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BGFV > SEC Filings for BGFV > Form 10-Q on 1-May-2013All Recent SEC Filings

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Form 10-Q for BIG 5 SPORTING GOODS CORP


1-May-2013

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 December 30, 2012.

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 March 31, 2013. 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, winter and summer recreation and roller sports.

Executive Summary

Our improved operating results for the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 were mainly attributable to our higher sales levels, including an increase in same store sales of 10.5%. We believe our higher sales largely reflect favorable customer response to changes in our merchandise offering and new marketing initiatives, higher demand for firearm and ammunition products, and improved sales of winter merchandise as a result of more favorable weather this year.

Net sales for the first quarter of fiscal 2013 increased 12.7% to $246.3 million compared to $218.5 million for the first quarter of fiscal 2012. The increase in net sales was primarily attributable to an increase in same store sales of 10.5% as well as added sales from new stores, partially offset by a reduction in closed store sales. Net sales comparisons year over year were negatively impacted by the calendar shift of the Easter holiday, during which our stores are closed, out of the second quarter and into the first quarter of this year. 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 income for the first quarter of fiscal 2013 increased to $7.5 million, or $0.34 per diluted share, compared to $0.2 million, or $0.01 per diluted share, for the first quarter of fiscal 2012. The increase in net income was driven primarily by higher net sales and higher merchandise margins resulting in higher gross profit, partially offset by increased selling and administrative expense.

Gross profit for the first quarter of fiscal 2013 represented 32.7% of net sales, compared with 30.9% in the same quarter of the prior year. Merchandise margins were 113 basis points higher than the same period last year, combined with reduced store occupancy and distribution costs as a percentage of net sales.

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Selling and administrative expense for the first quarter of fiscal 2013 increased 2.0% to $67.9 million compared to $66.6 million for the first quarter of fiscal 2012, but decreased as a percentage of net sales to 27.6% for the first quarter of fiscal 2013 compared to 30.5% for the same period last year. The increase in selling and administrative expense was primarily attributable to increased labor and employee benefit-related costs and higher store-related expense as a result of new store openings.

Operating income for the first quarter of fiscal 2013 increased to $12.5 million, or 5.1% of net sales, compared to $0.8 million, or 0.4% of net sales, for the first quarter of fiscal 2012. The increased operating income reflects higher net sales and higher merchandise margins resulting in higher gross profit, partially offset by increased 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 March 31, 2013 Compared to 13 Weeks Ended April 1, 2012

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
                                              March 31, 2013              April 1, 2012
                                                  (In thousands, except percentages)
  Net sales                                $ 246,266       100.0 %    $ 218,496       100.0 %
  Cost of sales (1)                          165,791        67.3        151,068        69.1

  Gross profit                                80,475        32.7         67,428        30.9
  Selling and administrative expense (2)      67,928        27.6         66,585        30.5

  Operating income                            12,547         5.1            843         0.4
  Interest expense                               453         0.2            600         0.3

  Income before income taxes                  12,094         4.9            243         0.1
  Income taxes                                 4,580         1.8             87         0.0

  Net income                               $   7,514         3.1 %    $     156         0.1 %

(1) 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.

(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.

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Net Sales. Net sales increased by $27.8 million, or 12.7%, to $246.3 million in the 13 weeks ended March 31, 2013 from $218.5 million in the comparable period last year. The change in net sales reflected the following:

Same store sales increased by $22.6 million, or 10.5%, for the 13 weeks ended March 31, 2013, versus the comparable 13-week period in the prior year. We believe our higher same store sales largely reflected favorable customer response to changes in our merchandise offering and new marketing initiatives, higher demand for firearm and ammunition products, and improved sales of winter merchandise as a result of more favorable weather this year compared to unseasonably warm winter weather experienced 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 15 new stores since January 1, 2012, partially offset by a reduction in closed store sales.

We experienced increased customer transactions in our retail stores and the average sale per transaction increased in the first quarter of fiscal 2013 compared to the same period last year.

