Big 5 Sporting Goods reported second-quarter results that came in line with an upbeat forecast given on July 9. The West Coast retailer also said the strong recovery in sales seen in the latter part of the second quarter has accelerated in the third quarter with same-store sales increasing 31.9 percent in July.
Steven G. Miller, the company’s chairman, president and chief executive officer, said, “We produced strong second-quarter earnings while managing the business through the extreme disruption caused by COVID-19, which included widespread store closures and significant shifts in consumer demand. Our ability to successfully navigate this fluid environment speaks to the strength of our team and the fundamental principles that have guided Big 5 for decades – convenience, value, service and selection. Customers are engaging with us in their local neighborhoods in a safe and inviting manner, attracted to our diverse merchandise assortment and compelling values. Our buying and distribution teams have done an incredible job recognizing and rapidly responding to the shifts in consumer demand, and our store and field operations teams have worked tirelessly to adapt to the changing environment so we could continue to serve our customers safely as an essential business during this critical period.”
Miller continued, “The momentum that we saw in our business over the back half of the second quarter has accelerated in the third quarter, with same-store sales increasing 31.9 percent for our fiscal July period, which ended on July 26. Strong sales across a broad array of categories and throughout our geographic markets, combined with the continuation of certain cost reductions that we implemented in response to the pandemic, have positioned us to drive significant operating leverage and earnings per share for the third quarter. The improved financial performance has carried over to our balance sheet, reflecting our very healthy capital structure, with no debt and a cash position of approximately $38 million as of the end of our fiscal July period. We are pleased that our strong recent performance and solid financial condition have positioned us to reinstate our quarterly dividend. While the circumstances created by COVID-19 are unprecedented, we are confident in our ability to respond to future challenges by applying lessons learned from our recent experience and success.”
Second Quarter Fiscal 2020
As previously reported, same-store sales decreased 4.2 percent for the second quarter of fiscal 2020, compared to a 0.7 percent increase for the second quarter of fiscal 2019. Over the first half of the second quarter, same-store sales decreased by 28.2 percent, primarily due to the impacts of the COVID-19 pandemic, which forced the company to operate with a highly reduced store count. Over the second half of the second quarter, as the company reopened its stores, same-store sales increased by 15.5 percent compared to the prior-year period. Net sales for the fiscal 2020 second quarter were $227.9 million compared to net sales of $241.0 million for the second quarter of fiscal 2019.
Gross profit for the fiscal 2020 second quarter was $72.2 million, compared to $73.1 million in the second quarter of the prior year. The company’s gross profit margin was 31.7 percent in the fiscal 2020 second quarter versus 30.3 percent in the second quarter of the prior year. The increase in gross profit margin largely reflects higher merchandise margins, which increased 173 basis points versus the prior-year period, with strong margin performance in May and June as the company’s product mix favored higher-margin categories and promotional activity was more limited. Gross profit margin also reflects reduced warehousing and store occupancy costs attributable to the company’s cost-containment efforts, partially offset by lower distribution costs capitalized into inventory for the quarter.
Selling and administrative expense decreased $13.8 million in the fiscal 2020 second quarter versus the prior-year period primarily due to a combination of lower employee labor expenses reflecting reduced store operating hours and lower advertising expenses during the period. As a percentage of net sales, selling and administrative expense decreased to 25.6 percent, versus 30.0 percent in the prior year, as a result of the cost containment measures and despite lower sales volume in the second quarter.
Net income for the second quarter of fiscal 2020 was $11.1 million, or $0.52 per diluted share, including a net benefit of approximately $0.13 per diluted share related to rent abatement savings and recovery in eminent domain litigation, partially offset by the expense associated with the special employee recognition bonus awards previously announced. This compares to break-even net income for the second quarter of fiscal 2019 of $0.00 per diluted share, including a $0.03 per diluted share benefit for the termination of a software contract.
On July 9, Big 5 said it expected earnings per share in the range of 52 cents to 54 cents for the quarter, including a benefit of 15 cents related to rent abatements and litigation recovery,
For the 26-week period ended June 28, 2020, net sales were $445.7 million compared to net sales of $486.3 million in the first 26 weeks of last year. Same-store sales decreased 7.5 percent in the first half of fiscal 2020 versus the comparable period last year. Net income for the first 26 weeks of fiscal 2020 was $6.5 million, or $0.31 per diluted share, including the net benefit in the second quarter as noted above. This compares to net income for the first 26 weeks of fiscal 2019 of $1.7 million, or $0.08 per diluted share, including a net benefit of $0.01 per diluted share for the software contract termination, partially offset by the write-off of deferred tax assets.
