Big 5 Earnings Dismal, Dips on Weak Q2 Outlook - Analyst Blog

Shares of the athletic goods retailer, Big 5 Sporting Goods Corp. BGFV tumbled 5.54% in the afterhours trading session yesterday as the company hinted at continued troubles ahead due the weak sales trends so far in the second quarter given the lower-than-expected demand for firearms and ammunition products, a shift of the Easter holiday period into the second quarter this year and a soft consumer environment.

Though beaten up by tougher year-ago comparison, we believe Big 5's first-quarter results were not the primary culprit for the market's negative reaction as the company's results came fairly in line with analysts' expectations and the company forecast. Earnings per share of 10 cents in the first quarter came a penny ahead of the Zacks Consensus Estimate and towards the higher end of the company's projected range of 5 – 11 cents.

However, earnings for the quarter were substantially below 34 cents per share earned in the prior-year quarter. As anticipated, the decline resulted from a diminished demand for firearms and ammunition products and unfavorably warm and dry conditions in the western markets zone throughout the winter season that hindered the demand for winter products.

Net sales for the first quarter fell 6.1% to $231.3 million from $246.3 million last year and were marginally short of the Zacks Consensus Estimate of $230 million. However, comparable store sales (comps) slipped 7.9% against a 10.5% increase recorded in the prior-year quarter. Comps decline for the quarter was almost in parity with the company's projection of a high single-digit decline.

The probable reason that hurt market sentiment on yesterday's after-market results is the company's comments on a soft start to the second-quarter driven by the factors discussed earlier. As a result, the company formulated a disappointing second-quarter guidance that projects a low negative to low positive single-digit comps along with earnings in the 12 cents to 20 cents range. This compares to comps growth of 4.4% and earnings of 28 cents per share in the second quarter of 2013.

With the weak demand for firearm and ammunition products continuing into the second quarter coupled with other factors mentioned above, we believe the troubles are not over for Big 5.

Quarter in Detail

Comps performance in the first quarter depicted a low single-digit comps decline in the apparel category, a low mid-single-digit decline in footwear comps and a low double-digit comps decline in hardgoods. The dismal category-wise performance reflected from the soft sales of winter products that impacted all three major merchandise categories, while the reduced sales of firearm-related products slowly impacted the hardgoods category.

Gross profit came in at $72.7 million, down 9.7% from the comparable year-ago level. Gross profit margin for the quarter contracted 130 basis points (bps) to 31.4% from 32.7% in first-quarter fiscal 2013. Margin contraction primarily resulted from a 28 bps decline in merchandise margins and an increase in store occupancy costs as a percentage of net sales.

Selling, general and administrative (SG&A) expenses increased 1.5% to $68.9 million on the back of higher expense in new stores and costs associated with the development of a new e-Commerce platform. As a percentage of sales, it expanded 220 bps to 29.8%.

Consequently, operating margin expanded about 350 bps to 1.6% from the prior-year quarter. In dollar terms, operating profit declined 69.6% to $3.8 million.

Financial Position

Big 5 ended first-quarter 2014 with cash and cash equivalents of $5.9 million compared with $9.4 million at the end of fiscal 2013. The company's total merchandise inventory at quarter end was $294.1 million down from $301.0 million at the end of fiscal 2013. On a per-store basis, inventory was up 5.7% year over year.

Long-term debt was $54.2 million as of Mar 30, 2014 compared with $43.0 million as of Dec 29, 2013. Shareholders' equity as of Mar 30, 2014, stood at $189.6 million versus $190.8 million as of Dec 29, 2013.

During the first quarter, the company generated operating cash flows of $3.4 million versus $23.8 million in the comparable period of 2013. The decrease was primarily due to funding of higher merchandise inventory levels as well as increased prepaid expenses related to rents and income taxes, along with lower net income for the first quarter.

Capital expenditures, excluding non-cash acquisitions, were $3.8 million in the first quarter, primarily towards store maintenance and remodeling of existing stores, and computer hardware and software purchases including investments related to the development of the new e-Commerce platform. For fiscal 2014, the company currently anticipates capital expenditures in the range of $26 – $30 million.

Dividend and Share Repurchase

The company continues to enhance shareholders' value by returning cash in the form of dividends and share repurchases. The company declared a quarterly cash dividend of 10 cents per share, payable on Jun 13, 2014 to shareholders of record as of May 30, 2014.

Moreover, the company bought back 28,512 shares for an aggregate value of $0.4 million during the quarter. As of the quarter-end, the company had about $9.2 million remaining under its current $20 million share repurchase program.

Store Update

In the first quarter, Big 5 Sporting shut down 4 stores, of which 2 were related to previously announced relocations. As of Mar 30, 2014, the company operated 425 stores in 12 states.

During the second quarter, the company plans to inaugurate two new stores, with about 12 to 15 new stores planned to be opened in fiscal 2014.

Other Stocks to Consider

Big 5 currently holds a Zacks Rank #3 (Hold). Better-ranked stocks in the related industry include Skechers USA Inc. SKX, Brown Shoe Co. Inc. BWS and Carter's Inc. CRI. Of these, Skechers carries a Zacks Rank #1 (Strong Buy), while Brown Shoe and Carter's hold a Zacks Rank #2 (Buy).