Sports & Recreation Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WON)") else Response.Write("(NYSE: WON)") end if %>
4701 W. Hillsborough Avenue
Tampa, FL 33614
(813) 886-9688

UNION CITY, Ca., August 30, 1996/FOOLWIRE/ --- Sports & Recreation reported Q2 results yesterday morning. Sales for the quarter increased by 35% to $169 million versus sales of $124.9 million for Q2 last year. While the company reported a net loss for the quarter, had they not taken a restructuring charge as they said they were going to take in the quarter, they would have shown a net profit of $0.07 per share. However, in taking the charge, they had a net loss of $33.2 million or $1.67 per share.

The so-called restructuring charge is composed of a $22.2 million charge to gross profit and then a $32.8 million non-recurring charge to earnings from operations. Their accountants required that they break those two pieces apart. The charges related to gross profit deal with the merchandise clearance sale that they began in mid-June. They expect to complete the majority of this clearance by the end of this month. The non-recurring charges to income from operations include substantial write-downs and write-offs of abandoned projects, under-performing units ala FAS 121, and certain deferred financing costs. They also made a provision for outstanding litigation matters and severance pay related to management changes that occurred last Spring.

The company operated 85 stores at the end of the quarter versus 67 stores in Q2 last year. Comp sales were up a little over 8% for the quarter. At the beginning of the quarter they were around 2% and increased substantially over the course of the next two months and have been up around 2% in the month of August. They want to be cautious about reporting an 8% comp increase primarily because the clearance sale had such a substantial influence on both June and July's numbers.

This year's gross margin was 23% prior to the $22 million one-time charge. Last year's gross was 26.4%. The principal difference between the 23% and the 26.4% relates to the fact that they sold approximately $18 million of goods at a zero margin. Otherwise, the goods they sold of a non-clearance nature averaged over 27%. After the $22 million charge, the gross margin as reported was 9.8% for the quarter. The charge was 13.2% of sales. Also, various increases in occupancy costs affected gross margins by 32 basis points.

Operating expenses were 18.6% of sales, improved from last year's 19.5%. The primary reason for the improvement was store labor. Last year, store labor was 9.7% of sales. This year the Q2 store payroll was 8.3% of sales. They believe this was done with very little interruption in customer service and they expect to improve even further as they refine their labor scheduling system.

There were a few other differences between the two periods. Legal and professional fees were up 32 basis points due to various consulting projects they have going on in distribution, labor, and systems. Relocation expense was up 7 basis points as they incurred costs to bring in new people from across the country. Benefits and fringes were up 19 basis points due primarily to the adoption of accrual accounting.

Pre-opening expenses were $240,000 this quarter versus $962,000 last year. Interest was $5.1 million versus $2.1 million last year in Q2. The difference, approximately $1.5 million of increase was due to an increase in borrowing associated with new store acquisition and construction. $0.9 million was due to less capitalized interest than last year and the remainder was due to a slightly higher rate this year than last year, approximately 20 basis points.

Depreciation and amortization was $2.2 million this quarter versus $1.5 million last year. Non-comp stores contributed about $1 million to overhead. They reported in Q1 that the stores they open during FY 1995 posted a negative $200,000 contribution to overhead. Those same stores contributed over $2.3 million in profit toward overhead in Q2. New stores are beginning to make a positive contribution.

They have listed 23 parcels of idle real estate with their broker for approximately $29 million. Net book value is a little over $22 million. As of today they have offers on 10 parcels for approximately $10.3 million against a net book value of $9.4 million.

Average store inventories this year were $2.5 million at quarter end versus $3.5 million at last year's quarter end. On June 4th they closed on their new $285 million bank credit facility which combined their previous $200 million working capital revolver with an $85 million off-balance-sheet facility. Outstanding withdrawals under this facility added $58 million of debt to the balance sheet but the undrawn commitment provided an extra $27 million in working capital borrowing capacity. On the closing date, the new facility was drawn down by $238 million. They had $219 million outstanding on the new facility as of quarter end and approximately $210 million as of any day this week.

For the 6 month period, net sales were also an all-time record. They increased by 33% to $312.7 million versus $235.7 million last year. They incurred a net loss of $33.6 million or $1.69 per share versus earnings of $5.5 million or $0.27 per share last year.

They are really excited about how they have been doing and what their new management team has accomplished. The operating profit they achieved during the quarter was something they had not anticipated. They have been saying in the past calls that the next 12 months are time when they are repositioning the company to be more profitable. So this was a surprise to all of them.

While they have a strong focus on putting the right people in place, their focus continues to be in improving inventory management and control, increasing inventory turns, developing and highlighting brand awareness, implementing a strong merchandising and marketing program, enhancing their vendor partnering and optimizing their existing stores' potential.

They had great success with their clearance sales to get rid of obsolete, slow-moving inventory. They still have a lot more to sell and are working on that. They did a lot of advertising which increased the foot traffic. It also brought in a lot of new customers and they made a lot of new friends.

