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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from _____________________ to ____________________
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code: ( |
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
☐ |
☒ |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
There were
BIG 5 SPORTING GOODS CORPORATION
INDEX
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Page |
PART I – FINANCIAL INFORMATION |
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Item 1 |
3 |
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Unaudited Condensed Consolidated Balance Sheets as of October 3, 2021 and January 3, 2021 |
3 |
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4 |
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5 |
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6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
7 |
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21 |
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Item 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 |
Item 3 |
33 |
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Item 4 |
34 |
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PART II – OTHER INFORMATION |
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Item 1 |
35 |
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Item 1A |
35 |
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Item 2 |
36 |
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Item 3 |
36 |
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Item 4 |
36 |
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Item 5 |
36 |
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Item 6 |
37 |
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38 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BIG 5 SPORTING GOODS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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October 3, |
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January 3, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net of allowances of $ |
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Merchandise inventories, net |
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Prepaid expenses |
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Total current assets |
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Operating lease right-of-use assets, net |
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Property and equipment, net |
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Deferred income taxes |
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Other assets, net of accumulated amortization of $ |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Current portion of operating lease liabilities |
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Current portion of finance lease liabilities |
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Total current liabilities |
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Operating lease liabilities, less current portion |
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Finance lease liabilities, less current portion |
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Other long-term liabilities |
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Total liabilities |
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Stockholders' equity: |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Less: Treasury stock, at cost; |
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( |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying notes to unaudited condensed consolidated financial statements.
- 3 -
BIG 5 SPORTING GOODS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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13 Weeks Ended |
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39 Weeks Ended |
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October 3, |
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September 27, |
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October 3, |
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September 27, |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling and administrative expense |
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Other income |
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— |
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— |
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— |
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( |
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Operating income |
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Interest expense |
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Income before taxes |
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Income tax expense |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Earnings per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average shares of common stock |
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Basic |
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Diluted |
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See accompanying notes to unaudited condensed consolidated financial statements.
- 4 -
BIG 5 SPORTING GOODS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
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13 Weeks Ended October 3, 2021 |
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Additional |
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Treasury |
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Common Stock |
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Paid-In |
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Retained |
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Stock, |
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Shares |
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Amount |
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Capital |
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Earnings |
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At Cost |
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Total |
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Balance as of July 4, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends on common stock ($ |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Exercise of share option awards |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Forfeiture of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Purchases of treasury stock |
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( |
) |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance as of October 3, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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13 Weeks Ended September 27, 2020 |
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Additional |
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Treasury |
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Common Stock |
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Paid-In |
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Retained |
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Stock, |
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Shares |
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Amount |
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Capital |
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Earnings |
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At Cost |
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Total |
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Balance as of June 28, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends on common stock ($ |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Exercise of share option awards |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Forfeiture of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Balance as of September 27, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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39 Weeks Ended October 3, 2021 |
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Additional |
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Treasury |
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Common Stock |
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Paid-In |
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Retained |
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Stock, |
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Shares |
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Amount |
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Capital |
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Earnings |
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At Cost |
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Total |
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Balance as of January 3, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends on common stock ($ |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Issuance of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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Exercise of share option awards |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Forfeiture of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Retirement of common stock for payment |
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( |
) |
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— |
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( |
) |
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— |
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— |
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( |
) |
Purchases of treasury stock |
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( |
) |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance as of October 3, 2021 |
|
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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39 Weeks Ended September 27, 2020 |
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Additional |
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Treasury |
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Common Stock |
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Paid-In |
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Retained |
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Stock, |
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Shares |
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Amount |
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Capital |
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Earnings |
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At Cost |
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Total |
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Balance as of December 29, 2019 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends on common stock ($ |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Issuance of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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Exercise of share option awards |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Forfeiture of nonvested share awards |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Retirement of common stock for payment |
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( |
) |
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— |
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( |
) |
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— |
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— |
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( |
) |
Balance as of September 27, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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See accompanying notes to unaudited condensed consolidated financial statements.
- 5 -
BIG 5 SPORTING GOODS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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39 Weeks Ended |
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October 3, |
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September 27, |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash |
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provided by operating activities: |
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Depreciation and amortization |
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Share-based compensation |
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Amortization of other assets |
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Noncash lease expense |
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Proceeds from insurance recovery - lost profit margin and expenses |
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— |
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Gain on recovery of insurance proceeds - lost profit margin and expenses |
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( |
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— |
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Gain on recovery of insurance proceeds - property and equipment |
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( |
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— |
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Gain on eminent domain condemnation |
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— |
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( |
) |
Proceeds from eminent domain condemnation - lost profit margin |
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— |
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Deferred income taxes |
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( |
) |
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( |
) |
Changes in operating assets and liabilities: |
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Accounts receivable, net |
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Merchandise inventories, net |
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( |
) |
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Prepaid expenses and other assets |
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( |
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Accounts payable |
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Operating lease liabilities |
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( |
) |
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( |
) |
Accrued expenses and other long-term liabilities |
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( |
) |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
) |
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( |
) |
Proceeds from insurance recovery - property and equipment |
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— |
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Proceeds from eminent domain condemnation - property and equipment |
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— |
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Net cash used in investing activities |
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( |
) |
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( |
) |
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Cash flows from financing activities: |
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Borrowings under revolving credit facility |
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— |
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Payments under revolving credit facility |
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— |
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( |
) |
Changes in book overdraft |
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( |
) |
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Debt issuance costs paid |
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( |
) |
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( |
) |
Principal payments under finance lease liabilities |
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( |
) |
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( |
) |
Proceeds from exercise of share option awards |
|
|
|
|
|
|
||
Cash purchases of treasury stock |
|
|
( |
) |
|
|
— |
|
Tax withholding payments for share-based compensation |
|
|
( |
) |
|
|
( |
) |
Dividends paid |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Net increase in cash and cash equivalents |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
|
||
Property and equipment acquired under finance leases |
|
$ |
|
|
$ |
— |
|
|
Property and equipment additions unpaid |
|
$ |
|
|
$ |
|
||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||
Interest paid |
|
$ |
|
|
$ |
|
||
Income taxes paid |
|
$ |
|
|
$ |
|
||
See accompanying notes to unaudited condensed consolidated financial statements.
- 6 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Big 5 Sporting Goods Corporation (the “Company”) is a leading sporting goods retailer in the western United States, operating
The accompanying interim unaudited condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its 100%-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended January 3, 2021 included in the Company’s Annual Report on Form 10-K. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented.
The operating results and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.
Consolidation
The accompanying Interim Financial Statements include the accounts of Big 5 Sporting Goods Corporation, Big 5 Corp. and Big 5 Services Corp. Intercompany balances and transactions have been eliminated in consolidation.
Reporting Period
The Company follows the concept of a
Recently Issued Accounting Updates
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this standard are elective and are effective upon issuance for all entities, and the impact from this standard was immaterial.
Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.
- 7 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
COVID-19 Impact on Concentration of Risk
The novel coronavirus (“COVID-19”) pandemic has significantly impacted health and economic conditions throughout the United States and globally, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine.
The Company primarily operates traditional sporting goods retail stores located in the western United States, with approximately
A substantial amount of the Company’s inventory is manufactured abroad. COVID-19, and surging consumer demand initially associated with the pandemic, has also impacted the Company’s supply chain for products sold, particularly those products that are sourced from Asia. To the extent one or more vendors is negatively impacted by continued supply chain disruptions or by COVID-19, including due to interruptions at or closure of those vendors’ distribution centers or manufacturing facilities, or the Company or its vendors are unable to obtain the necessary shipping capacity to transport products to the Company’s distribution center, the Company may be unable to maintain delivery schedules or adequate inventory in its stores. During the third quarter of fiscal 2021, the Company experienced significant shipping delays of products sourced from overseas vendors to be received at the Ports of Los Angeles and Long Beach, which reflected increased shipping volume and insufficient labor resources at the ports that have significantly increased cargo backlogs. These factors, in addition to workforce shortages in the trucking industry, have limited the Company’s ability to obtain desired quantities of inventory for various merchandise categories. While the Company has generally been able to sufficiently stock product in its stores to meet most consumer demand during the pandemic, future prolonged and sustained delays in product reaching the Company’s stores from overseas vendors, particularly during the holiday season, could result in the inability to obtain adequate levels of merchandise inventories to meet consumers’ needs, which could have an adverse impact on net sales and profitability.
