Another weak quarter and macroeconomic headwinds are causing us to lower fair value of Big 5.
As was expected, Big 5 Sporting Goods (BGFV) posted another weak quarter. Revenue fell by 0.1%, same store sales were poor at -1.7%, and earnings came in as expected at $0.14 per share. Though we were not surprised by the results, and are even encouraged that Big 5 posted positive comps for June, worries about unemployment and low-end consumer spending in 2012 are leading us to lower our fair value estimate to $12 per share (our original fair value estimate was $15 per share, the analysis of which can be found here). We make our DCF valuation model template available here.
Gross margins for the quarter were only down 50 basis points in a very challenging retail environment. However, Big 5 did lower guidance to $0.12 -$0.20 a share for Q3 2011 due to continued gross margin pressure and lower same store sales.
Though gross margins fell, the opening of a new distribution center should yield between $600 thousand to $800 thousand in 2012, and the opening of 9 new stores during the second half of the year will result in some revenue increases.
We think Big 5 is a victim of low-end consumers being squeezed by high fuel prices and unemployment. Therefore, we think the company has tremendous operating leverage when the economy improves, and we would not be surprised to see shares trade more toward our best-case scenario of $13. Additionally, Big 5 still trades at only 11x our 2011 earnings forecast, and below our bear-case scenario valuation of $9. A dividend yield of 3.75% at $8 a share could provide a nice return while patient investors wait for economic conditions to accelerate.
Nevertheless, we think the risk remains high as long as unemployment in key states like California, Nevada, and Arizona, remains significantly worse than the rest of the United States. With the risk of another slowdown looming, we recommend that investors be cautious when considering a position in Big 5.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.