Battered by continued weak demand for firearms and ammunition products along with a soft consumer environment, Big 5 Sporting Goods Corp. (BGFV) once again posted a disappointing result for second-quarter 2014. The company’s quarterly results were also negatively impacted by a shift of the Easter holiday period into the second quarter, during which Big 5 Sporting’s stores were closed.
The company posted adjusted earnings of 14 cents per share which was 50% lower than the year-ago quarter as well as way below the Zacks Consensus Estimate of 17 cents. Adjusted earnings for the reported quarter does not include a non-cash impairment charge of 2 cents and a penny associated with the expenses toward the development of e-commerce channel.
Net sales for the second quarter declined 3.6% to $231.2 million from $239.9 million last year and fell short of the Zacks Consensus Estimate of $241 million. Moreover, comparable store sales (comps) slipped 4.9% against a 4.4% increase recorded in the prior-year quarter. Decline in comps for the quarter were higher than the company’s projection of a low negative to low positive single-digit comps growth.
Disappointed with the second quarter results, the company formulated a dismal third-quarter guidance that projects a slightly negative to low positive single-digit comps and earnings per share in the 24 cents to 32 cents range. This compares to comps growth of 1.4% and earnings of 41 cents per share in the third quarter of 2013.
With the weak demand for firearm and ammunition products continuing into the third quarter coupled with other factors mentioned above, we believe the troubles are not over for Big 5 Sporting.
Quarter in Detail
Comps performance in the second quarter displayed a mid-single-digit decline in footwear comps and a high single-digit decline in hard goods comps. However, the company’s apparel category comps witnessed a rise of mid single-digit.
Gross profit came in at $75.6 million, down 5.1% from the comparable year-ago level. Gross profit margin for the quarter contracted 50 basis points (bps) to 32.7% from 33.2% in second-quarter 2013. Margin contraction primarily resulted from a 19 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 2.8% to $71.1 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 200 bps to 30.8%.
Consequently, operating margin contracted about 250 bps to 1.9% from the prior-year quarter. In dollar terms, operating profit declined 57.8% to $4.4 million.
Financial Position
Big 5 Sporting ended second-quarter 2014 with cash of $6.2 million and total merchandise inventory of $324.9 million. On a per-store basis, inventory was up 7.4% year over year. Long-term debt was $68.2 million and shareholders’ equity was $189.6 million as of Jun 29, 2014.
At the end of second quarter, the company had negative operating cash flows of $2.2 million versus a positive $10.4 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 two quarters of 2014.
Capital expenditures, excluding non-cash acquisitions, were $8.8 million in the first half of 2014, primarily toward store maintenance and remodeling of existing stores, opening of new 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 $25–$29 million.
Dividend and Share Repurchase
The company continues to enhance shareholder 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 Sep 15, 2014 to shareholders of record as of Aug 29, 2014.
Moreover, the company bought back 63,012 shares for an aggregate value of $0.8 million during the quarter. As of the quarter-end, the company had about $8.4 million remaining under its current $20 million share repurchase program.
Store Update
In the second quarter, Big 5 Sporting opened 2 stores. As of Jun 29, 2014, the company operated 427 stores in 12 states.
During the third quarter, so far the company has shut down 2 stores for the purpose of relocation. Moreover the company anticipates opening 4 new stores during the quarter while 12 stores throughout 2014.
Other Stocks to Consider
Big 5 Sporting currently holds a Zacks Rank #4 (Sell). However, some better-ranked stocks in the related industry include Barnes & Nobel, Inc. (BKS), Five Below, Inc. (FIVE) and ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA), all carrying a Zacks Rank #2 (Buy).
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