General Concentration of Risk
The Company purchases merchandise from over
Use of Estimates
Management makes a number of estimates and assumptions relating to the reporting of assets, liabilities and stockholders’ equity and the disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and reported amounts of revenue and expense during the reporting period to prepare these Interim Financial Statements in conformity with GAAP. Certain items subject to such estimates and assumptions include the carrying amount of merchandise inventories, property and equipment, lease assets and lease liabilities; valuation allowances for receivables, sales returns and deferred income tax assets; estimates related to stored-value cards and the valuation of share-based compensation awards; and obligations related to litigation, self-insurance liabilities and employee benefits. Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after October 3, 2021, including those resulting from the impacts of the COVID-19 pandemic, may result in actual outcomes that differ from those contemplated by management’s assumptions and estimates.
- 8 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Revenue Recognition
The Company operates solely as a sporting goods retailer, which includes both retail stores and an e-commerce platform, that offers a broad range of products in the western United States and online. Generally, all revenue is recognized when control of the promised goods is transferred to customers, for an amount that reflects the consideration in exchange for those goods. Accordingly, the Company implicitly enters into a contract with customers to deliver merchandise inventory at the point of sale. Collectability is reasonably assured since the Company only extends immaterial credit purchases to certain municipalities and local school districts.
In accordance with ASC 606, Revenue from Contracts with Customers, the Company disaggregates net sales into the following major merchandise categories to depict the nature and amount of revenue and related cash flows:
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
|
October 3, |
|
|
September 27, |
|
|
October 3, |
|
|
September 27, |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Hardgoods |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Athletic and sport footwear |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Athletic and sport apparel |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Substantially all of the Company’s revenue is for single performance obligations for the following distinct items:
For performance obligations related to retail store and e-commerce sales contracts, the Company typically transfers control, for retail stores, upon consummation of the sale when the product is paid for and taken by the customer and, for e-commerce sales, when the product is tendered for delivery to the common carrier. For performance obligations related to stored-value cards, the Company typically transfers control upon redemption of the stored-value card through consummation of a future sales transaction. The Company accounts for shipping and handling relative to e-commerce sales as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for only
The Company recognized $
In the accompanying interim unaudited condensed consolidated balance sheets, the Company recorded, as prepaid expense, estimated right-of-return merchandise cost of $
Share-Based Compensation
The Company accounts for its share-based compensation in accordance with ASC 718, Compensation—Stock Compensation. The Company recognizes compensation expense on a straight-line basis over the requisite service period using the fair-value method for share option awards, nonvested share awards and nonvested share unit awards granted with service-only conditions. See Note 10 to the Interim Financial Statements for a further discussion on share-based compensation.
- 9 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments of excess cash into U.S. Treasury bills, which have maturities of 90 days or less. Book overdrafts are classified as current liabilities.
Valuation of Merchandise Inventories, Net
The Company’s merchandise inventories are made up of finished goods and are valued at the lower of cost or net realizable value using the weighted-average cost method that approximates the first-in, first-out (“FIFO”) method. Average cost includes the direct purchase price of merchandise inventory, net of vendor allowances and cash discounts, in-bound freight-related expense and allocated overhead expense associated with the Company’s distribution center.
Management regularly reviews inventories and records valuation reserves for damaged and defective merchandise, merchandise items with slow-moving or obsolescence exposure and merchandise that has a carrying value that exceeds net realizable value. Because of its merchandise mix, the Company has not historically experienced significant occurrences of obsolescence.
Inventory shrinkage is accrued as a percentage of merchandise sales based on historical inventory shrinkage trends. The Company performs physical inventories of its stores at least once per year and cycle counts inventories at its distribution center throughout the year. The reserve for inventory shrinkage primarily represents an estimate for inventory shrinkage for each store since the last physical inventory date through the reporting date.
These reserves are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from expectations.
Valuation of Long-Lived Assets
In accordance with ASC 360, Property, Plant, and Equipment, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows (“asset group”), usually at the store level. The carrying amount of a store asset group includes stores’ property and equipment, primarily leasehold improvements, and operating lease right-of-use (“ROU”) assets. The carrying amount of a store asset group is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the store asset group. Factors that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating and cash flow losses, and a projection that demonstrates continuing losses or insufficient income over the remaining reasonably certain lease term associated with the use of a store asset group. Other factors may include an adverse change in the business climate or an adverse action or assessment by a regulator in the market of a store asset group. When stores are identified as having an indicator of impairment, the Company forecasts undiscounted cash flows over the store asset group’s remaining reasonably certain lease term and compares the undiscounted cash flows to the carrying amount of the store asset group. If the store asset group is determined not to be recoverable, then an impairment charge will be recognized in the amount by which the carrying amount of the store asset group exceeds its fair value, determined using discounted cash flow valuation techniques, as contemplated in ASC 820, Fair Value Measurements.
The Company determines the cash flows expected to result from the store asset group by projecting future revenue, gross margin and operating expense for each store asset group under evaluation for impairment. The estimates of future cash flows involve management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning, and include assumptions about sales growth rates, gross margins and operating expense in relation to the current economic environment and the Company’s future expectations, competitive factors in its various markets, inflation, sales trends and other relevant environmental factors that may impact the store under evaluation. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions. If economic conditions deteriorate in the markets in which the Company conducts business, or if other negative market conditions develop, the Company may experience additional impairment charges in the future for underperforming stores.
- 10 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The resulting impairment charge, if any, is allocated to the property and equipment, primarily leasehold improvements, and operating lease ROU assets on a pro rata basis using the relative carrying amounts of those assets. The allocated impairment charge to a long-lived asset is limited to the extent that the impairment charge does not reduce the carrying amount of the long-lived asset below its individual fair value. The estimation of the fair value of an ROU asset involves the evaluation of current market value rental amounts for leases associated with ROU assets. The estimates of current market value rental amounts are primarily based on recent observable market rental data of other comparable retail store locations. The fair value of an ROU asset is measured using a discounted cash flow valuation technique by discounting the estimated current and future market rental values using a property-specific discount rate.
The Company did
Leases
In accordance with ASC 842, Leases, the Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware, and distribution center delivery tractors and equipment. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the interim unaudited condensed consolidated balance sheets. Finance leases are included in property and equipment and finance lease liabilities on the interim unaudited condensed consolidated balance sheets. Lease liabilities are calculated using the effective interest method, regardless of classification, while the amortization of ROU assets varies depending upon classification. Finance lease classification results in a front-loaded expense recognition pattern over the lease term which amortizes the ROU asset by recognizing interest expense and amortization expense as separate components of lease expense and calculates the amortization expense component on a straight-line basis. Conversely, operating lease classification results in a straight-line expense recognition pattern over the lease term and recognizes lease expense as a single expense component, which results in amortization of the ROU asset that equals the difference between lease expense and interest expense. Lease expense for finance and operating leases are included in cost of sales or selling and administrative expense, based on the use of the leased asset, on the interim unaudited condensed consolidated statements of operations. Variable payments such as property taxes, insurance and common area maintenance related to triple net leases, as well as certain equipment sales taxes, licenses, fees and repairs, are expensed as incurred, and leases with an initial term of 12 months or less are excluded from minimum lease payments and are not recorded on the balance sheet. The Company recognizes variable lease expense for these short-term leases on a straight-line basis over the remaining lease term.
ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term. As the Company’s leases generally do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate (“IBR”) to determine the present value of lease payments. The collateralized IBR is based on a synthetic credit rating that is externally prepared on an annual basis. This analysis considers qualitative and quantitative factors based on guidance provided by a rating agency for the consumer durables industry. The Company adjusts the selected IBR quarterly with a company-specific unsecured yield curve that approximates the Company’s market risk profile. The collateralized IBR is also based upon the estimated impact that the collateral has on the IBR. To account for the collateralized nature of the IBR, the Company utilized a notching method based on notching guidance provided by a rating agency whereby the Company’s base credit rating is notched upward as the yield curve on a secured loan is expected to be lower versus an unsecured loan.
The operating lease ROU asset also includes any prepaid lease payments made and is reduced by lease incentives such as tenant improvement allowances. The operating lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term.
Certain of the leases for the Company’s retail store facilities provide for payments based on future sales volumes at the leased location, which are not measurable at the inception of the lease. Under ASC 842, these contingent rents are expensed as they accrue.
