The following discussion and analysis of the Big 5 Sporting Goods Corporation ("we", "our", "us") financial condition and results of operations should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes ("Interim Financial Statements") included herein and our consolidated financial statements and related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 28, 2008.
Overview
We are a leading sporting goods retailer in the western United States, operating 382 stores in 11 states under the name "Big 5 Sporting Goods" at September 27, 2009. We provide a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet. Our product mix includes athletic shoes, apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, snowboarding and in-line skating. Executive Summary
The continuing economic slowdown and uncertainty in the financial sector resulted in a difficult environment for retailers. The U.S. economy is in a recession, and if measures implemented, or to be implemented, by the federal and state governments fail to stimulate an economic recovery, this prolonged economic downturn could continue. While our results for the thirty-nine weeks ended September 27, 2009 and September 28, 2008 reflect this economic downturn, we experienced improved results in the second and third quarters of fiscal 2009 compared with the same periods of fiscal 2008.
• Net income for the third quarter of fiscal 2009 increased 79.7% to $8.0 million, or $0.37 per diluted share, compared to $4.5 million, or $0.21 per diluted share, for the third quarter of fiscal 2008. The increase primarily reflected higher sales levels, slightly lower selling and administrative expense and lower interest expense.

• Net sales for the third quarter of fiscal 2009 increased 3.8% to $231.6 million compared to $223.2 million for the third quarter of fiscal 2008. The increase in net sales was primarily attributable to an increase of $5.0 million in new store sales and $3.5 million in same store sales.

• Gross profit as a percentage of net sales for the third quarter of fiscal 2009 increased by 63 basis points to 33.9% compared to the third quarter of fiscal 2008, primarily as a result of slightly higher merchandise margins and lower distribution costs.

• Selling and administrative expense for the third quarter of fiscal 2009 declined 1.0% to $65.3 million, or 28.2% of net sales, compared to $66.0 million, or 29.6% of net

sales, for the third quarter of fiscal 2008. The decrease was due mainly to lower advertising expense.

• Operating income for the third quarter of fiscal 2009 increased 58.9% to $13.2 million, or 5.7% of net sales, compared to $8.3 million, or 3.7% of net sales, for the third quarter of fiscal 2008. The higher operating income primarily reflects an increase in net sales, a higher gross profit percentage and a decrease in selling and administrative expense.

Results of Operations
   The results of the interim periods are not necessarily indicative of results
for the entire fiscal year.
   13 Weeks Ended September 27, 2009 Compared to 13 Weeks Ended September 28,
2008
   The following table sets forth selected items from our interim unaudited
condensed consolidated statements of operations by dollar and as a percentage of
our net sales for the periods indicated:

                                                            13 Weeks Ended
                                            September 27, 2009          September 28, 2008
                                                  (In thousands, except percentages)

 Net sales                                $   231,582       100.0 %   $   223,180       100.0 %
 Cost of sales (1)                            153,073        66.1         148,925        66.7

 Gross profit                                  78,509        33.9          74,255        33.3
 Selling and administrative expense (2)        65,327        28.2          65,962        29.6

 Operating income                              13,182         5.7           8,293         3.7
 Interest expense                                 562         0.2           1,166         0.5

 Income before income taxes                    12,620         5.5           7,127         3.2
 Income taxes                                   4,609         2.0           2,669         1.2

 Net income                               $     8,011         3.5 %   $     4,458         2.0 %

(1) Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory shrinkage, buying, distribution center costs and store occupancy costs. Store occupancy costs include rent, amortization of leasehold improvements, common area maintenance, property taxes and insurance.

(2) Selling and administrative expense includes store-related expense, other than store occupancy costs, as well as advertising, depreciation and amortization and expense associated with operating our corporate headquarters.

Net Sales. Net sales increased by $8.4 million, or 3.8%, to $231.6 million in the 13 weeks ended September 27, 2009 from $223.2 million in the same period last year. The increase in net sales was primarily attributable to the following:
• New store sales increased $5.0 million, which reflected the opening of 12 new stores, net of relocations, since June 29, 2008, and same store sales increased

$3.5 million. Same store sales increased 1.6% in the 13 weeks ended September 27, 2009 versus the 13 weeks ended September 28, 2008. This increase represented the second consecutive quarter of same store sales growth, after six consecutive fiscal quarters of same store sales declines ending with the first quarter of fiscal 2009, resulting from the weakened consumer environment.

