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EX-32.2 - EX-32.2 - BIG 5 SPORTING GOODS Corpbgfv-ex322_9.htm
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EX-23.1 - EX-23.1 - BIG 5 SPORTING GOODS Corpbgfv-ex231_6.htm
EX-10.17 - EX-10.17 - BIG 5 SPORTING GOODS Corpbgfv-ex1017_352.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 2017

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:

 

Name of Each Exchange on which Registered:

 

 

 

Common Stock, par value $0.01 per share

 

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:
None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes       No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   No 

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 on Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  

The aggregate market value of the voting stock held by non-affiliates of the registrant was $176,236,713 as of July 2, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) based upon the closing price of the registrant’s common stock on the NASDAQ Stock Market LLC reported for June 30, 2017.  Shares of common stock held by each executive officer and director and by each person who, as of such date, may be deemed to have beneficially owned more than 5% of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates of the registrant under certain circumstances. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.

The registrant had 21,271,821 shares of common stock outstanding at February 21, 2018.

Documents Incorporated by Reference

Part III of this Form 10-K incorporates by reference certain information from the registrant’s 2018 definitive proxy statement (the “Proxy Statement”) to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year.

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

PART I

 

 

ITEM 1. BUSINESS

 

4

ITEM 1A. RISK FACTORS

 

9

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

18

ITEM 2. PROPERTIES

 

18

ITEM 3. LEGAL PROCEEDINGS

 

20

ITEM 4. MINE SAFETY DISCLOSURES

 

20

 

 

 

PART II

 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

21

ITEM 6. SELECTED FINANCIAL DATA

 

23

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

25

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

39

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

39

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

39

ITEM 9A. CONTROLS AND PROCEDURES

 

40

ITEM 9B. OTHER INFORMATION

 

42

 

 

 

PART III

 

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

43

ITEM 11. EXECUTIVE COMPENSATION

 

43

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

43

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

43

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

43

 

 

 

PART IV

 

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

44

 

 

 

EXHIBIT INDEX

 

45

SIGNATURES

 

48

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

F-1

 

 

 

 


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, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include, among other things, 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, 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, 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 our e-commerce platform, litigation risks, stockholder campaigns and proxy contests, disruption in product flow, 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 I, Item 1A, Risk Factors, in this report. We caution that the risk factors set forth in this report 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.

 

 

3


PART I

 

 

ITEM 1.

BUSINESS

General

Big 5 Sporting Goods Corporation (“we,” “our,” “us” or the “Company”) is a leading sporting goods retailer in the western United States, operating 435 stores and an e-commerce platform under the “Big 5 Sporting Goods” name as of December 31, 2017. We provide a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet.  In the fourth quarter of fiscal 2014, we launched our e-commerce platform to also offer selected products online. 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, tennis, golf, winter and summer recreation and roller sports.

We believe that over our 63-year history we have developed a reputation with the competitive and recreational sporting goods customer as a convenient neighborhood sporting goods retailer that consistently delivers value on quality merchandise. Our stores carry a wide range of products at competitive prices from well-known brand name manufacturers, including adidas, Coleman, Columbia, Everlast, New Balance, Nike, Rawlings, Skechers, Spalding, Under Armour and Wilson. We also offer brand name merchandise produced exclusively for us, private label merchandise and specials on quality items we purchase through opportunistic buys of vendor over-stock and close-out merchandise. We reinforce our value reputation through weekly print advertising in major and local newspapers, direct mailers and digital marketing programs designed to generate customer traffic, drive net sales and build brand awareness. We also maintain social media sites to enhance distribution capabilities for our promotional offers and to enable communication with our customers.

Robert W. Miller co-founded our company in 1955 with the establishment of five retail locations in California. We sold World War II surplus items until 1963, when we began focusing exclusively on sporting goods and changed our trade name to “Big 5 Sporting Goods.” In 1971, we were acquired by Thrifty Corporation, which was subsequently purchased by Pacific Enterprises.  In 1992, management bought our company in conjunction with Green Equity Investors, L.P., an affiliate of Leonard Green & Partners, L.P.  In 1997, Robert W. Miller, Steven G. Miller and Green Equity Investors, L.P. recapitalized our company so that the majority of our common stock would be owned by our management and employees. In 2002, we completed an initial public offering of our common stock and became a publicly-traded company.

Our accumulated management experience and expertise in sporting goods merchandising, advertising, operations, store development and overall cost management have enabled us to historically generate profitable growth.  We believe our historical success can be attributed to a value-based and execution-driven operating philosophy, a controlled growth strategy and a proven business model. Additional information regarding our management experience is available in Item 1, Business, under the sub-heading “Management Experience,” of this Annual Report on Form 10-K.

We are a holding company incorporated in Delaware on October 31, 1997.  We conduct our business through Big 5 Corp., a 100%-owned subsidiary incorporated in Delaware on October 27, 1997.  We conduct our gift card operations through Big 5 Services Corp., a 100%-owned subsidiary of Big 5 Corp. incorporated in Virginia on December 19, 2003.

Our corporate headquarters are located at 2525 East El Segundo Boulevard, El Segundo, California 90245. Our Internet address is www.big5sportinggoods.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments, if any, to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, are available on our website, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

4


Expansion and Store Development

Throughout our operating history, we have sought to expand our business with the addition of new stores through a disciplined strategy of controlled growth. Our expansion within the western United States has been systematic and designed to capitalize on our name recognition, economical store format and economies of scale related to distribution and advertising.  Over the past five fiscal years, we have opened 49 stores including relocations, an average of 10 new stores annually, of which 51% were in California. Over the past three fiscal years, we have reduced our store openings to an average of approximately five new stores annually, including relocations, as we have maintained a cautious approach toward store expansion in the current retail environment, which included the liquidation and closure of certain major competitors in our markets in fiscal 2016. The following table reflects our store opening, closing and relocation activity during the periods indicated:

 

 

 

Stores Opened

 

 

 

 

 

 

 

 

 

Year

 

California

 

 

Other

Markets

 

 

Total

 

 

Stores

Relocated

 

Stores

Closed

 

Number of Stores

at Period End

 

2013

 

 

8

 

 

 

9

 

 

 

17

 

 

(2)

 

 

 

429

 

2014

 

 

9

 

 

 

7

 

 

 

16

 

 

(4)

 

(2)

 

 

439

 

2015

 

 

3

 

 

 

2

 

 

 

5

 

 

(3)

 

(3)

 

 

438

 

2016

 

 

3

 

 

 

2

 

 

 

5

 

 

(1)

 

(10)

 

 

432

 

2017

 

 

2

 

 

 

4

 

 

 

6

 

 

(1)

 

(2)

 

 

435

 

 

Our store format enables us to have substantial flexibility regarding new store locations. We have successfully operated stores in major metropolitan areas and in areas with as few as 30,000 people. Our 11,000 average square foot store format differentiates us from superstores that typically average over 35,000 square feet, require larger target markets, are more expensive to operate and require higher net sales per store for profitability.

New store openings typically represent attractive investment opportunities due to the relatively low investment required and the relatively short time necessary before our stores typically become profitable.  Our store format normally requires investments of approximately $0.5 million in fixtures, equipment and leasehold improvements, net of landlord allowances, and approximately $0.3 million in net working capital with limited pre-opening and real estate expense related to leased locations that are built to our specifications. We seek to maximize new store performance by staffing new store management with experienced personnel from our existing stores.

Our in-house store development personnel analyze new store locations with the assistance of real estate firms that specialize in retail properties. We seek expansion opportunities to further penetrate our established markets, develop recently entered markets and expand into new, contiguous markets with attractive demographic, competitive and economic profiles.

Management Experience

We believe the experience and tenure of our professional staff in the retail industry gives us a competitive advantage. The table below indicates the tenure of our professional staff in some of our key functional areas as of December 31, 2017:

 

 

 

Number of

Employees

 

 

Average

Number of

Years With Us

 

Executive Management

 

 

9

 

 

 

29

 

Vice Presidents

 

 

7

 

 

 

27

 

Buyers

 

 

22

 

 

 

16

 

Store Territory / District / Regional Supervisors

 

 

51

 

 

 

23

 

Store Managers

 

 

435

 

 

 

13

 

 

Merchandising

We target the competitive and recreational sporting goods customer with a full-line product offering at a wide variety of price points.  We offer a product mix that includes athletic shoes, apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, winter and summer recreation and roller sports. We believe we offer consistent value to consumers by offering a distinctive merchandise mix that includes a combination of well-known brand name merchandise, merchandise produced exclusively for us under a manufacturer’s brand name, private label merchandise and specials on quality items we purchase through opportunistic buys of vendor over-stock and close-out merchandise.

5


Through our 63 years of experience across different demographic, competitive and economic markets, we have refined our merchandising strategy in an effort to offer a selection of products that meets customer demand. Specifically, we continue to strategically refine our merchandise and marketing strategies in order to better align our product mix and promotional efforts with today’s consumer. We have not made wholesale changes to our model, but rather have adjusted the model in an effort to broaden both our product offering and customer base. We have selectively refined our purchase strategy for certain product categories, and have expanded our assortment of branded products and introduced new products, some at higher price points.

