This Quarterly Report on Form 10-Q 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 "- Factors That May Affect Future Results" and "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 the Company's financial statements and related notes thereto provided under "Item 1-Financial Statements" above.

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 June 28, 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.

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.

Recent Events

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.

Comparable store sales declined 4.5% for fiscal 2008 and 12.4% for fiscal 2009 as we continued 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 for fiscal 2009, compared to a net loss of $3.4 million, or $0.24 per diluted share for fiscal 2008. Included in the losses are a non-cash impairment charge of $10.7 million and $2.1 million in fiscal 2009 and fiscal 2008, respectively, related to underperforming stores.

We have sustained operating losses in eight of the past nine quarters. Comparable store sales for the past eight quarters from the second quarter of fiscal 2008 to the first quarter of fiscal 2010 are -2.2%, -6.9%, -8.8%, -11.1%, -6.7%, -15.4%, -17.7% and -14.7%, respectively. More recently, for our second quarter through August 2, 2009, we have experienced a 10.4% decline in comparable store sales. In the event sales decline at a rate greater than anticipated to support the loan covenants, we may have insufficient working capital to continue to operate our business as it has been operated, or at all.

As a result of the comparable store sales decline, we are focused on reducing operating expenses and improving liquidity. In October 2008, we began aggressively taking action to address the severe downturn in the macroeconomic environment by examining our practices, assumptions, models and cost structures in an effort to modify our business model to make 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 and their savings realized for the first quarter of fiscal 2010 as compared to first quarter of fiscal 2009:

· Improved inventory management and saved $1.6 million in reduced markdowns. As a result of liquidating aged inventory throughout fiscal 2009, our inventory is fresher and cleaner.

· Renegotiated lease terms and saved $0.6 million in reduced rent. Based on executed amendments to date, we expect to save over $5.0 million in fiscal 2010 compared to fiscal 2009.

· Increased payroll efficiency and saved $3.4 million. Based on current trends, we anticipate saving $10.7 million in fiscal 2010.

· Reduced all expense categories and saved $3.7 million primarily from advertising, professional fees and repairs and maintenance. We anticipate saving $9.4 million in fiscal 2010.

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 in our marketplace, will better position us for sustainability, viability and positive results in the future as the economy improves. For a detailed discussion of these cost reductions and other initiatives, see "Item 1 - Company Initiatives to Manage Macro-Economic Environment" section of the Company's Annual Report on Form 10-K for the fiscal year ended March 29, 2009.

The terms comparable store sales or same store sales are used interchangeably and are 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.

Results of Operations

Three Months Ended June 28, 2009 Compared to June 29, 2008

The following table sets forth statements of operations data and relative
percentages of net sales for the three months ended June 28, 2009 compared to
three months ended June 29, 2008 (dollar amounts in thousands, except per share
amounts):

                                      Three months ended
                        June 28, 2009                   June 29, 2008               Dollar        Percentage
                    Amount         Percent          Amount         Percent          Change          Change
Net sales         $   79,403           100.0 %    $   87,120           100.0 %    $   (7,717 )           (8.9 %)
Gross profit          20,990            26.4 %        22,708            26.1 %        (1,718 )           (7.6 %)
Selling, general
and
administrative
expenses              19,937            25.1 %        25,969            29.8 %        (6,032 )          (23.2 %)
Depreciation and
amortization           3,456             4.4 %         3,611             4.1 %          (155 )           (4.3 %)
Loss from
operations            (2,403 )          (3.0 %)       (6,872 )          (7.9 %)        4,469                *
Interest expense         581             0.7 %           657             0.8 %           (76 )          (11.6 %)
Loss before taxes     (2,984 )          (3.8 %)       (7,529 )          (8.6 %)        4,545                *
Income tax
benefit                    -             0.0 %        (3,003 )          (3.4 %)        3,003                *
Net loss              (2,984 )          (3.8 %)       (4,526 )          (5.2 %)        1,542                *

Class A and Class
B Loss per share:
Basic             $    (0.21 )                    $    (0.32 )                    $     0.11                *
Diluted           $    (0.21 )                    $    (0.32 )                    $     0.11                *

*Percentage change not meaningful.

