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BGFV > SEC Filings for BGFV > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for BIG 5 SPORTING GOODS CORP

Form 10-K for BIG 5 SPORTING GOODS CORP


26-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Throughout this section, the Big 5 Sporting Goods Corporation ("we," "our," "us") fiscal years ended December 29, 2013, December 30, 2012 and January 1, 2012 are referred to as fiscal 2013, 2012 and 2011, respectively. The following discussion and analysis of our financial condition and results of operations for fiscal 2013, 2012 and 2011 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 2013, 2012 and 2011 each included 52 weeks.

Overview

We are a leading sporting goods retailer in the western United States, operating 429 stores in 12 states under the name "Big 5 Sporting Goods" at December 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, snowboarding and roller sports.

We believe that over our 59-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 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 2013, we opened 17 new stores, three of which were relocations, and closed two stores, both of which were relocations. In fiscal 2012, we opened 14 new stores, three of which were relocations, and closed six stores, two of which were relocations. For fiscal 2014, we expect to open approximately 15 net new stores. The following table summarizes our store count for the periods presented:

                                                        Fiscal Year
                                            2013           2012           2011
        Big 5 Sporting Goods stores:
        Beginning of period                     414            406            398
        New stores(1)                            17             14             13
        Stores relocated                         (2 )           (2 )           (5 )
        Stores closed                             -             (4 )            -

        End of period                           429            414            406

        New stores opened per year, net          15              8              8

(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.


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Executive Summary

Our improved operating results for fiscal 2013 compared to fiscal 2012 were mainly attributable to our higher sales levels, including an increase in same store sales of 3.9%. We believe our higher same store sales 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 in the first quarter of fiscal 2013. We also believe our operating results for fiscal 2012 and 2011, and to a lesser extent for fiscal 2013, reflected challenging macroeconomic conditions in our markets resulting primarily from the lingering effects of the economic recession.

Net sales for fiscal 2013 increased 5.6% to $993.3 million compared to fiscal 2012. The increase in net sales was primarily attributable to increased same store sales of 3.9% combined with added revenue from new stores.

Net income for fiscal 2013 increased 87.4% to $27.9 million, or $1.27 per diluted share, compared to $14.9 million, or $0.69 per diluted share, for fiscal 2012. The increase was driven primarily by higher net sales and higher merchandise margins, partially offset by increased selling and administrative expense and higher income tax expense.

Gross profit for fiscal 2013 represented 33.1% of net sales, compared with 32.2% in the prior year. Merchandise margins were 50 basis points higher than the prior year, combined with reduced distribution and store occupancy expense as a percentage of net sales.

Selling and administrative expense for fiscal 2013 increased 1.6% to $281.3 million, or 28.3% of net sales, compared to $276.8 million, or 29.4% of net sales, for fiscal 2012. The increase was primarily attributable to higher store-related expense, excluding occupancy, as a result of new store openings and increased employee labor and benefit-related expense.

Operating income for fiscal 2013 increased 82.6% to $47.4 million, or 4.8% of net sales, compared to $26.0 million, or 2.8% of net sales, for fiscal 2012. The higher operating income primarily reflects higher net sales and higher merchandise margins, partially offset by increased 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(1)
                                             2013                       2012                       2011
                                                               (Dollars in thousands)
Statement of Operations Data:
Net sales(2)                         $ 993,323       100.0 %    $ 940,490       100.0 %    $ 902,134       100.0 %
Cost of sales(3)                       664,583        66.9        637,721        67.8        610,531        67.7

Gross profit(2)                        328,740        33.1        302,769        32.2        291,603        32.3
Selling and administrative
expense(2)(4)(5)(6)                    281,313        28.3        276,797        29.4        272,436        30.2

Operating income                        47,427         4.8         25,972         2.8         19,167         2.1
Interest expense                         1,745         0.2          2,202         0.3          2,561         0.3

Income before income taxes              45,682         4.6         23,770         2.5         16,606         1.8
Income taxes                            17,736         1.8          8,855         0.9          4,933         0.5

Net income(2)(5)(6)                  $  27,946         2.8 %    $  14,915         1.6 %    $  11,673         1.3 %

Other Financial Data:
Net sales change                                       5.6 %                      4.3 %                      0.6 %
Same store sales change(7)                             3.9 %                      2.5 %                     (1.2 )%
Net income change                                     87.4 %                     27.8 %                    (43.2 )%

(1) Fiscal 2013, 2012 and 2011 each included 52 weeks.


