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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 29, 2003

OR

For the transition period from _________to ______________

Commission file number: 000-49850

BIG 5 SPORTING GOODS CORPORATION

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

     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  x    No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No   x

     There were 22,663,947 shares of common stock with a par value of $0.01 per share outstanding at August 13, 2003.

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BIG 5 SPORTING GOODS CORPORATION

INDEX

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BIG 5 SPORTING GOODS CORPORATION

Condensed Consolidated Balance Sheets
(unaudited)
(dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

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BIG 5 SPORTING GOODS CORPORATION

Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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BIG 5 SPORTING GOODS CORPORATION

Consolidated Condensed Statements of Cash Flows
(unaudited)
(dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

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BIG 5 SPORTING GOODS CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Basis of Presentation and Description of Business

     We operate in one business segment, as a sporting goods retailer under the Big 5 Sporting Goods name carrying a broad range of hardlines, softlines and footwear, operating 275 stores at June 29, 2003 in California, Washington, Arizona, Oregon, Texas, New Mexico, Nevada, Utah, Idaho and Colorado. We are a holding company that operates our business through Big 5 Corp., our wholly owned subsidiary.

     In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to present fairly and in accordance with generally accepted accounting principles (GAAP) the financial position as of June 29, 2003 and December 29, 2002 and the results of operations and cash flows for the periods ended June 29, 2003 and June 30, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission; however, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2002.

(2) Reclassifications

     Certain prior year balances in the accompanying condensed consolidated financial statements have been reclassified to conform to current year presentation.

(3) Initial Public Offering

     In June 2002, we completed an initial public offering (IPO) of 8.1 million shares of common stock, of which 1.6 million shares were sold by selling stockholders. In July 2002, our underwriters exercised their right to purchase an additional 1.2 million shares through their over-allotment option, of which 0.5 million shares were sold by selling stockholders. With net proceeds of $76.1 million from the offering and total net proceeds of $84.0 million after exercise of the underwriters’ over-allotment option, and together with borrowings under our credit facility, we redeemed all of our outstanding senior discount notes and preferred stock, paid bonuses to executive officers and directors which were funded by a reduction in the redemption price otherwise applicable to our preferred stock and repurchased 0.5 million shares of our common stock from non-executive employees.

     Our accompanying statements of operations report net income and earnings per diluted share in accordance with GAAP. In addition, we internally use pro forma reporting

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to evaluate our operating performance without regard to certain non-recurring financial effects of the IPO, including the exercise of the underwriters’ over-allotment option. We believe this presentation will provide investors with additional insight into our operating results. The pro forma figures assume that the IPO took place at the beginning of 2002 and exclude the effects of certain IPO-related expenses. The following table contains a reconciliation of the pro forma adjustments to GAAP for the 13 weeks and 26 weeks ended June 30, 2002. There were no pro forma adjustments for the 13 weeks and 26 weeks ended June 29, 2003.

(in thousands except earnings per share data)

		13 Weeks				26 Weeks
		ended				ended
		June 30, 2002				June 30, 2002
		(unaudited)
Reported net income available to common stockholders		$	2,104			$	3,670
Redeemable preferred stock dividends (a)			2,025				3,989
Reported net income			4,129				7,659
Bonus expense (b)			1,491				1,491
Management fees (c)			958				1,044
Interest expense (d)			827				1,773
Premium and unamortized financing fees related to redemption of debt (e)			—				66
Income taxes (f)			(1,343	)			(1,809	)
Pro forma net income available to common stockholders		$	6,062			$	10,224
Pro forma earnings per share - diluted		$	0.27			$	0.45
Pro forma weighted average shares outstanding - diluted			22,664				22,664

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(4) Earnings Per Share

     The following table sets forth the computation of basic and diluted net income per share of common stock:

(in thousands except earnings per share data)

     The outstanding warrant was exercised in the first quarter of fiscal 2003. Options to purchase an additional 59,000 shares of common stock that were outstanding at June 29, 2003 were not included in the computation of diluted earnings per share because the exercise price of these options was greater than the average market price of our common stock and thus would be antidilutive.

