A Big 5 Sporting Goods accounts payable supervisor is at the center of an issue that will cause the retailer to re-state earnings for the years 2000 through 2003, effectively taking the wind out of the sails of BGFV management as they reported another solid quarter and full year results for 2004. The restatement, which is expected to impact net income by $1.2 million for 2001, by $2.1 million for 2002, and by $1.4 million for 2003, was reportedly caused when “certain credits in the accounts payable account related to commercial invoices were not matched on a timely basis with the corresponding letter of credit items.”
BGFV shares were down 10.7% for the week to close at $25.01 on Friday.
Big 5 also anticipates a refund or credit of approximately $3.2 million attributable to an over-payment of income taxes for the affected periods.
Management said they have corrected the internal controls associated with these accounting adjustments. Surprisingly, the companys auditors, KPMG, didnt pick up on the problem over the last four years. BGFV credited a “change in the Supervisory function” in accounts payable for contributing to the discovery of the issue.
For fourth quarter ended January 2, Big 5 reported that net sales increased 13.4%, to $217.6 million, from $191.8 million in the year-ago period. The quarter this year had an extra week versus last year, netting a comparative sales gain of 6.0% for the period. Same-store sales increased 2.6% for Q4, including a 0.5% hit to comps from the effect of a sales return allowance.
Management said they had a solid performance despite the warm, dry weather that gripped most of their operating regions prior to Christmas. Winter product, particularly Apparel, was down in low-single-digits for the quarter. That decline was more than offset by a low-single-digit gain in Hardgoods and a mid- to high-single-digit increase in Footwear. They said the gains were almost entirely due to increased customer traffic as the average transaction size stayed “virtually flat”.
Gross margin for the quarter improved 40 basis points to 35.8% of sales from 35.4% in Q4 last year, again due primarily to gains in Footwear and Hardgoods, that were offset a bit by increased DC costs. Net income for the quarter increased 35.7% to $11.6 million, or 51 cents per diluted share, compared with preliminarily restated net income from the year-ago quarter.
The retailer opened 11 new stores in Q4, bringing the full year count to 18 stores. Big 5 had 309 doors at year-end. They have relocated one store so far this year and expect to have a net gain of 16 to 20 stores for 2005. Inventories on a comp store basis were up only 1% versus year-end 2003.
Big 5 expects to see diluted EPS in the 32 cents to 35 cents per share range for Q1 on same-store sales growth in the low-single-digit range. The comp sales gain is expected to be impacted by the shift of Easter into the second quarter, which the retailer sees affecting Spring baseball sales. Earnings may be impacted by expectations that the retailer will need to be a “little more aggressive” moving excess winter goods, effectively flattening out margin gains for the period. Much of the problem is due to a very weak winter season in the Northwest.
For full year 2005, the company is estimating earnings per diluted share in the $1.70 to $1.80 range on low-single-digit comp store sales growth.
>>> You run one of the tightest ships in the business for years and then some knucklehead in A/P puts you in this spot
Hey, KPMG, nice catch