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BGFV > SEC Filings for BGFV > Form 10-Q on 30-Oct-2013All Recent SEC Filings

Show all filings for BIG 5 SPORTING GOODS CORP

Form 10-Q for BIG 5 SPORTING GOODS CORP


30-Oct-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 420 stores in 12 states under the name "Big 5 Sporting Goods" at September 29, 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 third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 were mainly attributable to our higher sales levels, including an increase in same store sales of 1.4%. We believe our higher same store sales reflected favorable customer response to changes in our merchandise offering and new marketing initiatives and continued higher demand for firearm and ammunition products, partially offset by lower sales of summer-related merchandise as a result of unseasonably cool summer weather conditions.

Net sales for the third quarter of fiscal 2013 increased 2.9% to $259.1 million compared to $251.8 million for the third quarter of fiscal 2012. The increase in net sales was primarily attributable to added sales from new stores as well as an increase in same store sales of 1.4%, partially offset by a reduction in closed store sales. Net sales comparisons year over year reflect a small benefit from 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 third quarter of fiscal 2013 increased to $9.1 million, or $0.41 per diluted share, compared to $8.2 million, or $0.38 per diluted share, for the third quarter of fiscal 2012. The increase in net income was driven primarily by higher net sales and merchandise margins resulting in higher gross profit, partially offset by increased selling and administrative expense.

Gross profit for the third quarter of fiscal 2013 represented 33.9% of net sales, compared with 33.3% in the same quarter of the prior year. The improvement in gross

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profit resulted mainly from a year over year increase in merchandise margins of 12 basis points and reduced distribution expense, partially offset by increased store occupancy expense.

Selling and administrative expense for the third quarter of fiscal 2013 increased 2.9% to $72.4 million compared to $70.4 million for the third quarter of fiscal 2012, but remained unchanged as a percentage of net sales at 27.9% for both periods. The increase in selling and administrative expense was primarily attributable to a pre-tax charge to provide for legal settlements and higher store-related expense as a result of new store openings.

Operating income for the third quarter of fiscal 2013 increased to $15.4 million, or 6.0% of net sales, compared to $13.5 million, or 5.4% of net sales, for the third quarter of fiscal 2012. The increase in operating income primarily reflected higher net sales and 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 September 29, 2013 Compared to 13 Weeks Ended September 30, 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
                                                     September 29, 2013             September 30, 2012
                                                            (In thousands, except percentages)
Net sales                                         $   259,121        100.0 %     $   251,774        100.0 %
Cost of sales (1)                                     171,331         66.1           167,901         66.7

Gross profit                                           87,790         33.9            83,873         33.3
Selling and administrative expense (2)                 72,432         27.9            70,384         27.9

Operating income                                       15,358          6.0            13,489          5.4
Interest expense                                          395          0.2               469          0.2

Income before income taxes                             14,963          5.8            13,020          5.2
Income taxes                                            5,825          2.3             4,851          1.9

Net income                                        $     9,138          3.5 %     $     8,169          3.3 %

(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 $7.3 million, or 2.9%, to $259.1 million in the 13 weeks ended September 29, 2013 from $251.8 million in the comparable period last year. The change in net sales reflected the following:

Added sales from new stores reflected the opening of 18 new stores since July 1, 2012, partially offset by a reduction in closed store sales.

Same store sales increased by $3.5 million, or 1.4%, for the 13 weeks ended September 29, 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 and continued higher demand for firearm and ammunition products, partially offset by lower sales of summer-related merchandise as a result of unseasonably cool summer weather conditions. 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.

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

Net sales comparisons year over year reflect a small benefit from 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 September 29, 2013 was 420 versus 407 at September 30, 2012. We opened five new stores, two of which were relocations, and closed one store as a part of a relocation, in the 13 weeks ended September 29, 2013. We opened two new stores and closed two stores, one of which was a relocation, in the 13 weeks ended September 30, 2012. For fiscal 2013, we expect to open 15 net new stores.

Gross Profit. Gross profit increased by $3.9 million, or 4.7%, to $87.8 million, or 33.9% of net sales, in the 13 weeks ended September 29, 2013 from $83.9 million, or 33.3% of net sales, in the 13 weeks ended September 30, 2012. The change in gross profit was primarily attributable to the following:

Net sales increased $7.3 million, or 2.9%, year over year in the third quarter of fiscal 2013.