The following table illustrates our mix of soft goods, which are non-durable items such as shirts and shoes, and hard goods, which are durable items such as exercise equipment and baseball gloves, as a percentage of net sales:

 

 

 

Fiscal Year

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Soft goods

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Athletic and sport apparel

 

 

20.6

%

 

 

19.7

%

 

 

19.4

%

 

 

18.6

%

 

 

17.6

%

Athletic and sport footwear

 

28.7

 

 

28.2

 

 

28.4

 

 

28.2

 

 

27.8

 

Total soft goods

 

49.3

 

 

47.9

 

 

47.8

 

 

46.8

 

 

45.4

 

Hard goods

 

50.7

 

 

52.1

 

 

52.2

 

 

53.2

 

 

54.6

 

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

We purchase our popular branded merchandise from an extensive list of major sporting goods equipment, athletic footwear and apparel manufacturers.  Below is a selection of some of the brands we carry:

 

adidas

Coleman

Footjoy

Impex

Nike

Skechers

Asics

Columbia

Franklin

JanSport

Rawlings

Spalding

Bearpaw

Crosman

Gildan

Lifetime

Razor

Speedo

Bushnell

Daisy

Head

McDavid

Remington

Timex

Callaway

Dickies

Heelys

Mizuno

Rollerblade

Titleist

Camp Chef

Easton

Hillerich & Bradsby

Mossberg

Russell Athletic

Under Armour

Carhartt

Everlast

Icon (Proform)

Mueller Sports Medicine

Saucony

Wilson

Casio

Fila

Igloo

New Balance

Shimano

Winchester

 

We believe we enjoy significant advantages in making opportunistic buys of vendor over-stock and close-out merchandise because of our strong vendor relationships, purchasing volume and rapid decision-making process.  Our strong vendor relationships and purchasing volume also enable us to purchase merchandise produced exclusively for us under a manufacturer’s brand name which allows us to differentiate our product selection from competition, obtain volume pricing discounts from vendors and offer unique value to our customers. Our weekly advertising highlights our opportunistic buys together with merchandise produced exclusively for us in order to reinforce our reputation as a retailer that offers attractive values to our customers.

In order to complement our branded product offerings, we offer a variety of private label merchandise, which represents approximately 2% of our net sales. Our sale of private label merchandise enables us to provide our customers with a broader selection of quality merchandise at a wider range of price points and allows us the potential to achieve higher margins than on sales of comparable name brand products. Our private label items include shoes, apparel, camping equipment, fishing supplies and snowsport equipment. Private label merchandise is sold under trademarks owned by us or licensed by us from third parties. Our owned trademarks include Golden Bear, Harsh, Pacifica and Rugged Exposure, all of which are registered as federal trademarks. The renewal dates for these trademark registrations range from 2018 to 2027. Our licensed trademarks include Beach Feet, Bearpaw, Body Glove, Morrow and The Realm. One of the license agreements for these trademarks expires in 2018 and the other license agreements renew automatically on an annual basis unless terminated by either party upon prior written notice. We intend to renew these trademark registrations and license agreements if we are still using the trademarks in commerce and they continue to provide value to us at the time of renewal.

Seasonality influences our buying patterns and we purchase merchandise for seasonal activities in advance of a season and supplement our merchandise assortment as necessary and when possible during the season. We tailor our merchandise selection on a store-by-store basis in an effort to satisfy each region’s specific needs and seasonal buying habits. In the fourth fiscal quarter we normally experience higher inventory purchase volumes in anticipation of the winter and holiday selling season.

6


Our buyers, who average 16 years of experience with us, work in collaboration with senior management to determine and enhance product selection, promotion and pricing of our merchandise mix. Management utilizes integrated merchandising, business intelligence analytics, distribution, point-of-sale and financial information systems to continuously refine our merchandise mix, pricing strategy, advertising effectiveness and inventory levels to best serve the needs of our customers.

Advertising and Marketing

Through years of targeted advertising, we have solidified our reputation for offering quality products at attractive prices. We have advertised predominantly through weekly print advertisements since 1955. We typically utilize four-page color advertisements to highlight promotions across our merchandise categories. We believe our print advertising, which includes an average weekly distribution of approximately 12.1 million newspaper inserts or mailers, consistently reaches more households in our established markets than that of our full-line sporting goods competitors. For non-subscribers of newspapers, we provide our print advertisements through carrier delivery and direct mail. The consistency and reach of our print advertising programs drive sales and create high customer awareness of the name “Big 5 Sporting Goods.”

We use our own professional in-house advertising staff to generate our advertisements, including design, layout, production and media management. Our in-house advertising department provides management with the flexibility to react quickly to merchandise trends and to maximize the effectiveness of our weekly inserts and mailers. We are able to effectively target different population zones for our advertising expenditures. We place inserts in over 225 newspapers throughout our markets, supplemented in many areas by mailer distributions to create market saturation.

Though print advertising is the core of our promotional advertising, we also promote our products through digital marketing programs that include e-mail marketing (the “E-Team”), search engine marketing, social media including Facebook, Twitter and Instagram, mobile programs and other website initiatives.   

Our digital promotional strategy is designed to provide additional opportunities to connect with potential customers and enable us to promote the Big 5 brand. Our e-mail marketing program invites our customers to subscribe to our E-Team for weekly advertisements, special deals and product information disseminated on a regular basis. We use search engine marketing methods as a means to reach those customers searching the Internet to gather information about our products. Within our social media program, our customers have the opportunity to engage in conversations with other sports-minded people and receive exclusive information about new products and unique weekly offers. All of these marketing methods are intended to simplify the shopping experience for our customers and further demonstrate our commitment to provide great brands at great values.

Our website features a broad representation of our product assortment and provides visibility of store inventory to our customers, thereby enabling them to determine if items featured on our website are in-stock in one or more of our store locations. In fiscal 2014, we launched our e-commerce platform to deliver an online shopping experience to our customers. We continue to develop our online capabilities to meet customer expectations of being able to shop at their convenience.

We have developed a strong cause marketing platform through our 18-year support of the March of Dimes annual fundraising campaign and numerous other charities and organizations throughout our marketplace. We also build brand awareness by providing sponsorship support of established, high profile events that benefit our customers’ active lifestyles, such as the “LA Marathon” in Los Angeles, California, and the “Duke City Marathon” in Albuquerque, New Mexico, for which we are the title sponsor.

Vendor Relationships

We have developed strong vendor relationships over the past 63 years. We currently purchase merchandise from over 700 vendors. In fiscal 2017, only one vendor represented greater than 5% of total purchases, at 11.0%. We believe current relationships with our vendors are good. We benefit from the long-term working relationships with vendors that our senior management and our buyers have carefully nurtured throughout our history.

Information Technology Systems

We have fully integrated information technology (“IT”) systems that support critical business functions, such as sales reporting, inventory management and distribution functions and provide pertinent information for financial reporting, as well as robust business intelligence and retail analytics tools. We manage IT solutions for e-commerce, email and networks that connect our employees to appropriate technology solutions and tools. This includes connecting our stores via a managed wide area network (“WAN”) connection for purchasing card (i.e., credit and debit card) encryption, tokenization, authorization and processing, as well as providing access to valuable tools such as collaboration, online training, workforce management, online hiring, Company website functions and corporate communications. Our separate disaster recovery facility and solutions provide redundant networks and applications to be used in the event of an emergency or unplanned outage. We believe our IT systems are effectively supporting our current operations and continue to provide a foundation for future growth and new business initiatives.

7


Distribution

We operate a distribution center located in Riverside, California, that services all of our stores. The facility has 953,000 square feet of storage and office space. The distribution center warehouse management system is fully integrated with our enterprise-level IT systems and provides comprehensive warehousing and distribution capabilities. We generally distribute merchandise from our distribution center to our stores at least once per week, using our fleet of leased tractors, as well as contract carriers. Our lease for the distribution center is scheduled to expire on August 31, 2020, and includes two additional five-year renewal options.

In November 2015, we commenced operations at an additional 172,000 square foot distribution space adjacent to our distribution center in Riverside, California that enabled us to more efficiently fulfill our expanding distribution requirements. Our lease for this additional facility is scheduled to expire on August 31, 2020, and includes four additional five-year renewal options.

We operate a small distribution hub in Oregon to help mitigate fuel costs. This 12,000 square-foot facility enables us to ship full trailers of product from our Riverside distribution center to the Pacific Northwest, where we separate products for regional delivery. This distribution hub has greatly reduced the number of transportation miles logged to distribute our product to the Pacific Northwest. Our lease for the Oregon hub is scheduled to expire on January 31, 2019, and includes four additional five-year renewal options.

Industry and Competition

The retail market for sporting goods is highly competitive.  In general, competition tends to fall into the following six basic categories:

Sporting Goods Superstores. Stores in this category typically are larger than 35,000 square feet and tend to be free-standing locations.  These stores emphasize high volume sales and a large number of stock-keeping units.  Examples include Academy Sports & Outdoors and Dick’s Sporting Goods.

Traditional Sporting Goods Stores. This category consists of traditional sporting goods chains, including us.  These stores range in size from 5,000 to 20,000 square feet and are frequently located in regional malls and multi-store shopping centers.  The traditional chains typically carry a varied assortment of merchandise and attempt to position themselves as convenient neighborhood stores. Sporting goods retailers operating stores within this category include Hibbett Sports and Modell’s.

Specialty Sporting Goods Stores. Specialty sporting goods retailers are stores that typically carry a wide assortment of one specific product category or brand, such as athletic shoes, golf, or outdoor equipment. Examples of these retailers include Bass Pro Shops, Cabela’s, Foot Locker, Sportsman’s Warehouse and REI. This category also includes pro shops that often are single-store operations.

Mass Merchandisers. This category includes discount retailers such as Wal-mart, Target and KMart and department stores such as JC Penney, Kohl’s and Sears. These stores range in size from 50,000 to 200,000 square feet and are primarily located in regional malls, shopping centers or on free-standing sites.  Sporting goods merchandise and apparel represent a small portion of the total merchandise in these stores and the selection is often more limited than in other sporting goods retailers.

E-commerce Retailers. This category consists of many retailers that sell a broad array of new and used sporting goods products via e-commerce or catalogs, including Amazon.com. The types of retailers mentioned above may also sell their products through e-commerce. E-commerce has been a rapidly growing sales channel, particularly with younger consumers, and an increasing source of competition in the sporting goods retail industry.

