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BIG 5 SPORTING GOODS Corp - Quarter Report: 2023 April (Form 10-Q)

10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 2, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from _____________________ to ____________________

Commission file number: 000-49850

 

BIG 5 SPORTING GOODS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4388794

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

2525 East El Segundo Boulevard

El Segundo, California

 

90245

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (310) 536-0611

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

BGFV

The Nasdaq Stock Market LLC

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

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 22,394,171 shares of common stock, with a par value of $0.01 per share, outstanding as of April 25, 2023.

 

 


 

BIG 5 SPORTING GOODS CORPORATION

INDEX

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

3

 

Unaudited Condensed Consolidated Balance Sheets as of April 2, 2023 and January 1, 2023

3

 

Unaudited Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended April 2, 2023 and April 3, 2022

4

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Thirteen Weeks Ended April 2, 2023 and April 3, 2022

5

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended April 2, 2023 and April 3, 2022

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)

17

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4

Controls and Procedures

25

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

26

Item 1A

Risk Factors

26

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3

Defaults Upon Senior Securities

26

Item 4

Mine Safety Disclosures

26

Item 5

Other Information

26

Item 6

Exhibits

27

 

 

SIGNATURES

28

 

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

April 2,
2023

 

 

January 1,
2023

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,459

 

 

$

25,565

 

Accounts receivable, net of allowances of $47 and $44, respectively

 

 

11,234

 

 

 

12,270

 

Merchandise inventories, net

 

 

315,415

 

 

 

303,493

 

Prepaid expenses

 

 

15,116

 

 

 

16,632

 

Total current assets

 

 

369,224

 

 

 

357,960

 

Operating lease right-of-use assets, net

 

 

269,654

 

 

 

276,016

 

Property and equipment, net

 

 

55,714

 

 

 

58,311

 

Deferred income taxes

 

 

10,098

 

 

 

9,991

 

Other assets, net of accumulated amortization of $1,475 and $1,359, respectively

 

 

7,145

 

 

 

6,515

 

Total assets

 

$

711,835

 

 

$

708,793

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

Accounts payable

 

$

92,445

 

 

$

67,417

 

Accrued expenses

 

 

60,925

 

 

 

70,261

 

Current portion of operating lease liabilities

 

 

68,881

 

 

 

70,584

 

Current portion of finance lease liabilities

 

 

2,881

 

 

 

3,217

 

Total current liabilities

 

 

225,132

 

 

 

211,479

 

Operating lease liabilities, less current portion

 

 

209,406

 

 

 

214,584

 

Finance lease liabilities, less current portion

 

 

6,637

 

 

 

7,089

 

Other long-term liabilities

 

 

7,106

 

 

 

6,857

 

Total liabilities

 

 

448,281

 

 

 

440,009

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, $0.01 par value, authorized 50,000,000 shares; issued 26,701,426 and
   
26,491,750 shares, respectively; outstanding 22,394,171 and 22,184,495 shares, respectively

 

 

266

 

 

 

264

 

Additional paid-in capital

 

 

126,627

 

 

 

126,512

 

Retained earnings

 

 

190,918

 

 

 

196,265

 

Less: Treasury stock, at cost; 4,307,255 shares

 

 

(54,257

)

 

 

(54,257

)

Total stockholders' equity

 

 

263,554

 

 

 

268,784

 

Total liabilities and stockholders' equity

 

$

711,835

 

 

$

708,793

 

 

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)

 

 

13 Weeks Ended

 

 

 

April 2,
2023

 

 

April 3,
2022

 

Net sales

 

$

224,939

 

 

$

241,981

 

Cost of sales

 

 

149,795

 

 

 

156,048

 

Gross profit

 

 

75,144

 

 

 

85,933

 

Selling and administrative expense

 

 

75,173

 

 

 

75,317

 

Operating (loss) income

 

 

(29

)

 

 

10,616

 

Interest (income) expense

 

 

(115

)

 

 

184

 

Income before income taxes

 

 

86

 

 

 

10,432

 

Income tax (benefit) expense

 

 

(107

)

 

 

1,329

 

Net income

 

$

193

 

 

$

9,103

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

0.42

 

Diluted

 

$

0.01

 

 

$

0.41

 

Weighted-average shares of common stock
   outstanding:

 

 

 

 

 

 

Basic

 

 

21,629

 

 

 

21,680

 

Diluted

 

 

21,949

 

 

 

22,300

 

 

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)

 

 

13 Weeks Ended April 2, 2023

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Treasury

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of January 1, 2023

 

 

22,184,495

 

 

$

264

 

 

$

126,512

 

 

$

196,265

 

 

$

(54,257

)

 

$

268,784

 

Net income

 

 

 

 

 

 

 

 

 

 

 

193

 

 

 

 

 

 

193

 

Dividends on common stock ($0.25 per share)

 

 

 

 

 

 

 

 

 

 

 

(5,540

)

 

 

 

 

 

(5,540

)

Issuance of nonvested share awards

 

 

273,160

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Exercise of share option awards

 

 

18,800

 

 

 

 

 

 

57

 

 

 

 

 

 

 

 

 

57

 

Share-based compensation

 

 

 

 

 

 

 

 

679

 

 

 

 

 

 

 

 

 

679

 

Forfeiture of nonvested share awards

 

 

(3,080

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment
   of withholding tax

 

 

(79,204

)

 

 

(1

)

 

 

(618

)

 

 

 

 

 

 

 

 

(619

)

Balance as of April 2, 2023

 

 

22,394,171

 

 

$

266

 

 

$

126,627

 

 

$

190,918

 

 

$

(54,257

)

 

$

263,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended April 3, 2022

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Treasury

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of January 2, 2022

 

 

22,097,467

 

 

$

260

 

 

$

124,909

 

 

$

192,261

 

 

$

(50,121

)

 

$

267,309

 

Net income

 

 

 