• While net sales for the 13 weeks ended September 27, 2009 continued to be impacted by the challenging consumer environment, customer traffic into our retail stores increased for the 13 weeks ended September 27, 2009 when compared with the 13 weeks ended September 28, 2008.

Store count at September 27, 2009 was 382 versus 372 at September 28, 2008. We did not open any new stores in the 13 weeks ended September 27, 2009, while we opened three new stores and closed a store that was relocated in a prior period in the 13 weeks ended September 28, 2008. We expect to open approximately three new stores in fiscal 2009, substantially fewer than in fiscal 2008, due primarily to uncertainty arising from the challenging consumer environment. We expect the number of new store openings in fiscal 2010 to be substantially higher than fiscal 2009.
Gross Profit. Gross profit increased by $4.2 million, or 5.7%, to $78.5 million, or 33.9% of net sales, in the 13 weeks ended September 27, 2009 from $74.3 million, or 33.3% of net sales, in the 13 weeks ended September 28, 2008. The change in gross profit was primarily attributable to the following:
• Net sales increased by $8.4 million in the 13 weeks ended September 27, 2009 compared to the same period last year.

• Merchandise margins, which exclude buying, occupancy and distribution costs, increased 13 basis points versus the same period in the prior year, primarily reflecting shifts in product sales mix.

• Distribution center costs declined $0.5 million, or 40 basis points, compared to the same period last year, due mainly to reduced fuel costs.

• Store occupancy costs increased by $1.0 million, or 16 basis points, year over year, primarily reflecting the cost of new store openings.

Selling and Administrative Expense. Selling and administrative expense decreased by $0.7 million to $65.3 million, or 28.2% of net sales, in the 13 weeks ended September 27, 2009 from $66.0 million, or 29.6% of net sales, in the same period last year. The decrease in selling and administrative expense compared to the same period last year was largely attributable to a decline in advertising expense of $2.0 million due primarily to a reduction in the frequency and distribution of advertising circulars, as well as lower printing costs. This decrease was partially offset by an increase in store-related expense, excluding occupancy, of $0.9 million due mainly to higher labor and operating costs to support the increase in store count.

Interest Expense. Interest expense decreased by $0.6 million, or 51.8%, to $0.6 million in the 13 weeks ended September 27, 2009 from $1.2 million in the same period last year. This decrease was due to a reduction in average debt levels of approximately $23.3 million to $74.0 million in the third quarter of fiscal 2009 from $97.3 million in the same period last year, combined with a reduction in average interest rates of approximately 220 basis points to 2.1% in the third quarter of fiscal 2009 from 4.3% in the same period last year.
Income Taxes. The provision for income taxes was $4.6 million for the 13 weeks ended September 27, 2009 and $2.7 million for the 13 weeks ended September 28, 2008, primarily reflecting our higher pre-tax income. Our effective tax rate was 36.5% for the third quarter of fiscal 2009 compared with 37.4% for the third quarter of fiscal 2008. Our lower effective tax rate for the third quarter of fiscal 2009 compared to the same period last year primarily reflects an increased benefit from income tax credits for the current year.
39 Weeks Ended September 27, 2009 Compared to 39 Weeks Ended September 28, 2008
The following table sets forth selected items from our interim unaudited condensed consolidated statements of operations by dollar and as a percentage of our net sales for the periods indicated:

                                                            39 Weeks Ended
                                            September 27, 2009          September 28, 2008
                                                  (In thousands, except percentages)

 Net sales                                $   657,913       100.0 %   $   645,041       100.0 %
 Cost of sales (1) (2)                        441,002        67.0         430,828        66.8

 Gross profit (2)                             216,911        33.0         214,213        33.2
 Selling and administrative expense (3)       190,194        28.9         193,585        30.0

 Operating income (2)                          26,717         4.1          20,628         3.2
 Interest expense                               1,883         0.3           3,911         0.6

 Income before income taxes (2)                24,834         3.8          16,717         2.6
 Income taxes                                   9,409         1.4           6,415         1.0

 Net income (2)                           $    15,425         2.4 %   $    10,302         1.6 %

(1) Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory shrinkage, buying, distribution center costs and store occupancy costs. Store occupancy costs include rent, amortization of leasehold improvements, common area maintenance, property taxes and insurance.