(5) Stock-Based Compensation

     In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for interim and annual periods beginning after December 15, 2002.

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     As permitted under SFAS No. 123, we continue to apply the provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (APB Opinion No. 25), and related interpretations and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. Therefore, compensation expense for stock options issued to employees is recorded on the date of grant only if the then-current market price of the underlying stock exceeded the exercise price. If we had determined compensation cost based upon the fair value at the grant date for our stock options under SFAS No. 123 using the Black Scholes option pricing model, pro forma net income and pro forma net income per share, including the following weighted average assumptions used in these calculations, would have been as follows:

     The assumptions used in the Black Scholes calculations are reflective of the information at the date of grant. There was one grant date during each of the 26 weeks ended June 29, 2003 and June 30, 2002.

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(6) Vendor Payments

     In November 2002, EITF issued EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” EITF Issue No. 02-16 addresses the timing of recognition and classification of consideration received from vendors, including rebates or allowances. EITF Issue No. 02-16 presumes that cash consideration received from a vendor represents a reduction of the prices of the vendor’s products or services and should, therefore, be characterized as a reduction in cost of sales unless (i) it is a payment for assets or services delivered to the vendor, in which case the cash consideration should be characterized as revenue, or (ii) it is a reimbursement of costs incurred to sell the vendor’s products, in which case the cash consideration should be characterized as a reduction of that cost. EITF No. 02-16 became effective for us in the first quarter of 2003, and had no impact on our financial statements, as we have historically accounted for vendor payments in accordance with the provisions of this standard.

(7) Repurchase of Debt

     In January 2003, we adopted the provisions of SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 provides that the gain or loss recognized upon early debt extinguishment may no longer be classified as extraordinary, but rather must be recognized as a component of net income before extraordinary items, if any. We recognized $1.5 million and $0.1 million in premium and related unamortized financing fees in the 26 weeks ended June 29, 2003 and June 30, 2002, respectively. The $1.5 million charge in the first 26 weeks of 2003 resulted from a $1.1 million premium related to the redemption of $20.0 million face value of our senior notes and the related carrying value of applicable deferred financing costs which totaled $0.4 million in the first quarter of 2003. The $0.1 million charge in the first 26 weeks of 2002 resulted from the repurchase of $2.5 million face value of our senior discount notes and $0.5 million face value of our senior notes in the first quarter of 2002.

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BASIS OF REPORTING

Net Sales

     Net sales consist of sales from all stores operated during the period presented, net of merchandise returns. Same store sales for a period reflect net sales from stores operated throughout that period as well as the corresponding prior period. New store sales for a period reflect net sales from stores opened in that period as well as net sales from stores opened during the prior fiscal year. Stores that are relocated during any period are treated as new stores.

Gross Profit

     Gross profit is comprised of net sales less all costs of sales, including the cost of merchandise, inventory writedowns, inventory shrinkage, inbound freight, distribution and warehousing, payroll for our buying personnel and store and allocated corporate office occupancy costs. Store and corporate office occupancy costs include rent, contingent rents, common area maintenance, real estate property taxes and property insurance.

Selling and Administrative

     Selling and administrative includes store management and corporate expenses, including non-buying personnel payroll, employment taxes, employee benefits, management information systems, advertising, insurance other than property insurance, legal, store pre-opening expenses and other corporate level expenses. Store pre-opening expenses include store-level payroll, grand opening event marketing, travel, supplies and other store opening expenses.

Depreciation and Amortization

     Depreciation and amortization consists primarily of the depreciation of leasehold improvements, fixtures and equipment owned by us, amortization of leasehold interest and goodwill and non-cash rent expense.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

     In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition.

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Valuation of Inventory

     We value our inventories at the lower of cost or market using the weighted average cost method that approximates the first-in, first-out (FIFO) method. Management has evaluated the current level of inventories in comparison to planned sales volume and other factors and, based on this evaluation, has recorded adjustments to inventory and cost of goods sold for estimated decreases in inventory value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from our expectations. We are not aware of any events or changes in demand or price that would indicate to us that our inventory valuation may be inaccurate at this time.

