The Forzani Group Ltd.

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The Forzani Group Ltd.

824 41st Avenue N.E.
Calgary, Alberta T2E 3R3
Canada
Telephone: (403) 717-1400
Fax: (403) 717-1490
Web site: http://www.forzanigroup.com

Public Company
Incorporated: 1991
Employees: 9,516
Sales: CAD 1.13 billion ($984.3 million) (2006)
Stock Exchanges: Toronto
Ticker Symbol: FGL
NAIC: 451110 Sporting Goods Stores; 454110 Electronic Shopping and Mail-Order Houses; 421910 Sporting and Recreational Goods and Supplies Wholesalers; 533110 Lessors of Nonfinancial Intangible Assets (Except Copyrighted Works)

The Forzani Group Ltd. is the leading, and only national, sporting goods retailer in Canada. From the launch of a single outlet called Forzani's Locker Room by four Calgary Stampeder football players in 1974, the company has grown into an empire stretching across Canada and encompassing more than 450 stores, approximately 60 percent of which are company owned with the remainder being franchised outlets.

Forzani operates four company-owned retail chains: Sport Chek, Sport Mart, Coast Mountain Sports, and National Sports. Sport Chek outlets are large, typically about 20,000 square feet but with a few much larger, and are located primarily in enclosed malls and so-called power centers; their wide range of brand-name and private-label sporting goods are priced for the middle of the market. The smaller Sport Mart units, ranging from 5,000 to 11,000 square feet, are also located in shopping malls and power centers but their merchandise is priced for the lower to middle segment of the market; Sport Mart also runs an online store at www.sportmart.ca. Situated on the high end is Coast Mountain Sports, which offers outdoor technical gear; casual clothing, footwear, and accessories; and private-label apparel. National Sports, whose locations are centered in southern Ontario, focuses on team sports and the "athletic family." On the franchise side, Forzani administers a variety of banners, including Sports Experts, Intersport, Atmosphere, RnR, Econosports, Tech Shop, Pegasus, Nevada Bob's Golf, Hockey Experts, and The Fitness Source.

Forzani also runs its own wholesaling operation, which oversees the development, manufacturing, and importing of private-label-brand products that are sold to Forzani's own corporate stores, to Forzani franchisees, and to other retailers. Approximately one-fourth of the company's total sales are generated by the wholesale side, which helps to counter the cyclical and seasonal nature of the retail operations. Western Canada is the origination point for about 39 percent of overall revenues, Ontario and Quebec are responsible for ap-proximately 28 percent each, and eastern and northern Canada generate the remaining 5 percent.

BEGINNINGS AS OFF-SEASON VENTURE OF STAMPEDERS FOOTBALL PLAYERS

The driving force behind the Forzani Group throughout its history has been John Forzani, who was born in Calgary in 1947 and grew up in that city's Little Italy, part of a tight-knit family. Forzani's father had been a successful businessman himself as the owner of a prosperous service station, and when Forzani attended Utah State University on a full-ride football scholarship, he graduated in 1971 with a degree in business administration. Forzani was the middle brother of a football-playing Forzani trio that also included Joe and Tom. All three brothers attended Utah State and went on to star for the Calgary Stampeders of the professional Canadian Football League (CFL), John an offensive guard, Joe a linebacker, and Tom a running back. They became local heroes. During John's rookie season, the Stampeders won the Grey Cup, the CFL equivalent of the Super Bowl.

In 1974, in the middle of his CFL career, which extended from 1971 to 1977, John Forzani was inspired to open an athletic shoe store. He had noted that Calgary did not have a single outlet for athletic shoes and that he and other athletes typically bought their shoes in the United States. The spark that launched him into entrepreneurship was an article he read while working at his father-in-law's sporting goods store in Logan, Utah, during the off-season. The article focused on the owner of a sporting goods store who, lacking room for expansion, moved his shoe department into a separate location nearby, after which his shoe sales skyrocketed. Recognizing a good idea, Forzani pooled CAD 2,500 of his own money together with CAD 7,000 from his brothers Joe and Tom and the Forzanis' friend and Stampeders teammate Basil Bark to open the first Forzani's Locker Room, a 1,200-square-foot store in Calgary.