Athletic and Sporting Goods Brands. This category consists of athletic and sporting goods brands that engage in direct-to-consumer sales through traditional retail channels, e-commerce or a combination of both.  These brands may also sell their products to us and other competitors. Examples of brands that sell directly to consumers include Nike, adidas and Under Armour.

In competing with the retailers discussed above, we focus on what we believe are the primary factors of competition in the sporting goods retail industry, including breadth, depth, price and quality of merchandise offered; advertising; purchasing and pricing policies; experienced and knowledgeable personnel; customer service; effective sales techniques; direct involvement of senior officers in monitoring store operations; enterprise-level IT systems; and, convenience of store location and format.

8


Employees

As of December 31, 2017, we had nearly 9,000 active full and part-time employees. The General Teamsters, Airline, Aerospace and Allied Employees, Warehousemen, Drivers, Construction, Rock and Sand, Local Union No. 986, affiliated with the International Brotherhood of Teamsters (“Local 986”) represents approximately 450 hourly employees in our distribution center and select stores. In December 2017, we negotiated a new five-year contract with Local 986 for the covered distribution center employees, and in January 2018, we negotiated a new five-year contract with Local 986 for the covered store employees. Both contracts are retroactive to September 1, 2017, and expire on August 31, 2022. We have not had a strike or work stoppage in over 30 years, although such a disruption could have a significant negative impact on our business operations and financial results. We believe we provide working conditions and wages that are comparable to those offered by other retailers in the sporting goods industry and that employee relations are good.

Employee Training

We utilize an automated Learning Management System (“LMS”) and have developed comprehensive training that can be expressly tailored for each store and corporate position. Our LMS allows us to rapidly convey and track the dissemination of important information as it develops, such as product merchandising strategies, policy changes, safety rules, cash handling procedures, systems resolution and utilization, loss prevention updates and inventory control guidelines. All new store employees are assigned introductory LMS learning material as well as provided with a live orientation highlighting basic policies and responsibilities and our expectation that each employee strives to deliver excellence in customer service, product knowledge and salesmanship. New full-time store salespeople, cashiers and manager trainees receive supplementary training and evaluations specific to their job responsibilities and their ongoing development. The versatility of the LMS provides us with the ability to track and monitor many different types of training and the flexibility we need to deliver our message to widely dispersed personnel within the structure of our on-the-go work environment. Our employee training programs include self-directed online courses, live webinars, production of soft and hard reference materials, one-on-one training, hands-on training and progressive developmental training. In the stores, manager trainees are expected to complete a progressive series of outlines and evaluations in order to be considered for each successive level of advancement. Experienced store management training includes advanced merchandising, delegation, personnel management, scheduling, payroll control, harassment and discrimination prevention and loss prevention. Our overall training strategy and LMS enable us to efficiently manage, monitor, assign and report employee training results online and in real time.

Description of Service Marks and Trademarks

We use the “Big 5” and “Big 5 Sporting Goods” names as service marks in connection with our business operations and have registered these names as federal service marks.  The renewal dates for these service mark registrations are in 2025 and 2023, respectively. We have also registered the names Golden Bear, Harsh, Pacifica and Rugged Exposure as federal trademarks under which we sell a variety of merchandise.  The renewal dates for these trademark registrations range from 2018 to 2027. We intend to renew these service mark and trademark registrations if we are still using the marks in commerce and they continue to provide value to us at the time of renewal.

 

 

ITEM 1A.

RISK FACTORS

An investment in the Company entails risks and uncertainties including the following. You should carefully consider these risk factors when evaluating any investment in the Company. Any of these risks and uncertainties could cause our actual results to differ materially from the results contemplated by the forward-looking statements set forth herein, and could otherwise have a significant adverse impact on our business, prospects, financial condition or results of operations or on the price of our common stock.

Risks Related to Our Business and Industry

Disruptions in the overall economy and the financial markets may adversely impact our business and results of operations.

The retail industry can be greatly affected by macroeconomic factors, including changes in national, regional and local economic conditions, as well as consumers’ perceptions of such economic factors. In general, sales represent discretionary spending by our customers. Discretionary spending is affected by many factors, including general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, gasoline prices, income, unemployment trends, home values and other matters that influence consumer confidence and spending. Many of these factors are outside of our control. We have experienced in the past, and may continue to experience, increased inflationary pressure on our product costs. Our customers’ purchases of discretionary items, including our products, generally decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. Deterioration of the consumer spending environment could be harmful to our financial position and results of operations, could adversely affect our ability to comply with covenants under our credit facility and, as a result, may negatively impact our ability to continue payment of our quarterly dividend, to repurchase our stock and to open additional stores in the manner that we have in the past.

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Intense competition in the sporting goods industry could limit our growth and reduce our profitability.

The retail market for sporting goods is highly fragmented and intensely competitive.  We compete directly or indirectly with the following categories of companies, through traditional retail and e-commerce channels:

 

sporting goods superstores, such as Academy Sports & Outdoors and Dick’s Sporting Goods;

 

traditional sporting goods stores and chains, such as Hibbett Sports and Modell’s;

 

specialty sporting goods shops and pro shops, such as Bass Pro Shops, Cabela’s, Foot Locker, Sportsman’s Warehouse and REI;

 

mass merchandisers, discount stores and department stores, such as Wal-Mart, Target, Kohl’s, JC Penney, Kmart and Sears;

 

e-commerce retailers, such as Amazon.com; and

 

athletic and sporting goods brands that engage in direct-to-consumer sales, such as Nike, adidas and Under Armour.

Some of our competitors have a larger number of stores and greater financial, distribution, marketing and other resources than we have.  If our competitors reduce their prices, it may be difficult for us to retain market share without reducing our prices, which could impact our margins.  As a result of this competition, we may also need to spend more on advertising and promotion than we anticipate. Increased competition in our current markets or the adoption or proliferation by competitors of innovative store formats, aggressive pricing strategies and retail sales methods, such as e-commerce, could cause us to lose market share and could have a material adverse effect on our business.

While e-commerce has been a rapidly growing sales channel and an increasing source of competition in the retail industry, sales from our e-commerce channel are not material to our operations. We began selling products through our e-commerce platform in late fiscal 2014. We have no assurance that our e-commerce efforts will prove profitable, whether due to product preferences of online buyers, ability to compete with other (often more established) online retailers, or for other reasons, such as the cannibalization of sales from our existing store base. If we are unable to compete successfully, our operating results may suffer.

If we fail to anticipate changes in consumer preferences, we may experience lower net sales, higher inventory, higher inventory markdowns and lower margins.

Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty. These preferences are also subject to change and can be impacted by various factors, including sports participation levels in our market areas, the performance of sports teams for which we sell licensed products, weather conditions in our market areas and regulatory or political changes. Our success depends upon our ability to anticipate and respond in a timely manner to consumer trends and consumers’ participation in sports and other recreational activities for which we sell products. If we fail to identify and respond in a timely manner to these changes, our net sales and profitability may decline. In addition, because we often make commitments to purchase products from our vendors up to nine months in advance of the proposed delivery, if we misjudge the market for our merchandise or conditions change after we have committed to purchase products, we may over-stock unpopular products and be forced to take inventory markdowns that could have a negative impact on profitability.

Our quarterly net sales and operating results, reported and expected, can fluctuate substantially, which may adversely affect the market price of our common stock.

Our net and same store sales and results of operations, reported and expected, have fluctuated in the past and will vary from quarter to quarter in the future.  These fluctuations may adversely affect our financial condition and the market price of our common stock.  A number of factors, many of which are outside our control, have historically caused and will continue to cause variations in our quarterly net and same store sales and operating results, including changes in consumer demand for our products, competition in our markets, inflation, changes in pricing or other actions taken by our competitors, weather conditions in our markets, natural disasters, litigation, political events, government regulation, changes in accounting standards, changes in management’s accounting estimates or assumptions and economic conditions, including those specific to our western United States markets.

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Increased costs or declines in the effectiveness of print advertising, or a reduction in publishers of print advertising, could cause our operating results to suffer.

Our business relies heavily on print advertising. We utilize print advertising programs that include newspaper inserts, direct mailers and courier-delivered inserts in order to effectively deliver our message to our targeted markets. Newspaper circulation and readership has been declining, which could limit the number of people who receive or read our advertisements. Additionally, declining newspaper demand is adversely impacting newspaper publishers and could jeopardize their ability to operate, which could restrict our ability to advertise in the manner we have in the past. In an effort to continue to deliver our message to consumers, we have been shifting some of our advertising from print to digital. If these efforts fail or we are unable to develop other effective strategies to reach potential customers within our desired markets, awareness of our stores, products and promotions could decline and our net sales could suffer. In addition, an increase in the cost of print advertising, paper or postal or other delivery fees could increase the cost of our advertising and adversely affect our operating results.

Because our stores are concentrated in the western United States, we are subject to regional risks.

Our stores are located in the western United States.  Because of this, we are subject to regional risks, such as the economy, including downturns in the housing market, state financial conditions, unemployment and gas prices. Other regional risks include adverse weather and climate conditions, power outages, earthquakes and other natural disasters specific to the states in which we operate. For example, particularly in California where we have a high concentration of stores, seasonal factors such as unfavorable weather conditions or other localized conditions such as flooding, drought, fires, earthquakes or electricity blackouts could impact our sales and harm our operations.  State and local regulatory compliance, such as with recent minimum wage increases in our market areas, also can impact our financial results. Economic downturns or other adverse regional events could have an adverse impact upon our net sales and profitability and our ability to open additional stores in the manner that we have in the past.

A significant amount of our sales is impacted by seasonal weather conditions in our markets.