- 11 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in ASC 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic, in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in ASC 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.
In accordance with this interpretive guidance, the Company elected to account for lease concessions related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, the Company did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts. The Company accounted for its remaining lease deferrals related to COVID-19 as if no changes to the lease contract were made while continuing to recognize expense during the deferral period and deferring the payment obligation as a liability. The Company recorded remaining lease deferrals related to COVID-19 of $
See Note 5 to the Interim Financial Statements for a further discussion on leases.
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate the fair values of these instruments due to their short-term nature. The carrying amount for borrowings, if any, under the Company’s credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. When the Company recognizes impairment on certain of its underperforming stores, the carrying values of these stores are reduced to their estimated fair values.
The Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were assets subject to long-lived asset impairment related to certain underperforming stores. The Company estimated the fair values of these long-lived assets based on the Company’s own judgments about the assumptions that market participants would use in pricing the asset and on observable real estate market data of underperforming stores’ specific comparable markets, when available. The Company classified these fair value measurements as Level 3 inputs, which are unobservable inputs for which market data are not available and that are developed using the best information available about pricing assumptions used by market participants in accordance with ASC 820. As of October 3, 2021 and January 3, 2021, these long-lived assets were immaterial.
The major components of accrued expenses are as follows:
|
|
October 3, |
|
|
January 3, |
|
||
|
|
(In thousands) |
|
|||||
Payroll and related expense |
|
$ |
|
|
$ |
|
||
Occupancy expense |
|
|
|
|
|
|
||
Sales tax |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Accrued expenses |
|
$ |
|
|
$ |
|
||
Payroll and related expense as of October 3, 2021 and January 3, 2021 reflected a deferral of the employer portion of Social Security tax provided by the U.S. Coronavirus Aid, Relief and Economic Security (“CARES”) Act, which allowed employers to defer their portion of the social security payroll tax otherwise due with respect to wages earned from March 27, 2020 through December 31, 2020.
- 12 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware and distribution center delivery tractors and equipment, and accounts for these leases in accordance with ASC 842.
Certain of the leases for the Company’s retail store facilities provide for variable payments for property taxes, insurance, common area maintenance payments related to triple net leases, rental payments based on future sales volumes at the leased location, as well as certain equipment sales taxes, licenses, fees and repairs, which are not measurable at the inception of the lease, or rental payments that are adjusted periodically for inflation. The Company recognizes variable lease expense for these leases in the period incurred which, for contingent rent, begins in the period in which it becomes probable that the specified target that triggers the variable lease payments will be achieved. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
In accordance with ASC 842, the components of lease expense were as follows:
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
|
October 3, |
|
|
September 27, |
|
|
October 3, |
|
|
September 27, |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Lease expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of right-of-use assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Finance lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Variable lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sublease income |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total lease expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
In accordance with ASC 842, other information related to leases was as follows:
|
|
39 Weeks Ended |
|
|||||
|
|
October 3, |
|
|
September 27, |
|
||
|
|
(In thousands) |
|
|||||
Operating cash flows from operating leases |
|
$ |
|
|
$ |
|
||
Financing cash flows from finance leases |
|
|
|
|
|
|
||
Operating cash flows from finance leases |
|
|
|
|
|
|
||
Cash paid for amounts included in the measurement of lease liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Right-of-use assets obtained in exchange for new finance lease liabilities |
|
$ |
|
|
$ |
— |
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
$ |
|
|
$ |
|
||
Weighted-average remaining lease term—finance leases |
|
|
|
|
|
|
||
Weighted-average remaining lease term—operating leases |
|
|
|
|
|
|
||
Weighted-average discount rate—finance leases |
|
|
% |
|
|
% |
||
Weighted-average discount rate—operating leases |
|
|
% |
|
|
% |
||
- 13 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In accordance with ASC 842, maturities of finance and operating lease liabilities as of October 3, 2021 were as follows:
Year Ending: |
|
Finance |
|
|
Operating |
|
||
|
|
(In thousands) |
|
|||||
2021 (remaining three months) |
|
$ |
|
|
$ |
|
||
2022 |
|
|
|
|
|
|
||
2023 |
|
|
|
|
|
|
||
2024 |
|
|
|
|
|
|
||
2025 |
|
|
|
|
|
|
||
Thereafter |
|
|
|
|
|
|
||
Undiscounted cash flows |
|
$ |
|
|
$ |
|
||
Reconciliation of lease liabilities: |
|
|
|
|
|
|
||
Weighted-average remaining lease term |
|
|
|
|
|
|||
Weighted-average discount rate |
|
|
% |
|
|
% |
||
Present values |
|
$ |
|
|
$ |
|
||
Lease liabilities - current |
|
|
|
|
|
|
||
Lease liabilities - long-term |
|
|
|
|
|
|
||
Lease liabilities - total |
|
$ |
|
|
$ |
|
||
Difference between undiscounted and discounted cash flows |
|
$ |
|
|
$ |
|
||
On February 24, 2021, the Company entered into a Loan, Guaranty and Security Agreement with Bank of America, N.A. (“BofA”), as agent and lender (the “Loan Agreement”), at which time the Prior Credit Agreement was terminated. The Loan Agreement has a maturity date of
Similar to the Prior Credit Agreement, the Company may borrow under the Loan Agreement from time to time, provided the amounts outstanding will not exceed the lesser of the then aggregate committed availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the “Line Cap”). As defined in the Loan Agreement, the “Borrowing Base” generally is comprised of the sum, at the time of calculation, of (a)
- 14 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Generally, the Company may designate specific borrowings under the Loan Agreement as either base rate loans or LIBO rate loans. The applicable interest rate on the Company’s borrowings is a function of the daily average, over the preceding fiscal quarter, of the excess of the Line Cap over amounts borrowed (such amount being referred to as the “Average Daily Availability”). Those loans designated as LIBO rate loans bear interest at a rate equal to the then applicable adjusted LIBO rate plus an applicable margin as shown in the table below. Those loans designated as base rate loans bear interest at a rate equal to
Level |
|
Average Daily Availability |
|
LIBO Rate |
|
Base Rate |
I |
|
|
|
|||
II |
|
|
|
The commitment fee assessed on the unused portion of the credit facility is
As previously disclosed, the Prior Credit Agreement had a maturity date of
Level |
|
Average Daily Availability |
|
LIBO Rate |
|
Base Rate |
I |
|
|
|
|||
II |
|
|
|
The commitment fee assessed on the unused portion of the credit facility under the Prior Credit Agreement was
- 15 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In the first quarter of fiscal 2021, the Company paid and capitalized $
As of October 3, 2021 and January 3, 2021, the Company had
Under the asset and liability method prescribed under ASC 740, Income Taxes, the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The realizability of deferred tax assets is assessed throughout the year and a valuation allowance is recorded, if necessary, to reduce net deferred tax assets to the amount more likely than not to be realized. As of October 3, 2021 and January 3, 2021, the Company had a valuation allowance for deferred income tax assets of $
The Company files a consolidated federal income tax return and files tax returns in various state and local jurisdictions. The statutes of limitations for consolidated federal income tax returns are open for fiscal years
The provision for income taxes for the 39 weeks ended October 3, 2021 reflects an increased tax benefit related to the deduction for share-based compensation, a $
On March 27, 2020, the Federal government enacted the CARES Act to provide relief from the impact of COVID-19. Among other relief,
As of October 3, 2021 and January 3, 2021, the Company had
- 16 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted-average shares of common stock outstanding, reduced by shares repurchased and held in treasury, during the period. Diluted earnings per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding share option awards, nonvested share awards and nonvested share unit awards. During periods of net loss, diluted loss per share is equal to basic loss per share because the antidilutive effect of potential common shares is disregarded.
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
|
October 3, |
|
|
September 27, |
|
|
October 3, |
|
|
September 27, |
|
||||
|
|
(In thousands, except per share data) |
|
|||||||||||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Weighted-average shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted earnings per share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Antidilutive share option awards excluded |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Antidilutive nonvested share and nonvested |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
- 17 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Eminent Domain Matter
On approximately March 13, 2018, the Orange County Transportation Authority (“OCTA”) filed an eminent domain action against the Company and its Westminster, California, store location to acquire the Company’s interest in the property for public purposes related to a transportation project. The Company surrendered possession of this location on approximately January 31, 2019. On March 31, 2020, the Company and representatives of the OCTA agreed to a preliminary settlement of the proceedings, which was formally approved by the OCTA’s Board on approximately April 27, 2020. Pursuant to the terms of the settlement, on May 21, 2020, the Company received a cash condemnation settlement from the OCTA in the amount of $
Recovery of Insurance Proceeds
In the second quarter of fiscal 2020,
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s results of operations or financial condition.
