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  Forzani not low enough

BENJ GALLANDER and BEN STADELMANN

Friday, July 23, 2004

The biologist, Harvard professor and Pulitzer Prize-winning author, Edward O. Wilson, discusses the essence of environmentalism in his recent book, The Future of Life. He reminds us that the balance between human life and the natural environment that supports it is so very fragile.

He then adds: "But it is not yet a general worldview, evidently not yet compelling enough to distract many people away from the principal diversions of sport, politics, religion, and private wealth."

It's a poignant statement, particularly as we take the measure of The Forzani Group, an outfit inexorably linked to the first and last of said diversions.

Forzani is the largest retailer and franchisor of sporting goods in Canada, with almost 400 stores operating under the Sport Chek, Sport Mart and Coast Mountain Sports banners.

Sporting goods and sportswear can be as exciting to sell as they are to buy. Manufacturing monoliths continue to over-supplement their marketing budgets and pump up the endorsements and promotions.

Sports requiring lots of equipment, with a high rate of replacement, and that are easy to accessorize, keep the engine humming. And yes, they are highly lucrative, especially when a new wave of sports invade the psyche of a youthful, brand-conscious, active consumer — a customer highly conditioned to jettison disposable income.

Inline skates, radical skateboards, scooters and snowboards recently emerged to become hot new takes on, like, totally ancient equipment, dude.

This has led to a crowded North American retail scene in which rambunctious rivals jockey for position. Many smaller specialized players exist, but there is also big-name competition from Mountain Equipment Co-Op, Champs Sports, National Sports Centre, Play It Again Sports — and even non-pure plays like Canadian Tire and Wal-Mart.

Recently, Forzani received quite a bit of negative press when a consent agreement was signed with Canada's Competition Bureau to resolve an advertising issue. The language of the pricing and the use of disclaimers were in dispute, and the company agreed to pay a record-setting penalty of $1.7 million.

However, the company is unhappy with the way the bureau has negatively characterized the settlement, and legal action is being considered. Forzani wants it made crystal clear that there have been no charges and no convictions, and that they behave no differently than other Canadian retailers in advertising their prices. It does seem odd that they were the lone target. Maybe a case of the squeaky wheel? Regardless, these guys are not standing down.

A month before the final agreement was signed, Forzani had an application accepted to purchase and cancel up to a million shares, more than 3 percent of the issued and outstanding stock. They were explicit in their conviction that the shares are undervalued and are a good investment for the company.

Maybe they're right. The stock price certainly hasn't been down at this level — around $13 (CDN.) — in almost three years. Revenues in the first quarter were up 2.8 percent year-over-year, and earnings a whopping 38 percent. Not shabby at all.

A number of years ago, Forzani was added to our watch list when it showed more of a contrarian genotype at around $5 a share. The price vaulted before it had a chance to pass our physical, and alas it never got to wear the Contra jacket.

The stock would have to plunge to that level again to tickle our pocketbook. Right now, that seems about as likely as the Toronto Maple Leafs winning Lord Stanley's Cup.


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