Because many of the products we sell are used for seasonal outdoor sporting and recreational activities, our business is significantly impacted by weather and climate conditions in our markets.  For example, our winter sports and apparel sales are dependent on cold winter weather and snowfall in our markets, and can be negatively impacted by unseasonably warm or dry weather in our markets during the winter product selling season. Conversely, sales of our spring products and summer products, such as baseball gear and camping and water sports equipment, can be adversely impacted by unseasonably cold or wet weather in those periods. Accordingly, our sales results and financial condition will typically suffer when weather and climate patterns do not conform to seasonal norms.

Our business is subject to seasonal fluctuations, and unanticipated changes in our customers’ seasonal buying patterns can impact our business.

We experience seasonal fluctuations in our net sales and operating results. Seasonality 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, our net sales can decline, which can harm our financial performance. A significant shortfall from expected net sales can negatively impact our annual operating results.

If we lose key management or are unable to attract and retain the talent required for our business, our operating results could suffer.

Our future success depends to a significant degree on the skills, experience and efforts of Steven G. Miller, our Chairman, President and Chief Executive Officer, and other key personnel with longstanding tenure who are not obligated to stay with us.  The loss of the services of any of these individuals for any reason could harm our business and operations.  In addition, as our business grows, we will need to attract and retain additional qualified personnel in a timely manner and develop, train and manage an increasing number of management-level sales associates and other employees. Competition for qualified employees could require us to pay higher wages and benefits to attract a sufficient number of qualified employees, and increases in the minimum wage or other employee benefit costs could increase our operating expense.  If we are unable to attract and retain personnel as needed in the future, our net sales growth and operating results may suffer.

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All of our stores rely on a single distribution center. Any disruption or other operational difficulties at this distribution center could reduce our net sales or increase our operating expense.

We rely on a single distribution center located in Riverside, California to service our business. Any natural disaster or other serious disruption to the distribution center due to fire, earthquake or any other cause could damage a significant portion of our inventory and could materially impair both our ability to adequately stock our stores and our net sales and profitability. If the security measures used at our distribution center do not prevent inventory theft, our gross profit may significantly decrease. Our distribution center is staffed in part by employees represented by Local 986. We have not had a strike or work stoppage in over 30 years, although such a disruption could have a significant negative impact on our business operations and financial results. Further, in the event that we are unable to grow our net sales sufficiently to allow us to leverage the costs of this distribution center in the manner we anticipate, our financial results could be negatively impacted.

Additionally, because we rely on a single distribution center, our store growth could be limited to the geographic areas to which we can efficiently distribute products from this facility. Our store growth also could be limited if our distribution center reaches full capacity. Such constraints could result in a loss of market share and our inability to execute our business plan, which could have a material adverse effect on our financial condition and results of operations.

If we are unable to successfully implement our controlled growth strategy or manage our growing business, our future operating results could suffer.

One of our strategies includes opening profitable stores in new and existing markets. Our ability to successfully implement and capitalize on our growth strategy could be negatively affected by various factors including:

 

we may slow our expansion efforts, or close underperforming stores, as a result of challenging conditions in the retail industry and the economy overall;

 

we may not be able to find suitable sites available for leasing within our existing market areas, and our distribution capabilities may limit our ability to expand beyond our current market areas;

 

we may not be able to negotiate acceptable lease terms;

 

we may not be able to hire and retain qualified store personnel; and

 

we may not have the financial resources necessary to fund our expansion plans.

In the past three fiscal years, we have slowed our store openings and strategically closed certain stores as we maintained a cautious approach toward store expansion in the current retail environment, which included the liquidation and closure of certain major competitors in our markets.  If we are unable to resume our store expansion efforts for any of the reasons discussed above, our operating results could suffer.

In addition, our expansion in new and existing markets may present competitive, merchandising, marketing and distribution challenges that differ from our current challenges.  These potential new challenges include competition among our stores, added strain on our distribution center, additional information to be processed by our IT systems, diversion of management attention from ongoing operations and challenges associated with managing a larger enterprise. We face additional challenges in entering new markets, including consumers’ lack of awareness of us, difficulties in hiring personnel and problems due to our unfamiliarity with local real estate markets and demographics. New markets may also have different competitive conditions, consumer tastes, responsiveness to print advertising and discretionary spending patterns than our existing markets. To the extent that we are not able to meet these new challenges, our net sales could decrease and our operating expense could increase.

Our information technology systems are critical to the functioning of our business and are vulnerable to failure, damage, theft or intrusion that could harm our operations.

Our success, in particular our ability to successfully manage inventory levels and process customer transactions, largely depends upon the efficient operation of our information technology (“IT”) systems. We use IT systems to track inventory at the store level and aggregate daily sales information, communicate customer information and process purchasing card transactions, process shipments of goods and report financial information. These systems and our operations are vulnerable to damage or interruption from:

 

earthquake, fire, flood and other natural disasters;

 

power loss, computer systems failures, Internet and telecommunications or data network failures, third-party vendor system failures, operator negligence, improper operation by or supervision of employees;

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physical and electronic loss of data, security breaches, misappropriation, data theft and similar events; and

 

computer viruses, worms, Trojan horses, intrusions, or other external threats.

Any failure of our IT systems that causes an interruption in our operations, loss of data, or a decrease in inventory tracking could result in reduced net sales and profitability. Additionally, if any data intrusion, security breach, misappropriation or theft were to occur, we could incur significant costs in responding to such event, including responding to any resulting claims, litigation or investigations, which could harm our operating results.

Breach of data security or other unauthorized disclosure of sensitive or confidential information could harm our business, employees and standing with our customers.

The protection of our customer, employee and business data is critical to us. Our business, like that of most retailers, involves the receipt, storage and transmission of customers’ personal information, consumer preferences and payment card information, as well as confidential information about our employees, our suppliers and our Company. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of all such data, including confidential information. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, data theft, misplaced or lost data, programming or human errors, or other similar events. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means, including deceiving our employees or third party service providers. The methods used to obtain unauthorized access, disable or degrade service, or sabotage systems are also constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. We have implemented and regularly review and update our control systems, processes and procedures to protect against unauthorized access to or use of secured data and to prevent data loss. However, the ever-evolving threats mean we must continually evaluate and adapt our systems and processes, and there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. Any security breach involving the misappropriation, loss or other unauthorized disclosure of customer payment card or personal information or employee personal or confidential information, whether by us or our vendors, could damage our reputation, expose us to risk of litigation and liability, disrupt our operations, harm our business and have an adverse impact upon our net sales and profitability. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and changing requirements applicable to our business, compliance with those requirements could also result in additional costs.

If our suppliers do not provide sufficient quantities of products, our net sales and profitability could suffer.

We purchase merchandise from over 700 vendors. Although only one vendor represented more than 5.0% of our total purchases during fiscal 2017, our dependence on principal suppliers involves risk. Our 20 largest vendors collectively accounted for 40.9% of our total purchases during fiscal 2017. If there is a disruption in supply from a principal supplier or distributor, we may be unable to obtain merchandise that we desire to sell and that consumers desire to purchase. A vendor could discontinue or restrict selling products to us at any time for reasons that may or may not be within our control. In recent years, athletic and sporting goods brands have been increasingly developing the direct-to-consumer segments of their businesses, and this shift could result in restrictions on the products available for us to purchase and sell. Our net sales and profitability could decline if we are unable to promptly replace a product vendor who is unwilling or unable to satisfy our requirements with a vendor providing equally appealing products. Moreover, many of our suppliers provide us with incentives, such as return privileges, volume purchase allowances and co-operative advertising. A decline or discontinuation of these incentives could reduce our profits.

Because many of the products that we sell are manufactured abroad, we may face delays, increased cost or quality control deficiencies in the importation of these products, which could reduce our net sales and profitability.

Like many other sporting goods retailers, a significant portion of the products that we purchase for resale, including those purchased from domestic suppliers, is manufactured abroad in China and other countries. In addition, we believe most, if not all, of our private label merchandise is manufactured abroad. Foreign imports subject us to the risks of changes in, or the imposition of new, import tariffs, duties or quotas, new restrictions on imports, loss of “most favored nation” status with the United States for a particular foreign country, antidumping or countervailing duty orders, retaliatory actions in response to illegal trade practices, work stoppages, delays in shipment, freight expense increases, product cost increases due to foreign currency fluctuations or revaluations and economic uncertainties. If any of these or other factors were to cause a disruption of trade from the countries in which the suppliers of our vendors are located or impose additional costs in connection with the purchase of our products, we may be unable to obtain sufficient quantities of products to satisfy our requirements and our results of operations could be adversely affected.

To the extent that any foreign manufacturers which supply products to us directly or indirectly utilize quality control standards, labor practices or other practices that vary from those legally mandated or commonly accepted in the United States, we could be hurt by any resulting negative publicity or, in some cases, face potential liability.

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In addition, instability in the political and economic environments of the countries in which our vendors or we obtain our products, or general international instability, could have an adverse effect on our operations. In the event of disruptions or delays in supply due to economic or political conditions in foreign countries, such disruptions or delays could adversely affect our results of operations unless and until alternative supply arrangements could be made. In addition, merchandise purchased from alternative sources may be of lesser quality or more expensive than the merchandise we currently purchase abroad.

Disruptions in transportation, including disruptions at shipping ports through which our products are imported, could prevent us from timely distribution and delivery of inventory, which could reduce our net sales and profitability.

A substantial amount of our inventory is manufactured abroad. From time to time, shipping ports experience capacity constraints, labor strikes, work stoppages or other disruptions that may delay the delivery of imported products. A contract dispute at the ports through which our products travel, particularly the Ports of Los Angeles and Long Beach, could lead to protracted delays in the movement of our products, which could further delay the delivery of products to our stores and impact net sales and profitability. In addition, other conditions outside of our control, such as adverse weather conditions or acts of terrorism, could significantly disrupt operations at shipping ports or otherwise impact transportation of the imported merchandise we sell.