In April 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”) and stopped making grants under its 2007 Equity and Performance Incentive Plan, as amended and restated in April 2011 and April 2016 (the “2007 Plan”). As of October 3, 2021,
At its discretion, the Company grants share option awards, nonvested share awards and nonvested share unit awards to certain employees, as defined by ASC 718, Compensation—Stock Compensation, under the Company’s 2019 Plan, and accounts for its share-based compensation in accordance with ASC 718. The Company recognized $
Share Option Awards
Share option awards granted by the Company generally vest and become exercisable in four equal annual installments of
- 18 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A summary of the status of the Company’s share option awards is presented below:
|
|
Shares |
|
|
Weighted- |
|
|
Weighted- |
|
|
Aggregate |
|
||||
Outstanding at January 3, 2021 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding at October 3, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Exercisable at October 3, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Vested and Expected to Vest at October 3, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The aggregate intrinsic value represents the total pretax intrinsic value, based upon the Company’s most recent closing stock price of $
The fair value of each share option award on the date of grant is estimated using the Black-Scholes method based on the following weighted-average assumptions:
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
|
October 3, |
|
|
September 27, |
|
|
October 3, |
|
|
September 27, |
|
||||
Risk-free interest rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
% |
|
Expected term |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
||
Expected volatility |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
% |
|
Expected dividend yield |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option award; the expected term represents the weighted-average period of time that option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield is based upon the Company’s current dividend rate. In order to support its liquidity initiatives throughout the organization as a result of the COVID-19 outbreak, early in the second quarter of fiscal 2020 the Company’s Board of Directors suspended its quarterly cash dividend. Due to the uncertainty of future dividend payments when share option awards were granted in the first quarter of fiscal 2020, the Company used
As of October 3, 2021, there was $
Nonvested Share Awards and Nonvested Share Unit Awards
Nonvested share awards and nonvested share unit awards granted by the Company vest for employees from the date of grant in four equal annual installments of
Nonvested share awards become outstanding when granted and are delivered to the recipient upon their vesting. Shares issuable related to nonvested share unit awards, including any dividend reinvestments, are delivered to the recipient on the tenth business day of January following the year in which the recipient’s service to the Company is terminated, at which time the units convert to shares and become outstanding. The total fair value of nonvested share awards which vested during the first nine months of fiscal 2021 and 2020 was $
- 19 -
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company granted
A summary of the status of the Company’s nonvested share awards is presented below:
|
|
Shares |
|
|
Weighted- |
|
||
Balance at January 3, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Balance at October 3, 2021 |
|
|
|
|
$ |
|
||
To satisfy employee minimum statutory tax withholding requirements for nonvested share awards that vest, the Company withholds and retires a portion of the vesting common shares, unless an employee elects to pay cash. In the first nine months of fiscal 2021, the Company withheld
A summary of the status of the Company’s nonvested share unit awards is presented below:
|
|
Units |
|
|
Weighted- |
|
||
Balance at January 3, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Dividend reinvestments |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Dividend reinvestments vested |
|
|
( |
) |
|
|
|
|
Balance at October 3, 2021 |
|
|
|
|
$ |
|
||
As of October 3, 2021, there was $
On October 28, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $
- 20 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Big 5 Sporting Goods Corporation
El Segundo, California
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Big 5 Sporting Goods Corporation and subsidiaries (the “Company”) as of October 3, 2021, the related condensed consolidated statements of operations and stockholders’ equity for the fiscal 13 and 39 week periods ended October 3, 2021 and September 27, 2020, and of cash flows for the fiscal 39 week periods ended October 3, 2021 and September 27, 2020, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of January 3, 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 3, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 3, 2021, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Deloitte & Touche LLP
Los Angeles, California
November 3, 2021
- 21 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Big 5 Sporting Goods Corporation (“we,” “our,” “us”) financial condition and results of operations includes information with respect to our plans and strategies for our business and should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes (“Interim Financial Statements”) included herein, the Risk Factors included herein and in our other filings with the Securities and Exchange Commission (“SEC”), and our consolidated financial statements, related notes, Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021.
Our fiscal year ends on the Sunday nearest December 31. Fiscal 2021 is comprised of 52 weeks and ends on January 2, 2022. Fiscal 2020 was comprised of 53 weeks and ended on January 3, 2021. The four quarters of fiscal 2021 are each comprised of 13 weeks. The first three quarters in fiscal 2020 were each comprised of 13 weeks, and the fourth quarter of fiscal 2020 was comprised of 14 weeks.
Impact of COVID-19
During March 2020, the World Health Organization declared the rapidly growing novel coronavirus (“COVID-19”) outbreak to be a global pandemic. The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine.
Beginning on March 20, 2020 and continuing into the second quarter of fiscal 2020, we temporarily closed more than one-half of our retail store locations in response to state and local shelter orders related to the COVID-19 outbreak. We were subsequently able to gradually reopen all store locations based initially on qualifying as an “essential” business under applicable regulations and later as a result of the easing of regulatory restrictions on retail operations in our market areas. Throughout fiscal 2020, the pandemic and the shelter orders that were in place in our market areas negatively impacted customer traffic into the stores that were operating, and certain stores required additional closures during the remainder of the year. In an effort to promote social distancing protocols, we implemented reduced store hours for our open stores and limited the number of customers in our stores at any one time. While these temporary store closures, limited hours of operation and shelter orders in our market areas related to the initial COVID-19 outbreak had an unfavorable impact on our operations initially, as we began reopening stores we recognized significant shifts in consumer demand in favor of fitness and outdoor recreational products and we rapidly evolved our product assortment, which had a favorable impact on our operating results throughout the remainder of fiscal 2020. In the first nine months of fiscal 2021, as COVID-19 restrictions continued easing in many of our markets, we experienced strong consumer demand across a broad assortment of product categories, including increased consumer demand for team sports products, which was weak last year due to the COVID-19 pandemic.
During fiscal 2020, in response to COVID-19, we also initially took measures to reduce expense and preserve capital across the organization, including negotiating lease concessions with landlords that would reduce or defer our lease-related payments, scaling back merchandise inventory orders and extending payment terms with merchandise vendors, implementing temporary and permanent workforce reductions throughout the organization, reducing advertising and the amount of planned capital spending, and suspending our quarterly dividend payment, among other measures. Although a certain portion of the expense reduction initiatives only benefited the second quarter of fiscal 2020, the remainder of fiscal 2020 continued to reflect labor expense savings due primarily to continued reduced store operating hours throughout most of the period, as well as advertising expense savings due to significantly reduced advertising activity. In the first nine months of fiscal 2021, our labor expense has gradually increased as we have increased wage rates in a tightening labor market and increased our store operating hours compared to the same period in the prior year. While store operating hours were higher in fiscal 2021 compared with the same period last year, store operating hours remain below pre-pandemic levels for the comparable periods. We continue to maintain reduced advertising expense in comparison to historical levels and expect this trend to remain into the foreseeable future as we continue to evaluate the impact on our sales. We will continue to evaluate the impact of COVID-19 on our future operations.
The initial unfavorable impacts caused by the COVID-19 outbreak also led us to take various actions to enhance our liquidity. We initially increased borrowings and exercised the accordion feature under our previous revolving credit facility, and we drew down additional amounts that resulted in our highest borrowing level of $143.3 million as of March 31, 2020. However, with our favorable operating results throughout the remainder of fiscal 2020, we were able to fully repay our borrowings while increasing our levels of cash and cash equivalents. Our financial condition was further enhanced during the first nine months of fiscal 2021, reflecting our strong sales and operating cash flow for the period. As of October 3, 2021, January 3, 2021 and September 27, 2020, we had zero revolving credit borrowings and cash and cash equivalents of $114.0 million, $64.7 million and $55.7 million, respectively.
