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BGFV > SEC Filings for BGFV > Form 10-Q on 3-Nov-2011All Recent SEC Filings

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Form 10-Q for BIG 5 SPORTING GOODS CORP


3-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Big 5 Sporting Goods Corporation ("we", "our", "us") financial condition and results of operations includes information with respect to our plans and strategies for our business and 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 fiscal year ended January 2, 2011.

Overview

We are a leading sporting goods retailer in the western United States, operating 398 stores in 12 states under the name "Big 5 Sporting Goods" at October 2, 2011. 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 roller sports.

Executive Summary

Our operating results for the third quarter of fiscal 2011 and the third quarter of fiscal 2010 continue to reflect unfavorable macroeconomic conditions in our markets resulting primarily from the lingering effects of the economic recession and uncertainty in the financial sector. These conditions have led to an erosion of consumer confidence and, as long as this economic weakness continues, it is likely to continue to impact our operating results.

Net sales for the third quarter of fiscal 2011 increased to $234.7 million compared to $231.8 million for the third quarter of fiscal 2010. The increase in net sales was primarily attributable to an increase in new store sales, partially offset by a decline in same store sales of 0.1% and lower closed store sales in the 13 weeks ended October 2, 2011 versus the comparable 13-week period in the prior year. Same store sales for a period reflect net sales from stores that operated throughout the period as well as the corresponding prior period; e.g., comparable quarterly reporting periods for quarterly comparisons.

Net income for the third quarter of fiscal 2011 decreased 14.7% to $5.8 million, or $0.27 per diluted share, compared to $6.8 million, or $0.31 per diluted share, for the third quarter of fiscal 2010. The decrease in net income primarily reflected higher selling and administrative expense combined with lower merchandise margins.

Gross profit as a percentage of net sales for the third quarter of fiscal 2011 decreased by approximately 60 basis points to 32.8% compared to the third quarter of fiscal 2010, primarily as a result of lower merchandise margins.

Selling and administrative expense for the third quarter of fiscal 2011 increased 1.8% to $67.5 million, or 28.8% of net sales, compared to $66.3 million, or 28.6% of net sales, for the third quarter of fiscal 2010. The increase was primarily attributable to higher store-related expense, excluding occupancy, as a result of new store openings.

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Operating income for the third quarter of fiscal 2011 decreased 14.4% to $9.5 million, or 4.0% of net sales, compared to $11.1 million, or 4.8% of net sales, for the third quarter of fiscal 2010. The lower operating income primarily reflected higher selling and administrative expense combined with lower merchandise margins.

Results of Operations

The results of the interim periods are not necessarily indicative of results for the entire fiscal year.

13 Weeks Ended October 2, 2011 Compared to 13 Weeks Ended October 3, 2010

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:



                                             0000000000         0000000000          0000000000         0000000000
                                                                       13 Weeks Ended
                                                   October 2, 2011                        October 3, 2010
                                                             (In thousands, except percentages)

Net sales                                  $    234,680              100.0 %      $    231,753              100.0 %
Cost of sales (1)                               157,691               67.2             154,337               66.6

Gross profit                                     76,989               32.8              77,416               33.4
Selling and administrative expense (2)           67,484               28.8              66,301               28.6

Operating income                                  9,505                4.0              11,115                4.8
Interest expense                                    632                0.2                 603                0.3

Income before income taxes                        8,873                3.8              10,512                4.5
Income taxes                                      3,056                1.3               3,689                1.6

Net income                                 $      5,817                2.5 %      $      6,823                2.9 %

(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, expense associated with operating our corporate headquarters and impairment charges, if any.

Net Sales. Net sales increased by $2.9 million, or 1.3%, to $234.7 million in the 13 weeks ended October 2, 2011 from $231.8 million in the same period last year. The change in net sales reflected the following:

New store sales increased by $5.9 million in the 13 weeks ended October 2, 2011 from the same period last year, reflecting the opening of ten new stores and five relocated stores, since July 4, 2010. The increase in new store sales was partially offset by a reduction in closed store sales of $2.6 million, all of which were related to relocated stores.

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Same store sales decreased $0.3 million, or 0.1%, for the 13 weeks ended October 2, 2011, versus the comparable 13-week period in the prior year. Same store sales for a period reflect net sales from stores that operated throughout the period as well as the corresponding prior period; e.g., comparable quarterly reporting periods for quarterly comparisons.

Customer traffic into our retail stores decreased for the 13 weeks ended October 2, 2011 versus the comparable 13-week period in the prior year.

Store count at October 2, 2011 was 398 versus 391 at October 3, 2010. We opened three new stores in the 13 weeks ended October 2, 2011. We opened three new stores in the 13 weeks ended October 3, 2010. Excluding stores closed as part of relocations that began last year, we currently expect to open 11 net new stores in fiscal 2011.

