Good day for BGFV today. Established a small position back when below article came out.
(Sure wish I had gotten a full fill on my limit order, instead of a smallish partial fill in hindsight)
Getting Back in the Game
By DAVID ENGLANDER / Barrons Sept 22, 2012
Big 5 Sporting Goods is upgrading its merchandise mix to attract customers and boost sales and profits. The changes could beckon investors, too.
California was particularly hard-hit by the recession and has struggled to rebound, as unemployment levels still exceed those elsewhere in the nation. The troubled local economy and a value-focused customer base made business especially difficult in recent years for Big 5 Sporting Goods, a sporting-goods retailer that operates about half of its 407 stores in the state.
Based in El Segundo, Calif., Big 5 (ticker: BGFV) saw operating profit margins contract to 2.1% last year from 6.1% in 2007, depressed by weak sales trends and high promotional activity. Earnings tumbled 58% in the same span.
What's In Store? Big 5 is adjusting its merchandise mix to boost sales and profits. Half its stores are in California, including this Santa Monica unit.
But a turnaround set in motion in the summer of 2011 appears to be taking hold. Big 5 has been adjusting its merchandise mix to appeal to more-affluent customers, by expanding its offerings of higher-priced, name-brand goods. The company also has been scaling back on products that had been underperforming.
These measures have increased the average ticket price of store items, and led in the most recent quarter to an improvement in profit margins. Sales at stores open at least a year rose 1% in the three months ended July 1, reversing a trend of negative comparables for the prior six quarters. Management has guided investors to expect positive "comps" in the third quarter, as well.
Since the company's latest earnings report on July 31, Big 5's shares have surged 21%, to close Friday at $9.15. That's a notable improvement, but a far cry from the stock's 2007 high of $27.
More gains could be on the way, however. As the company's new merchandising strategy wins customers, operating margins could rise sharply, lifting earnings. This recovery, in turn, could spur a 30% rise in the shares. Big 5 pays an annual dividend of 30 cents a share, and yields a healthy 3.3%.
Co-founded by Robert Miller in 1955 as a seller of World War II surplus items, Big 5 has grown into a leading sporting-goods chain in 12 Western states. Miller and his son, Steven, who has been CEO since 2000, took the company public in 2002.
Big 5 sells athletic shoes and apparel, as well as outdoor and athletic equipment for team sports,camping, fishing and golf, among other things. So-called hard goods, such as fishing rods and golf clubs, generated 55% of last year's sales, with shoes and apparel contributing the rest. The stores carry top brands, including Nike, Adidas, Coleman, and Under Armour, and a small private-label line.
This year Big 5 could earn $13 million, or 60 cents a share, up 13% from 2011 earnings, on revenue of $930 million. Analysts expect earnings to jump to 77 cents a share in 2013, on 4% sales growth.
The merchandising changes are still in the early innings. At the end of last year, the company began using a new business-analytics system throughout its stores, which identifies weak-selling products, allowing management to make better buying decisions and keep a tighter control on inventory.
In addition to adding higher-priced and higher-margin branded products across its product categories, Big 5 also is expanding its size and color selection. In the July quarter, as a result, the company logged its best gain in quarterly same-store sales growth in apparel and footwear since 2006. Operating margins rose to 2% from 0.4% in the prior quarter, driven by the higher-margin product mix, and tighter inventory control.
Recent Price $9.15
Market Value $198 mil
12-Mo. Range $5.34 - $11.59
Revenue 2012E $930 mil
EPS 2012E $0.60
P/E 2013E 11.9
EPS 2013E $0.77
Net Inc 2012E $13 mil
Dividend Yield 3.3%
Expansion in operating margins could continue. Sean Naughton, who covers Big 5 for Piper Jaffray, estimates that operating margins could rise to 2.5% in 2012 and 3% in 2013. In a report, he notes that if margins recover to 4% in the next several years, earnings per share could vault to $1.50.
Big 5 trades for 11.9 times estimated 2013 earnings per share, well below Dick's Sporting Goods (DKS) and Hibbett Sports (HIBB), at 18.4 times and 19.6 times, respectively. Naughton thinks the shares could command 15 times his 2013 estimate of 80 cents a share in the next year, implying a price target of $12. Company officials couldn't be reached by press time.
BIG 5 HAS A SOLID balance sheet, with debt of $71 million to cash of $6 million, or net debt at 29% of total capitalization. The company is expected to generate $14 million of free cash this year. In addition to paying dividends, management has used the cash to buy back shares, reducing shares outstanding by 1.3% in the past year.
Big 5 also is revamping its digital marketing strategy. The company plans to launch a new product-intensive Website by the end of the year, and has retained IBM to evaluate an e-commerce strategy. An effective e-commerce launch could also give a nice lift to Big 5's business—and its shares. |