Future disruptions in transportation services or at a shipping port at which our products are received may result in delays in the transportation of such products to our distribution center and may ultimately delay the stocking of our stores with the affected merchandise. As a result, our net sales and profitability could decline.

Our costs may change as a result of currency exchange rate fluctuations or inflation in the purchase cost of merchandise manufactured abroad.

We and our suppliers source goods from various countries, including China, and thus changes in the value of the U.S. dollar compared to other currencies, or foreign labor and raw material cost inflation, may affect the cost of goods that we purchase. If the cost of goods that we purchase increases, we may not be able to similarly increase the retail prices of goods that we charge consumers without impacting our sales and our operating profits may suffer.

Increases in transportation costs due to rising fuel costs, climate change regulation and other factors may negatively impact our operating results.

We rely upon various means of transportation, including ship and truck, to deliver products from vendors to our distribution center and from our distribution center to our stores. Consequently, our results can vary depending upon the price of fuel. The price of oil has fluctuated drastically over the last few years, creating volatility in our fuel costs. In addition, efforts to combat climate change through reduction of greenhouse gases may result in higher fuel costs through taxation or other means. Any such future increases in fuel costs would increase our transportation costs for delivery of product to our distribution center and distribution to our stores, as well as our vendors’ transportation costs, which could decrease our operating profits.

In addition, labor shortages or other factors in the transportation industry could negatively affect transportation costs and our ability to supply our stores in a timely manner. In particular, our business is highly dependent on the trucking industry to deliver products to our distribution center and our stores. Our operating results may be adversely affected if we or our vendors are unable to secure adequate trucking resources at competitive prices to fulfill our delivery schedules to our distribution center or stores.

Terrorism and the uncertainty of war may harm our operating results.

Terrorist attacks or acts of war may cause damage or disruption to us and our employees, facilities, information systems, vendors and customers, which could significantly impact our net sales, profitability and financial condition. Terrorist attacks could also have a significant impact on ports or international shipping on which we are substantially dependent for the supply of much of the merchandise we sell.  Our corporate headquarters is located near Los Angeles International Airport and the Port of Los Angeles, which have been identified as potential terrorism targets.  The potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility may cause greater uncertainty and cause our business to suffer in ways that we cannot currently predict. Military action taken in response to such attacks could also have a short or long-term negative economic impact upon the financial markets, international shipping and our business in general.

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Risks Related to Our Capital Structure

Our future cash flows may not be sufficient to meet our obligations and we might have difficulty obtaining more financing or refinancing our existing indebtedness on favorable terms.

As of December 31, 2017, the aggregate amount of our outstanding indebtedness, including capital lease obligations, was $49.6 million. We have historically maintained a leveraged financial position. This means:

 

our ability to obtain financing in the future for working capital, capital expenditures and general corporate purposes might be impeded;

 

we are more vulnerable to economic downturns and our ability to withstand competitive pressures is limited; and

 

we are more vulnerable to increases in interest rates, which may affect our interest expense and negatively impact our operating results.

If our business declines, our future cash flows might not be sufficient to meet our obligations and commitments.

If we fail to make any required payment under our revolving credit facility, our debt payments may be accelerated under this agreement. In addition, in the event of bankruptcy, insolvency or a material breach of any covenant contained in our revolving credit facility, our debt may be accelerated.  This acceleration could also result in the acceleration of other indebtedness that we may have outstanding at that time.

The level of our indebtedness, and our ability to service our indebtedness, is directly affected by our cash flows from operations. If we are unable to generate sufficient cash flows from operations to meet our obligations, commitments and covenants of our revolving credit facility, we may be required to refinance or restructure our indebtedness, raise additional debt or equity capital, sell material assets or operations, delay or forego expansion opportunities, or cease or curtail our quarterly dividends or share repurchase plans. These alternative strategies might not be effected on satisfactory terms, if at all.

The terms of our revolving credit facility impose operating and financial restrictions on us, which may impair our ability to respond to changing business and economic conditions.

The terms of our revolving credit facility impose operating and financial restrictions on us, including, among other things, covenants that require us to maintain a fixed-charge coverage ratio of not less than 1.0 to 1.0 in certain circumstances, restrictions on our ability to 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. For example, our ability to engage in the foregoing transactions will depend upon, among other things, our level of indebtedness at the time of the proposed transaction and whether we are in default under our revolving credit facility. As a result, our ability to respond to changing business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might further our growth strategy or otherwise benefit us and our stockholders without obtaining consent from our lenders.  In addition, our revolving credit facility is secured by a perfected security interest in our assets. In the event of our insolvency, liquidation, dissolution or reorganization, the lenders under our revolving credit facility would be entitled to payment in full from our assets before distributions, if any, were made to our stockholders.

Disruptions in the economy and financial markets may adversely impact our lenders.

Volatility in capital and credit markets can impact the ability of financial institutions to meet their lending obligations. Based on information available to us, all of the lenders under our revolving credit facility are currently able to fulfill their commitments thereunder. However, circumstances could arise that may impact their ability to fund their obligations in the future. Although we believe the commitments from our lenders under the revolving credit facility, together with our cash on hand and anticipated operating cash flows, should be sufficient to meet our near-term borrowing requirements, if Wells Fargo Bank, National Association, our principal lender, or any other lender, is for any reason unable to perform its lending or administrative commitments under the facility, then disruptions to our business could result and may require us to replace this facility with a new facility or to raise capital from alternative sources on less favorable terms, including higher rates of interest.

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Risks Related to Regulatory, Legislative and Legal Matters

Current and future government regulation may negatively impact demand for our products and increase our cost of conducting business.

The conduct of our business, and the distribution, sale, advertising, labeling, safety, transportation and use of many of our products are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States. These laws and regulations may change, sometimes dramatically, as a result of political, economic or social events.  Changes in laws, regulations or governmental policy may alter the environment in which we do business and the demand for our products and, therefore, may impact our financial results or increase our liabilities.  Some of these laws and regulations include:   

 

laws and regulations governing the manner in which we advertise or sell our products;

 

laws and regulations that prohibit or limit the sale, in certain localities, of certain products we offer, such as firearm-related products;

 

laws and regulations governing the activities for which we sell products, such as hunting and fishing;

 

laws and regulations governing consumer products generally, such as the federal Consumer Product Safety Act and Consumer Product Safety Improvement Act, as well as similar state laws;

 

labor and employment laws, such as minimum wage or living wage laws, paid time off and other wage and hour laws;

 

laws requiring mandatory health insurance for employees, such as the Affordable Care Act; and

 

U.S. customs laws and regulations pertaining to duties and tariffs, including proper item classification, quotas and payment of duties and tariffs.

Changes in these and other laws and regulations or additional regulation could cause the demand for and sales of our products to decrease. Moreover, complying with increased or changed regulations could cause our cost of obtaining products and our operating expense to increase. This could adversely affect our net sales and profitability.

We may be subject to periodic litigation that may adversely affect our business and financial performance.

From time to time, we may be involved in lawsuits and regulatory actions relating to our business, certain of which may be maintained in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants.  Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings.  An unfavorable outcome could have a material adverse impact on our business, results of operations and financial condition.  In addition, regardless of the outcome of any litigation or regulatory proceedings, these proceedings could result in substantial costs and may require that we devote substantial resources to defend against these claims, which could impact our results of operations.

In particular, we may be involved in lawsuits related to employment, advertising and other matters, including class action lawsuits brought against us for alleged violations of the Fair Labor Standards Act, state wage and hour laws, state or federal advertising laws and other laws. An unfavorable outcome or settlement in any such proceeding could, in addition to requiring us to pay any settlement or judgment amount, increase our operating expense as a consequence of any resulting changes we might be required to make in employment, advertising or other business practices.

In addition, we sell products manufactured by third parties, some of which may be defective. Many such products are manufactured overseas in countries which may utilize quality control standards that vary from those legally allowed or commonly accepted in the United States, which may increase our risk that such products may be defective. If any products that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us as the retailer of the products based upon strict product liability. In addition, our products are subject to the federal Consumer Product Safety Act and the Consumer Product Safety Improvement Act, which empower the Consumer Product Safety Commission to protect consumers from hazardous products. The Consumer Product Safety Commission has the authority to exclude from the market and recall certain consumer products that are found to be hazardous. Similar laws exist in some states and cities in the United States.  If we fail to comply with government and industry safety standards or reporting requirements, we may be subject to claims, lawsuits, product recalls, fines and negative publicity that could harm our results of operations and financial condition.

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We also sell firearm-related products, which may be associated with an increased risk of injury and related lawsuits. We may incur losses due to lawsuits relating to our performance of background checks on firearms purchases as mandated by state and federal law or the improper use of firearms sold by us, including lawsuits by individuals, municipalities or other organizations attempting to recover damages or costs from firearms manufacturers and retailers relating to the misuse or release of firearms. Commencement of these lawsuits against us could reduce our net sales and decrease our profitability. The sale of firearm-related products also may present reputational risks and negative publicity that could affect consumers’ perception of us or willingness to shop with us, which could harm our results of operations and financial condition.

Our insurance coverage may not be adequate to cover claims that could be asserted against us. If a successful claim was to be brought against us in excess of our insurance coverage, or for which we have no insurance coverage, it could harm our business. Even unsuccessful claims could result in the expenditure of substantial funds and management time and could have a negative impact on our business.

The sale of firearm-related products is subject to strict regulation, which could affect our operating results.

