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BGFV > SEC Filings for BGFV > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for BIG 5 SPORTING GOODS CORP

Form 10-Q for BIG 5 SPORTING GOODS CORP


31-Jul-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 416 stores in 12 states under the name "Big 5 Sporting Goods" at June 30, 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 second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 were mainly attributable to our higher sales levels, including an increase in same store sales of 4.4%. We believe our higher sales continue to reflect favorable customer response to changes in our merchandise offering and new marketing initiatives, as well as continued higher demand for firearm and ammunition products.

Net sales for the second quarter of fiscal 2013 increased 5.9% to $239.9 million compared to $226.6 million for the second quarter of fiscal 2012. The increase in net sales was primarily attributable to an increase in same store sales of 4.4% as well as added sales from new stores, partially offset by a reduction in closed store sales. Net sales comparisons year over year were favorably 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. This benefit was partially offset by the impact of the calendar shift of the Fourth of July holiday further into the third quarter this year, which resulted in certain holiday-related sales moving from the second quarter to the third quarter. 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 second quarter of fiscal 2013 increased to $6.1 million, or $0.28 per diluted share, compared to $2.6 million, or $0.12 per diluted share, for the second 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 second quarter of fiscal 2013 represented 33.2% of net sales, compared with 32.2% in the same quarter of the prior year. The improvement in gross

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profit resulted from an increase in merchandise margins of 34 basis points compared with the same period last year, combined with reduced store occupancy and distribution expense as a percentage of net sales.

Selling and administrative expense for the second quarter of fiscal 2013 increased 0.9% to $69.2 million compared to $68.6 million for the second quarter of fiscal 2012, but decreased as a percentage of net sales to 28.8% for the second quarter of fiscal 2013 compared to 30.3% for the same period last year. The increase in selling and administrative expense was primarily attributable to increased employee labor and benefit-related expense and higher store-related expense as a result of new store openings.

Operating income for the second quarter of fiscal 2013 increased to $10.5 million, or 4.4% of net sales, compared to $4.5 million, or 1.9% of net sales, for the second quarter of fiscal 2012. The increased operating income primarily reflected 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 June 30, 2013 Compared to 13 Weeks Ended July 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
                                               June 30, 2013              July 1, 2012
                                                  (In thousands, except percentages)
  Net sales                                $ 239,899       100.0 %    $ 226,612       100.0 %
  Cost of sales (1)                          160,226        66.8        153,536        67.8

  Gross profit                                79,673        33.2         73,076        32.2
  Selling and administrative expense (2)      69,180        28.8         68,591        30.3

  Operating income                            10,493         4.4          4,485         1.9
  Interest expense                               418         0.2            576         0.2

  Income before income taxes                  10,075         4.2          3,909         1.7
  Income taxes                                 3,971         1.7          1,351         0.6

  Net income                               $   6,104         2.5 %    $   2,558         1.1 %

(1) Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution center expense and store occupancy expense. Store occupancy expense includes 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 expense, 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 $13.3 million, or 5.9%, to $239.9 million in the 13 weeks ended June 30, 2013 from $226.6 million in the comparable period last year. The change in net sales reflected the following:

Same store sales increased by $9.9 million, or 4.4%, for the 13 weeks ended June 30, 2013, versus the comparable 13-week period in the prior year. We believe our higher same store sales reflected favorable customer response to changes in our merchandise offering and new marketing initiatives, as well as continued higher demand for firearm and ammunition products. 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 16 new stores since April 1, 2012, partially offset by a reduction in closed store sales.

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

Net sales comparisons year over year were favorably impacted by the calendar shift of the Easter holiday, during which our stores are closed, out of the second fiscal quarter and into the first fiscal quarter of this year. This benefit was partially offset by the impact of the calendar shift of the Fourth of July holiday further into the third quarter this year, which resulted in certain holiday-related sales moving from the second quarter to the third quarter.

Store count at June 30, 2013 was 416 versus 407 at July 1, 2012. We opened two new stores, one of which was a relocation, in the 13 weeks ended June 30, 2013. We opened three new stores, one of which was a relocation, and closed three stores, one of which was a relocation, in the 13 weeks ended July 1, 2012. For fiscal 2013, we expect to open approximately 15 net new stores.

Gross Profit. Gross profit increased by $6.6 million, or 9.0%, to $79.7 million, or 33.2% of net sales, in the 13 weeks ended June 30, 2013 from $73.1 million, or 32.2% of net sales, in the 13 weeks ended July 1, 2012. The change in gross profit was primarily attributable to the following:

Net sales increased $13.3 million, or 5.9%, year over year in the second quarter of fiscal 2013.

