Shares of Big 5 Sporting Goods were down 85 cents, or 7.8 percent, to $10.10 on Wednesday after the sporting goods retailer posted second-quarter revenues that fell short of expectations due to weakness in firearms, camping and water sports. Third-quarter earnings are also expected to decline with comps off in the low single digits.
The stock hit came despite reporting second-quarter earnings that rose 33.3 percent to $2.8 million, or 13 cents per share, exceeding Wall Street’s consensus estimate of 11 cents.
“After producing solid sales for April and May, second quarter results came in below our expectations as a result of softening sales trends in June as we were challenged by weakness in certain outdoor product categories and we began cycling against some of the benefits from the store closures of Sports Authority and Sport Chalet that concluded early in the third quarter of last year,” said Steve Miller, chairman, CEO and president, on a conference all with analysts.
He added, “Despite falling short of expectations, given the challenging retail environment, we were encouraged by the strength of a number of product areas and pleased to have delivered both improved merchandise margins and earnings growth over the prior year.”
Sales for the period ended July 2 reached $243.7 million, up 0.9 percent. Same-store sales increased 0.8 percent. Calendar shifts related to the Easter and Fourth of July holidays is estimated to have negatively impacted same-store sales for the quarter by approximately 100 basis points. Small increases in both the number of customer transactions and average ticket were seen during the quarter.
Comps were generally on plan, with increases in the low mid-single-digit range in both April and May, but swung to negative low single digits for the month of June, below plan.
Miller said the shift was largely due to weakness three parts of its hardgoods area: firearm-related products, camping and water sports.
He noted that the company had already mentioned on its last quarterly conference call that demand for firearm-related products had declined year over year, and that trend continued. The soft demand for camping and water sport product in June was primarily attributed to unfavorable weather comparisons and “the colder and dangerously high water flows in many of the rivers in our markets from record rainfall and snow melt, which has led to closures of camp grounds in California and significantly affected recreational activities in these areas,” said Miller.
Additionally, in the back half of the second quarter, Big 5 began to cycle some of the benefits from the closures of many Sports Authority and Sport Chalet locations last year. Miller added, “A comparative spread between the stores that were impacted by the closures and those that were not impacted by the closures began to tighten over the course of the quarter.” Finally, June was also negatively impacted by the Fourth of July holiday calendar shift.
Among categories, apparel was “exceptionally strong throughout the quarter,” comping up high single digits. Footwear also comped positively throughout the quarter, increasing low single digits. Hardgoods comped positively for April and May before turning negative for June and finished in the period down low single digits. Excluding firearms-, camping- and water-related products, hardgoods comped up in the low mid-single-digit range for the period.
Merchandise margins for the quarter increased 37 basis points from the prior year, benefiting from favorable sales mix shift, including strong demand for higher-margin apparel product as well as continued efforts to leverage its vendor partnerships. Gross margins reached 32.5 percent versus 31.6 percent a year ago. Margins also benefited from a decrease in distribution expense resulting from higher costs capitalized into inventory.
SG&A expenses were 30.4 percent of sales in the latest quarter versus 29.9 percent in the same period a year ago. Overall SG&A expense increased $1.9 primarily due to higher employee labor expense and expenses related to information technology systems and services.
Big 5 now plans to open approximately 6 stores and close approximately 3 stores in the year. A few openings previously forecasted for this year have shifted into 2018. Two stores were opened in the quarter in Spokane Valley, WA and Montrose, CO. It ended the quarter with 433 locations.
For the third quarter, Big 5 is currently comping slightly down to date with product margins “running up nicely” over the prior-year period.
“While we have seen some improvement in demand for water sports products as a result of better weather comparisons over the past few weeks, our camping sales have remained below expectations and we continue to see reduced demand for firearm-related product,” said Miller. In addition, Big 5 continues to cycle the additional benefit from the competitive closures that occurred last year. The company is also facing “a number of new competitive openings” in its markets, many in former Sports Authority location. Dick’s Sporting Goods acquired several former Sports Authority leases.
He added, “As we anniversary the benefits from the competitive closures and the dust begins to settle, it’s apparent that we, like most retailers, are operating in a challenging environment. We are encouraged by the market share gains that we’ve worked hard to acquire over the past year as well as by the continued strength that we are seeing across key areas of our product offering. We are focused on maintaining and building on these market share gains and feel that we are well positioned from both an inventory and marketing standpoint for the remainder of the summer and for the back-to-school season.”
For the third quarter, the company expects same-store sales to be in the negative low-single-digit range and EPS to be in the range of 22 to 32 cents. That compares to a same-store sales increase of 6.8 percent and EPS of 38 cents, including 3 cents per diluted share for store closing costs, in the third quarter of 2016. The 2017 third-quarter guidance reflects a small benefit as a result of the calendar shift related to the Fourth of July holiday.
Photo courtesy Big 5 Sporting Goods