As previously announced, the company’s merchandise inventories at the end of the fiscal 2020 second quarter decreased 15.0 percent compared to the prior year. The company completed the fiscal 2020 second quarter with borrowings under its revolving credit facility, net of cash, of approximately $18 million, reflecting a $38 million improvement on a year-over-year basis and a $62 million improvement compared to the end of the fiscal 2020 first quarter.
Third Quarter Update
Same-store sales for the company’s fiscal July 2020 period increased 31.9 percent versus the prior-year period. Merchandise margins continue to trend positively for the fiscal 2020 third quarter-to-date period compared to the prior-year period, reflecting less promotional activity and shifts in the product mix.
The company is benefiting in the third quarter from certain aspects of its expense reduction initiatives that were implemented in response to the uncertainties of COVID-19, including continued labor expense savings due to reduced store operating hours and advertising expense savings due to significantly reduced advertising activity. The company expects these savings to contribute to significant operating leverage potential for the third quarter.
As of the end of its July 2020 fiscal period, the company had zero revolving credit borrowings, while holding a cash position of approximately $38 million, reflecting a $57.7 million reduction in borrowings on a year-over-year basis and a $35.0 million reduction compared to the end of the fiscal 2020 second quarter. Inventory levels have decreased approximately 20 percent as of the end of its July 2020 fiscal period compared to the prior year.
Cash Dividend
In light of the current strength of the company’s business, cash flow generation, and balance sheet, the company’s Board of Directors is reinstating its quarterly cash dividend at the previous rate of $0.05 per share of outstanding common stock. The company has declared a cash dividend of $0.10 per share of outstanding common stock, which will be paid on September 15, 2020 to stockholders of record as of September 1, 2020. This $0.10 cash dividend reflects the company’s reinstated quarterly cash dividend of $0.05 per share for the third quarter, and also includes an additional $0.05 per share in recognition that the company did not pay a dividend in the second fiscal quarter as it engaged in various efforts to conserve cash in response to the uncertainties of COVID-19.
Third Quarter Outlook
As discussed in this release and the company’s other public filings, the company has experienced dramatic swings in its sales trends due to the widespread closure of its stores and other disruptions related to COVID-19. While sales trends have been decidedly positive since the company’s stores reopened, with same-store sales up 31.9 percent for its July 2020 fiscal period, the dramatic shifts in customer demand and the uncertainties of these unprecedented circumstances, including any future impact on consumer spending from the potential expiration of stimulus benefits, make it difficult for the company to accurately forecast the months ahead. In light of the uncertainty in the current environment, for the third quarter of fiscal 2020, the company is providing wide sales and earnings guidance ranges and expects earnings to reflect expense savings primarily from reductions in advertising and store operating hours. So long as conditions relating to the COVID-19 pandemic, including any regulations issued in response to the pandemic, do not materially impact the company’s ability to continue to operate its stores, the company believes it is reasonable to expect same-store sales over the remainder of the fiscal 2020 third quarter to increase in the range of 5 percent to 15 percent compared to the comparable period during fiscal 2019. Assuming the company achieves sales within that range over the remainder of the quarter, the company would expect same-store sales for the full third quarter of fiscal 2020 to increase in the range of 14 percent to 20 percent compared to the comparable period during fiscal 2019 and for earnings per diluted share for the quarter to be in the range of $1.00 to $1.30, compared to a same-store sales increase of 0.3 percent and earnings per diluted share of $0.30 in the third quarter of fiscal 2019.
Store Openings
As previously announced, the company did not open any new stores or permanently close any stores during the second quarter, ending with 431 stores in operation. However, beginning on March 20, 2020, the company temporarily closed approximately one-half of its stores 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. As of the end of May, all of the company’s stores that were temporarily closed due to COVID-19 had reopened in some capacity, with less than 10 percent of the open stores operating for curbside business only in compliance with local regulations. As of the end of the second quarter, all of the company’s stores that were temporarily closed due to COVID-19 had reopened for in-store shopping, subject to appropriate social distancing restrictions and reduced operating hours. Additionally, during the second quarter, four of the company’s stores were temporarily closed due to damage incurred in connection with civil unrest, three of which reopened prior to the end of the second quarter and one of which reopened in the third quarter. During the second quarter, the company also reopened its Pasadena, California store, which had been closed for an extended period due to a fire. During the third quarter, the company has temporarily closed one store due to indoor mall closures required in California in response to COVID-19. Including that temporarily closed store, the company currently has 431 stores in operation, which compares to 434 stores in operation at the same time in the prior year. For the fiscal 2020 full year, the company does not currently anticipate opening any new stores and expects to permanently close approximately four stores, including three stores that were permanently closed during the first quarter, all of which were previously selected for closure prior to the COVID-19 pandemic.
Photo courtesy Big 5