 

 

 

 

 

 

 

 

9,103

 

 

 

 

 

 

9,103

 

Dividends on common stock ($0.25 per share)

 

 

 

 

 

 

 

 

 

 

 

(5,549

)

 

 

 

 

 

(5,549

)

Issuance of nonvested share awards

 

 

236,560

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Conversion of vested share unit awards

 

 

124,012

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Exercise of share option awards

 

 

61,575

 

 

 

1

 

 

 

244

 

 

 

 

 

 

 

 

 

245

 

Share-based compensation

 

 

 

 

 

 

 

 

563

 

 

 

 

 

 

 

 

 

563

 

Forfeiture of nonvested share awards

 

 

(2,705

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment
   of withholding tax

 

 

(77,340

)

 

 

 

 

 

(1,212

)

 

 

 

 

 

 

 

 

(1,212

)

Purchases of treasury stock

 

 

(94,983

)

 

 

 

 

 

 

 

 

 

 

 

(1,558

)

 

 

(1,558

)

Balance as of April 3, 2022

 

 

22,344,586

 

 

$

264

 

 

$

124,501

 

 

$

195,815

 

 

$

(51,679

)

 

$

268,901

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

- 5 -


 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

13 Weeks Ended

 

 

 

April 2,
2023

 

 

April 3,
2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

193

 

 

$

9,103

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

    provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

4,510

 

 

 

4,410

 

Share-based compensation

 

 

679

 

 

 

563

 

Amortization of other assets

 

 

115

 

 

 

114

 

Loss on disposal of equipment

 

 

 

 

 

288

 

Noncash lease expense

 

 

17,451

 

 

 

16,820

 

Deferred income taxes

 

 

(107

)

 

 

1,033

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

1,036

 

 

 

1,989

 

Merchandise inventories, net

 

 

(11,922

)

 

 

(21,536

)

Prepaid expenses and other assets

 

 

771

 

 

 

2,011

 

Accounts payable

 

 

25,364

 

 

 

(3,891

)

Operating lease liabilities

 

 

(17,970

)

 

 

(17,618

)

Accrued expenses and other long-term liabilities

 

 

(7,828

)

 

 

(17,003

)

Net cash provided by (used in) operating activities

 

 

12,292

 

 

 

(23,717

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,529

)

 

 

(2,939

)

Proceeds from disposal of property and equipment

 

 

 

 

 

13

 

Net cash used in investing activities

 

 

(2,529

)

 

 

(2,926

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Changes in book overdraft

 

 

(383

)

 

 

534

 

Principal payments under finance lease liabilities

 

 

(818

)

 

 

(815

)

Proceeds from exercise of share option awards

 

 

57

 

 

 

245

 

Cash purchases of treasury stock

 

 

 

 

 

(1,389

)

Tax withholding payments for share-based compensation

 

 

(619

)

 

 

(1,212

)

Dividends paid

 

 

(6,106

)

 

 

(6,102

)

Net cash used in financing activities

 

 

(7,869

)

 

 

(8,739

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

1,894

 

 

 

(35,382

)

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

25,565

 

 

 

97,420

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

27,459

 

 

$

62,038

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 Property and equipment acquired under finance leases

 

$

30

 

 

$

201

 

 Property and equipment additions unpaid

 

$

946

 

 

$

1,570

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 Interest paid

 

$

154

 

 

$

148

 

 Income taxes paid

 

$

12

 

 

$

7

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

- 6 -


 

BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)
Description of Business

Big 5 Sporting Goods Corporation (the “Company”) is a leading sporting goods retailer in the western United States, operating 430 stores and an e-commerce platform as of April 2, 2023. The Company provides a full-line product offering in a traditional sporting goods store format that averages approximately 12,000 square feet. The Company’s 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 Company is a holding company that operates as one reportable segment through Big 5 Corp., its 100%-owned subsidiary, and Big 5 Services Corp., which is a 100%-owned subsidiary of Big 5 Corp. Big 5 Services Corp. provides a centralized operation for the issuance and administration of gift cards and returned merchandise credits (collectively, “stored-value cards”).

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 1, 2023 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.

(2)
Summary of Significant Accounting Policies

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 52-53 week fiscal year, which ends on the Sunday nearest December 31. Fiscal year 2023 is comprised of 52 weeks and ends on December 31, 2023. Fiscal year 2022 was comprised of 52 weeks and ended on January 1, 2023. The interim periods in fiscal 2023 and 2022 are each comprised of 13 weeks.

Recently Issued Accounting Updates

Recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.

General Concentration of Risk

The Company purchases merchandise from nearly 700 suppliers, and the Company’s 20 largest suppliers accounted for 35.9% of total purchases in fiscal 2022. No vendor represented greater than 5% of total purchases in fiscal 2022.

A substantial amount of the Company’s inventory is manufactured abroad and, from time to time, shipping ports may experience capacity constraints (such as delays associated with the novel coronavirus “COVID-19”), labor strikes, work stoppages or other disruptions that may delay the delivery of imported products. A contract dispute may lead to protracted delays in the movement of the Company’s products, which could further delay the delivery of products to the Company’s stores and impact net sales and profitability. In addition, other conditions outside of the Company’s control, such as adverse weather conditions or acts of terrorism or war, such as the current conflict in Ukraine, could significantly disrupt operations at shipping ports or otherwise impact transportation of the imported merchandise we sell, either through supply chain disruptions, or rising freight and fuel costs.

- 7 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

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 April 2, 2023, including those resulting from the impacts of future COVID-19 variant outbreaks, may result in actual outcomes that differ from those contemplated by management’s assumptions and estimates.

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 probable since the Company only extends immaterial credit purchases to certain municipalities and local school districts.

