Big 5 Sporting Goods Corp. BGFV posted solid results for fourth-quarter 2015. However, shares of the company plunged 15.4% owing to a soft outlook issued for the first quarter of 2016.
The company’s fourth-quarter adjusted earnings of 22 cents a share not only surpassed the Zacks Consensus Estimate of 19 cents, but also jumped 29.4% year over year. Moreover, the bottom line exceeded the upper end of the company’s latest guidance range of 18–19 cents per share.
Also, net sales of this Zacks Rank #2 (Buy) company advanced 9.9% to $275 million, coming in line with the Zacks Consensus Estimate.
Comparable store sales (comps) for the quarter inched up 0.1%, meeting management’s expectations, as a low single-digit decline in customer transactions was compensated by a low single-digit rise in average transaction size. Also, merchandise margins in the quarter witnessed an improvement of nearly 20 basis points (bps) from the year-ago period.
Despite the heightened promotional activities and intense competition, Big 5 Sporting’s sales gained momentum during the Black Friday week, Christmas and New Year – the holiday season. Additionally, the top line gained strength from the favorable winter season across most Western regions.
Looking at product categories, while the apparel and footwear businesses performed well, the hardgoods category’s performance remained weak during the quarter.
Costs & Margins
Gross profit came in at $85.8 million, up 7.7% from the comparable year-ago level. However, gross profit margin contracted 40 bps to 31.2% in the fourth quarter of 2015 due to a rise in distribution and store occupancy expenses, as a percentage of net sales, somewhat compensated by improved merchandise margins.
Selling, general and administrative (SG&A) expenses, as a percentage of sales, fell 120 bps to 28.5%. However, on a dollar basis, SG&A expenses rose 5.5% to $78.4 million due to an increase in store operating and employee labor costs, along with expenses incurred in the extra week in fourth-quarter 2015, reduced to an extent by lower advertising costs.
Nonetheless, the operating income surged 55.6% to $7.4 million, with the operating income margin expanding 120 bps to 2.7%.
Financial Position
Big 5 Sporting ended 2015 with cash of $7.1 million, long-term debt of $54.8 million, and total shareholders’ equity of $198.8 million as of Jan 3, 2016.
During 2015, the company’s operating cash flows totaled $39.6 million, which enabled it to lower the borrowings under its credit facility by 17.3% as of 2015 end. Further, the company invested part of the operating cash flows toward store openings and renovations, alongside returning approximately $13 million to shareholders.
Capital expenditure for 2015 totaled $24.6 million and for 2016, the company currently anticipates capital expenditures, excluding non-cash acquisitions, in the range of $17–$21 million.
Dividend and Share Repurchase
The company continues to enhance shareholder value by returning cash in the form of dividends and share repurchases. Following a solid quarter, management declared a 25% hike in its quarterly cash dividend from 10 cents per share to 12.5 cents. This will be payable on Mar 22, 2016, to shareholders on record as of Mar 8.
Further, the company bought back 101,688 shares for an aggregate value of roughly $1 million in the fourth quarter, taking its total 2015 repurchases to $4.2 million. As a result, the company had about $2.9 million remaining under its $20 million share repurchase program as of Jan 3, 2016.
Store Update
During the quarter, Big 5 Sporting shut down 1 store as part of its ongoing relocation plan, taking the total store count to 438 as of 2015 end.
During 2016, the company aims to open nearly 5–8 new stores, while closing 10. The company intends to shut down 4 stores in the first quarter itself.
Outlook
While Big 5 Sporting ended 2015 on a strong note, management stated that the first quarter turned challenging in February owing to unseasonably warm weather in major markets, which weighed on the company’s winter business. Also, non-winter product category sales remained soft as a result of intense promotions and a tough retail environment.
On the one hand, management expects these headwinds to linger going forward, though it believes that the company's solid product range positions it well for the spring selling season.
For the first quarter of 2016, the company expects comps in the low negative single-digit to low positive single-digit range. Also, the company envisions the bottom line to range from a net loss of 5 cents per share to earnings of 2 cents.
Earnings and sales in the first quarter are also anticipated to be impacted by tough year-over-year comparisons on account of the unfavorable Easter shift to first-quarter 2016, when stores will remain closed, and calendar shift due to which 2015 had an extra week. Further, earnings are expected to bear the brunt of lower product margins and expense deleverage.
Stocks to Consider
Other favorably ranked stocks in the same industry include KAR Auction Services, Inc. KAR, Marinemax Inc. HZO, each with a Zacks Rank #1 (Strong Buy) and Build-A-Bear Workshop Inc. BBW, with a Zacks Rank #2.
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