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BGFV > SEC Filings for BGFV > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for BIG 5 SPORTING GOODS CORP

Form 10-Q for BIG 5 SPORTING GOODS CORP


30-Apr-2014

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 29, 2013.

Overview

We are a leading sporting goods retailer in the western United States, operating 425 stores in 12 states under the name "Big 5 Sporting Goods" as of March 30, 2014. 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 weaker operating results for the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013 were mainly attributable to our lower sales levels, including a decrease in same store sales of 7.9%. Our lower same store sales in the first quarter of fiscal 2014 compared to the same period last year reflected reduced demand for firearm and ammunition products combined with lower sales of winter-related merchandise as a result of unseasonably warm and dry winter-weather conditions in our primary markets in the first quarter of fiscal 2014.

Net sales for the first quarter of fiscal 2014 decreased 6.1% to $231.3 million compared to $246.3 million for the first quarter of fiscal 2013. The decrease in net sales was primarily attributable to a decrease in same store sales of 7.9% as well as a reduction in closed store sales, partially offset by added sales from new stores. Net sales comparisons year over year reflect a small benefit from the calendar shift of the Easter holiday, during which our stores are closed, out of the first quarter and into the second quarter of this year.

Net income for the first quarter of fiscal 2014 decreased to $2.1 million, or $0.09 per diluted share, compared to $7.5 million, or $0.34 per diluted share, for the first quarter of fiscal 2013. The decrease in net income was driven primarily by lower net sales and merchandise margins resulting in lower gross profit, as well as an increase in selling and administrative expense.

Gross profit for the first quarter of fiscal 2014 represented 31.4% of net sales, compared with 32.7% in the same quarter of the prior year. The decrease in gross profit margin resulted mainly from a year over year decrease in merchandise margins of 28 basis points and increased store occupancy expense as a percentage of net sales.

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Selling and administrative expense for the first quarter of fiscal 2014 increased 1.4% to $68.9 million, or 29.8% of net sales, compared to $67.9 million, or 27.6% of net sales, for the first quarter of fiscal 2013. The increase in selling and administrative expense was primarily attributable to higher store-related expense to support the increase in store count.

Operating income for the first quarter of fiscal 2014 decreased to $3.8 million, or 1.6% of net sales, compared to $12.5 million, or 5.1% of net sales, for the first quarter of fiscal 2013. The decrease in operating income primarily reflected lower net sales and merchandise margins resulting in lower gross profit, as well as an increase in 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 30, 2014 Compared to 13 Weeks Ended March 31, 2013

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 30, 2014             March 31, 2013
                                                  (In thousands, except percentages)

  Net sales                                $ 231,263       100.0 %    $ 246,266       100.0 %
  Cost of sales (1)                          158,585        68.6        165,791        67.3

  Gross profit                                72,678        31.4         80,475        32.7
  Selling and administrative expense (2)      68,904        29.8         67,928        27.6

  Operating income                             3,774         1.6         12,547         5.1
  Interest expense                               434         0.2            453         0.2

  Income before income taxes                   3,340         1.4         12,094         4.9
  Income taxes                                 1,280         0.5          4,580         1.8

  Net income                               $   2,060         0.9 %    $   7,514         3.1 %

(1) Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution center expense, including depreciation and amortization, 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 decreased by $15.0 million, or 6.1%, to $231.3 million in the 13 weeks ended March 30, 2014 from $246.3 million in the comparable period last year. The change in net sales reflected the following:

Same store sales decreased by $19.0 million, or 7.9%, for the 13 weeks ended March 30, 2014, versus the comparable 13-week period in the prior year. Our lower same store sales compared to the same period last year reflected reduced demand for firearm and ammunition products combined with lower sales of winter-related merchandise as a result of unseasonably warm and dry winter-weather conditions in our primary markets in the first quarter of fiscal 2014. 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 December 30, 2012, partially offset by a reduction in closed store sales.

We experienced decreased customer transactions in our retail stores, and the average sale per transaction decreased in the first quarter of fiscal 2014 compared to the same period last year.

Net sales comparisons year over year reflect a small benefit from the calendar shift of the Easter holiday, during which our stores are closed, out of the first quarter and into the second quarter of this year.

Store count as of March 30, 2014 was 425 versus 414 as of March 31, 2013. We closed four stores, two of which were relocations, in the 13 weeks ended March 30, 2014. We opened one new store and closed one store, which was a relocation, in the 13 weeks ended March 31, 2013. For fiscal 2014, we expect to open approximately 12 to 15 net new stores.

