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.

The following should be read in conjunction with "Item 6. Selected Financial Data" and our consolidated financial statements and related notes thereto.

General Overview

Sport Chalet, Inc. (referred to as the "Company," "Sport Chalet," "we," "us," and "our" unless specified otherwise), is a leading operator of 55 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 29, 2009, we had 33 locations in Southern California, eight in Northern California, two in Central California, three in Nevada, eight in Arizona and one in Utah. These stores average approximately 41,000 square feet in size. In addition, we have a retail e-commerce store 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 Caņada, California 91011, and our telephone number is (818) 949-5300.

Operating History

In 1959, Norbert Olberz, our founder (the "Founder"), purchased a small ski and tennis shop in La Caņada, 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 50 years, Sport Chalet has grown into a chain of 55 specialty sporting goods stores serving California, Nevada, Arizona and Utah.

Our growth had historically focused on Southern California; but since 2001 we have expanded our scope to all of California and to Nevada, Arizona and Utah. Generally, our new stores were located with the intent of strengthening our focus on Southern California or in areas characterized by a large number of housing developments. We opened seven stores in fiscal 2008, 17 stores in the last three years and 25 in the last five years. In fiscal 2009, we opened four new stores, relocated one and re-launched our website. We currently do not anticipate opening new stores or entering into new lease commitments in the near future.

Store openings have had a favorable impact on sales volume, but have negatively affected 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 historically have required 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 newer 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.

We believe our stores are located in the geographic regions hardest hit by the downturn in the housing and credit markets. Our sales largely 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.

The term comparable store sales is considered a key performance measurement. The sales of a store are first included in the comparable store sales calculation in the quarter following its twelfth full month of operation.

Beginning April 1, 2006, our fiscal year end was changed from March 31 to the Sunday closest to March 31. Fiscal years 2007 and 2008 consist of four 13 week quarters or 52 weeks. An extra week will be added onto the fourth quarter every five or six years. This fiscal calendar is widely used in the retail industry.

Recent Events

Our comparable store sales growth had been positive for the four fiscal years prior to fiscal 2008. Comparable store sales declined 4.5% for fiscal 2008 and 12.4% for fiscal 2009 as we continue to confront a difficult macro-economic environment, which began with weak housing trends and high gasoline prices in our core markets and continued with the financial and credit crisis. As a result of the reduction in comparable store sales for fiscal 2009 and the opening of new stores which have not reached maturity, we incurred a net loss of $52.2 million, or $3.70 per diluted share, compared to a net loss of $3.4 million, or $0.24 per diluted share, for fiscal 2008. We have sustained operating losses in seven of the past eight quarters. Comparable store sales for the past seven quarters from the second quarter of fiscal 2008 to the fourth quarter of fiscal 2009 are +2.2%, -6.9%, -8.8%, -11.1%, -6.7%, -15.4% and -17.7%, respectively. More recently, for our first quarter through June 21, 2009, we have experienced a 14.9% decline in comparable store sales.

Non-cash impairment charges of $10.7 million and $2.1 million were recorded in fiscal 2009 and 2008, related to eleven and two stores, respectively, with significantly lower than expected sales volume which, based on recent trends, those stores are not expected to obtain sufficient cash flow over their remaining lease terms to support the net book value of their leasehold improvements and fixtures.

As of December 31, 2008, an event of default had occurred under our Amended and Restated Loan and Security Agreement, as amended, dated as of June 20, 2008 (the "Loan Agreement") with our existing lender, Bank of America, N.A. (the "Lender"). On January 9, 2009, we entered into an amendment to the Loan Agreement (the "First Amendment") under which, among other things, the Lender agreed to forbear from exercising its rights in respect of the event of default until January 31, 2009. On January 29, 2009, the Lender agreed to extend the forbearance until March 2, 2009.

On March 2, 2009, we further amended the Loan Agreement (the "Third Amendment"). Under the Third Amendment, (i) the Lender waived the event of default, (ii) the amount we can borrow against our borrowing base was reduced,
(iii) the interest rate was increased, and (iv) we agreed to maintain a minimum monthly EBITDA. The seasonal revolver limits under the credit facility remain unchanged under the Third Amendment.

On May 4, 2009, we amended the Loan Agreement (the "Fourth Amendment"). Under the terms of the Fourth Amendment, our availability increases by up to an additional $10.0 million through a special advance facility. The amount available under the special advance facility will be reduced by $2.5 million on the first day of each month commencing on July 1, 2010 and the special advance facility will terminate on October 1, 2010. This effectively increases the revolver limit up to $55 million from January 1st of each year through August 31st and also allows for seasonal advances up to $75.0 million from September 1st of each year to December 31st, subject to the scheduled reductions. For a more detailed description of our Loan Agreement, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources and Item 1A. Risk Factors - The covenants in our revolving credit facility may limit future borrowings to fund our operations."

