Big 5 Sporting Goods Corp. reported a loss in the first quarter ended March 30 that came in line with projections provided in late February and said April’s comps tumbled 39 percent due to store closures tied to the pandemic. However, May’s sales and merchandising margins are seeing an uptick as stores reopen.
Steven G. Miller, the company’s chairman, president and chief executive officer, said, “Despite the extraordinary impact of the COVID-19 pandemic, which forced the temporary closure of approximately one-half of our stores for the last ten days of the first quarter, our earnings performance for the quarter was within the guidance range we originally provided in late February and subsequently withdrew due to the uncertainties surrounding COVID-19. As the consumer environment rapidly deteriorated in March due to COVID-19, our team quickly implemented decisive actions to protect our employees, our customers, and our business. Many of the states, counties, and cities in which we operate recognized our stores as essential and we were able to remain open or re-open many of our stores. We were able to quickly implement new operational protocols so our stores could operate in accordance with evolving social distancing guidelines. As consumers reacted to COVID-19, our nimble buying and distribution infrastructure has pivoted to fulfill the demand for a rapidly shifting merchandise mix across our impacted markets. Similarly, our team has worked hard over the past two months to reduce expenses throughout the organization in response to the loss of revenue and uncertainties created by COVID-19.”
Miller continued, “Big 5’s unique combination of value, selection, service and convenience has perhaps never been more relevant than in this disruptive period. Even as we dramatically reduced our advertising as part of our cost savings efforts, consumers are finding us in their local neighborhoods, and we are satisfying their needs with our full-line merchandise assortment. April was a challenging month due to COVID-19 with a large portion of our stores temporarily closed as well as the suspension of youth baseball and other recreational activities, but we have been experiencing a significant improvement in sales on a weekly basis in May as many of our stores re-open and consumers seek activities that fit within social distancing guidelines. Our business is in a solid financial position, reinforced by additional capital resources from our credit facility, a disciplined expense reduction strategy, accelerating inventory turns, and anticipated positive operating cash flow through the first two months of the fiscal second quarter. I am extremely grateful for the commitment of our Big 5 employees throughout the organization and thank them for their perseverance in the challenging environment.”
First Quarter Fiscal 2020
As previously reported, same-store sales decreased 10.8 percent for the first quarter of fiscal 2020, compared to a 4.6 percent increase for the first quarter of fiscal 2019. Net sales for the fiscal 2020 first quarter were $217.7 million compared to net sales of $245.3 million for the first quarter of fiscal 2019.
Gross profit for the fiscal 2020 first quarter decreased 14.9 percent to $64.6 million, compared to $75.9 million in the first quarter of the prior year. The company’s gross profit margin was 29.6 percent in the fiscal 2020 first quarter versus 30.9 percent in the first quarter of the prior year. Merchandise margins were essentially flat versus the prior year, decreasing 8 basis points, reflecting strong margin performance through mid-March prior to the impact of COVID-19, which was offset by a shift in product mix to lower margin products during the early stages of the consumer response to the pandemic. The decrease in gross profit margin largely reflects negative leverage of expenses on the lower sales base, partially offset by higher costs capitalized into inventory.
Selling and administrative expense decreased $1.2 million in the fiscal 2020 first quarter primarily due to lower print advertising costs during the period. As a percentage of net sales, selling and administrative expenses increased to 32.8 percent, versus 29.6 percent in the prior year, as a result of the decrease in net sales.
Net loss for the first quarter of fiscal 2020 was $4.6 million, or $0.22 per basic share, which was consistent with guidance of a loss per share in the range of $0.15 to $0.25 per basic share that the company originally provided on February 25, 2020, and subsequently withdrew on March 24, 2020, due to the uncertainties surrounding COVID-19. This compares to net income for the first quarter of fiscal 2019 of $1.7 million, or $0.08 per diluted share.
On February 25, Big 5 had warned that it expected a loss in the range of 15 cents to 25 cents in the first quarter due to a lack of winter weather in its primary California market against a strong winter season the prior year. Same-store sales were expected to decrease in the mid- to high-single-digit range.
Second Quarter Update
The company’s fiscal second-quarter began on March 30, 2020, and ends on June 28, 2020. As previously announced, beginning on March 20, 2020, the company temporarily closed approximately one-half of its retail store locations in response to state and local shelter orders related to the COVID-19 outbreak. At the end of April, approximately one-quarter of the company’s stores remained temporarily closed, and as of today, all of the company’s stores that were temporarily closed due to COVID-19 are now open in some capacity, with less than 10 percent of the open stores operating for curbside business only in compliance with local regulations.
Fiscal 2020 second-quarter same-store sales through the fiscal May period ended May 24, 2020 were down approximately 19 percent versus the prior-year period. However, the company’s sales trends have been sequentially improving on a weekly basis as customer demand has improved, stores have re-opened and shelter orders have loosened. Same-store sales for the company’s fiscal April period declined approximately 39 percent versus the prior-year period, and same-store sales for the fiscal May period increased slightly versus the prior-year period, with same-store sales increasing approximately 15 percent for the last two weeks of the fiscal May period compared to the prior-year period even though a number of stores remained closed or limited to curbside operation during that time. Merchandise margins are also trending positively for the fiscal 2020 second quarter-to-date period compared to the prior-year period, reflecting strong margin acceleration in May.
To manage through the COVID-19 impacts, the company has implemented reduced store hours for its open stores, has limited the number of customers in its stores at any one time to comply with local orders and allow for appropriate social distancing, and in some locations is providing curbside order and pickup capabilities. Given the uncertainties of COVID-19, in an effort to preserve capital, the company has implemented a number of expense reduction initiatives throughout the organization, including reducing store operating hours, advertising, and planned capital spending in fiscal 2020. As a result, for the first two months of the fiscal second quarter, the company has significantly reduced its operating expenses.
On March 30, 2020, the company exercised the accordion feature under its credit agreement to increase the aggregate commitments under the credit facility from $140 million to $165 million. In order to enhance the company’s financial flexibility during the COVID-19 pandemic, the company drew down additional amounts under its credit facility, and as of May 26, 2020 had total outstanding indebtedness under the credit facility of approximately $122 million, compared to the company’s highest borrowing level of approximately $143 million on March 31, 2020, and compared to $66.6 million outstanding at the end of fiscal 2019. As of May 26, 2020, the company’s cash position, net of outstanding checks, totaled approximately $58 million, compared to approximately $61 million and $8.2 million as of March 31, 2020, and the end of fiscal 2019, respectively.
Merchandise inventories increased 6 percent in the first quarter of fiscal 2020 compared to the prior-year period. However, the company has since adjusted certain merchandise inventory orders and as a result of these adjustments and the improving sales trends over the course of the second quarter-to-date, inventories as of May 26, 2020, were down approximately 9 percent compared to the prior year.
Quarterly Cash Dividend
In an effort to enhance financial flexibility during the COVID-19 pandemic, the company is pursuing expense reduction and cash preservation initiatives throughout the organization. In connection with that effort and as previously announced, the company’s Board of Directors suspended the company’s quarterly cash dividend until further notice.
Due to the disruption from COVID-19 on the company’s store operations and the uncertainty related to its duration and impact on consumers, the company is not providing guidance for its fiscal 2020 second quarter at this time other than the quarter-to-date information discussed above.
During the first quarter of fiscal 2020, the company permanently closed three stores, ending with 431 stores in operation. For the fiscal 2020 full year, the company does not currently anticipate opening any new stores and expects to permanently close approximately five stores, including the three stores, closed during the first quarter, all of which were previously selected for closure prior to the COVID-19 pandemic.
Photo courtesy Big 5