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.  o 

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   o
  
Accelerated filer o
Non-accelerated filer  o
  
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).
 o 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 30, 2007, was approximately $43.5 million based upon the closing sale prices of Class A Common Stock and Class B Common Stock on that date.

At June 24, 2008, there were 12,359,990 shares of Class A Common Stock outstanding and 1,763,321 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 2008 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 30, 2008.


TABLE OF CONTENTS 
 
Item
  
Page
       
PART I
    
       
1.
Business
  
       
1A.
Risk Factors
  
       
1B.
Unresolved Staff Comments
  
       
2.
Properties
  
       
3.
Legal Proceedings
  
       
4.
Submission of Matters to a Vote of Security Holders
  
       
PART II
    
       
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
       
6.
Selected Financial Data
  
       
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
       
7A.
Quantitative and Qualitative Disclosures About Market Risk
  
       
8.
Financial Statements and Supplementary Data
  
       
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
       
9A(T).
Controls and Procedures
  
       
9B.
Other Information
  
       
PART III
    
       
10.
Directors, Executive Officers and Corporate Governance
  
       
11.
Executive Compensation
  
       
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
       
13.
Certain Relationships and Related Transactions, and Director Independence
  
       
14.
Principal Accountant Fees and Services
  
       
PART IV
    
       
15.
Exhibits and Financial Statement Schedules
  


PART I

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

Sport Chalet, Inc. (referred to as the “Company,” “Sport Chalet,” “we,” “us,” and “our” unless specified otherwise), is a leading operator of 51 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 30, 2008, we had 31 locations in Southern California, seven in Northern California, two in Central California, three in Nevada, seven in Arizona and one in Utah. These stores average approximately 40,000 square feet in size. In addition, we have a retail e-commerce store operating by GSI Commerce, Inc. at www.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 and Growth Plans

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 the industry, Norbert’s mission was three simple things. To “see things through the eyes of the customer;” “to do a thousand things a little bit better;” and to focus on “not being the biggest, but the best.” Over the last 49 years, Sport Chalet has grown into a chain of 51 specialty sporting goods stores serving California, Nevada, Arizona and Utah.

Our growth strategy had historically focused on Southern California; but, since 2001 we have expanded our scope to all of California, Nevada, Arizona and Utah as suitable locations are found. We have opened seven stores this fiscal year, sixteen stores in the last three years and twenty-four in the last five years. In light of current macro-economic circumstances which include weak housing trends and rising gas prices in our core markets, we currently anticipate opening four new stores and relocating one store during the upcoming year and continue to look for additional opportunities in existing and new markets although we currently have no further new store commitments. We intend to continue adding new stores as broader economic trends improve. Future store openings are subject to availability of satisfactory store locations based on local competitive conditions, site availability and cost and our ability to provide and maintain high service levels and quality brand merchandise at competitive prices.

Store openings are expected to have a favorable impact on sales volume, but will negatively affect 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 require three to four years to attract a stable, mature customer base; but, because of our relatively low number of stores, the impact of competitors’ stores and changing economic conditions, reliable statistical trends are not available and there can be no assurance that our stores will mature at that rate. We estimate the cash required to open an average new store is approximately $2.5 million consisting primarily of the investment in inventory (net of average vendor payables), the cost of leasehold improvements (net of landlord reimbursement), fixtures and equipment and pre-opening expenses, which are primarily the costs associated with training employees and stocking the store. Cash requirements for opening costs of each new store can vary significantly depending on how much the landlord has agreed to contribute to our required improvements. For fiscal 2009, we expect the average cash for each new store to increase to $3.8 million as two of the four stores to be opened are in highly desirable locations.


Our sales partially depend on the economic environment and level of consumer spending in the geographic regions around our stores. The retail industry historically has been subject to substantial cyclical variation, and 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 in the future continue to have, a materially adverse effect on our results of operations.

For fiscal 2008, total sales exceeded $400 million with average sales per store of $8.5 million, down from $9.2 million in fiscal 2007, and corresponding average sales per square foot of $218, down from $235 in fiscal 2007. The decrease in average sales per store and sales per square foot are due to new stores, which take time to mature, along with a same store sales decrease of 4.5%. The same store sales decline is primarily due to the previously mentioned macro-economic conditions. As a result of the reduction in same store sales, the opening of new stores and an impairment loss, we incurred a net loss of $3.4 million or $0.24 per diluted share, compared to net income of $7.1 million or $0.49 per diluted share, for fiscal 2007. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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 categories. 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 experienced core sports enthusiast.

Our prototype format boasts a natural and outdoor-feel color scheme, clear-coated fixtures, 30-foot clear ceilings, large sport-specific graphics, 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. With the scheduled new store openings and remodels in fiscal 2009, 78% of our store base will be 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 experts and moderate users. Using our investments in technology, we tailor each store’s merchandise mix to appeal to our customers in each market. In addition, our stores offer over 50 services for the serious 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. 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.