Gross Profit. Gross profit decreased by $7.8 million, or 9.7%, to $72.7 million, or 31.4% of net sales, in the 13 weeks ended March 30, 2014 from $80.5 million, or 32.7% of net sales, in the 13 weeks ended March 31, 2013. The change in gross profit was primarily attributable to the following:

Net sales decreased $15.0 million, or 6.1%, year over year in the first quarter of fiscal 2014.

Merchandise margins, which exclude buying, occupancy and distribution expense, decreased 28 basis points versus the first quarter last year, when merchandise margins increased by 113 basis points versus the first quarter of fiscal 2012.

Store occupancy expense increased by $1.3 million, or 111 basis points, year over year in the first quarter of fiscal 2014 due primarily to the increase in store count.

Distribution expense decreased $1.0 million, or 17 basis points, resulting primarily from higher costs capitalized into inventory, partially offset by higher employee labor and benefit-related expense.

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Selling and Administrative Expense. Selling and administrative expense increased by $1.0 million to $68.9 million, or 29.8% of net sales, in the 13 weeks ended March 30, 2014 from $67.9 million, or 27.6% of net sales, in the same period last year. The increase in overall selling and administrative expense compared to the prior year was primarily attributable to higher store-related 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.

Interest Expense. Interest expense decreased by $0.1 million to $0.4 million in the 13 weeks ended March 30, 2014 compared to the first quarter of fiscal 2013. Interest expense reflected a decrease in average interest rates of 30 basis points to 2.0% in the first quarter of fiscal 2014 from 2.3% in the prior year. The impact of lower average interest rates was partially offset by an increase in average debt levels of $13.7 million to $55.3 million in the first quarter of fiscal 2014 from $41.6 million in the same period last year.

Income Taxes. The provision for income taxes was $1.3 million for the 13 weeks ended March 30, 2014 and $4.6 million for the 13 weeks ended March 31, 2013. Our effective tax rate was 38.3% for the first quarter of fiscal 2014 compared with 37.9% for the first quarter of fiscal 2013. The increased effective tax rate for the first quarter of fiscal 2014 compared to the same period in fiscal 2013 was primarily a reflection of the prior year's retroactive reinstatement of work opportunity tax credits for 2012 which reduced the effective tax rate for the first quarter of fiscal 2013 by 137 basis points. This impact was partially offset by other income tax credits representing a larger percentage of pre-tax income for the current year.

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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 on hand, cash flows from operations and borrowings from our revolving credit facility. We believe our cash 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 the first quarter of fiscal 2014 with $5.9 million of cash compared with $5.4 million at the end of the same period in fiscal 2013. Our cash flows from operating, investing and financing activities are summarized as follows:

                                                    13 Weeks Ended
                                               March 30,       March 31,
                                                 2014             2013
                                                    (In thousands)
            Net cash provided by (used in):
            Operating activities              $     3,401      $   23,783
            Investing activities                   (3,810 )        (3,219 )
            Financing activities                   (3,089 )       (22,842 )

            Net decrease in cash              $    (3,498 )    $   (2,278 )

Operating Activities. Net cash provided by operating activities for the 13 weeks ended March 30, 2014 and March 31, 2013 was $3.4 million and $23.8 million, respectively. The decrease in cash flow from operating activities for the 13 weeks ended March 30, 2014 compared to the same period last year primarily reflects the funding of higher inventory levels, including the timing of payments year over year, increased prepaid expenses related mainly to the timing of rent payments and the prepayment of income taxes, as well as lower net income for the period.

Investing Activities. Net cash used in investing activities for the 13 weeks ended March 30, 2014 and March 31, 2013 was $3.8 million and $3.2 million, respectively. Capital expenditures, excluding non-cash property and equipment acquisitions, represented all of the cash used in investing activities for each period.

Financing Activities. Net cash used in financing activities for the 13 weeks ended March 30, 2014 and March 31, 2013 was $3.1 million and $22.8 million, respectively. In the first quarter of fiscal 2014, net cash was used primarily to pay dividends and fund working capital, partially offset by increased net borrowings under our revolving credit facility. In the first quarter of fiscal 2013, net cash was used primarily to pay down borrowings under our revolving credit facility and pay dividends.

As of March 30, 2014, we had revolving credit borrowings of $54.2 million and letter of credit commitments of $0.6 million outstanding. These balances compare to revolving credit borrowings of $43.0 million and letter of credit commitments of $0.9 million outstanding as of December 29, 2013 and revolving credit borrowings of $31.9 million and letter of credit commitments of $4.0 million outstanding as of March 31, 2013. The increase in revolving credit borrowings as of the end of the first quarter of fiscal 2014 compared to the same period last year primarily reflects higher inventory levels as a result of lower than anticipated sales, combined with reduced accounts payable due to the timing of payments.

