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Sporting products retailer, Big 5 Sporting Goods Corp. (BGFV - Analyst Report) posted third-quarter 2012 earnings per share of 38 cents, surpassing the Zacks Consensus Estimate of 32 cents. Quarterly earnings also outnumbered the year-ago quarter earnings of 32 cents per share, augmenting 40.7% year over year.

Net sales of $251.8 million rose 7.3% from the prior-year quarter sales of $234.7 million and surpassed the Zacks Consensus Estimate of $247 million. Sales in the quarter mainly benefited from the calendar shift of the 4th July holiday into the third quarter as well as the company’s ongoing merchandise and marketing initiatives.

Third quarter same-store sales increased 5.0% over the prior-year quarter, driven by same-store sales improvement across all geographies as well as all major product categories of apparel, footwear and hard goods.

Quarter at Length

During the quarter, the company witnessed growth in both customer traffic and average sale, while simultaneously demonstrating efficient expense leverage. This aided the company to boost its merchandise and operating margins, ultimately driving earnings growth.

Gross profit in the quarter increased 9% to $83.9 million, while gross profit margin expanded 50 basis points to 33.3% due to a 25 basis points improvement in merchandise margins coupled with the leveraging of store occupancy and distribution expenses.

Selling and administrative expense, as a percentage of net sales, contracted 90 basis points to 27.9%, with the expense growing 4.3% year over year to $70.4 million in dollar terms. The escalation in selling and administrative expense is attributable to increased store related expenses, including increased store count, higher employee benefit-related costs and a $0.4 million pre-tax expense associated with the closing of one store.

Consequently, operating income elevated 42.1% to $13.5 million, while operating margin expanded 140 basis points to 5.4%.

Financial Update

Big 5 ended third quarter 2012 with cash and cash equivalents of $5.0 million. During the quarter, the company lowered its inventory levels per-store by 3.7% compared to the year-ago quarter, with inventory as of September 30, 2012, coming in at $275.8 million.

Further, the company managed to improve operating cash flows by over $40 million through the nine months of 2012. Simultaneously, the company cut down its debt levels by 23.9% year over year, as of September 30, 2012. Long-term debt as of the quarter end was $52.6 million, down from $63.5 million in the year-ago comparable period. Shareholders’ equity at quarter-end stood at $160.3 million.

Additionally, 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 December 14, 2012 to shareholders of record as of November 30, 2012.

In the third quarter, the company bought back 105,100 shares valued at $0.9 million. As of September 30, 2012, the company had nearly $10.0 million available for buyback under its $20.0 million authorization, approved in the fourth quarter of fiscal 2007.

Store Update

In the third quarter, Big 5 inaugurated two stores and closed two others, retaining its store count at the end of the quarter to 407 stores. Of those opened and closed in the quarter, one was related to relocation.

Guidance

Management expects earnings per share in the fourth quarter to range from 13 cents to 21 cents per share, with same store sales coming in the positive mid-single-digit range.

Looking ahead, Big 5 plans to open 8 new stores in the fourth quarter of fiscal 2012, of which one relates to relocation, and one store will be shut down. For fiscal 2012, the company targets to open nearly 14 new stores, of which three will be relocations. Further, the company plans to close 6 stores, two of which will be relocations. At year-end, the company’s total store count is currently expected to reach 414.

Our Take

Big 5 faces intense competition from national players, mass merchandisers as well as regional and local sporting goods stores. Some of the company’s prime competitors include Dick's Sporting Goods Inc. (DKS - Analyst Report), Wal-Mart Stores Inc. (WMT - Analyst Report) and Hibbett Sports Inc. (HIBB - Analyst Report).

Big 5 currently retains a Zacks #1 Rank, which translates into a Strong Buy 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.

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