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 ' (
) 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 (
) andSport Chalet (
"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
First-quarter same-store sales jumped 10.5%, the fourth
straight quarter of positive trends and the highest gain in
"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.
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
"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
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.
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
In the meantime, management says the intended launch of a full
e-commerce platform will likely be moved up from this year to
"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."