Big 5 Beats Bottom Line

Sporting products retailer, Big 5 Sporting Goods Corp. (BGFV - Analyst Report) posted robust second-quarter 2012 earnings per share of 15 cents, surpassing the Zacks Consensus Estimate of 10 cents. However, quarterly earnings slipped 6.3% from 16 cents per share earned in the year-ago quarter.

Net sales of $226.6 million rose 3.2% from the prior-year quarter sales of $219.6 million, marginally missing the Zacks Consensus Estimate of $227 million. Sales in the quarter mainly benefited from merchandise and marketing initiatives implemented in the last several quarters.

However, quarterly sales were slightly impacted by the shift of the 4th July holiday into the third quarter. Second quarter same-store sales increased 1.0%, rising for the first time since the third quarter of 2010.

Quarter at Length

Gross profit in the quarter increased 1.8% to $73.1 million, while gross profit margin contracted 50 basis points to 32.2% due to increased store occupancy and distribution expenses, partly offset by a 12 basis-point rise in merchandise margins.

Selling and administrative expense as a percentage of net sales expanded 20 basis points to 30.3%, attributable to increased store related expenses due to increased store count and higher employee benefit-related costs, offset by lesser advertising expenses as well as a downside in debit card fees due to recent federal legislation.

Consequently, operating income declined 8.4% to $4.5 million, while operating margin contracted 20 basis points to 2.0%.

Financial Update

As of July 1, 2012, Big 5 had cash and cash equivalents of $6.2 million, long-term debt of $71.4 million and shareholders’ equity of $154.2 million.

Additonally, the company continues to enhance shareholder value by returning cash in the form of dividends and share repurchases. Big 5 declared a quarterly cash dividend of 7.5 cents a share, payable on September 14, 2012 to shareholders of record as of August 31, 2012.

In the second quarter, the company bought back 131,420 shares valued at $0.9 million. As of July 1, 2012, the company had nearly $10.9 million available for buyback under its $20.0 million authorization, approved in the fourth quarter of fiscal 2007.

Store Update

In the second quarter, Big 5 inaugurated three stores and closed three others, retaining its store count at the end of the quarter to 407 stores. Of those opened in the quarter, one was a relocated store. Further, one among the closed stores was also related to relocation.

Guidance

Management expects earnings per share in the third quarter to range from 28 cents to 34 cents per share, compared with 27 cents per share in the comparable quarter last year. Same store sales are expected to be in the low to mid-single-digit range.

Looking ahead, Big 5 plans to open 9 new stores in the fourth quarter of fiscal 2012 and close one store which relates to relocation. For fiscal 2012, the company targets to open nearly 13 new stores, relocate about 3 stores and close 3 stores. At year-end, the company’s total store count is expected to reach 416.

Our Take

Big 5 faces intense competition from national players such as Dick's Sporting Goods Inc. (DKS - Analyst Report) and Hibbett Sports Inc. (HIBB), mass merchandisers such as Wal-Mart Stores Inc. (WMT - Analyst Report) and Target Corp. (TGT - Analyst Report), as well as regional and local sporting goods stores.

Big 5 currently retains a Zacks #3 Rank, which translates into a Hold rating. Our long-term Neutral recommendation is guided by the company’s strategy of resuming the store expansion program to boost its top line, offset by the sluggish top- and bottom-line performances in the recent quarters.