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BGFV AT A GLANCE

P/E ► 0   EV/EBITDA ► 2.55 LOW ROA ► 3.3% AVG ROE ► 8% AVG Debt to Equity ► 2.16 AVG Current Ratio ► 1.84 AVG Interest Coverage Ratio ► 5.77 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

Big 5 Sporting Goods Corporation (NASDAQ: BGFV) sells sporting goods through its network of 363 stores in 11 states in the western U.S.A. On average, each store covers approximately 11,000 square feet, which is smaller than other superstores (such as Dick's Sporting Goods that average over 35,000 square feet). This lets Big Five open stores in relatively small metropolitan and suburban areas, especially important in the sparsely populated western states that are Big 5's focus.

Big 5 carries the standard sporting goods brand names (Nike, Adidas, Under Armour), but it earns the highest margins from branded sporting goods made exclusively for its stores and sold at a discount, and by selling private label, closeout, and discontinued products. In 2007, the company sold over $898 million in products, for a gross margin of $309 million. This margin is about 5% higher than other sporting goods retailers that rely more heavily on brand name products. ^[1]

In 2007, Big 5 opened 23 new stores to increase its total store count to 363. Although predominately a western U.S. chain, the company has slowly begun to expand eastwards, while its top competitor Dick's, focused on the East Coast, looks to expand westward (evidenced by its acquisition of the Chick's Sporting Goods chain in Southern California). Dick's dominates the East Coast sporting goods market, posting net sales of $3.89 billion and gross margin of 29.8% in 2007.^[2] Big 5 tries to gain an advantage over Dick's and other competitors by strategically advertising its exclusive and discounted products in newspapers and by building vendor relationships that give Big 5 consistent flow of discontinued and closeout products. Although it focuses on providing cheap options for its customers, Big 5 depends on discretionary income to build its sales - its products are not necessary commodities. As such, the company is exposed to a hurting U.S. economy, the credit crunch, and seasonal fluctuations. In addition, a declining trend in newspaper readership impedes Big 5's sales and undermines its traditional method of advertising.

[edit] Business Overview

Big 5 Sporting Goods sells soft goods (athletic and sport apparel/footwear) and hard goods (durable items such as fishing rods, golf clubs, snowboarding equipment, etc.) through its physical stores and its website, big5sportinggoods.com. With an average store space of 11,000 square feet, Big 5 is smaller than superstores that typically average over 35,000 square feet, and consequently has more flexibility regarding new store locations. For example, the company can target small metropolitan areas with as few as 50,000 people--something its larger competitors cannot do.^[3]

^[4]

The company sold $898 million in products in 2007, for a gross profit of $309 million.^[5] Big 5's high gross margin (34.4%) surpasses all other sporting goods companies:

^[6]

^[7]

BGFV's net sales include a mix of athletic and sport apparel, athletic and sport footwear, and hard goods. The contributions that these three categories make towards sales have been relatively steady from 2003 to 2007:

[edit] Key Trends and Forces

[edit] New store openings drive Big 5's revenue

Since Big 5's stores are smaller than its competitors, new store openings require relatively low investment and typically a short amount of time before generating profits. A newly opened Big 5 store typically garners store-level return on investment of about 35% and sales of $1.9 million in its first full fiscal year. Prior to the second quarter of 2007, Big 5 also had 45 consecutive quarters of same-store sales increase, creating more incentive to open new locations.^[9]

Big 5's business has steadily expanded, by an average of 19 stores annually for the past five years. The company planned to open approximately 20 stores in 2008,^[10] but opened only 9 during the year because of weakened consumer spending.^[11]

^[13]

[edit] Newspaper advertisements drive BGFV's sales and strengthens its brand awareness, but newspapers have declining audiences

The company estimates that half its customers come from four-page sunday newspaper inserts and mailers that reach 20 million people every week.^[14] Big 5 relies on professional in-house advertising, rather than an outside advertising agency, to reach its customers.

Declining newspaper circulation hurts Big 5's brand awareness and hinders its sales. Additionally, any change in the cost of print advertising impacts Big 5's operating costs^[15] :

^[16]

[edit] The declining economy is hurting the disposable income of BGFV's core customers

As a retailer of non-necessary goods, BGFV is one of the first to get hit by a declining economy because consumers lack the disposable income to purchase its products as before (department stores like Target and Wal-Mart, who offer goods such as food and household necessities, are not as threatened in such a situation). Not only does the poor economy force BGFV's core customers to spend more money for gasoline and heating costs, but the subprime mortgage fallout and resulting credit crunch contracts their consumer spending even further, weakening Big 5's sales. In Q4 2008, BGFV's comparable store sales dropped by 8.6% because of decrease in customer traffic as a result of the challenging consumer environment.^[11] Because of this decrease in traffic, BGFV's revenue during the quarter declined to $219.6 million, down from $232.1 million in Q4 2007.^[11] Furthermore, the company expects that its comparable store sales and revenue will further decline in 2009 because of weakened consumer spending.

[edit] Strong vendor relationships boost Big 5's earnings

Big 5's relationships with vendors - which give it exclusive branded apparel, closeout and discontinued lines - are the source of Big 5's higher margin percentage. Vendor-related products represent approximately 45% of Big 5's sales.^[17]

[edit] Seasonal fluctuations impact Big 5's sales

Seasonality affects Big 5 in two ways:

• As a retailer, Big 5 generally has a boost in sales during the fourth fiscal quarter, which coincides with the holiday months . In 2006, BGFV generated 26.8% of its net sales and 30.8% of its operating income during this period.^[18]
• The fourth fiscal quarter includes the winter months, which is the peak season for cold-weather sports such as snowboarding and skiing.

