Big 5 Sporting Goods Tries To Reel In Richer Customer

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When customers lose their jobs, they're not apt to go shopping as much for sports apparel, and fitness and hobby gear.

So evenBig 5 Sporting Goods ' ( BGFV ) typical bargain-basement prices didn't help it weather the Great Recession well, especially in California, where about half of its stores are located.

Blame California's housing tailspin, especially in the southern part of the state.

Big 5 operates exclusively in Western states with more than 400 stores selling everything from sports apparel and footwear to outdoor and athletic gear at prices that are typically more affordable than rivals such asDick's Sporting Goods ( DKS ) andSport Chalet ( SPCHA ).

"They were hammered hard by the economic downturn. A lot of their customers were tied to construction or companies that get a lot of business from the housing (industry)," said Needham & Co. analyst Sean McGowan.

By 2011, Big 5's profits had sunk nearly 50%.

But the company's long string of losing seasons may be over.

First-quarter same-store sales jumped 10.5%, the fourth straight quarter of positive trends and the highest gain in years.

"I have records that go back to 1996 and the only quarter that came close was one in 1997 at 10.2%, McGowan said.

Net income in the quarter totaled $7.5 million, or 34 cents a share, up from $156,000, or 1 cent a share, in the prior year. Total revenue rose 12.7% to $246.3 million.

Housing-Market Rebound

California's strong housing-market rebound has played a part in the company's changing fortunes. But so did other factors, such as increased demand for firearms and ammunition, and favorable weather compared to the previous year.

Moreover, management tweaked the business model to keep or attract more up-market customers by offering better quality and more expensive merchandise.

But now the question analysts are asking is whether Big 5 can lift operating margins to their prerecession norm of around 7%, or better yet to the record 8.2% set in 2004.

At 5.1%, the operating margin in the first quarter was a big improvement over the earlier year's 0.4%.

"They are still operating at depressed operating levels relative to the past," said Credit Suisse analyst Seth Sigman. "That's the opportunity."

He thinks the company is taking steps by enhancing merchandising and integrating business analytic tools to manage inventory.

"But it's still to be seen if that will be effective or not. We think a lot of the upside is being driven by firearms," Sigman said.

Big 5 doesn't break down firearm and ammunition sales, but McGowan estimates they account for 5% to 10% of sales "and continue to be quite strong."

But after big runs on guns on concerns over potential gun-control legislation (which failed in the U.S. Senate), retail analysts suspect such gains may level off industrywide.

CEO Steven Miller, who declined an interview request, told analysts that apparel was the strongest product category in the first quarter, aided in part by "favorable weather." A colder ski season in the West helped outdoor products, for example.

"We are especially pleased with our efforts to realign (merchandising) by focusing on branded products, and higher price points are influencing sales," Miller told analysts in a post-earnings conference call.

Higher-margin winter and apparel products helped merchandise margins rise by 113 basis points, he added.

Positive sales trends continued into the second quarter, he said. The company expects same-store sales in the quarter to go up in the "mid-single-digit range" and per-share earnings of 20 to 26 cents vs. last year's 12 cents.

The company opened only one store in the first quarter while one closed, for 414 total. Management expects to open 15 to 20 net new stores this year, most in the back half of the year.

Same-Store Sales

The current store count is about a third larger than it was in 2004 when operating profit was at its peak, McGowan says. And with same-store sales accelerating, he adds, there's no reason why the company can't obtain an 8.2% operating margin.

"It's conceivable it could be higher than that because they have a bigger base of stores," he said.

McGowan thinks it could happen within two years. Earnings would certainly lift off if margins reached normal levels .

"If operating margin last year had been 7% instead of 2.8%," he said, "earnings would have been two to three times higher."

In the meantime, management says the intended launch of a full e-commerce platform will likely be moved up from this year to 2014.

"It sounds absurd (that they don't have one)," McGowan said. But he says Big 5 customers have typically lived "paycheck to paycheck" and many didn't have credit cards.

"So in the past they probably didn't lose a lot of customers by not having e-commerce," he said. But with efforts to reach more affluent customers, "they want to change that."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BGFV , DKS , SPCHA

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