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(2) In fiscal 2013, we recorded a pre-tax charge of $1.3 million reflecting an accrual for legal settlements, of which $0.3 million was classified as a reduction to net sales and $1.0 million was classified as selling and administrative expense. This charge reduced net income in fiscal 2013 by $0.8 million, or $0.04 per diluted share.

(3) Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution center expense, including depreciation, and store occupancy expense. Store occupancy expense includes 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 expense, 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 2013, 2012 and 2011, we recorded pre-tax non-cash impairment charges of $0.1 million, $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 2013, 2012 and 2011 by $44,000, or $0.00 per diluted share, $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 that operated throughout the period as well as the full corresponding prior year period.

Fiscal 2013 Compared to Fiscal 2012

Net Sales. Net sales increased by $52.8 million, or 5.6%, to $993.3 million for fiscal 2013 from $940.5 million for fiscal 2012. The change in net sales was primarily attributable to the following:

Same store sales increased 3.9% for fiscal 2013 versus fiscal 2012. We believe our higher same store sales 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 in the first quarter of fiscal 2013 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 31 new stores since January 1, 2012, partially offset by a reduction in closed store sales.

While we experienced a slight decline in customer transaction levels in our retail stores in fiscal 2013 when compared with fiscal 2012, 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 2013 was 429 versus 414 at the end of fiscal 2012. We opened 17 new stores, three of which were relocations, and closed two stores, both of which were relocations, in fiscal 2013. For fiscal 2014, we expect to open approximately 15 net new stores.

Gross Profit. Gross profit increased by $25.9 million to $328.7 million in fiscal 2013 from $302.8 million in fiscal 2012. Gross profit as a percentage of net sales in fiscal 2013 was 33.1% compared with 32.2% during fiscal 2012. The change in gross profit was primarily attributable to the following:

Net sales increased by $52.8 million in fiscal 2013 compared to the prior year.

Merchandise margins, which exclude buying, occupancy and distribution expense, increased 50 basis points versus fiscal 2012, when merchandise margins decreased 24 basis points versus 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, combined with sales of firearm and ammunition products at higher margins during fiscal 2013.

Store occupancy expense for fiscal 2013 increased by $3.5 million year over year due primarily to the increase in store count. Store occupancy expense as a percentage of net sales in fiscal 2013 decreased by ten basis points compared with fiscal 2012.


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Distribution expense decreased $1.5 million, or 38 basis points, primarily resulting from higher costs capitalized into inventory and decreased employee labor and benefit-related expense, as well as reductions in various other operating expenses.

Selling and Administrative Expense. Selling and administrative expense increased by $4.5 million, or 1.6%, to $281.3 million in fiscal 2013 from $276.8 million in fiscal 2012. Selling and administrative expense as a percentage of net sales decreased 110 basis points to 28.3% in fiscal 2013 from 29.4% in fiscal 2012. The change in selling and administrative expense was primarily attributable to the following:

Store-related expense, excluding occupancy, increased by $1.5 million due primarily to higher labor and other operating expense to support the increase in store count and increased credit card fees reflecting higher net sales levels, partially offset by decreased employee benefit-related expense, primarily related to lower health and welfare expense.

Advertising expense for fiscal 2013 decreased by $1.4 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 2013 increased by $4.4 million, primarily reflecting higher employee labor and benefit-related expense, added costs related to our new e-commerce initiative and increases in other administrative expense to support our growth. Also, administrative expense for fiscal 2013 reflected a pre-tax charge of $1.0 million related to legal settlements. In fiscal 2012, we recorded 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. These charges are further discussed in Notes 4, 5 and 14 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 $0.5 million, or 20.8%, to $1.7 million in fiscal 2013 from $2.2 million in fiscal 2012. The decrease in interest expense reflects the combined impact of a decrease in average debt levels of $22.2 million to $44.0 million in fiscal 2013 from $66.2 million in fiscal 2012, as well as a decrease in average interest rates of 10 basis points to 2.1% in fiscal 2013 from 2.2% in fiscal 2012, due mainly to lower applicable margins under our credit agreement.

