized for the 2010, 2009 and 2008 fiscal years was $530,000, $354,000 and $233,000, respectively, before income taxes, and the related tax benefit for fiscal 2008 was $91,000.





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.  The following weighted average assumptions are used to estimate the fair value for stock options granted in the years listed below:





Fiscal year2010


2009


2008Risk-free interest rate


2.3%



3.0%



4.9%Expected volatility


92.5%



39.1%



36.6%Expected dividend yield


0.0%



0.0%



0.0%Expected life in years


6.4



7.5



7.5




The weighted average fair value of options granted during fiscal 2010, 2009 and 2008 was $1.89,   $2.19 and $5.02, respectively.





Recently Issued Accounting Pronouncements





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.





3. Loans Payable to Bank





Under our bank credit facility with Bank of America, N.A. (the “Lender”), 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 currently is 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 March 28, 2010) 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. 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.




50
 
 Table of Contents




Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)


At March 28, 2010, there is $45.3 million outstanding under the facility as well as letters of credit amounting to $1.6 million relating to relating to workers’ compensation insurance.





The weighted average interest rate on borrowings during the 2010, 2009 and 2008 fiscal years was 4.86%, 4.97% and 6.09%, respectively.





4. Other Accrued Expenses





Other accrued expenses consist of the following, in thousands:




March 28,


March 29,2010


2008Amount due to customers

$
5,690


$
5,923Accrued sales tax


3,088



2,572Self-insurance accruals


1,260



1,601Other


5,871



9,283Other accrued expenses

$
15,909


$
19,379




5. Commitments and Contingencies





The Company leases all buildings (including its corporate office space and three stores from the Company’s Founder). The leases for most of the existing stores are approximately ten-year terms plus multiple option periods under non-cancelable operating leases with scheduled rent increases.  The 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 the Company enters the space to 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.  All of the leases obligate the Company to pay costs of maintenance, utilities, and property taxes.





In the Company’s efforts to reduce operating expenses and improve liquidity, it has reviewed its store leases and obtained rent reductions and lease modifications from its landlords. These negotiations included renegotiating base rent, revising some of the Company’s leases to contain percentage rent clauses, which obligate the Company to pay rents based on a percentage of sales rather than fixed amounts, and amending certain leases to feature kick-out clauses, which allow the Company to terminate the lease at its option at a specified date when contractually defined minimum sales volumes are not exceeded.





Future minimum payments, including lease modifications, by year and in the aggregate, under those leases with terms of one year or more, in thousands, consist of the following at March 28, 2010:





Leases with


UnrelatedFounder


Leases


Total2011

$
2,428


$
28,528


$
30,9562012


1,886



29,262



31,1482013


1,649



27,654



29,3032014


1,459



24,360



25,8192015


1,393



19,473



20,866Thereafter


3,416



55,420



58,836$
12,231


$
184,697


$
196,928




51
 
 Table of Contents




Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)




Total rent expense amounted to $41.2 million, $44.8 million and $39.8 million for fiscal years 2010, 2009 and 2008, respectively, which include $3.2 million, $2.8 million and $2.5 million, respectively, for the leases with the Founder. Also, total rent expense includes contingent rentals calculated as a percentage of gross sales over certain base amounts of $1.7 million, $568,000 and $591,000 for fiscal years 2010, 2009 and 2008, respectively.





Pursuant to his amended employment contract dated April 1, 2000, the Founder is paid a base salary of $150,000 per year until March 31, 2014.





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.





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.





6. Income Taxes





The provision (benefit) for income taxes for fiscal years 2010, 2009 and 2008, in thousands, consists of the following:




Fiscal year2010


2009


2008Federal:Current

$
(9,136
)

$
(32
)

$
(4,033
)Deferred


-



3,565



2,395(9,136
)


3,533



(1,638
)State:Current


(3
)


83



(117
)Deferred


-



2,207



(469
)(3
)


2,290



(586
)$
(9,139
)

$
5,823


$
(2,224
)




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 and reduced the associated valuation allowance. 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.




52
 
 Table of Contents
  Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)




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 March 28, 2010, our net deferred tax assets and related valuation allowance totaled $22.0 million.  The Company has federal and state net operating loss carryforwards of $13.1 million and $38.6 million, respectively, which can be carried forward for a period of up to 20 years.





Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of fiscal year end 2010 and 2009, in thousands, are as follows:




Fiscal year2010


2009Current


Non-current


Current


Non-currentDeferred tax assets:Fixed assets

$
-


$
9,655


$
-


$
4,655Net operating loss carryforward


-



6,714



-



14,112Uniform cost capitalization


131



-



593



-Inventory reserves


2,020



-



1,195



-Accrued vacation


425



-



500



-Self-insurance accruals


588



-



767



-Allowance for bad debt andsales returns


311



-



298



-Deferred rent


-



1,067



-



1,378Other


1,050



-



565



-Total deferred tax assets beforevaluation allowance


4,525



17,436



3,918



20,145Valuation allowance


(4,525
)


(17,436
)


(3,918
)


(20,145
)Total deferred tax assets

$
-


$
-


$
-


$
-


A reconciliation of the provision for income taxes for fiscal years 2010, 2009 and 2008 with the amount computed using the federal statutory rate, in thousands, follows:





Fiscal year2010


2009


2008Statutory rate, 34% applied to incomebefore taxes

$
(5,920
)

$
(15,663
)

$
(1,899
)State taxes, net of federal tax effect


(1,016
)


(2,688
)


(321
)Deferred tax valuation allowance


(2,102
)


24,063



-Other, net


(101
)


111



(4
)$
(9,139
)

$
5,823


$
(2,224
)




For the years ended March 29, 2009 and March 30, 2008, we recorded tax benefits related to the exercise of non-qualified stock options which were recorded as a credit to additional paid-in capital in the amount of $10,000 and $300,000, respectively.





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 and fiscal 2009 is currently under audit by the Internal Revenue Service.  The tax years after fiscal 2006 remain open to examination by state tax authorities.




53
 
 Table of Contents




Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)


7. Award Plan and Stock Award





Award Plan





The Company’s 2004 Equity Incentive Plan (“2004 Plan”) became effective on August 2, 2004 and terminated its prior plan (“1992 Plan”).  Awards outstanding under the 1992 Plan may be exercised or settled in accordance with their original terms.  Any shares not issued under the 1992 Plan were added to the shares available for issuance under the 2004 Plan.





Under the 2004 Plan, stock options or other awards to purchase or receive shares of the Company’s common stock may be granted to employees, directors and consultants of the Company and its affiliates.  Generally, the option price per share shall not be less than fair market value at the date of grant, and options vest for periods up to five years and if not exercised, expire ten years from the date of grant. The 2004 Plan also provides for issuance by the Company of stock appreciation rights, restricted stock and performance awards.




In November 2009, we completed an offer to exchange certain employee stock options for new options (the "Option Exchange").   Under the Option Exchange, each eligible employee, other than the Chief Executive Officer, Chief Financial Officer and members of the Board of Directors, were given the 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 new options to purchase a fewer number of shares than the exchanged options. The number of shares underlying the new options equaled one-half of the number of shares underlying the exchanged options. The exercise price of the new options was $1.71, the closing price of the Class A Common Stock on the new option grant date, November 9, 2009, as reported by The Nasdaq Global Market. The new options vest in two equal installments, one-half on the first anniversary of the new option grant date and the remaining one-half on the second anniversary of the new option grant date, regardless of whether the exchanged options were fully or partially vested. The term of the new options is six years, regardless of the remaining term of the exchanged options.  Options to purchase an aggregate of 721,927 shares of Class A Common Stock were exchanged for new options to purchase an aggregate of 360,976 shares of Class A Common Stock.





As of March 28, 2010, there were 567,640 shares of common stock available for issuance pursuant to future stock option grants. The stock option activity during the 2010 fiscal year is presented in the following table:





Weighted-AverageWeighted


Remaining


AggregateAverage


Contractual


Intrinsic ValueOptions


Exercise Price


Term (Years)


(in 000's)Outstanding as of March 29, 2009


1,907,955


$
5.06Granted


907,000



1.96Granted through Option Exchange


360,976



1.71Exercised


(60,000
)


2.38Forfeited or expired


(483,068
)


3.91Forfeited through Option Exchange


(721,927
)


6.16Outstanding as of March 28, 2010


1,910,936


$
2.91



7.2


$
1,033,094Vested as of March 28, 2010


510,360


$
4.98



3.5


$
52,921




Options to purchase Class A Common Stock and Class B Common Stock are combined in the table above.  The aggregate intrinsic value is based on the Company’s closing stock price of $2.65 and $3.40 for Class A Common Stock and Class B Common Stock, respectively, as of the last trading day of the period ended March 28, 2010.  During the 2010 fiscal year, the total fair value of options vested was $361,000.




