Throughout this section, the Big 5 Sporting Goods Corporation ("we", "our", "us") fiscal years ended December 30, 2012, January 1, 2012 and January 2, 2011 are referred to as fiscal 2012, 2011 and 2010, respectively. The following discussion and analysis of our financial condition and results of operations for fiscal 2012, 2011 and 2010 includes information with respect to our plans and strategies for our business and should be read in conjunction with the consolidated financial statements and related notes, the risk factors and the cautionary statement regarding forward-looking information included elsewhere in this Annual Report on Form 10-K.

Our fiscal year ends on the Sunday nearest December 31. Fiscal 2012, 2011 and 2010 each included 52 weeks.

Overview

We are a leading sporting goods retailer in the western United States, operating 414 stores in 12 states under the name "Big 5 Sporting Goods" at December 30, 2012. 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.

We believe that over our 58-year history we have developed a reputation with the competitive and recreational sporting goods customer as a convenient neighborhood sporting goods retailer that consistently delivers value on quality merchandise. Our stores carry a wide range of products at competitive prices from well-known brand name manufacturers, including adidas, Coleman, Easton, New Balance, Nike, Reebok, Spalding, Under Armour and Wilson. We also offer brand name merchandise produced exclusively for us, private label merchandise and specials on quality items we purchase through opportunistic buys of vendor over-stock and close-out merchandise. We reinforce our value reputation through weekly print advertising in major and local newspapers, direct mailers and digital marketing designed to generate customer traffic, drive net sales and build brand awareness. We also maintain social media sites to enhance distribution capabilities for our promotional offers and to enable communication with our customers.

Throughout our history, we have emphasized controlled growth. In fiscal 2012, we opened 14 new stores, three of which were relocations, and closed six stores, two of which were relocations. In fiscal 2011, we opened 13 new stores, two of which were relocations, and closed three stores as part of relocations that began in fiscal 2010. For fiscal 2013, we expect to open approximately 15 to 20 new stores, including three relocations, and to close approximately three relocated stores. The following table summarizes our store count for the periods presented:

                                                        Fiscal Year
                                            2012           2011           2010
        Big 5 Sporting Goods stores:
        Beginning of period                     406            398            384
        New stores(1)                            14             13             15
        Stores relocated                         (2 )           (5 )           (1 )
        Stores closed                            (4 )            -              -

        End of period                           414            406            398

        New stores opened per year, net           8              8             14

(1) Stores that are relocated are classified as new stores. Sales from the prior location are treated as sales from a closed store and thus are excluded from same store sales calculations.

Executive Summary

Our improved operating results for fiscal 2012 compared to fiscal 2011 were mainly attributable to our higher sales levels, including an increase in same store sales. We believe our higher sales largely reflect favorable customer response to changes in our merchandise offering and new marketing initiatives. We also believe our operating results for fiscal 2012, 2011 and 2010 continue to reflect challenging macroeconomic conditions in our markets resulting primarily from the lingering effects of the economic recession.

• Net sales for fiscal 2012 increased 4.3% to $940.5 million compared to fiscal 2011. The increase in net sales was primarily attributable to added revenue from new stores combined with increased same store sales of 2.5%.

• Net income for fiscal 2012 increased 27.8% to $14.9 million, or $0.69 per diluted share, compared to $11.7 million, or $0.53 per diluted share, for fiscal 2011. The increase was driven primarily by higher net sales, partially offset by the impact of lower merchandise margins, higher selling and administrative expense and higher income tax expense.

• Gross profit for fiscal 2012 represented 32.2% of net sales, compared with 32.3% in the prior year. Merchandise margins were 24 basis points lower than last year, partially offset by reduced store occupancy expense as a percentage of net sales.

• Selling and administrative expense for fiscal 2012 increased 1.6% to $276.8 million, or 29.4% of net sales, compared to $272.4 million, or 30.2% of net sales, for fiscal 2011. The increase was primarily attributable to higher store-related expense, excluding occupancy, as a result of new store openings and increased employee benefit costs.