In accordance with Accounting Standards Codification (“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

 

 

 

April 2,
2023

 

 

April 3,
2022

 

 

 

(In thousands)

 

Hardgoods

 

$

102,764

 

 

$

120,964

 

Athletic and sport apparel

 

 

61,308

 

 

 

56,574

 

Athletic and sport footwear

 

 

58,982

 

 

 

62,766

 

Other sales

 

 

1,885

 

 

 

1,677

 

Net sales

 

$

224,939

 

 

$

241,981

 

 

Substantially all of the Company’s revenue is for single performance obligations for the following distinct items:

Retail store sales
E-commerce sales
Stored-value cards

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 one performance obligation, the sale of the product, at shipping point (when the customer gains control). Revenue associated with e-commerce sales was not material for the 13 weeks ended April 2, 2023 and April 3, 2022.

The Company recognized $1.7 million and $1.8 million in stored-value card redemption revenue for the 13 weeks ended April 2, 2023 and April 3, 2022, respectively. The Company also recognized $0.1 million in stored-value card breakage revenue for the 13 weeks ended April 2, 2023 and April 3, 2022. The Company had outstanding stored-value card liabilities of $8.3 million and $8.8 million as of April 2, 2023 and January 1, 2023, respectively, which are included in accrued expenses in the accompanying interim unaudited condensed consolidated balance sheets. Based upon historical experience, stored-value cards are predominantly redeemed in the first two years following their issuance date.

 

- 8 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

In the accompanying interim unaudited condensed consolidated balance sheets, the Company recorded, as prepaid expense, estimated right-of-return merchandise cost of $0.8 million and $1.2 million related to estimated sales returns as of April 2, 2023 and January 1, 2023, respectively, and recorded, in accrued expenses, an allowance for sales returns reserve of $1.6 million and $2.3 million as of April 2, 2023 and January 1, 2023, respectively.

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.

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 original maturities of three months or less. See Note 3 to the Interim Financial Statements for a further discussion on the fair value of U.S. Treasury bills. Book overdrafts are classified as current liabilities in the Company’s interim unaudited condensed consolidated balance sheets.

Valuation of Merchandise Inventories, Net

The Company’s merchandise inventories 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.

 

- 9 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

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.

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 not recognize any impairment charges in the first quarter of fiscal 2023 or 2022.

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 (“IT”) systems 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, current and noncurrent, 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 interim unaudited condensed consolidated balance sheets. 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.

 

- 10 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

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.

See Note 5 to the Interim Financial Statements for a further discussion on leases.

 

 

(3)
Fair Value Measurements

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. Cash equivalents consist of highly-liquid investments of excess cash into U.S. Treasury bills, which have original maturities of three months or less. As of April 2, 2023, the Company recorded $15.0 million in cash equivalents and classified these assets as Level 1 inputs, which are quoted prices (unadjusted) in active markets for identical assets that the Company can access at the measurement date. The Company records these cash equivalents monthly, based on the prevailing market interest rate as of the measurement date. As of January 1, 2023, the Company had no cash equivalents. Book overdrafts for checks outstanding are classified as current liabilities in the Company’s interim unaudited condensed consolidated balance sheets. 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 estimates 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 classifies 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 April 2, 2023 and January 1, 2023, there were no long-lived assets subject to impairment.

(4)
Accrued Expenses

The major components of accrued expenses are as follows:

 

 

April 2,
2023

 

 

January 1,
2023

 

 

 

(In thousands)

 

Payroll and related expense

 

$

21,949

 

 

$

26,525

 

Occupancy expense

 

 

10,923

 

 

 

10,126

 

Sales tax

 

 

7,451

 

 

 

9,964

 

Other

 

 

20,602

 

 

 

23,646

 

Accrued expenses

 

$

60,925

 

 

$

70,261

 

 

(5)
Lease Commitments

The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, IT systems 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.

 

- 11 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The components of lease expense were as follows:

 

 

13 Weeks Ended

 

 

 

April 2,
2023

 

 

April 3,
2022

 

 

 

(In thousands)

 

Lease expense:

 

 

 

 

 

 

Operating lease expense

 

$

21,038

 

 

$

20,561

 

Variable lease expense

 

 

4,813

 

 

 

4,624

 

Operating lease expense

 

 

25,851

 

 

 

25,185

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

950

 

 

 

902

 

Interest on lease liabilities

 

 

79

 

 

 

73

 

Finance lease expense

 

 

1,029

 

 

 

975

 

Total lease expense

 

$

26,880

 

 

$

26,160

 

Other information related to leases was as follows:

 

 

13 Weeks Ended

 

 

 

April 2,
2023

 

 

April 3,
2022

 

 

 

(In thousands)

 

Operating cash flows from operating leases

 

$

22,211

 

 

$

22,048

 

Financing cash flows from finance leases

 

 

818

 

 

 

815

 

Operating cash flows from finance leases

 

 

85

 

 

 

82

 

Cash paid for amounts included in the measurement of lease liabilities

 

$

23,114

 

 

$

22,945

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 

$

30

 

 

$

216

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

$

11,183

 

 

$

26,041

 

Weighted-average remaining lease term—finance leases

 

3.7 years

 

 

3.7 years

 

Weighted-average remaining lease term—operating leases

 

5.0 years

 

 

5.0 years

 

Weighted-average discount rate—finance leases

 

 

3.9

%

 

 

3.0

%

Weighted-average discount rate—operating leases

 

 

5.1

%

 

 

5.1

%

Maturities of finance and operating lease liabilities as of April 2, 2023 were as follows:

Fiscal Year Ending:

 

Finance
Leases

 

 

Operating
Leases

 

 

 

(In thousands)

 

2023 (remaining nine months)

 

$

3,531

 

 

$

61,052

 

2024

 

 

2,460

 

 

 

76,195

 

2025

 

 

1,946

 

 

 

59,547

 

2026

 

 

1,429

 

 

 

44,186

 

2027

 

 

621

 

 

 

27,364

 

Thereafter

 

 

267

 

 

 

47,260

 