Merchandise margins, which exclude buying, occupancy and distribution expense, increased 12 basis points versus the third quarter last year.

Distribution expense decreased $1.0 million, or 53 basis points, resulting primarily from higher costs capitalized into inventory, along with lower employee labor and benefit-related expense.

Store occupancy expense increased by $0.9 million, or 11 basis points, year over year in the third quarter of fiscal 2013 due primarily to the increase in store count.

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Selling and Administrative Expense. Selling and administrative expense increased by $2.0 million to $72.4 million in the 13 weeks ended September 29, 2013 from $70.4 million in the same period last year. Selling and administrative expense as a percentage of net sales remained unchanged at 27.9% in the 13 weeks ended September 29, 2013 compared to the same period last year. The increase in overall selling and administrative expense compared to the prior year was primarily attributable to a pre-tax charge of $1.0 million to provide for legal settlements, higher operating expense to support the increase in store count, and added costs related to our new e-commerce initiative, partially offset by a reduction in advertising expense. Selling and administrative expense for the third quarter of fiscal 2012 included a pre-tax charge of $0.4 million related to store closing costs.

Interest Expense. Interest expense decreased by $0.1 million to $0.4 million in the 13 weeks ended September 29, 2013 compared to the third quarter last year. The decrease in interest expense reflected a decrease in average debt levels of $19.1 million to $35.6 million in the third quarter of fiscal 2013 from $54.7 million in the same period last year. Additionally, average interest rates declined 10 basis points, to 2.1% in the third quarter of fiscal 2013 from 2.2% in the prior year.

Income Taxes. The provision for income taxes was $5.8 million for the 13 weeks ended September 29, 2013 and $4.9 million for the 13 weeks ended September 30, 2012. Our effective tax rate was 38.9% for the third quarter of fiscal 2013 compared with 37.3% for the third quarter of fiscal 2012. The increased effective tax rate for the third 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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39 Weeks Ended September 29, 2013 Compared to 39 Weeks Ended September 30, 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:



                                                                      39 Weeks Ended
                                                     September 29, 2013             September 30, 2012
                                                            (In thousands, except percentages)
Net sales                                         $   745,286        100.0 %     $   696,882        100.0 %
Cost of sales (1)                                     497,348         66.7           472,505         67.8

Gross profit                                          247,938         33.3           224,377         32.2
Selling and administrative expense (2)                209,540         28.1           205,560         29.5

Operating income                                       38,398          5.2            18,817          2.7
Interest expense                                        1,266          0.2             1,645          0.2

Income before income taxes                             37,132          5.0            17,172          2.5
Income taxes                                           14,376          1.9             6,289          0.9

Net income                                        $    22,756          3.1 %     $    10,883          1.6 %

(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 $48.4 million, or 6.9%, to $745.3 million in the 39 weeks ended September 29, 2013 from $696.9 million in the comparable period last year. The change in net sales reflected the following:

Same store sales increased by $36.0 million, or 5.3%, for the 39 weeks ended September 29, 2013, versus the comparable 39-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 22 new stores since January 1, 2012, partially offset by a reduction in closed store sales.

We experienced slightly decreased customer transactions in our retail stores, while the average sale per transaction increased in the 39 weeks ended September 29, 2013 compared to the same period last year.

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Store count at September 29, 2013 was 420 versus 407 at September 30, 2012. We opened eight new stores, three of which were relocations, and closed two stores, both of which were relocations, in the 39 weeks ended September 29, 2013. We opened six new stores, two of which were relocations, and closed five stores, two of which were relocations, in the 39 weeks ended September 30, 2012. For fiscal 2013, we expect to open 15 net new stores.

Gross Profit. Gross profit increased by $23.5 million, or 10.5%, to $247.9 million, or 33.3% of net sales, in the 39 weeks ended September 29, 2013 from $224.4 million, or 32.2% of net sales, in the 39 weeks ended September 30, 2012. The change in gross profit was primarily attributable to the following:

Net sales increased $48.4 million, or 6.9%, year over year in the 39 weeks ended September 29, 2013 compared to the same period last year.

