Big 5 Shakes Off Weather and Lower Margins to Post Solid Q1 Profit Growth…

Big 5 Sporting Goods saw rising distribution costs impact gross margins for the first quarter ended April 3, but was able to muster net income growth for the period that outpaced sales growth by a 2-to-1 margin. The retailer said they were “off to a good start” for the year, despite the loss of one selling day during the quarter and the loss of one store in Northern California for more than two months due to flooding from heavy rains. Weather certainly played a role in the quarter for the SoCal-based Big 5, as heavier-than-normal rainfall in California proved to be too much of a good thing and started to impact categories like baseball, while a drier-than-normal Northwest hindered sales of winter goods.

The retailer saw positive growth across its three major product categories, with Footwear up in the low- to mid-single-digit range and Apparel and Hardgoods both up in low-single-digits for the quarter. Customer traffic was said to be “consistent” with Q1 last year, but average transaction size was up “a couple of percent”, boosting sales for the period.

Big 5 said they still weren’t doing a lot with higher-end footwear product and indicated that price-points stayed pretty consistent with last year. Apparel may have seen some uptick in price as performance product sales improve. Product margins were said to be “flat” for the quarter, due to “abnormal weather conditions” that hurt higher margin baseball sales and other product lines.

As for the distribution costs, Big 5 said they under-estimated the impact of fuel costs during the period. They are also transitioning to a new 950,000 sf distribution center in Riverside this year that is expected to meet their needs for the next 8 to 10 years. After that, they feel increased store growth to the east will require them to re-think their DC location.

Inventories rose a bit, but the retailer sounded more than comfortable with the position, indicating that they had been able to purchase good winter sports closeouts in Q1 that they will put away for fall promotions. On a comp store basis, inventories were up just 1.5% at quarter-end.

Big 5 finished the quarter with 309 stores, up from 293 at quarter-end last year and has opened a new Denver store in Q2. They expect to see a net increase of 16 to 20 stores by year-end.

Management said they were “pretty much on target” for second quarter, with summer-related goods the notable exception as they attempt to anniversary strong sales of water sports and summer apparel and early spring weather last year. They did say the comps “get a little easier” in the back half of the quarter and that margins were “back on track as well.

Big 5 is still working through the filing of their 10-K and all quarterly restatements.

Management said the current environment around accounting matters has caused them and their accountants to take the time needed to ensure a full understanding of the impact of some of the changes.