Undiscounted cash flows

 

$

10,254

 

 

$

315,604

 

Reconciliation of lease liabilities:

 

 

 

 

 

 

Weighted-average remaining lease term

 

3.7 years

 

 

5.0 years

 

Weighted-average discount rate

 

 

3.9

%

 

 

5.1

%

Present values

 

$

9,518

 

 

$

278,287

 

Lease liabilities - current

 

 

2,881

 

 

 

68,881

 

Lease liabilities - long-term

 

 

6,637

 

 

 

209,406

 

Lease liabilities - total

 

$

9,518

 

 

$

278,287

 

Difference between undiscounted and discounted cash flows

 

$

736

 

 

$

37,317

 

 

 

- 12 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

(6)
Long-Term Debt

The Company, Big 5 Corp. and Big 5 Services Corp. are parties to a Loan, Guaranty and Security Agreement with Bank of America, N.A. (“BofA”), as agent and lender, which was amended on November 22, 2021 and October 19, 2022 (as so amended, the “Loan Agreement”). 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. The Company may also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the existing lender under the Loan Agreement will have the option to increase the commitment to accommodate the requested increase. If such existing lender does not exercise that option, the Company 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.

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) 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, the Company may designate specific borrowings under the Loan Agreement as either base rate loans or Term SOFR 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 Term SOFR rate loans bear interest at a rate equal to the then applicable secured overnight financing rate as administered by the Federal Reserve Bank of New York (“SOFR”) rate plus a 0.10% “SOFR adjustment” spread, 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 one-month SOFR 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 is a function of Average Daily Availability for the preceding fiscal quarter as set forth below.

Level

 

Average Daily Availability

 

SOFR Rate
Applicable
Margin

 

Base Rate
Applicable Margin

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.

Obligations under the Loan Agreement are secured by a general lien on and security interest in substantially all of the Company’s assets. The Loan Agreement contains covenants that require the Company 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. The Company 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 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. 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 the Company, 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.

As of April 2, 2023 and January 1, 2023, the Company had no long-term revolving credit borrowings outstanding. As of April 2, 2023 and January 1, 2023, the Company had outstanding letter of credit commitments of $1.4 million. Total remaining borrowing availability, after subtracting letters of credit, was $148.6 million as of April 2, 2023 and January 1, 2023.

 

- 13 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

(7)
Income Taxes

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 April 2, 2023 and January 1, 2023, the Company had a valuation allowance for deferred income tax assets of $0.3 million related to unused California Enterprise Zone Tax Credits, which the Company will no longer be able to carry forward beyond 2024 as a result of California’s termination of this program.

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 2019 and after, and state and local income tax returns are open for fiscal years 2018 and after.

As of April 2, 2023 and January 1, 2023, the Company had no unrecognized tax benefits including those that, if recognized, would affect the Company’s effective income tax rate over the next 12 months. The Company’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expense. As of April 2, 2023 and January 1, 2023, the Company had no accrued interest or penalties.

(8)
Earnings Per Share

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

 

 

April 2,
2023

 

April 3,
2022

 

 

(In thousands, except per share data)

Net income

 

$193

 

$9,103

Weighted-average shares of common stock
   outstanding:

 

 

 

 

Basic

 

21,629

 

21,680

Dilutive effect of common stock equivalents arising from
   share option, nonvested share and nonvested share unit
   awards

 

320

 

620

Diluted

 

21,949

 

22,300

Basic earnings per share

 

$0.01

 

$0.42

Diluted earnings per share

 

$0.01

 

$0.41

Antidilutive share option awards excluded from diluted
   calculation

 

20

 

10

Antidilutive nonvested share and nonvested share unit awards
   excluded from diluted calculation

 

371

 

The computation of diluted earnings per share for the 13 weeks ended April 2, 2023 and April 3, 2022 excludes certain share option awards that were outstanding and antidilutive (i.e., including such share option awards would result in higher earnings per share), since the exercise prices of these share option awards exceeded the average market price of the Company’s common shares.

 

- 14 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The computation of diluted earnings per share for the 13 weeks ended April 2, 2023 excludes certain nonvested share awards that were outstanding and antidilutive, since the grant date fair values of these nonvested share awards exceeded the average market price of the Company’s common shares. No nonvested share awards were antidilutive for the 13 weeks ended April 3, 2022.

(9)
Commitments and Contingencies

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 effect on the Company’s results of operations, financial condition or cash flows.

(10)
Share-based Compensation

In June 2022, the Company amended and restated its 2019 Equity Incentive Plan (the “2019 Plan”), primarily authorizing an additional 3,300,000 shares available for future grant. As of April 2, 2023, 3,660,551 shares remained registered and available for future grant under the 2019 Plan.

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 $0.7 million and $0.6 million in share-based compensation expense for the 13 weeks ended April 2, 2023 and April 3, 2022, respectively.

Share Option Awards

Share option awards granted by the Company generally vest and become exercisable in four equal annual installments of 25% per year with a maximum life of ten years. The exercise price of share option awards is equal to the quoted market price of the Company’s common stock on the date of grant. No share option awards were granted in the first quarter of fiscal 2023 and 2022.

A summary of the status of the Company’s share option awards is presented below:

 

 

Shares

 

 

Weighted-
Average
Exercise
Price

 

 

Weighted-
Average
Remaining
Contractual
Life
(In Years)

 

 

Aggregate
Intrinsic
Value

 

Outstanding at January 1, 2023

 

 

300,035

 

 

$

4.24

 

 

 

 

 

 

 

Exercised

 

 

(18,800

)

 

 

3.07

 

 

 

 

 

 

 

Outstanding at April 2, 2023

 

 

281,235

 

 

$

4.32

 

 

 

6.56

 

 

$

1,174,261

 

Exercisable at April 2, 2023

 

 

198,357

 

 

$

3.79

 

 

 

6.25

 

 

$

816,872

 

Vested and Expected to Vest at April 2, 2023

 

 

280,959

 

 

$

4.32

 

 

 

6.56

 

 

$

1,173,573

 

The aggregate intrinsic value represents the total pretax intrinsic value, based upon the Company’s most recent closing stock price of $7.69 as of April 2, 2023, which would have been received by the share option award holders had all share option award holders exercised their share option awards as of that date.