Forzani's timing could not have been better. Although Forzani had originally envisioned catering to full-time athletes, he quickly found that his venture had propitiously coincided with the start of the jogging and fitness craze and its legion of baby-boomer participants. The Nike brand of shoes had just been launched, and this and other highly technical footwear required experts to serve as salespersons. Forzani's Locker Room was staffed with hard-core athletes, who were able to provide expert guidance to the baby boomers taking up running and other sports to stay in shape. Soon, the store found itself maintaining waiting lists for particular models. During its first year, the venture netted CAD 10,000 on sales of CAD 214,000; sales proceeded to double for each of the next few years. Of these early years, Forzani told Alberta Report in 1995, "We had a winning formula, we had good people, and suddenly we were growing."

Although the venture was originally a part-time endeavor for Forzani, even, initially, somewhat of a lark, it eventually began to overshadow even football. "I'd go into the huddle and I wouldn't even listen to the quarterback—I would be thinking about my adidas shipment," he told Report on Business Magazine in 2003. After retiring following the 1977 football season, Forzani dedicated himself full-time to retailing. By the end of the fiscal year ending in January 1978, his company's sales had reached CAD 1 million, profits had reached CAD 150,000, and Forzani and company had expanded their operation into a seven-store chain.

COMPANY PERSPECTIVES

Our mission is to provide the best customer shopping experience; to have the largest market share and buying power; to always remain the lowest cost competitor in any retail business that we participate in; and to offer branded and private-branded products in a manner that is unique, maintaining our Company's continued position as the most profitable sports/lifestyle retailer in Canada.

FIRST ACQUISITIONS, GOING PUBLIC

Over the ensuing dozen years or so, the company steadily expanded, opening additional stores in western Canada. In the late 1980s the firm began launching additional retail concepts, including RnR—The Walking Store, which catered to aging baby boomers, and Jersey City, purveyor of pro sports merchandise. Forzani, however, recognized that the company needed to start pursuing acquisitions to keep growing and in particular to expand into eastern Canada. In 1991, the same year that The Forzani Group Ltd. was incorporated, the founder engineered the sale of a 35 percent stake in the company to Edmonton-based Vencap Equities Ltd., a venture capital firm. With this added backing, the Forzani Group completed its first deal, the acquisition of the ailing Sport Chek International Ltd. Founded in 1976 and also based in Calgary, Sport Chek was the first Canadian retailer to venture into the sporting goods superstore category. By the time of its acquisition, the Sport Chek chain consisted of eight locations, seven of which were located in Alberta, each 20,000-square-foot store offering a wide and deep selection of merchandise at competitive prices.

The Sport Chek acquisition was followed in 1992 by the CAD 2.3 million purchase of Hogarth's Sport & Ski, which added six stores in British Columbia that were subsequently converted to the Sport Chek format. In 1992 Forzani's revenues reached CAD 55.6 million, a 21 percent increase over the previous year, while profits nearly tripled to CAD 1.1 million. To fund further growth, Forzani Group was taken public through an August 1993 initial public offering on the Toronto Stock Exchange that raised CAD 10.4 million.

Forzani next made a daring move, paying CAD 22 million to Univa Inc. in April 1994 for the Sports Experts chain, which Univa had been attempting to unload since 1991. Sports Experts, based in Montreal, was a franchiser of several sporting goods concepts and gave Forzani immediate entrance into the central and eastern Canadian markets. The 121-store Sports Experts chain consisted of all mall-based stores averaging 6,000 square feet in size and offering a wide variety of clothing and footwear and a select range of sporting goods. Among the other chains included in the deal was Podium, whose 43 outlets were located in smaller shopping centers and in rural communities and offered a variety of sporting goods, clothing, and footwear; some locales also featured extensive lines of outdoor gear for hunting, fishing, and camping. This acquisition of a much larger player transformed Forzani Group into a nationwide retailer and propelled its revenues to CAD 296.7 million for the fiscal year ending January 1995. Profits that year totaled CAD 7.7 million.

