Big 5 Sporting Goods Corporation

Transcription

1 February 2, 2015 Big 5 Sporting Goods Corporation (BGFV-NASDAQ) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 02/02/2015 Current Price (01/30/15) $11.91 Target Price $ Week High $ Week Low $9.27 One-Year Return (%) Beta 1.82 Average Daily Volume (sh) 218,129 Shares Outstanding (mil) 22 Market Capitalization ($mil) $264 Short Interest Ratio (days) 4.73 Institutional Ownership (%) 70 Insider Ownership (%) 8 Annual Cash Dividend $0.40 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 2.4 Earnings Per Share (%) -0.1 Dividend (%) 17.5 using TTM EPS 14.5 using 2014 Estimate 16.5 using 2015 Estimate 13.7 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Big 5 Sporting posted lower-than-expected preliminary sales results for the fourth quarter and fiscal 2014 owing to soft holiday comps, leading management to lower its earnings per share guidance for the same period. Consequently, the company witnessed downward estimate revisions for 2014 and Also, the company remains susceptible to foreign exchange and macroeconomic headwinds, which may impact results. Hence, we downgrade our long-term recommendation on Big 5 Sporting to Neutral. However, Big 5 Sporting leverages an extensive network of stores to effectively penetrate into its target markets, directed to generate healthy sales and capture market share. Also, the company aims to expand its ecommerce platform to gain traction in the changing market. We believe that these moves are likely to place it well for future growth. Risk Level * Average, Type of Stock Small-Value Industry Retail-Misc/Div Zacks Industry Rank * 71 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 240 A 259 A 248 A 993 A A 231 A 265 A 250 E 978 E E 243 E 277 E 262 E 1,027 E ,070 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.34 A $0.28 A $0.45 A $0.24 A $1.33 A 2014 $0.10 A $0.14 A $0.34 A $0.14 E $0.72 E 2015 $0.13 E $0.14 E $0.38 E $0.22 E $0.87 E 2016 $0.94 E Projected EPS Growth - Next 5 Years % 14 (Note: Qtly. fig. may not add up to annual fig. due to rounding off) 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Big 5 Sporting Goods Corp. is a sporting goods retailer in the western U.S., operating 429 stores in 12 states as of Sep 28, The company offers athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, snowboarding, and in-line skating. Big 5 Sporting s stores span across 11,000 square feet on an average and stock nationally recognized brands, such as Nike, Reebok, Adidas, New Balance, Coleman, Rollerblade, Spalding and Wilson. The company also offers branded products, manufactured exclusively for its stores, private label merchandise under Court Casuals, Golden Bear, Harsh and Pacifica brands. In addition, it vends overstock and closeout (discontinued colors, sizes or styles of a manufacturer s current product line) goods. REASONS TO BUY Efficient Merchandising Strategy Provides Competitive Edge: Big 5 Sporting s unique strategy of offering exclusive branded merchandise sourced from leading manufacturers, provides it with a competitive edge over its rivals in a cut-throat specialty retailing industry. Furthermore, the company leverages its strong vendor relationships to source overstock and closeout merchandise at substantial discounts. This helps it achieve the dual objectives of boosting gross margin while offering compelling value to customers. Growth Initiatives Augur Well for the Future: Big 5 Sporting leverages an extensive network of stores to effectively penetrate into its target markets, directed to generate healthy sales and capture market share. The company has been focused on expanding its store base and introducing technological advancements in order to enhance services to its patrons. As part of this strategy, Big 5 Sporting planned to expand its store base to 439 by 2014-end. We believe that these moves are likely to place it well for future growth. Newly Launched ecommerce Site to Boost Future Results: Another area that Big 5 Sporting has been focusing on for quite some time is the expansion of its ecommerce platform to gain traction in the changing market. In Oct 2014, the company launched its ecommerce site with limited product offerings. Big 5 Sporting plans to advance toward making the site fully operational in phases, meaning that it will gradually ramp up its product assortments and marketing efforts related to the online portal. Though the ecommerce medium is not likely to sweeten the company s fourth-quarter results, we expect this platform to be a significant contributor to top and bottom lines in the long run. RISKS Lowered Earnings Guidance Leading to Downward Estimate Revisions: Big 5 Sporting s lowerthan-expected preliminary sales results for the fourth quarter and fiscal 2014 led management to lower its earnings per share guidance for the same period. The company s sales lagged mainly on account of soft holiday comparable-store sales (comps), which in turn stemmed from weak sales of firearm and related products coupled with the impact of unfavorable weather conditions on the sale of winter-related products. The lowered earnings guidance triggered the Zacks Consensus Estimate for the fourth quarter, full-year 2014 and 2015 to undergo a downward revision. Macroeconomic Challenges: The sporting goods retail industry is consumer-driven and hence, very sensitive to the health of the economy as sports is mainly a leisure activity. Spending on Equity Research BGFV Page 2