As of April 2, 2023, there was $0.2 million of total unrecognized compensation expense related to share option awards granted. That expense is expected to be recognized over a weighted-average period of 1.3 years.

Nonvested Share Awards and Nonvested Share Unit Awards

Nonvested share awards granted by the Company vest for employees from the date of grant in four equal annual installments of 25% per year. Nonvested share awards and nonvested share unit awards granted by the Company to non-employee directors for their service as directors, as defined by ASC 718, generally vest 100% on the earlier of (a) the date of the Company’s next annual stockholders meeting following the grant date, or (b) the first anniversary of the grant date.

 

- 15 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Nonvested share awards become outstanding when granted and are delivered to the recipient upon their vesting. Vested 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 quarter of fiscal 2023 and 2022 was $1.6 million and $3.2 million, respectively. No nonvested share unit awards vested during the first quarter of fiscal 2023 and 2022.

The Company granted 273,160 and 236,560 nonvested share awards in the first quarter of fiscal 2023 and 2022, respectively. The weighted-average grant-date fair value per share of the Company’s nonvested share awards granted in the first quarter of fiscal 2023 and 2022 was $7.82 and $15.68, respectively.

A summary of the status of the Company’s nonvested share awards is presented below:

 

 

Shares

 

 

Weighted-
Average Grant-
Date Fair
Value

 

Balance at January 1, 2023

 

 

587,675

 

 

$

11.64

 

Granted

 

 

273,160

 

 

 

7.82

 

Vested

 

 

(209,485

)

 

 

9.23

 

Forfeited

 

 

(3,080

)

 

 

10.57

 

Balance at April 2, 2023

 

 

648,270

 

 

$

10.82

 

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 quarter of fiscal 2023, the Company withheld 79,204 common shares with a total value of $0.6 million. This amount is presented as a cash outflow from financing activities in the accompanying interim unaudited condensed consolidated statement of cash flows.

As of April 2, 2023, there was $6.4 million of total unrecognized compensation expense related to nonvested share awards, which is expected to be recognized over a weighted-average period of 2.9 years. As of April 2, 2023, there was no remaining unrecognized compensation expense related to nonvested share unit awards.

(11)
Subsequent Events

On April 27, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock, which will be paid on June 15, 2023 to stockholders of record as of June 1, 2023.

 

- 16 -


 

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 April 2, 2023, the related condensed consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal 13-week periods ended April 2, 2023 and April 3, 2022, 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 1, 2023, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal year then ended (not presented herein); and in our report dated March 1, 2023, 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 1, 2023, 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

May 3, 2023

 

 

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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 1, 2023.

Our fiscal year ends on the Sunday nearest December 31. Fiscal 2023 is comprised of 52 weeks and ends on December 31, 2023. Fiscal 2022 was comprised of 52 weeks and ended on January 1, 2023. The interim periods in fiscal 2023 and 2022 are each comprised of 13 weeks.

Overview

We are a leading sporting goods retailer in the western United States, with 430 stores and an e-commerce platform under the name “Big 5 Sporting Goods” as of April 2, 2023. We provide a full-line product offering in a traditional sporting goods store format that averages approximately 12,000 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.

In the first quarter of fiscal 2023 we closed two stores and in the first quarter of fiscal 2022 we did not open or close any stores. For fiscal 2023, we anticipate opening approximately six new stores and closing approximately six stores.

Executive Summary

Net income decreased in the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022 as a result of reduced net sales and lower merchandise margins year over year. Reduced net sales in the first quarter of fiscal 2023 in part reflected challenging macro-economic conditions including significant inflationary pressures which dampened consumer sentiment and negatively impacted discretionary spending.

Net sales for the first quarter of fiscal 2023 decreased 7.1% to $224.9 million compared to $242.0 million for the first quarter of fiscal 2022. The decrease in net sales reflects a decline of 7.1% in same store sales when compared with the first quarter of fiscal 2022. Our lower same store sales in the first quarter of fiscal 2023 in part reflected significant inflationary pressures and heightened recessionary concerns that negatively impacted consumer demand, which contributed to reduced net sales across our major merchandise categories of hardgoods and footwear, partially offset by an increase in our apparel category that reflected higher winter-product sales.
Gross profit for the first quarter of fiscal 2023 represented 33.4% of net sales, compared with 35.5% in the first quarter of the prior year. The decrease in gross profit margin primarily reflects higher store occupancy and distribution expense as a percentage of net sales as well as lower merchandise margins compared with the prior year. While merchandise margins were down year over year they remained healthy and continued to compare favorably to pre-pandemic levels.
Selling and administrative expense for the first quarter of fiscal 2023 remained relatively unchanged at $75.2 million, or 33.4% of net sales, compared to $75.3 million, or 31.1% of net sales, for the first quarter of fiscal 2022. Selling and administrative expense primarily reflects decreases in company performance-based incentive accruals offset by an increase in employee labor expense.
Net income for the first quarter of fiscal 2023 was $0.2 million, or $0.01 per diluted share, compared to net income of $9.1 million, or $0.41 per diluted share, for the first quarter of fiscal 2022, primarily reflecting lower net sales and, to a lesser degree, lower merchandise margins year over year.
Operating cash flow for the first quarter of fiscal 2023 was a positive $12.3 million compared to operating cash flow in the first quarter of fiscal 2022 of a negative $23.7 million. The increased operating cash flow was due primarily to decreased funding of merchandise inventory and accrued expenses, primarily related to performance-based incentive accruals, partially offset by decreased net income.
Capital expenditures for the first quarter of fiscal 2023 decreased to $2.5 million from $2.9 million for the first quarter of fiscal 2022. We expect to open approximately six new stores in fiscal 2023, after opening three new stores in the prior year.

