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Big 5 Shares Dip on Weak Outlook Despite Earnings Beat

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Shares of the athletic goods retailer, Big 5 Sporting Goods Corp. (BGFV - Free Report) crashed on the index by 10.3% in the afterhours trading session yesterday after the company communicated highly disappointing comparable store sales (comps) and earnings forecast for the first quarter of fiscal 2014.

While the company posted satisfactory financial results for the fourth quarter and fiscal 2013, it anticipates a taxing first quarter fiscal 2014 ahead due to the diminished demand for firearms and ammunition products and an unusually harsh winter in the western markets zone coupled with severe drought conditions that hindered the demand for winter products.

As a result, the company expects comps to decline in the high single-digit range in the first quarter of fiscal 2014, with earnings per share coming in the range of 5 – 11 cents. Results for the upcoming quarter are expected to be a stark contrast compared with the extremely high demand for firearms and ammunition products and favorable winter weather that fetched comps growth of 10.5% and earnings per share of 34 cents in the first quarter of 2013.

However, the company expects pressure of comparison against sky high results last year to ease out beyond the first quarter, enabling it to generate positive comps through the rest of fiscal 2014. Nevertheless, the company projects firearm and ammunition sales to continue to impact comps throughout fiscal 2014.

Coming to Big 5’s financial results, the company reported adjusted earnings of 23 cents per share for fourth-quarter fiscal 2013, surging 21.1% year over year and beating the Zacks Consensus Estimate by a penny. Moreover, the company reported fiscal 2013 adjusted earnings per share of $1.34, way above the prior-year earnings of 70 cents and the Zacks Consensus Estimate of $1.29.  

The company’s continued focus on improvising product margins and effective cost management helped it post better-than-expected earnings in both the periods.

Net sales for the fourth quarter rose 1.8% to $248.0 million from $243.6 million last year but fell marginally short of the Zacks Consensus Estimate of $250 million. However, comparable store sales (comps) slipped 0.5% against a 6.5% increase recorded in the prior-year quarter. For fiscal 2013, Big 5 reported net sales of $993.3 million, which rose 5.6% year over year but missed the Zacks Consensus Estimate of $998 million. Further, comps for the year increased 3.9%.

Sales results were primarily impacted by comparatively higher firearm and ammunition sales in the prior year periods and an unfavorable weather across the western markets, offset by a heartening performance in other categories that mainly reflected the success of the company’s merchandising and marketing strategies.

Quarter in Detail

Comps performance in the fourth quarter depicted a low double-digit increase in the apparel category and slightly positive comps in footwear, offset largely by a mid-single-digit decline in hardgoods stemming from lower demand for firearms and ammunition products.

Gross profit came in at $80.8 million, up 3.1% from the comparable year-ago level. Gross profit margin for the quarter improved 40 basis points (bps) to 32.6% from 32.2% in fourth-quarter fiscal 2012. The upside in margins was primarily driven by a 47 bps improvement in merchandise margins.

Selling, general and administrative (SG&A) expenses increased by a marginal 0.8% to $71.8 million and as a percentage of sales it contracted 30 bps to 28.9%.

Consequently, operating margin contracted about 60 bps to 3.6% from the prior-year quarter. However, in dollar terms, operating profit increased 25.0% to $9.0 million.

Financial Position

Big 5 ended fiscal 2013 with cash and cash equivalents of $9.4 million compared with $7.6 million at the end of fiscal 2012. The company’s inventory level at the fiscal year end was $301.0 million. On a per-store basis, inventory was up 7.4% year over year.

Long-term debt was $43.0 million compared with $47.5 million as of Dec 30, 2012. Shareholders’ equity as of Dec 29, 2013, stood at $190.8 million versus $164.4 million as of Dec 30, 2012.

During fiscal 2013, the company generated operating cash flows of $26.3 million versus $39.6 million in the comparable period of 2012. The decrease was primarily due to higher merchandise inventory levels as a result of lower-than-expected sales in the fourth quarter, partially offset by higher net income for 2013.

The company continues to enhance shareholders’ value by returning cash in the form of dividends and share repurchases. Following the earnings release, Big 5 Sporting declared a quarterly cash dividend of 10 cents per share, payable on Mar 21, 2014 to shareholders of record as of Mar 7, 2014.

Store Update

In the fourth quarter, Big 5 Sporting inaugurated a total of 9 stores, bringing the fiscal year-end store count to 429. Store opening in the quarter included 2 stores each in Arizona and New Mexico, 4 stores in California and one store in Colorado. The newly opened stores were located in Green Valley and Phoenix, Arizona; Coachella, Susanville, Hayward and Santa Paula, California; Kansas City, Colorado; and Gallup and Taos, New Mexico.

So far in the first quarter of fiscal 2014, Big 5 Sporting shuttered 4 stores, of which 3 relate to the relocations planned in fiscal 2013. Looking ahead, Big 5 Sporting plans to open 15 net new stores in fiscal 2014.

Other Stocks to Consider

Big 5 currently holds a Zacks Rank #4 (Sell). Better-ranked stocks in the retail sector include Deckers Outdoor Corp. (DECK - Free Report) , Francesca's Holdings Corporation (FRAN - Free Report) and Skechers USA Inc. (SKX - Free Report) . All of these carry a Zacks Rank #2 (Buy).

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