• Operating income for fiscal 2012 increased 35.5% to $26.0 million, or 2.8% of net sales, compared to $19.2 million, or 2.1% of net sales, for fiscal 2011. The higher operating income primarily reflects higher net sales, partially offset by the impact of lower merchandise margins and higher selling and administrative expense.

Results of Operations

The following table sets forth selected items from our consolidated statements of operations by dollar and as a percentage of our net sales for the periods indicated:

                                                                     Fiscal Year
                                            2012(1)                    2011(1)                     2010(1)
                                                                (Dollars in thousands)
Statement of Operations Data:
Net sales(2)                         $ 940,490       100.0 %    $ 902,134       100.0 %     $ 896,813       100.0 %
Cost of sales(3)                       637,721        67.8        610,531        67.7         599,101        66.8

Gross profit(2)                        302,769        32.2        291,603        32.3         297,712        33.2
Selling and administrative
expense(2)(4)(5)(6)                    276,797        29.4        272,436        30.2         263,488        29.4

Operating income                        25,972         2.8         19,167         2.1          34,224         3.8
Interest expense                         2,202         0.3          2,561         0.3           2,108         0.2

Income before income taxes              23,770         2.5         16,606         1.8          32,116         3.6
Income taxes                             8,855         0.9          4,933         0.5          11,554         1.3

Net income(2)(5)(6)                  $  14,915         1.6 %    $  11,673         1.3 %     $  20,562         2.3 %

Other Financial Data:
Net sales change                                       4.3 %                      0.6 %                       0.1 %
Same store sales change(7)                             2.5 %                     (1.2 )%                      0.8 %
Net income change                                     27.8 %                    (43.2 )%                     (5.7 )%

(1) Fiscal 2012, 2011 and 2010 each included 52 weeks.

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

(4) 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.

(5) In fiscal 2012, we recorded a pre-tax charge related to store closing costs of $1.2 million. This charge was included in selling and administrative expense, and reduced net income in fiscal 2012 by $0.8 million, or $0.03 per diluted share.

(6) In fiscal 2012 and 2011, we recorded pre-tax non-cash impairment charges of $0.2 million and $2.1 million, respectively, related to certain underperforming stores. These impairment charges are included in selling and administrative expense, and reduced net income in fiscal 2012 and 2011 by $0.1 million, or $0.01 per diluted share, and $1.5 million, or $0.07 per diluted share, respectively.

(7) Same store sales for a period reflect net sales from stores operated throughout that period as well as the full corresponding prior year period.

Fiscal 2012 Compared to Fiscal 2011

Net Sales. Net sales increased by $38.4 million, or 4.3%, to $940.5 million for fiscal 2012 from $902.1 million for fiscal 2011. The change in net sales was primarily attributable to the following:

• Same store sales increased 2.5% for fiscal 2012 versus fiscal 2011. We believe our higher same store sales largely reflected favorable customer response to changes in our merchandise offering and new marketing initiatives, despite lower sales of winter merchandise as a result of unseasonably warm winter weather in the first quarter of fiscal 2012. Same store sales for a period reflect net sales from stores that operated throughout the period as well as the full corresponding prior year period.

• Added sales from new stores reflected the opening of 27 new stores since January 2, 2011, partially offset by a reduction in closed store sales.

• Net sales for fiscal 2012 continued to be impacted by the economic recession. While we experienced decreased customer transactions in our retail stores in fiscal 2012 when compared with fiscal 2011, the average sale per transaction increased primarily as a result of changes in our sales mix and merchandise offering.

Store count at the end of fiscal 2012 was 414 versus 406 at the end of fiscal 2011. We opened 14 new stores, three of which were relocations, and closed six stores, two of which were relocations, in fiscal 2012. For fiscal 2013, we expect to open approximately 15 to 20 new stores, including three relocations, and to close approximately three relocated stores.

Gross Profit. Gross profit increased by $11.2 million to $302.8 million in fiscal 2012 from $291.6 million in fiscal 2011. Gross profit as a percentage of net sales in fiscal 2012 was 32.2% compared with 32.3% during the prior year. The change in gross profit was primarily attributable to the following:

• Net sales increased by $38.4 million in fiscal 2012 compared to the prior year.