Because we sell firearm-related products, we are required to comply with federal, state and local laws and regulations pertaining to the purchase, storage, transfer and sale of such products.  These laws and regulations require us to, among other things, obtain and maintain federal, state or local permits or licenses in order to sell firearms, ensure that all purchasers of firearms are subjected to a pre-sale background check and other requirements, record the details of each firearm sale on appropriate government-issued forms, record each receipt or transfer of a firearm at our distribution center or any store location on acquisition and disposition records, and maintain these records for a specified period of time. Additionally, in certain jurisdictions we are required to obtain a license to sell ammunition or record the details of each ammunition sale and maintain these records for a specified period of time. We also are required to timely respond to traces of firearms by law enforcement agencies.  Over the past several years, the purchase and sale of firearm-related products has been the subject of increased federal, state and local regulation, such as recently enacted requirements related to performing a safe-handling demonstration of firearms in California. These regulatory efforts are likely to continue in our current markets and other markets into which we may expand.  If enacted, new laws and regulations could limit the types of firearm-related products that we are permitted to purchase and sell, impose new restrictions and requirements on the manner in which we purchase, sell and store these products, and impact our ability to offer these products in certain retail locations or markets. If we fail to comply with existing or newly enacted laws and regulations relating to the purchase and sale of firearm-related products, our permits or licenses to sell firearm-related products at our stores or maintain inventory of firearm-related products at our distribution center may be suspended or revoked.  If this occurs, our net sales and profitability could suffer.  Further, complying with increased regulation relating to the sale of firearm-related products could cause our operating expense to increase and this could adversely affect our results of operations.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

Accounting principles generally accepted in the United States of America (“GAAP”) and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition; lease accounting; income taxes; the carrying amount of merchandise inventories, property and equipment and goodwill; valuation allowances for receivables, sales returns and deferred income tax assets; estimates related to gift card breakage and the valuation of share-based compensation awards; and obligations related to litigation, self-insurance liabilities and employee benefits are highly complex and may involve many subjective assumptions, estimates and judgments by our management, such as the assumptions used in our goodwill impairment analysis as of December 31, 2017. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance.

Risks Related to Investing in Our Common Stock

The declaration of discretionary dividend payments or the repurchase of our common stock pursuant to our share repurchase program may not continue.

We currently pay quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of us and our stockholders. Our dividend policy may be affected by, among other items, business conditions, our financial condition, our views on potential future capital requirements, the terms of our debt instruments, legal risks, changes in federal income tax law and challenges to our business model. Our dividend policy may change from time to time and we may or may not continue to declare discretionary dividend payments. Additionally, although we have a share repurchase program authorized by our Board of Directors, we are not obligated to make any purchases under the program and we may reduce the amount of purchases we make under the program or discontinue the program at any time.

17


Our anti-takeover provisions could prevent or delay a change in control of our Company, even if such change of control would be beneficial to our stockholders.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our Company, even if such change in control would be beneficial to our stockholders. The provisions of our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law that could discourage, delay or prevent a merger, acquisition or other change in control include:

 

a Board of Directors that is classified such that two to three of the seven directors, depending on classification, are elected each year;

 

limitations on the ability of stockholders to call special meetings of stockholders;

 

prohibition of stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders;

 

a requirement in our certificate of incorporation that stockholder amendments to our bylaws and certain amendments to our certificate of incorporation must be approved by 80% of the outstanding shares of our capital stock;

 

authorization of the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt; and

 

establishment of advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporations Law limits business combination transactions with 15% stockholders that have not been approved by the Board of Directors.  These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the transaction may be considered beneficial by some stockholders.

Significant stockholders or potential stockholders may attempt to effect changes or acquire control over our Company, which could adversely affect our results of operations and financial condition.

Stockholders may from time to time attempt to effect changes, engage in proxy solicitations or advance stockholder proposals, such as the publicly-disclosed proxy contest that the Company settled in 2015. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of our Board of Directors and senior management from the pursuit of business strategies. As a result, stockholder campaigns could adversely affect our results of operations and financial condition.

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

 

ITEM 2.

PROPERTIES

Properties

Our primary corporate headquarters are located at 2525 East El Segundo Boulevard, El Segundo, California 90245, with a satellite office located nearby at 2401 East El Segundo Boulevard, El Segundo, California 90245. We lease 55,000 square feet of office and adjoining retail space related to our primary corporate headquarters, and we lease 11,500 square feet related to our satellite office.  The lease for the primary corporate headquarters is scheduled to expire on February 28, 2021 and provides us with two five-year renewal options, while the lease for the satellite office is scheduled to expire on February 28, 2021 and provides us with one five-year renewal option.

Our distribution facility is located in Riverside, California and has 953,000 square feet of warehouse and office space. Our lease for the distribution center is scheduled to expire on August 31, 2020, and includes two additional five-year renewal options. In the first quarter of fiscal 2015, we executed a lease for 172,000 square feet of additional distribution space adjacent to our distribution center in Riverside, California that enables us to more efficiently fulfill our expanding distribution requirements. Our lease for this additional facility is scheduled to expire on August 31, 2020, and includes four additional five-year renewal options. We commenced operations in this facility in November 2015. We have a distribution hub located in Salem, Oregon, utilizing 12,000 square feet of space to separate consolidated truckloads of product for delivery to our regional markets. Our lease for the hub is scheduled to expire on January 31, 2019, and includes four additional five-year renewal options.

18


We lease all of our retail store sites. Most of our store leases contain multiple fixed-price renewal options having a typical duration of five years per option. As of December 31, 2017, of our total store leases, 58 leases are due to expire in the next five years without renewal options. In most cases, as current leases expire, we believe we will be able to obtain lease renewals for existing store locations or new leases for substantially equivalent locations in the same general area.  

Our Stores

Throughout our history, we have focused on operating traditional, full-line sporting goods stores. Our stores generally range from 8,000 to 15,000 square feet and average approximately 11,000 square feet. Our typical store is located in either a free-standing street location or a multi-store shopping center. Our numerous convenient locations and accessible store format encourage frequent customer visits, resulting in approximately 26.8 million sales transactions and an average transaction size of approximately $37 in fiscal 2017. The following table details our store locations by state as of December 31, 2017:

 

State

 

Year

Entered

 

Number

of Stores

 

 

Percentage of Total

Number of Stores

 

California

 

1955

 

 

226

 

 

 

52.0

%

Washington

 

1984

 

 

47

 

 

 

10.8

 

Arizona

 

1993

 

 

42

 

 

 

9.6

 

Oregon

 

1995

 

 

29

 

 

 

6.7

 

Colorado

 

2001

 

 

22

 

 

 

5.1

 

New Mexico

 

1995

 

 

19

 

 

 

4.4

 

Nevada

 

1978

 

 

18

 

 

 

4.1

 

Utah

 

1997

 

 

17

 

 

 

3.9

 

Idaho

 

1994

 

 

11

 

 

 

2.5

 

Texas

 

1995

 

 

3

 

 

 

0.7

 

Wyoming

 

2010

 

 

1

 

 

 

0.2

 

Total

 

 

 

 

435

 

 

 

100.0

%

 

Our same store sales per square foot were approximately $204 for fiscal 2017. Our same store sales per square foot combined with our efficient store-level operations and low store maintenance costs have allowed us to historically generate strong store-level returns.

 


19


ITEM 3.

LEGAL PROCEEDINGS

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 4.

MINE SAFETY DISCLOSURES

None.

 

20


PART II

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock, par value $0.01 per share, trades on The NASDAQ Stock Market LLC under the symbol “BGFV.”  The following table sets forth the high and low closing prices for our common stock as reported by The NASDAQ Stock Market LLC during fiscal 2017 and 2016:

 

 

 

2017

 

 

2016

 

Fiscal Period

 

High

 

 

Low

 

 

High

 

 

Low

 

First Quarter

 

$

17.40

 

 

$

13.35

 

 

$

13.70

 

 

$

9.49

 

Second Quarter

 

$

16.55

 

 

$

13.05

 

 

$

12.42

 

 

$

8.35

 

Third Quarter

 

$

13.35

 

 

$

7.25

 

 

$

14.51

 

 

$

9.22

 

Fourth Quarter

 

$

8.15

 

 

$

6.05

 

 

$

20.00

 

 

$

13.85

 

 

As of February 21, 2018, the closing price for our common stock as reported on The NASDAQ Stock Market LLC was $5.93 per share.

As of February 21, 2018, there were 21,271,821 shares of common stock outstanding held by 413 holders of record.

Performance Graph

Set forth below is a graph comparing the cumulative total stockholder return for our common stock with the cumulative total return of (i) the NASDAQ Composite Stock Market Index and (ii) the NASDAQ Retail Trade Index.  The information in this graph is provided at annual intervals for the fiscal years ended 2013, 2014, 2015, 2016 and 2017. This graph shows historical stock price performance (including reinvestment of dividends) and is not necessarily indicative of future performance:

 

 


21


Dividend Policy

Dividends are paid at the discretion of the Board of Directors. In fiscal 2017, 2016 and 2015 we paid annual cash dividends of $0.60, $0.525 and $0.40 per share, respectively, of outstanding common stock. In the first quarter of fiscal 2018, our Board of Directors declared a quarterly cash dividend of $0.15 per share of outstanding common stock, which will be paid on March 23, 2018 to stockholders of record as of March 9, 2018.

The agreement governing our revolving credit facility imposes restrictions on our ability to make dividend payments. For example, our ability to pay cash dividends on our common stock will depend upon, among other things, our compliance with certain availability and fixed charge coverage ratio requirements at the time of the proposed dividend or distribution, and whether we are in default under the agreement. Our future dividend policy will also depend on the requirements of any future credit or other financing agreements to which we may be a party and other factors considered relevant by our Board of Directors, including the General Corporation Law of the State of Delaware, which provides that dividends are only payable out of surplus or current net profits.