- 22 -
A substantial amount of our inventory is manufactured abroad. COVID-19, and surging consumer demand initially associated with the pandemic, has impacted our supply chain for products sold, particularly those products that are sourced from Asia. To the extent one or more vendors is negatively impacted by continued supply chain disruptions or by COVID-19, including due to interruptions at or closure of those vendors’ distribution centers or manufacturing facilities, or we or our vendors are unable to obtain the necessary shipping capacity to transport products to our distribution center, we may be unable to maintain delivery schedules or adequate inventory in our stores. During the third quarter of fiscal 2021, we experienced significant shipping delays of products sourced from overseas vendors to be received at the Ports of Los Angeles and Long Beach, which reflected increased shipping volume and insufficient labor resources at the ports that have significantly increased cargo backlogs. These factors, in addition to workforce shortages in the trucking industry, have limited our ability to obtain desired quantities of inventory for various merchandise categories. While we have generally been able to sufficiently stock product in our stores to meet most consumer demand during the pandemic, future prolonged and sustained delays in product reaching our stores from overseas vendors, particularly during the holiday season, could result in our inability to obtain adequate levels of merchandise inventories to meet our consumers’ needs, which could have an adverse impact on our net sales and profitability.
Overview
We are a leading sporting goods retailer in the western United States, with 429 stores and an e-commerce platform under the name “Big 5 Sporting Goods” as of October 3, 2021. We provide a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet. Our product mix includes athletic shoes, apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, home recreation, tennis, golf and winter and summer recreation.
The following table summarizes our store count for the periods presented:
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
October 3, |
|
|
September 27, |
|
|
October 3, |
|
|
September 27, |
|
||||
Beginning stores |
|
430 |
|
|
|
431 |
|
|
|
430 |
|
|
|
434 |
|
Stores opened |
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
Stores permanently closed |
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
|
|
(3 |
) |
Ending stores |
|
429 |
|
|
|
431 |
|
|
|
429 |
|
|
|
431 |
|
For fiscal 2021, we anticipate opening approximately five new stores and closing four stores.
Executive Summary
Net income decreased in the third quarter of fiscal 2021 compared with net income in the third quarter of fiscal 2020 as a result of decreased net sales and increased selling and administrative expense, partially offset by the favorable impact of higher merchandise margins year over year. Decreases in net sales and earnings in the third quarter of fiscal 2021 reflected comparison to the third quarter of fiscal 2020, which at the time represented the highest reported net sales and earnings of any fiscal quarter in our history. While net sales in the third quarter of fiscal 2021 remained healthy from a historical perspective, reflecting healthy demand for many categories of sporting goods products as a result of COVID-19 and consumers’ desire to recreate and stay active, net sales declined compared with the third quarter of fiscal 2020 primarily due to the unfavorable impact of a calendar shift related to our 53-week fiscal 2020.
- 23 -
Results of Operations
The results of the interim periods are not necessarily indicative of results for the entire fiscal year.
13 Weeks Ended October 3, 2021 Compared to 13 Weeks Ended September 27, 2020
The following table sets forth selected items from our interim unaudited condensed consolidated statements of operations by dollar and as a percentage of our net sales for the periods indicated:
|
|
13 Weeks Ended |
|
|||||||||||||
|
|
October 3, |
|
|
September 27, |
|
||||||||||
|
|
(Dollars in thousands) |
|
|||||||||||||
Net sales |
|
$ |
289,637 |
|
|
|
100.0 |
% |
|
$ |
304,959 |
|
|
|
100.0 |
% |
Cost of sales (1) |
|
|
181,660 |
|
|
|
62.7 |
|
|
|
194,924 |
|
|
|
63.9 |
|
Gross profit |
|
|
107,977 |
|
|
|
37.3 |
|
|
|
110,035 |
|
|
|
36.1 |
|
Selling and administrative expense (2) |
|
|
75,147 |
|
|
|
25.9 |
|
|
|
71,337 |
|
|
|
23.4 |
|
Operating income |
|
|
32,830 |
|
|
|
11.4 |
|
|
|
38,698 |
|
|
|
12.7 |
|
Interest expense |
|
|
175 |
|
|
|
0.1 |
|
|
|
199 |
|
|
|
0.1 |
|
Income before income taxes |
|
|
32,655 |
|
|
|
11.3 |
|
|
|
38,499 |
|
|
|
12.6 |
|
Income tax expense |
|
|
8,524 |
|
|
|
2.9 |
|
|
|
10,106 |
|
|
|
3.3 |
|
Net income |
|
$ |
24,131 |
|
|
|
8.4 |
% |
|
$ |
28,393 |
|
|
|
9.3 |
% |
- 24 -
Net Sales. Net sales decreased by $15.4 million, or 5.0%, to $289.6 million in the third quarter of fiscal 2021 from $305.0 million in the third quarter last year. The change in net sales reflected the following:
Gross Profit. Gross profit decreased by $2.0 million to $108.0 million, or 37.3% of net sales, in the 13 weeks ended October 3, 2021, compared with $110.0 million, or 36.1% of net sales, in the 13 weeks ended September 27, 2020. The change in gross profit was primarily attributable to the following:
- 25 -
Selling and Administrative Expense. Selling and administrative expense increased by $3.8 million to $75.1 million, or 25.9% of net sales, in the 13 weeks ended October 3, 2021, from $71.3 million, or 23.4% of net sales, in the third quarter last year. The change in selling and administrative expense was primarily attributable to the following:
Interest Expense. Interest expense remained relatively flat in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, primarily reflecting a zero balance in borrowings under our existing credit facility since July 2020.
Income Taxes. The provision for income taxes decreased to $8.5 million for the third quarter of fiscal 2021 from $10.1 million for the third quarter of fiscal 2020, primarily reflecting lower pre-tax income in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. Our effective tax rate was 26.1% for the third quarter of fiscal 2021 and 26.3% for the third quarter of fiscal 2020.
39 Weeks Ended October 3, 2021 Compared to 39 Weeks Ended September 27, 2020
The following table sets forth selected items from our interim unaudited condensed consolidated statements of operations by dollar and as a percentage of our net sales for the periods indicated:
|
|
39 Weeks Ended |
|
|||||||||||||
|
|
October 3, |
|
|
September 27, |
|
||||||||||
|
|
(Dollars in thousands) |
|
|||||||||||||
Net sales |
|
$ |
888,463 |
|
|
|
100.0 |
% |
|
$ |
750,630 |
|
|
|
100.0 |
% |
Cost of sales (1) |
|
|
555,670 |
|
|
|
62.5 |
|
|
|
503,847 |
|
|
|
67.1 |
|
Gross profit |
|
|
332,793 |
|
|
|
37.5 |
|
|
|
246,783 |
|
|
|
32.9 |
|
Selling and administrative expense (2) |
|
|
223,670 |
|
|
|
25.2 |
|
|
|
201,040 |
|
|
|
26.8 |
|
Other income |
|
|
— |
|
|
|
— |
|
|
|
(2,500 |
) |
|
|
(0.3 |
) |
Operating income |
|
|
109,123 |
|
|
|
12.3 |
|
|
|
48,243 |
|
|
|
6.4 |
|
Interest expense |
|
|
701 |
|
|
|
0.1 |
|
|
|
1,683 |
|
|
|
0.2 |
|
Income before income taxes |
|
|
108,422 |
|
|
|
12.2 |
|
|
|
46,560 |
|
|
|
6.2 |
|
Income tax expense |
|
|
25,942 |
|
|
|
2.9 |
|
|
|
11,642 |
|
|
|
1.6 |
|
Net income |
|
$ |
82,480 |
|
|
|
9.3 |
% |
|
$ |
34,918 |
|
|
|
4.6 |
% |
- 26 -
Net Sales. Net sales increased by $137.9 million, or 18.4%, to $888.5 million in the first nine months of fiscal 2021 from $750.6 million in the first nine months last year. The change in net sales reflected the following:
Gross Profit. Gross profit increased by $86.0 million to $332.8 million, or 37.5% of net sales, in the 39 weeks ended October 3, 2021, compared with $246.8 million, or 32.9% of net sales, in the 39 weeks ended September 27, 2020. The change in gross profit was primarily attributable to the following:
- 27 -
Selling and Administrative Expense. Selling and administrative expense increased by $22.7 million to $223.7 million, or 25.2% of net sales, in the 39 weeks ended October 3, 2021, from $201.0 million, or 26.8% of net sales, in the first nine months last year. The change in selling and administrative expense was primarily attributable to the following:
Other Income. Other income in the first nine months of fiscal 2020 consisted of a cash condemnation settlement related to eminent domain proceedings, as more fully described in Note 9 to the Interim Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
Interest Expense. Interest expense decreased by $1.0 million in the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020, primarily reflecting a zero balance in borrowings under our existing credit facility since July 2020.
