I hate shopping, especially around the holidays, but braved visiting my local Big 5 Sporting Goods (BGFV) in the name of research. Big 5 Sporting Goods is a regional sporting goods retailer with stores in 12 states in the Southwest and Pacific Coast. They mass-market a variety of sporting goods and associated products, competing on price and availability for the general consumer, not the specialized athlete.
A smaller Big 5 just opened in my town, taking over the space previously occupied by a K-Five store. K-Five was a specialized "board sports" store that recently went out of business. This store is in one of the older shopping centers along our main road, which has numerous retail centers that are fairly well-occupied but aren't the "trendy" shopping area for our part of suburban San Diego county. I visited the store late on a Friday night during their extended holiday hours. This was done to gauge what kind of shoppers would be in the store and hopefully have less of a crowd to deal with -- bad for margins, but good to walk around and see the product mix in a smaller store than any Big 5 I've been in previously.
First impression: The store is packed with merchandise, very narrow aisles and room to hold items away from the display. A broad, possibly excessive variety of goods.
Second impression: Like all other Big 5s and many of their competitors -- Sports Authority, Sports Chalet (SPCHB), Dicks (DKS) -- there are the usual types of equipment, clothes and shoes. Big 5 seems to be aiming at the lower end price points, but some items are higher in value.
Odd impression: Lots and lots of fishing gear. Of note, we have a stocked lake within a few miles of the store, so having a slightly disproportionate amount of tackle and bait may be worth asking the manager about during my next visit.
Real Analysis of Big 5 Stock
I'd like to point out a few aspects of Big 5 other than just walking around one store. First, the company is concentrated in the Southwest, which has some pros and cons. The first is our great weather and diversity of climes. Throughout Southern California and up the coast are ski areas that remain open almost as long as any in the nation. At the same time, surfing and scuba diving can be done year-round. This equates to sporting goods being a solid year-round business.
Second, while it currently has a lower return on equity than it's main competitors, Big 5 has a solid strategy and position. The lower RoE is attributable to some management missteps but also renovating stores, relocating stores and opening newer smaller stores. Big 5 is also investing in an e-commerce suite scheduled to be rolled out in 2014. This is a positive development for the company and should serve to guard sales and likely increase margins.
Third, Big 5 pays a conservative dividend, currently at 2.2% and an ex-dividend date back in November (key statistics can be found here). The payout rate is 31% -- a healthy amount but not excessive. This allows some dividend return to shareholders while also retaining earnings for the e-commerce rollout, store opening and refurbishment, and some margin for errors or downturns.
That brings me to the two reasons I am a "cautious long" in Big 5 and not too excited:
- Tough year-over-year comparables coming up. 2012 sales were driven in part by large gun and ammunition purchases. This occurred throughout the sporting goods sector, and even affected more diversified retailers that had exposure to guns and ammunition. While these comparisons won't affect the underlying business, they will shape perception.
- Continued consumer weakness, especially after the holidays and ACA "sticker shock." Big 5 has the potential to improve margins from the current 4%, however this could be offset by slower sales in 2014. Big 5 could give up much of it's 2013 gain if one or both of these.
If you are currently long (as I am), I think sitting tight is an OK strategy, especially with the fairly secure dividend. I also write slightly out of the money covered calls (19 or 20 at current trading prices) to juice the yield a bit. If called out, the opportunity to reestablish a position has presented itself this year.
Would I recommend establishing a new position in Big 5? I'd wait until after the earnings statement this month to see if margins are begin to improve. I'd also wait for a consolidation closer to 16.50, which would juice the dividend yield. I'm going to remain cautious about my Big 5 holdings and plan on walking through the local store and a few others early in January.