Issuer Purchases

The following tabular summary reflects the Company’s share repurchase activity during the quarter ended December 31, 2017:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total Number

of Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs (1)(2)

 

 

Maximum Number (or

Approximate Dollar

Value) of Shares that

May Yet Be Purchased

Under the Plans or

Programs (1)(2)(3)

 

October 2 – October 29

 

 

60,210

 

 

$

7.29

 

 

 

60,210

 

 

$

16,084,000

 

October 30 – November 26

 

 

56,499

 

 

$

6.58

 

 

 

56,499

 

 

$

15,713,000

 

November 27 – December 31

 

 

1,900

 

 

$

6.77

 

 

 

1,900

 

 

$

15,700,000

 

Total

 

 

118,609

 

 

 

 

 

 

 

118,609

 

 

$

15,700,000

 

 

(1)

In the third quarter of fiscal 2016, the Company’s Board of Directors authorized the current share repurchase program for the purchase of up to $25.0 million of the Company’s common stock. This program replaced the Company’s previous share repurchase program, under which $2.9 million remained available for repurchase. All share repurchases shown in this table were made under the Company’s current share repurchase program. Under the current authorization, the Company 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 Securities and Exchange Commission. However, the timing and amount of such purchases, if any, would be at the discretion of the Company’s management and Board of Directors and would depend upon market conditions and other considerations. Since the inception of its initial share repurchase program in May 2006 through December 31, 2017, the Company has repurchased a total of 3,453,224 shares for $41.4 million. As of December 31, 2017, a total of $15.7 million remained available for share repurchases under the current share repurchase program.

(2)

The Company’s dividends and stock repurchases are generally funded by distributions from its subsidiary, Big 5 Corp. The Company’s Credit Agreement contains covenants that require it to maintain a fixed charge coverage ratio of not less than 1.0:1.0 in certain circumstances, and limit the ability to, among other things, pay dividends or repurchase stock. The Company may 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. See Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, for a further discussion of the Credit Agreement.

(3)

This amount reflects the dollar value of shares remaining available to repurchase under the Company’s current share repurchase program.

 

 

22


ITEM 6.

SELECTED FINANCIAL DATA

The “Statement of Operations Data” and the “Balance Sheet Data” for all years presented below have been derived from our audited consolidated financial statements. Selected consolidated financial data under the captions “Store Data” and “Other Financial Data” have been derived from the unaudited internal records of our operations.  The information contained in these tables should be read in conjunction with our consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Annual Report on Form 10‑K.

 

 

 

Fiscal Year (1)

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

 

(Dollars and shares in thousands, except per share, certain store and other financial data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales (2)

 

$

1,009,635

 

 

$

1,021,235

 

 

$

1,029,098

 

 

$

977,860

 

 

$

993,323

 

Cost of sales (3)

 

 

686,303

 

 

 

696,777

 

 

 

704,134

 

 

 

664,411

 

 

 

664,583

 

Gross profit (2)

 

 

323,332

 

 

 

324,458

 

 

 

324,964

 

 

 

313,449

 

 

 

328,740

 

Selling and administrative expense (2) (4) (5) (6) (7) (8)

 

 

306,990

 

 

 

294,971

 

 

 

298,425

 

 

 

288,274

 

 

 

281,313

 

Operating income

 

 

16,342

 

 

 

29,487

 

 

 

26,539

 

 

 

25,175

 

 

 

47,427

 

Interest expense

 

 

1,644

 

 

 

1,551

 

 

 

1,791

 

 

 

1,667

 

 

 

1,745

 

Income before income taxes

 

 

14,698

 

 

 

27,936

 

 

 

24,748

 

 

 

23,508

 

 

 

45,682

 

Income taxes (9)

 

 

13,594

 

 

 

11,050

 

 

 

9,451

 

 

 

8,632

 

 

 

17,736

 

Net income (2) (5) (6) (7) (8) (9)

 

$

1,104

 

 

$

16,886

 

 

$

15,297

 

 

$

14,876

 

 

$

27,946

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.78

 

 

$

0.70

 

 

$

0.68

 

 

$

1.28

 

Diluted

 

$

0.05

 

 

$

0.77

 

 

$

0.70

 

 

$

0.67

 

 

$

1.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.60

 

 

$

0.525

 

 

$

0.40

 

 

$

0.40

 

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock

   outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,439

 

 

 

21,607

 

 

 

21,741

 

 

 

21,933

 

 

 

21,765

 

Diluted

 

 

21,585

 

 

 

21,816

 

 

 

21,927

 

 

 

22,133

 

 

 

22,083

 

 

Store Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store sales (decrease) increase (10)

 

 

(1.2

)%

 

 

1.7

%

 

 

1.3

%

 

 

(2.9

)%

 

 

3.9

%

Same store sales per square foot (in dollars) (11)

 

$

204

 

 

$

207

 

 

$

208

 

 

$

203

 

 

$

212

 

End of period stores

 

 

435

 

 

 

432

 

 

 

438

 

 

 

439

 

 

 

429

 

End of period same stores

 

 

423

 

 

 

422

 

 

 

414

 

 

 

402

 

 

 

394

 

Same store sales per store (12)

 

$

2,333

 

 

$

2,365

 

 

$

2,383

 

 

$

2,324

 

 

$

2,415

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit margin

 

 

32.0

%

 

 

31.8

%

 

 

31.6

%

 

 

32.1

%

 

 

33.1

%

Selling and administrative expense as a percentage of

   net sales

 

 

30.4

%

 

 

28.9

%

 

 

29.0

%

 

 

29.5

%

 

 

28.3

%

Operating margin

 

 

1.6

%

 

 

2.9

%

 

 

2.6

%

 

 

2.6

%

 

 

4.8

%

Depreciation and amortization

 

$

19,222

 

 

$

19,130

 

 

$

21,410

 

 

$

21,505

 

 

$

20,192

 

Capital expenditures (13)

 

$

16,462

 

 

$

14,109

 

 

$

24,567

 

 

$

22,565

 

 

$

22,035

 

Inventory turns (14)

 

2.2x

 

 

2.4x

 

 

2.2x

 

 

2.1x

 

 

2.3x

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

7,170

 

 

$

7,895

 

 

$

7,119

 

 

$

11,503

 

 

$

9,400

 

Working capital (15)

 

$

167,171

 

 

$

136,972

 

 

$

172,010

 

 

$

182,664

 

 

$

156,693

 

Total assets

 

$

445,060

 

 

$

433,579

 

 

$

445,029

 

 

$

455,576

 

 

$

441,888

 

Long-term debt and capital leases, less current portion

 

$

47,800

 

 

$

11,999

 

 

$

57,238

 

 

$

67,467

 

 

$

44,613

 

Stockholders’ equity

 

$

187,069

 

 

$

205,037

 

 

$

198,831

 

 

$

195,004

 

 

$

190,770

 

 

(See notes on following page:)


23


(Notes to table on previous page)

 

(1)

Our fiscal year is the 52 or 53 week reporting period ending on the Sunday nearest December 31. Fiscal 2017, 2016, 2014 and 2013 each included 52 weeks, and fiscal 2015 included 53 weeks.

(2)

In fiscal 2015, 2014 and 2013, we recorded pre-tax charges of $0.4 million, $1.4 million and $1.3 million, respectively, reflecting legal accruals. In fiscal 2015 and 2014, the amounts were classified as selling and administrative expense. In fiscal 2013, $0.3 million was classified as a reduction to net sales and $1.0 million was classified as selling and administrative expense. These charges reduced net income in fiscal 2015, 2014 and 2013 by $0.2 million, or $0.01 per diluted share, $0.9 million, or $0.04 per diluted share, and $0.8 million, or $0.04 per diluted share, respectively.

(3)

Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution center expense, including depreciation, and store occupancy expense. Store occupancy expense includes rent, amortization of leasehold improvements, common area maintenance, property taxes and insurance.

(4)

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.

(5)

In fiscal 2016, we recorded pre-tax charges related to store closing costs of $1.2 million. These charges reduced net income in fiscal 2016 by $0.7 million, or $0.03 per diluted share.

(6)

In fiscal 2017, 2015, 2014 and 2013, we recorded pre-tax non-cash impairment charges of $0.6 million, $0.2 million, $1.2 million and $0.1 million, respectively, related to certain underperforming stores. These impairment charges reduced net income in fiscal 2017, 2015, 2014 and 2013 by $0.4 million, or $0.02 per diluted share, $0.1 million, or $0.00 per diluted share, $0.8 million, or $0.03 per diluted share, and $44,000, or $0.00 per diluted share, respectively.

(7)

In fiscal 2015, we recorded pre-tax charges of $1.6 million related to a publicly-disclosed proxy contest. These charges reduced net income in fiscal 2015 by $1.0 million, or $0.05 per diluted share.

(8)

In fiscal 2017, we recorded a non-cash goodwill impairment charge of $4.4 million, which reduced net income in fiscal 2017 by the same amount, or $0.21 per diluted share.

(9)

In fiscal 2017, we recorded a charge of $5.5 million to revalue existing net deferred tax assets resulting from the enactment of the Tax Cuts and Jobs Act in December 2017. This charge reduced net income in fiscal 2017 by the same amount, or $0.26 per diluted share. Additionally, in fiscal 2017, we recorded a charge of $0.6 million, net of the federal income tax benefit, to establish a valuation allowance related to unused California Enterprise Zone Tax Credits, which reduced net income in fiscal 2017 by the same amount, or $0.03 per diluted share. In fiscal 2016, we recorded charges of $0.5 million to write off deferred tax assets related to share-based compensation. These charges reduced net income in fiscal 2016 by the same amount, or $0.02 per diluted share.