 

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We had cash and cash equivalents of $27.5 million, $25.6 million and $62.0 million as of April 2, 2023, January 1, 2023 and April 3, 2022, respectively. The balances as of April 2, 2023 and April 3, 2022 included cash equivalents of $15.0 million and $50.0 million, respectively, related to investments in highly-liquid U.S. Treasury bills. We have had no borrowings under our credit facility since the full pay-down of outstanding balances under the credit facility in the third quarter of fiscal 2020.
We paid cash dividends in the first quarter of fiscal 2023 and 2022 of $6.1 million, or $0.25 per share.
We did not repurchase any shares of common stock in the first quarter of fiscal 2023, and we repurchased 94,983 shares of common stock for $1.6 million in the first quarter of fiscal 2022.

Results of Operations

The results of the interim periods are not necessarily indicative of results for the entire fiscal year.

13 Weeks Ended April 2, 2023 Compared to 13 Weeks Ended April 3, 2022

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

 

 

 

April 2,
2023

 

 

April 3,
2022

 

 

 

(Dollars in thousands)

 

Net sales

 

$

224,939

 

 

 

100.0

%

 

$

241,981

 

 

 

100.0

%

Cost of sales (1)

 

 

149,795

 

 

 

66.6

 

 

 

156,048

 

 

 

64.5

 

Gross profit

 

 

75,144

 

 

 

33.4

 

 

 

85,933

 

 

 

35.5

 

Selling and administrative expense (2)

 

 

75,173

 

 

 

33.4

 

 

 

75,317

 

 

 

31.1

 

Operating (loss) income

 

 

(29

)

 

 

0.0

 

 

 

10,616

 

 

 

4.4

 

Interest (income) expense

 

 

(115

)

 

 

(0.1

)

 

 

184

 

 

 

0.1

 

Income before income taxes

 

 

86

 

 

 

0.1

 

 

 

10,432

 

 

 

4.3

 

Income tax (benefit) expense

 

 

(107

)

 

 

0.0

 

 

 

1,329

 

 

 

0.5

 

Net income

 

$

193

 

 

 

0.1

%

 

$

9,103

 

 

 

3.8

%

 

(1)
Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution center expense, including depreciation and amortization, and store occupancy expense. Store occupancy expense includes rent, amortization of leasehold improvements, common area maintenance, property taxes and insurance.
(2)
Selling and administrative expense includes store-related expense, other than store occupancy expense, as well as advertising, depreciation and amortization, expense associated with operating our corporate headquarters and impairment charges, if any.

Net Sales. Net sales decreased by $17.1 million, or 7.1%, to $224.9 million in the first quarter of fiscal 2023 from $242.0 million in the first quarter last year. The change in net sales reflected the following:

Same store sales decreased by $17.0 million, or 7.1%, for the 13 weeks ended April 2, 2023, versus the comparable 13-week period in the prior year. The decline in same store sales was attributed to the following:
o
The decrease in same store sales in the first quarter of fiscal 2023 in part reflected significant inflationary pressures and heightened recessionary concerns that dampened consumer sentiment and negatively impacted discretionary spending. While we experienced strong winter-related product sales as a result of cold winter-weather conditions during the first fiscal quarter, the continuing cold and wet winter-weather patterns negatively impacted sales for the spring categories of product such as baseball and other spring sports during the second half of the fiscal quarter.
o
Our lower same store sales reflected decreases in our major merchandise categories of hardgoods and footwear, while our apparel category increased reflecting higher winter-product sales.
o
Same store sales comparisons are made on a comparable-day basis. Same store sales for a period normally consist of sales for stores that operated throughout the period and the full corresponding prior-year period, along with sales from e-commerce. Same store sales comparisons exclude sales from stores permanently closed, or stores in the process of closing, during the comparable periods. Sales from e-commerce in the first quarter of fiscal 2023 and 2022 were not material.
We experienced decreased customer transactions of 5.9% and a lower average sale per transaction of 1.2% in the first quarter of fiscal 2023 compared to the prior year.

 

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Gross Profit. Gross profit decreased by $10.8 million to $75.1 million, or 33.4% of net sales, in the 13 weeks ended April 2, 2023, compared with $85.9 million, or 35.5% of net sales, in the 13 weeks ended April 3, 2022. The change in gross profit was primarily attributable to the following:

Net sales decreased by $17.1 million, or 7.1%, compared with the first quarter of last year.
Merchandise margins, which exclude buying, occupancy and distribution expense, decreased by an unfavorable 23 basis points compared with the first quarter of last year when merchandise margins increased by a favorable 119 basis points. Our decreased merchandise margins primarily reflect increased promotional pricing and higher product purchase costs. While merchandise margins were down year over year they remained healthy and continued to compare favorably to pre-pandemic levels.
Store occupancy expense increased by $0.7 million, or an unfavorable 110 basis points as a percentage of net sales, compared with the first quarter of last year.
Distribution expense, including costs capitalized into inventory, increased by $0.5 million, or an unfavorable 59 basis points as a percentage of net sales, in the first quarter of fiscal 2023 compared to the prior year. The increase primarily reflected decreased costs capitalized into inventory, which were partially offset by lower trucking and fuel expense.

