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Big 5’s Quiet Success Continues

publication date: Feb 28, 2013

Sporting goods retailer Big 5 (click ticker for report: BGFV) announced wonderful fourth quarter results Tuesday afternoon. Revenue increased 7% year-over-year to $243 million, slightly above consensus estimates. Earnings per share were considerably better, as the company was roughly break-even during the fourth quarter of 2011, but earned $0.19 per share in the fourth quarter of this year. For the full-year, earnings per share were 30% higher at $0.69.

We profiled Big 5 in June of 2011, and shares have appreciated very nicely since.

Same-store sales during the quarter were strong, jumping 6.5% from the same period a year ago. Big 5 admitted to benefiting from the post-Sandy Hook jump in guns and ammunition sales, but we also think the company is reaping the rewards of improving housing and employment trends in its key markets of Arizona and California. Big 5 serves primarily lower-income households, so we think the firm’s performance is a very informative data point on the health of the low-end consumer. Although results from Wal-Mart (click ticker for report: WMT) suggest that low-end customers may be more cautious than ever, Big 5’s results, on the other hand, reveal consumers may actually be feeling a bit better about spending on discretionary items. In any case, we’re monitoring the health of consumer spending very closely.

The firm’s gross margin improved by 100 basis points to 32.2% during the fourth quarter, in spite of a product mix that favored lower-margin firearms sales. We expect some modest gross margin upside in 2013, assuming that a stronger overall retail environment will help the company be slightly less promotional (though we don’t anticipate a seismic shift in its gross margin profile).

SG&A as a percentage of sales dropped 210 basis points year-over-year to 29.2%, as the firm was able to easily leverage fixed costs with revenue expansion. Though capital will likely be spent as the firm rolls out an e-commerce platform, we don’t anticipate that SG&A will jump too much in 2013.

On top of reporting strong results for the fourth quarter, management remains confident about returning Big 5 to its pre-Recession operating margins of 6%-8%. The firm’s operating margin in 2012 totaled 2.8%, so a return to previous levels of profitability would lead to a substantial increase in earnings. Though management’s profitability target sounds ambitious for 2013, we do believe a 3%-4% operating margin is quite achievable, especially given the amount of sales leverage inherent to the business model.

Looking ahead, Big 5 believes it can achieve high-single-digit same-store sales growth, driving earnings per share of $0.18-$0.24 for the fiscal 2013 first quarter—which compares quite favorably to the $0.01 the firm earned in the first quarter of fiscal 2012. We think management has done a nice job allocating capital, repurchasing $0.4 million worth of shares during the fourth quarter while raising its quarterly dividend 33% to $0.10 per share—an annual yield of 2.5% at current levels. Though we do see fundamentals improving, the market has now come around to reflect a more optimistic outlook in Big 5’s share price. We believe the company is fairly valued.

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