(10)

Same store sales for a period reflect net sales from stores operated throughout that period as well as the full corresponding prior year period. For purposes of reporting same store sales comparisons to prior years, we generally use comparable 52-week periods. However, for purposes of reporting fiscal 2015 same store sales comparisons to fiscal 2014, we used comparable 53-week periods.  

(11)

Same store sales per square foot is calculated by dividing net sales for same stores, as defined above, by the total square footage for those stores.

(12)

Same store sales per store is calculated by dividing net sales for same stores, as defined above, by total same store count.

(13)

Increased capital expenditures in fiscal 2017 primarily reflected increased investment in new stores compared with fiscal 2016. Reduced capital expenditures in fiscal 2016 primarily reflected lower required investment in our distribution center and reduced investment in new stores compared with fiscal 2015. Reduced investment in new stores in fiscal 2016 was due primarily to payments made in early fiscal 2015 related to new stores opened in late fiscal 2014. Capital expenditures in fiscal 2017, 2016, 2015, 2014 and 2013 included increased investment in existing store remodeling to support our merchandising initiatives, added costs related to the development of an e-commerce platform and enhanced information security measures to support our infrastructure. Capital expenditures for computer hardware and software in fiscal 2017, 2016, 2015 and 2014 included amounts related to the development of a new point-of-sale system.

(14)

Inventory turns equal fiscal year cost of sales divided by the fiscal year four-quarter weighted-average cost of merchandise inventory.

(15)

Working capital is defined as current assets less current liabilities. In accordance with the early adoption of a new accounting standard in the first quarter of fiscal 2016, deferred income tax assets in the amount of $11.1 million, $11.0 million and $12.0 million, which were previously classified as current assets as of January 3, 2016, December 28, 2014 and December 29, 2013, respectively, were reclassified to non-current deferred income tax assets on our consolidated balance sheets to conform to current year presentation. Accordingly, working capital in fiscal 2015, 2014 and 2013 was reduced by the same respective amounts.

 

 

24


ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Throughout this section, the Big 5 Sporting Goods Corporation (“we,” “our,” “us”) fiscal years ended December 31, 2017, January 1, 2017 and January 3, 2016 are referred to as fiscal 2017, 2016 and 2015, respectively. The following discussion and analysis of our financial condition and results of operations for fiscal 2017, 2016 and 2015 includes information with respect to our plans and strategies for our business and should be read in conjunction with the consolidated financial statements and related notes, the risk factors and the cautionary statement regarding forward-looking information included elsewhere in this Annual Report on Form 10-K.

Our fiscal year ends on the Sunday nearest December 31. Fiscal 2017 and 2016 each included 52 weeks and fiscal 2015 included 53 weeks.

Overview

We are a leading sporting goods retailer in the western United States, operating 435 stores and an e-commerce platform under the name “Big 5 Sporting Goods” as of December 31, 2017.  We provide a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet. Through our e-commerce platform, we also offer selected products online. E-commerce sales for fiscal 2017, 2016 and 2015 were not material. 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, tennis, golf, winter and summer recreation and roller sports.

We believe that over our 63-year history we have developed a reputation with the competitive and recreational sporting goods customer as a convenient neighborhood sporting goods retailer that consistently delivers value on quality merchandise.  Our stores carry a wide range of products at competitive prices from well-known brand name manufacturers, including adidas, Coleman, Columbia, Everlast, New Balance, Nike, Rawlings, Skechers, Spalding, Under Armour and Wilson. We also offer brand name merchandise produced exclusively for us, private label merchandise and specials on quality items we purchase through opportunistic buys of vendor over-stock and close-out merchandise. We reinforce our value reputation through weekly print advertising in major and local newspapers, direct mailers and digital marketing designed to generate customer traffic, drive sales and build brand awareness. We also maintain social media sites to enhance distribution capabilities for our promotional offers and to enable communication with our customers.

Throughout our history, we have emphasized controlled growth. In fiscal 2017, we opened six new stores, two of which were relocations, and closed three stores, one of which was a relocation. In fiscal 2016, we opened five new stores and closed 11 stores, one of which was a relocation. In fiscal 2015, we opened five new stores and closed six stores, three of which were relocations. The following table summarizes our store count for the periods presented:

 

 

 

Fiscal Year

 

 

 

2017

 

 

2016

 

 

2015

 

Big 5 Sporting Goods stores:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

432

 

 

 

438

 

 

 

439

 

New stores (1)

 

 

6

 

 

 

5

 

 

 

5

 

Stores relocated

 

 

(1

)

 

 

(1

)

 

 

(3

)

Stores closed

 

 

(2

)

 

 

(10

)

 

 

(3

)

End of period

 

 

435

 

 

 

432

 

 

 

438

 

Stores opened (closed) per year, net

 

 

3

 

 

 

(6

)

 

 

(1

)

 

(1)

Stores that are relocated are classified as new stores. Sales from the prior location are treated as sales from a closed store and thus are excluded from same store sales calculations.

For fiscal 2018, we anticipate opening approximately eight new stores and closing approximately three stores.

25


Executive Summary

Our lower earnings for fiscal 2017 compared to fiscal 2016 were mainly attributable to lower net sales and higher selling and administrative expense combined with an increased income tax provision resulting from the enactment of the Tax Cuts and Jobs Act (“TCJA”) in December 2017, partially offset by higher merchandise margins in fiscal 2017. Our lower net sales in fiscal 2017 primarily reflected sales declines experienced in the fourth quarter as unseasonably dry and warm weather conditions negatively affected the sale of winter-related products, as well as softness in sales of firearm-related products throughout much of the year.

 

Net sales for fiscal 2017 decreased 1.1% to $1,009.6 million compared to fiscal 2016. The decrease in net sales was primarily attributable to a reduction in sales from same stores and closed stores, partially offset by added sales from new stores.

 

Our same store sales decreased 1.2% for fiscal 2017 versus the comparable period in fiscal 2016. Same store sales comparisons to the prior year largely reflected sales declines in the fourth quarter of fiscal 2017 as unseasonably dry and warm weather conditions in most of our major markets had a significant negative effect on sales of cold-weather and snow-related products, which followed higher sales during the first half of fiscal 2017 after the liquidation and closure of certain major competitors in our markets that concluded in the third quarter of fiscal 2016. Same store sales in fiscal 2017 reflected a decrease in our hard goods category, primarily firearm-related products. This decrease was partially offset by increases in our apparel and footwear categories. Same store sales for a period reflect net sales from stores that operated throughout the period as well as the full corresponding prior year period, and same store sales comparisons exclude sales from stores closed during the comparable periods.

 

Gross profit for fiscal 2017 represented 32.0% of net sales, compared with 31.8% in the prior year. Merchandise margins were 47 basis points higher in fiscal 2017 than the prior year and distribution expense as a percentage of net sales was lower than the prior year, while store occupancy expense as a percentage of net sales was higher than the prior year.

 

Selling and administrative expense for fiscal 2017 increased 4.1% to $307.0 million, or 30.4% of net sales, compared to $295.0 million, or 28.9% of net sales, for fiscal 2016. The increase in selling and administrative expense primarily reflects higher employee labor and benefit-related expense and non-cash impairment charges related to goodwill and certain underperforming stores.

 

Net income for fiscal 2017 decreased to $1.1 million, or $0.05 per diluted share, compared to $16.9 million, or $0.77 per diluted share, for fiscal 2016. The decrease was driven primarily by lower net sales, increased selling and administrative expense and a higher income tax provision resulting from the enactment of the TCJA, partially offset by an increased gross profit margin.

Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements primarily through cash on hand, cash flows from operations and borrowings from our revolving credit facility.

 

Operating cash flow for fiscal 2017 was a negative $4.4 million compared to a positive $73.7 million last year. The decrease in operating cash flow primarily reflects increased funding of merchandise inventory purchases, reduced accrued expenses primarily for income taxes, increased prepaid expenses mainly for income taxes and rent, and lower net income in fiscal 2017.

 

Capital expenditures for fiscal 2017 increased to $16.5 million from $14.1 million in fiscal 2016.

 

We ended fiscal 2017 with a balance under our revolving credit facility of $45.0 million compared with $10.0 million at the end of fiscal 2016.

 

We paid aggregate cash dividends in fiscal 2017 of $13.0 million, or $0.60 per share, compared with $11.5 million, or $0.525 per share, in fiscal 2016.

 

We repurchased 795,718 shares of common stock for $7.7 million in fiscal 2017, compared with 126,899 shares of common stock for $1.6 million in fiscal 2016.

26


Results of Operations

The following table sets forth selected items from our consolidated statements of operations by dollar and as a percentage of our net sales, and other financial data, for the periods indicated:

 

 

 

Fiscal Year (1)

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,009,635

 

 

 

100.0

%

 

$

1,021,235

 

 

 

100.0

%

 

$

1,029,098

 

 

 

100.0

%

Cost of sales (2)

 

 

686,303

 

 

 

68.0

 

 

 

696,777

 

 

 

68.2

 

 

 

704,134

 

 

 

68.4

 

Gross profit

 

 

323,332

 

 

 

32.0

 

 

 

324,458

 

 

 

31.8

 

 

 

324,964

 

 

 

31.6

 

Selling and administrative expense (3)

 

 

306,990

 

 

 

30.4

 

 

 

294,971

 

 

 

28.9

 

 

 

298,425

 

 

 

29.0

 

Operating income

 

 

16,342

 

 

 

1.6

 

 

 

29,487

 

 

 

2.9

 

 

 

26,539

 

 

 

2.6

 

Interest expense

 

 

1,644

 

 

 

0.2

 

 

 

1,551

 

 

 

0.2

 

 

 

1,791

 

 

 

0.2

 

Income before income taxes

 

 

14,698

 

 

 

1.4

 

 

 

27,936

 

 

 

2.7

 

 

 

24,748

 

 

 

2.4

 

Income taxes