Merchandise margins, which exclude buying, occupancy and distribution expense, increased 51 basis points versus the 39 weeks ended September 30, 2012, when merchandise margins decreased 37 basis points versus the same period in 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 $2.1 million year over year due primarily to the increase in store count. Store occupancy expense decreased 27 basis points as a percentage of net sales.

Distribution expense decreased $0.3 million, or 32 basis points as a percentage of net sales, primarily resulting from decreased employee labor and benefit-related expense and lower depreciation expense.

Selling and Administrative Expense. Selling and administrative expense increased by $3.9 million to $209.5 million in the 39 weeks ended September 29, 2013 from $205.6 million in the same period last year. Selling and administrative expense as a percentage of net sales decreased 140 basis points to 28.1% in the 39 weeks ended September 29, 2013 from 29.5% 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, increased credit card fees reflecting higher net sales levels, higher operating expense to support the increase in store count, and added costs related to our new e-commerce initiative, partially offset by a reduction in advertising expense. Also, in the third quarter of fiscal 2013, we recorded a pre-tax charge of $1.0 million to provide for legal settlements. In the 39 weeks ended September 30, 2012, we recorded pre-tax charges of $1.1 million related to store closing costs.

Interest Expense. Interest expense decreased by $0.3 million to $1.3 million in the 39 weeks ended September 29, 2013 compared to the same period last year. The decrease in interest expense reflected a decrease in average debt levels of $25.7 million to $38.3 million in the 39 weeks ended September 29, 2013 from $64.0 million in the same period last year. Additionally, average interest rates declined 10 basis points, to 2.2% in the 39 weeks ended September 29, 2013 from 2.3% in the prior year.

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Income Taxes. The provision for income taxes was $14.4 million for the 39 weeks ended September 29, 2013 and $6.3 million for the 39 weeks ended September 30, 2012. Our effective tax rate was 38.7% for the 39 weeks ended September 29, 2013 compared with 36.6% for the 39 weeks ended September 30, 2012. The increased effective tax rate year over year primarily reflected higher pre-tax income combined with lower overall income tax credits for the current year, partially offset by the retroactive reinstatement of the work opportunity tax credit ("WOTC") for 2012 that 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 third quarter of fiscal 2013 with $4.9 million of cash and cash equivalents compared with $5.0 million at the end of the same period in fiscal 2012. Our cash flows from operating, investing and financing activities are summarized as follows:

                                                                39 Weeks Ended
                                                    September 29,            September 30,
                                                        2013                     2012
                                                                (In thousands)
Net cash provided by (used in):
Operating activities                               $        25,179          $        28,529
Investing activities                                       (12,597 )                 (7,025 )
Financing activities                                       (15,286 )                (21,407 )

Net (decrease) increase in cash and cash
equivalents                                        $        (2,704 )        $            97

Operating Activities. Net cash provided by operating activities for the 39 weeks ended September 29, 2013 and September 30, 2012 was $25.2 million and $28.5 million, respectively. The decrease in cash flow from operating activities for the 39 weeks ended September 29, 2013 compared to the same period last year primarily reflects increased funding of inventory purchases, partially offset by higher net income year over year as a result of improved sales.

Investing Activities. Net cash used in investing activities for the 39 weeks ended September 29, 2013 and September 30, 2012 was $12.6 million and $7.0 million, respectively. Capital expenditures, excluding non-cash property and equipment acquisitions,

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represented all of the cash used in investing activities for the 39 weeks ended September 29, 2013. Capital expenditures, excluding non-cash property and equipment acquisitions, for the 39 weeks ended September 30, 2012 were $7.3 million, and during the period we received $0.3 million as part of a local utility rebate program related to the implementation of a green energy system at our distribution center. 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 39 weeks ended September 29, 2013 and September 30, 2012 was $15.3 million and $21.4 million, respectively. In the first nine months 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 nine months of fiscal 2012, net cash was used primarily to pay down borrowings under our revolving credit facility, pay dividends and repurchase stock.

As of September 29, 2013, we had revolving credit borrowings of $37.9 million and letter of credit commitments of $0.8 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 $52.6 million and letter of credit commitments of $4.1 million outstanding as of September 30, 2012. The decrease in revolving credit borrowings at the end of the third 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.

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 three 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 fourth 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 December 13, 2013 to stockholders of record as of November 29, 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 39 weeks 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 September 29, 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

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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 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"). . . .

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