Income Taxes. The provision for income taxes was $17.7 million for fiscal 2013 compared with $8.9 million for fiscal 2012. This increase was primarily due to higher pre-tax income and a higher effective tax rate in fiscal 2013. Our effective tax rate was 38.8% for fiscal 2013 compared with 37.3% for fiscal 2012. The increased effective tax rate year over year primarily reflected the impact of lower overall income tax credits as a percentage of pre-tax income for fiscal 2013, 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 WOTC reduced the effective tax rate for the first quarter of fiscal 2013 by 137 basis points.

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.


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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.

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 fiscal 2011.

Merchandise margins, which exclude buying, occupancy and distribution expense, 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 expense for fiscal 2012 increased by $2.6 million year over year due primarily to the increase in store count. Store occupancy expense as a percentage of net sales in fiscal 2012 decreased by seven basis points compared with fiscal 2011.

Distribution expense increased $1.5 million primarily resulting from lower costs capitalized into inventory and increased employee labor and benefit-related expense, partially offset by lower trucking expense. Distribution expense 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 expense to support the increase in store count, increased employee benefit-related expense and higher public liability claim-related expense, 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 fiscal 2011 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.


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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.

We ended fiscal 2013 with $9.4 million of cash and cash equivalents compared with $7.6 million in fiscal 2012. After reducing our long-term debt by $16.0 million, or 25.2%, during fiscal 2012, we further decreased our long-term debt by $4.5 million, or 9.5%, during fiscal 2013 to $43.0 million from $47.5 million at the end of fiscal 2012. The following table summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years:

                                                                   Fiscal Year
                                                     2013             2012             2011
                                                                 (In thousands)
Total cash provided by (used in):
Operating activities                               $  26,287        $  39,604        $   2,218
Investing activities                                 (22,035 )        (12,650 )        (11,988 )
Financing activities                                  (2,487 )        (24,219 )          9,050

Net increase (decrease) in cash and cash
equivalents                                        $   1,765        $   2,735        $    (720 )

The seasonality of our business historically provides greater cash flows from operations during the holiday and winter selling season. 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 normally at their highest in the months leading up to Christmas. As holiday sales typically 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 2013, while we increased inventory purchases in the months leading up to Christmas, weaker-than-anticipated sales during the fourth quarter of fiscal 2013 resulted in higher-than-expected inventory levels and lower operating cash flows in the fourth quarter of fiscal 2013. However, healthy net sales and net income for the full fiscal year 2013 contributed sufficient levels of operating cash flows that allowed us to pay down debt balances year over 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.

Operating Activities. Net cash provided by operating activities for fiscal 2013, 2012 and 2011 was $26.3 million, $39.6 million and $2.2 million, respectively. The decrease in cash provided by operating activities for fiscal 2013 compared to fiscal 2012 was due primarily to higher inventory levels, which reflected softer-than-anticipated sales in the fourth quarter of fiscal 2013. Furthermore, the timing of inventory purchases resulted in higher funding of accounts payable in fiscal 2013 when compared to fiscal 2012. The impact of higher inventory


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was partially offset by higher net income for fiscal 2013. 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 fiscal 2011 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.

Investing Activities. Net cash used in investing activities for fiscal 2013, 2012 and 2011 was $22.0 million, $12.7 million and $12.0 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
                                                  2013         2012         2011
                                                          (In thousands)
        New stores                              $ 10,996     $  7,076     $  7,108
        Store-related remodels                     7,600        3,703        3,749
        Distribution center                          871          536        1,127
        Computer hardware, software and other      2,568        1,586        1,006

        Total                                   $ 22,035     $ 12,901     $ 12,990

Our capital expenditures included 17 new stores in fiscal 2013, 14 new stores in . . .

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