TURNAROUND FROM NEAR BANKRUPTCY

Acquiring Sports Experts, however, nearly proved to be Forzani's undoing. Integrating the corporate-owned Forzani's Locker Rooms and Sport Cheks with the franchised operations of Sports Experts proved quite difficult. Particularly troublesome was the launch of a new company-wide inventory management system. The system was fast-tracked once a new threat appeared on the horizon: the entrance of two U.S. "category killers," Sportmart, Inc. and the Sports Authority, Inc., into the Canadian market. The Forzani Group rushed to implement the expensive new system, leading to bogged-down deliveries, duplicate purchasing, and more than CAD 30 million of overstocking that eventually had to be dumped at deep discounts. Also adding to the operational woes was a huge and simultaneous expansion of the Sport Chek chain, which was taken national through the addition of another 32 stores in less than one year. This move too was aimed at fending off the encroaching U.S. competitors. The first Sportmart store opened in Toronto in March 1995, with Sports Authority arriving a few months later.

The operational difficulties, the increased competition, and a slowdown in consumer spending combined to create the first year in the red in company history, a CAD 5 million loss for the year ending in January 1996. John Forzani followed the lead of a number of outside consultants in quickly overseeing the completion of the new inventory system and in refinancing the firm's debt in order to stave off a possible bankruptcy filing. Perhaps most importantly in the long term, he agreed to shake up his management team. The old-timers who had been running the show simply did not have the experience to handle the enlarged and complex operations of the post-Sports Experts company. In early 1997, then, Forzani hired Bill Gregson as executive vice-president of corporate retailing and Bob Sartor as president and chief financial officer. Gregson was a turnaround specialist credited with rejuvenating the fortunes of Bata Industries Ltd.'s Athletes World chain. Sartor had previously served as corporate controller of Avenor Inc. and treasurer of Kraft Canada Inc. A third management change saw Tom Quinn, a Sports Experts veteran, promoted to head of the franchise operations.

KEY DATES

1974:: John Forzani and partners open the first Forzani's Locker Room, an athletic shoe store in Calgary.
1991:: Company is incorporated as The Forzani Group Ltd.; Sport Chek International Ltd. is acquired.
1993:: Forzani Group goes public.
1994:: Sports Experts is acquired.
1996:: Forzani reports the first net loss in the company's history.
1997:: New management team is put in place to lead a turnaround.
2000:: Forzani acquires Coast Mountain Sports Inc.
2001:: Sport Mart Inc. is acquired.
2005:: National Sports chain is acquired.

These appointments were made just before Forzani announced a hefty loss of CAD 32.8 million for 1996, a result that included CAD 13.6 million in charges for asset writedowns and restructuring costs. The new management team focused relentlessly on the bottom line, placing real controls on inventory, adopting a penny-pinching approach to advertising, and closing down around 30 underperforming stores. The selection of products was overhauled as well, with an increased emphasis on that quintessential Canadian sport, hockey, including a full range of women's gear. The latter move was part of a larger strategy to carry more women's merchandise across the board, particularly casual fashions. Forzani shifted focus away from highly seasonal equipment toward clothing, which offered higher turnover, larger margins, and more growth potential. Forzani's Locker Room was relaunched as simply Forzani's, with the store size doubled to between 4,000 and 7,000 square feet in order to make it stand out from smaller mall competitors. Through these and other initiatives, Forzani turned the corner. The company returned to the black in 1998, posting a net gain of CAD 276,000, and then the following year reported record profits of CAD 8.1 million on revenues of CAD 378.6 million. Although its defense of its home turf had nearly turned suicidal, Forzani also succeeded in fending off the south-of-the-border encroachers. Sportmart abandoned the Canadian market in early 1997, and the Sports Authority did the same one year later.

LOOKING TO THE FUTURE

The results for 1999 were the start of a streak of four consecutive years of record results in both profits and revenues. During this period Forzani aggressively expanded its existing chains as well as its lineup of store formats. The company reached a deal with Austria-based Intersport S.A. to be the exclusive supplier of Intersport private-label products for the Canadian and U.S. markets, and also purchased a 6.7 percent stake in Intersport. Intersport, Europe's largest sporting goods retailer and distributor, ranked as the largest sporting goods buying group in the world. In 2000 Forzani converted all of its Podium stores and 14 Sports Experts outlets to the Intersport banner.