Gross Profit. Gross profit decreased by $0.4 million, or 0.5%, to $77.0 million, or 32.8% of net sales, in the 13 weeks ended October 2, 2011 from $77.4 million, or 33.4% of net sales, in the 13 weeks ended October 3, 2010. The change in gross profit was primarily attributable to the following:

Merchandise margins, which exclude buying, occupancy and distribution costs, decreased 40 basis points versus the third quarter last year, primarily reflecting the impact of promotional activities to stimulate sales as well as inflation in the purchase cost of product.

Distribution costs, including the impact of costs capitalized into inventory, increased $0.9 million, or 30 basis points, compared to the same period last year. The increase in distribution costs resulted primarily from lower costs capitalized into merchandise inventory, along with increased warehouse expense reflecting higher fuel costs.

Net sales increased $2.9 million, or 1.3%, year over year in the third quarter of fiscal 2011.

Selling and Administrative Expense. Selling and administrative expense increased by $1.2 million to $67.5 million, or 28.8% of net sales, in the 13 weeks ended October 2, 2011 from $66.3 million, or 28.6% of net sales, in the same period last year. The increase in selling and administrative expense compared to the prior year was largely attributable to an increase in store-related expense, excluding occupancy, of $1.4 million due mainly to higher labor and operating costs to support the increase in store count.

Interest Expense. Interest expense remained relatively unchanged at $0.6 million in the 13 weeks ended October 2, 2011 compared to the same period last year. Interest expense for the 13 weeks ended October 2, 2011 compared to the same period last year reflects an increase in average debt levels of approximately $13.2 million to $65.0 million in the third quarter of fiscal 2011 from $51.8 million in the same period last year, combined with an increase in average interest rates of approximately 60 basis points, to 2.5% in the third quarter of fiscal 2011 from 1.9% in the same period last year, due mainly to higher applicable margins under our current Credit Agreement as compared to our prior credit agreement. Interest expense in the 13 weeks ended October 3, 2010 included a $0.3 million charge for a one-time early termination fee and the write off of the remaining deferred debt issuance costs associated with the termination of our prior financing agreement.

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Income Taxes. The provision for income taxes was $3.1 million for the 13 weeks ended October 2, 2011 and $3.7 million for the 13 weeks ended October 3, 2010. Our effective tax rate was 34.4% for the third quarter of fiscal 2011 compared with 35.1% for the third quarter of fiscal 2010. The lower effective tax rate for the third quarter of fiscal 2011 compared to the same period last year primarily reflects our lower pre-tax income, along with higher income tax credits for the current year.

39 Weeks Ended October 2, 2011 Compared to 39 Weeks Ended October 3, 2010

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:



                                              0000000000       0000000000        0000000000       0000000000
                                                                     39 Weeks Ended
                                                   October 2, 2011                    October 3, 2010
                                                           (In thousands, except percentages)

Net sales                                   $    675,411            100.0 %    $    670,102            100.0 %
Cost of sales (1)                                454,497             67.3           448,170             66.9

Gross profit                                     220,914             32.7           221,932             33.1
Selling and administrative expense (2)           201,590             29.8           194,366             29.0

Operating income                                  19,324              2.9            27,566              4.1
Interest expense                                   1,838              0.3             1,370              0.2

Income before income taxes                        17,486              2.6            26,196              3.9
Income taxes                                       5,804              0.9             9,588              1.4

Net income                                  $     11,682              1.7 %    $     16,608              2.5 %

(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, expense associated with operating our corporate headquarters and impairment charges, if any.

Net Sales. Net sales increased by $5.3 million, or 0.8%, to $675.4 million in the 39 weeks ended October 2, 2011 from $670.1 million in the 39 weeks ended October 3, 2010. The increase in net sales was primarily attributable to the following:

New store sales increased by $18.2 million, reflecting the opening of 14 new stores and six relocated stores, since January 3, 2010. The increase in new store sales was partially offset by a reduction in closed store sales of $7.1 million, all of which were related to relocated stores.

Same store sales decreased $5.9 million, or 0.9%, in the 39 weeks ended October 2, 2011 versus the comparable 39-week period in the prior year. Same store sales for a period reflect net sales from stores that operated throughout the period as well as the corresponding prior period; e.g., comparable year-to-date reporting periods for year-to-date comparisons.

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Customer traffic into our retail stores decreased for the 39 weeks ended October 2, 2011 when compared with the 39 weeks ended October 3, 2010.

Store count at October 2, 2011 was 398 versus 391 at October 3, 2010. We opened five new stores, two of which were relocations, and closed three stores related to 2010 relocations, in the 39 weeks ended October 2, 2011, while we opened seven new stores, net of relocations, in the 39 weeks ended October 3, 2010. Excluding stores closed as part of relocations that began last year, we currently expect to open 11 net new stores in fiscal 2011.