Income Taxes. The provision for income taxes increased to $25.9 million for the first nine months of fiscal 2021 from $11.6 million for the first nine months of fiscal 2020, primarily reflecting higher pre-tax income in the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020. Our effective tax rate was 23.9% for the first nine months of fiscal 2021 and 25.0% for the first nine months of fiscal 2020. Our effective tax rate for the first nine months of fiscal 2021 reflects an increased tax benefit related to the deduction for share-based compensation, a $0.3 million favorable reduction of our previously established valuation allowance related to unused California Enterprise Zone Tax Credits and a $0.2 million disaster recovery credit related to fires in California. Our effective tax rate for the first nine months of fiscal 2020 reflects the write-off of deferred tax assets related to share-based compensation of $0.3 million. As a result of the U.S. Coronavirus Aid, Relief and Economic Security Act enacted on March 27, 2020, to provide relief from the impact of COVID-19, we amended our 2018 income tax return and our effective tax rate for the first nine months of fiscal 2020 reflects the carryback of our 2018 net operating loss to a period with a higher statutory income tax rate.
- 28 -
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements primarily through cash and cash equivalents on hand, cash flows from operations and borrowings from the revolving credit facility, when necessary.
As of October 3, 2021, we had $114.0 million of cash and cash equivalents compared to $55.7 million of cash as of September 27, 2020. Our cash flows from operating, investing and financing activities are summarized as follows:
|
|
39 Weeks Ended |
|
|||||
|
|
October 3, |
|
|
September 27, |
|
||
|
|
(In thousands) |
|
|||||
Total cash provided by (used in): |
|
|
|
|
|
|
||
Operating activities |
|
$ |
95,193 |
|
|
$ |
136,388 |
|
Investing activities |
|
|
(7,017 |
) |
|
|
(4,804 |
) |
Financing activities |
|
|
(38,824 |
) |
|
|
(84,112 |
) |
Net increase in cash and cash equivalents |
|
$ |
49,352 |
|
|
$ |
47,472 |
|
Operating Activities. Operating cash flows for the first nine months of fiscal 2021 and 2020 were a positive $95.2 million and a positive $136.4 million, respectively. The decreased cash flow provided by operating activities for the first nine months of fiscal 2021 compared to the prior year primarily reflects increased funding of merchandise inventory and decreased accrued expenses primarily related to income taxes, partially offset by an increase in net income for the current year.
Investing Activities. Net cash used in investing activities for the first nine months of fiscal 2021 and 2020 was $7.0 million and $4.8 million, respectively. Capital expenditures, excluding non-cash acquisitions, represented substantially all of the cash used in investing activities for each period. In the first nine months of fiscal 2021, capital expenditures of $7.3 million were partially offset by a portion of settlement proceeds related to a civil unrest insurance recovery of $0.2 million, and in the first nine months of fiscal 2020, capital expenditures of $5.0 million were partially offset by a portion of settlement proceeds from an eminent domain condemnation of $0.2 million. Capital expenditures for both periods primarily reflect store-related remodeling, distribution center investments and computer hardware and software purchases.
Financing Activities. Financing cash flows for the first nine months of fiscal 2021 and 2020 were a negative $38.8 million and a negative $84.1 million, respectively. For the first nine months of fiscal 2021, net cash was used primarily to fund dividend payments, purchase treasury stock and make principal payments on finance lease liabilities, partially offset by proceeds received from the exercise of employee share option awards. For the first nine months of fiscal 2020, net cash was used primarily to pay down borrowings under the Credit Facility, fund dividend payments and make principal payments on finance lease liabilities. The change in cash flow from financing activities for the first nine months of fiscal 2021 compared to last year primarily reflects a full pay-down of borrowings under the credit facility to zero in the prior fiscal year as a result of improved profitability and positive operating cash flow from increased consumer demand related to the COVID-19 pandemic, partially offset by dividend payments in fiscal 2021 that included a special dividend of $1.00 per share that was declared in the second quarter of fiscal 2021.
As of October 3, 2021, we had zero revolving credit borrowings and letter of credit commitments of $1.1 million outstanding. These balances compare to zero revolving credit borrowings and letter of credit commitments of $2.6 million outstanding as of January 3, 2021 and zero revolving credit borrowings and letter of credit commitments of $4.7 million outstanding as of September 27, 2020.
- 29 -
In the first quarter of fiscal 2020, we paid a quarterly cash dividend of $0.05 per share of outstanding common stock. In the second quarter of fiscal 2020, our Board of Directors suspended our quarterly cash dividend as a result of COVID-19. In response to the improved strength of our balance sheet, operations and cash flow generation, in the third quarter of fiscal 2020, our Board of Directors reinstated our quarterly cash dividend at the previous rate of $0.05 per share of outstanding common stock and declared a cash dividend of $0.10 per share of outstanding common stock. The $0.10 cash dividend reflected our reinstated quarterly cash dividend of $0.05 per share of outstanding common stock for the third quarter of fiscal 2020, and also included an additional $0.05 per share in recognition that we did not pay a dividend in the second quarter of fiscal 2020. In the fourth quarter of fiscal 2020, first quarter of fiscal 2021, second quarter of fiscal 2021 and third quarter of fiscal 2021, our Board of Directors declared increases in our quarterly cash dividends to $0.10 per share of outstanding common stock, $0.15 per share of outstanding common stock, $0.18 per share of outstanding common stock and $0.25 per share of outstanding common stock, respectively. Additionally, in the second quarter of fiscal 2021, our Board of Directors declared a special cash dividend of $1.00 per share of outstanding common stock, which was paid on June 1, 2021. In the fourth quarter of fiscal 2021, our Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock, which will be paid on December 15, 2021 to stockholders of record as of December 1, 2021, and also declared a special cash dividend of $1.00 per share of outstanding common stock, which will be paid on December 1, 2021 to stockholders of record as of November 17, 2021.
We repurchased 100,498 shares of common stock in the third quarter and first nine months of fiscal 2021 pursuant to our current share repurchase program. We did not repurchase any shares of common stock in the first nine months of fiscal 2020. Since the inception of our initial share repurchase program in May 2006 through October 3, 2021, we have repurchased a total of 3,629,470 shares for $44.1 million.
Loan Agreement. As of January 3, 2021, we had a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and a syndicate of other lenders, as amended (the “Prior Credit Agreement”), which was terminated and replaced on February 24, 2021 as discussed below.
On February 24, 2021, we entered into a Loan, Guaranty and Security agreement with Bank of America, N.A. (“BofA”), as agent and lender (the “Loan Agreement”), at which time the Prior Credit Agreement was terminated. The Loan Agreement has a maturity date of February 24, 2026 and provides for a revolving credit facility with an aggregate committed availability of up to $150.0 million. We may also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the existing lenders under the Loan Agreement will have the option to increase their commitment to accommodate the requested increase. If the lenders do not exercise that option, we may (with the consent of BofA in its role as the administrative agent, not to be unreasonably withheld) seek other lenders willing to provide such commitments. The credit facility includes a $50.0 million sublimit for issuances of letters of credit.
Similar to the Prior Credit Agreement, we may borrow under the Loan Agreement from time to time, provided the amounts outstanding will not exceed the lesser of the then aggregate committed availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the “Line Cap”). As defined in the Loan Agreement, the “Borrowing Base” generally is comprised of the sum, at the time of calculation, of (a) 90.00% of eligible credit card receivables; plus (b) the cost of eligible inventory (other than eligible in-transit inventory), net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible inventory (expressed as a percentage of the cost of eligible inventory); plus (c) the cost of eligible in-transit inventory, net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible in-transit inventory (expressed as a percentage of the cost of eligible in-transit inventory), minus (d) certain agreed-upon reserves as well as other reserves established by BofA in its role as the administrative agent in its reasonable discretion.
