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Big 5 Sporting's Comps Hurt: Can Strategies Aid a Turnaround?

Zacks Equity Research

Big 5 Sporting Goods Corporation BGFV is witnessing weak hard goods category and soft comparable store sales (comps) for quite some time now. Moreover, the company is grappling with strained margin. In third-quarter 2018, it performed disappointingly, which along with a bleak outlook for the fourth quarter has hurt investors’ sentiment.

A glimpse of Big 5 Sporting’s price trend reveals that it has underperformed the industry in the past three months. Shares of this El Segundo, CA-based company have lost approximately 40% compared with the industry’s 8.2% decline.

Nevertheless, Big 5 Sporting’s solid store-growth plans and a unique merchandising strategy are likely to cushion the stock.

Let’s take a closer look at the factors impacting the stock’s performance and efforts to aid revival.

Factors Behind Big 5 Sporting’s Dismal Run

Big 5 Sporting is witnessing soft comps due to decline in the number of customer transactions and various products categories, particularly hard goods. In the third quarter, comps dropped 2%. The company is also grappling with sluggishness across its footwear and hard goods category. In the last reported quarter, comps fell in a low-single-digit range for hard goods category due to softness across camping and water sports products coupled with persistent weakness in firearm-related products. Weak comps have been hurting the company’s top line and remain a major concern.

Furthermore, the company is experiencing strained margins for a while now due to lower sales and comps, unfavorable weather and higher costs. In third-quarter 2018, gross margin contracted 140 basis points (bps) on increased distribution and store occupancy costs (as a percentage of net sales) as well as slight decrease in merchandise margins. Additionally, it recorded 52.9% decline in operating income due to higher selling and administrative expenses.

Consequently, management issued soft guidance for the fourth quarter, which was below the analysts’ expectations. Loss per share is anticipated to be in the band of 15-25 cents in the fourth quarter compared with a loss of 10 cents in fourth-quarter 2017.

Can Efforts Aid Recovery?

Big 5 Sporting has been focused on expanding its store base and introducing technological advancements to enhance services for its patrons. Further, it is undertaking strategies to expand its scale, and drive traffic and sales. It is also testing the pricing strategies to achieve the optimal balance between driving sales and maintaining margins. Moreover, the company is changing its advertising cadence and structure to allow more flexibility for diversifying its marketing message across the print and digital platforms. This includes shifting a greater proportion of its marketing budget from print to digital programs, and testing a number of digital marketing channels.

Notably, the company’s merchandise strategy helped it retain a solid inventory position. At the end of third-quarter 2018, inventories remained strong despite soft sales. Further, the company predicts inventory to be well-positioned for the fourth quarter.

These apart, Big 5 Sporting is focusing on the expansion of its e-commerce platform. Launched in October 2014, the company is gradually ramping up its product assortments and marketing efforts related to its e-commerce site. Currently, it is focused on marketing the site in order to drive new customers and simultaneously evaluate initial customer response.

Also, Big 5 Sporting is on track to integrate its e-commerce operations with existing merchandising and promotional strategies, with an aim to boost results.

Backed by these aforementioned tailwinds, we expect this Zacks Rank #3 (Hold) stock to return on its growth trajectory.

3 Stocks to Watch

Dick's Sporting Goods, Inc. DKS delivered average positive earnings surprise of 25.5% in the trailing four quarters. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Office Depot, Inc. ODP delivered average positive earnings surprise of 11.9% in the trailing four quarters and carries a Zacks Rank #2.

Five Below, Inc. FIVE delivered average positive earnings surprise of 9.1% in the trailing four quarters. It has a long-term earnings growth rate of 30% and a Zacks Rank #2.

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Big 5 Sporting Goods Corporation (BGFV) : Free Stock Analysis Report
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DICK'S Sporting Goods, Inc. (DKS) : Free Stock Analysis Report
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