Company Initiatives to Manage Macro-Economic Environment

In October 2008, we began aggressively taking action to address the severe downturn in the macro-economic environment by examining our practices, assumptions, models and cost structures in an effort to modify our business model in a manner which makes the Company more efficient, more focused and better able to navigate the difficult environment. We are focused more intently than ever on reducing operating expenses and improving liquidity through the following core initiatives:

· Amended loan agreement with our single source lender, Bank of America, following two 30-day forbearance agreements.

· Aggressively reduced aged inventory, providing fresher and cleaner merchandise on the floor and enhancing the collateral base.

· Communicated with all vendors regularly throughout in the process to make sure they were fully aware of the challenges we are facing and the initiatives taken for a turnaround.

· Renegotiated lease terms across many of our stores, which eliminated the immediate need for store closures with reduced base rent payments, percentage rent and kick-out clauses.

· Significantly increased payroll efficiency in our stores and distribution center, which delivered lower spend per customer while maintaining the customer experience.

· Initiated significant reductions in corporate overhead, from a personnel and discretionary spending standpoint.

· Strengthened our corporate governance policies and practices.

Although no assurance can be given about the ultimate impact of these initiatives or of the overall economic climate, we believe these initiatives combined with a diminished competitive environment due to the exit or diminished capacity of many key specialty competitors throughout the marketplace will position us for sustainability, viability and positive results in the future.

In June 2008, we moved from a cash flow based revolving bank loan to an asset-based loan to improve liquidity. We had gone for nine years, through the end of 2006, without bank debt at the end of any quarter. This changed as we invested heavily for growth with twelve new stores over the past two years, a 33% growth rate. Additionally, there was a $9.5 million investment in computer systems primarily from SAP along with $2.1 million investment in ecommerce. This led to the increased borrowing. Subsequently, we defaulted on a loan covenant and received a Forbearance Agreement from Bank of America in January 2009 and a second Forbearance Agreement in February 2009. By March 2, 2009, based on improving metrics of the Company and the initiatives listed above, we were able to successfully negotiate an amendment to our loan agreement which waived the event of default and reset the covenants. Subsequently, on May 4, 2009, the bank amended the line to increase availability an additional $10 million.

In Fall 2008, we began an aggressive inventory management program, which led to historic lows of aged Winter apparel and hardlines, along with footwear, general apparel, and other key categories of hardlines. This was due in part to the renewed commitment by us to better inventory control, new executive leadership in merchandising, along with the implementation and roll out of SAP computer systems. The result was fresh assortments on the floor and an enhanced borrowing base.

In January 2009, we began communicating with vendors asking for additional dating and credit terms, merchandise returns and other means of vendor support. Our requests were reviewed and approved by a significant number of our vendors. From January through May 2009, we received a total of $138.6 million in fresh inventory at retail. Combined with the reduction in aged inventory, we believe we have the freshest and cleanest inventory on our sales floors in our history.

In November 2008, we began approaching landlords of all 55 stores, as well as of the corporate office, distribution center, and Team Sales division about restructuring lease terms. To date, these efforts have resulted in projected savings of approximately $14 million over the next three years with many leases to include kick-out clauses, percentage rent and co-tenancy clauses. We continue to negotiate aggressively for additional concessions.

In October 2008, we revised our store operating model by creating four models based on individual store performance, increasing the number of fulltime versus part-time employees, freezing incentive and salary programs. This resulted in a $7.2 million payroll reduction in the second half of fiscal 2009, combined with an expected $10.7 million reduction throughout fiscal 2010. We began approaching expense vendors concerning elimination or reduction of non-critical programs, implementing aggressive cost containment and renegotiations. In the second half of fiscal 2009, we reduced over $2.8 million in annual expenses, which includes advertising and marketing, professional fees, supplies, utilities, repairs and maintenance, travel, insurance, computer maintenance agreements, auditor and attorney fees, alarm monitoring services and shipping costs. We expect a $9.4 million reduction throughout fiscal 2010 in those expenses. In addition, there were headcount reductions in the corporate office and distribution center.

We are working toward new corporate governance policies aimed to provide complete transparency to stockholders, such as removal of classes for Directors, annual election of Directors by a simple majority vote, and the elimination of Actions by Written Consent. Additionally, we are changing the compensation structure to decrease the fees paid to the Board of Directors.

Despite the macro-economic environment, we continued to aggressively move forward with our Sport Chalet Action Pass program, which was initiated in November 2007 to enhance our customer relationship management capabilities. At the beginning of the fiscal year, we had 278,000 members. To date, we have 720,000 members and are signing 6,000 to 8,000 new members each week. Currently, over 40% of all sales are being generated by Action Pass members. We have shifted a significant portion of our marketing activities away from traditional channels and towards direct marketing to our Action Pass members, our best customers, and believe that this will result in a higher return on advertising investment.