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In fiscal 2013 and the first quarter of fiscal 2014, we paid quarterly cash dividends of $0.10 per share of outstanding common stock, for an annual rate of $0.40 per share. In the second quarter of fiscal 2014, our Board of Directors declared a quarterly cash dividend of $0.10 per share of outstanding common stock, which will be paid on June 13, 2014 to stockholders of record as of May 30, 2014.

Periodically, we repurchase our common stock in the open market pursuant to programs approved by our Board of Directors. We may repurchase our common stock for a variety of reasons, including, among other things, our existing business conditions, our alternative cash requirements and the current market price of our stock. In fiscal 2013, we did not repurchase any shares of our common stock. In the first quarter of fiscal 2014, we repurchased 28,512 shares of common stock for $0.4 million. Since the inception of our initial share repurchase program in May 2006 through March 30, 2014, we have repurchased a total of 1,956,138 shares for $25.8 million, leaving a total of $9.2 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 and December 19, 2013 (as so amended, the "Credit Agreement") as further discussed below. The maturity date of the Credit Agreement is December 19, 2018.

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. Total remaining borrowing availability under the Credit Agreement, after subtracting letters of credit, was $85.2 million and $96.1 million as of March 30, 2014 and December 29, 2013, respectively.

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"). After giving effect to the amendments, the "Borrowing Base" generally is comprised of the sum, at the time of calculation of (a) 90.00% of our eligible credit card receivables; plus (b) the cost of our eligible inventory (other than our eligible in-transit 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); plus (c) the lesser of (i) the cost of our eligible in-transit inventory, net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of our eligible in-transit inventory

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(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. Following the most recent amendment of the Credit Agreement on December 19, 2013 (the "Second Amendment"), the applicable interest rate on our borrowings will be a function of the daily average, over the preceding fiscal quarter, of the excess of the Loan Cap over amounts borrowed (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 will be 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 $100,000,000                1.25 %             0.25 %
II           Less than $100,000,000 but greater than or
                        equal to $40,000,000                        1.50 %             0.50 %
III                    Less than $40,000,000                        1.75 %             0.75 %

Following the Second Amendment, the commitment fee assessed on the unused portion of the Credit Facility is 0.25% per annum.

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 $5.9 million as of March 30, 2014. We expect capital expenditures for fiscal 2014, excluding non-cash acquisitions, to range from approximately $26.0 million to $30.0 million, primarily to fund the opening of new stores, store-related remodeling, distribution center equipment and computer hardware and software purchases, including amounts related to the planned development of an e-commerce platform. For fiscal 2014, we expect to open approximately 12 to 15 net new stores.

We currently pay quarterly dividends, subject to declaration by our Board of Directors. In the second quarter of fiscal 2014, our Board of Directors declared a quarterly cash dividend of $0.10 per share of outstanding common stock, which will be paid on June 13, 2014 to stockholders of record as of May 30, 2014.

As of March 30, 2014, a total of $9.2 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 existing business conditions, our alternative cash requirements 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 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, as well as 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.

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.

Our material contractual obligations include capital lease obligations, borrowings under our Credit Facility, certain occupancy expense 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 expense includes 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, and asset retirement obligations related to the removal and retirement of leasehold improvements for certain stores upon termination of their leases.

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Issued and outstanding letters of credit were $0.6 million as of March 30, 2014, 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 Operations, of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013, is a discussion of our future obligations and commitments as of December 29, 2013. In the 13 weeks ended March 30, 2014, our revolving credit borrowings increased by $11.2 million from the end of fiscal 2013. We entered into new operating lease agreements in relation to our business operations during the 13 weeks ended March 30, 2014. We do not believe that these operating leases or the increase in our revolving credit borrowings materially impact our contractual obligations or commitments presented as of December 29, 2013.

In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise in advance of expected delivery. Because most of these purchase orders do not contain any termination payments or other penalties if cancelled, they are not included as outstanding contractual obligations.

Critical Accounting Estimates

As discussed in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013, we consider our estimates on inventory valuation, long-lived assets and self-insurance liabilities to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. There have been no significant changes to these estimates in the 13 weeks ended March 30, 2014.

Seasonality and Impact of Inflation

We experience seasonal fluctuations in our net sales and operating results. In the fourth fiscal quarter, which includes the holiday selling season, we normally experience higher inventory purchase volumes and increased expense for staffing and advertising. Seasonality influences our buying patterns which . . .

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