Big 5 Sporting Goods posted record results for the third quarter in a row due to robust sales growth, margin expansion and leaner cost structure and forecast sustained momentum for 2021.
Steve Miller, CEO, told analysts: “We are satisfied with everything we have achieved in 2020 and are even more excited about the prospect than many of the leisure and product trends originally driven by the pandemic prove sustainable even if the disruption occurs the pandemic subsides. “
He said customers continue to “look for ways to stay active and healthy in the face of the pandemic,” and he expects many of the Big 5 trends to continue.
Miller stated, “Demand for home fitness products and other outdoor recreational activities remains high. People have made significant investments in home gym equipment, and are new or perhaps returning to golf, tennis, hiking, camping, and fishing. We believe that even as the world begins to normalize, many customers will continue these activities and shop with us to make further investments in their equipment. “
He added, “More importantly, we expanded our customer base over the past year and we believe we are at the forefront of customers when it comes to sporting goods.”
Hard goods make up almost 40 percent in the fourth quarter
In the fourth quarter, which ended on January 3, the momentum was evident in the hardware category, in which sales in the same store rose by almost 40 percent, which is due to the “exceptional demand” for products for home fitness as well as for recreation in the Outdoors and at home is attributed to Miller. The sale of hardware also reflects the continued strong demand for products related to firearms.
Sales in the same store for the apparel category declined in the mid to high single digits, and footwear declined in the advanced teens. Both clothing and shoes have been negatively impacted by the ongoing disruption to the team sports season due to COVID-19. Apparel was also negatively impacted by adverse winter weather until the end of the fourth quarter when sales of winter-related products reacted positively to favorable weather.
Overall, revenue in the same business rose 10.5 percent in the quarter, compared to 0.6 percent in the fourth quarter of fiscal 2019.
Revenue results for the same business for the quarter were in line with the updated guidance as of Jan. 13. Before the update, Big 5 had forecast fourth quarter revenue for the same business in the flat to positive 7 percent range.
Monthly comps rose in mid-teens in October, in high single digits in November, and in low double digits in December.
The November win came despite the lack of door opener events around the Black Friday weekend in 2020 due to social distancing measures.
At Big 5, the average sales size increased by around 20 percent, driven by increases in the number of units per sale and the average price per unit, which was partially offset by a decline in high single-digit customer transactions. The lower traffic reflects the impact of fewer team sports due to COVID-19. Customers opt for fewer shopping trips.
Margins expand 243 basis points
Merchandise margins continued to climb, increasing 243 basis points from the fourth quarter of 2019, when margins increased 239 basis points year over year. A reduction in advertising activities and favorable product mix shifts were the main drivers for the profit margin.
The gross margin improved to 35.2 percent for the quarter from 31.6 percent. In addition to the improvement in the merchandise margin, the improvement in the gross margin reflects the lower capacity utilization of the branches and the storage costs as a percentage of sales and, to a lesser extent, the beneficial effects of taking out an insurance policy, which are partially offset by lower selling costs that were capitalized in the portfolio for the quarter.
SG&A expenses decreased $ 1.1 million year-over-year mainly due to lower print advertising costs and the beneficial effects of purchasing insurance, which were partially offset by higher performance-based incentive provisions. As a percentage of sales, SG&A costs decreased by 530 basis points to 25.6 percent due to the combination of cost reductions and higher sales volume. The chain had taken several cost-saving measures at the beginning of the pandemic.
Earnings improved significantly to $ 21.0 million, or 95 cents per share, from $ 356,000, or 2 cents, a year ago. Last year included a $ 0.10 stock benefit related to a cheap insurance deal. On January 13th, Big 5 forecast an EPS in the range of 90 to 93 cents and was thus well above the previous range of 35 to 60 cents.
Record result for 2020
Revenue for the year increased 4.3 percent to $ 1.04 billion, reflecting the negative impact of periods of significant store closures during the year related to COVID-19. Sales in the same business increased by 3 percent in the year under review.
By the quarter, sales declined in the same business of 10.8 percent in the first quarter and 4.2 percent in the second quarter, followed by increases of 14.8 percent in the third and 10.5 percent in the fourth quarter.
Net income for 2020 was a record $ 55.9 million, or $ 2.58 per share, versus $ 8.4 million, or 40 cents.
Inventories drop 19.2 percent
Year-end inventories declined 19.2 percent due to strong summer product sales and the challenges of securing the product as demand continued to outperform supply in many high performing product categories.
Miller said the retailer is still tracking inventory in hot categories, with significant supply chain disruptions slowing down efforts.
“We get the inventory. Without them, we wouldn’t be able to generate positive sales, ”said Miller. “But it was an uneven flow in several categories. Regardless of whether it is factory problems, raw material shortages, ship problems or certainly important problems with the transport of products through the port, we see deliveries that are later than ideal. We work hard with our suppliers and we can do this and are optimistic that conditions will improve in the coming months. “
The decline in inventories also reflects the “extraordinary sell-off” of winter products, including clothing and footwear, towards the end of the quarter, driven by favorable winter weather in the chain’s western markets.
“Customers continue to seek ways to recreate nature,” Miller said. “Our strong winter season has led to a very positive sell-off of our winter inventory, which should position this category well for the next season with a fresh range.”
Comps for the first quarter are expected to rise 20 percent
For the first quarter, Big 5 expects an increase in sales in the same business of around 20 percent and earnings per share in the range of 47 to 53 cents. This corresponds to a decline in sales in the same business of 10.8 percent in the same quarter of the previous year and a loss per base share of 22 cents in the first quarter of the 2020 financial year. The same period of the previous year was negatively affected prematurely by a lack of winter weather in the period and pandemic-related lockouts last March.
The profit forecast reflects the expected further expansion of the merchandise margins due to a favorable shift in the product mix with fewer advertising activities. The leverage is expected to continue as branch opening hours are reduced and the cost of print advertising has decreased significantly compared to last year.
Miller said the first quarter had “got off to a very good start,” and sales were up around 20 percent.
“Almost all of the categories that contributed to last year’s results have continued to develop at a high level,” said Miller, emphasizing the strength of the winter categories, which is partly related to the favorable weather. Offsetting some of these gains is a major impact from the ongoing loss of team sports, particularly baseball, which historically is a significant contributor to first-quarter revenue. Miller added, “We are pleased, however, that restrictions are gradually easing in many of our markets, which should lead to more school openings and the launch of various youth sports programs.”
Big 5 ends the year with no debt
Miller said annual performance allowed Big 5 to “meaningfully bolster” its balance sheet, which was reflected in the board of directors’ decision to increase the regular cash dividend from an annual rate of 40 cents per share to an annual rate of 60 cents authorize.
Big 5 had no borrowing under its credit facility and had $ 64.7 million in cash versus $ 66.6 million in loans and $ 8.2 million in cash at the end of fiscal 2019. A new loan agreement with the bank of America, announced the week before, offered more flexibility.
Investments totaled $ 7.3 million in FY2020, below normal as the retailer sought flexibility at the start of the pandemic. Investments in the range of US $ 12 million to US $ 16 million are expected for fiscal year 2021, mainly investments in store remodeling, around five new branches, equipment for distribution centers, and purchases of computer hardware and software.
Miller concluded in his comments: “We are very excited about our future and feel well positioned to continue to leverage our product dynamics and improve the cost structure to deliver another banner year.”
Photos courtesy of Big 5