We successfully completed on-time and on-budget the launch of the new sportchalet.com website on March 23, 2009. We established a leadership position in ecommerce in the sporting goods industry by selecting Marketlive, Sapient, Shopatron, Bazaarvoice, and Experian CheetahMail to run the website. This new business is expected to achieve average store sales volume by the end of the fiscal year and continue to grow. It is also expected to be one of our primary advertising and marketing vehicles in the future.

In April 2008, we implemented SAP, our core finance and merchandising system, replacing a 25-year-old legacy system. The cost of this system was $9.5 million. This installation provided the platform for us to become Sarbanes-Oxley compliant and provided the foundation for the ecommerce platform to launch. The system provides enhanced cost controls as well as performance data and has been a key component to manage cash flow and expenses. We received an award from SAP as the retailer experiencing the most timely and efficient implementation for the year.

As mentioned earlier, as a result of the initiatives taken by us, Bank of America approved loan amendments favorable to us and agreed to covenants that require a $19 million EBITDA loss in fiscal 2009 improve to a $5.4 million EBITDA profit in fiscal 2010, a $24 million improvement. Performance against this plan is measured on a monthly cumulative basis and non-compliance could result in a default. We have reported to the bank that results have exceeded plan in the first two months of fiscal 2010. We believe that these aggressive actions taken early in the crisis, and in most cases well ahead of our competitors, positions us for sustainability, viability and positive results in the future.

Results of Operations

Fiscal 2009 Compared to Fiscal 2008

The following table sets forth statement of operations data determined in
accordance with generally accepted accounting principals ("GAAP"), the relative
percentages of net sales, and the percentage increase or decrease, for the 2009
and 2008 fiscal years (in thousands, except per share amounts).

                                          Fiscal year
                              2009                            2008                   Dollar        Percentage
                     Amount         Percent          Amount         Percent          Change          Change
Net sales          $  372,652           100.0 %    $  402,534           100.0 %    $  (29,882 )           (7.4 %)
Gross profit           88,395            23.7 %       116,552            29.0 %       (28,157 )          (24.2 %)
Selling, general
and
administrative
expenses              107,651            28.9 %       105,697            26.3 %         1,954              1.8 %
Depreciation and
amortization           14,243             3.8 %        12,898             3.2 %         1,345             10.4 %
Impairment
charge                 10,730             2.9 %         2,077             0.5 %         8,653            416.6 %
Loss from
operations            (44,229 )         (11.9 %)       (4,120 )          (1.0 %)      (40,109 )          973.5 %
Interest expense        2,195             0.6 %         1,466             0.4 %           729             49.7 %
Loss before
taxes                 (46,424 )         (12.5 %)       (5,586 )          (1.4 %)      (40,838 )          731.1 %
Net loss              (52,247 )         (14.0 %)       (3,362 )          (0.8 %)      (48,885 )        1,454.0 %

Class A and
Class B
Earnings (loss)
per share:
       Basic       $    (3.70 )                    $    (0.24 )                    $    (3.46 )        1,441.7 %
       Diluted     $    (3.70 )                    $    (0.24 )                    $    (3.46 )        1,441.7 %

Sales decreased $29.9 million, or 7.4%, to $372.7 million for fiscal 2009 from $402.5 million for fiscal 2008. Sales from eleven new stores, not included in the comparable store sales calculation, resulted in a $16.2 million increase in sales, or 4.1%. This increase was offset by a comparable store sales decrease of $45.3 million, or 12.4%. The positive impact on sales by reducing prices was offset by worsening macro-economic conditions.

Gross profit decreased $28.2 million, or 24.2%, primarily as a result of the sales decrease, an additional $9.7 million in markdowns primarily used to stimulate the demand for inventory and a $4.4 million increase in rent from new stores. As a percent of sales, gross profit decreased 530 basis points to 23.7% from 29.0%. The decrease is primarily the result of increased markdowns, rent as a percent of sales in newer stores which take time to reach their desired operating efficiency.

Selling, general and administrative expenses ("SG&A") increased $2.0 million, or 1.8%, primarily due to $4.7 million from expenses related to additional stores, $2.1 million for increased professional fees primarily related to new system implementation support and training as well as professional fees incurred in obtaining our new bank credit facility and the related amendments, partially offset by labor savings of $4.8 million. As a percent of sales, SG&A increased to 28.9% from 26.3%, primarily from the decrease in comparable store sales, the expenses associated with new stores, which take time to reach their desired operating efficiency, and an increase in professional fees offset by labor savings.