Selling and Administrative Expense. Selling and administrative expense decreased by $0.1 million to $75.2 million, or 33.4% of net sales, in the 13 weeks ended April 2, 2023, compared to $75.3 million, or 31.1% of net sales, in the first quarter last year. The change in selling and administrative expense was primarily attributable to the following:

Administrative expense decreased by $1.7 million, primarily attributable to decreases in company performance-based incentive accruals and employee benefit-related expense in the current year.
Our advertising expense decreased by $0.2 million in the first quarter of fiscal 2023. Our expense remains less than half of pre-pandemic expense as a result of initial measures we took in response to COVID-19 in fiscal 2020. We expect our expense to continue to benefit from reduced advertising activity in the foreseeable future as we continue to evaluate the impact on our sales.
Store-related expense, excluding occupancy, increased by $1.8 million due largely to increases in employee labor expense, store security and systems improvements and the impact of broad-based inflation, partially offset by reductions in health and welfare expense as compared to the prior year which experienced a surge related to post-COVID-19 medical treatment. Wages continue to reflect the incremental impact of legislated minimum wage rate increases primarily in California, where over half of our stores are located. In California, state-wide minimum wage rates have risen from $10.00 per hour in 2017 to $15.50 per hour beginning on January 1, 2023. Additionally, certain other jurisdictions within California, including Los Angeles and San Francisco, as well as various other states in which we do business, are and have been implementing their own scheduled increases that exceed the state-wide minimum wage rates, which may also include interim impacts effective at various points throughout the year. Labor expense for the first quarter of fiscal 2023 also reflected higher demand for labor in many of our markets resulting in higher wages. We estimate that the combined impact of these wage pressures caused our labor expense to increase by approximately $1.2 million for the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022.

Interest (Income) Expense. Interest expense decreased by $0.3 million in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 as a result of generating interest income for the current fiscal year reflecting higher interest earned on cash equivalents.

Income Taxes. The provision for income taxes was a benefit of $0.1 million for the first quarter of fiscal 2023 compared to an expense of $1.3 million for the first quarter of fiscal 2022, primarily reflecting lower pre-tax income and a tax deduction related to share-based compensation compared to the first quarter of fiscal 2022.

 

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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, cash flows from operations and borrowings from the revolving credit facility, when necessary.

As of April 2, 2023, we had $27.5 million of cash and cash equivalents compared to $62.0 million of cash and cash equivalents as of April 3, 2022. Our cash flows from operating, investing and financing activities are summarized as follows:

 

 

 

13 Weeks Ended

 

 

 

April 2,
2023

 

 

April 3,
2022

 

 

 

(In thousands)

 

Total cash provided by (used in):

 

 

 

 

 

 

Operating activities

 

$

12,292

 

 

$

(23,717

)

Investing activities

 

 

(2,529

)

 

 

(2,926

)

Financing activities

 

 

(7,869

)

 

 

(8,739

)

Net increase (decrease) in cash and cash equivalents

 

$

1,894

 

 

$

(35,382

)

Operating Activities. Operating cash flows for the first quarter of fiscal 2023 and 2022 were a positive $12.3 million and a negative $23.7 million, respectively. The increased cash flow provided by operating activities for the first quarter of fiscal 2023 compared to the prior year primarily reflects decreased funding of merchandise inventory and accrued expenses, primarily related to performance-based incentive accruals, partially offset by lower net income.

Investing Activities. Net cash used in investing activities for the first quarter of fiscal 2023 and 2022 was $2.5 million and $2.9 million, respectively. Capital expenditures, excluding non-cash acquisitions, represented substantially all of the cash used in investing activities for each period. 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 quarter of fiscal 2023 and 2022 were a negative $7.9 million and a negative $8.7 million, respectively. For the first quarter of both periods, cash was used primarily to fund dividend payments and make principal payments on finance lease liabilities, partially offset by proceeds received from the exercise of employee share option awards. For the first quarter of fiscal 2022, cash was also used to purchase treasury stock.

As of April 2, 2023, January 1, 2023 and April 3, 2022, we had no revolving credit borrowings, and $1.4 million, $1.4 million and $1.1 million, respectively, of letter of credit commitments outstanding.

In fiscal 2022 we paid quarterly cash dividends of $0.25 per share of outstanding common stock. In the first quarter of fiscal 2023, we paid a quarterly cash dividend of $0.25 per share of outstanding common stock, and in the second quarter of fiscal 2023, our Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock, which will be paid on June 15, 2023 to stockholders of record as of June 1, 2023.

Periodically, we repurchase our common stock in the open market pursuant to programs approved by our Board of Directors. We may repurchase our common stock for a variety of reasons, including, among other things, our alternative cash requirements, existing business conditions and the current market price of our stock. In the first quarter of fiscal 2022, our Board of Directors authorized a new share repurchase program of up to $25.0 million of our common stock, which replaced the previous share repurchase program. Under this program, we 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 SEC. However, the timing and amount of such purchases, if any, would be at the discretion of our management and Board of Directors, and would depend on market conditions and other considerations. We repurchased 94,983 shares of our common stock for $1.6 million in the first quarter of fiscal 2022 and repurchased 295,719 shares of our common stock for $4.1 million in the full year of fiscal 2022. We did not repurchase any shares of our common stock in the first quarter of fiscal 2023. Since the inception of our initial share repurchase program in May 2006 through April 2, 2023, we have repurchased a total of 4,186,014 shares for $53.6 million.

 

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Loan Agreement. We are party to a Loan, Guaranty and Security agreement with Bank of America, N.A. (“BofA”), as agent and lender, which was amended on November 22, 2021 and October 19, 2022 (as so amended, the “Loan Agreement”). 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 lender under the Loan Agreement will have the option to increase their commitment to accommodate the requested increase. If the lender does 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.

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 Term SOFR 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 Term SOFR rate loans bear interest at a rate equal to the then applicable secured overnight financing rate as administered by the Federal Reserve Bank of New York (“SOFR”) rate plus a 0.10% “SOFR adjustment” spread, 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 one-month SOFR 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

 

SOFR Rate
Applicable
Margin

 

Base Rate
Applicable Margin

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.

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.

