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Big 5 Sporting Goods: Financials Will Normalize This Year After Pandemic Boost

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When looking for a baseball bat for my son, I happened to stumble across a Big 5 Sporting Goods Corp. (NASDAQ:BGFV) store and found some great bargains. The company is a sporting goods retailer operating mostly in the Western United States. The companys products include athletic shoes and apparel, as well as outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf and seasonal recreation goods. The company also provides private label items, such as shoes, apparel, camping equipment, fishing supplies and snow sport equipment. It sells private label merchandise under its own trademarks comprising Golden Bear, Harsh, Pacifica and Rugged Exposure. The company operates approximately 430 stores and maintains e-commerce operations as well.


Big 5 was founded in 1955 in California and currently has a market capitalization of $236 million.

Pandemic boost

Since the Covid-19 pandemic began in 2020, Americans have been purchasing sporting goods at record levels as health and fitness became a priority of many consumers. Exercise weights, bikes, running shoes and pretty much every other fitness and outdoor item has been selling strongly and often in short supply.

It is not normal for an established retail chain with over 400 stores have same-store sales of 17.5%. That was what Big 5 reported for fiscal year 2021. The results were driven by pandemic-related issues, such as lockdown fitness needs as well as newcomers to outdoor-related activities. Government stimulus also played a significant role.

But 2022 is the return to normalcy, and most sporting goods retailers are showing declines in sales after abnormally strong results in 2020 and 2021. Inflationary pressures are also playing a role in declining sales.

Financial review

The difficult comparisons showed up in the companys first-quarter results, in which same-store sales declined 11.4%. Adjusted Ebitda was $15 million in the quarter compared $30.3 million in the prior-year period, largely due to difficult comparisons, but also due to inflationary pressures and higher labor costs.

The company maintains a safe balance sheet with no debt and $62 million in cash as of the end of the first quarter. Merchandise inventories as of the end of the quarter increased by 18.2% year over year, which reflects more normalized inventory levels relative to sales as well as the higher carryover of winter-related inventory. In the first quarter, the company repurchased 94,983 shares of its stock.

Valuation

The company expects a decline in sales and earnings for the 2022 fiscal year due to the difficult comparisons against the 2021 record year. The company expects same-store sales to decline in the high-teens for the second quarter and decline in the 6% to 10% range for the year. The company has limited analyst coverage, but one estimate is $2.41 for this year, which is significantly down from $4.55 earned in 2021.

It appears investors are only looking at the decline in sales and earnings from the prior year as opposed to current earnings and potential growth in earnings going forward. If that estimate is close to being accurate, Big 5 is selling at only approximately four to five times current year earnings.

The company recently declared a dividend of 25 cents per share. If that continues throughout the year, the $1 dividend would create a dividend yield of approximately 9%. High dividend yields like that often portend a dividend cut is looming, but with a payout ratio of less than 50% and no debt on the balance sheet, that dividend level may be safe.

Using the GuruFocus DCF calculator with $2 as the earnings per share starting point and only 4% long-term growth, a value of over $20 per share is created. The current share price includes the long-term earnings decline of 8%.

Guru trades

Guru who have purchased Big Five's stock recently include Jim Simons (Trades, Portfolio)'s Renaissance Technologies and Joel Greenblatt (Trades, Portfolio). Gurus who have reduced their positions include Mario Gabelli (Trades, Portfolio).

Conclusion

Big 5 appears to be materially undervalued at this time. Although the company will show a decline in revenue and profits compared to last year, the company remains solidly profitable and the dividend appears to be safe. The company is cautiously opening stores and has announced plans to open four new locations and close two locations in 2022.

This article first appeared on GuruFocus.