There's a lot of 'smoke and mirrors' with Big 5 Sporting Goods (NYSE: BGFV) and, for now, this stock must be avoided. To drive home this point, we have to discuss three main points -- 1) uneasiness in the sporting goods industry 2) recent price action 3) don't chase dividends.
TURMOIL IN THE SPORTING GOODS INDUSTRY
Big 5 Sporting Goods is a sporting goods retailer based out of southern California. The bulk of their retail stores stretch from California to Texas, currently occupying 420 stores. In general, the sporting goods industry has hit a rough lull due, in part, to consumers continued move to online purchasing and the closing of many brick-and-mortar retail stores. There's no doubt competition has always been present in the industry (think Dick's (DKS), Modell's, Foot Locker, Finish Line, etc.) and the constant pressure from online megastore, Amazon (AMZN), forces companies within this industry to market creatively to keep bottom line numbers in tact. Most importantly, in my opinion, major sporting goods names (Nike (NKE), adidas, Under Armour (UA), etc.) are creating more and better direct-to-consumer channels as well as teaming up with Amazon to bypass these smaller retail chains. A March 2017 USAToday article outlined the recent company failures in this sector:
MC Sports - filed for bankruptcy and closed 68 stores
Sports Authority - liquidated in 2016, closing 400 stores
Golfsmith - closed 2/3 of stores and sold remains 1/3
Sports Chalet - closed 47 stores
Big 5 has begun the same pattern, closing five stores in Texas at the end of last summer. So, why is Big 5, specifically, falling victim to the retail sporting goods collapse? Let's look at basic earnings history to start -- earnings per share has decreased dramatically over the past four quarters (from $0.41 per share down to $0.13), including a huge earnings miss this past August (-31.60%). Growth estimates for this quarter are coming in close to -30% and next quarter is slated to fall -6.10%. That's a huge red flag considering fourth quarter retail sales typically see dramatic increases due to holiday shopping. The so-called "Christmas effect" should be a major boon for BGFV but current estimates are staying negative.
RECENT PRICE ACTION
According to Zack's, their Miscellaneous Retail grouping (which BGFV belongs to) has shown a decline in stock price of 17.3% this year and their Apparel and Shoes Retail grouping has dropped 37.1% in the same time. For BGFV, specifically, most recent earnings in August showed exactly this pattern as mentioned above.
Since the high-of-day price at the last earnings announcement (August 1), BGFV has lost over 32% in stock price as of this writing. And positive sentiment hasn't been pouring in; there have been multiple earnings estimate revisions in the past few months, all for the negative, starting from $1.23 per share down to $0.96. Could this just be second quarter woes? Important to note, BGFV had four straight earnings beats prior to this past second quarter results. However, the stock price has been in a bearish trend ever since November 2016, amidst two of those earnings beats. To me, that signals traders have taken note of the lagging industry and are staying away.
Looking towards the future, has BGFV been already beaten down? The answer is absolutely "Yes!" but I feel there can be more to go. The current 52 week change for the S&P 500 sits at 17.61% while BGFV's change is -53.15%. Clearly, this company has completely broken from the overly bullish S&P market trend and is still decreasing earnings estimates. That doesn't bode well for a company with minimizing margins.
BUT THAT DIVIDEND!
The major driver towards BGFV over the years has been their monster dividend. BGFV offers a dividend yield of 7.95% with a payout ratio of 62.5%, having risen three times since first introduced late 2012. Frankly, any company offering a dividend yield over 5% (especially in the retail good sector) should turn some heads. Value investors should be looking to trade stocks with an attractive valuation, solid dividend, and upside price potential. Personally, I just don't see the latter taking place because I don't believe the current stock price is the "absolute bottom". To invest in a strong dividend yield with shaky fundamentals and already loose footing is to take a gamble moving forward.
We have to continually ask ourselves, as value investors, is BGFV turning enough profit to continue with such a large dividend? Gross profit has stayed mostly flat. Net income applicable to common shares has risen nominally ($15.297 million to $16.886 million). Are we concerned BGFV's dividend is going away completely? No. Could we be concerned that it may decrease in the short run? Sure. BGFV's earnings are a major piece of how they justify their quarterly dividend amount and those earnings are starting to crumble as noted above. Remember RadioShack and their suspended dividend in 2012? Revenues were in decline for some time, and finally, in April 2012, RadioShack reported their first quarterly loss. Sound familiar?
My bottom line is this -- if you're not in this company, stay away, and, if you are invested in BGFV, seriously consider selling your shares. Of course, for all the above reasons, I'm forecasting a further downward movement in stock price though the dividend should hold up for the near future. Be cautious: the apparel and sports retail sectors are simply not strong right now and there's will be no mercy if/when shares continue getting dropped.
Disclosure: I/we 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.