Inventory averages $2.5 million, down from $3.5 million last year. Their goal is to get down to around $2.2 million per store or 2.1 to 2.2 turns in a current sales level. If sales go up dramatically later this year, their inventory is going to go up to support those sales. However, they want the turnover number to be 2.1 to 2.2. They are focusing on the turnover number. But, if they exceed budget and have a great second half, they are going to have to buy more merchandise to support those sales and the number they are going to be looking at is the turnover number. If they can get over 2.0, which they think they can, it is going to be the first time the company has done that in a long time.

As far as the company's IS, they've undertaken many initiatives to improve that with the current system. And they are implementing and putting in the new system currently from JDA and that is now in place and on time and they are looking for full implementation early next year.

Brand awareness is high on their list of priorities and they will be rolling out their name change later this year and that will be followed by a fully integrated marketing campaign. They will be announcing the name change later this year and then implementing it at the beginning of their fiscal year in February.

As far as vendor partnering, they have spent a lot of time meeting with most of their suppliers and believe they will be able to do some co-op advertising with some of their key vendors. They are all on board and are very excited about the company's future and are helping the company in many ways -- shipping the product they need on time and working with them to build the business.

They have just finished another quarterly regional managers meeting. Since February, they bring all the regional managers to Tampa every month. They have 11 regional managers and they bring them all together for 3 days, talk about the business, review the P&L, review marketing and advertising, etc. They have been very pleased with how well the regional managers are adapting and learning how to run the business. They said before that they might close stores this year, but right now they are not going to close any stores. Most of the stores now are contributing to their overhead. They will continue to keep a close eye on some of the marginal stores, but they have a lot of confidence in their people and they are working very hard to keep these marginal stores working and they are improving them day by day. They have implemented a bonus program for store managers that rewards them based on profitability, not just sales. Instilling belief and opportunity is the key driving force for this company and it is a new culture for Sports & Recreation and it is working.

The proposal to reincorporate the company in the state of Florida was passed at the annual meeting in June. That will be a nice savings for the company, reducing their state franchise costs from $150,000 per year to $200 per year. They will wait and change the name of the company and the state of incorporation when they make the name change later this year.

At this point, the company is 6 months into the 12-18 month turnaround period for Sports & Recreation. To this point they have done everything they said they would accomplish by this date and more.

QUESTIONS AND ANSWERS

The company was asked what the growth in units is that people could expect to see once they have the company stabilized and are no longer looking at closing stores. The company responded that they might open 1 or 2 stores in 1997. These stores have already been build, so they are looking at possibly opening a couple of them. 1998 will be the beginning of their aggressive growth plans. They are working on a new prototype to field that growth and it won't be ready until Q1 1998.

The company was asked to discuss what they think the store operating profit model should be. The company responded that there is no one earning a really good substantial return in the sporting goods industry. Sports Authority, for example, is at 3.5% pre-tax. But, world-class retailers such as Home Depot, etc. are up at 8% and higher. Their long-term goal is to make more than 5%, 5-8% ideally. They have the recipe how to get there, but no one has been able to achieve it in the sporting goods industry. They think they can transfer their knowledge to this industry and they have begun that process. They want to lower the gross margin. To do that, they have to execute better. They have to execute like world-class retailers execute and they need to be more competitive. They don't want to raise gross margins, they want to control their operating expenses and drive revenues.

The company was asked about the items that were cleared out. The company responded that most of it has been flushed out and most of that was discontinued merchandise -- stuff that was discontinued or obsolete, like from 1991 and 1992, particularly in the hunting and fishing area. What they are working on in the next year is their assortments. They think that a lot of the current merchandise is over-assorted. The new buying team is reviewing all of these assortments and asking if they need to have, for example, 40 different pair of binoculars or is 20 different pairs good enough. Also, they think that their strength is in hard goods and they are going to focus on and maximize that strength. Yet, they think that their apparel department is arguably one of the better ones in terms of selection and price in the industry. Yet, they don't tout it well, display it well, or merchandise it well. They have excellent support from their vendors and a whole new buying team.

The company was asked about recent insider stock purchases. The company responded that Stephen Bebis (the chairman, president, and CEO) bought 100,000 shares recently and they have two other senior people who are in the process right now of buying some stock.

The company was asked to discuss what priorities they were addressing now. They responded that their number one priority is systems. Everyone is working toward developing those systems. Their new merchants that have joined them from other companies can't believe the current systems. It is very frustrating for them. They are used to dealing with information to make buying decisions and they don't have it. Basically, they are working on instinct right now in a lot of these situations. However, they just signed a letter of intent with AMR Distribution where they are going to be cross-stocking all their freight and all their product through Nashville Tennessee. Currently all the stores receive freight, most of it through RPS -- single packages -- and it comes from manufacturers throughout the country and is drop-shipped into the store. They are used to using break bulk and logistics to help lower freight costs. And their initial estimates show that they will lower their freight costs immediately on an annualized basis of about $1.5 million. That's without all the enhancements like central pre-ticketing and hanging and a lot of other things they are looking at. So, they hope to implement that in October/November of this year. It will have immediate impact on their freight costs and will be much easier for the stores to receive because now they are getting one solid truck from Nashville with material from all over the country. It'll improve their lead times and getting merchandise first because vendors can ship solid trucks from their factories right into Nashville where they break it out to all the stores.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event.

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