Net sales comparisons year over year were negatively impacted by the calendar shift of the Easter holiday, during which our stores are closed, out of the second quarter and into the first quarter of this year.

Store count at March 31, 2013 was 414 versus 407 at April 1, 2012. We opened one new store and closed one store, which was a relocation, in the 13 weeks ended March 31, 2013. We opened one new store, which was a relocation, in the 13 weeks ended April 1, 2012. For fiscal 2013, we expect to open 15 to 20 net new stores.

Gross Profit. Gross profit increased by $13.1 million, or 19.4%, to $80.5 million, or 32.7% of net sales, in the 13 weeks ended March 31, 2013 from $67.4 million, or 30.9% of net sales, in the 13 weeks ended April 1, 2012. The change in gross profit was primarily attributable to the following:

Net sales increased $27.8 million, or 12.7%, year over year in the first quarter of fiscal 2013.

Merchandise margins, which exclude buying, occupancy and distribution costs, increased 113 basis points versus the first quarter last year, when merchandise margins decreased 156 basis points versus the first quarter of fiscal 2011. The improvement in the first quarter of fiscal 2013 primarily reflected a sales mix shift to higher-margin winter product categories as a result of favorable winter weather in the first quarter of fiscal 2013 compared with the same period in fiscal 2012.

Store occupancy costs increased by $0.6 million year over year in the first quarter of fiscal 2013 due primarily to the increase in store count. Store occupancy costs decreased 76 basis points as a percentage of net sales.

Distribution costs increased $1.0 million primarily from lower costs capitalized into inventory and higher labor expense. Distribution costs decreased 7 basis points as a percentage of net sales.

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Selling and Administrative Expense. Selling and administrative expense increased by $1.3 million to $67.9 million in the 13 weeks ended March 31, 2013 from $66.6 million in the same period last year. Selling and administrative expense as a percentage of net sales decreased 289 basis points to 27.6% in the 13 weeks ended March 31, 2013 from 30.5% in the same period last year. The increase in selling and administrative expense compared to the prior year was primarily attributable to higher employee labor and benefit-related costs, higher credit card fees reflecting higher net sales levels and higher operating costs to support the increase in store count, partially offset by a reduction in print advertising costs.

Interest Expense. Interest expense decreased by $0.1 million to $0.5 million in the 13 weeks ended March 31, 2013 compared to the first quarter last year. The decrease in interest expense reflected a decrease in average debt levels of $28.1 million to $41.6 million in the first quarter of fiscal 2013 from $69.7 million in the same period last year. Additionally, average interest rates declined 10 basis points, to 2.3% in the first quarter of fiscal 2013 from 2.4% in the prior year.

Income Taxes. The provision for income taxes was $4.6 million for the 13 weeks ended March 31, 2013 and $0.1 million for the 13 weeks ended April 1, 2012. Our effective tax rate was 37.9% for the first quarter of fiscal 2013 compared with 35.8% for the first quarter of fiscal 2012. The increased effective tax rate for the first quarter of fiscal 2013 compared to the same period in fiscal 2012 primarily reflected lower overall income tax credits combined with higher pre-tax income in the current year. The increased effective rate was partially offset by the retroactive reinstatement of the work opportunity tax credit ("WOTC") for 2012, which resulted from enactment of The American Taxpayer Relief Act of 2012. Reinstatement of the WOTC reduced the effective tax rate by 137 basis points in the first quarter of fiscal 2013.

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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 the first quarter of fiscal 2013 with $5.4 million of cash and cash equivalents compared with $5.6 million at the end of the same period in fiscal 2012. Our cash flows from operating, investing and financing activities are summarized as follows:

                                                              13 Weeks Ended
                                                         March 31,       April 1,
                                                            2013           2012
                                                              (In thousands)
  Net cash provided by (used in):
  Operating activities                                   $   23,783      $  11,387
  Investing activities                                       (3,219 )       (1,602 )
  Financing activities                                      (22,842 )       (9,122 )

  Net (decrease) increase in cash and cash equivalents   $   (2,278 )    $     663

Operating Activities. Net cash provided by operating activities for the 13 weeks ended March 31, 2013 and April 1, 2012 was $23.8 million and $11.4 million, respectively. The increase in cash flow from operating activities for the 13 weeks ended March 31, 2013 compared to the same period last year primarily reflects higher net income year over year as a result of improved sales and a reduction in accounts receivable related primarily to collections of credit card receivables.