• Merchandise margins, which exclude buying, occupancy and distribution costs, decreased for fiscal 2012 by 24 basis points versus fiscal 2011, primarily reflecting a sales mix shift away from higher margin winter product categories in the first quarter of fiscal 2012, combined with product cost inflation.

• Store occupancy costs for fiscal 2012 increased by $2.6 million year over year due primarily to the increase in store count. Store occupancy costs as a percentage of net sales in fiscal 2012 decreased by seven basis points compared with fiscal 2011.

• Distribution costs increased $1.5 million primarily resulting from lower costs capitalized into inventory and higher distribution center labor and employee benefit-related costs, partially offset by lower trucking expense. Distribution costs as a percentage of net sales in fiscal 2012 decreased by two basis points compared with fiscal 2011.

Selling and Administrative Expense. Selling and administrative expense increased by $4.4 million, or 1.6%, to $276.8 million, or 29.4% of net sales, in fiscal 2012 from $272.4 million, or 30.2% of net sales, in fiscal 2011. The change in selling and administrative expense was primarily attributable to the following:

• Store-related expense, excluding occupancy, increased by $3.0 million due primarily to higher labor and operating costs to support the increase in store count, increased employee benefit-related costs and higher public liability claim-related costs, partially offset by lower debit card fees.

• Advertising expense for fiscal 2012 decreased by $1.7 million, due primarily to lower newspaper advertising, partially offset by increases in digital marketing programs and other advertising to support sales.

• Administrative expense for fiscal 2012 included a pre-tax charge of $1.2 million related to store closing costs, and a pre-tax non-cash impairment charge of $0.2 million related to certain underperforming stores. Administrative expense for fiscal 2011 included a pre-tax non-cash impairment charge of $2.1 million related to certain underperforming stores. These charges are further discussed in Notes 4 and 5 to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Interest Expense. Interest expense decreased by $0.4 million, or 14.0%, to $2.2 million in fiscal 2012 from $2.6 million in fiscal 2011. The decrease in interest expense reflects the combined impact of a decrease in average interest rates of 30 basis points, to 2.2% in fiscal 2012 from 2.5% in fiscal 2011, due mainly to lower applicable margins under our amended credit agreement, as well as a decrease in average debt levels of $1.3 million to $66.2 million in fiscal 2012 from $67.5 million in fiscal 2011.

Income Taxes. The provision for income taxes was $8.9 million for fiscal 2012 compared with $4.9 million for fiscal 2011. This increase was primarily due to higher pre-tax income and a higher effective tax rate in fiscal 2012. Our effective tax rate was 37.3% for fiscal 2012 compared with 29.7% for fiscal 2011. Our higher effective tax rate for fiscal 2012 compared to the prior year primarily reflects the expiration of previously enacted legislation that resulted in the loss of certain tax credits in fiscal 2012 that were previously available in fiscal 2011, combined with higher pre-tax income in fiscal 2012.

Fiscal 2011 Compared to Fiscal 2010

Net Sales. Net sales increased by $5.3 million, or 0.6%, to $902.1 million for fiscal 2011 from $896.8 million for fiscal 2010. The change in net sales was primarily attributable to the following:

• Added sales from new stores reflected the opening of 28 new stores since January 3, 2010. The revenue from new store sales was partially offset by a reduction in same store and closed store sales.

• Same store sales decreased 1.2% for fiscal 2011 versus fiscal 2010. Same store sales for a period reflect net sales from stores that operated throughout the period as well as the full corresponding prior year period.

• Net sales for fiscal 2011 continued to be impacted by the economic recession, and we experienced decreased customer transactions in our retail stores when compared with fiscal 2010.

• Net sales for fiscal 2010 reflected a net pre-tax charge of $0.8 million for a legal settlement accrual that was classified as a reduction of net sales.

Store count at the end of fiscal 2011 was 406 versus 398 at the end of fiscal 2010. In fiscal 2011, we opened 13 new stores, including two relocations, and closed three stores as part of relocations that began in fiscal 2010.