54
 
 Table of Contents




Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)




The non-vested stock option activity during the 2010 fiscal year is presented in the following table:





WeightedAverageShares


Fair ValueNonvested, March 29, 2009


599,450


$
2.66Granted


1,267,976



1.89Vested


(135,010
)


5.43Forfeited


(331,840
)


2.84Nonvested, March 28, 2010


1,400,576



1.61




As of March 28, 2010, total unrecognized share-based compensation expense related to non-vested stock options was $2,131,000, which is expected to be recognized over a weighted average period of approximately 2.3 years.





The Company issues new shares of common stock upon exercise of stock options.





Additional information regarding options outstanding as of March 28, 2010, is as follows:





Options Outstanding


Options ExercisableWeightedAverage


Weighted





WeightedRemaining


Average





AverageContractual


Exercise





ExerciseRange of Exercise Price

Shares


Life (Years)

Price


Shares


PriceUnder $3.00


1,380,476



8.01


$
1.91



108,900


$
2.28$3.00 to $4.49


194,250



2.25



4.12



186,250



4.12$4.50 to $5.99


147,250



8.19



4.77



29,450



4.77$6.00 to $7.50


147,960



5.60



7.20



147,960



7.20$7.51 to $10.00


41,000



5.98



8.49



37,800



8.46$0.00 to $10.00


1,910,936



7.21



2.91



510,360



4.85




8. Employee Retirement Plan





The Sport Chalet, Inc. Employee Retirement Savings Plan (the “401(k) Plan”) covers all eligible employees.  Employees who have completed three months of service and are 21 years of age or older are eligible to participate.  Employees may contribute from 2% to 100% of their eligible earnings or the government limit (whichever is less).  The Company matched 25% of the first 4% of employee pre-tax earnings deferred into the 401(k) Plan up to December 31, 2009.  The Company expense related to this plan was $59,000, $88,000 and $115,000 for fiscal years 2010, 2009 and 2008, respectively.




55
 Table of Contents


Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements (continued)





9. Quarterly Results of Operations (Unaudited)





A summary of the unaudited quarterly results of operations follows (dollar amounts in thousands, except per share amounts).





Fourth


Third


Second


FirstFY 2010

Quarter


Quarter


Quarter


QuarterNet sales

$
90,223


$
95,258


$
88,811


$
79,403Gross profit


24,983



24,018



24,831



20,990Income (loss) from operations


358



(12,097
)


(509
)


(2,403
)Net loss


(278
)


(3,800
)


(1,212
)


(2,984
)Basic and diluted loss per share

$
(0.02
)

$
(0.27
)

$
(0.09
)

$
(0.21
)Fourth


Third


Second


FirstFY 2009

Quarter


Quarter


Quarter


QuarterNet sales

$
84,513


$
104,562


$
96,457


$
87,120Gross profit


16,766



23,325



25,596



22,708Loss from operations


(10,579
)


(20,212
)


(6,566
)


(6,872
)Net loss


(11,124
)


(32,376
)


(4,221
)


(4,526
)Basic and diluted loss per share

$
(0.79
)

$
(2.29
)

$
(0.30
)

$
(0.32
)
 56
 
 Table of Contents


SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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.


(Registrant)




Date:  June 18, 2010
By:
/s/ Howard K. KaminskyHoward K. Kaminsky, Executive Vice President –Finance, Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)





KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Howard K. Kaminsky, Executive Vice President, Chief Financial Officer and Secretary, his true and lawful attorney-in-fact and agent, with full power of substitution, to sign and execute on behalf of the undersigned any and all amendments to this report, and to perform any acts necessary in order to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requested and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their or his or her substitutes, shall do or cause to be done by virtue hereof.





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.




Date:  June 18, 2010
By:
/s/ Craig L. LevraCraig L. Levra, Chairman,Chief Executive Officer and President(Principal Executive Officer)
 Date:  June 18, 2010
By:
/s/ Howard K. KaminskyHoward K. Kaminsky, Executive Vice President –Finance, Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)
 Date:  June 18, 2010
By:
/s/ John R. AttwoodJohn R. Attwood, Director  Date:  June 18, 2010
By:
/s/ Donald J. HowardDonald J. Howard, Director
 Date:  June 18, 2010
By:
/s/ Eric S. OlberzEric S. Olberz, Director  Date:  June 18, 2010
By:
/s/ Frederick H. SchneiderFrederick H. Schneider, Director  Date:  June 18, 2010
By:
/s/ Kevin J. VentrudoKevin J. Ventrudo, Director
  57
 