Investing Activities. Net cash used in investing activities for the 13 weeks ended March 31, 2013 and April 1, 2012 was $3.2 million and $1.6 million, respectively. Capital expenditures, excluding non-cash property and equipment acquisitions, represented all of the cash used in investing activities for both periods. The higher capital expenditures in the current year reflect an increased investment in existing store remodeling.

Financing Activities. Net cash used in financing activities for the 13 weeks ended March 31, 2013 and April 1, 2012 was $22.8 million and $9.1 million, respectively. In the first quarter of fiscal 2013 and 2012, net cash was used primarily to pay down borrowings under our revolving credit facility and pay dividends. In the first quarter of fiscal 2012, net cash was also used to repurchase stock.

As of March 31, 2013, we had revolving credit borrowings of $31.9 million and letter of credit commitments of $4.0 million outstanding. These balances compare to revolving credit borrowings of $47.5 million and letter of credit commitments of $4.3 million outstanding as of December 30, 2012 and revolving credit borrowings of $60.2 million and letter of credit commitments of $3.6 million outstanding as of April 1, 2012. The decrease in revolving credit borrowings at the end of the first quarter of fiscal 2013 compared to the same period last year primarily reflects our ability to pay down debt using cash flow generated from operating activities.

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Quarterly cash dividends of $0.075 per share of outstanding common stock, for an annual rate of $0.30 per share, were paid in fiscal 2012. In the first quarter of fiscal 2013, our Board of Directors declared a quarterly cash dividend of $0.10 per share of outstanding common stock, for an annual rate of $0.40 per share, which was paid on March 22, 2013. In the second quarter of fiscal 2013, our Board of Directors declared a quarterly cash dividend of $0.10 per share of outstanding common stock, which will be paid on June 14, 2013 to stockholders of record as of May 31, 2013.

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 and alternative cash requirements. In the first quarter of fiscal 2013 we did not repurchase any shares of our common stock. Since the inception of our initial share repurchase program in May 2006 through March 31, 2013, we have repurchased a total of 1,927,626 shares for $25.4 million, leaving a total of $9.6 million available for share repurchases under our current share repurchase program.

Credit Agreement. On October 18, 2010, we entered into a credit agreement with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and a syndicate of other lenders, which was amended on October 31, 2011 (as so amended, the "Credit Agreement"). The maturity date of the Credit Agreement is October 31, 2016.

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.

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

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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, the applicable interest rate is 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." The applicable margin for all loans is as set forth below as a function of Average Daily Excess Availability for the preceding fiscal quarter.

                                                       LIBO Rate    Base Rate
                                                       Applicable   Applicable
        Level    Average Daily Excess Availability       Margin       Margin
          I     Greater than or equal to $70,000,000     1.50%        0.50%
         II     Greater than or equal to $40,000,000     1.75%        0.75%
         III           Less than $40,000,000             2.00%        1.00%

As of March 31, 2013 and December 30, 2012, our total remaining borrowing availability under the Credit Agreement, after subtracting letters of credit, was $104.1 million and $88.2 million, respectively.

The Credit Agreement provides for a commitment fee of 0.375% per annum to be assessed on the unused portion of the Credit Facility.

