Big 5 Sporting Goods Corp. reported a challenging third quarter against tough-year-ago comparisons and guided for a downbeat fourth quarter despite continued progress on merchandise margins and healthy inventory levels.
“Hopefully, we turn out to be conservative,” said Steve Miller, president and CEO, on an analyst call regarding its fourth-quarter outlook. “We do see the challenges of the consumer headwinds. In terms of our inventory, we couldn’t feel better about our assortments, particularly relative to last year when we were very supply-constrained. We’ve been able to purchase opportunistically, take advantage of excess inventory in the marketplace and buy closeouts that we think should resonate positively with our customers. Last year, we did have a strong winter season, particularly over December. It was one for the ages, and we’re mindful of comping against that and with the unknown to weather. But in terms of our own preparation and positioning, we feel very good.”
Third-Quarter EPS Reaches Upper Range Of Guidance
In the quarter ended October 2, sales declined 9.7 percent year over year to $261.4 million.
Same-store sales decreased 9.8 percent, in line with guidance calling for same-store sales to decrease in the high-single-digit range. Same-store sales increased 2.1 percent versus the comparable-day period in pre-pandemic fiscal 2019.
Net income fell 73.4 percent to $6.4 million, or 29 cents per share, from the quarterly record of $24.1 million, or $1.07, a year ago, but was above the mid-point of the company’s guidance range of 22 cents to 32 cents.
“Despite facing significant macroeconomic headwinds that accelerated over the course of the quarter, we achieved fiscal third-quarter sales and earnings results within our guidance range,” said Miller. “We believe these results underscore our ability to execute in the current challenging economic climate and reflect the durability and efficiency of our operating model, which we have evolved and improved over the last several years.”
Miller said he was pleased that sales trends continue to exceed pre-pandemic levels despite the “exceptionally challenging” operating environment.
The earnings result also reflects “very strong merchandise margins” on a historical basis for the chain, as well as efforts to optimize its cost structure by slightly reducing store operating hours and significantly reducing advertising spend versus 2019.
On a year-over-year basis, transactions for the third quarter were down high-single-digits, with average sales down low single digits. Big 5’s major merchandise categories were below last year’s strong performance.
Miller said that Big 5 saw a shift away from discretionary spending among its customers.
Said Miller, “In the third quarter, with economic conditions dampening consumer sentiment, we noticed the distinct bifurcation sales trends as products that are more essential to our sporting goods customer outperform products that might be viewed as more discretionary purchases. For example, customers continue to buy the equipment they or their children needed to remain active participants in team sports and recreational activities but perhaps they were less inclined to buy an extra pair of shoes or a piece of apparel.”
Merchandise Margins Beat Plan
In a bright spot were merchandise margins, which decreased 132 basis points year-over-year but came in slightly ahead of plan and were approximately 300 basis points higher than in any pre-pandemic third quarter in its history as a public company.
Miller said Big 5 continues to benefit from the evolution of its promotional model to become less reliant on chain-wide print advertising. Aside from the advertising cost savings, this facilitated an efficient pricing and promotional strategy that allows the chain to reduce its inventory depth and breadth which it has historically needed to support planned promotions.
Said Miller, “As we’ve said before, maximizing gross profit dollars is a key area of focus. And in the third quarter, our merchandise margin performance certainly was key to driving gross profit in a difficult consumer environment.”
In the 2021 third quarter, Big 5 logged record merchandise margins, driven by strong consumer demand, coupled with a significantly constrained supply chain.
Gross margins overall eroded 420 basis points to 33.1 percent. The decrease also reflected higher store occupancy and distribution expense, including costs capitalized into inventory as a percent of sales.
The quarter’s overall S&A expense increased $3.1 million from the prior year, primarily reflecting higher labor costs and other inflationary impacts, partially offset by lower performance-based incentive accruals. As a percent of sales, S&A expenses increased to 29.9 percent compared to 25.9 percent a year ago due to the sales de-leverage.
Adjusted EBITDA in the quarter declined 65.1 percent to $13.0 million.
For the nine months, net sales were down 14.8 percent to $757.2 million; same-store sales decreased 14.9 percent; net earnings dropped 70.4 percent to $24.4 million, or $1.10 a share; adjusted EBITDA fell 62.1 percent to $45.7 million.
Fresh Inventory Assortments
Inventories at the quarter’s end increased 23.2 percent as year-ago inventory levels were constrained due to supply chain disruptions. Compared to the 2019 third quarter, inventories were down 1.3 percent, despite a significant carryover of winter-related inventory from the prior winter season.
Looking ahead, same-store sales in the current quarter are running down in the low double-digit range versus last year but are running up in the low single-digit range compared to the pre-pandemic 2019 fourth quarter.
Miller noted that October and November, before Thanksgiving week, are typically low-volume periods, with holiday selling the key to fourth-quarter results.
On the positive side, inventory levels are significantly improved year-over-year. Miller said, “Unlike last year when we were very supply-constrained and missing depth and breadth in our product offerings, this year, we are extremely pleased with our product assortment and believe our inventory levels are rightsized for the balance of the quarter. Our inventory is very current, with low levels of clearance products. As a result, we are in a position to be strategically promotional to profitably drive traffic and sales.”
Nonetheless, Miller said anticipates challenges “will likely continue to revolve around consumer discretionary spending in an uncertain economic environment. And as we’ve experienced over the years, winter weather is always a variable that can significantly impact our results.”
For the fourth quarter, same-store sales are projected to decrease in the high single-digit to low double-digits year over year while increasing in the low-single digits range versus the pre-pandemic 2019 fourth quarter, on a comparable day basis. The sales guidance reflects an expectation that macroeconomic headwinds will continue to impact consumer discretionary spending over the balance of the fourth quarter.
EPS for the fourth quarter is projected in the range of 8 cents to 20 cents, down from 89 cents in 2021 and ahead of 2 cents earned in the 2019 fourth quarter, which included a 2 cents non-recurring charge.
Miller concluded, “Taking a step back, our model has been tested in a wide range of economic cycles over many decades. While this cycle will certainly be memorable with its intense challenges, our playbook remains the same: use the flexibility of our model to our advantage, look to optimize gross profit dollars and relentlessly focus on the areas of expense management that we can control. Over the past few years, we have made significant enhancements to our model and financial health and, as a result, we believe we are well-positioned to continue to drive results over the balance of the fourth quarter and beyond.”
Photo courtesy Big 5