(2) In the second quarter of fiscal 2008, we recorded a nonrecurring pre-tax charge of $1.5 million to correct an error in our previously recognized straight-line rent expense, substantially all of which related to prior periods and accumulated over a period of 15 years. This charge reduced net income by $0.9 million, or $0.04 per diluted share. We have determined this charge to be immaterial to our prior period consolidated financial statements.

(3) Selling and administrative expense includes store-related expense, other than store occupancy costs, as well as advertising, depreciation and amortization and expense associated with operating our corporate headquarters.

Net Sales. Net sales increased by $12.9 million, or 2.0%, to $657.9 million in the 39 weeks ended September 27, 2009 from $645.0 million in the same period last year. The change in net sales was primarily attributable to the following:
• New store sales increased by $19.0 million, which reflected the opening of 19 new stores, net of relocations, since December 30, 2007, partially offset by decreases in same store sales and closed store sales of $5.1 million and $1.2 million, respectively. Same store sales decreased 0.8% in the 39 weeks ended September 27, 2009 versus the 39 weeks ended September 28, 2008.

• While net sales for the 39 weeks ended September 27, 2009 continued to be impacted by the challenging consumer environment, we are experiencing a trend of increasing customer traffic into our retail stores when compared with the same period last year.

Store count at September 27, 2009 was 382 versus 372 at September 28, 2008. We opened one new store in the 39 weeks ended September 27, 2009, and opened nine new stores, net of closures and relocations, in the 39 weeks ended September 28, 2008. We expect to open approximately three new stores in fiscal 2009, substantially fewer than in fiscal 2008, due primarily to uncertainty arising from the challenging consumer environment. We expect the number of new store openings in fiscal 2010 to be substantially higher than fiscal 2009.
Gross Profit. Gross profit increased by $2.7 million, or 1.3%, to $216.9 million, or 33.0% of net sales, in the 39 weeks ended September 27, 2009 from $214.2 million, or 33.2% of net sales, in the 39 weeks ended September 28, 2008. The change in gross profit was primarily attributable to the following:
• Net sales increased by $12.9 million in the 39 weeks ended September 27, 2009 compared to the same period last year.

• Distribution costs decreased by $2.5 million in the 39 weeks ended September 27, 2009 compared to the same period last year, due primarily to lower costs for trucking and fuel, along with reduced labor expense attributed to reduced headcount.

• Merchandise margins, which exclude buying, occupancy and distribution costs, decreased 51 basis points versus the same period in the prior year, primarily due to shifts in product sales mix and product cost inflation.

• Store occupancy costs increased by $1.7 million, or 10 basis points, year over year, due primarily to the increase in store count. The increase in store occupancy costs was offset by the impact of a second quarter of fiscal 2008 nonrecurring pre-tax charge of $1.5 million to correct an error in our previously recognized straight-line rent expense (see footnote 2 of table on page 20).

Selling and Administrative Expense. Selling and administrative expense decreased by $3.4 million to $190.2 million, or 28.9% of net sales, in the 39 weeks ended September 27,