Merchandise margins, which exclude buying, occupancy and distribution expense, increased 34 basis points versus the second quarter last year.

Distribution expense decreased $0.3 million, or 34 basis points, primarily resulting from lower depreciation expense and lower trucking expense compared with the same period last year.

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Store occupancy expense increased by $0.6 million year over year in the second quarter of fiscal 2013 due primarily to the increase in store count. Store occupancy expense decreased 22 basis points as a percentage of net sales.

Selling and Administrative Expense. Selling and administrative expense increased by $0.6 million to $69.2 million in the 13 weeks ended June 30, 2013 from $68.6 million in the same period last year. Selling and administrative expense as a percentage of net sales decreased 150 basis points to 28.8% in the 13 weeks ended June 30, 2013 from 30.3% in the same period last year. The increase in overall selling and administrative expense compared to the prior year was primarily attributable to higher employee labor and benefit-related expense, higher credit card fees reflecting higher net sales levels and higher operating expense to support the increase in store count, partially offset by a reduction in public liability claims expense. In the second quarter of fiscal 2012, we recorded pre-tax charges of $0.7 million related to store closing costs and $0.2 million related to impairment of certain underperforming stores.

Interest Expense. Interest expense decreased by $0.2 million to $0.4 million in the 13 weeks ended June 30, 2013 compared to the second quarter last year. The decrease in interest expense reflected a decrease in average debt levels of $29.8 million to $37.7 million in the second quarter of fiscal 2013 from $67.5 million in the same period last year. Additionally, average interest rates declined 20 basis points, to 2.0% in the second quarter of fiscal 2013 from 2.2% in the prior year.

Income Taxes. The provision for income taxes was $4.0 million for the 13 weeks ended June 30, 2013 and $1.4 million for the 13 weeks ended July 1, 2012. Our effective tax rate was 39.4% for the second quarter of fiscal 2013 compared with 34.6% for the second quarter of fiscal 2012. The increased effective tax rate for the second quarter of fiscal 2013 compared to the same period in fiscal 2012 primarily reflected higher pre-tax income combined with lower overall income tax credits for the current year.

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26 Weeks Ended June 30, 2013 Compared to 26 Weeks Ended July 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:



                                                            26 Weeks Ended
                                               June 30, 2013              July 1, 2012
                                                  (In thousands, except percentages)
  Net sales                                $ 486,165       100.0 %    $ 445,108       100.0 %
  Cost of sales (1)                          326,017        67.1        304,604        68.4

  Gross profit                               160,148        32.9        140,504        31.6
  Selling and administrative expense (2)     137,108        28.2        135,176        30.4

  Operating income                            23,040         4.7          5,328         1.2
  Interest expense                               871         0.2          1,176         0.3

  Income before income taxes                  22,169         4.5          4,152         0.9
  Income taxes                                 8,551         1.7          1,438         0.3

  Net income                               $  13,618         2.8 %    $   2,714         0.6 %

(1) Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution center expense and store occupancy expense. Store occupancy expense includes 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 expense, 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 $41.1 million, or 9.2%, to $486.2 million in the 26 weeks ended June 30, 2013 from $445.1 million in the comparable period last year. The change in net sales reflected the following:

Same store sales increased by $32.5 million, or 7.4%, for the 26 weeks ended June 30, 2013, versus the comparable 26-week period in the prior year. We believe our higher same store sales reflected favorable customer response to changes in our merchandise offering and new marketing initiatives, continued higher demand for firearm and ammunition products, and improved sales of winter merchandise in this year's first fiscal quarter as a result of more favorable weather 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 17 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 half of fiscal 2013 compared to the same period last year.

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Store count at June 30, 2013 was 416 versus 407 at July 1, 2012. We opened three new stores, one of which was a relocation, and closed one store, which was a relocation, in the 26 weeks ended June 30, 2013. We opened four new stores, two of which were relocations, and closed three stores, one of which was a relocation, in the 26 weeks ended July 1, 2012. For fiscal 2013, we expect to open approximately 15 net new stores.

Gross Profit. Gross profit increased by $19.6 million, or 14.0%, to $160.1 million, or 32.9% of net sales, in the 26 weeks ended June 30, 2013 from $140.5 million, or 31.6% of net sales, in the 26 weeks ended July 1, 2012. The change in gross profit was primarily attributable to the following:

Net sales increased $41.1 million, or 9.2%, year over year in the first half of fiscal 2013.

