Sport Chalet Staying Fit

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For Southern Californians, skiing has become a marathon of standing in line, first to rent equipment and then to buy a lift ticket on the slopes.


Sport Chalet Inc. has developed a plan that it hopes will help skiers spend more time performing, not waiting, once they reach the mountain. Customers will be able to rent skis for the entire season and buy lift tickets at the stores. Of course, the offer just might boost rentals and sales at the outdoor sporting goods chain, too.


That kind of creative responsiveness to consumers’ concerns has helped the company carve a solid niche for itself in the market despite being in the midst of a leadership transfer and a developing strategic growth plan.


“We try to create an environment that’s easy to shop in we got high marks on that,” said Chief Executive Craig Levra, referring to a recent report from the Kanbay Research Institute, which called the La Ca & #324;ada-based chain the “most desired retailer” among the nation’s large stores.


The study compared consumer’s expectations about a store with their actual experience as measured across 12 attributes. Sport Chalet fulfilled its customers desires better than the 103 other chains included in the study, beating big names like PetSmart (third), Kohl’s (fifth) and Men’s Wearhouse (sixth).


“Categories are laid out correctly and we have an extremely broad assortment,” Levra said. “We try to be complete from novice to expert in the products we offer.”


The ski rental plan is part of an extensive and unique rental business. Among other things, it allows customers to spend a weekend with camping gear, for instance, without making a major financial commitment to the sport. If it turns out they like camping and want to buy the equipment, the rental cost is deducted from the purchase price.



Flexible structure


According to a Sport Chalet filing with the Securities & Exchange Commission on Aug. 8, the prototype store has 42,000 square feet and “showcases each product category with the feel of a specialty shop all contained under one roof.”


Store displays clearly identify each section and the sales staff must pass a test with 90 days of hiring to become experts in the sport. A scuba salesperson, for example, must be a certified diver, and most stores have a dive pool.


A.J. Duran, manager of the store at the Santa Anita Mall in Arcadia, said 30 percent of the staff fails the test the first time, so passing isn’t a given.


Store architecture helps management react quickly to market swings. All flooring consists of movable carpet squares, and the fixtures have wheels. So if golf equipment suddenly starts to sell fast while camping gear cools, the store can shift its shelf space overnight to provide golfers a bigger selection. Massive overhauls of the sales floor occur for winter and summer sports seasons.


From a marketing angle, the niche-store-within-a-store concept means Sport Chalet can’t appeal to a single demographic. “For each category, we have a different customer. The water ski customer acts differently than the competitive swim customer only 20 feet away,” said Levra. As a result, the chain doesn’t have big sales or loss leaders to bring in customers.


Also, the company has almost no private-label products. Serious sports types want state-of-the-art quality equipment, so “we buy only the very best brands,” Duran explained.


Publicly traded Sport Chalet owns 41 stores in California, Nevada and Arizona. In April it reported annual revenues of $343.2 million, an 11 percent increase from the previous year. The company also announced that its gross margins had improved from almost 28.6 percent to 30.9 percent during the past five years.


That makes a strong statement, given that the Kanbay study found the pricing power of retailers had declined 68 percent since 2004. “Pricing power” is defined as the willingness of customers to pay more if the store meets their demands. Without pricing power on their side, “retailers are in danger of becoming a commodity,” according to Kanbay.


While Levra believes sports aficionados’ loyalty is what set his stores off from mass merchandisers, he doesn’t feel that it leads to wide latitude on pricing.


“We have a perception of being a little higher priced than others,” he said. “I can tell you categorically that’s not the case. If you take our basic consumable items, we match up against all the Marts within pennies. But with our commitment to better merchandise, you walk into the store and see a $1,300 bike. You go to a competitor and see a $300 bike. If customers don’t know the category, they think we’re expensive. Well, not really. We extend the product line out to the higher end because our customers demand it.”


To grow the company Levra will open five new stores this year. By increasing density in existing markets, the company hopes to leverage fixed costs such as management salaries, advertising and distribution facilities. Capital for new stores or remodeling old ones comes from cash flow; the company has zero debt.



Stock lagging


For investors, Sport Chalet’s good numbers and prudent growth strategy have yet to translate into higher share prices. Since the beginning of the year, the share price has moved horizontally between $7.22 and $8.50. Shares currently trade for about $8.15 each. Only two analysts cover the stock.


In part the lackluster stock performance stems from a complex leadership transition. Sport Chalet started in 1959 when Norbert Olberz bought a ski and tennis shop in La Ca & #324;ada. Olberz established five company values that coincidentally echo the wisdom of the Kanbay study phrases such as “To see things through the eyes of the customer” and “To create ease of shopping.” But in September last year, stockholders approved a plan to move control of the company beyond Olberz, now age 81.


Under the plan, the company created two types of equity, A and B shares. Then Olberz transferred a portion of his holding to Levra and Howard Kaminsky, chief financial officer. “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,” according to the SEC filing.


Levra emphasized that today, A and B shares have the same economic value, and they trade within cents of each other. However, B shares have 20 times more voting power than A shares. The Olberz family now controls 58 percent of the economic ownership of the company, but only 22 percent of the voting power. In contrast, management has a 9 percent stake in economic ownership but 45 percent of the votes. Public investors have 33 percent of both the economic and voting rights.


Although the two-ticker listing may confuse investors, Levra believes the transition has strengthened Sport Chalet as a public company. At the same time, he said that the two-stock system is not transitional and “will continue for the foreseeable future.”

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