Big 5 Sporting Goods May Be About To Break Out

| About: Big 5 (BGFV)
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After one of the best quarters in many years, Big 5 Sporting Goods (NASDAQ:BGFV) may be poised to break out, as overall positive trends for the company have been moving up for the last four quarters; a sign that usually signifies it's not a temporary situation.

Here's how same-store sales growth has occurred for Big 5 over the last year. In the second quarter of 2012, same-store sales were up 1.0 percent; in the third quarter of 2012, they jumped 5.2 percent; in the fourth quarter they climbed 6.5 percent.

That was followed by fiscal 2013 first quarter same-store sales which soared 10.5 percent, the largest improvement I've been able to find over the last 20 years for Big 5, which went public in 2002.

Much of this is attributed to the rebound in the California housing market, the continuing growth in sales of firearms and ammunition, and the good weather conditions during the reporting period.

The good news is everything was going on all cylinders for the quarter, but the challenge going forward is it'll be hard to repeat that unusually positive performance because of everything lining up right for the company.

Nonetheless, Big 5 appears to have really turned the corner in a sustainable way. If it can continue to grow in the mid-single digits, it will drive the share price of the company up.

Source:StockCharts.com

Latest Numbers

In the first quarter of fiscal 2013, Big 5's net sales jumped from $218.5 million in the first fiscal quarter of 2012 to $246.3 million.

Gross profit jumped from $65.4 million in the same reporting period in 2012 to $80.5 million. Margin for gross profit in the quarter climbed from 30.9 percent in the previous year to 32.7 percent. Big 5 attributed that to an "increase in merchandise margins of 113 basis points and lower store occupancy and distribution costs as a percentage of net sales."

Quarterly net income soared from $156,000, or $0.01 per diluted share year-over-year, to $7.5 million, or $0.34 per diluted share.

As measured by a percentage of net sales, selling and administrative expense dropped from 30.5 percent in the first fiscal quarter of 2012 to 27.6 percent in the first fiscal quarter of 2013. Higher labor costs, credit card fees and operating costs resulted in higher overall selling and administrative expenses for the quarter, rising by $1.3 million over last year in the same period.

Cash Flow Statement

Source: Ycharts

Balance Sheet

Source:Ycharts

New Strategy

After getting crushed during the housing collapse, Big 5 has slightly altered its strategy by adding merchandise that caters to a more upscale clientele. The reason for that appears to be the vulnerability experienced by the company when its low-priced offerings no longer appealed to its customer base, which stopped spending on sporting goods and primarily used their capital to acquire staples during the recession.

Attracting higher-end customers would help alleviate the impact on the company whenever the next economic slowdown comes, as they tend to continue buying leisure products when the economy is slow, even if they gravitate to lower-end products.

While the sporting goods industry is different than other retailers, this isn't the first time a company has tried to expand beyond its core customer base. Wal-Mart attempted that a while back and it didn't take hold for them.

Big 5, which is working on improving its margins, could benefit if more expensive products begin to move for the firm.

Attempting to maintain a core customer base while trying to expand to another is a tricky maneuver to accomplish, as a company risks alienating one while not successfully attracting the other. The smaller physical stores of Big 5, which average about 11,000 square feet, make it hard to offer a comprehensive new line, suggesting this will help the company incrementally if the experiment succeeds.

With consumers starting to spend again, that may not be an insignificant addition to the bottom line of Big 5 if its existing customer base continue to spend.

Geographic Risk

Even though Big 5 has a physical presence in 12 states, about half of its 414 stores are located in California. So however California goes, for the most part, so will go Big 5. The company needs to add more of its new stores outside of California in order to mitigate the geographic risk it still faces.

Source:Big 5 Sporting Goods

On the other hand, that's a strength as well, evidenced by the resurgence of the company in response to the improving California housing market. That should continue to be a plus for the company in the short term, but California continues to be under heavy economic stress, and that doesn't bode well for Big 5 over the long haul.

For now it is focusing on improving same-store sales and margins, while slowly adding new stores.