Valuation of Long-Lived Assets

     Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows estimated by us to be generated by these assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. We are not aware of any events or changes in circumstances that would indicate to us that our long-lived assets are impaired or that would require an impairment consideration at this time.

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RESULTS OF OPERATIONS

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

13 Weeks Ended June 29, 2003 Compared to 13 Weeks Ended June 30, 2002

     The following table sets forth selected items from our operating results as a percentage of our net sales for the periods indicated:

     1.     Net Sales. Net sales increased by $7.4 million, or 4.6%, to $170.1 million in the 13 weeks ended June 29, 2003 from $162.7 million in the same period last year. This growth reflected an increase of $1.5 million in same store sales and an increase of $6.2 million in new store sales, which reflected the opening of 15 new stores since March 31, 2002. The remaining variance was attributable to net sales from closed stores. Same store sales increased 0.9% in the 13 weeks ended June 29, 2003 versus the same period last year, representing the thirtieth consecutive quarterly increase in same store sales over comparable prior periods. This 0.9% increase in same store sales was primarily attributable to higher sales in our apparel and hardgoods categories which were partially offset by a slight decrease in our footwear category. Store count at June 29, 2003 was 275 versus 261 at June 30, 2002. We opened no new stores in the 13 weeks ended June 29, 2003 and we opened one new store in the 13 weeks ended June 30, 2002. We expect to open approximately 16 to 18 new stores during the remainder of fiscal 2003.

     2.     Gross Profit. Gross profit increased by $3.0 million, or 5.0%, to $62.6 million in the 13 weeks ended June 29, 2003 from $59.6 million in the same period last year. Gross profit margin was 36.8% in the 13 weeks ended June 29, 2003 compared to 36.7% in the same period last year. We were able to achieve higher gross profit margins primarily due to improved product selling margin comparisons. These increases were partially offset by

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higher occupancy and distribution center costs when measured as a percentage of sales resulting from a smaller than expected growth in net sales.

     3.     Selling and Administrative. Selling and administrative expenses increased by $0.7 million, or 1.6%, to $46.5 million in the 13 weeks ended June 29, 2003 from $45.8 million in the same period last year. The increase was primarily due to a $2.0 million increase in store related expenses primarily resulting from supporting our store growth and increased employee health benefit costs. Other factors impacting the increase were higher advertising expenses of $0.7 million which resulted from supporting our store growth and the timing of the Easter holiday between periods and higher insurance related costs of $0.2 million primarily related to increased director and officers insurance premiums after our initial public offering (IPO). These increases were partially offset by expenses incurred in connection with our IPO which occurred in the 13 weeks ended June 30, 2002. These expenses include management services agreement fees and termination costs paid to Leonard Green & Associates, L.P., an affiliate of Leonard Green & Partners, L.P., which were $1.0 million in the 13 weeks ended June 30, 2002, as well as bonuses paid to our executive officers and directors during the 13 weeks ended June 30, 2002. The bonuses for that period totaled $1.5 million and were funded through a reduction of the redemption price that would otherwise have been applicable to the redemption of our outstanding preferred stock. When measured as a percentage of net sales, selling and administrative expenses were 27.3% for the 13 weeks ended June 29, 2003 compared to 28.2%, including IPO related expenses, for the same period last year.

     4.     Depreciation and Amortization. Depreciation and amortization expense remained flat at $2.5 million for the 13 weeks ended June 29, 2003 and the same period last year.

     5.     Interest Expense, Net. Interest expense, net decreased by $1.4 million, or 32.5%, to $2.9 million in the 13 weeks ended June 29, 2003 from $4.3 million in the same period last year. This decrease reflected lower average interest rates on our credit facility in the 13 weeks ended June 29, 2003 versus the 13 weeks ended June 30, 2002 and lower average interest costs associated with the use of borrowings from our credit facility to redeem $20.0 million of our 10.875% senior notes during the first quarter of 2003. In the third quarter of fiscal 2002, we used some of the proceeds from our IPO to redeem all of our outstanding senior discount notes for an aggregate redemption price of approximately $27.5 million. Accordingly, interest expense, net included no expense related to those senior discount notes in the 13 weeks ended June 29, 2003 versus $1.0 million in the 13 weeks ended June 30, 2002.