 Table of Contents




Exhibit Index


Number
Description  3.1
Restated Certificate of Incorporation, restated as of November 4, 2009.
(1)3.2
Bylaws, of Sport Chalet, Inc., amended as of September 15, 2009.
(2)4.1
Form of Certificate for the Class A Common Stock.
(3)4.2
Form of Certificate for the Class B Common Stock.
(4)10.1*
1992 Incentive Award Plan.
(5)10.2*
Sport Chalet Stock Option Incentive Award Agreement.
(5)10.3*
2004 Equity Incentive Plan.
(6)10.4*
Sport Chalet 2004 Equity Incentive Plan Stock Option Agreement.
(6)10.5*
Form of Director and Officer Indemnification Agreement.
(7)10.6
Lease for La Cañada stores dated as of September 1, 1992, between the Company and La Cañada Properties, Inc.
(8)10.7
First Amendment to Lease for La Cañada stores dated as of March 31, 2006, between the Company and La Cañada Properties, Inc.
(9)10.8
Retail Lease for La Cañada store dated as of January 11, 2008, between the Company and La Cañada Properties, Inc.
(10)10.9
Lease for Huntington Beach store dated as of August 25, 1994, between the Company and Huntington Beach Properties, Inc.
(11)10.10
First Amendment to Lease for Huntington Beach store dated as of March 31, 2006, between the Company and Huntington Beach Properties, Inc.
(12)10.11
Lease for Porter Ranch store dated as of May 7, 1999, between the Company and North San Fernando Valley Properties, Inc.
(1310.12
Lease for La Cañada offices dated as of October 1, 2002, between the Company and La Cañada Properties, Inc.
(14)10.13
Business Loan Agreement dated as of June 19, 1998, between the Company and Bank of America, N.A.
(15)10.14
Amendment No. 2 to Business Loan Agreement dated as of June 19, 1998, between the Company and Bank of America, N.A.
(16)10.15
Amendment No. 3 to Business Loan Agreement dated as of November 20, 2001, between the Company and Bank of America, N.A.
(17)10.16
Amendment No. 4 to Business Loan Agreement dated as of June 10, 2002, between the Company and Bank of America, N.A.
(18)10.17
Amendment No. 5 to Loan Agreement dated as of September 25, 2003, between the Company and Bank of America, N.A.
(19)10.18
Amendment No. 6 to Loan Agreement dated as of September 30, 2006, between the Company and Bank of America, N.A.
(20)10.19
Amendment No. 7 to Loan Agreement dated as of March 31, 2006, between the Company and Bank of America, N.A.
(21)10.20
Amendment No. 8 to Loan Agreement dated as of April 19, 2007, between the Company and Bank of America, N.A.
(22)  58
 