Sales decreased $7.7 million, or 8.9%, to $79.4 million for the three months ended June 28, 2009 from $87.1 million for the first quarter of last year. Sales from four new stores, not included in the same store sales calculation, resulted in a $4.0 million increase in sales, or 5.0%. This increase, along with an increase in Team Sales of $0.8 million, was offset by a same store sales decrease of $12.5 million, or 14.7%.

Gross profit decreased $1.7 million, or 7.6%, as a result of the sales decrease of $7.7 million. Gross profit benefitted from reductions in markdowns of $1.6 million and in rent of $0.6 million. As a percent of sales, gross profit increased 30 basis points to 26.4% from 26.1%, primarily as a result of decreased markdowns. Rent decreased by $0.6 million compared to the first quarter of fiscal 2009; however, rent expense as a percent of sales increased due to the $7.7 million sales decrease.

Selling, general and administrative expenses decreased $6.0 million, or 23.2%, as expenses related to new stores of $2.0 million were offset by expense reductions of $7.1 million. Expense reduction initiatives include $3.4 million in labor savings from stores, corporate office overhead and the distribution center. Additional savings in other areas include advertising of $2.1 million, professional fees of $0.6 million and repairs and maintenance of $0.5 million. As a percent of sales, SG&A decreased 470 basis points to 25.1% from 29.8% in the first quarter of fiscal 2009, because the expense reductions more than offset the decline in sales.

We will not record income tax benefits in the consolidated financial statements until it is determined that it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. As of June 28, 2009, our net deferred tax assets and related valuation allowance totaled $25.3 million. The Company has federal and state net operating loss carryforwards of $37.2 million and $36.5 million, respectively, which can be carried forward for a period of 20 years.

Net loss for the first quarter of fiscal 2010 was $3.0 million, or $0.21 per diluted share, compared to a net loss of $4.5 million, or $0.32 per diluted share, for the first quarter of fiscal 2009. The net loss for the first quarter of fiscal 2010 did not reflect any net tax benefit (because of tax valuation allowances), while the first quarter of fiscal 2009 reflected a net tax benefit of $3.0 million, or $0.21 per share. Without the tax benefit, the net loss for the first quarter of fiscal 2009 would have been $7.5 million, or $0.53 per share.

Liquidity and Capital Resources

Historically our primary capital requirements for inventory, technology infrastructure, new stores, store relocation and remodeling have been funded by cash from operations, credit terms from vendors and bank borrowing. For the foreseeable future our ability to continue our operations and business is dependent on our cash flow from operations and borrowing capacity. Comparable store sales for the past eight quarters from the second quarter of fiscal 2008 to the first quarter of fiscal 2010 are -2.2%, -6.9%, -8.8%, -11.1%, -6.7%, -15.4%, -17.7% and -14.7%, respectively. More recently, for our second quarter through August 2, 2009, we have experienced a 10.4% decline in comparable store sales. In the event sales decline at a rate greater than anticipated to support the loan covenants, we may have insufficient working capital to continue to operate our business as it has been operated, or at all.

As a result of the comparable store sales decline, we are focused on reducing operating expenses and improving liquidity. In October 2008, we began aggressively taking action to address the severe downturn in the macroeconomic environment by examining our practices, assumptions, models and cost structures in an effort to modify our business model to make 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 and their savings realized for the first quarter of fiscal 2010 as compared to first quarter of fiscal 2009:

· Improved inventory management and saved $1.6 million in reduced markdowns. As a result of liquidating aged inventory throughout fiscal 2009, our inventory is fresher and cleaner.

· Renegotiated lease terms and saved $0.6 million in reduced rent. Based on executed amendments to date, we expect to save over $5.0 million in fiscal 2010 compared to fiscal 2009.

· Increased payroll efficiency and saved $3.4 million. Based on current trends, we anticipate saving $10.7 million in fiscal 2010.

· Reduced all expense categories and saved $3.7 million primarily from advertising, professional fees and repairs and maintenance. We anticipate saving $9.4 million in fiscal 2010.

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 in our marketplace, will better position us for sustainability, viability and positive results in the future as the economy improves. For a detailed discussion of these cost reductions and other initiatives, see "Item 1 - Company Initiatives to Manage Macro-Economic Environment" section of the Company's Annual Report on Form 10-K for the fiscal year ended March 29, 2009.