Gross Profit. Gross profit decreased by $6.1 million to $291.6 million in fiscal 2011 from $297.7 million in fiscal 2010. Gross profit as a percentage of net sales in fiscal 2011 was 32.3% compared with 33.2% in fiscal 2010. The change in gross profit was primarily attributable to the following:

• Merchandise margins, which exclude buying, occupancy and distribution costs, decreased for fiscal 2011 by 74 basis points versus fiscal 2010, primarily reflecting the impact of product cost inflation, increased promotional activities to stimulate sales and a sales mix shift away from higher margin winter product categories during the fourth quarter as a result of unseasonably warm weather.

• Store occupancy costs for fiscal 2011 increased by $1.4 million, or 11 basis points, year over year, due primarily to the increase in store count.

• Net sales increased by $5.3 million in fiscal 2011 compared to fiscal 2010.

Selling and Administrative Expense. Selling and administrative expense increased by $8.9 million, or 3.4%, to $272.4 million, or 30.2% of net sales, in fiscal 2011 from $263.5 million, or 29.4% of net sales, in fiscal 2010. The change in selling and administrative expense was primarily attributable to the following:

• Store-related expense, excluding occupancy, increased by $6.8 million, or 65 basis points, due primarily to higher labor and operating costs to support the increase in store count and increased employee benefit costs.

• Advertising expense for fiscal 2011 increased by $2.7 million, due primarily to an increase in newspaper advertising, digital marketing and other advertising to support sales.

• Administrative expense for fiscal 2011 included a pre-tax non-cash impairment charge of $2.1 million related to certain underperforming stores. Administrative expense in fiscal 2010 reflected a net pre-tax charge for a legal settlement accrual of $1.5 million.

Interest Expense. Interest expense increased by $0.5 million, or 21.4%, to $2.6 million in fiscal 2011 from $2.1 million in fiscal 2010. The increase in interest expense primarily reflected an increase in average debt levels of approximately $7.5 million to $67.5 million in fiscal 2011 from $60.0 million in fiscal 2010, combined with an increase in average interest rates of approximately 40 basis points to 2.5% during fiscal 2011 from 2.1% in fiscal 2010. The increase in average interest rates was due mainly to higher applicable margins under our current credit agreement as compared to our prior credit agreement. Interest expense in fiscal 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 credit agreement.

Income Taxes. The provision for income taxes was $4.9 million for fiscal 2011 compared with $11.6 million for fiscal 2010. This decrease was primarily due to lower pre-tax income in fiscal 2011 compared to fiscal 2010. Our effective tax rate was 29.7% for fiscal 2011 compared with 36.0% for fiscal 2010. Our lower effective tax rate for fiscal 2011 compared to fiscal 2010 primarily reflected the impact of higher income tax credits for fiscal 2011 relative to lower pre-tax income.

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 and cash equivalents 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 fiscal 2012 with $7.6 million of cash and cash equivalents compared with $4.9 million in fiscal 2011. After increasing our long-term debt by $15.2 million, or 31.4%, during fiscal 2011, we decreased our long-

term debt by $16.0 million, or 25.2%, during fiscal 2012 to $47.5 million from $63.5 million at the end of fiscal 2011. The following table summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years:

                                                                Fiscal Year
                                                  2012             2011              2010
                                                               (In thousands)
Total cash provided by (used in):
Operating activities                            $  39,604        $   2,218        $   29,867
Investing activities                              (12,650 )        (11,988 )         (15,624 )
Financing activities                              (24,219 )          9,050           (14,388 )

Net increase (decrease) in cash and cash
equivalents                                     $   2,735        $    (720 )      $     (145 )

The seasonality of our business historically provides greater cash flows from operations during the holiday and winter selling season. Typically, we use operating cash flows and borrowings under our revolving credit facility to fund inventory increases in anticipation of the holidays and our inventory levels are at their highest in the months leading up to Christmas. As holiday sales significantly reduce inventory levels, this reduction, combined with net income, historically provides us with strong cash flows from operations at the end of our fiscal year.

For fiscal 2012, we increased inventory purchases in the months leading up to Christmas, resulting in a higher accounts payable balance at year-end compared to fiscal 2011. Additionally, improved net sales and net income in fiscal 2012 compared with fiscal 2011 contributed to higher operating cash flows which allowed us to significantly pay down debt balances year over year.