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

   
Fiscal Year
  
   
2008
  
2007
  
2006
  
Hardlines 
    
%
  
%
  
%
Apparel 
    
%
  
%
  
%
Footwear 
    
%
  
%
  
%
Total 
    
%
  
%
  
%

While we currently have an online store for direct to consumer Ecommerce service only through GSI Commerce, Inc. (“GSI”) at www.sportchalet.com, we expect to change this relationship during this 2009 fiscal year. GSI currently creates and operates all aspects of the www.sportchalet.com shopping experience, including fulfillment and purchasing, while attempting to remain transparent to the customer. We receive a license fee based on a percentage of sales generated by the website. The licensing fee is not material to total revenues. In addition, we offer a branding website, www.actionpass.com, which presents our in store brands and specialty services in a robust manner. This site also serves our Action Pass members with notification of member-exclusive merchandise and experiences. The site also features athlete appearances and instructional information, blogs, and we plan on offering customer rating capabilities on merchandise and services we sell in our stores.

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 represent approximately 17% of our annual net sales and have ranged from 27% to 31% of our fourth fiscal quarter. We anticipate this seasonal trend in sales will continue. We 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.”

Marketing and Advertising

We generate all of 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, direct mail, radio, newspaper, magazines and the internet. Through our Team Sales Division, we reach out to communities in which our stores do business, contributing to local teams and leagues. 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. During fiscal 2008 we rolled out our customer relationship program, “Action Pass”, after a successful pilot that began in fiscal 2007 in select markets. Action Pass members earn points for each purchase completed at our stores which enable members to receive a certificate that may be redeemed on future purchases. More importantly, Action Pass members have access to exclusive merchandise introductions where initial production runs are limited, plus they earn the opportunity to participate in once-in-a-lifetime-experiences pertaining to the sports in which we specialize, combined with the vendors from whom we buy merchandise and value-added services. Using the information we collect about our members allows us to directly market to each member based on their individual shopping patterns across various sports and brands. Combining individual data across multiple customers allows us to better understand behavior on an aggregate basis, which in turn drives assortments, category adjacencies, and more global marketing initiatives across our network of stores. This initiative is supported by our branding website, www.actionpass.com.


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 8% of our total inventory purchases for fiscal 2008 and 2007, respectively.

For merchandise planning and allocation we use the SAS Marketmax software solution. The software solution 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 create optimal store assortments and allocate merchandise in a precise and proactive manner.

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 utilize the JDA Consumer Outlook and Pinpoint seasonal profile software to help identify, create and manage the seasonal trends of our merchandise. Currently, we utilize 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 now 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.

During fiscal 2008, we rolled out the CRS Enterprise Selling software which replaced our manual processes of locating and transferring products for a customer. 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, effective March 31, 2008 the legacy system has been replaced. 


In October 2006, we selected mySAP2005 ERP from SAP as the replacement system and the implementation process began. Selecting SAP was a strategic decision focusing future resources on a single-vendor ERP solution in lieu of the historical “best of breed” approach. 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 milestone decision will eventually permit us to enjoy the efficiencies of a fully integrated solution without the traditional overhead generally associated with interfacing systems in a multi-vendor solution. BearingPoint, a global management and technology consulting company, assisted with the software selection and implementation.

Store systems utilize the Retail Store 3.0 Suite of applications from CRS Retail Systems that were upgraded to the current release in the summer of 2006, including a Returns Management application, and IBM SurePOS hardware. CRS Enterprise Selling was added in fiscal 2008. The processing of debit/credit card authorization allows on-line debit and signature capture. A custom 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 (a 3M Company).  

Our inventory systems track purchasing, sales and inventory transfers down to the lowest level of detail, individual items by size, color and store, which allows 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. The effect on net income is described in greater detail in Note 1 of Notes to Consolidated Financial Statements.

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, such as REI, Sportsman’s Warehouse, Finish Line, Active Board Shops and Adventure 16;
 
·
full-line sporting goods chains, such as The Sports Authority and Dick's Sporting Goods;
 
·
supplier-owned stores, such as Nike, The North Face, adidas, New Balance and Puma;
 
·
mass merchandisers, club stores, discount stores and department stores, such as Wal-Mart, Costco, Target and Kohl’s, Macy's and Nordstrom; and
 
·
Internet retailers and catalog merchandisers, such as Amazon.com, Bass Pro, Cabela’s and Sportsman’s Guide.
 