Obligations under the Credit Facility are secured by a general lien and perfected security interest in substantially all of our assets. Our Credit Agreement contains covenants that require us to maintain a fixed charge coverage ratio of not less than 1.0:1.0 in certain circumstances, and limit our ability to, among other things, incur liens, incur additional indebtedness, transfer or dispose of assets, change the nature of the business, guarantee obligations, pay dividends or make other distributions or repurchase stock, and make advances, loans or investments. We may declare or pay cash dividends or repurchase stock only if, among other things, no default or event of default then exists or would arise from such dividend or repurchase of stock and, after giving effect to such dividend or repurchase, certain availability and/or fixed charge coverage ratio requirements are satisfied. The Credit Agreement contains customary events of default, including, without limitation, failure to pay when due principal amounts with respect to the Credit Facility, failure to pay any interest or other amounts under the Credit Facility for five days after becoming due, failure to comply with certain agreements or covenants contained in the Credit Agreement, failure to satisfy certain judgments against us, failure to pay when due (or any other default which does or may lead to the acceleration of) certain other material indebtedness in principal amount in excess of $5.0 million, and certain insolvency and bankruptcy events.

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Future Capital Requirements. We had cash on hand of $5.4 million as of March 31, 2013. We expect capital expenditures for fiscal 2013, excluding non-cash acquisitions, to range from approximately $18.0 million to $22.0 million, primarily to fund the opening of new stores, store-related remodeling, distribution center equipment and computer hardware and software purchases. For fiscal 2013, we expect to open approximately 15 to 20 net new stores.

Quarterly cash dividends of $0.075 per share of outstanding common stock, for an annual rate of $0.30 per share, were paid in fiscal 2012. In the first quarter of fiscal 2013, our Board of Directors declared a quarterly cash dividend of $0.10 per share of outstanding common stock, for an annual rate of $0.40 per share, which was paid on March 22, 2013. In the second quarter of fiscal 2013, our Board of Directors declared a quarterly cash dividend of $0.10 per share of outstanding common stock, which will be paid on June 14, 2013 to stockholders of record as of May 31, 2013.

As of March 31, 2013, a total of $9.6 million remained available for share repurchases under our share repurchase program. We consider several factors in determining when and if we make share repurchases including, among other things, our alternative cash requirements, existing business conditions and the market price of our stock.

We believe we will be able to fund our cash requirements, for at least the next 12 months, from cash and cash equivalents on hand, operating cash flows and borrowings from our revolving credit facility. However, our ability to satisfy our cash requirements depends upon our future performance, which in turn is subject to general economic conditions and regional risks, and to financial, business and other factors affecting our operations, including factors beyond our control. There is no assurance that we will be able to generate sufficient cash flows or that we will be able to maintain our ability to borrow under our revolving credit facility.

If we are unable to generate sufficient cash flows from operations to meet our obligations and commitments, or if we are unable to maintain our ability to borrow sufficient amounts under our Credit Agreement, we will be required to refinance or restructure our indebtedness or raise additional debt or equity capital. Additionally, we may be required to sell material assets or operations, suspend or reduce dividend payments or delay or forego expansion opportunities. We might not be able to implement successful alternative strategies on satisfactory terms, if at all.

Off-Balance Sheet Arrangements and Contractual Obligations. Our material off-balance sheet arrangements are operating lease obligations and letters of credit. We excluded these items from the balance sheet in accordance with accounting principles generally accepted in the United States of America.

Operating lease commitments consist principally of leases for our retail store facilities, distribution center and corporate office locations. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term. With respect to most of those leases, we intend to renegotiate those leases as they expire.

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Our material contractual obligations include capital lease obligations, borrowings under our Credit Facility, certain occupancy costs related to our leased properties and other liabilities. Capital lease obligations, which include imputed interest, consist principally of leases for some of our distribution center delivery tractors, management information systems hardware and point-of-sale equipment for our stores. Our Credit Facility debt fluctuates daily depending on operating, investing and financing cash flows. Other occupancy costs include estimated property maintenance fees and property taxes for our stores, distribution center and corporate headquarters. Other liabilities consist principally of actuarially-determined reserve estimates related to self-insurance liabilities, a contractual obligation for the surviving spouse of Robert W. Miller, our co-founder, asset retirement obligations related to the removal and retirement of leasehold improvements for certain stores upon termination of their leases, and an obligation for remaining lease rental payments related to the closure of certain underperforming stores.

Issued and outstanding letters of credit were $4.0 million at March 31, 2013, and were related primarily to securing insurance program liabilities.

Included in the Liquidity and Capital Resources section of Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of . . .

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