By Thomas J. Ryan

Big 5 Sporting Goods (Nasdaq:BGFV) reported earnings fell 19.2 percent in the second quarter due to the impact of liquidation sales by Sports Authority and Sport Chalet, but they still came in ahead of internal expectations.

Earnings fell to $2.1 million, or 10 cents a share, ahead of guidance given when it reported first-quarter results calling for earnings in the range of break-even to 6 cents a share.

“We are pleased to exceed our earnings guidance for the second quarter, despite a highly competitive and promotional environment in our markets,” said Steven Miller, chairman, president and CEO, on a conference call with analysts. “While sales were pressured by the liquidation efforts of Sports Authority and Sport Chalet, our team successfully held merchandise margins flat with the prior-year period and maintained a healthy balance sheet.”

He noted the chain ended the quarter with per-store inventories down 9.1 percent and borrowings under its credit facility down 19 percent from the prior year.

“This prudent management of our business has been a hallmark of our model throughout our 60-year history and has positioned us to take advantage of the competitive rationalization that is occurring in our sector and we are already beginning to see the benefits in the start of our third quarter,” said Miller.

Partly as a sign of “our confidence in the strength of our business model,” Big 5’s board announced a new $25 million share repurchase program.

Same-store sales on a comparative week basis in the quarter decreased 1.7 percent. The west-coast chain had previously forecast that same-store sales would be in the negative low-single-digit to flat range. The chain saw a low-single-digit decrease in customer transactions and average sales.

By month, same-store sales were down in the low- to mid-single-digit range in April, down low single digits in May and up slightly in June. Added Miller, “While sales throughout the period were pressured by Sports Authority’s and Sport Chalet’s going out of business sales, we believe we reached an inflection point toward the end of June when the benefit from competitor stores that had already closed began to offset the impact from competitors that we’re still in the process of liquidating.”

From a product category standpoint, all of its major merchandise categories were affected by the liquidation sales. Apparel and hardgoods were each down low single digits and footwear was up slightly for the period.

Net sales inched up 0.4 percent to $241.4 million. As forewarned, net sales gains were favorably impacted by the calendar shift from a 53-week fiscal year in 2015, which caused fiscal 2016 to begin one week later than fiscal 2015 and resulted in pre-Fourth of July holiday sales moving from the third quarter in fiscal 2015 to the second quarter in fiscal 2016, as well as by the calendar shift of the Easter holiday, during which the company’s stores are closed, from the second quarter in fiscal 2015 to the first quarter in fiscal 2016. These calendar shifts boosted sales in the latest quarter by $6.8 million.

Gross margins eroded to 31.6 percent of sales from 32.1 percent in the same period a year ago, reflecting an increase in distribution and store occupancy costs as a percentage of sales. Merchandise margins were even with the year-ago second quarter.

SG&A expense as a percentage of sales was reduced to 29.9 percent in the latest quarter versus 30.2 percent a year ago. Overall SG&A expense for the quarter decreased $0.4 million from the prior year, primarily due to its proxy contest costs in 2015, partially offset by higher employee labor and benefit-related expense. So far in the third quarter, Big 5’s comps quarter to date are up in the high mid-single-digit range, benefiting from store closures.

“We believe that these closures are leading more customers to recognize Big 5 Sporting Goods for the right mix of convenience, value and strong product assortments,” said Miller.

Miller noted that with the liquidation sales concluded last week, roughly 210 Sports Authority and Sport Chalet store locations have closed within the general trading area of a Big 5 store. The 210 competitor stores impacted approximately 250 of its Big 5 stores, or nearly 60 percent of the chain.

“Although we are well aware that some of these competitive locations ultimately will be replaced by other competitors, the playing field should be much more rational moving forward than it has been for a number of years,” said Miller.

Miller said Big 5 is “working hard” to position its merchandise mix and promotional efforts to capitalize on the disruption in the marketplace.

“Among our initiatives, we are leveraging our deep experience with opportunistic buys to take advantage of the surplus product that is becoming available in our sector,” said Miller. “We are also pursuing new product lines and expanded assortments where we see opportunity, while actively cultivating new vendor relationships. Additionally, we are implementing marketing plans designed to reach customers who may have been displaced by the competitive closures. We are tremendously excited about the possibilities for our business as we look ahead.”

Big 5 currently expects to open five to eight stores this year and close approximately ten. Miller did note that the ongoing consolidation “could create additional opportunities for us.”

For the third quarter, Big 5 expects same-store sales to be in the positive mid- to high-single-digit range and earnings to be in the range of 23 to 30 cents per share. In the year-ago period, it earned 28 cents a share. The EPS guidance reflects a charge of approximately 4 cents per share related to store closings.

In concluding his comments, Miller took the unusual step of defending Big 5’s successful track record over its more than 60 years in business and its proven ability to evolve its business model when facing past challenging periods for the sporting goods sector.

“Two of our major competitors have gone out of business this year, and we remain financially sound and stand to benefit from this rationalization,” said Miller. “As we pursue the opportunities presented to us as a result of the competitor closings, we remain, as we always have, focused on continuous improvement across our business. I thank the Big 5 team for their hard work and dedication.”

Lead photo courtesy Big 5 Sporting Goods