It's not just the birds chirping and the flowers blooming. Even
humans are getting in on the spring action; gearing up for softball
leagues, mountain hikes and lazy days of fishing. This eternal
ritual brings hordes of shoppers to sporting goods stores to check
out the latest gear. That helps explain why the parking lots are
Big Five Sporting Goods (Nasdaq: BGFV)
Big Five is one of several large publicly-traded sports retailers,
Dick's Sporting Goods (
Hibbett Sports (Nasdaq: HIBB)
. But Big Five may have hit on the best approach of the bunch,
which should allow ample room for expansion.
Right now, most of the retailer's 384 stores are in the Western
United States, half of them in California. The store base grows by
about 20 a year. Unlike other sporting goods retailers which
re-sell shoes and gear from the brand name manufacturers, Big Five
relies more heavily on exclusive products, many of which carry the
retailer's brand name. In addition, the company's buyers are always
on the lookout for closeout specials, which can yield rock-bottom
prices for customers.
This entire approach enables Big Five to be seen as a
value-oriented store, so the company maintains very high profit
margins. Big Five's gross margins typically fall in the 34% to 35%
range -- roughly 500 basis points higher than the rivals' profit
margins. And as management keeps a tight lid on store-level
expenses, the company generates impressive store-level economics.
Stores generate an EBITDA return on invested capital of about 40%
in a store's first year, 45% in the second year and nearly 50% in
the third year and beyond.
A maturing base of stores has enabled Big Five to steadily expand
its footprint by about +5% a year. The rising base of stores yields
even greater purchasing power for the company's buyers, which can
strike even better deals on closeout sales and private label goods.
The formula worked like a charm -- until the recession hit. Profits
slumped badly in 2008, and only partially rebounded in 2009. Prior
to the slowdown, Big Five typically earned $1.25 to $1.50 a share
each year. As consumers slowly emerge from their shell, profits are
likely to stay below the low end of that range this year, but could
bounce back toward the $1.40 mark in 2011.
Based on current expansion plans, Big Five is likely to have about
440 stores by the end of 2012. Simply applying historical profit
margins on that expanded store base, while allowing for a moderate
expansion in corporate overhead , should push 2012 EPS toward the
$1.65 mark. This isn't scorching profit growth, but investors are
likely to reward Big Five for its slow and steady growth approach.
In its most recent quarter, Big Five noted that stores open more
than a year posted a +2.4% jump in same store sales. That's nothing
special, but it's all that's really needed for Big Five to pound
out its tried-and-true growth formula.
Shares have posted solid gains during the past year and have
recently risen to $16, but they have historically traded in the $20
to $30 range prior to the economic downturn. As long as the economy
maintains a slow and steady course, shares are likely to work their
way back to that range. To get to $25, the midpoint of that range,
shares would need to trade for about 18 times 2011 profits, right
in-line with the earnings growth rate.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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