For fiscal 2011, we strategically increased merchandise inventory levels to add certain new products to stimulate sales and also purchased inventory earlier in the year to mitigate the impact of product cost inflation and potential delivery delays. Reduced inventory purchases in the fourth quarter of fiscal 2011 resulted in lower accounts payable as a percentage of inventory. Also, weaker than anticipated sales during fiscal 2011, particularly in the fourth quarter, resulted in higher inventory levels and reduced operating cash flows for the year, contributing to higher debt balances year over year.

For fiscal 2010, we purchased larger quantities of inventory primarily in anticipation of improving business conditions and as a result of increased availability of certain products. The higher inventory levels combined with lower than anticipated sales in the fourth quarter of fiscal 2010 resulted in reduced operating cash flows for the year as compared to the prior year.

Operating Activities. Net cash provided by operating activities for fiscal 2012, 2011 and 2010 was $39.6 million, $2.2 million and $29.9 million, respectively. The increase in cash provided by operating activities for fiscal 2012 compared to fiscal 2011 primarily reflected higher accounts payable year over year due mainly to the timing of inventory purchases. Inventory purchases were higher in the fourth quarter of fiscal 2012 compared to the fourth quarter of fiscal 2011, which resulted in a higher accounts payable balance at the end of fiscal 2012. Also contributing to the improved operating cash flow in fiscal 2012 over the prior year was a smaller increase in inventory, higher net income and increased accrued expenses related primarily to employee benefit-related accruals and a liability for store closings. The decrease in cash provided by operating activities for fiscal 2011 compared to fiscal 2010 primarily reflected higher funding of merchandise inventory along with the timing of inventory purchases and payments, as well as lower net income and accrued expenses, primarily for legal settlements.

Investing Activities. Net cash used in investing activities for fiscal 2012, 2011 and 2010 was $12.7 million, $12.0 million and $15.6 million, respectively. In fiscal 2012 and 2011, we received proceeds of $0.3 million and

$0.5 million, respectively, as part of a local utility rebate program related to the implementation of a green energy system at our distribution center, and in fiscal 2011 we received proceeds of $0.5 million from the sale of owned real property. Our capital spending is primarily for new store openings, store-related remodeling, distribution center and corporate headquarters' costs and computer hardware and software purchases. Capital expenditures by category for each of the last three fiscal years are as follows:

                                                           Fiscal Year
                                                2012           2011           2010
                                                          (In thousands)
     New stores                              $    7,076     $    7,108     $    9,773
     Store-related remodels                       3,703          3,749          3,888
     Distribution center                            536          1,127          1,487
     Computer hardware, software and other        1,586          1,006            480

     Total                                   $   12,901     $   12,990     $   15,628

Our capital expenditures included 14 new stores in fiscal 2012; 13 new stores in fiscal 2011; and 15 new stores in fiscal 2010. Capital expenditures in fiscal 2012, 2011 and 2010 also included amounts related to our computer system replacement program as well as enhanced security measures to support our infrastructure.

Financing Activities. Net cash used in financing activities for fiscal 2012 and 2010 was $24.2 million and $14.4 million, respectively, and net cash provided by financing activities for fiscal 2011 was $9.1 million. For fiscal 2012, we used cash provided from operating activities to pay down borrowings from our revolving credit facility, pay dividends, make capital lease payments and purchase treasury stock. For fiscal 2011, cash provided by financing activities primarily reflected increased borrowings under our revolving credit facility, partially offset by dividend payments and capital lease payments. Borrowings under our revolving credit facility for fiscal 2011 were largely used to fund merchandise inventory purchases. For fiscal 2010, we used cash provided from operating activities to pay down borrowings from our revolving credit facility, pay dividends and make capital lease payments.

As of December 30, 2012, we had revolving credit borrowings of $47.5 million and letter of credit commitments of $4.3 million outstanding. These balances compare to borrowings of $63.5 million and letter of credit commitments of $3.7 million outstanding as of January 1, 2012.

Our revolving credit facility balances have historically increased from the end . . .