 Table of Contents
  Exhibit Index
 Number
Description
 10.21
Loan Agreement dated as of August 31, 2007, between the Company and Bank of America, N.A.
(23)10.22
Security Agreement dated August 31, 2007, between the Company and Bank of America, N.A.
(24)10.23
Amended and Restated Loan and Security Agreement dated as of June 20, 2008, between the Company, together with each of the other Obligated Parties party thereto from time to time, certain financial institutions, as Lenders thereunder, and Bank of America, N.A., as Agent.
(25)10.24
Pledge Agreement dated as of June 20, 2008, between the Company and Bank of America, N.A., as administrative agent for the Lenders.
(26)10.25
Secured Continuing Guaranty dated as of June 20, 2008, by Sport Chalet Value Services, LLC in favor of Bank of America, N.A., as administrative agent for the Lenders.
(27)10.26
Website Security Agreement and Power of Attorney dated as of June 20, 2008, between the Company and Bank of America, N.A., as administrative agent for the Lenders.
(28)10.27
Post Closing Agreement dated as of June 20, 2008, between the Company and Bank of America, N.A., as administrative agent for the Lenders.
(29)10.28
Trademark Security Agreement dated as of June 20, 2008, between the Company and Bank of America, N.A., as administrative agent for the Lenders.
(30)10.29
First Amendment to Amended and Restated Loan and Security Agreement and Limited Forbearance Agreement dated as of December 28, 2008, among the Company, Sport Chalet Value Services, LLC, the Lenders and Bank of America, N.A., as agent for the Lenders.
(31)10.30
Letter agreement dated as of December 28, 2008, among the Company, Sport Chalet Value Services, LLC and Bank of America, N.A.
(32)10.31
Second Amendment to Amended and Restated Loan and Security Agreement and Limited Forbearance Agreement dated as of January 29, 2009, among the Company, Sport Chalet Value Services, LLC, the Lenders and Bank of America, N.A., as agent for the Lenders.
(33)10.32
Third Amendment to Amended and Restated Loan and Security Agreement and Limited Waiver dated as of March 2, 2009, among the Company, Sport Chalet Value Services, LLC, the Lenders and Bank of America, N.A., as agent for the Lenders.
(34)10.33
Fourth Amendment to Amended and Restated Loan and Security Agreement dated as of May 4, 2009, among the Company, Sport Chalet Value Services, LLC, the Lenders and Bank of America, N.A., as agent for the Lenders.
(35)10.34*
Employment Agreement dated as of April 1, 2000, between the Company and Norbert J. Olberz.
(36)10.35*
Amendment No. 1 to Employment Agreement dated as of December 9, 2005, between the Company and Norbert J. Olberz.
(37)10.36*
Employment Agreement dated as of December 31, 2008, between the Company and Craig L. Levra.
(38)10.37*
Employment Agreement dated as of December 31, 2008, between the Company and Howard K. Kaminsky.
(39)10.38*
Employment Agreement dated as of December 31, 2008, between the Company and Dennis D. Trausch.
(40)10.39*
Employment Agreement dated as of December 31, 2008, between the Company and Thomas H. Tennyson.
(41)10.40*
Employment Agreement dated as of December 31, 2008, between the Company and Tim Anderson.
(42)  59
 
 Table of Contents
  Exhibit Index
 Number
Description
 10.41*
Form of letter agreement dated as of March 31, 2006 re acceleration of vesting of options between the Company and certain of its executive officers and key employees.
(43)14.1
Code of Conduct.
(44)24.1
Power of attorney (see signature page).31.1
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†31.2
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†32.1
Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
††
Filed as part of this Annual Report on Form 10-K.*
Constitute management contracts, or compensatory plans or arrangements, which are required to be filed pursuant to Item 601 of Regulation S-K.(1)
Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2009.(2)
Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2009.(3)
Incorporated by reference to Exhibit 4.1 to the Company’s Registration of Certain Classes of Securities on Form 8-A, filed on September 29, 2005.(4)
Incorporated by reference to Exhibit 4.2 to the Company’s Registration of Certain Classes of Securities on Form 8-A, filed on September 29, 2005.(5)
Incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1 (Registration Statement No. 33-53120).(6)
Incorporated by reference to Appendix D to the Company's definitive proxy statement for the 2004 annual meeting of stockholders.(7)
Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.(8)
Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (Registration Statement No. 33-53120).(9)
Incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.(10)
Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2008.(11)
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.(12)
Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.(13)
Incorporated by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1999.  60
 
 Table of Contents
  Exhibit Index
 Number
Description
 (14)
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.(15)
Incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998.(16)
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.(17)
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001.(18)
Incorporated by reference to Exhibit 10.55 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002.(19)
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.(20)
Incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on October 3, 2005.(21)
Incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.(22)
Incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended April 1, 2007.(23)
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on August 31, 2007.(24)
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on August 31, 2007.(25)
Incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for fiscal year ended March 30, 2008.(26)
Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for fiscal year ended March 30, 2008.(27)
Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for fiscal year ended March 30, 2008.(28)
Incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for fiscal year ended March 30, 2008.(29)
Incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for fiscal year ended March 30, 2008.(30)
Incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for fiscal year ended March 30, 2008.(31)
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on January 16, 2009.(32)
Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed on January 16, 2009.(33)
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on February 3, 2009.(34)
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on March 2, 2009.  61
 
 Table of Contents
  Exhibit Index
 Number
Description
 (35)
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on May 7, 2009.(36)
Incorporated by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2000.(37)
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on December 9, 2005.(38)
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on January 8, 2009.(39)
Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on January 8, 2009.(40)
Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on January 8, 2009.(41)
Incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on January 8, 2009.(42)
Incorporated by reference to Exhibit 99.5 to the Company’s Current Report on Form 8-K filed on January 8, 2009.(43)
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on April 3, 2006.(44)
Incorporated by reference to Exhibit 14.1 to Amendment No.1 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005.