Net cash used in or provided by operating activities has generally been the result of net income or loss, adjusted for depreciation and amortization, and changes in inventory along with related accounts payable. The following table shows the more significant items for the three months ended June 28, 2009 and June 29, 2008:

                                                       Three months ended
                                                June 28, 2009       June 29, 2008
                                               (in thousands)
    Net loss                                   $        (2,984 )   $        (4,526 )
    Depreciation and amortization                        3,456               3,611
    Deferred income taxes                                    -              (4,418 )
    Merchandise inventories                            (11,273 )            (7,441 )
    Accounts payable                                     2,327               9,063
    Other accrued expenses                              (4,015 )             4,510
    Other                                               (1,044 )              (162 )
    Net cash (used in) provided by operating
    activities                                 $       (13,533 )   $           637

Typically, inventory levels increase from year to year due to the addition of new stores, while improvements in inventory management decrease inventory required for each store. Average inventory per store slightly increased 0.7% to $1.81 million from $1.80 million at the end of the first quarter of fiscal 2010 and fiscal 2009, respectively. Given our recent financial performance and the overall uncertainty during the fourth quarter of fiscal 2009, we were anticipating reductions in available credit from our vendors and therefore had sought merchandise from alternate vendors. However, we received better than expected support from our vendor community and as a result experienced an increase in average inventory per store. We anticipate reducing average inventory per store over the remainder of this fiscal year. The increase of $11.3 million in the three months ended June 28, 2009 and the increase of $7.4 million in the three months ended June 29, 2008 were primarily due to seasonality, as sales increase significantly from our first quarter to our second quarter.

Historically, accounts payable increases as inventory increases. However, the timing of vendor payments or receipt of merchandise near the end of the period influences this relationship. As a result of insufficient cash available during the fourth quarter of fiscal 2009, we had slowed payments to our vendors, many of which were brought current during the first quarter of fiscal 2010. This is the primary reason for an increase of only $2.3 million in accounts payable compared to the increase in inventory of $11.3 million.

Additionally, the insufficient cash available during the fourth quarter of fiscal 2009 also caused other accrued expenses to increase as compared to fiscal 2008. During the first quarter of fiscal 2010, payments were made to bring expense vendors more current.

We have determined that we will not record income tax benefits in the consolidated financial statements until it is determined that it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. As of June 28, 2009, our net deferred tax assets and related valuation allowance totaled $25.3 million. The Company has federal and state net operating loss carryforwards of $37.2 million and $36.5 million, respectively, which can be carried forward for a period of 20 years. A new bill, the Net Operating Loss Carryback Act (H.R. 2452) has been introduced in the House which would permit a carryback of losses from 2008 or 2009 for up to five years. In the event this bill becomes a law, we believe we could obtain an income tax refund of up to $10.0 million.

Net cash used in investing activities is primarily for capital expenditures as shown below:

                                             Three months ended
                                     June 28, 2009         June 29, 2008
                                    (in thousands)
             New stores             $             -       $         3,180
             Remodels/Relocations                 -                 1,439
             Existing stores                    204                   244
             Information systems                  4                   708
             Other                                -                   177
             Total                  $           208       $         5,748

We did not open any new stores in the three months ended June 28, 2009 compared to one new store in the same period last year. The costs to open new stores can vary significantly depending on the terms of the lease. We currently do not anticipate opening new stores or entering into new lease commitments in the near future.

Forecasted capital expenditures for the remainder of fiscal 2010 are expected to be nominal as all nonessential projects have been curtailed.

Net cash provided by financing activities reflects advances and repayments of borrowings under our revolving credit facility. The outstanding balance as of June 28, 2009 is $49.8 million compared to $39.1 million at the end of fiscal 2009. The increase is primarily the result of cash used in operations.