     6.     Income Taxes. Provision for income taxes was $4.4 million for the 13 weeks ended June 29, 2003 and $2.9 million for the 13 weeks ended June 30, 2002. Our effective income tax rate was 41% for both periods. Income taxes are based upon the estimated effective tax rate for the entire fiscal year applied to pre-tax income for the year. The effective rate is subject to ongoing evaluation by management.

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26 Weeks Ended June 29, 2003 Compared to 26 Weeks Ended June 30, 2002

     The following table sets forth selected items from our operating results as a percentage of our net sales for the periods indicated:

     1.     Net Sales. Net sales increased by $14.8 million, or 4.6%, to $334.6 million in the first 26 weeks of 2003 from $319.8 million in the same period last year. This growth reflected an increase of $2.4 million in same store sales and an increase of $12.3 million in new store sales, which reflected the opening of one new store during the first 26 weeks of 2003 and 15 new stores in fiscal 2002. The remaining variance was attributable to net sales from closed stores. Same store sales increased 0.8% in the first 26 weeks of 2003 versus the same period last year. The increase in same store sales was attributable to higher sales in each of our three major categories, apparel, footwear and hardgoods. Store count at June 29, 2003 was 275 versus 261 at June 30, 2002. We opened one new store and closed one store in the first 26 weeks of 2003 and we opened one new store in the first 26 weeks of 2002. We expect to open approximately 16 to 18 new stores during the remainder of fiscal 2003.

     2.     Gross Profit. Gross profit increased by $5.8 million, or 5.1%, to $120.4 million in the first 26 weeks of 2003 from $114.6 million in the same period last year. Gross profit margin was 36.0% in the first 26 weeks of 2003 compared to 35.8% in the same period last year. We were able to achieve higher gross profit margins primarily due to improved selling margins in the majority of our product categories, including favorable comparisons in our footwear and hardgoods categories which were partially offset by higher occupancy and distribution center costs when measured as a percentage of sales resulting from a smaller than expected growth in net sales.

     3.     Selling and Administrative. Selling and administrative expenses increased by $3.7 million, or 4.2%, to $91.6 million in the first 26 weeks of 2003 from $87.9 million in the same period last year. The increase was primarily due to a $4.5 million increase in store

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related expenses primarily resulting from supporting our store growth and increased employee health benefit costs. Other factors impacting the increase were higher advertising expenses of $0.9 million which resulted from supporting our store growth and higher insurance related costs of $0.3 million primarily related to increased director and officers insurance premiums after our IPO. These increases were partially offset by expenses incurred in connection with our IPO which occurred in the 26 weeks ended June 30, 2002. These expenses include management services agreement fees and termination costs paid to Leonard Green & Associates, L.P., an affiliate of Leonard Green & Partners, L.P., which were $1.0 million in the 26 weeks ended June 30, 2002, as well as bonuses paid to our executive officers and directors during the 26 weeks ended June 30, 2002. The bonuses for that period totaled $1.5 million and were funded through a reduction of the redemption price that would otherwise have been applicable to the redemption of our outstanding preferred stock. When measured as a percentage of net sales, selling and administrative expenses were 27.4% for the first 26 weeks of 2003 compared to 27.5%, including IPO related expenses, for the same period last year.

     4.     Depreciation and Amortization. Depreciation and amortization expense increased by $0.2 million, or 4.6%, to $5.0 million in the first 26 weeks of 2003 from $4.8 million in the same period last year.

     5.     Premium and Unamortized Financing Fees Related to Redemption of Debt. Premium and unamortized financing fees related to redemption of debt were $1.5 million in the first 26 weeks of 2003 versus $0.1 million in the first 26 weeks of 2002. The $1.5 million charge in the first 26 weeks of 2003 resulted from a $1.1 million premium related to the redemption of $20.0 million face value of our senior notes and the related carrying value of applicable deferred financing costs which totaled $0.4 million in the first quarter of 2003. The $0.1 million charge in the first 26 weeks of 2002 resulted from the repurchase of $2.5 million face value of our senior discount notes and $0.5 million face value of our senior notes in the first quarter of 2002.