Gross Profit. Gross profit decreased by $1.0 million, or 0.5%, to $220.9 million, or 32.7% of net sales, in the 39 weeks ended October 2, 2011 from $221.9 million, or 33.1% of net sales, in the 39 weeks ended October 3, 2010. The change in gross profit was primarily attributable to the following:

Merchandise margins, which exclude buying, occupancy and distribution costs, decreased 34 basis points year over year, primarily reflecting the impact of promotional activities to stimulate sales as well as inflation in the purchase cost of product.

Store occupancy costs increased by $1.0 million, or nine basis points, year over year, primarily reflecting the expense for new stores.

Net sales increased by $5.3 million in the 39 weeks ended October 2, 2011 compared to the 39 weeks ended October 3, 2010.

Selling and Administrative Expense. Selling and administrative expense increased by $7.2 million to $201.6 million, or 29.8% of net sales, in the 39 weeks ended October 2, 2011 from $194.4 million, or 29.0% of net sales, in the same period last year. The increase in selling and administrative expense compared to the same period last year was largely attributable to an increase in store-related expense, excluding occupancy, of $5.8 million due mainly to higher labor and operating costs to support the increase in store count and increased employee benefit costs, as well as an increase in advertising expense of $1.6 million to support sales. Selling and administrative expense also reflected a pre-tax impairment charge of $0.6 million related to certain underperforming stores, as discussed in Note 4 to the Interim Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Interest Expense. Interest expense increased by $0.4 million to $1.8 million in the 39 weeks ended October 2, 2011 from $1.4 million in the same period last year. This increase was due to an increase in average debt levels of approximately $5.0 million to $60.1 million in the 39 weeks ended October 2, 2011 from $55.1 million in the same period last year, combined with an increase in average interest rates of approximately 90 basis points, to 2.6% in the 39 weeks ended October 2, 2011 from 1.7% in the same period last year, due mainly to higher applicable margins under our current Credit Agreement as compared to our prior credit agreement. Interest expense in the 39 weeks ended October 3, 2010 included a $0.3 million charge for a one-time early termination fee and the write off of the remaining deferred debt issuance costs associated with the termination of our prior financing agreement.

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Income Taxes. The provision for income taxes was $5.8 million for the 39 weeks ended October 2, 2011 and $9.6 million for the 39 weeks ended October 3, 2010. Our effective tax rate was 33.2% for the 39 weeks ended October 2, 2011 compared with 36.6% for the same period last year. Our lower effective tax rate for the 39 weeks ended October 2, 2011 compared to the same period last year primarily reflects our lower pre-tax income, along with higher income tax credits for the current year.

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 flows from operations and borrowings from our revolving credit facility. We believe our cash and cash equivalents on hand, future cash flows 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 flows from operations or maintain our ability to borrow under our revolving credit facility.

We ended the third quarter of fiscal 2011 with $4.7 million of cash and cash equivalents compared with $4.1 million at the end of the same period in fiscal 2010. Our cash flows from operating, investing and financing activities are summarized as follows:

                                                   0000000000        0000000000
                                                         39 Weeks Ended
                                                  October 2,        October 3,
                                                     2011              2010
                                                         (In thousands)

     Net cash (used in) provided by:
     Operating activities                        $    (11,570 )    $     12,647
     Investing activities                              (6,814 )          (8,599 )
     Financing activities                              17,487            (5,673 )

     Net decrease in cash and cash equivalents   $       (897 )    $     (1,625 )

Operating Activities. Net cash used in operating activities for the 39 weeks ended October 2, 2011 was $11.6 million, and net cash provided by operating activities for the 39 weeks ended October 3, 2010 was $12.6 million. The reduction in cash flow from operating activities for the 39 weeks ended October 2, 2011 compared to the same period last year primarily reflects higher funding of merchandise inventory purchases, along with the timing of inventory purchases and payments, lower accrued expenses and other liabilities, combined with lower net income for the current year. Our increase in merchandise inventory purchases during the first nine months of this year over the first nine months of last year primarily reflected the addition of certain new products to stimulate sales, product cost inflation, bringing in seasonal product earlier to mitigate the impact of potential delivery delays and purchase cost increases, and opportunistic buys. Inventory levels were also higher than last year as a result of lower than anticipated current year sales.

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Investing Activities. Net cash used in investing activities for the 39 weeks ended October 2, 2011 and October 3, 2010 was $6.8 million and $8.6 million, respectively. Capital expenditures, excluding non-cash property and equipment acquisitions, represented $7.8 million in the 39 weeks ended October 2, 2011, and represented substantially all of the cash used in investing activities for the 39 weeks ended October 3, 2010. In the 39 weeks ended October 2, 2011, we received proceeds of $0.5 million from the sale of owned real property and $0.5 million as part of a local utility rebate program related to the implementation of a green energy system at our distribution center.