Under our bank credit facility, $45.0 million will be available to the Company, increasing up to $70.0 million, from September 1st of each year through December 31st of each year, and up to an additional $10.0 million will be available to the Company 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. This facility also provides for up to a $10.0 million maximum in authorized letters of credit. The amount we may borrow under this credit facility is limited to a percentage of the value of eligible inventory, minus certain reserves. Interest accrues at the Lender's prime rate plus 2.0% (5.25% at June 28, 2009) or at our option we can fix the rate for a period of time at LIBOR plus 4.5%. In addition, there is an unused commitment fee of 0.25% per year, based on a weighted average formula, a one-time, non-refundable commitment fee of $350,000 and an early termination fee of 1.50% in year one, 0.75% in year two and 0.25% in year three which is waived if the loan is refinanced by the Lender or any of its affiliates. Our obligation to the Lender is presently secured by a first priority lien on substantially all of our non-real estate assets, and we are subject to a covenant that we maintain a minimum monthly EBITDA.

EBITDA is defined in our bank credit facility as (loss) income before provision (benefit) for income taxes, interest expense, depreciation and amortization, and non-cash charges. EBITDA is a liquidity measure that is one of the key measures used in calculating compliance with covenants in our credit facility. Non-compliance with financial covenants could result in a default under our credit agreement and restrict our ability to finance operations or capital needs. Based on the strategic initiatives taken by management, we believe we can improve a $19 million EBITDA loss in fiscal 2009 to exceed the Lender's minimum EBITDA requirement of $5.4 million EBITDA profit in fiscal 2010, a $24 million improvement. Performance against this plan is measured on a monthly cumulative basis and we have reported to the Lender that results have exceeded plan for our first quarter of fiscal 2010. The monthly minimum EBITDA requirements are not necessarily indicative of future results, nor are they our projection of future results and our actual results may or may not differ materially. We can satisfy our monthly EBITDA requirement through a number of different combinations of any of the following components: net sales, gross margins, and operating expenses. A deterioration of any component(s) can be offset by an improvement of any other component(s) and vice versa. The relationships between the components as they actualize will determine whether the minimum EBITDA requirement is met.

The amount we can borrow under our credit facility with the Lender is limited to a percentage of the value of eligible inventory, minus certain reserves. A significant decrease in eligible inventory due to the aging of inventory, an unfavorable inventory appraisal or other factors, could have an adverse effect on our borrowing capabilities under our credit facility, which may adversely affect the adequacy of our working capital.

Our off-balance sheet contractual obligations and commitments relate to operating lease obligations, employment contracts and letters of credit which are excluded from the balance sheet in accordance with generally accepted accounting principles.

The following table summarizes such obligations as of June 28, 2009:

                                               Payment due by period
                                     Less than                                       More than
                       Total          1 year         2-3 year        4-5 year         5 years
  Contractual
  Obligations                                      (in thousands)
  Operating Leases
  (a)                $  229,743     $    32,518     $    63,464     $    53,937     $    79,824
  Employment
  Contracts                 806             170             339             297               -
  Total
  Contractual
  Obligations        $  230,549     $    32,688     $    63,803     $    54,234     $    79,824

(a) Amounts include the direct lease obligations. Other obligations required by the lease agreements such as contingent rent based on sales, common area maintenance, property taxes and insurance are not fixed amounts and are therefore not included. The amount of the excluded expenses are; $10.5 million, $9.6 million and $8.5 million for the fiscal years 2009, 2008 and 2007, respectively. Operating Lease Obligations reflect savings from lease modifications, assume kick-out clauses will be excercised and do not reflect potential renewals or replacements of expiring leases.

We lease all of our existing store locations. The leases for most of the existing stores are for approximately ten-year terms with multiple option periods under non-cancelable operating leases with scheduled rent increases. Some leases provide for contingent rent based upon a percentage of sales in excess of specified minimums. If there are any free rent periods, they are accounted for on a straight line basis over the lease term, beginning on the date of initial possession, which is generally when we enter the space and begin the construction build-out. The amount of the excess of straight line rent expense over scheduled payments is recorded as a deferred rent liability. Construction allowances and other such lease incentives are recorded as deferred credits, and are amortized on a straight line basis as a reduction of rent expense over the lease term. In our efforts to reduce operating expenses and improve liquidity, we have reviewed all of our store leases and have obtained and are seeking additional rent reductions and lease modifications from our landlords. We currently expect to achieve savings totaling approximately $14 . . .