2009 from $193.6 million, or 30.0% of net sales, in the same period last year. The decrease in selling and administrative expense compared to the same period last year was largely attributable to a decline in advertising expense of $5.6 million due primarily to a reduction in the frequency and distribution of advertising circulars, as well as lower printing costs, along with a decline in administrative expense in various categories of $0.5 million. These decreases were partially offset by an increase in store-related expense, excluding occupancy, of $2.7 million, or 4 basis points as a percentage of net sales, due mainly to higher labor and operating costs to support the increase in store count.
Interest Expense. Interest expense decreased by $2.0 million, or 51.9%, to $1.9 million in the 39 weeks ended September 27, 2009 from $3.9 million in the same period last year. This decrease was due to a reduction in average debt levels of approximately $20.6 million to $81.2 million in the 39 weeks ended September 27, 2009 from $101.8 million in the same period last year, combined with a reduction in average interest rates of approximately 260 basis points to 2.2% in the 39 weeks ended September 27, 2009 from 4.8% in the same period last year.
Income Taxes. The provision for income taxes was $9.4 million for the 39 weeks ended September 27, 2009 and $6.4 million for the 39 weeks ended September 28, 2008. This increase was primarily due to higher pre-tax income in the 39 weeks ended September 27, 2009. Our effective tax rate was 37.9% for the 39 weeks ended September 27, 2009 compared with 38.4% for the 39 weeks ended September 28, 2008.
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements primarily through cash on hand, cash flow from operations and borrowings from our revolving credit facility. We believe our cash on hand, future funds from operations and borrowings from our revolving credit facility will be sufficient to fund our cash requirements for at least the next 12 months. There is no assurance, however, that we will be able to generate sufficient cash flow or that we will be able to maintain our ability to borrow under our revolving credit facility.
We ended the 39 weeks ended September 27, 2009 with $3.9 million of cash and cash equivalents compared with $3.0 million at the end of the same period in fiscal 2008. Our cash flows from operating, investing and financing activities for the 39 weeks ended September 27, 2009 and September 28, 2008 were as follows:

                                                       39 Weeks Ended
                                              September 27,       September 28,
                                                  2009                2008
                                                   (Dollars in thousands)

     Net cash provided by (used in):
     Operating activities                    $        47,392     $        29,350
     Investing activities                             (3,169 )           (14,157 )
     Financing activities                            (49,378 )           (21,963 )

     Decrease in cash and cash equivalents   $        (5,155 )   $        (6,770 )

Operating Activities. Net cash provided by operating activities for the 39 weeks ended September 27, 2009 and September 28, 2008 was $47.4 million and $29.4 million, respectively. The increase in cash provided by operating activities for the 39 weeks ended September 27, 2009 compared to the same period last year primarily reflects higher net income, reduced funding for accrued expenses including employee compensation and benefit plans and advertising and an increased collection of accounts receivable, primarily credit card receivables. The net cash flow benefit from reduced merchandise inventory and accounts payable this year declined from the same period in the prior year.
Investing Activities. Net cash used in investing activities for the 39 weeks ended September 27, 2009 and September 28, 2008 was $3.2 million and $14.2 million, respectively. Capital expenditures, excluding non-cash property and equipment acquisitions, represented substantially all of the net cash used in investing activities for both periods. This decrease was primarily attributable to a reduction in store expansion activity and a corresponding reduction in new store capital expenditures. Due primarily to the current challenging operating and economic environment, we continue to reduce our capital expenditures, particularly store expansion investments, in fiscal 2009 in comparison to previous years.
Financing Activities. Net cash used in financing activities for the 39 weeks ended September 27, 2009 and September 28, 2008 was $49.4 million and $22.0 million, respectively. For the 39 weeks ended September 27, 2009, cash was used primarily to pay down borrowings under our revolving credit facility and pay dividends. For the 39 weeks ended September 28, 2008, cash was used primarily to pay down borrowings under our revolving credit facility, repurchase stock and pay dividends.
As of September 27, 2009, we had revolving credit borrowings of $59.7 million and letter of credit commitments of $4.6 million outstanding under our financing agreement. These balances compare to revolving credit borrowings of $96.5 million and letter of credit commitments of $3.0 million outstanding as of December 28, 2008 and revolving credit borrowings of $99.9 million and letter of credit commitments of $7.2 million outstanding as of September 28, 2008.
Quarterly dividend payments of $0.09 per share were paid in fiscal 2008. In the first quarter of fiscal 2009, our Board of Directors reduced the quarterly cash dividend to $0.05 per share of outstanding common stock, and dividends were paid at that rate on March 20, 2009, June 15, 2009 and September 15, 2009. The dividend rate was reduced in an effort to conserve our capital to maintain a healthy financial condition during the current economic downturn.
Periodically, we repurchase our common stock in the open market pursuant to programs approved by our Board of Directors. Depending on business conditions, we may repurchase our common stock for a variety of reasons, including the current market price of our stock, to offset dilution related to equity-based compensation plans and to optimize our capital structure.
In light of the current economic climate, we did not repurchase any shares of our common stock during the 39 weeks ended September 27, 2009. We repurchased 575,999 shares of our common stock for $5.1 million in the 39 weeks ended September 28, 2008. Since the inception of our initial share repurchase program in May 2006 through September 27, 2009, we have repurchased a total of 1,369,085 shares for $20.8 million, leaving a total of $14.2 million available for share repurchases under our current share repurchase program. However, due to the current economic environment, we do not expect to resume share repurchases in fiscal 2009.
Our dividend payments and stock repurchases are generally funded by distributions from our subsidiary, Big 5 Corp. Generally, as long as there is no default or event of default

under our financing agreement, Big 5 Corp. may make distributions to us of up to $15.0 million per year (and up to $5.0 million per quarter) for any purpose (including dividend payments or stock repurchases) and may make additional distributions for the purpose of paying our dividends or repurchasing our common stock if Big 5 Corp. will have post-dividend liquidity (as defined in the financing agreement) of at least $30 million.
Financing Agreement. Our financing agreement with The CIT Group/Business Credit, Inc. ("CIT") and a syndicate of other lenders, as amended, provides for a line of credit up to $175.0 million. The initial termination date of the revolving credit facility is March 20, 2011 (subject to annual extensions thereafter). The revolving credit facility may be terminated by the lenders by giving at least 90 days prior written notice before any anniversary date, commencing with its anniversary date on March 20, 2011. We may terminate the revolving credit facility by giving at least 30 days prior written notice, provided that if we terminate prior to March 20, 2011, we must pay an early termination fee. Unless it is terminated, the revolving credit facility will continue on an annual basis from anniversary date to anniversary date beginning on March 21, 2011.
Under the revolving credit facility, our maximum eligible borrowing capacity is limited to 73.66% of the aggregate value of eligible inventory during October, November and December and 67.24% during the remainder of the year. An annual fee of 0.325%, payable monthly, is assessed on the unused portion of the revolving credit facility. As of September 27, 2009 and December 28, 2008, our total remaining borrowing capacity under the revolving credit facility, after subtracting letters of credit, was $78.5 million and $69.1 million, respectively.
The revolving credit facility bears interest at various rates based on our overall borrowings, with a floor of LIBOR plus 1.00% or the JP Morgan Chase Bank prime lending rate and a ceiling of LIBOR plus 1.50% or the JP Morgan Chase Bank prime lending rate. Additionally, if our earnings before interest, taxes, depreciation and amortization ("EBITDA") for the prior four quarters, in the aggregate, falls below $50 million, the interest rate under the revolving credit facility is increased to LIBOR plus 1.75% or the JP Morgan Chase Bank prime lending rate plus 0.25%.
Our financing agreement is secured by a first priority security interest in substantially all of our assets. Our financing agreement contains various financial and other covenants, including covenants that require us to maintain a fixed-charge coverage ratio of not less than 1.0 to 1.0 in certain circumstances, restrict our ability to incur indebtedness or to create various liens and restrict the amount of capital expenditures that we may incur. Our financing agreement also restricts our ability to engage in mergers or acquisitions, sell assets,

repurchase our stock or pay dividends. We may repurchase our stock or declare a dividend only if, among other things, no default or event of default exists on the stock repurchase date or dividend declaration date, as applicable, and a default is not expected to result from the repurchase of stock or payment of the dividend. The requirements are described in more detail in the financing agreement and the amendments thereto, which have been filed as exhibits to our previous filings with the Securities and Exchange Commission ("SEC"). We are currently in compliance with all financial covenants under our financing agreement. If we fail to make any required payment under our financing agreement or if we otherwise default under this instrument, the lenders may (i) require us to agree to less favorable interest rates and other terms under the agreement in exchange for a waiver of any such default or (ii) accelerate our debt under this agreement. This acceleration could also result in the acceleration of other indebtedness that we may have outstanding at that time.
Future Capital Requirements. We had cash on hand of $3.9 million at September 27, 2009. We expect capital expenditures for the last quarter of fiscal 2009, excluding non-cash property and equipment acquisitions, to range from approximately $3.0 million to $5.0 million, primarily to fund the opening of new stores, store-related remodeling, distribution center equipment and computer hardware and software purchases. In light of the current economic environment, we continue to slow our store expansion efforts substantially in . . .