Financing Activities. Net cash provided by financing activities for the 39 weeks ended October 2, 2011 was $17.5 million, and net cash used in financing activities for the 39 weeks ended October 3, 2010 was $5.7 million, respectively. For the first nine months of fiscal 2011, net cash was provided primarily from increased borrowings under our revolving credit facility, offset by cash used to pay dividends. For the first nine months of fiscal 2010, net cash was used primarily to pay dividends. The increase in borrowings under our revolving credit facility in fiscal 2011 compared with fiscal 2010 primarily reflects this year's increased funding of merchandise inventory purchases, along with the timing of inventory purchases and payments, combined with lower than anticipated sales.

As of October 2, 2011, we had revolving credit borrowings of $69.1 million and letter of credit commitments of $3.5 million outstanding. These balances compare to revolving credit borrowings of $48.3 million and letter of credit commitments of $0.8 million outstanding as of January 2, 2011 and revolving credit borrowings of $55.2 million and letter of credit commitments of $0.8 million outstanding as of October 3, 2010. The increase in our revolving credit borrowings from the end of fiscal 2010 is due primarily to the seasonal growth in merchandise inventory. The increase in revolving credit borrowings at the end of the third quarter of fiscal 2011 compared to the same period last year primarily reflects higher inventory levels as discussed under Operating Activities above, combined with lower accounts payable as a percentage of inventory due in part to the timing of payments.

Credit Agreement. On October 18, 2010, we entered into a new credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and a syndicate of other lenders. Initial borrowings under the Credit Agreement on October 18, 2010 were used to, among other things, repay all of our outstanding indebtedness under our prior financing agreement, at which time the prior financing agreement was terminated. As further discussed below, the Credit Agreement was amended on October 31, 2011.

The Credit Agreement provides for a revolving credit facility (the "Credit Facility") with an aggregate committed availability of up to $140.0 million, which amount may be increased at our option up to a maximum of $165.0 million. We may also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the existing lenders under the Credit Agreement will have the option to increase their commitments to accommodate the requested increase. If such existing lenders do not exercise that option, we may (with the consent of Wells Fargo, not to be unreasonably withheld) seek other lenders willing to provide such commitments. The Credit Facility includes a $50.0 million sublimit for issuances of letters of credit and a $20.0 million sublimit for swingline loans. As of October 2, 2011, all amounts outstanding under the Credit Facility were to

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mature and become due on October 18, 2014. On October 31, 2011, the Credit Agreement was amended to extend its maturity date to October 31, 2016 (see discussion below). As of October 2, 2011 and January 2, 2011, our total remaining borrowing availability under the Credit Agreement, after subtracting letters of credit, was $67.4 million and $90.9 million, respectively.

We may borrow under the Credit Facility from time to time, provided the amounts outstanding will not exceed the lesser of the then aggregate availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the "Loan Cap"). The "Borrowing Base" generally is comprised of the sum, at the time of calculation of (a) 90.00% of our eligible credit card accounts receivable; plus (b)(i) during the period of September 15 through December 15 of each year, the cost of our eligible inventory, net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible inventory (expressed as a percentage of the cost of eligible inventory); and
(ii) at all other times, the cost of our eligible inventory, net of inventory reserves, multiplied by 85.00% of the appraised net orderly liquidation value of eligible inventory (expressed as a percentage of the cost of eligible inventory); plus (c) the lesser of (i) the cost of our eligible in-transit inventory, net of inventory reserves, multiplied by 85.00% of the appraised net orderly liquidation value of our eligible in-transit inventory (expressed as a percentage of the cost of eligible in-transit inventory), or (ii) $10.0 million, minus (d) certain reserves established by Wells Fargo in its role as the Administrative Agent in its reasonable discretion.

Generally, we may designate specific borrowings under the Credit Facility as either base rate loans or LIBO rate loans. In each case, prior to the amendment dated October 31, 2011 (see discussion below), the applicable interest rate was a function of the daily average, over the preceding fiscal quarter, of the excess of the Loan Cap over amounts outstanding under the Credit Facility (such amount being referred to as the "Average Daily Excess Availability"). Those loans designated as LIBO rate loans shall bear interest at a rate equal to the then applicable LIBO rate plus an applicable margin as shown in the table below. Those loans designated as base rate loans shall bear interest at a rate equal to the applicable margin for base rate loans (as shown below) plus the highest of
(a) the Federal funds rate, as in effect from time to time, plus one-half of one percent (0.50%), (b) the LIBO rate, as adjusted to account for statutory reserves, plus one percent (1.00%), or (c) the rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its "prime rate." Prior to the amendment discussed below, the applicable margin for all loans was as set forth below as a function of Average Daily Excess Availability for the preceding fiscal quarter.

                                                                   LIBO Rate             Base Rate
                                                                   Applicable           Applicable
. . .
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