Big 5 Sporting Goods (BGFV) operates a chain of stores in the West. The stock was expensive, extended and overbought going into its last earnings report, but severe profit-taking has dropped the price to the point that my negativity two months ago has been replaced by cautious optimism. The balance sheet is strong, the valuation low, and the chart showing strong support just below the current price. BGFV isn’t on my official watchlist, so I don’t have a price target that I am maintaining, but, as I explain below, I can see the stock performing well over the next year, with perhaps 45-50% upside potential.
BGFV was founded in 1955 as a WWII army surplus store that also sold company-manufactured tents and air mattresses. It was initially known as “Big 5 Stores” due to its operation of 5 stores in California. By 1963, the company decided to focus on sporting goods and adopted its current name. It was owned by Thrifty Drug Stores in the 70s and then by Leonard Green & Partners in the 90s. The company went public in 2002 at $13, so it hasn’t exactly been a great investment, up 27% in 11 years. Today, the company operates 414 stores averaging 11K square feet (smaller than superstores) in 12 contiguous western states.
Soft goods typically represent about the same 45% that they comprised in 2012, with footwear at 29% and clothing at 16%. Hard goods make up the balance at about 55%. The largest vendor is 9%. The company has a large distribution center in Riverside, CA, as well as a smaller one in Oregon that it opened in 2011. The average tenure of the 414 store managers is an impressive 11 years with the company, while the 23 buyers average 16 years.
The management team is led by Steve Miller (61), who is the son of one of the founders and who serves as Chairman, CEO and President. His long-time head of operations, Richard Johnson (67), serves as EVP, while most of the rest of the team is long-tenured and in their mid-50s. CFO Barry Emerson has served in that role since joining the company in 2005. Ownership by insiders is high, with an overall 10.2% stake that includes 6% by CEO Miller and another 1.3% by his brother, Michael, who is a director. There are also several large institutional holders.
Q1 sales jumped nicely, growing 13%, but Q2 saw slowing to just +6%. Still, the 4.4% same-store sales growth compared well to other retailers. A huge positive factor has been ammunition and firearms, which were very strong early in the year but still continue to fuel growth. This is one of my concerns, as it’s not that clear that it’s sustainable. The company provided Q3 guidance for EPS of $0.40-.45, and this includes about $0.02 for investing in its e-commerce platform. Even incorporating that expense, this would be 5-15% EPS growth compared to last year. BGFV is expecting about 5% growth in comparable sales. This leaves the full year estimates by analysts (according to First Call) at $1.30, a 78% jump. One of the reasons I think the stock may be a buy is that this estimate didn’t really decline after the report, and analysts still project about 15% growth next year.
The balance sheet has improved significantly, with net debt at Q2 at just $43mm, down from $70mm a year ago. Equity is $178mm, almost all tangible. Free cash flow, defined as net income plus D&A less CapEx, had exceeded net income for several years now, and it is likely to be in line this year. The company is guiding to CapEx of $19-23mm in 2013, which will fund 15 new stores and an unusually high number of remodels (perhaps 50 compared to 13 last year). D&A is expected to be about $19mm. Excess cash flow is returned fairly generously to shareholders. The company recently boosted its quarterly dividend by 1/3 to $0.10 per share (2.4% yield). BGFV has repurchased 1.9mm shares since it first began its buyback program in 2006, spending $25mm. It didn’t repurchase any shares in H1 and has $9.6mm authorized after spending $3.6mm in 2012.
On a forward PE basis, at 12.1X, the stock trades near its low valuation over the last decade and below the median of 13.8X. This is also a discount to the overall market. The bottom panel shows a relatively low 6.4X EV/EBITDA valuation. As I think about the potential for BGFV over the next year, I think that the PE could expand to a 15PE ratio, suggesting a target price of $24 a year from now. Note that the dividend yield is a generous 2.4%.
BGFV has been in the rally mode since late 2008, but it couldn’t recover it’s previous all-time high of 29.54 set in 2004:
The stock ran up into its last earnings report but has been selling off since. In all fairness, the run over the past year was stellar, and it was due for a correction. I see some support in the 15-15.50 area based on trading earlier this year as well as the rising one-year average price trend. Those who monitor Fibonacci retracements will note that the move from 3 to 25 has seen a 38.2% retracement, suggesting that we could be right at the lows. Resistance is in the 21 area.
With close to 50% return potential over the next year (plus the 2.4% dividend yield), I think that Big 5 Sporting Goods is highly appropriate for conservative growth investors and even more aggressive growth investors.
Disclosure: I have no position in BGFV.