Shareholders in sporting goods retailer Big 5 Sporting Goods (NASDAQ: BGFV) have likely been feeling a little grumpy lately with the company's share price sitting near a 52-week low. Big 5 Sporting Goods has been hurt by lower operating profitability, due to weakening comparable store sales results, a negative trend that has also affected competitors, like Dick's Sporting Goods (NYSE: DKS). Case in point was Big 5 Sporting Goods' performance in its latest fiscal quarter, which featured a 3.6% decline in revenues and lower than expected profitability. However, after losing almost half its market value over the past twelve months, is Big 5 Sporting Goods a good bet at current prices?
What's the value?
Big 5 Sporting Goods is a major player in the retail sporting goods space, operating a concentrated network of more than 400 stores, a majority of which are located in the state of California. The company has benefited from greater per-store productivity over the last two fiscal years, anecdotally due to greater consumer interest in firearms, a key product category. The net result for Big 5 Sporting Goods was an upward trend in its operating margin over that time period, partially financing a further expansion of its store network beyond its West Coast home base.
In its latest fiscal year, Big 5 Sporting Goods performed fairly well, generating a 5.6% increase in total revenues, its highest gain of the past five years, thanks to a healthy 3.9% uptick in comparable store sales. More importantly, the company profited from higher average sales prices during the period, which helped it to post increases in both its gross and operating margins. The higher profit allowed Big 5 Sporting Goods to fund the largest annual expansion of its store network in recent years, with 15 net new stores.
Headwinds in 2014
FY2014, though, has been a slightly different story for Big 5 Sporting Goods, evidenced by a 4.9% decrease in total revenues that was a function of a 6.4% decline in comparable store sales, far below the 7.4% gain of the prior-year period. The company has been negatively impacted by an increasingly promotional selling environment, a trend that helped to produce a 64.4% drop in its operating income. Not surprisingly, the reduced profitability led to weaker cash flow generation, bringing into question the company's ability to deliver on management's plan for further store expansion in the current year.
Of course, Big 5 Sporting Goods doesn't appear to be alone in its struggles in 2014, as retail sporting goods kingpin Dick's Sporting Goods has also had its share of profit growth woes. While the company posted a top-line gain of 7.9% in its latest fiscal quarter, far better than its smaller competitor, its comparable store sales growth was less than half of expectations, courtesy of a bad showing for its Golf Galaxy unit. Combined with a need to use promotions in order to drive sales and customer traffic volumes, it added up to a margin contraction for Dick's Sporting Goods, limiting its adjusted operating income growth to 3.5% for the period.
Looking for growth
Given the obviously difficult operating environment for broad line sporting goods retailers, investors looking for gains in the sector should probably stick with specialty players that seem well positioned for further growth, like Foot Locker (NYSE: FL). The company had a solid financial performance in its latest fiscal year, highlighted by a 4.2% increase in comparable store stores and its best per-square foot sales performance of the past five years. More importantly, unlike its competitors, Foot Locker seems to have kept its momentum intact in FY2014, illustrated by a strong 7.6% gain in comparable store sales and a 13.5% increase in operating income in its latest fiscal quarter.
The bottom line
Big 5 Sporting Goods is undoubtedly cheaper than it was at the start of the year, after a nearly 50% decline that has left its stock price with a below-market P/E multiple of roughly 12. That being said, management's recent decision to chop its profit forecast for the current year makes it hard to ascertain whether or not the company has hit bottom. As such, investors should probably wait for more positive data prior to betting on this small cap.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.