Merchandise margins, which exclude buying, occupancy and distribution expense, increased 73 basis points versus the first half of last year, when merchandise margins decreased 71 basis points versus the first half of fiscal 2011. The improvement 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 expense increased by $1.2 million year over year in the first half of fiscal 2013 due primarily to the increase in store count. Store occupancy expense decreased 49 basis points as a percentage of net sales.

Distribution expense increased $0.7 million primarily resulting from lower costs capitalized into inventory along with increased employee labor and benefit-related expense. Distribution expense decreased 20 basis points as a percentage of net sales.

Selling and Administrative Expense. Selling and administrative expense increased by $1.9 million to $137.1 million in the 26 weeks ended June 30, 2013 from $135.2 million in the same period last year. Selling and administrative expense as a percentage of net sales decreased 220 basis points to 28.2% in the 26 weeks ended June 30, 2013 from 30.4% in the same period last year. The increase in overall selling and administrative expense compared to the prior year was primarily attributable to higher employee labor and benefit-related expense, higher credit card fees reflecting higher net sales levels and higher operating expense to support the increase in store count, partially offset by a reduction in advertising expense. In the second quarter of fiscal 2012, we recorded pre-tax charges of $0.7 million related to store closing costs and $0.2 million related to impairment of certain underperforming stores.

Interest Expense. Interest expense decreased by $0.3 million to $0.9 million in the 26 weeks ended June 30, 2013 compared to the same period last year. The decrease in interest expense reflected a decrease in average debt levels of $28.9 million to $39.7 million in the first half of fiscal 2013 from $68.6 million in the same period last year. Additionally, average interest rates declined 10 basis points, to 2.2% in the first half of fiscal 2013 from 2.3% in the prior year.

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Income Taxes. The provision for income taxes was $8.6 million for the 26 weeks ended June 30, 2013 and $1.4 million for the 26 weeks ended July 1, 2012. Our effective tax rate was 38.6% for the first half of fiscal 2013 compared with 34.6% for the first half of fiscal 2012. The increased effective tax rate for the first half of fiscal 2013 compared to the same period in fiscal 2012 primarily reflected higher pre-tax income combined with lower overall income tax credits for the current year. The increased effective rate for the first half of fiscal 2013 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 for the first quarter of fiscal 2013 by 137 basis points.

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 half of fiscal 2013 with $5.9 million of cash and cash equivalents compared with $6.2 million at the end of the same period in fiscal 2012. Our cash flows from operating, investing and financing activities are summarized as follows:

                                                              26 Weeks Ended
                                                          June 30,       July 1,
                                                            2013           2012
                                                              (In thousands)
   Net cash provided by (used in):
   Operating activities                                   $  10,408      $  6,444
   Investing activities                                      (6,740 )      (4,337 )
   Financing activities                                      (5,400 )        (761 )

   Net (decrease) increase in cash and cash equivalents   $  (1,732 )    $  1,346

Operating Activities. Net cash provided by operating activities for the 26 weeks ended June 30, 2013 and July 1, 2012 was $10.4 million and $6.4 million, respectively. The increase in cash flow from operating activities for the 26 weeks ended June 30, 2013 compared to the same period last year primarily reflects higher net income year over year as a result of improved sales, partially offset by increased funding of accounts payable related to inventory purchases.

Investing Activities. Net cash used in investing activities for the 26 weeks ended June 30, 2013 and July 1, 2012 was $6.7 million and $4.3 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.

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Financing Activities. Net cash used in financing activities for the 26 weeks ended June 30, 2013 and July 1, 2012 was $5.4 million and $0.8 million, respectively. In the first half of fiscal 2013, net cash was used primarily to pay down borrowings under our revolving credit facility and pay dividends, partially offset by proceeds received from the exercise of employee share option awards. In the first half of fiscal 2012, net cash was used primarily to pay dividends and repurchase stock, partially offset by additional borrowings under our revolving credit facility.

As of June 30, 2013, we had revolving credit borrowings of $44.9 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 $71.4 million and letter of credit commitments of $4.1 million outstanding as of July 1, 2012. The decrease in revolving credit borrowings at the end of the first half 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.

In fiscal 2012, we paid quarterly cash dividends of $0.075 per share of outstanding common stock, for an annual rate of $0.30 per share. In the first two quarters of fiscal 2013, we paid cash dividends of $0.10 per share of outstanding common stock, for an annual rate of $0.40 per share. In the third 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 September 13, 2013 to stockholders of record as of August 30, 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 half 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 June 30, 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.

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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, 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 . . .

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