The company next added two more corporate-owned banners to its portfolio. In June 2000 the company acquired Vancouver-based Coast Mountain Sports Inc., operator of five stores in British Columbia, Alberta, and the Yukon offering high-end outdoor merchandise. This addition provided an entree for the Forzani Group into the fishing, hunting, hiking, and mountaineering markets. Forzani next went down market in the fall of 2000 with the launch of Save on Sports as a regional sports specialty store offering brand-name merchandise at everyday low prices. But this proved to be a short-lived venture following the August 2001 acquisition of Sport Mart Inc. for CAD 35 million. Based in Kamloops, British Columbia, Sport Mart (which was unrelated to the U.S.-based Sportmart) operated 36 stores in its home province, Saskatchewan, Manitoba, and Ontario. Its focus on the lower-end of the market provided Forzani with a quicker way to expand within this segment, and therefore the Save on Sports outlets were subsequently converted into Sport Marts. On the franchise side, Forzani in 2001 launched Atmosphere, seller of outdoor gear, in Quebec. By the end of the year, Forzani had grabbed about 15 percent of the Canadian sporting goods market, making it the leader of the CAD 6 billion category. It was by then operating or franchising 345 stores totaling 3.6 million square feet of retail space.

During 2002 Forzani opened 38 more corporate stores—14 Sport Cheks, 18 Sport Marts, and 6 Coast Mountain Sports. The company also began testing a new, larger format for Sport Chek that encompassed 42,000 square feet. In addition, it opened a new distribution center for western Canada located in Calgary. Revenues for the year surpassed the CAD 1 billion mark for the first time, and profits reached a record CAD 30.5 million. In February 2003 John Forzani stepped down as CEO but remained chairman. Sartor was named his successor, while Gregson was named president and chief operating officer.

Forzani's streak of full-year profit increases ended in 2003 with a 6.6 percent drop in earnings. Two of the factors contributing to this decline were the slowest growth in the sporting goods industry in several years and heightened competition in the casual clothing sector due in part to the entrance into the Canadian market of several U.S. casual clothing chains, including Old Navy and American Eagle. Forzani reacted quickly, shutting down the Forzani's chain and shifting the merchandise mix at its principal remaining chains to deemphasize nonathletic, nontechnical clothing. The firm's difficulties, however, continued over the next two years. A key factor was that the company had been concentrating so much on expansion that it was neglecting its existing stores. Both the older stores and the merchandise were looking tired. Renovations of existing stores were launched, particularly at the Sport Chek outlets, and the lines of merchandise were overhauled. By the second half of 2005 it appeared that the Forzani Group was well on its way to another comeback. Earnings for the fourth quarter were a record CAD 17 million, while revenues also reached a new high, CAD 438 million. Same-store sales (that is, sales at stores open at least one year) at the corporate stores increased a very healthy 10.1 percent.

Despite the struggles during this period, Forzani completed a series of acquisitions. In March 2004 the company bolstered its wholesale side by purchasing Gen-X Sports Inc., a distributor specializing in selling excess merchandise from manufacturers. Forzani enhanced its position in the Ontario market in January 2005 by acquiring National Gym Clothing Limited, the operator of 19 National Sports stores in the province that collectively generated annual sales of about CAD 80 million. These outlets averaged 20,000 to 25,000 square feet of retail space and offered a wide variety of sporting apparel and equipment. As its opportunities for growth in the general sporting goods sector diminished, Forzani began venturing into the specialty sports retailing market. In the summer of 2004 the company gained the Canadian rights to the Nevada Bob's golf equipment chain, thereby acquiring 23 franchised Nevada Bob's outlets. In early 2006 Forzani acquired The Fitness Source Inc., operator of nine retail stores in Ontario selling home fitness products as well as commercial exercise equipment and accessories. By this time the company's franchise division had also launched two additional specialty sports banners: Hockey Experts and Pegasus, the latter focusing on running shoes.

PRINCIPAL SUBSIDIARIES

Sports Experts 2000 Inc.; Intersport North America Ltd.; Sport-Chek International 2000 Ltd.; Gen-X Sports Inc.; National Gym Clothing Limited; The Fitness Sources Inc.