Many of these competitors have greater financial resources than we do, or better name recognition in regions into which we seek to expand. Our industry is dominated by sporting goods superstore retailers, i.e., full-line sporting goods chains with stores typically larger than 40,000 square feet. Superstore chains generally provide a greater selection of higher quality merchandise than other retailers, while remaining price competitive. 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. Many of these competitors have an online store, offering customers easy access to merchandise.

Historically, we have distinguished ourselves from our competitors by providing a broader selection of higher-end specialty items that require higher levels of customer service and sales associate 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 discount and department stores, traditional and specialty sporting goods stores and other superstore operations.

Our format takes advantage of several significant trends and conditions in the sporting goods industry. These conditions include the size of the industry, fragmented competition, limited assortments offered by many sporting goods retailers, consumer preference for one-stop shopping, and the importance of delivering value through selection, quality, service and price.

Employees

As of March 30, 2008, we had a total of approximately 4,300 full and part-time employees, 4,000 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 encourage and welcome the communication of our employees’ ideas, suggestions and concerns and believe this contributes to our strong employee relations. A typical store has approximately 75 employees, of whom 20 to 40 are in the store at any given time on a normal operating basis. Generally, each store employs a general manager, two to three assistant managers, who along with area managers and department heads supervise 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. 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, in addition to passing specific testing, 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, www.sportchalet.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and 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.


ITEM 1A. RISK FACTORS

Our short- 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.

A downturn in the economy has affected consumer purchases of discretionary items, reducing our net sales. 
 
The retail industry historically has been subject to substantial cyclical variations. The merchandise sold by us is generally a discretionary expense for our customers. A downturn in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits is having, and is likely to continue for some time to have, a materially adverse effect on our 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 national, regional and local full-line sporting goods chains, specialty stores, supplier owned stores, discount and department stores, and internet retailers. A number of our competitors are larger and have greater resources.
 
Our future growth will be dependent on the availability of additional financing. 

We may not be able to fund our future growth 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 2008. Although we have restructured our bank credit facility, the new agreement will cost more in the form of interest expense and fees. In addition, while we have historically had modest bank debt, we anticipate having much larger debt going forward. Currently, we believe we have sufficient cash available through our bank credit facilities 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, Central 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 past. When the region suffers an economic downturn, such as the mortgage crisis affecting California, Arizona and Nevada, or when other adverse events occur, historically there has been an adverse effect on our sales and profitability and this could also affect our ability to implement our planned growth. 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 over-stock unpopular products and force inventory markdowns that could have a negative impact on profitability, or have insufficient inventory of a popular item that can be sold at full markup.

Implementing Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive, time-consuming and require significant management attention, and may not be successful.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are first required to perform an evaluation of our internal control over financial reporting in this Annual Report on Form 10-K. Beginning in our 2009 fiscal year, our independent registered public accounting firm will have to test and evaluate the design and operating effectiveness of such internal controls and publicly attest to such evaluation. The implementation process of Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive, time-consuming and will require significant attention of the Company’s management. The Company cannot assure that it will not discover material weaknesses in its internal controls. The Company also cannot assure that it will complete the process of its evaluation and the auditors' attestation on time. If the Company discovers a material weakness, corrective action may be time-consuming, costly and further divert the attention of management. The disclosure of a material weakness, even if quickly remedied, could reduce the market's confidence in the Company’s financial statements, and harm its stock price, especially if a restatement of financial statements for past periods were to be necessary.

In October 2006, we selected an enterprise resource management system (the "ERP System") from SAP to replace our existing merchandise and financial information systems. Over the next eighteen months, we were in the process of implementing this system, including testing the system in a controlled environment, training our personnel in the use of the system and documenting and testing the control environment in preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Our planned “go-live” date for the new system was October 1, 2007. However, we encountered delays in, among other things, integrating the ERP System with our existing "best of breed" merchandise planning system. As a result of such delays we elected to postpone implementation of the ERP System until after the end of the fiscal year ended March 30, 2008 as we did not believe it would be prudent to implement the new system so close to our fiscal year-end. We implemented the ERP System on March 31, 2008.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to assess the effectiveness of our internal control over financial reporting as of the end of each fiscal year beginning with fiscal 2008. We have made a substantial investment to ensure that the ERP System will provide effective internal control over financial reporting, and we have evaluated our controls that are not intended to change with the implementation of the ERP System. Because we initially anticipated that the “go-live” date of the ERP System would be prior to March 30, 2008, we did not, however, fully evaluate the effectiveness of the existing controls that were to be replaced by the ERP System. With the delay in implementing the ERP System, we did not have sufficient time to fully document, test and remediate (where applicable) those controls that we previously planned to replace prior to March 30, 2008. As a result, we believe our inability to fully test the legacy system or the ERP System as required by Section 404 results in a material weakness in our internal control over financial reporting and results in an ineffective assessment of our control environment.