A non-cash impairment charge of $10.7 million was recorded in the year ended March 29, 2009 related to eleven stores with significantly lower than expected sales volume and based on recent trends are not expected to obtain sufficient cash flow over their remaining lease terms to support the net book value of their leasehold improvements and fixtures. The existence of the impairment was assessed by calculating the net cash flow of each individual store on an undiscounted basis and comparing it to the net book value of the individual store. The actual impairment charge was measured by determining the fair value of the store's assets, calculated based on the discounted net cash flow of the store over the remaining lease term, and comparing it to the book value.

A tax provision of $5.8 million was recorded for fiscal 2009 as there was no valuation allowance on the net deferred tax assets of $5.8 million at March 30, 2008. Based largely on the magnitude of this year's loss, the cumulative losses to date, the near term outlook and other available objective evidence, management concluded that a valuation allowance equal to all of the net deferred tax assets, $24.1 million, should be recorded as the Company's ability to return to profitability during the loss carryforward period does not meet the "more likely than not" standard.

Primarily as a result of the reduction in comparable store sales, the opening of new stores, the impairment charge and the income tax valuation allowance, we incurred a net loss of $52.2 million, or $3.70 per diluted share for the year ended March 29, 2009. Excluding the non-cash impairment charge and the affect of the valuation allowance as well as a non-cash impairment charge of $2.1 million pre-tax, or $0.09 per diluted share, recorded in the prior fiscal year, net loss was $35.6 million, or $2.53 per diluted share, compared to net loss of $2.1 million, or $0.15 per diluted share for the same period last year.

Fourth Quarter 2009 Compared to Fourth Quarter 2008

The following tables set forth statement of income data and relative percentages
of net sales, and the percentage increase or decrease, for the fourth quarter of
fiscal 2009 and 2008 (in thousands, except per share amounts).

                                     Fourth fiscal quarter
                              2009                            2008                   Dollar        Percentage
                     Amount         Percent          Amount         Percent         Increase        Increase
Net sales          $   84,513           100.0 %    $   96,753           100.0 %    $  (12,240 )          (12.7 %)
Gross profit           16,766            19.8 %        25,443            26.3 %        (8,677 )          (34.1 %)
Selling, general
and
administrative
expenses               24,069            28.5 %        26,629            27.5 %        (2,560 )           (9.6 %)
Depreciation and
amortization            3,276             3.9 %         3,131             3.2 %           145              4.6 %
Loss from
operations            (10,579 )         (12.5 %)       (4,317 )          (4.5 %)       (6,262 )          145.1 %
Interest expense          545             0.6 %           260             0.3 %           285            109.6 %
Loss before
taxes                 (11,124 )         (13.2 %)       (4,577 )          (4.7 %)       (6,547 )          143.0 %
Net loss              (11,124 )         (13.2 %)       (2,755 )          (2.8 %)       (8,369 )          303.8 %

Class A and
Class B
Loss per share:
       Basic       $    (0.79 )                    $    (0.20 )                    $    (0.59 )          295.0 %
       Diluted     $    (0.79 )                    $    (0.20 )                    $    (0.59 )          295.0 %

Sales decreased $12.2 million, or 12.7%, to $84.5 million for the fourth quarter 2009 from $96.8 million for the same period in fiscal 2008. Sales growth due to four new stores, not included in the comparable store sales calculation, resulted in a $3.8 million increase in sales, or 3.9%. This increase was offset by a comparable store sales decrease of $16.8 million, or 17.7%. The positive impact on sales by reducing prices was offset by worsening macro-economic conditions and a warm January, as compared to the January 2008, in our markets which impacted the demand for Winter-related merchandise.

Gross profit decreased $8.7 million, or 34.1%, primarily as a result of the sales decrease, an additional $2.8 million in markdowns primarily used to stimulate the demand for inventory and a $0.5 million increase in rent from new stores. As a percent of sales, gross profit decreased 650 basis points to 19.8% from 26.3%. The decrease is primarily the result of increased markdowns.

Selling, general and administrative expenses decreased $2.6 million, or 9.6%, as $1.1 million from expenses related to additional stores and $0.4 million for increased professional fees primarily related to amendments to our bank credit facility and related work from turn-around consultants, was offset by labor savings of $3.4 million and a reduction in advertising of $1.1 million. As a percent of sales, SG&A increased to 28.5% from 27.5%, primarily from the decrease in comparable store sales, the expenses associated with new stores and an increase in professional fees offset by labor and advertising savings.

Primarily as a result of the reduction in comparable store sales, we incurred a net loss of $11.1 million, or $0.79 per diluted share for the quarter ended March 29, 2009 compared to net loss of $2.8 million, or $0.20 per diluted share for the same period last year.

Fiscal 2008 Compared to Fiscal 2007

The following table sets forth statement of operations data determined in
accordance with generally accepted accounting principals ("GAAP"), the relative
. . .