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Sport Chalet Inc.

 

Sport Chalet is a premier, full-service specialty sporting goods retailer featuring the industry's top sports brands in apparel, footwear, and sports equipment. Founded in 1959 by Norbert Olberz, the company has 52 stores in Arizona, California, Nevada and Utah; an online store at www.sportchalet.com; a Team Sales Division; and offers more than 50 specialty services for the sports enthusiast, including online same day delivery, climbing, backcountry skiing, ski mountaineering, avalanche education, and mountain trekking instruction, car rack installation, snowboard and ski rental and repair, Scuba training and certification, Scuba boat charters, team sales, gait analysis, baseball/softball glove steaming and lacing, racquet stringing, and bicycle tune-up and repair at its store locations.

 

spchachart

 

 

Key Number to consider:

 

I spent the afternoon putting together the following data. When looking at retailers, I really like to look at Costs of Goods Sold to Sales. I think this number gives us an idea of how strong this company is at managing inventory costs. The good news is that this company is consistent. The bad news, is that they need to find a way to cut down their COGS; as I will break it down below, just a little would go a long way.

 

keynumbres

 

 

From previous annual reports, it appears that Sport Chalet does around 50 percent of their sales in sports equipments, 30 percent in apparel, and 20 percent in footwear. I have never worked in retail, but the optimist in me assumes they can find a way to cut down COGS. For example,

 

If we consider Foot Locker’s COGS to Sales over the last 4 years:

footlocker

 

And if we consider the COGS to SALES ratio for Dick Sporting Goods:

dicks

 

Then consider the same chart for Sport Chalet Inc:

sportchalet

 

The key take away here is that two of the industry leaders in sporting goods, footwear and apparel are managing two cut their costs while Sport Chalet isn’t seeing a decline. Sport Chalet seems to average around 73% while the others sit around 69%. It should be noted Sport Chalet is has diving pools in their stores; I am not sure if they include this in their COGS and if that distorts the ratio. But it could have an impact. Aside from COGS, there are a few things that I find encouraging about Sport Chalet’s future.

  • They are cutting stores that are unprofitable.
  • They are creating more customer appealing stores.
  • They are finding ways to increase revenues through online stores.

 

With the following assumption: (I don’t think this is too much to ask):

  • COGS to Sales of 70%
  • Increase Revenue 2%
  • Operating Expenses follows a linear regression relative to sales.

Here would be my projections for net income:

proj1

 

However, if this company could really trim some fat and get the operating expenses down, the earnings fly. For example, let’s move forward with all the same assumptions, but assume they cut down their OE to Sales from 28% to 25%:

proj2

 

Now I will concede that’s probably a huge leap. But if we were to assume a PE Ratio of 10, that would mean my two valuations would have this stock between $1.90 to $10.32. This probably seems like a giant range, and it is. I am not a full time analyst, so I can’t really dive into the operating expenses and determine where they can make cuts.

 

When it comes to analyzing this company there is one giant elephant in the room: the liquidity. This company is currently operating with a quick ratio of $0.12 (for comparison purposes Dick’s has a quick ratio of $0.37). Solvency is also a concern. Obviously the inventory isn’t worthless, but if this company needs a cash injection with a debt ratio of 92%, it’s not a stretch to say they might struggle finding lenders.

 

For comparison purposes, Dick’s Sporting Goods and Foot Locker currently have debt ratios of 45% and 29%. In 2009, before Eddie Bauer Holding Company went into Chapter 11, they had a debt ratio of 88%; which is better than Sport Chalet currently sits at. Here in Canada, in 2010, West 49 (who was bought out by Billabong with similar income statements to Sport Chalet) had a debt ratio of 55%.

 

When you compare market capitalization to the number of stores, each store is worth approximately $350,000 on the open market. That being said, any retail store with 40,000 square feet and any sort of future should probably be worth at least 2 million dollars. So if we consider this approach, and Sport Chalet managed to cut 10 of their weak stores, thus making the company solvent long term and giving each store a value of 1 million. The current share price would be around $5.42. That would probably be a low estimate.

 

The point is, that if this company can turn things around there is great opportunity here. The problem is, I don't know how likely that turn around is.

 

Recommendation

 

Overall, I am giving this stock a buy recommendation. I feel they have enough time to figure out their debt issues before the become insolvent, but I must warn any investors reading this to proceed with caution. There is a considerable chance this company files for bankruptcy protection within the next two years. But after reading an interview with CEO Craig Levra, I have some confidence this company is worth a shot.

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