Future Capital Requirements. We had cash and cash equivalents of $27.5 million as of April 2, 2023. We expect capital expenditures for fiscal 2023, excluding non-cash acquisitions, to range from approximately $15.0 million to $20.0 million primarily to fund store-related remodeling, the opening of new stores, distribution center investments and computer hardware and software purchases. For fiscal 2023, we anticipate opening approximately six new stores and closing approximately six stores.

 

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Dividends are paid at the discretion of our Board of Directors. In fiscal 2022 we paid quarterly cash dividends of $0.25 per share of outstanding common stock. In the first quarter of fiscal 2023, we paid a quarterly cash dividend of $0.25 per share of outstanding common stock, and in the second quarter of fiscal 2023, our Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock, which will be paid on June 15, 2023 to stockholders of record as of June 1, 2023.

As of April 2, 2023, a total of $20.9 million remained available for share repurchases under our new share repurchase program. We did not repurchase any shares of our common stock in the first quarter of fiscal 2023. We repurchased 94,983 shares of our common stock for $1.6 million in the first quarter of fiscal 2022 and repurchased 295,719 shares of our common stock for $4.1 million in the full year of fiscal 2022. 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, 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 quarter of fiscal 2023 and 2022, we had zero borrowings under our revolving credit facility.

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 1, 2023, we consider our estimates on valuation of merchandise inventory and valuation of 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 13 weeks ended April 2, 2023.

Seasonality and Impact of Inflation

We experience seasonal fluctuations in our net sales and operating results, which can suffer when weather does not conform to seasonal norms, such as the first quarter of fiscal 2022 when we experienced warm and dry winter-weather conditions across our markets that resulted in significant carryover of winter inventory. Seasonality in our net sales influences our buying patterns which directly impacts our merchandise 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.

In fiscal 2022 and the first quarter of fiscal 2023, we experienced greater inflation in the cost of products that we purchase for resale as well as higher freight costs than in previous years. While our merchandise inventory costs have been impacted by inflationary pressures, we have generally been able to adjust our selling prices in response to these higher product purchase costs. However, if we are unable to adjust our selling prices for product purchase cost increases that might occur in the future, then our merchandise margins could decline, which would adversely impact our operating results. In fiscal 2022 and the first quarter of fiscal 2023, we also experienced increased wage expense as a result of higher demand and competition for labor in many of our markets and we expect these dynamics to continue in fiscal 2023. Broad-based inflationary pressures adversely impacted many categories of costs and expenses during fiscal 2022 and this impact is expected to continue during fiscal 2023.

 

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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 and uncertainties and other factors that may cause our actual results in current or future periods to change significantly and differ materially from forecasted results. These forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause our actual results in current or future periods to change significantly and differ materially from forecasted results. 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, global supply chain disruptions resulting from the ongoing conflict in Ukraine, 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 as well as environmental, social and governance issues, public health issues (including those caused by COVID-19 or any potential variants), impacts from 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

We are subject to risks resulting from interest rate fluctuations since interest on our borrowings under our Loan Agreement, if any, is based on variable rates. We enter into borrowings under our Loan Agreement principally for working capital, capital expenditures and general corporate purposes. We routinely evaluate the best use of our cash on hand and manage financial statement exposure to interest rate fluctuations by managing our level of indebtedness and the interest base rate options on such indebtedness. We did not have borrowings under our Loan Agreement as of April 2, 2023 and January 1, 2023. We do not utilize derivative instruments and do not engage in foreign currency transactions or hedging activities to manage our interest rate risk.

Changes in foreign currency rates can increase the purchase cost of our products. All of our stores are located in the United States, and all imported merchandise is purchased in U.S. dollars.

 

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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 April 2, 2023, 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.

 

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PART II. OTHER INFORMATION

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

There have been no material changes to the risk factors identified in Part I, Item 1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2023.

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 April 2, 2023:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total Number
of Shares
Purchased
(1)

 

 

Average
Price Paid
per Share

 

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

 

 

Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
   Programs
(2)

 

January 2 – January 29

 

 

 

 

$

 

 

 

 

 

$

20,864,000

 

January 30 – February 26

 

 

 

 

$

 

 

 

 

 

$

20,864,000

 

February 27 – April 2

 

 

79,204

 

 

$

 

 

 

 

 

$

20,864,000

 

Total

 

 

79,204

 

 

 

 

 

 

 

 

$

20,864,000

 

(1)

The Company withheld 79,204 shares of Company common stock at an average price of $7.82 per share to satisfy minimum statutory tax withholding obligations in connection with the vesting of certain nonvested share awards issued to employees, in accordance with the Company’s 2019 Equity Incentive Plan.

(2)

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

In December 2022, the Company entered into a five-year collective bargaining agreement with General Teamsters, Airline, Aerospace and Allied Employees, Warehousemen, Drivers, Construction, Rock and Sand; Airline Employees, Local Union No. 986, affiliated with the International Brotherhood of Teamsters (“Local 986”), which was approved by the covered distribution center employees. The Company is currently negotiating a five-year collective bargaining agreement with Local 986 for a smaller number of covered store employees. Both collective bargaining agreements are retroactive to September 1, 2022, and expire on August 31, 2027. The Company has not had a strike or work stoppage in over 40 years, although such a disruption could have a significant negative impact on the Company’s business operations and financial results.

 

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Item 6. Exhibits

(a)
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

 

Section 1350 Certification of Chief Executive Officer. (1)

 

 

 

  32.2

 

Section 1350 Certification of Chief Financial Officer. (1)

 

 

 

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)

 

(1)
Filed herewith.

 

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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: May 3, 2023

By:

/s/ Steven G. Miller

 

 

    Steven G. Miller

 

 

Chairman of the Board of Directors,

President and Chief Executive Officer

 

 

 

Date: May 3, 2023

By:

/s/ Barry D. Emerson

 

 

     Barry D. Emerson

 

 

Executive Vice President,

Chief Financial Officer and Treasurer

(Principal Financial and

Accounting Officer)

 

 

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