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Bear of the Day: Big Five Sporting Goods (BGFV)

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Rumors of the demise of traditional retail turn out to have been greatly exaggerated. Despite stiff competition from Amazon (AMZN - Free Report) and Big Box stores like Wal Mart (WMT - Free Report) , some retailers have survived and even thrived by adopting innovative internet marketing and selling campaigns and providing attractive, well-stocked brick-and-mortar locations that appeal to customers who prefer to see and feel merchandise before they buy.

Retail companies that operate clean, well-lit locations have been able to carve out a niche for themselves despite internet competition and are still able to sell goods at reasonable margins because the entire value proposition makes sense to consumers even if the prices of items are a bit higher.

Unfortunately, Big Five Sporting Goods (BGFV - Free Report) is not one of those success stories.

In an era when customers have a wide range of choices about where to purchase sporting equipment, Dick’s Sporting Goods (DKS - Free Report) has succeeded by leasing premium real estate in high-profile mall locations that are stocked with a wide variety of brand name equipment and apparel that generally sells at or near full MSRP.

Big Five instead relies on smaller stores in less expensive locations and consequently relies more on sales promotions, discounts and lower priced brands favored by more budget conscious customers. Their most recent quarterly report illustrates the difficulties of utilizing that model.

BGFV reported declines in revenues, net earnings, and same-store sales and cut the quarterly dividend by 66% from $0.15 to $0.05. Net earnings of $0.15/share missed the Zacks Consensus Estimate of $0.19/share and represented a represented a 46% decline from the same period in 2017.

Expenses, measured as a percentage of sales, grew from the year ago period and the outfit only opened one new location during the quarter, bringing the total to 436. In the full year, they expect to open a total of four new stores, but also close two existing locations.

In its guidance for the fourth quarter, Big Five expects same store sales to be in a range from “negative low single digits to positive low single digits” and predicts a net loss of between ($0.25) and ($0.15)/share.

Currently a Zacks rank #5 thanks to recent downward earnings estimate revisions, Big Five has seen share prices decline by over 50% in 2018 even as the retail sector as a whole has outperformed the S&P 500 by a wide margin.

In a fast changing and competitive landscape, Big Five has lagged behind more innovative retail operations and the damage is evident in the financial results and the share price. At just $3.61/share, shorting the stock doesn’t present a very attractive risk reward proposition, but it’s also probably not worth holding in a portfolio.

In the retail sporting goods segment, Dick’s Sporting goods, a Zacks Rank #2, is a much more sensible choice.

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