Citing ongoing benefits from “the competitive rationalization in the retail sporting goods sector,” Big 5 Sporting Goods reported fourth-quarter earnings skyrocketed 80 percent and issued a bullish forecast for the first quarter.
“We’re very encouraged that the profit and sales momentum has continued and actually accelerated into the first quarter of fiscal 2017,” CEO Steven Miller said on a conference call with analysts.
On January 17, the west-coast sporting goods chain reported its sales results while lifting its EPS outlook for the quarter. The range was lifted to 34 to 35 cents a share, up from 25 to 35 cents previously. Earnings came in at $7.7 million, or 35 cents a share.
Sales for the period ending December 31 were down 3.2 percent to $266.3 million, with the year-ago period benefiting from an extra week. Same-store sales in the latest period grew 3.1 percent.
Comps grew high single digits in October and comped up in low single digits in both November and December.
“While we enjoyed a strong Black Friday November sales were impacted by very unfavorable winter weather conditions in our markets,” said Miller. “In December, we like many retailers experienced the challenges of a generally soft holiday shopping environment. We finally saw the arrival of favorable winter weather over the last week or so of the quarter, which drove strong winter product sales a very nice finish to the period.”
Miller noted that the winter weather has supported apparel sales the most, followed by footwear and then hardgoods. Overall, the wintry weather wound up being “very positive from a margin mix viewpoint.”
Increases were seen in both customer transactions and average sale, with the growth in average sale being the primary driver of the sales increase.
Among categories, hardgoods comps grew mid single digits while apparel was up low single digits and footwear was down slightly. Added Miller, “All major merchandise categories benefited from the competitive store closures, offset to some degree by softer winter product sales during much of the period.”
Merchandise margins increased 68 basis points, benefiting from opportunistic fixed price resulting from the competitive rationalization along with a less promotional environment during the period. Several Sports Authority locations, as well as the Sport Chalet chain, closed last year in its markets. Overall gross margins improved to 32.8 percent from 31.2 percent.
SG&A expenses decreased slightly to 28.2 percent of sales from 28.5 percent in the year-ago fourth quarter. On an absolute basis, SG&A expense decreased $3.2 million year over year due primarily to the extra week in the fourth quarter of fiscal 2015 and a decrease in print advertising expense, partially offset by the incremental impact of minimum wage rate increases.
During the quarter, Big 5 opened one store in Maricopa, AZ and closed one. It ended the year with 432 stores. For 2017, it expects to open eight and close three.
For the full year, sales reached $1.02 billion, about equal with $1.03 billion a year ago. Same-store sales increased 1.7 percent in fiscal 2016 from the prior year. Net income was $16.9 million, or 77 cents per diluted share, including 5 cents per diluted share of charges for store closing costs and the net write-off of deferred tax assets related to share-based compensation. Net income for fiscal 2015 was $15.3 million, or 70 cents, including 7 cents per diluted share of charges for expense associated with the company’s publicly disclosed proxy contest, a legal settlement, evaluating store growth strategies and potential profit improvement opportunities and non-cash impairment.
Big 5 reduced year-over-year borrowings under its credit facility during the year by 82 percent, and returned over $13 million to shareholders for cash dividends and stock repurchases in 2016.
Regarding current trends, first-quarter same-store sales for the period to date were up in the mid-single-digit range “as we continue to benefit from the Sports Authority and Sport Chalet closures that occurred during the second and third quarters of last year,” said Miller.
Additionally, the favorable winter weather conditions experienced near the end of the fourth quarter have continued into the first quarter, “creating strong demand for winter-related products across many of our Western markets.”
Merchandise margins also have “continued to move in the right direction” so far in the first quarter, benefiting from a favorable sales mix shift, opportunistic buys and a less promotional environment following the competitor closures.
“While the favorable winter weather has been a huge benefit to our winter product categories this season, some of that benefit has been offset by softness in our non-winter product categories, which have been impacted by the heavy rains we’ve experienced over the past several weeks, particularly in California,” said Miller. “These non-winter categories become more important over the balance of the quarter, so at this point we are rooting for warmer and dryer conditions so that our customers are able to take advantage of our spring sports offering.”
He added, “We believe our merchandise assortment is well-positioned for the spring selling season and we remain focused on providing our customers with the optimal mix of the value, selection, service and convenience.”
For the first quarter, Big 5 expects same-store sales to be in the positive mid-single-digit range and EPS in the range of 12 to 18 cents a share, compared to a same-store decrease of 1.9 percent and a loss of 5 cents per share in the first quarter of 2016. Year-ago comps were impacted by competitor liquidation sales.
The guidance assumes a higher merchandise margin compared to the prior year as a result of favorable sales mix shift, decreased clearance activity, opportunistic buys and less promotional activity following the competitive rationalization. An Easter shift is expected to boost comps by approximately 50 basis points.
In the Q&A session, Miller noted that the competitor closings could create opportunities for Big 5 to expand at a faster rate.
“We are going to let the dust settle, watch how the existing store base is impacted as we play through this cycle of closures and then really take a hard look at how that might impact our sales going forward,” he said. However, Miller added that the company was still focused as traditionally on finding the “right locations.”
He added, “We’re going to continue to grow and continue to follow our longstanding philosophy of positive growth and growth under control.”
Miller agreed that the competitive closures are helping the chain secure better buys. He elaborated, “As one would expect, we’ve become more significant to many of our vendors and that can only be beneficial in establishing relationships and various programs and opportunity,”
He also said that despite the end of liquidations of its direct sporting goods competitors, the “turmoil that has taken place in the general retail environment” continues to present some healthy opportunistic buying for the company. The department store sector in particular faced challenges over the holiday season.
Miller also said the slowdown in same-store gains to 3.1 percent from 6.8 percent in the third quarter was not due to the chain recouping any less market share from the competitor closings but instead was the result of a “challenging holiday environment” overall and the unfavorable weather earlier in the quarter.
Asked about e-commerce, Miller said it remains “not material” to its business, with the focus of its website and overall digital communications on driving traffic to its stores. Said Miller, “We’re focused on trying to build an e-com model that is accretive for our business, but not one that cannibalizes our store business.”
Photo courtesy Big 5 Sporting Goods