[edit] Competition

Big 5 is part of an industry where the top six sporting goods retailers comprise only 20.6% of the $53.7 billion market. The company directly or indirectly competes with:

• department stores (Wal-Mart, Target, Kohl's, J.C. Penney, Sears, Kmart);
• specialty sporting goods shops (Footlocker, Golfsmith, Bass Pro Shops, Gander Mountain, REI);
• catalog and Internet-based retailers (Cabela's, Nike.com)^[19]

Presently, there are only four major, publicly traded sporting goods retailers: Dick's Sporting Goods, Hibbett Sports, Sport Chalet, and Big 5. Big 5's main competitors in the sporting goods market are:

• Dick's Sporting Goods: Dick's Sporting Goods is the nation's top sporting goods retailer and operates 340 stores in 36 states. The company sells a wide range of sporting equipment and apparel, and also runs Golf Galaxy and Chick's Sporting Goods chains.^[20]In 2007, Dick's generated $3.89 billion of revenue, of which $1.16 billion yielded into gross profit.^[21] Its gross margin in 2007 is therefore 29.8%.
• The Sports Authority: The Sports Authority boasts over 400 stores in 45 states and offers a large spectrum of athletic equipment and gear.^[22]
• Academy Sports & Outdoors: Academy operates just under 100 stores throughout the South and Southwest regions of the U.S. The company offers apparel and equipment for outdoor activities such as camping, hunting, fishing and boating.^[23]
• Recreational Equipment, Inc. (REI): REI operates about 90 stores and, like Big 5, runs mostly in the Western half of the U.S. The company sells mostly apparel and equipment used for hiking, climbing, kayaking and other outdoor activities.^[24]
• Hibbett Sports: Hibbett Sports operates over 600 small-format stores, usually situated in strip malls and based primarily in the Southeast region of the US. The company sells a variety of sporting equipment and apparel.^[25]

In terms of market share, Big 5 lags behind four sporting goods businesses:

Note: Market shares calculated with estimated $53.7 billion sporting goods retail market size.^[32]

^{[33][34][35] [36]}

[edit] Notes

1. ↑ BGFV 2007 10k, Item 6:Selected Financial Data, pg. 19
2. ↑ DKS 2007 10k, Item 6:Selected Consolidated Financial and Other Data, pg. 24
3. ↑ BGFV 2006 10K, Item 1:Business, pg. 4-5
4. ↑ CIBC Initiate 04/30/2007:BGFV
5. ↑ BGFV 2007 10K, Item 6:Selected Financial Data, pg. 19
6. ↑ BGFV 2007 10k, Item 6:Selected Financial Data, pg.19
7. ↑ BGFV 2007 10k, Item 6:Selected Financial Data, pg.19
8. ↑ BGFV 2007 10k, Item 1:Business, pg. 3
9. ↑ Nollenberger Initiate 07/31/07:BGFV
10. ↑ BGFV 2007 10k, Item 1:Business, pg. 3
11. ↑ ^{11.0 11.1 11.2} "Big 5 Sporting Goods Corporation Announces Fiscal 2008 Fourth Quarter and Full-Year Results" PRNewswire.com 2/26/2009
12. ↑ BGFV 2007 10k, Item 1:Business, pg. 3
13. ↑ BGFV 2007 10k, Item 1:Business, pg. 3
14. ↑ BGFV 2007 10K, Item 1:Business, pg. 5
15. ↑ BGFV 2007 10K, Item 1A:Risk Factors, pg. 9
16. ↑ CIBC Initiate 04/30/2007:BGFV
17. ↑ BGFV 2007 10K
18. ↑ BGFV 2006 10K, Item 1A:Risk Factors, pg. 13
19. ↑ BGFV 2006 10k, Item 1A:Risk Factors, pg. 13
20. ↑ Dick's Sporting Goods (DKS)
21. ↑ DKS 2007 10k, Item 6:Selected Consolidated Financial and Other Data, pg. 24
22. ↑ The Sports Authority:About us
23. ↑ Dick's Sporting Goods (DKS)
24. ↑ Dick's Sporting Goods (DKS)
25. ↑ Dick's Sporting Goods (DKS)
26. ↑ DKS 2007 10k, Item 6:Selected Consolidated Financial and Other Data, pg. 24
27. ↑ Hoovers:The Sports Authority Information
28. ↑ Hoovers:Academy Sports & Outdoors Information
29. ↑ Hoovers:REI Information
30. ↑ BGFV 2007 10k, Item 6:Selected Financial Data, pg. 19
31. ↑ Hoovers:Hibbett Sports Information
32. ↑ Needham Initiate 03/10/08:BGFV
33. ↑ HIBB 2007 10K, Item 6:Selected Consolidated Financial Data, pg. 18
34. ↑ DKS 2007 10k, Item 6:Selected Consolidated Financial and Other Data, pg. 24
35. ↑ SPCHB 2007 10k, Item 6:Selected Financial Data, pg. 17
36. ↑ Google Finance, HIBB, SPCHA, DKS, BGFV