     6.     Interest Expense, Net. Interest expense, net decreased by $2.9 million, or 33.1%, to $5.9 million in the first 26 weeks of 2003 from $8.8 million in the same period last year. This decrease reflected lower average interest rates on our credit facility in the first 26 weeks of 2003 versus the first 26 weeks of 2002 and lower average interest costs associated with the use of borrowings from our credit facility to redeem $20.0 million of our 10.875% senior notes during the first quarter of 2003. In the third quarter of fiscal 2002, we used some of the proceeds from our IPO to redeem all of our outstanding senior discount notes for an aggregate redemption price of approximately $27.5 million. Accordingly, interest expense, net included no expense related to those senior discount notes in the first 26 weeks of 2003 versus $2.1 million in the first 26 weeks of 2002.

     7.     Income Taxes. Provision for income taxes was $6.7 million for the first 26 weeks of 2003 and $5.4 million for the first 26 weeks of 2002. Our effective income tax rate was 41% for both periods. Income taxes are based upon the estimated effective tax rate for the entire fiscal year applied to pre-tax income for the year. The effective rate is subject to ongoing evaluation by management.

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LIQUIDITY AND CAPITAL RESOURCES

     Our principal liquidity requirements are for working capital and capital expenditures. We fund our liquidity requirements with cash flow from operations and borrowings under our credit facility.

     Net cash used in operating activities for the first 26 weeks of 2003 was $5.9 million versus net cash provided by operating activities of $0.9 million for the first 26 weeks of 2002. The change between periods primarily reflects timing of working capital requirements partially offset by higher net income in the first 26 weeks of 2003.

     Capital expenditures for the first 26 weeks of 2003 and 2002 were $1.7 million and $2.7 million, respectively. We expect capital expenditures for the remaining 26 weeks of 2003 will range from $10.0 to $11.0 million, primarily to fund the opening of approximately 16 to 18 new stores, store improvements and remodelings, warehouse and headquarters improvements and computer hardware and software expenditures. Our store format requires a low investment in furniture and equipment (approximately $0.4 million), working capital (approximately $0.4 million, net of amount financed by vendors through trade payables, which is typically one-third) and real estate (leased “built-to-suit” locations).

     Net cash provided by financing activities for the first 26 weeks of 2003 and 2002 was $5.1 million and $73.7 million, respectively. As of June 29, 2003, we had borrowings of $52.1 million and letter of credit commitments of $5.4 million outstanding under our credit facility and $82.8 million of our senior notes outstanding. These balances compare to borrowings of $29.4 million and letter of credit commitments of $4.5 million outstanding under our credit facility, $103.3 million of our senior notes outstanding and $23.6 million of our senior discount notes outstanding as of June 30, 2002. In the third quarter of 2002 we redeemed our senior discount notes following the consummation of the IPO. In the first quarter of 2003 we redeemed $20.0 million face value of our senior notes. During the first 26 weeks ended June 30, 2002, we repurchased $2.8 million face value of our senior discount notes and $0.5 million face value of our senior notes. We had cash of $6.9 million and $79.8 million at June 29, 2003 and June 30, 2002, respectively. On June 28, 2002, we completed an IPO of 8.1 million shares of our common stock, of which 1.6 million shares were sold by selling stockholders. We received $76.4 million in net proceeds from this offering, of which $73.9 million is included in cash at June 30, 2002.

     We believe we will be able to fund our future cash requirements for operations from operating cash flows, cash on hand and borrowings under our credit facility. We believe these sources of funds will be sufficient to continue our operations and planned capital expenditures and satisfy our scheduled payments under debt obligations for at least the next twelve months. However, our ability to satisfy such obligations depends upon our future performance, which in turn is subject to general economic conditions and regional risks, and to financial, business and other factors affecting our operations, including factors beyond our control. See “Risk Factors That May Affect Future Results or Market Price of Our Common Stock.”

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     Our principal future obligations and commitments, excluding periodic interest payments, include the following: