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 September 27, 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 nine of the past ten quarters. The following table sets forth comparable store sales by quarter for the past three fiscal years:

                          FY 2008               FY 2009        FY 2010
                Q1         1.3%                 (11.1%)        (14.7%)
                Q2        (2.2%)                (6.7%)         (12.4%)
                Q3        (6.9%)                (15.4%)        (2.8%)*
                Q4        (8.8%)                (17.7%)          n/a

*Third quarter through November 1, 2009.

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 have 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 costs in an effort to modify our business model to make the Company more efficient. We continue to focus on reducing operating expenses and improving liquidity through the following core initiatives and their savings realized for the first half of fiscal 2010 as compared to first half of fiscal 2009:

· Improved inventory management and saved $3.7 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 $1.5 million in 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 $7.1 million. Based on current trends, we anticipate saving $10.7 million in fiscal 2010.

· Reduced all expense categories and saved $6.9 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 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 Business
- 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

13 Weeks Ended September 27, 2009 Compared to September 28 2008

The following table sets forth statements of operations data and relative
percentages of net sales for the 13 weeks ended September 27, 2009 compared to
the 13 weeks ended September 28, 2008 (dollar amounts in thousands, except per
share amounts):

                                              13 weeks ended
                            September 27, 2009              September 28, 2008           Dollar        Percentage
                          Amount         Percent          Amount         Percent         Change          Change
Net sales               $    88,811          100.0 %    $    96,457          100.0 %    $  (7,646 )           (7.9 %)
Gross profit                 24,831           28.0 %         25,596           26.5 %         (765 )           (3.0 %)
Selling, general and
administrative
expenses                     22,066           24.8 %         28,506           29.6 %       (6,440 )          (22.6 %)
Depreciation and
amortization                  3,274            3.7 %          3,656            3.8 %         (382 )          (10.4 %)
Loss from operations           (509 )         (0.6 %)        (6,566 )         (6.8 %)       6,057            (92.2 %)
Interest expense                703            0.8 %            422            0.4 %          281             66.6 %
Loss before taxes            (1,212 )         (1.4 %)        (6,988 )         (7.2 %)       5,776            (82.7 %)
Income tax benefit                -            0.0 %         (2,767 )         (2.9 %)       2,767                *
Net loss                     (1,212 )         (1.4 %)        (4,221 )         (4.4 %)       3,009            (71.3 %)

Class A and Class B
Loss per share:
Basic                   $     (0.09 )                   $     (0.30 )                   $    0.21            (71.3 %)
Diluted                 $     (0.09 )                   $     (0.30 )                   $    0.21            (71.3 %)

*Percentage change
not meaningful.

Sales decreased $7.7 million, or 7.9%, to $88.8 million for the 13 weeks ended September 27, 2009 from $96.5 million for the second quarter of last year. The decrease is primarily the result of worsening macro-economic conditions. Sales from three new stores, not included in the same store sales calculation, resulted in a $2.3 million increase in sales, or 2.4%. This increase, along with an increase in Team Sales of $0.9 million, was offset by a same store sales decrease of $11.7 million, or 12.4%.

Gross profit decreased $0.8 million, or 3.0%, as a result of the sales decrease partially offset by reductions in markdowns of $1.6 million and in rent of $0.8 million. As a percent of sales, gross profit increased 150 basis points to 28.0% from 26.5%, also primarily as a result of decreased markdowns and rent.

Selling, general and administrative expenses decreased $6.4 million, or 22.6%, as expenses related to new stores of $0.9 million were offset by expense reductions of $7.3 million. Expense reduction initiatives include $3.9 million in labor savings from stores, corporate office overhead and the distribution center. Additional savings in other areas include advertising of $1.6 million, professional fees of $0.7 million, utilities of $0.5 million and repairs and maintenance of $0.5 million. As a percent of sales, SG&A decreased 480 basis points to 24.8% from 29.6% in the second 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 September 27, 2009, our net deferred tax assets and related valuation allowance totaled $25.7 million. The Company has federal and state net operating loss carryforwards of approximately $39 million, which can be carried forward for a period of 20 years.

Net loss for the second quarter of fiscal 2010 was $1.2 million, or $0.09 per diluted share, compared to a net loss of $4.2 million, or $0.30 per diluted share, for the second quarter of fiscal 2009. The net loss for the second quarter of fiscal 2010 did not reflect any net tax benefit (because of tax valuation allowances), while the second quarter of fiscal 2009 reflected a net tax benefit of $2.8 million, or $0.20 per share. Without the tax benefit, the net loss for the second quarter of fiscal 2009 would have been $7.0 million, or $0.49 per share.

26 Weeks Ended September 27, 2009 Compared to September 28 2008

The following table sets forth statements of operations data and relative
percentages of net sales for the 26 weeks ended September 27, 2009 compared to
the 26 weeks ended September 28, 2008 (dollar amounts in thousands, except per
share amounts):

                                              26 weeks ended
                            September 27, 2009              September 28, 2008           Dollar        Percentage
                          Amount         Percent          Amount         Percent         Change          Change
Net sales               $   168,214          100.0 %    $   183,577          100.0 %    $ (15,363 )           (8.4 %)
Gross profit                 45,821           27.2 %         48,304           26.3 %       (2,483 )           (5.1 %)
Selling, general and
administrative
expenses                     42,003           25.0 %         54,475           29.7 %      (12,472 )          (22.9 %)
Depreciation and
amortization                  6,730            4.0 %          7,267            4.0 %         (537 )           (7.4 %)
Loss from operations         (2,912 )         (1.7 %)       (13,438 )         (7.3 %)      10,526            (78.3 %)
Interest expense              1,284            0.8 %          1,079            0.6 %          205             19.0 %
Loss before taxes            (4,196 )         (2.5 %)       (14,517 )         (7.9 %)      10,321            (71.1 %)
Income tax benefit                -            0.0 %         (5,770 )         (3.1 %)       5,770                *
Net loss                     (4,196 )         (2.5 %)        (8,747 )         (4.8 %)       4,551            (52.0 %)

Class A and Class B
Loss per share:
Basic                   $     (0.30 )                   $     (0.62 )                   $    0.32            (52.0 %)
Diluted                 $     (0.30 )                   $     (0.62 )                   $    0.32            (52.0 %)

*Percentage change
not meaningful.

Sales decreased $15.4 million, or 8.4%, to $168.2 million for the 26 weeks ended September 27, 2009 from $183.6 million for the 26 weeks of last year. The decrease is primarily the result of worsening macro-economic conditions. Sales from four new stores, not included in the same store sales calculation, resulted in a $6.1 million increase in sales, or 3.3%. This increase, along with an increase in Team Sales of $1.7 million, was offset by a same store sales decrease of $24.0 million, or 13.6%.

Gross profit decreased $2.5 million, or 5.1%, as a result of the sales decrease offset by reductions in markdowns of $3.7 million and in rent of $1.5 million. As a percent of sales, gross profit increased 90 basis points to 27.2% from 26.3%, also primarily as a result of decreased markdowns and rent.

Selling, general and administrative expenses decreased $12.5 million, or 22.9%, as expenses related to new stores of $1.8 million were offset by expense reductions of $14.0 million. Expense reduction initiatives include $7.1 million in labor savings from stores, corporate office overhead and the distribution center. Additional savings in other areas include advertising of $3.7 million, professional fees of $1.3 million, utilities of $0.6 million and repairs and maintenance of $1.1 million. As a percent of sales, SG&A decreased 470 basis points to 25.0% from 29.7% in the first half 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 September 27, 2009, our net deferred tax assets and related valuation allowance totaled $25.7 million. The Company has federal and state net operating loss carryforwards of approximately $39 million, which can be carried forward for a period of 20 years.

Net loss for the first half of fiscal 2010 was $4.2 million, or $0.30 per diluted share, compared to a net loss of $8.7 million, or $0.62 per diluted share, for the first half of fiscal 2009. The net loss for the first half of fiscal 2010 did not reflect any net tax benefit (because of tax valuation allowances), while the first half of fiscal 2009 reflected a net tax benefit of $5.8 million, or $0.41 per share. Without the tax benefit, the net loss for the first half of fiscal 2009 would have been $14.5 million, or $1.03 per share.

Liquidity and Capital Resources

Our primary capital requirements are for inventory. Historically, cash from
operations, credit terms from vendors and bank borrowing have met our liquidity
needs. For the foreseeable future our ability to continue our operations and
business is dependent on these same sources of capital. The following table sets
forth comparable store sales by quarter for the past three fiscal years:

                          FY 2008               FY 2009        FY 2010
                Q1         1.3%                 (11.1%)        (14.7%)
                Q2        (2.2%)                (6.7%)         (12.4%)
                Q3        (6.9%)                (15.4%)        (2.8%)*
                Q4        (8.8%)                (17.7%)          n/a

*Third quarter through November 1, 2009.

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 have 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 costs in an effort to modify our business model to make the Company more efficient. We continue to focus on reducing operating expenses and improving liquidity through the following core initiatives and their savings realized for the first half of fiscal 2010 as compared to first half of fiscal 2009:

· Improved inventory management and saved $3.7 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 $1.5 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 $7.1 million. Based on current trends, we anticipate saving $10.7 million in fiscal 2010.

· Reduced all expense categories and saved $6.9 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 Business - 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 26 weeks ended September 27, 2009 and September 28, 2008:

                                                                   26 weeks ended
                                                             September        September
                                                              27, 2009         28, 2008
                                                                   (in thousands)
Net loss                                                    $     (4,196 )   $     (8,747 )
Depreciation and amortization                                      6,730            7,267
Deferred income taxes                                                  -           (5,780 )
Merchandise inventories                                           (5,539 )        (15,573 )
Accounts payable                                                  (1,377 )         18,136
Other accrued expenses                                            (4,143 )          5,065
Other                                                               (889 )           (125 )
Net cash (used in) provided by operating activities         $     (9,414 )   $        243

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. In addition, sales have decreased 13.6% on a same store basis reducing the need for inventory and as a result, average inventory per store decreased 11% to $1.7 million from $1.9 million at the end of the second quarter of fiscal 2010 and fiscal 2009, respectively. The increase of $5.5 million in the 26 weeks ended September 27, 2009 and the increase of $15.6 million in the 26 weeks ended September 28, 2008 were primarily due to seasonality, while the period ended September 28, 2008 also included increases for three new stores.

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, most of which have now been brought current. This is the primary reason for a decrease of $1.4 million in accounts payable compared to the increase in inventory of $5.5 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 September 27, 2009, our net deferred tax assets and related valuation allowance totaled $25.7 million. The Company has federal and state net operating loss carryforwards of approximately $39 million, which can be carried forward for a period of 20 years. A 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:

                                               26 weeks ended
                                 September 27, 2009       September 28, 2008
                                               (in thousands)
         New stores             $                  -     $              7,069
         Remodels/Relocations                      -                    2,860
         Existing stores                         305                      376
         Information systems                      56                    1,020
         Other                                     -                      211
         Total                  $                361     $             11,536

We did not open any new stores in the 26 weeks ended September 27, 2009 compared to two new stores and one relocation 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 September 27, 2009 is $49.1 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, up to $45.0 million will be available to the Company, increasing 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 revolving credit limit 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 $10.0 million 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 September 27, 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, and an early termination fee if the facility is terminated before June 2010 which is waived if the loan is refinanced by the Lender or any of its affiliates. This credit facility expires in June 2012. 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, among others, a covenant that we maintain a minimum monthly EBITDA.

EBITDA is defined in our bank credit facility as (loss) income before provision . . .