Big 5 Sporting Goods, Inc. forecasted a sharp decline in first-quarter results as the chain faces elevated pandemic demand in the year-ago period. However, Big 5 officials expect the improved margin rates seen over the last two years to continue.

Like other retailers in the space, Big 5’s margins have benefited from reduced promotional pressures amid a lean inventory environment due to supply chain disruptions caused by the pandemic.

On a conference call with analysts, however, Steve Miller, chairman, president and CEO, said Big 5’s recent margin improvement had been driven, in part, by an evolution of its promotional strategy that was already boosting margins before the pandemic with the improvement accelerated over the course of the pandemic.

Miller said, “Historically, our model revolved around print advertising that focused on product-by-product, price-driven promotions, typically weekly. As we’ve reduced print advertising, we have opened up more flexibility in our purchasing and pricing, which has benefited our product mix and margins, not to mention significantly reduced our advertising expense.”

Merchandise margins increased 194 basis points in the latest fourth quarter compared to the fourth quarter of 2020 and increased 437 basis points versus the fourth quarter of 2019. Compared to the fourth quarter of 2018, merchandise margins are up over 600 basis points.

The better-than-expected margin improvement was the reason Big 5, on January 16, issued an update raising its EPS guidance for the fourth quarter. At the time, Big 5 said it expected earnings in the range of 84 cents to 86 cents, up from previous guidance in the range of 55 cents to 70 cents.

In the fourth quarter ended January 2, net income reached $19.9 million, or 89 cents a share, above the high end of the updated guidance range. That’s down 5.2 percent from $21.0 million, or 95 per share, in the fourth quarter of fiscal 2020, although the year-ago period included a benefit of 12 cents per share from an insurance settlement.

Gross margins were 37.7 percent in the fiscal 2021 fourth quarter versus 35.2 percent in the fourth quarter of the prior year. The increase in gross margin also reflected lower distribution costs, including costs capitalized into inventory, as a percentage of net sales, partially offset by the favorable impact from an insurance settlement in the prior-year period.
SG&A expense, as a percentage of sales, was 27.9 percent in the fourth quarter versus 25.6 percent a year ago. Overall, SG&A expense increased $1.8 million from the prior year primarily due to increased store-related costs, along with higher advertising expenses, which remained substantially below pre-pandemic levels. The comparison to the prior year also reflected the prior-year period’s favorable impact from the insurance settlement.

Net sales in the quarter declined 5.9 percent to $273.4 million, reflecting the latest period running 13 weeks versus a 14-week year-ago period. On the same 13-week basis year over year, same-store sales inched up 0.2 percent year over year and grew 10.6 percent compared to the pre-pandemic fourth quarter of 2019.

The results were in line with its initial guidance calling for year-over-year same-store sales in the range of negative low-single-digits to positive low-single-digits.

By month, Miller said October sales were slightly up versus 2020 and up mid-teens versus 2019. November sales were down in the high-single-digits versus 2020 and down low-single-digits versus 2019.
Miller said, “The softness in November was primarily due to unseasonably warm weather conditions, coupled with supply chain disruptions that inhibited our ability to fully capitalize on the key Black Friday periods.”

December sales were up mid-single-digits versus 2020 and up mid-teens versus 2019. Miller said, “We saw particular strength over the last couple of weeks of the year when very favorable winter weather finally arrived in our markets and drove sales of winter-related products.”
From a category standpoint, apparel and footwear continued to see strength, both up double digits compared to the prior year. Miller noted that pandemic-related factors had negatively impacted both categories.

On the other hand, hardgoods were down low-double-digits year-over-year. Hard goods in 2020 had been up nearly 40 percent versus 2019, driven by pandemic-related demand for products such as home fitness and outdoor recreation.

For the year, Big 5 sales increased to a record $1.16 billion in the 52-week fiscal year 2021, up 11.5 percent compared to sales of $1.04 billion for the 53-week fiscal 2020. On the same 52-week basis, same-store sales increased 13.9 percent year over year and 17.5 percent compared to 2019.

Big 5 opened five stores and closed four stores in 2021, including two relocations to end the year with 431 stores. In 2022, it plans to open approximately six stores and close about two stores.

Inventory was up 7.1 percent compared to the prior year and down 13.4 percent compared to 2019.

Barry Emerson, Big 5’s CFO, said inventory levels are “generally a little lower than we would have liked” due to supply chain disruptions amid elevated demand. He added, “However, one benefit of our reduction in print advertising is that we are now able to operate with less inventory than we have historically carried. We will continue to manage through the supply chain issues, although there are areas where we certainly wish we had more inventory. We believe our assortment is generally well positioned for spring. Our inventory is very fresh, and we are operating with considerably less clearance inventory than we have historically.”
Big 5 ended 2021 with zero borrowings under its credit facility on a cash balance of 97.4 million, which compares to zero borrowings and 64.7 million cash at the end of 2020.

Looking to the current quarter, Big 5 said in the first two months of its first quarter, most categories are performing well against pre-pandemic periods, but sales overall are down roughly 12 percent compared to the record results of last year’s first quarter when Big 5 recorded a same-store sales jump of 31.8 percent.

“Last year, in the first quarter, our sales benefited from strong COVID-related demand and favorable winter weather in our markets,” said Miller. “In January this year, sales were down approximately 20 percent as we faced a number of headwinds, including unseasonably warm and dry winter weather our markets, the impact of the Omicron surge and ongoing supply chain disruption.

He added, “Our trends improved in February with same-store sales slightly up as Omicron impacts eased and, last week, for the first time of this calendar year. We finally benefited from a shot of favorable winter weather in our key markets. As we look ahead to March, we are facing very challenging comps against last year when sales benefited greatly as COVID restrictions eased and there was a resumption of in-person schooling and sports leagues along with the distribution of stimulus checks.”

For the quarter, Big 5 expects same-store sales to decrease 10 percent to 13 percent, with EPS in the range of 30 cents to 40 cents. That compares to a same-store sales increase of 31.8 percent and record first-quarter EPS of 96 cents in the year-ago first quarter, which included a previously reported net benefit of 6 cents per share.

Miller said that while guidance expectations are lower than the prior year’s record first-quarter results, its guidance range reflects first-quarter earnings that would be near or above any pre-pandemic first-quarter earnings in its history.

Miller concluded, “Our last seven quarters have been the seven most profitable quarters in our company’s history. While we have set the bar high and without a doubt, we and others in the retail sector will continue to face many challenges related to the pandemic, including supply constraints and staffing issues, we have a proven track record of successfully adapting to challenges and are confident in our ability to continue to thrive in this dynamic environments. We are a stronger company with an improved operating model and are well-positioned to continue to drive healthy bottom-line results.”

Photo courtesy Big 5