- Big 5 is still expected to report strong results in Q3'21 before facing some major headwinds.
- The sporting goods retailer doesn't appear to have a strong e-commerce focus.
- The stock is cheap at 8x '22 EPS estimates, but supply chain issues and pulled forward demand will keep the stock gains capped.
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After an initial dip, the sporting goods retail sector got a massive boost from Covid lockdowns in the U.S. Big 5 Sporting Goods (NASDAQ:BGFV) was one of the biggest beneficiaries as the relatively unknown sporting goods retailer got a huge sales boost. My investment thesis is more Neutral on the stock expecting the sporting goods sector to have a major give back period in the year ahead.
Still Going Strong
The sporting goods sector appears to have gotten a double boost of consumers looking for outdoor activities during 2020 followed by a return to sports in 2021. The retailers such as Big 5 saw a boost from consumers loading up on big ticket items such as fitness gear, bikes and canoes last year while returning to heavy spending on sporting goods in 2021 after a year of absence.
For this reason, 2021 sales are actually topping the 2019 levels by a significant amount, but investors have to be concerned that 2022 sales can't match these peak levels of the last 2 years. So far, the BoA research continues to show amazing sales growth for the sector. According to the latest data for the week ending September 11, sales increased an impressive 10.6% YoY.
The numbers are impressive after Big 5 reported the quarter ending July 4 where comp sales surged 31.2%. The sporting goods retailer guided to a Q3'21 EPS of ~$1.05, up from just $0.30 back in Q3'19.
The forecast doesn't even include a $0.20 unfavorable shift in the calendar pushing the July 4 sales into the prior quarter along with ongoing supply chain issues. These numbers just sum up how impressive the last year has been for the sector.
Big 5 only guided to flat to positive mid-single digit comp sales gains for the quarter, but the number is impressive after negative comps in July. The BoA data continues to suggest the retailer might be too conservative for the current period.
In the prior quarter, Big 5 beat analyst estimates by an incredible $0.55 per share. The beat followed a few other big quarterly beats, but the sporting goods retailer had a long history of missing analyst estimates. In fact, from Q2'17 through Q3'20, Big 5 only had 2 quarters where the company actually beat both EPS and revenue targets in a quarter.
Source: Seeking Alpha earnings
Ultimately though, the major concern with Big 5 is a lack of focus on e-commerce sales. DICK'S Sporting Goods (DKS) saw a far bigger jump in lockdown sales due to the online sales boost while Academy Sports and Outdoors (ASO) along with Big 5 didn't see the same level of gains.
In fact, the Q2'21 earnings release didn't even discuss e-commerce sales making any investors fear Big 5 hasn't solved the issue contributing to the years of missed targets. Prior to the Covid lockdowns, the sporting goods sector was donating market share to online retailers such as Amazon (AMZN) quarter after quarter.
Big 5 spent more of the earnings release and earnings call discussing the big dividend hike due to much higher earnings and cash flows. The sector of course benefited from much higher sales with relatively fixed cost structures beyond merchandise costs while cutting variable costs such as marketing and removing promotional activity. The combination was impressive margins that boosted net income.
Cheap Valuation, But Major Headwinds Ahead
The biggest struggle with these sporting goods retailers is determining a more normalized valuation. Big 5 has already discussed weak July comps and a difficult number for the current quarter making a more normal EPS level difficult to derive.
The retailer is on the pace to earn $4+ this year, but the big question is the 2022 EPS estimates. Big 5 only has a one analyst making the numbers even more difficult to compare. As supply chain disruptions end next year, the sector will probably face more promotional activity as new entrants enter into the space making for more competition while the demand environment likely dissipates.
Big 5 has already seen a substantial rally from a stock trading regularly below $2 in 2019 and recently topping $30. Investors though need to not pay much attention to where the stock traded prior, other than to question whether the business has been altered enough to warrant sustained greatness.
The one analyst EPS estimate for 2022 is only $3+ per share placing the forward PE multiple at only 10x. The 2022 PE multiple is just 8x the one analyst estimate.
The average analyst EPS estimate for DICK'S Sporting Goods forecasts a nearly 30% dip next FY. Assuming a similar dip for Big 5 suggests the one analyst 2022 EPS estimate is very valid.
The key investors takeaway is that Big 5 has major e-commerce concerns and any investor should question their lack of focus on shifting away from in-store purchases. Even putting that issue aside, the sporting goods sector faces major headwinds next year. Regardless, the stock appears cheap based on likely EPS estimates for 2022. My view on the stock is Neutral until some of the shakeout in the sector occurs with the supply chain issues at key supplier NIKE (NKE) and a slowdown in sales starting soon. After that, Big 5 is likely a cheap stock worth an investment.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
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