3 sporting goods is heavily dependent on the personal disposable income of consumers. The current macroeconomic challenges may restrain consumer spending on sporting goods items. Risk of Sourcing from Overseas Markets: A significant portion of Big 5 Sporting s merchandise is manufactured in countries outside the U.S. such as China, Taiwan and South Korea. Accordingly, the company is vulnerable to political, social and economic risks associated with operations in these countries. Further, an adverse movement in foreign currency exchange rates may dent the company s operational performance. RECENT NEWS Big 5 Sporting Posts Dismal Sales Results, Cuts Earnings Forecast- Jan 12, 2015 Big 5 Sporting reported lower-than-expected sales results for the fourth quarter and fiscal 2014 while lowering its earnings outlook for the same period. Net sales for the fourth quarter rose by less than 1% to $250.3 million from $248 million last year and were below the Zacks Consensus Estimate of $257 million. However, comps slipped 0.5% from the prioryear quarter and also came below the company s guidance of lower single-digit growth. in 2013, the company had posted a 0.5% decline in comps for the fourth quarter. The decline was primarily attributed to a low single-digit decline in holiday period comps, which more than offset the positive low single-digit comps for Oct and Nov Soft holiday sales came on the back of lower-than-expected sales of firearm and related products as well as the impact of unfavorable weather conditions on the sale of winter-related products in almost all the markets where the company operates. During the fourth quarter, the company s apparel and footwear categories reported comps increase in the low single-digit range, while comps for hardgoods dipped in the low single-digit range, mainly accounting for the weak sales of firearm-related products. Further, despite weaker-than-expected sales and a highly promotional retail backdrop, the company witnessed only a 10 basis points (bps) decline in merchandise margins for the quarter. Merchandise margins were helped by the company s efficient inventory management. Big 5 Sporting reported net sales of $977.9 million for fiscal 2014, which fell 1.6% year over year from $993.3 million. Top line also fell short of the Zacks Consensus Estimate of $984 million. Further, comps for the year declined 2.9% unlike a 3.9% increase reported in fiscal Given the lower-than-expected sales results, the athletic goods retailer lowered its earnings outlook for the fourth quarter and fiscal The company now estimates fourth-quarter earnings in the band of $0.14 $0.16 per share, lower than the previous guidance of $0.14 $0.22 per share as well as $0.23 recorded in the year-ago quarter. For fiscal 2014, Big 5 Sporting anticipates earnings to range from $0.68 $0.70 per share compared with $1.27 earned in fiscal Though the holiday season was a challenging one for Big 5 Sporting, the weather being warmer than usual in the markets it serves, the company has benefited from favorable winter weather in the last few days of the fourth quarter. Further, continuation of the favorable weather into the New Year has led to a positive start for Big 5 Sporting in Equity Research BGFV Page 3

