Big 5 Sporting Goods Corp. reported sales in the second quarter ended July 3 exceeded any pre-pandemic second quarter, but missed plan due to macroeconomic headwinds that accelerated over the course of the quarter.
“Similar to other retailers, our top line was impacted by macroeconomic headwinds, which became progressively worse over the course of the second quarter,” said CEO Steve Miller on a call with analysts. “These macro trends are undoubtedly pulling dollars away from consumers’ discretionary spending.”
Additionally, Miller said Big 5 was impacted by the resurgence of COVID cases that began in June, particularly in its key California market.
“This likely has impacted customer traffic and we’ve certainly experienced an uptick in COVID cases among our team members and this compounded the ongoing store staffing issues we’ve been battling in a difficult hiring environment,” said Miller. “With the staffing challenges, we’ve been unable to keep all of our stores open for optimal operating hours.”
On the positive side, Big 5’s margins remained “very strong” and helped the chain report earnings within its guidance range as well as higher than in any pre-pandemic second quarter in its history.
Miller noted that the retailer faced “extremely difficult comparisons” on a year-over-year basis as the prior year’s sales surged due to unusual pandemic-related factors, including a significant benefit from pent-up demand for products following the resumption of in-person schools and sports leagues along with the distribution of stimulus checks. As a result, year-over-year comparisons remains highly distorted and some pre-pandemic comparisons were provided for context.
Same-Store Sales Miss Plan
In the quarter, sales fell 22.1 percent $253.8 million from $326 million a year ago. The year-ago period represented the highest second-quarter sales in the company’s history.
Same-store sales fell 22.3 percent versus last year and below plan that called for a high-teens decrease due to the macroeconomic and pandemic-related pressures. Compared to the pre-pandemic 2019 second quarter, same-store sales increased 3.9 percent on a comparable day basis.
Transactions for the second quarter decreased in the high-teens year-over-year, with average sales down approximately 4 percent.
Margins Well Above Pre-Pandemic Levels
Gross margins eroded 390 basis points to 35 percent in the second quarter from 38.9 percent a year ago. The decrease in gross profit margin year-over-year primarily reflected higher store occupancy and warehouse expense as a percentage of net sales partially offset by a significant increase in cost capitalized into inventory.
Merchandise margins decreased 102 basis points for the latest quarter year-over-year. However, gross margins were up 470 basis points compared to the 30.3 percent margin reported in the second quarter of 2019, reflecting the evolution of its pricing and promotional strategy.
Miller also noted that the latest quarter’s margins were 310 basis points higher than in any pre-pandemic second quarter in its 20-year history as a public company.
“This margin strength demonstrates the flexibility of our model and highlights the evolution of our business through the pandemic era that made us a stronger and more resilient company,” said Miller. “Our inventory is current so we are well-positioned to use promotions strategically rather than relying upon them to drive sales or clear excess inventory.”
He added that while Big 5 has lately become more promotional in certain categories, it’s been able to do so without meaningfully impacting its planned merchandise margins, which in turn helped the chain achieve its earnings plan for the second quarter.
Miller also noted over the course of the pandemic, Big 5 has evolved its promotional model to become much less reliant on chain-wide print advertising. Aside from the obvious advertising cost savings, this has facilitated a more efficient pricing and promotional strategy that allows the chain to reduce the inventory depth and breadth that it has historically needed to support planned promotions.
Added Miller, “This improved inventory efficiency has been a major factor in driving gross margin dollars. In the second quarter of 2022, the gross margin dollars we generated relative to our inventory dollar investment was higher than in any pre-pandemic second quarter in our history as a publicly traded company.”
Operating Expenses Decline
SG&A expense decreased $1.8 million in the latest second quarter year-over-year period, primarily due to lower performance-based incentive accruals and credit card fees, partially offset by broad-based inflationary impacts, including increased employee labor and benefit-related expenses year-over-year, and to a lesser degree higher advertising expense due in part to the Easter calendar shift.
Additionally, the quarter included a charge of $1 million, or 3 cents a share, for the revaluation of workers’ compensation reserves due to a change in claims assessment methodology.
As a percent of sales, SG&A, expense was 30.2 percent sales versus 24 percent in the 2021 second quarter, reflecting the deleveraging effect of lower sales. Compared to the 2019 second quarter, SG&A expense as a percent of sales this year was approximately flat.
Net income tumbled 75.8 percent to $8.9 million, or 41 cents a share, from record earnings of $36.8 million, or $1.63, a year ago. Results were within the company’s guidance range of 40 cents to 50 cents. The latest quarter included the workers’ compensation charge of 3 cents. Compared to the 2019 second quarter, EPS of 41 cents a share was break even.
Adjusted EBITDA continues to be “very healthy” on a historic basis, according to Barry Emerson, CFO, totaling $17.7 million, although well below adjusted EBITDA of $52.9 million.
Inventory at the end of the second quarter increased 26.8 percent year over year, primarily reflecting more normalized inventory levels following the significant sell-through in the prior year period. To a lesser extent, the higher inventory also reflects the carryover of winter-related inventory following unseasonably warm and dry winter weather in the first quarter.
Compared to the end of the second quarter of fiscal 2019, merchandise inventory, this year increased slightly by 1.5 percent. Factoring out winter-related products, merchandise inventory was well below 2019 levels.
Miller said, “While supply chain disruptions still persist, they are improved from where they were at this time a year ago. We believe our product assortment is generally well-positioned and we anticipate that sales trends versus last year will improve over the balance of the quarter.”
Third-Quarter Sales Down Low Teens Quarter-To-Date
For the quarter to date, same-store sales are running down in the low teens versus last year but are running up low single-digits versus the comparable days in 2019. Miller said, “In the third quarter just like in the second quarter, we are comping extraordinary prior year results and we continue to battle macroeconomic headwinds.”
For the third quarter, Big 5 expects same-store sales to decrease in the high single-digit range compared to the 2021 third quarter. Versus 2019, same-store sales are expected to increase in the low single-digit range on a comparable day basis.
Earnings are expected in the range of 22 cents to 32 cents, which compares to EPS of $1.07 in the third quarter of fiscal 2021 and 30 cents in fiscal 2019. Relative to this year, the fiscal 2019 third quarter benefited from a shift related to its fiscal calendar.
Miller concluded, “Stepping back, over the course of the pandemic we have enhanced and evolved our model and emerged a stronger company. We have a strong debt-free balance sheet with a healthy inventory position. We knew fiscal year 2022 would be hard to predict due to the combination of challenging comps from periods of unprecedented demand and the uncertainties of the current environment.
“We continue to benefit from enhancements we have made to our cost structure which are helping to mitigate extraordinary inflationary pressures and are protecting our EBITDA in the face of new challenges borne by the shifting macroeconomic forces that all retailers are facing.
“We have a long operating history and proven track record of managing through challenging conditions, which combined with the flexibility that, we’ve created are allowing us to continue to generate healthy operating results.”
Photo courtesy Big 5