Under the current geographic risk that may appear too conservative on the surface, but the company does have to boost margins and continue to grow same-store sales, otherwise growth over time could turn out to be a negative for the company. After all, what's the point of growth if it's only reproducing the poor results of existing stores.

The bottom line is that Big 5 needs to increase the number of its store locations outside of California. The effects of the slow California economy on the company during the recession confirm that as a necessity.

This may slightly dilute the results when California's economy is strong, but it's worth it to produce a more level and predictable performance for the sporting retailer.

Where the Opportunity Lies

There are two important elements to consider when deciding on the probable opportunity with Big 5. The first is the continuing strong demand for firearms and ammunition, and the second being the effect an improvement in margins will have on the company.

For now, there is no doubt firearms and ammunition demand will remain high, as the political battle continues to rage over the 2nd Amendment and gun control. As long as there are concerns the right to bear arms could be eliminated or cut back, consumers will continue to demand firearms and ammunition. That isn't going to slow down any time soon.

Over time though, what will probably have a stronger impact on the company will be whether or not it can return to pre-recession margin levels.

While Big 5's operating margin improved in the latest quarter, rising to 5.1 percent in contrast to the 0.4 percent it increased last year in the same quarter, it is still far from the approximate 7 percent in operating margins it enjoyed before the recession.

If the company can boost margins while it continues to grow same-store sales, it could propel the company much higher than the range it has been trading at since June of 2012, when the share price stood at $6.49 a share.

So while the share price could lose some momentum in the short term, if Big 5 continues to increase same-store sales and margins it isn't close to finishing its upward run. It'll be even better if higher-end merchandise attracts more affluent consumers.

To that end the company is improving merchandising and integrating analytic tools to better manage its inventory.

Total Returns Comparisons

Source:Ycharts

Conclusion

After the earnings report showing same-store sales had soared in the fiscal first quarter of Big 5 Sporting Goods, the share price of the company has skyrocketed from $14.70 on April 15, 2013 to over $21.00 a share as I write. While a big move, I don't think this stock is close to slowing down yet, although the sporting goods retailer must be effective in the steps it's taking to ensure long-term growth.

In the near term it looks like the company will continue to move up, based on the continual demand for firearms and ammunition. That won't let up any time in the near future, so ensures some good numbers for the next couple of years at least. If operating margins are successfully widened, shares could possibly push the $30.00 mark, or possibly even a little higher.

Longer out there are plans for continual expansion through the opening new stores, with the majority of the 15 to 20 planned this year to open in the latter part of 2013. That should boost the numbers nicely in 2014 and beyond.

On the technical side, shares have appear to found support at $21.00. If that price manages to rise into the mid-$22.00 a share, it could launch a major breakout which would propel it to at least $25.00 share fairly quickly. The 52-week high is $22.58, so if it approaches that level it's likely it will drive the share price up.

If this breakout happens in the near term, the share price could start to test the $30.00 level on momentum.

Assuming the share price drops to about $20.00 or a little lower, it could result in the company taking a breather before continuing on its upward trajectory. It also may lose some of its ability to test the $30.00 per share mark in the near term as well.

On the outlook side of things, guidance is for comparable-store sales to grow at about 6 percent for all of fiscal 2013. If the company achieves or surpasses its estimates, it will no doubt be a major positive for Big 5, as shown by the response of investors to the outperformance in the first quarter of 2013.

If this trend continues, the P/E ratio of Big 5 will decline while its return on equity goes up. With a trailing P/E (NYSE:TTM) of 20.85 and a forward P/E of 14.39 (fye Dec. 30, 2014), it looks like this is the direction the company is heading in.

Add to this the increasingly positive economic outlook in the United States, and Big 5 Sporting Goods looks like it has a lot of gas left in the tank and could jump by as high as 50 percent within the next year or so ... maybe sooner. The timing depends on whether or not the share price takes a breather and how deep that will be if it does. Either way, Big 5 looks to be heading at least to the upper $20s, and possibly as high as into the low $30s in the not too distant future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.