4 Big 5 Sporting Q3 Earnings & Sales Beat, Guides 2014 Oct 28, 2014 Benefitting from improved sales, Big 5 Sporting s third-quarter fiscal 2014 earnings of $0.34 a share not only cruised ahead of the Zacks Consensus Estimate of $0.27, but also exceeded its previous guidance range of $0.24 $0.32. However, earnings slumped 24.4% year over year due to continued weak demand for firearms and ammunition products. Net sales for the third quarter climbed 2.3% to $265.1 million and surpassed the Zacks Consensus Estimate of $259 million, aided by robust summer products sales and favorable weather, when compared to the same period last year. Moreover, comps inched up 1% compared with a 1.4% increase recorded in the prior-year quarter. Comps in the apparel and footwear sections showed strength, partly offset by softness in the hardgoods category. Quarter in Detail Gross profit came in at $86.1 million, down 1.9% from the comparable year-ago level. Gross profit margin for the third quarter of 2014 contracted 140 bps to 32.5% from third-quarter Margin contraction mainly reflects a 47 bps decline in merchandise margins, which in turn, resulted from an increase in store occupancy and distribution costs as a percentage of net sales and intense promotional activities. Selling, general and administrative (SG&A) expenses increased 1.9% to $73.8 million on account of higher labor costs, greater expenses associated with new stores, partly compensated by lower legal expenses. As a percentage of sales, SG&A remained flat at 27.9%. Consequently, operating income fell 20.4% to $12.2 million, with operating margin contracting about 130 bps year over year to 4.6%. Financial Position Big 5 Sporting ended the third quarter with cash of $5.6 million and net merchandise inventory of $307.5 million. Long-term debt was $55.4 million and shareholders equity was $194.1 million as of Sep 28, The company s operating cash flows totaled $25.1 million in the first nine months of 2014 versus $25.2 million in the comparable period of Capital expenditures, excluding non-cash acquisitions, were $14.7 million in the first nine months of 2014, primarily toward store maintenance and remodeling of existing stores, opening of new ones, and computer hardware and software purchases including investments related to the development of the new ecommerce platform. For fiscal 2014, the company currently anticipates capital expenditures in the range of $24 $26 million. Dividend and Share Repurchase The company continues to enhance shareholder value by returning cash in the form of dividends and share repurchases. It declared a quarterly cash dividend of $0.10 per share, payable on Dec 15, 2014 to shareholders of record as of Dec 1. Equity Research BGFV Page 4

5 Moreover, the company bought back 114,200 shares for an aggregate value of $1.2 million during the quarter. As of the quarter-end, the company had about $7.3 million remaining under its current $20 million share repurchase program. Store Update During the third quarter, Big 5 Sporting opened four stores, including one which was relocated. Also, the company shut down two stores as part of repositioning. As of Sep 28, 2014, the company operated 429 stores. The company anticipates introducing 10 new stores in the fourth quarter, which will take its store count to 439 by the end of Guidance Management seems satisfied with its quarterly results as the company managed to perform well in spite of facing continuous low demand for firearms-related products along with drought-hitting chunks of its western markets. For the fourth quarter, earnings are envisioned in the range of $0.14 $0.22 per share, against $0.23 recorded last year. Equity Research BGFV Page 5

6 VALUATION Big 5 Sporting s current trailing 12-month earnings multiple is 14.5x compared with 25.1x industry average and 18.6x for the S&P 500. Moreover, the stock is trading at a discount to the industry average, based on forward earnings estimates. Over the last 5 years, Big 5 Sporting s shares have traded in the range of 7.5x to 23.3x trailing 12-month earnings. Our target price of $13.00, 14.9x 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Big 5 Sporting Goods Corp. (BGFV) Industry Average S&P Regis Corp. (RGS) N/A N/A N/A 9.7 KAR Auction Services, Inc. (KAR) N/A Hibbett Sports, Inc. (HIBB) Steiner Leisure Ltd. (STNR) TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow Big 5 Sporting Goods Corp. (BGFV) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Industry Average S&P N/A 2.0 N/A Equity Research BGFV Page 6

7 Earnings Surprise and Estimate Revision History Equity Research BGFV Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of BGFV. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1130 companies covered: Outperform %, Neutral %, Underperform 6.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research BGFV Page 8