Generally, we may designate specific borrowings under the Loan Agreement as either base rate loans or LIBO rate loans. The applicable interest rate on our borrowings is a function of the daily average, over the preceding fiscal quarter, of the excess of the Line Cap over amounts borrowed (such amount being referred to as the “Average Daily Availability”). Those loans designated as LIBO rate loans bear interest at a rate equal to the then applicable adjusted LIBO rate plus an applicable margin as shown in the table below. Those loans designated as base rate loans bear interest at a rate equal to the applicable margin for base rate loans (as shown below) plus the highest of (a) the Federal funds rate, as in effect from time to time, plus one-half of one percent (0.50%), (b) the LIBO rate, plus one percentage point (1.00%), or (c) the rate of interest in effect for such day as announced from time to time within BofA as its “prime rate.” The applicable margin for all loans will be a function of Average Daily Availability for the preceding fiscal quarter as set forth below.
Level |
|
Average Daily Availability |
|
LIBO Rate |
|
Base Rate |
I |
|
Greater than or equal to $70,000,000 |
|
1.375% |
|
0.375% |
II |
|
Less than $70,000,000 |
|
1.500% |
|
0.500% |
The commitment fee assessed on the unused portion of the credit facility is 0.20% per annum.
- 30 -
Obligations under the Loan Agreement are secured by a general lien on and security interest in substantially all of our assets. The Loan Agreement contains covenants that require us to maintain a fixed charge coverage ratio of not less than 1.0:1.0 in certain circumstances, and limits the ability to, among other things, incur liens, incur additional indebtedness, transfer or dispose of assets, change the nature of the business, guarantee obligations, pay dividends or make other distributions or repurchase stock, and make advances, loans or investments. We may generally declare or pay cash dividends or repurchase stock only if, among other things, no default or event of default then exists or would arise from such dividend or repurchase of stock and, after giving effect to such dividend or repurchase, certain availability and/or fixed charge coverage ratio requirements are satisfied, although we are permitted to make up to $5.0 million of dividend payments or stock repurchases per year without satisfaction of the availability or fixed charge coverage ratio requirements, but dividends or stock repurchases made without satisfying the availability and/or fixed charge coverage ratio requirements will require the establishment of an additional reserve that will reduce borrowing availability under the Loan Agreement for 75 days. The Loan Agreement contains customary events of default, including, without limitation, failure to pay when due principal amounts with respect to the credit facility, failure to pay any interest or other amounts under the credit facility, failure to comply with certain agreements or covenants contained in the Loan Agreement, failure to satisfy certain judgments against us, failure to pay when due (or any other default which permits the acceleration of) certain other material indebtedness in principal amount in excess of $5.0 million, and certain insolvency and bankruptcy events.
The Prior Credit Agreement had a maturity date of September 29, 2022 and, as amended, provided for a line of credit up to $140.0 million, which amount could be increased at our option up to a maximum of $165.0 million. We could also request additional increases in aggregate availability, on an uncommitted basis up to a maximum of $200.0 million. The prior revolving credit facility included a $25.0 million sublimit for issuances of letters of credit and a $20.0 million sublimit for swingline loans. The Prior Credit Agreement provided for LIBO rate loans to bear interest at a rate equal to the applicable adjusted LIBO rate plus an applicable margin, as shown in the table below. The loans designated as base rate loans bore interest at a rate equal to the applicable margin for base rate loans plus the highest of (a) the Federal funds rate in effect plus one-half of one percent, (b) the LIBO rate, plus one percentage point, or (c) the prime interest rate. Under the Prior Credit Agreement, the applicable margin for all loans was a function of Average Daily Availability for the preceding fiscal quarter as set forth below.
Level |
|
Average Daily Availability |
|
LIBO Rate |
|
Base Rate |
I |
|
Greater than or equal to $70,000,000 |
|
1.250% |
|
0.250% |
II |
|
Less than $70,000,000 |
|
1.375% |
|
0.500% |
The commitment fee assessed on the unused portion of the prior credit facility was 0.20% per annum.
In the first quarter of fiscal 2021, we paid and capitalized $0.7 million in new creditor and third-party fees associated with the Loan Agreement, which will be amortized over the term of the Loan Agreement, and extinguished $0.2 million of deferred financing fees associated with the Prior Credit Agreement.
In order to support our liquidity in response to the rapidly growing COVID-19 outbreak, in March 2020 we exercised the accordion feature under our $140.0 million prior credit facility and drew down additional amounts under that facility that resulted in long-term revolving credit borrowings of $143.3 million as of March 31, 2020, our highest borrowing level. As a result of improved profitability and positive operating cash flow from increased consumer demand related to the COVID-19 pandemic, we paid our long-term revolving credit borrowings down to zero and we had letter of credit commitments of $1.1 million, $2.6 million and $4.7 million outstanding as of October 3, 2021, January 3, 2021 and September 27, 2020, respectively. Total remaining borrowing availability, after subtracting letters of credit, was $148.9 million, $162.4 million and $160.3 million as of October 3, 2021, January 3, 2021 and September 27, 2020, respectively.
Future Capital Requirements. We had cash and cash equivalents on hand of $114.0 million as of October 3, 2021. In response to the COVID-19 pandemic, we initially suspended capital spending in the first half of fiscal 2020 but since resumed our planned capital spending through the remainder of fiscal 2020 and for fiscal 2021. We expect capital expenditures for fiscal 2021, excluding non-cash acquisitions, to range from approximately $9.0 million to $12.0 million primarily to fund the opening of new stores, store-related remodeling, distribution center investments and computer hardware and software purchases. For fiscal 2021, we anticipate opening approximately five new stores and closing four stores.
- 31 -
We have historically paid quarterly cash dividends, subject to declaration by our Board of Directors. In order to support our liquidity initiatives as a result of COVID-19, in the second quarter of fiscal 2020 our Board of Directors suspended our quarterly cash dividend. In response to the improved strength of our balance sheet, operations and cash flow generation, in the third quarter of fiscal 2020 our Board of Directors reinstated our quarterly cash dividend at the previous rate of $0.05 per share of outstanding common stock and declared a cash dividend of $0.10 per share of outstanding common stock. The $0.10 cash dividend reflected our reinstated quarterly cash dividend of $0.05 per share of outstanding common stock for the third quarter of fiscal 2020, and also included an additional $0.05 per share in recognition that we did not pay a dividend in the second quarter of fiscal 2020. In the fourth quarter of fiscal 2020, first quarter of fiscal 2021, second quarter of fiscal 2021 and third quarter of fiscal 2021, our Board of Directors increased our quarterly cash dividend to $0.10 per share of outstanding common stock, $0.15 per share of outstanding common stock, $0.18 per share of outstanding common stock and $0.25 per share of outstanding common stock, respectively, and in the second quarter of fiscal 2021 our Board of Directors also declared a special cash dividend of $1.00 per share of outstanding common stock. In the fourth quarter of fiscal 2021, our Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock, which will be paid on December 15, 2021 to stockholders of record as of December 1, 2021, and also declared a special cash dividend of $1.00 per share of outstanding common stock, which will be paid on December 1, 2021 to stockholders of record as of November 17, 2021.
As of October 3, 2021, a total of $13.0 million remained available for share repurchases under our current share repurchase program. We repurchased 100,498 shares of our common stock in the third quarter and first nine months of fiscal 2021, but did not repurchase any shares of our common stock in the first nine months of fiscal 2020. We consider several factors in determining when and if we make share repurchases including, among other things, our alternative cash requirements, existing business conditions and the market price of our stock.
We believe we will be able to fund our cash requirements from cash and cash equivalents on hand, operating cash flows and borrowings from our credit facility, for at least the next 12 months.
Contractual Obligations. Our material contractual obligations include operating lease commitments associated with our leased properties and other occupancy expense, finance lease obligations, borrowings under the credit facility, if any, and other liabilities. Operating lease commitments consist principally of leases for our retail store facilities, distribution center and corporate offices. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term, and we intend to renegotiate most of these leases as they expire. Operating lease commitments also consist of information technology (“IT”) systems hardware, distribution center delivery tractors and equipment. Additional information regarding our operating and finance leases is available in Notes 2 and 5 to the Interim Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
In the first nine months of fiscal 2021, we had zero borrowings under our revolving credit facility. Our zero borrowings as of the third quarter of fiscal 2021 and the prior year end reflect improved profitability and positive operating cash flow from increased consumer demand related to the COVID-19 pandemic.
In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise in advance of expected delivery. Because most of these purchase orders do not contain any termination payments or other penalties if cancelled, they are not included as outstanding contractual obligations.
Critical Accounting Estimates
As discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended January 3, 2021, we consider our estimates on valuation of inventory and long-lived assets to be among the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. There have been no significant changes to these estimates in the 39 weeks ended October 3, 2021.
- 32 -
Seasonality and Impact of Inflation
We experience seasonal fluctuations in our net sales and operating results. Seasonality in our net sales influences our buying patterns which directly impacts our merchandise inventory and accounts payable levels and cash flows. We purchase merchandise for seasonal activities in advance of a season and supplement our merchandise assortment as necessary and when possible during the season. Our efforts to replenish products during a season are not always successful. In the fourth fiscal quarter, which includes the holiday selling season and the start of the winter selling season, we normally experience higher inventory purchase volumes and increased expense for staffing and advertising. If we miscalculate the consumer demand for our products generally or for our product mix in advance of a season, particularly the fourth quarter, our net sales can decline, which can harm our financial performance. A significant shortfall from expected net sales, particularly during the fourth quarter, can negatively impact our annual operating results.
During the latter part of fiscal 2020 and continuing in the first nine months of fiscal 2021, we are experiencing rising product purchase costs, including higher freight costs. As a result of strong consumer demand related to COVID-19 and reduced product availability, in fiscal 2020 and 2021 we have been able to adjust our selling prices for purchase cost increases. However, if we are unable to adjust our selling prices for purchase cost increases in the future, then our merchandise margins will decline, which will adversely impact our operating results.
Recently Issued Accounting Updates
See Note 2 to the Interim Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This document includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, our financial condition, our results of operations, our growth strategy and the business of our company generally. In some cases, you can identify such statements by terminology such as “may,” “could,” “project,” “estimate,” “potential,” “continue,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends” or other such terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results to change significantly. These risks and uncertainties include, among other things, the economic impacts of COVID-19, including any potential variants, on our business operations, including as a result of regulations that may be issued in response to COVID-19, changes in the consumer spending environment, fluctuations in consumer holiday spending patterns, increased competition from e-commerce retailers, breach of data security or other unauthorized disclosure of sensitive personal or confidential information, the competitive environment in the sporting goods industry in general and in our specific market areas, inflation, product availability and growth opportunities, changes in the current market for (or regulation of) firearm-related products, a reduction or loss of product from a key supplier, disruption in product flow, seasonal fluctuations, weather conditions, changes in cost of goods, operating expense fluctuations, increases in labor and benefit-related expense, changes in laws or regulations, including those related to tariffs and duties, public health issues (including those caused by COVID-19 or any potential variants), impacts of civil unrest or widespread vandalism, lower than expected profitability of our e-commerce platform or cannibalization of sales from our existing store base which could occur as a result of operating the e-commerce platform, litigation risks, stockholder campaigns and proxy contests, risks related to our historically leveraged financial condition, changes in interest rates, credit availability, higher expense associated with sources of credit resulting from uncertainty in financial markets and economic conditions in general. Those and other risks and uncertainties are more fully described in Part II, Item 1A, Risk Factors, in this report and in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K and other filings with the SEC. We caution that the risk factors set forth in this report and the other reports that we file with the SEC are not exclusive. In addition, we conduct our business in a highly competitive and rapidly changing environment. Accordingly, new risk factors may arise. It is not possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. We undertake no obligation to revise or update any forward-looking statement that may be made from time to time by us or on our behalf.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Because we are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information under this Item.
- 33 -
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures are effective, at a reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended October 3, 2021, no changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
- 34 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s results of operations or financial condition.
Item 1A. Risk Factors
We are providing the following additional risk factor to supplement the risk factors contained in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended January 3, 2021.
A reduction or loss of product from a key supplier could cause our net sales and profitability to suffer.
We purchase merchandise from over 680 vendors, and our 20 largest vendors collectively accounted for 36.4% of our total purchases during fiscal 2020. One vendor, Nike, represented greater than 5% of total purchases, at 8.5%, in fiscal 2020 and accounted for 7.2% of our total sales in fiscal 2020. In the first quarter of fiscal 2021, we were informed of an expansion of Nike’s direct-to-consumer initiatives that will impact certain multi-branded retailers, including us, and which will lead to a significant reduction in our future supply chain relative to this vendor. This transition is not expected to impact our ability to continue to purchase certain Nike branded products from authorized licensees. Based on our current and expected supply chain relative to this vendor, we do not expect this transition to have a material impact on our sales for fiscal 2021. We are actively expanding our relationships with other new and existing vendors in order to replace the affected Nike product within our product mix. If we are unable to develop a suitable alternative to satisfy product demand, sales could decline which could negatively impact future operating results.
Additionally, if there are other disruptions in supply from a principal supplier or distributor, we may be unable to obtain merchandise that we desire to sell and that consumers desire to purchase. A vendor could discontinue or restrict selling products to us at any time for reasons that may or may not be within our control. The increased development of direct-to-consumer initiatives by athletic and sporting goods brands could result in additional restrictions on the products available for us to purchase and sell. Our net sales and profitability could decline if we are unable to promptly replace a product vendor that is unwilling or unable to satisfy our requirements with a vendor providing equally appealing products. Moreover, many of our key suppliers provide us with incentives, such as return privileges, volume purchase allowances and co-operative advertising. A decline or discontinuation of these incentives could reduce our profits.
- 35 -
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following tabular summary reflects the Company’s share repurchase activity during the quarter ended October 3, 2021:
ISSUER PURCHASES OF EQUITY SECURITIES |
|
|||||||||||||||
Period |
|
Total Number |
|
|
Average |
|
|
Total Number of |
|
|
Maximum Number (or |
|
||||
July 5 – August 1 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
15,271,000 |
|
August 2 – August 29 |
|
|
100,498 |
|
|
$ |
22.54 |
|
|
|
100,498 |
|
|
$ |
13,005,000 |
|
August 30 – October 3 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
13,005,000 |
|
Total |
|
|
100,498 |
|
|
|
|
|
|
100,498 |
|
|
$ |
13,005,000 |
|
|
_________________________
(1) |
All share repurchases shown in this table were made under the Company’s current share repurchase program. Under the current authorization, the Company may purchase shares from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the Securities and Exchange Commission. However, the timing and amount of such purchases, if any, would be at the discretion of the Company’s management and Board of Directors and would depend upon market conditions and other considerations. Since the inception of its initial share repurchase program in May 2006 through October 3, 2021, the Company has repurchased a total of 3,629,470 shares for $44.1 million. As of October 3, 2021, a total of $13.0 million remained available for share repurchases under the current share repurchase program. |
(2) |
The Company’s dividends and stock repurchases are generally funded by distributions from its subsidiary, Big 5 Corp. The Company’s Loan Agreement generally permits the Company to declare or pay cash dividends or repurchase stock only if, among other things, no default or event of default then exists or would arise from such dividend or repurchase of stock and, after giving effect to such dividend or repurchase, certain availability and/or fixed charge coverage ratio requirements are satisfied, although the Company is permitted to make up to $5.0 million of dividend payments or stock repurchases per year without satisfaction of the availability or fixed charge coverage ratio requirements, but dividends or stock repurchases made without satisfying the availability and/or fixed charge coverage ratio requirements will require the establishment of an additional reserve that will reduce borrowing availability under the Loan Agreement for 75 days. |
(3) |
This amount reflects the dollar value of shares remaining available to repurchase under the Company’s current share repurchase program. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
- 36 -
Item 6. Exhibits
Exhibit Number |
|
Description of Document |
|
|
|
15.1 |
|
Independent Auditors’ Awareness Letter Regarding Interim Financial Statements. (1) |
|
|
|
31.1 |
|
Rule 13a-14(a) Certification of Chief Executive Officer. (1) |
|
|
|
31.2 |
|
Rule 13a-14(a) Certification of Chief Financial Officer. (1) |
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. (1) |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. (1) |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Calculation Linkbase Document. (1) |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Definition Linkbase Document. (1) |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Label Linkbase Document. (1) |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Presentation Linkbase Document. (1) |
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document). (1) |
- 37 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
BIG 5 SPORTING GOODS CORPORATION, |
|
|
a Delaware corporation |
|
|
|
|
Date: November 3, 2021 |
By: |
/s/ Steven G. Miller |
|
|
Steven G. Miller |
|
|
Chairman of the Board of Directors, President and Chief Executive Officer |
|
|
|
Date: November 3, 2021 |
By: |
/s/ Barry D. Emerson |
|
|
Barry D. Emerson |
|
|
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
- 38 -
